Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2 Registration of Securities by a Small-Business 66± 276K
Issuer
5: EX-3.(I) Articles of Incorporation/Organization or By-Laws 4± 19K
6: EX-3.(II) Articles of Incorporation/Organization or By-Laws 19 74K
7: EX-3.(III) Articles of Incorporation/Organization or By-Laws 1 8K
13: EX-4 Instrument Defining the Rights of Security Holders 5 20K
3: EX-5 Opinion re: Legality 1 10K
2: EX-23.(II) Consent of Experts or Counsel 1 7K
12: EX-99.(I) Miscellaneous Exhibit 2± 9K
11: EX-99.(II) Miscellaneous Exhibit 4 15K
10: EX-99.(III) Miscellaneous Exhibit 4± 19K
9: EX-99.(IV) Miscellaneous Exhibit 2 12K
8: EX-99.(V) Miscellaneous Exhibit 2± 10K
4: EX-99.(VI) Miscellaneous Exhibit 2± 10K
SB-2 — Registration of Securities by a Small-Business Issuer
Document Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FRANKLIN LAKE RESOURCES INC.
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(Name of small business issuer in its charter)
NEVADA 1000 52-2352724
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(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
172 Starlite Street
South San Francisco, California 94080
(650) 588-0425
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(Address and telephone number of principal executive offices)
172 Starlite Street
South San Francisco, California 94080
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(Address of principal place of business
or intended principal place of business)
with a copy to:
Father Gregory Ofiesh Corporate Capital Formation, Inc.
172 Starlite Street 2921 N. Tenaya Way, Suite 323
South San Francisco, CA 94080 Las Vegas, NV 89128
(650) 588-0425 (702) 947-4877
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(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 452(b) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
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If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check
the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check
the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule
434 check the following box. [ ]
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
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Amount to be Proposed maximum Proposed maximum Amount of
Title of each class of securities to be registered offering price aggregate registration
registered (1) per unit offering price (2) fee
(3)
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Common Stock, par value $.001 per share 1,623,398 $0.76 $1,233,782 $114
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Common Stock Purchase Rights 1,623,398 -- - --
=====================================================================================================================
(1) Maximum number of shares of common stock to be sold in this offering.
(2) Estimated, pursuant to rule 457(o) under the Securities Act, solely for
purposes of calculating the registration fee. (3) Since both the shares of
common stock and the rights are being registered for distribution in this
Registration Statement, pursuant to rule 457(g) there is no separate
registration fee for the rights.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT TO COMPLETION, DATED May____, 2002
PROSPECTUS
FRANKLIN LAKE RESOURCES INC.
1,623,398 SHARES OF COMMON STOCK
$ PER SHARE
We are distributing, together with this prospectus, at no charge,
non-transferable subscription rights to purchase shares of our common stock to
persons who own our common stock as of the close of business on ______, 2002,
the record date. You will not be entitled to receive any rights unless you are a
shareholder of the Company at that time. You will receive 1 subscription right
for every 5 shares of our common stock that you own on the record date. Each
subscription right will entitle you to purchase 1 share of our common stock at
the subscription price of $ per share. The shares are being offered directly by
us without the services of an underwriter or selling agent.
The subscription rights are exercisable beginning on the date of this
prospectus and will expire at 5:00 p.m., Pacific Standard Time, on _________,
2002. We, at our sole discretion, may extend the period for exercising the
rights. Rights which are not exercised by the expiration date will expire and
will have no value. Your exercise of the rights may not be revoked unless the
expiration date is extended for more than thirty days or there is a material
change in the terms of the rights offering. You should carefully consider
whether or not to exercise your rights before the expiration date.
If you timely exercise all of your subscription rights, you will be
entitled to exercise over-subscription privileges to purchase additional shares
of our common stock at the same subscription price. The oversubscription
privilege will expire concurrently with the expiration of the basic subscription
rights.
We are undertaking this rights offering to raise proceeds from the
offering, which will be used for payables and operating capital. There is no
escrow of subscription funds, minimum subscription amount, or minimum amount of
proceeds to us. We have not enlisted the services of any broker or underwriter
in connection with the Offering, and no one has committed to purchase any amount
of shares.
The subscription rights may not be sold, transferred or assigned, and
will not be listed for trading on any stock exchange.
Our common stock is listed on the Nasdaq OTC Bulletin Board under the
symbol "FKLR" On April 15, 2002 the closing sales price of our common stock on
the Nasdaq OTC Bulletin Board was $1.05.
YOU SHOULD READ THE DESCRIPTION OF RISKS UNDER THE CAPTION "RISK
FACTORS" BEGINNING ON PAGE [ ] BEFORE PURCHASING ANY OF THE COMMON STOCK OFFERED
BY THIS PROSPECTUS.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
May ___, 2002
No person has been authorized by us to give any information or to make
any representation not contained in this prospectus and, if given or made, such
information or representation should not be relied upon as having been
authorized by us. This prospectus does not constitute an offer or a solicitation
of an offer to buy any securities other than the shares of our common stock to
which it relates issuable upon exercise of the rights or an offer or
solicitation to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
distribution of the securities offered hereby shall, under any circumstances,
imply or create any implication that there have not been any changes in our
affairs or in the information set forth or incorporated by reference herein
subsequent to the date hereof.
TABLE OF CONTENTS
Page
Forward-Looking Statements..............................................
Questions and Answers about the Rights Offering.........................
Who Can Help Answer Your Questions......................................
Prospectus Summary......................................................
Risk Factors............................................................
The Rights Offering.....................................................
Use of Proceeds.........................................................
Determination of Offering Price.........................................
Market Price of Common Stock............................................
Dividend Policy.........................................................
Capitalization..........................................................
Selected Financial Data.................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................
Business................................................................
Management..............................................................
Ownership of Common Stock...............................................
Disclosure of Commission Position on Indemnification....................
Certain Relationships and Related Transactions..........................
Description of Securities...............................................
Plan of Distribution....................................................
Certain Federal Income Tax Consequences.................................
Legal Matters...........................................................
Experts.................................................................
Available Information...................................................
Index to Franklin Lake's Financial Statements...........................
PROSPECTUS SUMMARY
Company's Business Summary
Franklin Lake Resources Inc. is a Nevada corporation engaged in the business of
prospecting, exploration, and development of mineral resources, primarily
precious metals, in the area of Death Valley, California. Our interests in
potential mining properties are through mining claims on U.S. Government-owned
land that we have registered with the U.S. Department of the Interior's Bureau
of Land Management ("BLM"), and certain leasehold interests in lands owned or
claimed by others. WE DO NOT HAVE A PRODUCING MINING PROPERTY AT THIS TIME.
Since our inception in 1986, Franklin Lake has primarily engaged in exploration
of various land areas whose geological properties indicate the potential for the
existence of valuable ore bodies. In certain instances, we have undertaken
sampling programs in an attempt to verify the presence of valuable minerals, and
to determine whether they exist in commercially mineable concentrations. To
date, although we have demonstrated the existence of valuable minerals on our
properties, we have been unsuccessful in proving commercially viable ore
deposits.
During various periods since 1991, we have conducted limited exploration and
testing on two areas of Death Valley, California, near the border with Nevada,
known as Death Valley Junction and Franklin Lake. In the past two years we have
concentrated our activities exclusively in those areas, based on certain assay
results which we regard as favorable but not conclusive. We have recently
upgraded our pilot plant at Death Valley Junction and invested approximately
$80,000 in new equipment. This plant is designed to "concentrate" the ore so it
can be sent to a refinery for final processing and extraction of any precious
metals contained in the ore. Our internal tests have shown that these ores
contain fine particles of gold, sliver, and platinum group metals. We hope and
expect, but cannot be certain, that operation of the pilot plant as a method of
volume-sampling ore from several areas of our properties will give us sufficient
information to determine whether there exists an ore body that can be
commercially developed, although the period of time that may be required to make
that determination is highly uncertain. We will need to raise additional capital
to finance the operation of the pilot plant, which we hope to accomplish through
this rights offering.
Stockholder Rights Offering
We are now offering and selling up to 1,623,398, shares of our common
stock, which are the subject of this prospectus, to our existing stockholders.
Pursuant to this offering, each of our stockholders shall have the right to
purchase from us up to 1 share of our common stock for every 5 shares of common
stock registered in his or her name at a price per share of $.__. This right may
only be exercised during the period of time from the effectiveness of the
registration statement of which this prospectus is a part, until the termination
of the offering at 5:00 p.m. Pacific Standard Time on _________, 2002. You may
find detailed information about the subscription rights and how to exercise them
under the section titled "Plan of Distribution" beginning on page [ ] of this
prospectus.
We were incorporated in British Columbia, Canada in 1986, and
redomiciled to the State of Nevada on January 3, 2002. Our principal executive
offices are located at 172 Starlite Street, South San Francisco, California
94080 and our telephone number is (605) 588-0425.
RISK FACTORS
Investing in our common stock is very risky. The business of mining is
generally subject to a number of risks, hazards and uncertainties, including
gold bullion losses, environmental hazards, industrial accidents, labor
disputes, unusual or unexpected geological formations or other geological or
grade problems, unanticipated ground or water conditions, cave-ins, pit wall
failures, flooding, rock falls, periodic interruptions due to inclement or
hazardous weather conditions, other unfavorable operating conditions and other
acts of God. Such risks could result in damage to or destruction of mineral
properties or costs that make further activities prohibitively expensive. These
general risks, together with the following specific risks, should be carefully
considered by anyone contemplating an investment in the Company's stock.
EXPLORATION FOR ECONOMIC DEPOSITS OF MINERALS IS SPECULATIVE.
We expect to expend considerable funds before we are able to determine
whether there is a commercially mineable ore body on our properties. Should we
fail to find adequate valuable minerals before our funds are exhausted, and if
we cannot raise additional capital, we will have to discontinue operations,
which could make our stock valueless.
EVEN IF THE COMPANY IS ABLE TO LOCATE VALUABLE ORE SITES, WE MAY NOT BE ABLE TO
EXTRACT THE MINERALS PROFITABLY.
In particular, the silica or "desert dirt" from which we are attempting
to extract minerals has proven difficult and other companies have failed and
gone out of business because they have not been able to develop economic
extraction processes. The Company is working to develop an extraction process
which we believe may be effective, but we do not yet have sufficient experience
with it to make a reasonable prediction of our success. Without an economic
extraction process, will not be able to produce sufficient revenues to sustain
operations and may fail.
WE SELF-INSURE AGAINST TYPICAL BUSINESS RISKS.
Except as required by law, the Company does not maintain property and
liability insurance against risks which are typical in the operation of its
business. In view of its very limited operations, the difficulty of obtaining
such insurance, the high deductibles and broad exclusions common to such
policies, as well as the direct cost involved, the Company has determined not to
obtain such coverage until it is warranted by its operations. The lack of such
insurance could result in significant economic hardship for the Company should
it suffer indemnifiable losses prior to obtaining coverage, perhaps resulting in
the failure of our business.
MARKET PRICES FOR PRECIOUS METALS MAY MOVE AGAINST US.
The prices of precious metals have historically been subject to
significant fluctuation. Even if we identify a valuable ore body on our
properties and develop effective extractions processes, we cannot be certain of
selling our production at prices sufficient to earn a profit from our
operations. You should be able to bear a complete loss of your investment. You
should carefully consider the following factors, in addition to the other
information in this prospectus, before investing in our common stock.
WE ARE EXPERIENCING A LIQUIDITY CRISIS
We have incurred operating losses since our inception, resulting in a
shareholders' deficit of CN$38,946,423 (approximately US$24,494,606) as of
October 31, 2001. We are currently experiencing a liquidity crisis and require
an immediate infusion of cash in order to continue operations. If we are unable
to secure an immediate infusion of cash we will not be able to continue with the
development of our properties and recovery systems, will be unable to generate
revenues, and may even be forced to seek protection from our creditors through a
voluntary bankruptcy filing. We cannot assure you that we will succeed in
obtaining an immediate cash infusion.
WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history, and have generated only
insignificant revenues from sales of precious metals recovered during our
exploration and development activities. We cannot assure you when, if ever, we
will develop a process for the economic recovery of the minerals we believe
exist on our properties, or that we will be able to operate such a process
profitably in large-scale recovery operations.
WE EXPECT TO CONTINUE TO OPERATE AT A LOSS AND WE MAY NEVER ACHIEVE
PROFITABILITY
We cannot be certain that we will ever achieve and sustain
profitability. To date, we have been engaged in exploration, sampling and
testing activities and have not generated any significant revenues from sales of
precious metals recovered from our properties. We expect that we will continue
to incur operating losses for the foreseeable future.
OUR BOARD OF DIRECTORS IS AUTHORIZED TO ISSUE PREFERRED STOCK WITHOUT
STOCKHOLDER AUTHORIZATION WHICH COULD BE USED AS AN ANTI-TAKEOVER DEVICE
Our Board of Directors is authorized to issue shares of preferred stock
from time to time without stockholder authorization. The issuance of preferred
stock could decrease the amount of assets and earnings available for
distribution to our other stockholders. Preferred stockholders could receive
voting rights and rights to payments on liquidation or of dividends or other
rights which are greater than the rights of the holders of our common stock. In
addition, the issuance of preferred stock may make it more difficult for a third
party to acquire, or may discourage a third party from acquiring, voting control
of our stock. This provision could also discourage an unsolicited acquisition
and could make it less likely that stockholders receive a premium for their
shares as a result of any unsolicited acquisition proposal.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SIGNIFICANT AMOUNT OF STOCK OF
FRANKLIN LAKE AND EXERT CONSIDERABLE INFLUENCE OVER US
As of April 1, 2002, our directors and executive officers beneficially
owned approximately 38.1% (fully-diluted) of voting power represented by our
outstanding common stock. As a result, these stockholders are able to
significantly influence all matters requiring stockholder approval, including
the election of directors and the approval of significant corporate
transactions. This concentration of ownership could also delay or prevent a
change in control that may be favored by other stockholders.
WE WILL NEED TO INVEST IN ADDITIONAL PERSONNEL TO ASSIST IN OUR TRANSITION FROM
AN EXPLORATION STAGE COMPANY TO A PRODUCING MINING COMPANY
Mining exploration and recovery activities often involve highly
technical and specialized processes and procedures, including surveying,
engineering, metallurgy, chemistry, geology, environmental science, and perhaps
others. It will be necessary for us to timely recruit and retain, either as
employees or as contracted consultants, such specialists at various stages of
our business development. Because we are still analyzing our deposits and
developing our processes, we cannot yet determine the future cost to the Company
of these specialists; however, should we be unable to acquire the financial
resources to retain these personnel when needed, our business may fail.
OUR STOCK PRICE MAY BE VOLATILE
The market price of our common stock has historically been volatile. We believe
investors should expect continued volatility in our stock price as a result of
various factors, including:
1. analyst recommendations,
2. fluctuations in the commodity prices of precious metals,
3. market conditions relating to the world precious metals markets,
4. sales of substantial amounts of our common stock by existing stockholders,
including short sales,
5. general public sentiment regarding the environmental impact of mining
operations,
6. Company disclosures regarding the results of various stages of our sampling
operations.
Such volatility may make it difficult or impossible for you to obtain a
favorable selling price for our shares.
EXERCISE OF OUTSTANDING WARRANTS WILL DILUTE THE INTERESTS OF EXISTING
STOCKHOLDERS
The exercise prices of our outstanding warrants may be less than the
current market price of our common stock on the date of conversion. To the
extent of any exercise of these securities, the interests of our existing
stockholders will be diluted proportionately.
WE EXPECT TO ISSUE ADDITIONAL COMMON SHARES IN THE FUTURE WHICH WOULD DILUTE THE
OUTSTANDING SHARES
As of April 15, 2002, approximately 36,883,010 shares of our common stock were
authorized but unissued, of which 2,777,314 were reserved for the possible
exercise of warrants and options. These shares may be issued in the future
without stockholder approval. The prices at which we sell these securities and
other terms and provisions will depend on prevailing market conditions and other
factors in effect at that time, all of which are beyond our control. Shares may
be issued at prices which are less than the then-current market price of our
common stock and/or at prices which are less than the prices at which the shares
of common stock being offered by Company under this rights offering are sold.
FAILURE TO EXERCISE YOUR SUBSCRIPTION RIGHTS WILL RESULT IN DILUTION
If you decide not to exercise your subscription rights offered by this
prospectus, or exercise fewer than the maximum rights offered you under the
basic subscription right, your proportionate economic interest and voting rights
will be reduced (called "dilution." The amount of dilution you experience as a
result on not exercising your subscription rights will depend upon the number of
rights exercised by other shareholders.
NO ONE HAS COMMITTED TO PURCHASE ANY AMOUNT OF THE SHARES OFFERED
We have not engaged the services of an underwriter for this offering, or
received any commitment from anyone to purchase a minimum amount of the shares
offered. If the amount of the subscriptions we receive is less than the cost to
the us of making the offering, we will not accomplish our purpose of raising
additional capital for use in our exploration and development activities.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
We believe that certain statements contained or incorporated by
reference in this prospectus are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and are considered
prospective. These include statements contained under "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis" and "Business." The
following statements are or may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995:
o statements before, after or including the words "may," "will," "could,"
"should," "believe," "expect," "future," "potential," "anticipate,"
intend," "plan," estimate" or "continue" or the negative or other
variations of these words; and
o other statements about matters that are not historical facts.
We may be unable to achieve future results covered by the
forward-looking statements. The statements are subject to risks, uncertainties
and other factors that could cause actual results to differ materially from the
future results that the statements express or imply. Please do not put undue
reliance on these forward-looking statements, which speak only as of the date of
this prospectus.
Although it is important for you to be aware of the these limitations
regarding forward-looking statements, our disclosure of them does not limit the
liability of our officers, directors, control persons or promoters under the
United States securities laws for material inaccuracies in, or omissions from,
this prospectus.
USE OF PROCEEDS
We expect to use the net proceeds of this offering as follows (in order
of priority - amounts are estimated):
[Enlarge/Download Table]
Amount Assuming Amount Assuming Amount Assuming
Subscription of Subscription of Subscription of
Purpose $350,000 $800,000 $1,200,000
--------------------------------------- ------------------- ----------------- -----------------
1. Rights Offering Expenses 27,114 27,114 27,114
2. Registration of Xenolix Shares* 25,000 25,000 25,000
3. Working Capital 297,886 747,9886 1,147,886
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* Refers to registration rights agreement in connection with the asset
acquisition from Xenolix Technologies discussed on page [___] under "Description
of Business."
Working capital will be applied toward general and administrative expenses,
and the further exploration, testing, and recovery process development as
described under "Description of Business" beginning on page ____ .
DETERMINATION OF OFFERING PRICE
The price of our shares of common stock in this offering was arbitrarily
determined. The factors we considered in determining the offering price included
the historic and current market price of the common stock, our financial
condition, challenges facing our Company, our history of profits and losses,
general conditions in the securities market, our need for capital, alternatives
available to us for raising capital, the amount of proceeds desired, the
liquidity of our common stock, the level of risk to our investors, and the need
to offer shares at a price that would be attractive to our investors relative to
the then current trading price of our common stock. The offering price is not an
indication of and is not based upon the actual value of the Company. The
offering price bears no relationship to the book value, assets or earnings of
the Company or any other recognized criteria of value. The offering price should
not be regarded as an indicator of the future market price of the securities. On
April 15, 2002, the last reported sales price of our common stock on the Nasdaq
OTC Bulletin Board was $1.05 per share.
PLAN OF DISTRIBUTION
The stock offered by Franklin Lake is being offered through the issuance of
rights directly to its shareholders of record as of __________, 2002. Certain
employees, officers or directors of Franklin Lake may solicit responses from
you, but such individuals will not receive any commissions or compensation for
such services other than their normal employment compensation.
We intend to distribute rights and copies of this prospectus to
shareholders of record on _________, 2002, as soon as the Registration
Statement, of which this prospectus is a part, becomes effective with the
Securities and Exchange Commission ("SEC").
You may purchase shares under your subscription rights and, if you so
choose, under your over-subscription privilege by applying to our stock transfer
agency who will act as "subscription agent" for the offering. The specific
procedures are explained in the following section and in the subscription
documents accompanying this prospectus. You should understand that once your
subscription is submitted to the subscription agent, you may not rescind it.
There is no escrow of subscription funds, and there is no minimum amount of
proceeds that we must receive in order for the company to use your subscription
funds.
EXPLANATION OF THE RIGHTS OFFERING
What a "subscription right" means
Without cost to you, we are distributing to you an instrument known as a
"subscription right." You will receive 1 subscription right for each 5 shares of
our common stock you owned as of _________, 2002, which we arbitrarily
established as the "record date" for the rights offering. Each subscription
right will entitle you, at your option, to purchase one share of our common
stock at the "subscription price," which we have established as $____ per share.
Should you elect to exercise your rights to subscribe, meaning that you choose
to purchase the common stock offered to you, you may do so only on the terms and
conditions of the offering, which are summarized in this section and explained
fully in the following section captioned "The Rights Offering."
You may exercise any number of your subscription rights, or you may choose
not to exercise any subscription rights. You cannot give or sell your
subscription rights to anyone; only you can exercise them. If not exercised,
your rights will expire at 5:00 p.m. on _________, 2002. Prior to that date and
time, the Board of Directors may cancel the rights offering for any reason.
The basic subscription privilege of each subscription right entitles you to
purchase 1 share of our common stock at a subscription price of $.____ per
share. Under the basic privilege, you may purchase any number of shares up to
one-fourth the number of shares you already own.
In addition, an oversubscription privilege may enable you to purchase a
portion of shares, if any, that may become available as a result of other
shareholders exercising fewer than their allotted numbers of rights.
Once you submit your subscription form to the Subscription Agent you may
not revoke your subscription, even if you subsequently learn unfavorable
information about the Company.
The Purpose of the Rights Offering
We are offering the subscription rights to our current shareholders in
order to raise additional working capital. We require additional funds in order
to pursue our business plan. Our Board of Directors has chosen to give you the
opportunity to buy more shares and provide us with additional capital. This
option provides each shareholder the opportunity to avoid dilution of their
ownership interest, at least insofar as this current financing is concerned. Of
course, we cannot assure you that we will not need to seek additional financing
in the future that could result in dilution of your ownership, and in fact it is
likely that we will seek such future financing.
Proceeds to Franklin Lake
Our gross proceeds from the rights offering depends on the number of shares
that are purchased. If we sell all 1,623,398 shares which may be purchased upon
exercise of the rights offered by this prospectus, then we will receive proceeds
of $1,233,782, before deducting expenses payable by us, estimated to be $27,080.
Method of Exercising Subscription Rights
In order to exercise your subscription rights, you must properly complete
the attached subscription certificate and deliver it to the Subscription Agent
before 5 p.m., Pacific Standard Time, on _________, 2002. The address for the
Subscription Agent is on page [ ]. Your subscription certificate must be
accompanied by proper payment for each share that you wish to purchase. Please
note that funds paid by uncertified personal check may take at least ten
business days to clear. Accordingly, if you wish to pay by means of uncertified
personal check, we urge you to make payment sufficiently in advance of
_________, 2002 to ensure that we receive the payment and that it clears before
that date. If your shares are held in the name of your bank or broker, you must
contact your bank or broker if you wish to participate in this offering.
Risks of Exercising Subscription Rights
The exercise of your subscription rights involves certain risks. Exercising
your subscription rights means buying additional shares of our common stock, and
should be carefully considered as you would view other equity investments. Among
other things, you should carefully consider the risks described under the
heading "Risk Factors," beginning on page [ ].
Effect of Not Exercising Subscription Rights
If you choose not to exercise your subscription rights under the offering,
you will retain your current number of shares of common stock. However, if other
shareholders exercise their subscription rights and you do not, the percentage
of Franklin Lake Resources Inc. that you own will diminish, and your relative
voting rights and economic interests will be diluted. If you exercise your
subscription rights and oversubscription privilege, or if you exercise your
subscription rights and other shareholders do not, your proportionate voting
rights and economic interests will increase.
Federal Income Tax Effect of Exercising Subscription Rights
The receipt and exercise of your subscription rights are intended to create
no tax effect; however, we are not representing any particular tax treatment and
you should seek specific tax advice from your personal tax advisor.
Delivery of Subscribed Shares
If you purchase shares of common stock through the rights offering, you
will receive certificates representing those shares as soon as practicable after
________, 2002.
DISTRIBUTION OF RIGHTS AND SUBSCRIPTION PROCEDURES
BEFORE EXERCISING YOUR SUBSCRIPTION RIGHTS, YOU SHOULD READ CAREFULLY THE
INFORMATION SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE [ ].
The Subscription Rights
We are distributing non-transferable subscription rights to
shareholders who owned shares of our common stock on _______, 2002, at no cost
to the shareholders. We will give you 1 subscription right for each 5 shares of
common stock that you owned on _________, 2002. Each subscription right will
entitle you to purchase one share of common stock for $.__. If you wish to
exercise your subscription rights, you must do so before 5 P.M., Pacific
Standard Time, on _________, 2002. After that date, the subscription rights will
expire and will no longer be exercisable unless we extend the offering.
Basic Subscription Privilege
Each subscription right will entitle you to receive, upon payment of
$.___, 1 share of common stock. You will receive certificates representing the
shares that you purchase pursuant to your basic subscription privilege as soon
as practicable after __________, 2002, whether you exercise your subscription
rights immediately prior to that date or earlier.
Over-Subscription Privilege
Subject to the allocation described below, each subscription right also
grants you an over-subscription privilege to purchase additional shares of
common stock that are not purchased by other shareholders. You are entitled to
exercise your over-subscription privilege only if you exercise your basic
subscription privilege in full.
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in the
space provided on your subscription certificate. When you send in your
subscription certificate, you must also send the full purchase price for the
number of additional shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If we receive over-subscription requests for a number of shares greater than the
the number of shares available, we will allocate the available over-subscription
shares to the over-subscribers in the same proportion that your basic
subscription shares bear to the total of basic subscriptions. Regardless of the
proportion, however, you will not receive more over-subscription shares than you
actually apply for, although you may receive fewer.
No Recommendation
We are not making any recommendations as to whether or not you should
exercise your subscription rights. You should make your decision based on your
own assessment of your best interests.
Expiration Date
The rights will expire at 5:00 p.m., Pacific Standard Time, on
_________, 2002, unless we decide to extend the rights offering. If you do not
exercise your subscription rights prior to that time, your subscription rights
will be null and void. We will not be required to issue shares of common stock
to you if the Subscription Agent receives your subscription certificate or your
payment after that time, regardless of when you sent the subscription
certificate and payment, unless you send the documents in compliance with the
guaranteed delivery procedures described below.
Board of Directors' Withdrawal Right
Our Board of Directors may withdraw the rights offering in its sole
discretion at any time prior to or on April ___, 2002, for any reason
(including, without limitation, a change in the market price of the common
stock). If we withdraw the rights offering, any funds you paid will be promptly
refunded, without interest or penalty.
Determination of Subscription Price
Our Board of Directors chose the $.___ per share subscription price
after considering a variety of factors, including the following:
--the historic and current market price of the common stock;
--our history of losses;
--our business prospects;
--our need for capital;
--alternatives available to us for raising capital;
--general conditions in the securities market;
--the level of risk to our investors; and
-- the need to offer shares at a price that would be attractive to our
investors relative to the current trading price of our common stock.
The $.__ per share subscription price should not be considered an
indication of the actual value of Franklin Lake or of our common stock. We
cannot assure you that the market price of the common stock will not decline
during or after the rights offering. We also cannot assure you that you will be
able to sell shares of common stock purchased during the rights offering at a
price equal to or greater than $.___ per share.
Non-Transferability of Subscription Rights
Both the basic subscription rights and over-subscription rights are
non-transferable and non-assignable. Only you may exercise these rights.
Exercise of Subscription Rights
You may exercise your subscription rights by delivering to the
Subscription Agent to be received on or prior to _______, 2002:
o A properly completed and duly executed subscription certificate;
o Any required signature guarantees; and
o Payment in full of $.___ per share for the shares of common stock
subscribed for by exercising your basic subscription rights and, if
desired, your over-subscription rights.
You should deliver your subscription certificate and payment to the
Subscription Agent at the address shown under the heading "Subscription Agent."
We recommend registered mail or overnight delivery. We will not pay you interest
on funds delivered to the Subscription Agent pursuant to the exercise of rights.
If you choose to wire transfer funds for payment, you are urged to send your
subscription certificate by overnight delivery no later than the date of your
wire transfer to assure proper matching with your payment and, in any event, in
time for delivery on or prior to _________, 2002. In addition, we request that
you provide the name, ABA routing number of the originating bank and the date of
your wire transfer on your subscription certificate.
Method of Payment
Payment for the shares must be made by check or bank draft (cashier's
check) drawn upon a United States bank or a postal, telegraphic or express money
order payable to the order of Computershare Trust Company of Canada, as
Subscription Agent. Payment for basic subscription rights and over-subscription
rights may also be effected through wire transfer. Contact the Subscription
Agent at (888) 661-5566 or (604) 661-0232 for wiring information.
Payment will be deemed to have been received by the Subscription Agent
only upon:
(A) clearance of any uncertified check;
(B) receipt by the Subscription Agent of any certified check or bank draft
drawn upon a U.S. bank or of any postal, telegraphic or express money
order;
(C) receipt by the Subscription Agent of any funds transferred by wire
transfer; or
(D) receipt of funds by the Subscription Agent through an alternative payment
method approved by Franklin Lake Resources Inc.
Please note that funds paid by uncertified personal check may take at
least ten business days to clear. Accordingly, if you wish to pay by means of an
uncertified personal check, we urge you to make payment sufficiently in advance
of _________, 2002, to ensure that the payment is received and clears before
that date. We also urge you to consider payment by means of a certified or
cashier's check, money order or wire transfer.
Guaranteed Delivery Procedures
If you want to exercise your subscription rights, but time will not
permit your subscription certificate to reach the Subscription Agent on or prior
to _________, 2002, you may exercise your subscription rights if you satisfy the
following guaranteed delivery procedures:
(1) You send, and the Subscription Agent receives, payment in full for each
share of common stock being subscribed for through the basic subscription
privilege and the over-subscription privilege, on or prior to __________,
2002;
(2) You send, and the Subscription Agent receives, on or prior to ________,
2002, a notice of guaranteed delivery, substantially in the form provided
with the attached instructions, from a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States. The notice of guaranteed delivery must
state your name, the number of subscription rights that you hold, the
number of shares of common stock that you wish to purchase pursuant to the
basic subscription privilege and the number of shares, if any, you wish to
purchase pursuant to the over-subscription privilege. The notice of
guaranteed delivery must guarantee the delivery of your subscription
certificate to the Subscription Agent within three business days following
the date of the notice of guaranteed delivery; and
(3) You send, and the Subscription Agent receives, your properly completed and
duly executed subscription certificate, including any required signature
guarantees, within three business days following the date of your notice of
guaranteed delivery. The notice of guaranteed delivery may be delivered to
the Subscription Agent in the same manner as your subscription certificate
at the addresses set forth under the heading "Subscription Agent," or may
be transmitted to the Subscription Agent by facsimile transmission, to
facsimile number (604) 683-3694. You can obtain additional copies of the
form of notice of guaranteed delivery by requesting them from the
Subscription Agent at the address set forth under the heading "Subscription
Agent."
Signature Guarantee
Signatures on the subscription certificate do not need to be guaranteed
if either the subscription certificate provides that the shares of common stock
to be purchased are to be delivered directly to the record owner of such
subscription rights, or the subscription certificate is submitted for the
account of a member firm of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc., or a commercial
bank or trust company having an office or correspondent in the United States. If
a signature guarantee is required, signatures on the subscription certificate
must be guaranteed by an Eligible Guarantor Institution, as defined in Rule
17Ad-15 of the Securities Exchange Act of 1934, as amended, subject to the
standards and procedures adopted by the Subscription Agent. Eligible Guarantor
Institutions include banks, brokers, dealers, credit unions, national securities
exchanges and savings associations.
Shares Held for Others
If you are a broker, a trustee or a depository for securities, or you
otherwise hold shares of common stock for the account of a beneficial owner of
common stock, you should notify the beneficial owner of such shares as soon as
possible to obtain instructions with respect to their subscription rights. If
you are a beneficial owner of common stock held by a holder of record, such as a
broker, trustee or a depository for securities, you should contact the holder
and ask him or her to effect transactions in accordance with your instructions.
Ambiguities in Exercise of Subscription Rights
If you do not specify the number of subscription rights being exercised
on your subscription certificate, or if your payment is not sufficient to pay
the total purchase price for all of the shares that you indicated you wished to
purchase, you will be deemed to have exercised the maximum number of
subscription rights that could be exercised for the amount of the payment that
the Subscription Agent receives from you. If your payment exceeds the total
purchase price for all of the subscription rights shown on your subscription
certificate, your payment will be applied, until depleted, to subscribe for
shares of common stock in the following order:
(1) to subscribe for the number of shares, if any, that you indicated on the
subscription certificate that you wished to purchase through your basic
subscription privilege;
(2) to subscribe for shares of common stock until your basic subscription
privilege has been fully exercised;
(3) to subscribe for additional shares of common stock pursuant to the
over-subscription privilege (subject to any applicable proration).
Any excess payment remaining after the foregoing allocation will be
returned to you as soon as practicable by mail, without interest or deduction.
Regulatory Limitation
We will not be required to issue you shares of common stock pursuant to
the rights offering if, in our opinion, you would be required to obtain prior
clearance or approval from any state or federal regulatory authorities to own or
control such shares if, at the time the subscription rights expire, you have not
obtained such clearance or approval.
State and Foreign Securities Laws
The rights offering is not being made in any state or other
jurisdiction in which it is unlawful to do so, nor are we selling or accepting
any offers to purchase any shares of common stock to you if you are a resident
of any such state or other jurisdiction. We may delay the commencement of the
rights offering in certain states or other jurisdictions in order to comply with
the securities law requirements of such states or other jurisdictions. It is not
anticipated that there will be any changes in the terms of the rights offering.
In our sole discretion, we may decline to make modifications to the terms of the
rights offering requested by certain states or other jurisdictions, in which
case shareholders who live in those states or jurisdictions will not be eligible
to participate in the rights offering.
Our Decision Regarding Certain Matters Binding on You
All questions concerning the timeliness, validity, form and eligibility
of any exercise of subscription rights will be determined by us, and our
determinations will be final and binding. In our sole discretion, we may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine, or reject the purported exercise of any
subscription right by reason of any defect or irregularity in such exercise.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we determine in our
sole discretion. Neither Franklin Lake Resources Inc. nor the Subscription Agent
will be under any duty to notify you of any defect or irregularity in connection
with the submission of a subscription certificate or incur any liability for
failure to give such notification.
No Revocation
After you have exercised your basic subscription privilege or
over-subscription privilege, YOU MAY NOT REVOKE THAT EXERCISE. You should not
exercise your subscription rights unless you are certain that you wish to
purchase additional shares of common stock.
Shares of Common Stock Outstanding after the Rights Offering
Assuming we issue all of the shares of common stock offered in the
rights offering, approximately 9,740,388 shares of common stock will be issued
and outstanding. This would represent a 25% increase in the number of
outstanding shares of common stock.
IF YOU DO NOT EXERCISE YOUR BASIC SUBSCRIPTION RIGHTS, THE PERCENTAGE OF COMMON
STOCK THAT YOU HOLD WILL DECREASE IF SHARES ARE PURCHASED IN THE RIGHTS
OFFERING.
Fees And Expenses
We will pay all fees charged by the Subscription Agent. You are responsible
for paying any other commissions, fees, taxes or other expenses incurred in
connection with the exercise of the subscription rights. Neither Franklin Lake
Resources Inc. nor the Subscription Agent will pay such expenses.
Subscription Agent
We have appointed our transfer agent, Computershare Trust Company of
Canada, as Subscription Agent for the rights offering. The Subscription Agent's
address for packages sent by mail or overnight delivery is:
Computershare Trust Company of Canada
510 Burrard Street
Vancouver, BC V6C 3B9
The Subscription Agent's telephone number is (888) 661-5566 or (604)
661-0232, and its facsimile number is (604) 683-3694. You should deliver your
subscription certificate, payment of the subscription price and notice of
guaranteed delivery (if any) to the Subscription Agent. We will pay a fee of $[
] plus certain expenses of the Subscription Agent. We have also agreed to
indemnify the Subscription Agent from certain liabilities which it may incur in
connection with the rights offering.
IMPORTANT
PLEASE CAREFULLY READ THE INSTRUCTIONS ACCOMPANYING THE SUBSCRIPTION
CERTIFICATE AND FOLLOW THOSE INSTRUCTIONS IN DETAIL. DO NOT SEND SUBSCRIPTION
CERTIFICATES DIRECTLY TO US. YOU ARE RESPONSIBLE FOR CHOOSING THE PAYMENT AND
DELIVERY METHOD FOR YOUR SUBSCRIPTION CERTIFICATE, AND YOU BEAR THE RISKS
ASSOCIATED WITH SUCH DELIVERY. IF YOU CHOOSE TO DELIVER YOUR SUBSCRIPTION
CERTIFICATE AND PAYMENT BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. WE ALSO RECOMMEND THAT YOU
ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT
AND CLEARANCE OF PAYMENT PRIOR TO __________, 2002. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST TEN BUSINESS DAYS TO CLEAR, WE STRONGLY URGE YOU TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY
ORDER OR WIRE TRANSFER.
IF YOU HAVE QUESTIONS
If you have questions or need assistance concerning the procedure for
exercising subscription rights or if you would like additional copies of this
prospectus, the instructions, or the Notice of Guaranteed Delivery, you should
contact Ian Malcolm, of Computershare Trust Company of Canada, at (888) 661-5566
or (604)661-0232.
If you would like additional copies of this prospectus, the
instructions, or the Notice of Guaranteed Delivery you should contact the
Franklin Lake Resources Inc. office at (650) 588-0425.
DETERMINATION OF OFFERING PRICE
The price of our shares of common stock in this offering was
arbitrarily determined. The factors considered in determining the offering price
included the historic and current market price of the common stock, our
financial condition, challenges facing our Company, our history of profits and
losses, general conditions in the securities market, our need for capital,
alternatives available to us for raising capital, the amount of proceeds
desired, the liquidity of our common stock, the level of risk to our investors,
and the need to offer shares at a price that would be attractive to our
investors relative to the then current trading price of our common stock. The
offering price is not an indication of and is not based upon the actual value of
the Company. The offering price bears no relationship to the book value, assets
or earnings of the Company or any other recognized criteria of value. The
offering price should not be regarded as an indicator of the future market price
of the securities. On April 1, 2002, the last reported sales price of our common
stock on the Nasdaq OTC Bulletin Board was $1.06 per share.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our stock is currently quoted on the Over-the-Counter Bulletin Board.
As of March 31, 2002, we had 6,915,333 shares of common stock outstanding. As of
March 31, 2002, there were approximately 805 record owners and approximately
4,700 beneficial owners of our common shares.
The following tables set forth the high and low bid prices of our
common stock for each of the periods indicated (after giving retroactive effect
to the January 2002 1-for-10 Reverse Stock Split):
Period High Low
November 1, 1999 to January 31, 2000 2.20 0.63
February 1, 2000 to April 30, 2000 1.25 0.63
May 1, 2000 to July 31, 2000 0.63 0.50
August 1, 2000 to October 31, 2000 1.88 0.40
November 1, 2000 to January 31, 2001 0.59 0.30
February 1, 2001 to April 30, 2001 0.48 0.25
May 1, 2001 to July 31, 2001 2.30 0.30
August 1, 2001 to October 31, 2001 0.80 0.40
November 1, 2001 to January 31, 2002 2.90 0.60
February 1, 2002 to April 15, 2002 1.42 0.80
------------
Note: Prices have been adjusted to reflect a 1-for-10 reverse stock split
effective January 9, 2002.
Dividend Policy
Holders of our common stock are entitled to receive such dividends as
our board of directors may declare from time to time from any surplus that we
may have. However, we have not paid any cash dividends since our inception, and
have no plans to declare or pay cash dividends on the common stock in the
foreseeable future.
DESCRIPTION OF BUSINESS
Background - Redomiciliation
We were federally incorporated as Naxos Resources Ltd. in Canada under the
Canada Business Corporation Act on May 23, 1986. At a special meeting convened
October 15, 2001, a majority of our shareholders voted to authorize the Company
to apply for a Certificate of Continuance, continuing the corporation as if it
had been incorporated under the laws of the State of Nevada. Accordingly,
Franklin Lake Resources Inc. ("Franklin Lake" or "the Company") was incorporated
in Nevada on October 29, 2001. On the same date, Articles of Domestication were
filed with the Secretary of State, acknowledging the continuance of Naxos
Resources as Franklin Lake Resources Inc. On January 3, 2002, Industry Canada
issued Naxos a Certificate of Discontinuance. As a result of these filings and
the issuance of the Certificate of Discontinuance the Company is now, and has
been since January 3, 2002 a Nevada corporation and no longer under the
jurisdiction of the Canadian Government.
One consequence of our redomestication from British Columbia to Nevada is to
alter, in material respects, the rights of shareholders. Generally, the Nevada
General Corporation Law (Chapter 78 of the Nevada Revised Statutes) permits the
directors to undertake certain significant actions, such as entering into
reorganization arrangements, changing the Company's independent auditors, or
altering the corporation's capital structure, without prior approval of
shareholders. Moreover, in Nevada a corporation may stipulate in its bylaws that
actions on which shareholders are entitled to vote may be decided by as little
as a simple majority, where Canadian law may require a super-majority vote for
the same sort of action. Also, dissenters' rights are established by statute in
Canada, but not in Nevada.
Development Stage Company
We are a "developmental stage company", as the term is defined in the
Statement of Financial Accounting Standards No. 7 (Accounting and Reporting by
Developmental Stage Enterprises). A Company is considered to be in the
developmental stage if it is devoting substantially all of its efforts to
establishing a new business and either of the following conditions exists:
(1) Planned principal operations have not commenced; or
(2) Planned principal operations have commenced, but they have not produced
significant revenue.
The meaning of the term "development stage" as applied to the progress of our
business does not mean that we have a commercially-proven mining property that
is "in development." For purposes of our mining activities, we are considered to
be an "exploration-stage company," pursuant to Guide 7 of Securities Act of
1933, because we are engaged in the search for mineral deposits and have not
established that minerals exist of a type and in a quantity that would warrant
commercial mining. As of the date of this prospectus, there can be no assurance
that commercially viable mineral deposits will be found to exist on our
properties.
As a developmental stage company, we are not in a position to fund our cash
requirements through our current operations. Recently, we have been able to
raise a limited amount of capital through private placements of our equity
stock, but we are uncertain about our continued ability to raise funds
privately. Further, we believe that in general, junior resources companies such
as Franklin Lake have a difficult time raising capital, particularly so in the
current economic environment. If we are unable to secure adequate capital to
continue our exploration and development efforts, shareholders may lose some or
all of the value of their common stock.
During Fiscal Year 2000, we completed a private offering of 360,500 units
at a price of CDN$1.00 per unit, with each unit consisting of one share of
common stock and warrants to purchase two additional shares. Father Gregory
Ofiesh, our President, who purchased 300,000 of the units, has been making cash
advances to us from his personal funds to cover our day-to-day operations. He is
under no obligation, however, to make any such advances, and there is no
assurance that he will be either willing or able to do so in the future. As of
October 31, 2001, his total cash loans to us were CDN$313,409. He also
contributed rents and management fees of $36,000 which are payable in shares of
our common stock. (The numbers in this paragraph have been adjusted to reflect
the 1-for-10 reverse stock split effective January 9, 2002.)
Ore Sampling Strategy
In the past, we received various conflicting assays with respect to what
minerals, if any, exist at our Franklin Lake site and whether they exist in a
quantity and in a form that would warrant production. Differences in expert
opinions exist as to what methods of analysis to use, whether deposits are
homogeneous throughout and what metals, if any, are present, and, if present, of
what grade and quantity. Such testing is expensive. Prior to the year 2000, we
had spent several million dollars on tests and consulting fees on these matters.
In March 2000, new management was elected and made a review of this subject a
priority.
After examining some of the past tests and studies, and viewing the
extremely limited financial resources of Company, the new management determined
that it would conduct all future exploration and sampling on the site
internally, to limit the use of outside laboratories, and to minimize the use of
independent consultants, in an attempt to gain greater control over the testing
program and greater informational value from our expenditures. Our recent
sampling activities, together with assay reports from prominent metallurgical
laboratories, have led us to believe that precious metals do exist on our sites
at Franklin Lake. Furthermore, we believe we have developed in our laboratory a
process for extracting them, although we have not yet determined whether the
value of the metals produced will exceed the cost of production. We are
currently testing and working on scaling up our new process in order to commence
larger-scale sampling. There is no assurance, however, that even with such
efforts, or with further efforts, that we will be able to process ore
profitably.
Since November 2001, we have spent approximately $80,000 on equipment to
retrofit our pilot plant to accommodate the scaling-up. We are hopeful that this
will allow it to produce precious metals on a scale that although small, will be
consistent enough to interest a refinery in purchasing its product. Even if such
sales are made, there is no assurance that they will produce revenue adequate to
cover ongoing expenses or to fund the expansion of its production to a more
commercially viable level. If not, the Company will be required to raise
additional capital for any such expansion. Should we be unable to raise the
needed capital, we may not be able to continue in business.
In April 2002 we entered into an agreement to purchase certain assets from
Xenolix Technologies, Inc., an Arizona-based mining and exploration company that
recently suspended operations. We purchased several items of equipment used in
ore handling and processing with a depreciated value of $110,000, and
intellectual property including patented mineral recovery processes which we
believe will be applicable to the ores on our properties. As consideration for
the tangible and intangible assets transferred to us, we issued 1,201,657 shares
of our common stock to Xenolix Technologies, and agreed to register the shares
under the Securities Act of 1933 as soon as practicable following the
termination of the rights offering that is the subject of this prospectus. As
additional consideration, we will place into escrow two warrants, each to
purchase an additional 1,201,657 shares of our common stock. The two warrants
expire six months and twelve months, respectively, following the execution of
the asset purchase agreement. The warrants will be released to Xenolix following
our verification and acceptance of the intellectual property, which we expect
will take about sixty days. We have not agreed to register the warrants, or the
shares underlying the warrants, under the Securities Act. We have filed the form
of the agreement as an exhibit to the registration statement of which this
prospectus is a part.
Staffing
As of February 15, 2002, the Company employed personnel equivalent to
four-to-five full-time persons, all in the United States. We believe that our
relationship with our employees is good.
Historical Drill And Assay Program
Since 1991, the Company has conducted and completed numerous drilling and
assay programs. During the fiscal year 1997, we hired Ledoux & Company
("Ledoux") to extensively verify and evaluate different samples of preparation
assay techniques for the most effective methodology for assaying any group
elements of gold and/or platinum that may be present on our site at Franklin
Lake. Ledoux conducted various assay and sample preparation techniques, which in
early testing, they found what it showed to be some presence of gold as
evidenced by their certified assays. The results however were inconsistent.
Also during 1997, we obtained permits for a portion of a proposed 225 drill
hole program, and five holes were drilled under the supervision of Behre Dolbear
Engineering. It was Phase I of three-phase drilling program, scheduled for
completion in 1998. Chain of custody was preserved on the material from these
holes and later was shipped to Colorado Mineral Research Institute for sample
preparation, and subsequently to Ledoux for analysis; again, it showed the
presence of gold.
Subsequent to the end of fiscal year 1997, Ledoux advised us that it was
achieving success in recovering gold from our ores using a conventional approach
involving the preparation, drying, grinding, and splitting of ore. Splitting
means to divide the sample into some number of smaller samples whose assays can
be compared for consistency, thus guarding against a false result due to
contamination or procedural errors in the laboratory.
During 1998, we finally completed Phases II and III of the 225 drill hole
program. Sixty-one holes were drilled to depths ranging from 150 to 250 feet.
Material was then forwarded under chain of custody to Rocky Mountain Geochemical
("Rocky Mountain"). Thereafter, the ore was prepared, split, and sent to two
laboratories: Ledoux and Alfred H. Knight ("Knight") for assaying, in addition
to assaying performed by Rocky Mountain.
In July 1998, we learned from Ledoux that we had received economically
viable assay results with regard to the ore assayed in the 1998 program.
However, shortly thereafter Rocky Mountain and Knight notified us that their
assaying revealed no economically viable precious metals in the ore from the
Franklin Lake property. When Ledoux learned of these reports, it retracted its
assays for the 1998 drill program. After receiving the conflicting results, we
questioned Ledoux as to why it had certified economically viable assay results
while the other two labs that worked with Ledoux's assay protocol had not
achieved similar results. Ledoux's response was that there was contamination in
the rotation of the material at the Ledoux lab that resulted from the rotation
of gold and silver as collectors in the protocol. Ledoux did, however, reaffirm
its support for the assay result it certified with regard to ore processed prior
to the 1998 drill program.
During 1999, the Company also drilled four wells ranging in depth from 600
to 1000 feet to test and identify materials suspended in the brine water located
under the Franklin Lake property. Work performed by the U.S. Geological Survey
in the early 1980's indicated that there might be value in these minerals. The
analysis of the brine water indicated potentially valuable amounts of sodium
sulfate and boron. However, our management decided to focus on precious metals
and not to pursue sodium sulfate and boron.
Subsequent to the end of the fiscal year October 31, 2000, we received
notice from the U.S. Bureau of Land Management ("BLM") that the holes drilled in
1999 had not been properly capped. After receiving the notice, the Company
worked with BLM, employed contractors licensed for this specialized work, and
filled and sealed the holes at an approximate total cost of US$11,000. The work
was completed and completely paid for by April 10, 2001.
Regulation And Licensing
From our inception through January 3, 2002, the Company, doing business as
Naxos Resources, was primarily subject to the law of Canada and required to file
various reports with agencies of Canada (including British Columbia and
Alberta). As Franklin Lake, we will be primarily subject to U.S. and Nevada law.
(See "Background - Redomiciliation," above.) Because the majority of the former
Naxos' shareholders were residents of the U.S., we were also required to file
certain reports with the Securities and Exchange Commission ("SEC") including
Annual Reports on Form 20-F. Our most recent report on Form 20-F was filed for
the fiscal year ended October 31, 2000. As Franklin Lake, we will also be
required to file SEC reports in addition to other federal and government
reports. Principal among these reports will be the Annual Reports on Form
10-KSB, Quarterly Reports on Form 10-QSB, and Current Reports on Form 8-K. Our
Annual Report for the year ended October 31, 2001 was filed on Form 10-KSB.
Our mining operations and exploration activities are subject to extensive
laws and regulation governing prospecting, development, exports, taxes, labor
standards, occupational safety and health, waste disposal, protection and
redemption of the environment, protection of endangered and protected species,
mine safety, toxic substances and other matters. Mining is subject to potential
risks and liabilities associated with pollution of the environment and the
disposal of waste products occurring as a result of mineral exploration and
production. We may in the future be subject to clean up liability under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 and
other Federal and State rules that establish cleanup liability for the release
of hazardous substances. In the context of environmental permits, including the
approval of reclamation plans, we must comply with standards, existing laws and
regulations, which may entail greater or lesser costs and delays depending on
the nature of the activities to be permitted and how the regulations are
implemented by the permitting authority. It is possible that the costs and
delays associated with the compliance with such laws, regulations and permits
could become so onerous that the company would not proceed with the development
of a project or the operation or further development of a mining site.
Amendments to current laws and regulations governing operations and
activities of mining companies are actively considered from time to time and
could have a material adverse impact on us. The mining industry had been subject
to increasing government controls and regulations in recent years.
We have obtained the necessary permits for exploration work performed to
date, and will continue to seek such permits in the future. To date, we have not
experienced any material adverse economic effects as a result of complying with
applicable laws relating to the protection of the environment, but there can be
no assurance that it will not suffer such adverse effects in the future.
Environmental and other laws and regulations are continually evolving. We
cannot determine the impact of future changes in such laws and regulations on
our operations or future financial position, due to the uncertainty surrounding
the ultimate form and scope of such laws and regulations. We believe the Company
to be substantially in compliance with all applicable laws and regulations. If
we are not in compliance with any such law or regulation, we may be subject to
fines, clean-up orders, restrictions on operations, or other penalties.
In recent years, the U.S. Congress has considered a number of proposed
amendments to the General Mining Law, which governs mining claims and related
activities on U.S. Federal lands. If adopted, such legislation could, among
other things, impose royalties on production from current unpatented mining
claims located on Federal lands, and reduce the amount of future exploration and
development activities we may conduct on our unpatented claims. In October 1994,
however, a moratorium on processing new patent applications on mining claims was
approved. While such moratorium currently remains in effect, its future remains
unclear. All of the Company's mining claims so far are located on unpatented
mining claims on U.S. Federal lands.
There is no known cause of action which may have existed by January 3,
2002, when Industry Canada issued the Certificate of Discontinuance, which we,
directly or on behalf of our shareholders may have had against any party in
Canada. To the extent any such cause of action may have existed, it may be
difficult or impractical to pursue. Further, U.S. shareholders may experience
impediments to the enforcement of civil liabilities in the U.S. against foreign
persons such as an officer, director or expert acting on behalf of the Company
in Canada. Such difficulty arises out of the uncertainty as to whether a court
in the U.S. would have jurisdiction over a foreign person in the U.S., whether a
U.S. judgment is enforceable under Canadian Law, and whether suits under U.S.
securities laws could be filed in Canada.
At this time, we have no place of business in Canada and own no property in
Canada. Because of such facts and because of the issuance of the Certificate of
Discontinuance, the Company is no longer subject to regulation by Canada or any
of its provinces. We may, however, if we have a certain minimum number of
shareholders in any Canadian province, be required to file annual or other
informational reports with the appropriate government agency. We believe that at
this time we are required to file reports with Alberta and British Columbia
government agencies, and intend to do so.
Competition
The business of mineral exploration and mine development is highly
competitive, and tends to be dominated by a limited number of major companies.
Although we do not compete directly against any particular firms for sales or
market share, many of the human and physical resources we may require - such as
engineering professionals, skilled equipment operators, and managers, as well as
extractive and metallurgical processes and equipment -- are also sought by
companies with substantially greater financial means than we possess, which
places us at a competitive disadvantage in obtaining such resources.
Accordingly, we cannot be certain that we will be able to obtain the human and
physical resources we may need from time to time.
DESCRIPTION OF PROPERTY
As noted in "Description of Business" above, we hold interests in three
properties, referred to as the Death Valley Junction site, the Franklin Lake
site, and the South San Francisco office.
Death Valley Junction Site
Our laboratory facilities and pilot plant are located at this site. We hold
a lease to 52.5 acres of land and buildings, including tailings piles. The lease
covered an initial ten-year term, which expired on April 24, 2001. The lease
provided, however, that "said principal term to be extended for a period of time
as long as lessee (Company) is active in obtaining permits and/or drilling
and/or making any other agreements as may be later agreed as to a modification
of this lease agreement." Company management believes that its current
activities fall within the meaning of said provision and that the lease is
extended pursuant thereto. The lease requires advance royalty payments of
$1,000.00 per month (increased by mutual agreement to $1,200.00 per month for
months after April 24, 2001) or 5 percent net smelter returns from tailings pile
and settling pond ore, whichever greater.
Franklin Lake Site
Franklin Lake is a dry lake in Inyo County, California. The Lake bed,
called the "playa," and the surrounding area is the ground on which the Company
is conducting its exploration and testing efforts. In its annual report for
Fiscal Year Ended October 31, 2000, the Company reported a lease to 408 mineral
claims. During Fiscal Year Ended October 31, 2001, the exact area covered by the
408 claims was restaked as 58 placer association claims. This was possible
because, whereas the former claims were limited to 20 acres each, the placer
association claims may cover up to 160 acres each, considerably reducing the
Company's claims costs.
South San Francisco Office
The Company uses space in a building owned by the Company president for its
executive and administrative offices. From March 2000, through January 2001, the
president provided such space and provided office support services to us without
charge or other consideration. Effective February 1, 2001, the Company began to
compensate him for such services at the rate of US$1,258.00 (Cdn$2,000.00) per
month. Effective November 1, 2001, the payment was changed to US$2,000 per
month. None of such payments are made in cash; the obligation may only be
redeemed in exchange for shares of Company stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with
our audited financial statements for the fiscal year ended October 31, 2001, and
our interim financial statements (unaudited) for the period ended January 31,
2002.
NOTE: The amounts in the following discussion have been converted to United
States Dollars (US$). A reconciliation between United States Generally Accepted
Accounting Practices and ("GAAP") and Canadian GAAP is provided in the notes to
our audited financial statements under the heading "Financial Information"
below.
Results Of Operations For Fiscal Year Ended October 31, 2001
With respect to the Company's short term liquidity, our "current ratio"
(current assets divided by current liabilities) as of October 31, 2001 was 0.45
compared with 0.25 as of October 31, 2000 and 0.21 as of October 31, 1999. The
greater the current ratio, the greater the short-term liquidity of the Company.
In terms of Company's long-term liquidity, the Company will continue to
depend almost exclusively on equity financing through private placements,
warrants, and options until such time that Company's is able to produce and sell
precious metals in a quantity that will provide the needed funds.
At October 31, 2001, we had working capital in the amount of $28,314
compared with $65,388 at October 31, 2000, and $309,634 at October 31, 1999.
During fiscal year 2001, the Company incurred mineral exploration costs of
$145675, all on our Franklin Lake properties. During fiscal year 2000, we
incurred such costs of $230,576. We expect to continue to concentrate our
resources on further exploration and development of the Franklin Lake
properties.
During the three fiscal years ended October 31, 2001, the Company did not
generate any significant revenues from operations and, since we are not in
production, no royalty payments are payable. We expect to pay no advance
royalties for the fiscal year 2002.
The operating loss for fiscal year 2001 was $311,826, compared to an
operating loss of $454,764 for the year 2000. In the year 2001, the loss per
share was $0.01 compared to a loss of $0.03 in 2000. The weighted average number
of shares in the per-share calculations was 36,316,344 in fiscal year 2001, and
32,548,930 in fiscal year 2000.
As of October 31, 2001, the Company's cash balance was $7,872, compared to
$5,224 on October 31, 2000 and $65,291 on October 31, 1999.
To date, the Company has not implemented environmental loss contingencies
since the Company is not yet in the production stage and therefore has not
experienced any significant environmental concerns.
The Company is a resource development company engaged in the exploration
and, if warranted, development of mineralized properties in the U.S. We are in
the development stage and have not yet earned any significant revenues; as a
developmental stage company all exploration and development stage expenditures
are expensed as incurred.
Since our inception, we have funded our activities by issuing equity stock.
Although we will continue periodically to seek external sources of funds, there
can be no assurance that we will be able to raise sufficient capital to fund our
operations. If we do raise equity capital, depending on the number of shares
issued and the issue price of the shares, current shareholders' interests may be
diluted.
During fiscal year 2001, the Company raised net cash proceeds from equity
financing in the amount of $16,981. In fiscal year 2000, net cash proceeds were
$254,621, and in fiscal year 1999, they were $130,935.
Total cash provided by financing activities, namely the issuance of shares
of common stock and warrants and the exercise of options, during fiscal year
2001 was $287,320, as compared with $273,229 and $130,935 for fiscal years 2000
and 1999, respectively.
The Company's consolidated financial statements were prepared on a going
concern basis, which assumes that the Company will be able to realize assets and
discharge liabilities in the normal course of business. The ability to continue
as a going concern is dependent on the Company's ability to generate profitable
operations in the future, to maintain adequate financing, and to achieve a
positive cash flow. There is no assurance it will be able to meet any or all of
such goals.
Interim Period through January 31
During the period from October 31, 2001 through January 31, 2002 we
continued operations as in the previous year.
Mineral exploration expenses were approximately the same as in the previous
year.
Administrative expenses increased in several accounts. This period included
salaries to an employee of $3,200 versus no salary expense for the prior year.
Travel increased because of more trips between the Company's executive and
administrative offices and its operations sites. Office expenses increased from
$(1,180) to $8,197 partly because of shifts of items between accounts and
between accounting periods. Management fees and rent increased but neither of
these accounts involves cash; the amounts are payable only by the issuance of
shares of our stock.
During the interim period, we issued 600,000 shares of our stock for
$150,000 on a subscription received in a prior period, and 120,000 shares for
$30,000 cash.
Subsequent Events
On April 9, 2002 we entered into an agreement to acquire certain tangible
and intellectual assets of Xenolix Technologies, Inc. of Summit, New Jersey. In
connection with that agreement, we issued 1,201,657 shares of common stock to
Xenolix, and reserved an additional 2,403,314 shares for issuance against the
possible conversion of warrants issued to Xenolix under the same agreement. The
warrants are exercisable 50% within six months, and 50% within 12 months, of the
date of issue, at an exercise price of $1.08. The warrants were issued into an
escrow account, to be released to Xenolix upon our verification and acceptance
of the intellectual property that was the principle subject of the purchase
agreement.
Plan Of Operation For Fiscal Year 2002
We will need to raise additional equity capital to support our
operations during the next 12 months. We have focused our limited resources on
the completion of the pilot plant and implementation of the bulk sampling
program, but will be unable to continue beyond 90 days or so without an infusion
of cash. We hope and expect, but cannot be certain, that subscriptions to our
common stock under this rights offering will provide funds to continue; if not,
we will explore alternative financing options, or perhaps a joint venture
arrangement with a company capable of completing the plant and conducting the
sampling.
MANAGEMENT
The directors and executive officers of the Company are as follows:
Name Age Position Service Began
--------------------------------------------------------------------------------
Stanley Combs 56 Director, Chairman July 1998
Father Gregory Ofiesh 70 President, Chief March 2000
Executive Officer,
Acting Treasurer and
Director
Robert Chatwin 75 Director July 1998
Maher Moussa 36 Director April 2001
Kamal Alawas 50 Director January 2002
Paul Kaser Director January 2002
Peter Boyle 63 Vice President - August 2000
Regulatory Affairs,
Secretary
Frances Nelson* 47 Treasurer* January 2002*
---------------
* Frances Nelson resigned as Treasurer in April, 2002, and her successor has not
yet been appointed. Father Gregory Ofiesh has assumed the duties of acting
treasurer. Ms. Nelson's resignation was for personal reasons and not as a result
of any disagreement with the Company.
STANLEY R. COMBS, director and chairman of the board, is a Florida
resident. Mr. Combs is currently self-employed as a business consultant. Until
January 2001, he was Vice President of Asighning Construction - Laundromax -
Architect. Prior to that he had been director of planning and construction for
Claire's Stores.
FATHER GREGORY OFIESH, director, president and chief executive officer, is
California resident. After 42 years as an Orthodox priest, Father Ofiesh retired
as Pastor of St. Nicholas Orthodox Church, San Francisco, California, on January
1, 2001. Prior to his retirement, he was, and he continues to serve as, Dean of
the San Francisco Bay Area Orthodox Clergy.
ROBERT CHATWIN, a director, is a resident of British Columbia. He is a
retired businessman.
MAHER MOUSSA, a director, is a citizen of Canada, resident in the U.S. He
is currently self-employed as a business consultant. Previously, he was employed
in a family import-export business in Egypt and Canada.
PAUL A. KASER, a resident of New Jersey, is a chemical engineer with BASF, a
large chemical company.
KAMAL ALAWAS, resident of Washington, is the president of International
Star Inc. and Sidon International Resources Corp., both mining companies.
Previously, he was associated with other mining companies and involved with
private investments.
PETER BOYLE, vice president-regulatory affairs, is resident of California.
He is an attorney-at-law and a member of the State Bar of California. He has
over 35 years of experience representing a diverse group of businesses on a wide
range of transactional, corporate, and regulatory matters. He is a graduate of
the University of Notre Dame and the University of Pennsylvania Law School.
FRANCES NELSON, Treasurer, is employed by Franklin Lake on a part time
basis, and also works part time as controller of Romono, Inc., a wholesale
baking company owned by members of Father Ofiesh's family. She previously served
as assistant controller of another bakery. She studied accounting at Skyline
College and is a licensed by the State of California as a tax preparer.
There are no family relationships between any directors and/or executive
officers. There are no arrangements or understandings between any director
and/or executive officer and any other party relating to the selection of any
person as an officer or director.
To the Company's knowledge, it is not owned or controlled, directly or
indirectly, by another corporation or any foreign government.
EXECUTIVE COMPENSATION
Summary Compensation Table
The Company does not currently have any formal plan or standard
arrangement for compensating its directors for their services as directors,
other than the granting of stock options. The Company gives each director an
option to purchase 5,000 shares of Company stock (adjusted for the reverse split
effective January 9, 2002), for each year he serves as a director. The options
are for three years and are granted at the market price on the date of the
grant. Although the Director Stock Option Plan has expired, it is the Company's
intention to continue this practice. Directors receive no cash compensation.
The following table sets forth a summary of compensation received by
each of our officers and directors who received compensation from the Company
during either of our most recent fiscal years.
[Enlarge/Download Table]
===================================================================================================================
Name and Principal Position Year Annual Compensation Long-Term Compensation
-------------------------------------------------------------------------------------------------------------------
Awards Payouts
------------------------------------
All Other
Salary ($) Bonus ($) Options (#) Compensation ($)
-------------------------------- ------- -------------- ------------ ------------ -------------------
Father Gregory Ofiesh 2001 $27,642
President, CEO, Director 2000 $17,647
1999 $0
Peter Boyle 2001 $27,962
Vice President 2000 $9,052
1999 $0
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* The payments to Father Gregory Ofiesh, President and CEO, are called
management fees, but they are not payable in cash; the amounts may only
used to purchase securities of the Company.
** Peter Boyle, vice president-regulatory affairs, is an attorney at law and
does not work full-time for the Company. He is paid on a fee basis and the
amounts above represent the fees paid to him during each of the respective
years.
No funds were set aside or accrued by the Company during fiscal year 2001
or 2000 to provide pension, retirement or similar benefits for directors or
executive officers.
The table below provides information, as of April 1, 2001, as to the number
of outstanding shares of common stock subject to stock options held by directors
and officers of the Company. The numbers have been adjusted to give effect to
the 1-for-10 reverse stock split effective January 9, 2002.
Stock Options Outstanding - Directors/Officers
As Of April 1, 2001
==========================================================================
Expiration Date Exercise Price Number of Common Shares
--------------------------------------------------------------------------
October 1, 2002 CDN$0.13 5,000 (director)
October 1, 2002 CDN$0.13 5,000 (former director)
November 27, 2002 CDN$0.13 10,000 (director)
November 27, 2002 CDN$0.13 5,000 (former director)
March 24, 2003 CDN$0.10 15,000 (director)
March 24, 2003 CDN$0.10 7,000 (former director)
----------
Total 47,000
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Under Canadian securities law, if any warrants are exercised during the
first twelve months after issuance, the shares cannot be transferred prior to
the end of such twelve-month period.
Under U.S. securities law, shares issued on the exercise of such warrants
cannot be transferred until 12 months from the date of exercise and full payment
of the exercise price.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
The Nevada General Corporations Law, codified in Chapter 78 of the Nevada
Revised Statutes, permits a corporation to indemnify its officers and directors
against liabilities that may arise in the course of their service. The By-laws
of Franklin Lake Resources Inc. provide that the Company shall indemnify its
officers and directors to the fullest extent permitted by law. We have not
entered into any specific contractual arrangement with any officer or director
with respect to such indemnification.
We have been advised that in the opinion of the SEC, indemnification for
liabilities arising under the Securities Act is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities is asserted by one of
our directors, officers or controlling persons in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit the question of whether such
indemnification is against public policy to a court of appropriate jurisdiction.
We will then be governed by the court's decision.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of February 15, 2001, the beneficial
ownership of the Common Stock: (i) by each stockholder known by the Company to
beneficially own more than 5% of the Common Stock (ii) by each director of the
Company; (iii) by the Company's Chief Executive Officer; and (iv) by all
executive officers and directors of the Company as a group. Amounts presented
give effect to the January 9, 2002 one-for-ten reverse stock split Except as
otherwise indicated below, each named beneficial owner has sole voting and
investment power with respect to the shares of Common Stock listed.
=====================================================================
Title Percent
of Class Persons or Group Shares Owned of Class
=====================================================================
Common Father Gregory Ofiesh (1)
172 Starlite Street
South San Francisco
California 94080 2,382,096 37.2%
Common Kamal Alawas,
172 Starlite Street 0 0%
South San Francisco
California 94080
Common Robert Chatwin (2)
172 Starlite Street 34,700(2) 0.5%
South San Francisco
California 94080
Common Stan Combs
172 Starlite Street 6,250 0.1%
South San Francisco
California 94080
Common Paul Kaser
172 Starlite Street 10,000 0.2%
South San Francisco
California 94080
Common Maher Moussa
172 Starlite Street 0 0%
South San Francisco
California 94080
Common Peter Boyle
172 Starlite Street 5,000 0.1%
South San Francisco
California 94080
Common Forrest G. Godde(4)
P.O. Box 1152 744,230 9.2%
Lancaster, CA 93584-1152
----------------------------------------------------------------------------
Common Officers and Directors
as a Group (3) 2,438,046 38.1%
============================================================================
(1) Father Gregory Ofiesh, President and a Director, hold warrants to purchase
2,000,000 shares of common stock. Exercise of all such warrants, and
assuming the exercise of all other outstanding warrants and options, would
result in beneficial ownership of 4,382,096 shares, or 42.6% of the class.
(2) Robert Chatwin, a Director, holds warrants to purchase 27,000 shares of
common stock. Exercise of all such warrants, and assuming the exercise of
all other outstanding warrants and options, would result in beneficial
ownership of 61,700 shares, or 0.6% of the class.
(3) Upon exercise of outstanding warrants, Officers and Directors as a group
would beneficially own 4,595,496 shares, or 44.9% of the class.
(4) Mr. Godde is an investor who does not hold a position in the Company.
There are currently no arrangements known to the Company the operation of
which may at a subsequent date result in a change of control of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 21, 1998, the Company had agreed to loan Jimmy John, former
director, former chairman of the board, and former president of the Company,
CDN$733,107.45 to exercise existing warrants held by him for shares in the
Company. The loan is now due but unpaid and Company has filed suit against Mr.
John, and he has filed a counter-claim against the Company. See Item 3, "Legal
Proceedings."
In the fiscal year 1999, the Company received an offer from Father Gregory
Ofiesh, a director but then not an officer of the Company, to purchase all
property owned by the Company (including improvements and equipment located
thereon), situated in the County of Nye, State of Nevada. In the fiscal year of
2000, the Company sold the property to him on the following terms:
1. The Company sold all rights, titles, and interests in the property for
US$125,000, payable in full at closing, with the title to the property to
be free and clear of all liens, charges and encumbrances.
2. The Company has the right to store ore samples conveyed under chain of
custody and under the Company's lock and key in a satisfactory place
located in a building on the property at no charge to the Company.
3. The closing date was February 1, 2000, with the full purchase price paid in
cash; and
4. All costs of this transaction were borne by the purchaser.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 45,000,000 shares of common stock,
par value $0.001 per share, of which 8,116,990 shares have been issued and are
outstanding, and 5,000,000 shares of preferred stock, of which no shares have
been issued or are outstanding.
Under Nevada law and our Articles of Incorporation, holders of common stock
are entitled to the following rights and privileges:
1. to cast one vote per share on all matters to be voted upon by the
stockholders;
2. subject to preferences that may be applicable to any outstanding preferred
stock, to share ratably in dividends, if any, when and if declared from
time to time by the Board of Directors out of legally available funds; and
3. in the event of the liquidation, dissolution or winding up of Franklin
Lake, to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if
any, then outstanding.
The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
Anti-takeover Effects of Nevada Law.
The Nevada General Corporation Law, codified as Chapter 78 of the Nevada
Revised Statutes, applies to the Company since we are a Nevada corporation..
Under certain circumstances, the following selected provisions of the NGCL may
delay or make more difficult acquisitions or changes of control of the Company.
The Articles and By-laws do not exclude the Company from such provisions of the
NGCL. Such provisions also may have the effect of preventing changes in the
management of the Company. It is possible that such provisions could make it
more difficult to accomplish transactions that stockholders may otherwise deem
to be in their best interests, and that they could limit or prevent an upward
fluctuation in the price of our common stock in response to a take-over attempt.
NRS 78.378 to 78.3793 limits the voting rights of a person who acquires a
controlling interest in a Nevada corporation.
NRS 78.411 to 78.444 limits certain business combinations with interested
stockholders, unless the combination is approved by a majority of the
corporation's directors prior to the interested stockholder acquiring his or her
shares.
NRS 78.200 empowers a corporation's board of directors to create and issue
rights or options to purchase any class of the company's equity stock. Such an
issuance may be used to prevent or discourage a change of control of the
Company.
NRS 78.138 permits the board of directors to determine whether a change in
control or proposed business combination is in the best interests of the
corporation, and to take action to continue the corporation's independence if it
so chooses.
Transfer Agent and Registrar
The transfer agent and registrar for Franklin Lake's common stock is
Computershare Trust Company of Canada, 510 Burrard Street, Vancouver, British
Columbia, Canada V6C 3B9. Computershare's telephone number is (604) 661-0232 and
its facsimile number is (604) 683-3694.
Shares Eligible for Future Sale
Upon completion of this offering, if all the subscription rights are
exercised, the Company will have a maximum of 9,740,388 shares of Common stock
outstanding. All of the shares sold by the Company in this offering will be
freely transferable without restriction or further registration under the
Securities Act, except for any shares purchased by an "affiliate" of the Company
(as defined under the Securities Act). Also, we have agreed to register
1,201,657 shares that we issued to Xenolix Technologies, Inc., in exchange for
assets we purchased from them. Once the registration statement becomes effective
those shares will be freely transferable and could be sold into the market. Of
the remaining 6,915,333 shares of common stock, certain shares may be
"restricted securities" under applicable securities laws. Additional shares of
common stock may become eligible for sale in the public market from time to time
upon exercise of warrants and stock options.
Holders of restricted securities must comply with the requirements of Rule
144 in order to sell their shares in the open market. In general, under Rule 144
as currently in effect, any affiliate of the Company and any person (or persons
whose sales are aggregated) who has beneficially owned his or her restricted
shares for at least two years, would be entitled to sell in the open market
within any three-month period a number of shares that does not exceed the
greater of: (i) 1% of the then outstanding shares of the Company's Common Stock;
or (ii) the average weekly trading volume reported on the Nasdaq OTC Bulletin
Board during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain limitations on manner of sale, notice requirements,
and availability of current public information about the Company. Non-affiliates
who have held their restricted shares for two years are entitled to sell their
shares under Rule 144 without regard to any of the above limitations, provided
they have not been affiliates of the Company for the three months preceding such
sale. As of April 1, 2002, options to acquire 47,000 shares and warrants to
acquire 327,000 shares were outstanding.
We can make no prediction as to the effect, if any, that sales of shares of
common stock or the availability of shares for sale will have on the market
price of our common stock. Nevertheless, sales of significant amounts of common
stock could adversely affect the prevailing market price of common stock, as
well as impair the ability of the Company to raise capital through the issuance
of additional equity securities.
FINANCIAL INFORMATION
The Company's consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP") and all
amounts therein are expressed in Canadian Dollars unless otherwise stated.
Reconciliation to U.S. generally accepted accounting principles ("U.S. GAAP") is
contained in the Notes to the Consolidated Financial Statements. The value of
the Canadian Dollar in relation to one U.S. Dollar was CDN$1.59 for every
US$1.00 as of October 31, 2001; CDN$1.53 as of October 31, 2000; and CDN$1.47 as
of October 31, 1999. See attached Consolidated Financial Statements attached and
Notes thereto.
INDEX TO FINANCIAL STATEMENTS
Pages
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Report of Independent Auditors
Consolidated Balance Sheets as of October 31, 2001 and 2000
Consolidated Statements of Operations for the years ended
October 31, 2001 and 2000
Consolidated Statements of Stockholders Equity for the years
ended October 31, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended
October 31, 2001 and 2000
Notes to Consolidated Financial Statements
Differences Between Canadian And United States Generally
Accepted Accounting Principles (Canadian GAAP and US GAAP)
ELLIS FOSTER
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: generaldelivery@ellisfoster.bc.ca
Website: www.ellisfoster.com
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INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Naxos Resources Ltd.
(An Exploration State Company)
We have audited the consolidated balance sheet of Naxos Resources Ltd. as at
October 31, 2001 and the consolidated statements of operations and deficit and
cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at October 31, 2001
and the results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
The consolidated financial statements as at October 31, 2000 and for the year
then ended were audited by other auditors who expressed an opinion without
reservation in their report dated February 16, 2001.
Vancouver, Canada "Ellis Foster"
January 3, 2002 Chartered Accountants
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by significant uncertainties such as that referred to in
the attached balance sheets as at October 31, 2001 and described in note 1 to
the financial statements. Our report to the shareholders dated January 3, 2002
is expressed in accordance with Canadian reporting standards which do not permit
a reference to such an uncertainty in the auditors' report when the uncertainty
is adequately disclosed in the financial statements.
Vancouver, Canada "Ellis Foster"
January 3, 2002 Chartered Accountants
NAXOS RESOURCES LTD.
(An Exploration Stage Company)
Consolidated Balance Sheet
October 31, 2001
(In Canadian Dollars)
[Enlarge/Download Table]
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2001 2000
-------------------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 12,516 $ 7,993
Tax credits recoverable 318 -
Prepaid expenses 6,402 3,949
-------------------------------------------------------------------------------------------
19,236 11,942
Reclamation bond 45,145 58,831
Loan receivable (note 3) 1 1
Resource properties (note 4) 4 8
Plant and equipment (note 5) 68,122 85,134
-------------------------------------------------------------------------------------------
$ 132,508 $ 155,916
===========================================================================================
LIABILITIES
Current
Accounts payable and accrued liabilities $ 73,047 $ 111,985
Due to a director 313,409 42,240
Loan payable (note 6) 158,670 -
-------------------------------------------------------------------------------------------
545,126 154,225
-------------------------------------------------------------------------------------------
SHARE CAPITAL AND DEFICIT
Share capital (note 7) 38,533,805 38,441,387
Deficit (38,946,423) (38,439,696)
-------------------------------------------------------------------------------------------
(412,618) 1,691
-------------------------------------------------------------------------------------------
$ 132,508 $ 155,916
===========================================================================================
The accompanying notes form an integral part of these consolidated financial
statements.
Approved by the Directors:
"Father Gregory Ofiesh" "Robert Chatwin"
----------------------------- --------------------------
Father Gregory Ofiesh Robert Chatwin
NAXOS RESOURCES LTD.
(An Exploration Stage Company)
Consolidated Statement of Operations and Deficit
Year Ended October 31, 2001
(In Canadian Dollars)
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------
Cumulative from
inception on Year Ended Year Ended
May 23, 1986 to October 31, October 31,
October 31, 2001 2001 2000
------------------------------------------------------------------------------------------------------
Expenses
Amortization $ 4,616,082 $ 17,012 $ 23,960
Automobile 230,512 - 233
Bad debt 44,269 - -
Capital taxes 5,996 - -
Filing fees 93,028 1,400 235
Interest and bank charges 130,471 892 2,218
Investor relations 1,732,878 16,362 76,127
Management fees 372,123 36,000 27,000
Mill testing 1,917,564 - -
Mineral exploration (note 4(b)) 14,959,443 232,429 352,781
Office and miscellaneous 971,092 16,938 45,899
Professional and administrative fees 6,727,281 133,609 107,739
Rent 489,682 12,416 31,790
Research and development 406,300 - -
Salaries and benefits 1,059,727 - 1,424
Transfer agent fees 232,201 9,727 12,755
Travel 1,439,061 27,583 13,628
-----------------------------------------------------
Operating loss (35,427,710) (504,368) (695,789)
-----------------------------------------------------
Other income (expenses)
Interest income 226,061 5,196 9,800
Joint venture equity income 216,856
Foreign exchange (loss) gain 107,973 (7,551) 28,200
Provision for loss on loan receivable (665,673) - (665,673)
Gain on settlement of debt 170,645 - 40,645
Recovered on abandonment
of Venezuelan subsidiaries 152,496 - 152,496
Gain on sale of capital assets 50,641 - 21,172
Write-down of resource properties (1,996,624) (4) -
Write-down of plant and equipment (1,613,089) - (60,000)
Write-down of license agreement (167,999) - -
-----------------------------------------------------
(3,518,713) (2,359) (473,360)
-----------------------------------------------------
Loss for the year (38,946,423) (506,727) (1,169,149)
Deficit, beginning of year - (38,439,696) (37,270,547)
-----------------------------------------------------
Deficit, end of year $ (38,946,423) $ (38,946,423) $ (38,439,696)
=====================================================
Loss per share $ (0.01) $ (0.04)
=====================================================
Weighted average number of common shares 36,316,344 32,548,930
=====================================================
The accompanying notes form an integral part of these consolidated financial
statements.
NAXOS RESOURCES LTD.
(An Exploration Stage Company)
Consolidated Statement of Cash Flows
Year Ended October 31, 2001
(In Canadian Dollars)
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------
Cumulative from
inception on Year Ended Year Ended
May 23, 1986 to October 31, October 31,
October 31, 2001 2001 2000
---------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Loss for the year $ (38,946,423) $ (506,727) $ (1,169,149)
Adjustments for items not involving cash:
Amortization 4,616,082 17,012 23,960
Write-down of plant and equipment 1,613,089 - 60,000
Gain on disposal of plant and equipment (63,477) - (21,172)
Provision for loss on loan receivable 665,673 - 665,673
Issuance of common shares
for debt settlement 720,827 - 81,409
Write-down of license agreement 167,999 - -
Issuance of common shares for services 85,250 - -
Issuance of common shares
for mineral expenditures 1,017,915 - -
Gain of settlement of debt (40,645) - (40,645)
Recovered on abandonment of
Venezuelan subsidiaries (152,496) - (152,496)
Write-down of resource properties 1,996,624 4 -
---------------------------------------------------------
(28,319,582) (489,711) (552,420)
Changes in non-cash working capital items
Increase in tax credits recoverable (318) (318) -
Decrease (increase) in prepaid expenses (65,231) (2,453) 48,841
Increase (decrease) in accounts
payable and accrued liabilities 391,604 26,480 (211,713)
---------------------------------------------------------
(27,993,527) (466,002) (715,292)
---------------------------------------------------------
Cash flows from (used in) financing activities
Funds received from the issuance of shares 34,184,344 27,000 375,800
Increase in due to a director 313,409 271,169 42,240
Increase in loan payable 158,670 158,670 -
Repayment of long-term debt (162,336) - -
---------------------------------------------------------
34,494,087 456,839 418,040
---------------------------------------------------------
Cash flows from (used in) investing activities
Acquisition of plant and equipment (5,556,293)
Proceeds on sale of plant and equipment 1,215,197 - 201,834
Decrease in loan receivable (725,674) - 7,433
Decrease in reclamation bond 13,686 13,686 -
Acquisition of resource properties (1,434,960) - -
---------------------------------------------------------
(6,488,044) 13,686 209,267
---------------------------------------------------------
Increase (decrease) in
cash and cash equivalents 12,516 4,523 (87,985)
Cash and cash equivalents, beginning of year - 7,993 95,978
---------------------------------------------------------
Cash and cash equivalents, end of year $ 12,516 $ 12,516 $ 7,993
=========================================================
The accompanying notes form an integral part of these consolidated financial
statements.
1. Continuing Operations
Since inception in 1986, the Company has incurred cumulative losses of
$38,946,423 and has a working capital deficiency of $525,890 at October 31,
2001. These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles applicable to a going
concern which assumes that the Company will realize its assets and discharge its
liabilities in the normal course of business. Realization values may be
substantially different from carrying values as shown in these financial
statements should the Company be unable to continue as a going concern.
The Company's ability to meet its obligations and maintain its operations is
contingent upon several factors, including profitable operations, successful
completion of additional financing arrangements and the continuing support of
its creditors and shareholders.
2. Significant Account Policies
- Basis of presentation
The Company follows accounting principles generally accepted in
Canada. All amounts shown in these consolidated financial statements
are in Canadian dollars unless otherwise stated.
- Principles of consolidation
The financial statements include the accounts of Naxos Resources Ltd.,
and its wholly owned subsidiaries, Naxos Resources (U.S.A.) Ltd. and
Franklin Mining Corporation.
- Nature of exploration stage activities
The Company is engaged in the acquisition and exploration of precious
metals properties.
Mineral exploration expenditures are charged to earnings until it is
determined that a property has economically recoverable ore reserves;
further exploration expenditures will then be capitalized. Incidental
revenues from mineral sales during the exploration phase are offset
against mineral exploration expenses.
- Amortization
Amortization is calculated using the declining balance method at the
following annual rates:
Office furniture and equipment 20% - 30%
Mining equipment 20% - 30%
- Foreign exchange
The accounts of the Company's integrated foreign subsidiaries are
translated into Canadian dollars using the temporal method. Under this
method, monetary assets and liabilities are translated at the rate in
effect at the balance sheet date. Other balance sheet items and
revenues and expenses are translated at the rates prevailing on the
respective transaction dates. Exchange gains and losses are included
in operations.
- Restoration, rehabilitation and environmental expenditures
Restoration, rehabilitation and environmental expenditures are charged
to earnings as incurred during the exploration phase. Significant
restoration, rehabilitation and environmental expenditures to be
incurred subsequent to the cessation of exploration are accrued when
their extent can be reasonably estimated.
- Use of estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
- Cash and cash equivalents
Cash equivalents usually consist of highly liquid investments which
are readily convertible into cash with maturities of three months or
less when purchased.
- Loss per share
Loss per share is based on the weighted average number of common
shares outstanding during the year. Diluted loss per share is not
presented as it is not dilutive.
- Stock based compensation
No compensation expense is recognized when stock options are issued to
employees and directors. Any consideration paid by employees and
directors on the exercise of stock options is credited to share
capital. If stock options are repurchased from employees and
directors, the excess of the consideration paid over the carrying
amount of the stock options is charged to deficit.
- Income taxes
The Company has adopted the provision of The Handbook of the Canadian
Institute of Chartered Accountants Section 3465, Income Taxes. Under
this standard, current income taxes are recognized for the estimated
income taxes payable for the current period.
Future taxes are recognized for the tax consequences of "temporary
differences" by applying enacted or substantively enacted statutory
tax rates applicable to future years to differences between the
financial statement carrying amounts and tax basis of existing assets
and liabilities. The effect on deferred taxes for a change in tax
rates is recognized in income in the period that includes the date of
enactment or substantive enactment. In addition, Section 3465 requires
the recognition of future tax benefits to the extent that realization
of such benefits is more likely than not.
3. Loan Receivable
On January 21, 1998, the Company loaned a former director $733,107 to exercise
warrants for a total of 321,833 shares of the Company. The loan did not bear
interest and was for a period not to exceed 24 months. The former director
deposited the shares acquired into escrow as security for the loan.
On December 18, 1998, the director resigned and accordingly, the loan became due
immediately. To date, the Company's attempt to collect this loan have been
unsuccessful. The Company has charged a provision for loss of $665,673 to
operations in fiscal 2000 based on its estimate of collectibility of the loan at
that time.
The loan receivable is carried at nominal value of $1 at October 31, 2001. Any
amounts recovered in the future on this note receivable will be credited to
operations in the year of recovery. In the event the shares held in escrow are
returned, they will be cancelled, without recognition of gain to the Company.
4. Resource Properties
- Franklin Lake Project, California, USA
The Company holds/held the following mineral property interests.
- Lease to 99 mineral claims in Inyo County, California
The lease requires advance royalty payments of US$1,500 per
month. The property is subject to a 10% net smelter or mill
returns royalty.
The Company may purchase the claims upon payment of US$800,000.
The lease to these mineral claims was abandoned in the year 2001.
- Lease to 52.5 acres of land and buildings, including tailings
piles in Inyo County, California.
The lease requires monthly payments equal to the greater of
US$1,200 or 5% of net smelter returns of ore extracted from the
tailings.
- Interest in 58 placer association claims in Inyo County,
California.
During the year, the exact area as was covered by the 408 mineral
claims reported as of October 31, 2000, was restaked as 58 placer
association claims. This was possible because, whereas the former
claims were limited to 20 acres each, the placer association
claims may cover up to 160 acres each, considerably reducing the
Company's claim costs.
- Mineral exploration expenditures incurred are as follows:
2001 2000
----------------------------------------- ---------- ----------
Assaying $ 2,310 $ 12,239
Claims and lease payments 60,509 167,531
Drilling - 26,088
Engineering 2,772 5,737
Reclamation, repairs and maintenance 46,113 65,058
Supplies and chemicals 16,355 7,514
Wages and benefits 104,370 68,614
----------------------------------------- ---------- ---------
5. Plant and Equipment
Net Book Value
Accumulated -----------------------
Cost Amortization 2001 2000
------------------------------------------------
Office furniture
and equipment 44,468 $ 18,773 $ 25,695 32,115
Mining equipment 318,572 276,145 42,427 53,019
--------- -------------- ----------- -----------
363,040 $ 294,918 $ 68,122 $ 85,134
========= ============== =========== ===========
6. Loan Payable
The loan payable is non-interest bearing and will be settled by the future
issuance of shares from the Company stock.
7. Share Capital
- Authorized: unlimited common shares without par value
- Issued:
[Download Table]
Number
of Shares Amount
-------------------------------------- ------------- ---------------
Balance, October 31, 1999 $ 31,710,330 $ 37,984,178
Issued for cash 3,758,000 375,800
Issued for settlement of debt 550,000 81,409
-------------------------------------- ------------- ---------------
Balance, October 31, 2000
Issued for settlement of debt 475,000 65,418
-------------------------------------- ------------- ---------------
Allotted for cash at $0.10 per share 270,000 27,000
-------------------------------------- ------------- ---------------
Balance, October 31, 2001 $ 36,763,330 $ 38,533,805
====================================== ============= ===============
- At October 31, 2001, the following share purchase warrants were
outstanding:
Number of Shares Exercise Price Expiry Date
-------------------------- ----------------- ----------------
3,270,000 0.10 October 18, 2002
========================== ================= ================
- As at October 31, 2001, the following stock options were outstanding:
Number of Shares Exercise
Subject to Stock Options Price Expiry Date
------------------------------- ----------- ---------------------
25,000 (former director) $0.08 December 18, 2001
(subsequently expired)
50,000 (director) 0.13 October 1, 2002
50,000 (former director) 0.13 October 1, 2002
100,000 (director) 0.13 November 27, 2002
50,000 (former director) 0.13 November 27, 2002
150,000 (director) 0.10 March 24, 2003
70,000 (former director) 0.10 March 24, 2003
------------------------------ ----------- ---------------------
8. Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, tax
credits recoverable, prepaid expenses, reclamation bond, loan receivable,
accounts payable and accrued liabilities, due to director and a loan payable.
The fair value of these financial instruments approximate their carrying values,
unless otherwise noted. The Company is not exposed to significant interest,
currency or credit risk arising from these financing instruments.
9. Related Party Transaction
The aggregate amount of expenditures, either paid or accrued, to parties not at
arm's length to the Company consist of the following:
2001 2000
-------------------------------------------- ---------- ------------
Management fees to a director who is
also the president of the Company to
be settled by future issuance of
Company stock $ 36,000 $ 27,000
Investor relation expenses paid to a
former president of the Company. - 35,160
Reimbursement for office overhead,
services and supplies to a director who
is also the president of the Company to
be settled by future issuance of
Company stock 24,000 -
Legal fees paid to an officer of the
Company 40,736 -
-------------------------------------------- ---------- ------------
$ 100,736 $ 62,160
========== ============
10. Income Taxes
At October 31, 2001, the Company had net operating loss carryforwards for
Canadian income tax purposes of approximately $9,800,000 which, if not utilized
to reduce Canadian taxable income in future periods, will expire during the
years 2002 through 2009.
At October 31, 2001, the Company had net operating loss carryforwards for U.S.
income tax purposes of approximately $8,500,000, which, if not utilized to
reduce U.S. taxable income in future periods, will expire during the years 2009
through 2021.
No tax benefits have been recognized in the statements of operations from the
availability of operating loss carryforwards due to the uncertainty of their
realization.
11. Segmented Information
12. Industry information
The Company considers itself to be operating in one reportable operating
segment, being the acquisition and development of resource properties.
- Geographic information
The Company's non-current assets by geographic locations are as
follows:
2001 2000
----------- ------------
USA $ 113,271 $ 143,973
Canada 1 1
----------- ------------
$ 113,272 $ 143,974
=========== ============
13. Non-Cash Financing and Investing Activities
The Company issued 475,000 common shares to settle outstanding debt of $65,418
during the year.
14. Comparative Figures
Certain of the comparative figures for the 2000 fiscal year have been
reclassified to conform to the presentation adopted for the fiscal 2001 year.
15. Subsequent Events
Subsequent to October 31, 2001, the Company was re-domiciled from Canada to the
United States as a Nevada corporation. The shareholders have approved a
consolidation of the Company's outstanding and issued share capital on the basis
of one new share being issued for each ten shares currently held and have
approved a change of the Company's name to Franklin Lake Resources Inc.
16. Differences Between Canadian And United States Generally Accepted
Accounting Principles (Canadian GAAP and US GAAP)
- Recent accounting pronouncements
(i) Earnings per share
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard No. 128 (SFAS
128), "Earnings per Shares". The statement is effective for
financial statements for periods ending after December 15, 1997,
and changes the method in which earnings per share will be
determined. The Company's adoption of FASB 128 for U.S. GAAP
purposes results in no difference in net loss per share
disclosure.
(ii) Income tax
Under Canadian GAAP, the future tax benefit related to the
non-capital loss carry forwards have not been recorded in the
accounts. Under U.S. GAAP, companies must follow the requirements
of Statement of Financial Accounting Standards No. 109 (SFAS 109)
which requires the use of the asset/liability method of
measurement of tax liabilities, wherein deferred tax assets are
recognized as well as deferred tax liabilities.
The Company has significant non-capital loss carry forwards (note
10). SFAS 109 would require the recognition of a long-term tax
asset for the future benefit expected from the application of
these carryforwards to future profitable years. If it is expected
that the entire amount of non-capital loss carryforwards will not
be utilized, then a valuation allowance is applied to the asset
to reasonably state the asset at its expected value. Under SFAS
109, disclosure of the amount of the valuation allowance is
required. As at May 31, 2001, the valuation allowance is equal to
100% of the deferred tax asset. Changes in the value of the
deferred asset are recognized each year as income tax expense.
(iii) SFAS 130, "Reporting Comprehensive Income" and SFAS 131,
"Disclosures About Segments of an Enterprise and Related
Information" were also issued in 1997. These standards, which
became effective in 1998, expand or modify disclosures and,
accordingly, will have no effect on the corporation's
consolidated financial position, results of operations or cash
flows.
- In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements. SAB 101 provides
guidance on applying generally accepted accounting
principles to revenue recognition issues in financial
statements. The Company has not assessed the effect that
such adoption may have on its consolidated results of
operations and financial position.
- Stock Options
The Company has granted founders, directors and certain
employees stock options. All options granted were vested
immediately and will be exercised from the date of grant for
a period from two to five years.
A summary of the options granted is as follows:
-----------------------------------------------------------------
Average
Exercise
Number Price
of Shares (Cdn$)
----------------------------------------- ------------ ----------
Balance outstanding, October 31, 1999 1,661,593 $ 0.47
2000 -Granted 400,000 0.11
-Expired (340,000) 0.95
-Exercised (195,000) 0.82
-Cancelled (981,593) 0.26
------------ ----------
Balance outstanding, October 31, 2000 545,000 0.21
2001 -Expired (50,000) 0.80
----------------------------------------- ------------ ----------
Balance outstanding, October 31, 2001 495,000 $ 0.15
========================================= ============ ==========
Weighted Weighted
Range of Number Average Average
Exercise Outstanding Contractual Exercise
Price and Exercisable Life Price
---------------------- --------------- ------------- --------
$0.01 - $0.1 0 245,000 2.16 $ 0.10
$0.11 - $0.15 250,000 1.01 $ 0.13
-------------- ------------- ---------
495,000 1.58 $ 0.12
============== ============= =========
The Company accounts for its stock-based compensation plan
in accordance with Accounting Principles Board ("APB") No.
25, Accounting for Stock Issued to Employees, under which no
compensation is recognized in connection with options
granted to employees except if options are granted at a
strike price below fair value of the underlying stock. The
Company adopted the disclosure requirements of Statement of
Financial Accounting Standard No. 123 (SFAS 123), Accounting
for Stock-based Compensation. Accordingly, the Company is
required to calculate and present the pro-forma effect of
all awards granted. For disclosure purposes, the fair value
of each option granted to an employee has been estimated as
of the date of grant using the Black-Scholes option pricing
model with the following assumptions: risk-free interest
rate of 5.0%; dividend yield 0%; volatility of 1.7%; and one
year of expected lives.
Based on the computed option values and the number of
options issued, had the Company recognized compensation
expense, the following would have been its effect on the
Company's losses for the year and loss per share:
2001 2000
---------------------------------- ------------- --------------
Loss for the year: (506,727) (1,169,149)
- as reported
---------------------------------- ------------- --------------
- pro forma (506,727) (1,200,149)
---------------------------------- ------------- --------------
Basic and diluted loss per share:
- as reported (0.01) (0.04)
---------------------------------- ------------- --------------
- pro forma (0.01) (0.04)
================================== ============= ==============
In March 2000 the Financial Accounting Standards Board
issued "Interpretation #44, Accounting For Certain
Transaction Involving Stock Compensation" among other
issues, this interpretation clarifies:
(iv) The definition of employee for purposes of applying opinion
25.
(v) The criteria for determining whether a plan qualifies as a
non-compensatory plan.
(vi) The accounting consequence of various modifications of the
terms of a previously fixed stock option or award, and
(vii) The accounting for an exchange of stock compensation awards
in a business combination.
In relation to (iii) the interpretation states, "if the
exercise price of a fixed stock option reward is reduced,
the award shall be accounted for as a variable from the date
of the modification to the date the award is exercised, is
forfeited, or expires unexercised, the exercise price of an
option award has been reduced if the fair vale of the
consideration required to be remitted pursuant to the
sward's original terms".
The interpretation is generally effective July 1, 2000 and
the Company may incur additional compensation expense in
future years.
- The acquisition in prior years of certain mining claims acquired
from the spouse of a director are accounted for at cost being the
market value of the shares issued as consideration. Under United
States GAAP these acquisitions would have been recorded at the
Directors' and related companies original cost. The impact on the
capital stock and cost of claims if the Financial Statements were
prepared in accordance with United States GAAP is indeterminable.
- Statement of Cash Flows
Supplemental Disclosure of Cash Flow Information
[Download Table]
-------------------------------- ----------------- ------------ ------------
Cash paid during the period May 23, 1986 Year Year Ended
(inception) to Ended
October 31, 2001 October 31, October 31,
(cumulative) 2001 2000
-------------------------------- ----------------- ------------ ------------
Interest $ - $ - $ -
Income taxes $ - $ - $ -
-------------------------------- ----------------- ------------ ------------
- Operations in Foreign County
The Company is subject to numerous factors relating to
conducting business in a foreign country (including, without
limitation, economic, political and currency risk), any of
which could have a significant impact on the Company's
operation.
- Supplemental Financial Information:
(i) Reconciliation of Stockholders' Equity under US GAAP
[Enlarge/Download Table]
Deficit
Common Shares Accumulated Total
----------------------------------------- During the Shareholders'
To Be Exploration Equity
Number Amount Issued Stage (Deficiency)
---------------------------------- ------------- ------------- ----------- --------------- -------------
$'s $'s $'s $'s
Issuance of common shares for
Cash 1,620,000 57,000 - - 57,000
Net loss - - - (10,249) (10,249)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1986 -
Issuance of common shares for
Cash 1,025,000 51,500 - - 51,500
Net loss - - - (64,540) (64,540)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1987 2,645,000 108,500 - (74,789) 33,711
Issuance of common shares for
Cash 150,000 9,000 - - 9,000
Net loss - - - (20,671) (20,671)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1988 2,795,000 117,500 - (95,460) 22,040
Issuance of common shares for
Cash 1,876,332 363,225 - - 363,225
Resource property 300,000 40,500 - - 40,500
Net loss - - - (247,866) (247,866)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1989 4,971,332 521,225 - (343,326) 177,899
Issuance of common shares for
Cash 1,947,255 1,240,500 - - 1,240,500
Resource property 400,000 54,000 - - 54,000
Services 24,014 85,250 - - 85,250
Commons shares to be issued for
Resource property - - 560,000 - 560,000
Net loss - - - (2,759,079) (2,759,079)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1990 7,342,601 1,900,975 (3,102,405) (641,430)
Issuance of common shares for
Cash 2,759,027 1,117,950 (560,000) - 557,950
Resource property 165,000 169,750 - - 169,750
Debt settlement 789,240 358,168 - - 358,168
Commons shares to be issued for
Resource property - - 94,915 - 94,915
Net loss - - - (650,082) (650,082)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balance at October 31, 1991 11,055,868 3,546,843 94,915 (3,752,487) (110,729)
================================== ============= ============= =========== =============== =============
[Enlarge/Download Table]
Deficit
Common Shares Accumulated Total
----------------------------------------- During the Shareholders'
To Be Exploration Equity
Number Amount Issued Stage (Deficiency)
---------------------------------- ------------- ------------- ----------- --------------- -------------
$'s $'s $'s $'s
Balances at October 31, 1991,
Carried forward 11,055,868 3,546,843 94,915 (3,752,487) (110,729)
Issuance of common shares for
Cash 1,958,636 1,230,450 - - 1,230,450
Resource property 876,483 753,665 (94,915) - 658,750
License 400,000 168,000 - - 168,000
Net loss - - - (1,423,468) (1,423,468)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1992 14,290,987 5,698,958 - (5,175,955) 523,003
Issuance of common shares for
Cash 2,456,413 2,923,415 - - 2,923,415
Issuance of common shares to
Acquire subsidiary 311,000 40 - - 40
Common shares to be issued - - 100,000 - 100,000
Net loss - - - (1,882,810) (1,882,810)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1993 17,058,400 8,622,413 100,000 (7,058,765) 1,663,648
Issuance of common shares for
Cash 3,394,000 4,883,100 (100,000) - 4,783,100
Issuance of common shares to
Acquire subsidiary 25,000 87,500 - - 87,500
A director 250,000 281,250 - - 281,250
Net loss - - - (3,290,933) (3,290,933)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1994 20,727,400 13,874,263 - (10,349,698) 3,524,565
Issuance of common shares for
Cash 2,083,591 3,973,440 - - 3,973,440
Resource property 231,000 474,220 - - 474,220
Plant and equipment 18,000 39,780 - - 39,780
Net loss - - - (3,537,371) (3,537,371)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1995 23,059,991 18,361,703 - (13,887,069) 4,474,634
Issuance of common shares for
Cash 3,160,236 5,995,913 - - 5,995,913
Plant and equipment 309,707 1690,511 - - 1,690,511
Net loss - - - (5,126,791) (5,126,791)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balances at October 31, 1996 26,529,934 26,048,127 - (19,013,860) 7,034,267
Issuance of common shares for
Cash 2,706,081 6,148,626 - - 6,148,626
Net loss - - (7,133,674) (7,133,674)
---------------------------------- ------------- ------------- ----------- --------------- -------------
Balance at October 31, 1997 29,236,015 32,196,753 - (26,147,534) 6,049,219
================================== ============= ============= =========== =============== =============
[Enlarge/Download Table]
Deficit
Common Shares Accumulated Total
------------------------------------------ During the Shareholders'
To Be Exploration Equity
Number Amount Issued Stage (Deficiency)
--------------------------------- ------------- ------------- ----------- ------------- ---------------
$'s $'s $'s $'s
Balances at October 31, 1997,
carried forward 29,236,015 32,196,753 - (26,147,534) 6,049,219
Issuance of common shares for
Cash 1,989,278 5,594,951 - - 5,594,951
Issuance of common shares
pursuant to dilution provision 244,444 - - - -
Net loss - - - (8,707,548) (8,707,548)
--------------------------------- ------------- ------------- ----------- ------------- ---------------
Balances at October 31, 1998 31,469,737 37,791,704 - (34,855,082) 2,936,622
Issuance of common shares for
Cash 240,593 192,474 - - 192,474
Net loss - - - (2,415,465) (2,415,465)
--------------------------------- ------------- ------------- ----------- ------------- ---------------
Balances at October 31, 1999 31,710,330 37,984,178 - (37,270,547) 713,631
Issuance of common shares for
Cash 3,758,000 375,800 - - 375,800
Issuance of common shares
on conversions of accounts
Payable 550,000 81,409 - - 81,409
Net loss - - - (1,169,149) (1,169,149)
--------------------------------- ------------- ------------- ----------- ------------- ---------------
Balances at October 31, 2000 36,018,330 38,441,387 - (38,439,696) 1,691
Issuance of common shares for
Debt settlement 475,000 65,418 - - 65,418
Common shares to be issued for
Cash 270,000 - - - 27,000
Net loss - - - (506,727) (506,727)
--------------------------------- ------------- ------------- ----------- ------------- ---------------
Balances at October 31, 2001 36,763,330 38,506,805 - (38,946,423) (412,618)
================================= ============= ============= =========== ============= ===============
- There is no difference between Canadian and United States
generally accepted accounting principles on total assets and
total liabilities, statement of operations and statement of cash
flows.
Franklin Lake Resources Inc.
(An Exploration Stage Company)
Balance Sheet
January 31, 2002 October 31, 2001
---------------- ----------------
(Unaudited)
Assets
Current
Cash $ 1,462 $ 7,872
Tax credits recoverable 236 200
Prepaids, deposits and advances 2,100 4,026
------------- -------------
Total Current Assets $ 3,798 $ 12,098
Long-Term
Reclamation Bond 58,452 28,393
Loan Receivable 1 1
Resource Properties 7 3
Plant and equipment, net 80,182 42,843
------------- -------------
Total Long-Term Assets 138,642 71,240
------------- -------------
Total Assets $ 142,440 $ 83,338
Liabilities and Shareholders' Equity (Deficiency)
Liabilities
Current Liabilities
Accounts Payable and accrued 39,515 45,942
liabilities
Due a Director 289,379 197,113
Loan Payable - 99,792
------------- -------------
Total Liabilities 328,894 342,847
Shareholders' Equity (Deficiency)
Share capital 24,360,503 24,235,097
Deficit (24,546,957) (24,494,606)
------------- -------------
Total Shareholders' Equity
(Deficiency) (186,454) (259,509)
------------- -------------
Total Liabilities and
Shareholders' Deficiency $ 142,440 $ 83,338
============= =============
See accompanying notes to consolidated financial statements
Franklin Lake Resources Inc.
(An Exploration Stage Company)
Statement of Operations
3 Months Ended 3 Months Ended
January 31, 2002 January 31, 2001
---------------- ----------------
Operating Expenses
Mineral Exploration $ 26,252 $ 27,273
Professional and administrative fees 16,420 4,803
Investor relations 573 62
Salaries and benefits 3,200 0
Travel 5,128 2,350
Management fees 12,000 6,002
Office 8,197 (1,180)
Rent 9,600 0
Transfer agent fees 749 654
Filing fees 109 0
Interest and bank charges 279 26
Depreciation 2,914 2,980
------------ ------------
Total Operating expenses 85,422 42,971
Other income (expenses)
Interest income (17) 0
Foreign exchange gain (loss) (1,426)
------------ ------------
Total other income (expenses) (17) (1,426)
------------ ------------
Net Loss $85,404 $41,545
============ ============
Loss per share $ 0.02 $ 0.01
============ ============
Weighted average number of shares 4,276,333 3,601,833
============ ============
See accompanying notes to consolidated financial statements
Franklin Lake Resources Inc.
(An Exploration Stage Company)
Statement of Cash Flows
[Enlarge/Download Table]
Three Months Ended Three Months Ended
January 31, 2002 January 31, 2001
---------------- ----------------
(Unaudited) (Unaudited)
Cash flows from (used in) operating activities
Loss for quarter $ (85,404) $ (41,870)
Adjust for items not involving cash:
Depreciation $2,914 $ 2,811
Expenses payable only in shares of stock 18,000
Write-up of resources properties (4) 20,910 2,811
---------- ------------
20,910 2,811
Changes in non-cash working
capital items
Increase in tax credits recoverable 36
Decrease (increase) in
prepaid expenses (1,926) (423)
Increase (decrease) in accounts
payable and accrued liabilities 6,427 4,537 (8,083) (8,506)
---------- ------------
Changes in other assets
Increase in equipment (new purchases) 37,339
Increase in reclamation bond 30,059 67,398
---------- ------------
Cash flows from financing activities
Funds received for shares (30,000) 46,219
Advances received from/due
to director (83,851)
Decrease in loan payable 100,000 (13,851) 46,219
---------- ----------- ------------ -----------
Increase (decrease) in cash (6,410) (1,346)
Cash at beginning of quarter
(November 1, 2001) 7,872 5,027
----------- -----------
Cash at end of quarter (January 31, 2002) $ 1,462 $ 3,681
=========== ===========
See accompanying notes to consolidated financial statements
Franklin Lake Resources Inc.
(An Exploration Stage Company)
Notes to Consolidated Financial Statements for the
Quarter Ended January 31, 2002
(Unaudited)
1. Continuing Operations.
These consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles applicable to a going
concern, which assumes that the Company will realize its assets and
discharge its liabilities in the normal course of business. Realization
values may be substantially different from carrying values as shown in
these financial statements should the Company be unable to continue as a
going concern.
The Company's ability to meet its obligations and maintain its operations
is contingent upon several factors, including profitable operations,
successful completion of additional financing arrangements and the
continuing support of its creditors and shareholders.
2. Significant Accounting Policies
a. Basis of presentation.
The Company follows accounting principles generally accepted in the
U.S. All amounts shown in these consolidated financial statements are
in U.S. dollars unless otherwise stated.
b. Principles of consolidation.
The financial statements include the accounts of Franklin Lake
Resources Inc., and its wholly owned subsidiaries, Naxos Resources
(USA) Ltd. and Franklin Mining Corporation.
c. Nature of exploration stage activities.
The Company is engaged in the acquisition and exploration of precious
metals properties. Mineral exploration expenditures are charged to
earnings until it is determined that a property has economically
recoverable ore reserves; further exploration expenditures will then
be capitalized. Incidental revenues from mineral sales during the
exploration phase are offset against mineral exploration expenses.
d. Amortization.
Amortization is calculated using the declining balance method at the
following annual rates:
Office furniture and equipment 20% - 30%
Mining equipment 20% - 30%
e. Restoration, rehabilitation and environmental expenditures.
Restoration, rehabilitation and environmental expenditures are charged
to earnings as incurred during the exploration phase. Significant
restoration, rehabilitation and environmental expenditures to be
incurred subsequent to the cessation of exploration are accrued when
their extent can be reasonably estimated.
f. Use of estimates.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
g. Cash and cash equivalents.
Cash equivalents usually consist of highly liquid investments, which
are readily convertible into cash with maturities of three months or
less when purchased.
h. Loss per share.
Loss per share is based on the weighted average number of common
shares outstanding during the period. Diluted loss per share is not
presented, as it is not dilutive.
i. Stock based compensation.
No compensation expense is recognized when stock options are issued to
employees and directors. Any consideration paid by employees and
directors on the exercise of stock options is credited to share
capital.
3. Loan Receivable.
On January 21, 1998, the Company loaned a former director $733,107 to
exercise warrants for a total of 321,833 shares of the Company. The loan
did not bear interest and was for a period not to exceed 24 months. The
former director deposited the shares acquired into escrow as security for
the loan. On December 18, 1998, the director resigned and the loan became
due immediately. To date, the Company's attempt to collect this loan have
been unsuccessful. The Company has charged a provision for loss of $665,673
to operations in fiscal 2000 based on its estimate of collectibility of the
loan at that time. The loan receivable is carried at nominal value of $1 at
January 31, 2002. Any amounts recovered in the future on this note will be
credited to operations in the year of recovery. If the shares held in
escrow are returned, they will be canceled without recognition of gain to
the Company.
4. Resource Properties
Franklin Lake Project, California, USA
The Company holds/held the following property interests:
a. Lease to 52.5 acres of land and buildings, including tailings piles in
Inyo County, California.
The lease requires monthly payments equal to the greater of $1,200 or
5% of net smelter returns of ore extracted from the tailings.
b. Interest in 58 placer association claims in Inyo County, California.
During the fiscal year ended October 31, 2001, the exact area that was
covered by the 408 mineral claims reported as of October 31, 2000, was
restaked as 58 placer association claims. This was possible because,
whereas the former claims were limited to 20 acres each, the placer
association claims may cover up to 160 acres each, considerably
reducing the Company's claim costs.
5. Share Capital
(a) Authorized: At October 31, 2001, the Company was a Canadian
corporation known as Naxos Resources Ltd. It had authorized capital of
an unlimited number of shares of common stock without par value.
During the period covered by this report, the Company was "continued"
to the U.S. and became a Nevada corporation. The authorized capital of
this corporation consists of 45,000,000 shares of common stock, par
value $0.001 per share, and 5,000,000 shares of preferred stock, par
value $0.001 per share. Effective January 9, 2002, the Company changed
its name to Franklin Lake Resources Inc. and reverse split its shares
on the basis of one new share for each ten existing shares.
(b) Issued:
Shares
-------------
Balance, October 31, 2001 (per Annual Report) 36,763,330
=============
Adjusted for reverse stock split 3,676,333
Shares issued for cash 600,000
-------------
Balance, January 31, 2002 4,276,333
(c) Warrants: At January 31, 2002, the following share purchase warrants
were outstanding:
Number of Shares Exercise Price Expiration Date
----------------------- -------------- -----------------
3,270,000 0.10* October 18, 2002
600,000 0.25 January 31, 2003
-----------
Total 3,870,000
--------------------------------------------------------
* in Canadian Dollars
(d) Options: As at January 31, 2002, the following stock options were
outstanding:
[Download Table]
Number of Shares Exercise Expiration
Subject to Stock Options Price* Date
----------------------------------------------------------------------------
50,000 (director) 0.13 October 1, 2002
50,000 (former director) 0.13 October 1, 2002
100,000 (director) 0.13 November 27, 2002
50,000 (former director) 0.13 November 27, 2002
150,000 (director) 0.10 March 24, 2003
70,000 (former director) 0.10 March 24, 2003
-----------
Total 470,000
----------------------------------------------------------------------------
* In Canadian Dollars
6. Financial Instruments.
The Company's financial instruments consist of cash and cash equivalents,
tax credits recoverable, prepaid expenses, reclamation bond, loan
receivable, accounts payable and accrued liabilities, amounts due to
director, and a loan payable. The fair values of these financial
instruments approximate their carrying values, unless otherwise noted. The
Company is not exposed to significant interest, currency, or credit risk
arising from these financing instruments.
7. Related Party Transaction
The aggregate amount of expenditures, either paid or accrued during the
quarter, to parties not at arm's length to the Company consist of the
following:
1-31-2002 1-31-2001
---------------------------------------------- ----------- -----------
Management fees to a director who is
also the president of the Company to
be settled by future issuance of
Company stock $ 12,000 $ 9,000
Reimbursement for office overhead,
services and supplies to a director who
is also the president of the Company to
be settled by future issuance of
Company stock 6,000 -
Legal fees paid to an officer of the
Company 7,500 7,500
---------------------------------------------- ----------- -----------
$ 25,500 $ 16,500
============================================== =========== ===========
8. Income Taxes
At January 31, 2002, the Company had net operating loss carryforwards for
Canadian income tax purposes of approximately $9,900,000 which, if not
utilized to reduce Canadian taxable income in future periods, will expire
during the years 2002 through 2009.
At January 31, 2002, the Company had net operating loss carryforwards for
U.S. income tax purposes of approximately $8,600,000, which, if not
utilized to reduce U.S. taxable income in future periods, will expire
during the years 2009 through 2021.
No tax benefits have been recognized in the statements of operations from
the availability of operating loss carryforwards due to the uncertainty of
their realization.
9. Segmented Information
(a) Industry information. The Company considers itself to be operating in
one reportable operating segment, being the acquisition and
development of resource properties.
(b) Geographic information. All the Company's assets are located in the
U.S.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On September 6, 2001, the Company engaged Ellis Foster, Chartered
Accountants, as its independent auditors for the fiscal year ended October 31,
2001 after Matthew Hoogendorn, Chartered Accountant, who was the Company's
auditorfor fiscal year 2000, resigned on September 5, 2001. DeLoitte & Touche
conducted the fiscal year 1999 audit and also resigned before the end of the
fiscal year 2000.
Neither the resignation of DeLoitte & Touche nor the resignation of Matthew
Hoogendorn was based on any disagreement with the Company on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure.
LEGAL MATTERS
On February 19, 1999, the Company filed a suit again Jimmy John, former
President, CEO and director of Franklin Lake (then "Naxos Resources"), in the
Supreme Court of British Columbia, titled Naxos Resources Ltd. v. Jimmy John,
Case No. C9900946, for failure to repay a loan of CDN$733,107.45 made to him by
the Company. The loan was made to allow Mr. John to exercise warrants he held to
purchase shares of Company stock. The shares were deposited with an escrow as
security for the loan. The loan becomes due upon Mr. John's resignation as a
director of the Company. The Company is seeking full payment of the loan plus
interest and costs. Mr. John has since filed a counter-claim against the
Company, adding Sydney Kemp, Rene Daignault, and Walker & Company as defendants,
alleging that they and the Company had misrepresented terms and conditions of
the written loan agreement. His counter claim also seeks indemnification for
legal fees he incurred in defending himself against the Alberta Securities
Commission in a prior administrative proceedings. Hearings on this matter have
not yet been scheduled. The Company has set aside the suit temporarily due to
other priorities for uses of its funds. We cannot predict the outcome of this
suit.
EXPERTS
Our financial statements for the fiscal year ended October 31, 2001 and
October 31, 2000, including the "Reconciliation to U.S. GAAP", have been
prepared and audited by Ellis Foster, Chartered Accountants and independent
auditors, as set forth in their report dated January 3, 2002, and are included
in this prospectus and registration statement in reliance upon the authority of
Ellis Foster as experts in accounting and auditing.
The validity of the common shares to be issued under this rights offering
will be passed upon for us by Peter Boyle, Attorney at Law, a member of the
State Bar of California. He also serves as corporate secretary of Franklin Lake.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2, which
registers the securities that we are offering under this prospectus. The
registration statement, including the attached exhibits, contains additional
relevant information about us and the securities offered. The rules and
regulations of the SEC allow us to omit from this prospectus certain information
included in the registration statement.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934. You may read
and copy this information at the following locations of the SEC:
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661
You may also obtain copies of this information by mail from the Public
Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling the SEC at (800) SEC-0330.
The SEC also maintains an Internet World Wide Web site that contains
reports, proxy statements and other information about issuers, like us, who file
electronically with the SEC. The Internet address of that site is
http://www.sec.gov. You can access any of the filings we have made as a
publicly-reporting company by going to the site and performing a search.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 78.037 of the Nevada Revised Statutes authorizes, and the Company's
Articles of Incorporation provide for, the indemnification of our officers and
directors. The By-laws of the corporation require Franklin Lake to indemnify
officers and directors to the full extent permitted by Nevada law. Each person
will be indemnified in any proceeding if he or she acted in good faith and in a
manner which he or she reasonably believed to be in, or not opposed to, the best
interests of the Company. Indemnification would cover judgments, fines, amounts
paid in settlement and reasonable expenses, including attorney's fees.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various estimated amount of fees and
expenses payable in connection with this offering. All of these expenses will be
borne by the registrant.
Amount of
Item Expenses
--------------------------------------------------------
SEC Registration Fee .........................$ 114
Printing and Distribution Expenses ........... 11,000*
Legal Fees and Expenses ...................... 15,000*
Miscellaneous Expenses ....................... 1,000*
---------
Total ...........................$ 27,114
-------
*Estimated
Item 26. Recent Sales of Unregistered Securities.
The following securities were sold by executives of the Company without the
use of an underwriter. In effecting the sales, we relied on the exemption
authority provided by Section 4(2) of the Securities Act of 1933, as amended,
relating to sales not involving any public offering. We believe that all such
sales were made by our executive officers in private, negotiated transactions
without any advertising, public announcements or general solicitation. The
purchasers of the shares represented themselves in writing to be, and the
company believes them to be, members of one or more of the following classes:
a. Officers, directors, promoters or control persons of the issuer; or
b. Individuals who:
i. Are knowledgeable and sophisticated in investment matters;
ii. Are able to assess the risks of an investment such as in our
securities;
iii. Are financially able to bear the risk of a loss of their entire
investment; and
iv. Have access to pertinent information regarding the issuer and its
operations.
The shares are subject to the resale provisions of Rule 144 and may not be sold
or transferred without registration except in accordance with Rule 144.
Certificates representing the securities bear a legend to that effect.
[Enlarge/Download Table]
----------------------- ----------------------- ------------ ------------ ------------------
Date Class Amount Price(CDN$) # of Purchasers
----------------------- ----------------------- ------------ ------------ ------------------
October 31, 1999(1) Common, $.001 par value 192,474 $0.80
December 16, 1999(2) Common, $.001 par value 550,000 $0.15 1
October 31, 2000(3) Common, $.001 par value 293,000 $0.10 15
October 31, 2000(4) Common, $.001 par value 195,000 $0.10 2
October 18, 2000 Common, $.001 par value 3,270,000 $0.10 2
March 21, 2001 Common, $.001 par value 475,000 $0.08 2
----------------------- ----------------------- ------------ ------------ ------------------
(1) Exercise of options during the fiscal year ended October 31, 1999 (2) Issued
in exchange for cancellation of debt (3) Exercise of warrants during the fiscal
year ended October 31, 2000 (4) Exercise of options during the fiscal year ended
October 31, 2000 (5) Cancellation of debt for legal and accounting services
Item 27. Exhibits.
Number Description of Document
------ -----------------------
3.1 - Articles of Incorporation of Franklin Lake Resources Inc.
3.2 - By-laws of Franklin Lake Resources Inc.
3.3 - Articles of Domestication of Franklin Lake Resources Inc.
5 - Opinion Regarding Legality.
23.1 - Consent of Peter Boyle, Attorney at Law (included in Exhibit 5).
23.2 - Consent of Ellis Foster, Chartered Accountants
24.1 - Power of Attorney (Included under Part II - Signatures).
99.1 - Form of Letter to Shareholders
99.2 - Form of Subscription Certificate
99.3 - Instructions for Use of Subscription Certificate
99.4 - Notice of Guaranteed Delivery
99.5 - Form of Letter to Clients
99.6 - Form of Letter to Brokers
Item 28. Undertakings.
The undersigned registrant hereby undertakes to supplement this prospectus,
after the end of the subscription period for this offering, to include the
results of the subscription offer, and the terms of any later reoffering. If the
underwriters make any public offering of the securities on terms different from
those on the cover page of the prospectus, the small business issuer will file a
post-effective amendment to state the terms of such offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned.
FRANKLIN LAKE RESOURCES INC.
By:
May 6, 2002 /s/ FATHER GREGORY OFIESH
------------ ---------------------------------------------
Date President, CEO, Acting Treasurer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Father Gregory Ofiesh and Frances Nelson, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement, and
to file the same, with all exhibits thereto, and other documentation in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully as to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Peter Boyle May 6, 2002
-------------------------- -----------------
Vice President, Secretary Date
/s/ Kamal Alawas May 6, 2002
-------------------------- -----------------
Director Date
/s/ Robert Chatwin May 6, 2002
-------------------------- -----------------
Director Date
Dates Referenced Herein and Documents Incorporated by Reference
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