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Formation Metals Inc – ‘40FR12B’ on 5/27/05 – ‘EX-99’

On:  Friday, 5/27/05, at 5:35pm ET   ·   Accession #:  1176256-5-199   ·   File #:  1-32517

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/27/05  Formation Metals Inc              40FR12B               57:14M                                    e3 Fil… Computershare/FA

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 1: 40FR12B     Registration of Securities of a Canadian Issuer --  HTML     61K 
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Exhibit 99.6

Deloitte.

Deloitte & Touche LLP

2800 - 1055 Dunsmuir Street

4 Bentall Centre

P.O. Box 49279

Vancouver BC  V7X 1P4

Canada

Tel: (604) 669-4466

Fax: (604) 685-0395

www.deloitte.ca

Auditors' Report

To the Shareholders of

Formation Capital Corporation

(An exploration stage company)

We have audited the consolidated balance sheets of Formation Capital Corporation (an exploration stage company) as at February 29, 2004 and February 28, 2003 and the consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three year period ended February 29, 2004 and for the period from inception on June 13, 1988 to February 29, 2004.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards.  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at February 29, 2004 and February 28, 2003 and the results of its operations and its cash flows for each of the years in the three year period ended February 29, 2004 and for the period from inception on June 13, 1988 to February 29, 2004 in accordance with Canadian generally accepted accounting principles, consistently applied.

/s/ Deloitte & Touche LLP

Chartered Accountants

Vancouver, Canada

May 21, 2004

Member of

Deloitte Touche Tohmatsu

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

1.

NATURE OF OPERATIONS

The Company was incorporated on June 13, 1988 under the Company Act of British Columbia and commenced operations on that date. The Company, directly and through joint exploration ventures, is in the process of exploring its mineral properties and has not yet determined, through a bankable feasibility study, whether these properties contain ore reserves which are economically recoverable.

The Company’s emergence from the exploration stage and the recoverability of the amounts shown for resource properties is dependent upon the quantity of economically recoverable reserves, on the ability of the Company to obtain financing to complete exploration and development of the properties, on the timing of legislative or regulatory developments relating to environmental protection, and on future profitable operations or proceeds from the disposition thereof.

The Company also owns a hydrometallurgical facility in Northern Idaho.  The facility contains a precious metals refinery, which the Company has refurbished and intends to utilize to  process third party, high content precious metals material to produce high purity bullion.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”), which in these circumstances conform in all material respects with United States generally accepted accounting principles (“US GAAP”) except as described in Note 16.

(a)

Basis of consolidation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Formation Capital Corporation U.S., a Nevada corporation, Formation Chemicals, Inc., an Idaho corporation, Coronation Mines Ltd. (“Coronation”), a Saskatchewan company and Minera Terranova S.A. de C.V., a Mexican company.  All inter-company transactions and balances have been eliminated.

(b)

Use of estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results may differ from those estimates.

(c)

Cash and cash equivalents

Cash and cash equivalents consists of cash on hand, deposits in banks and highly liquid investments with an original maturity of three months or less.

(d)

Reclamation costs

Ongoing reclamation costs are charged to earnings in the period that they are reasonably determinable.

(e)

Mineral properties

Acquisition costs of mineral properties together with direct exploration and development expenditures thereon are capitalized in the accounts.  These costs will be amortized using the unit-of-production method based on proven and probable reserves on the commencement of commercial production or written-off as the properties are sold, allowed to lapse or are abandoned.  Mineral property costs not directly attributable to specific properties are expensed during the year.

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(e)

Mineral properties (continued)

Management regularly reviews the carrying value of mineral properties by comparing the carrying value to the estimated net recoverable amounts, based on estimated undiscounted future cash flows resulting from the use of the mineral properties and their eventual disposition, to determine whether there is any indication of impairment.  Measurement of an impairment loss is based on the fair value of the mineral properties.  An impairment in value would be indicated if the assets’ carrying value exceeds expected future cash flows.

For the year ended February 29, 2004 an impairment of $788,618 was provided. No such impairment was provided for the years ended February 28, 2003 and 2002.

(f)

Property, plant and equipment

Property and equipment are recorded at cost and the Company provides for depreciation on a declining balance basis at the rate of 5% per annum for buildings and 30% per annum on all other equipment.  As at February 29, 2004, the plant was not yet in use. Depreciation of the plant will be charged to operations when commercial production commences.

(g)

Future income taxes

The Company accounts for income taxes using the asset and liability method.  Under this method, future income taxes are recorded for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities.  These future taxes are measured by the provisions of currently substantively enacted tax laws.  Management believes that it is not sufficiently likely that the Company will generate sufficient taxable income to allow the realization of future tax assets and therefore the Company has fully provided for these assets.

(h)

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 exercise of stock options is credited to share capital.

Pro forma net loss and pro forma loss per share are disclosed in Note 10 (a) (iv) as if the fair value based method of accounting had been used.

Compensation expense is determined when stock options are issued to non-employees and is recognized over the vesting period of the option.  The compensation expense is determined as the fair value of the options at the date of the grant using an option-pricing model.

(i)

Loss per share

Basic loss per share is computed using the weighted average number of common shares outstanding during the period.  Diluted loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period using the “treasury stock” method.  Common equivalent shares consist of the incremental common shares issuable upon the exercise of stock options and warrants unless their effect is anti-dilutive.  The Company had a net loss for all years presented herein; therefore, none of the options and warrants outstanding during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive.

(j)

Foreign currency translation

The Company’s functional currency is the Canadian dollar.  Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at the exchange rates in effect at the time of the transaction.  Revenues and expenses are also translated at rates in effect at the time of the transaction.  Gains and losses on translation are included in the results from operations.

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(k)

Comparative figures

Certain of the prior year’s figures have been reclassified to conform to the current period’s presentation.

3.

PREPAID EXPENSES AND OTHER

The investments represent shares in publicly-traded companies which are carried at the lower of cost and quoted market value.  As at February 29, 2004, the quoted market value was $2,218 (February 28, 2003 - $2,022).

4.

MINERAL PROPERTIES

Mineral properties consist of:

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

4.

MINERAL PROPERTIES (Continued)

(a)

Idaho Cobalt Belt

(i)

Idaho Cobalt Project

The Company has exercised its lease option agreement, with a company controlled by a director, whereby the Company can earn a 100% interest in certain mineral claims in Idaho by paying US$26,805 (paid) and option payments of US$2,130 per year until 2004 (paid) provided that the option payment will be reduced by US$30 for each claim the Company has elected to purchase by paying US$100 for such claim. The Company now owns a 100% interest in these claims.

(ii)

Black Pine

The Company has a 100% interest in certain mineral claims in Lemhi County, Idaho.

The Company also has a lease option agreement to purchase certain mineral claims located in Lemhi County, Idaho which requires annual advance royalty payments of US$20,000 to 2006.  During the year ended February 28, 1999 an amendment to the agreement was negotiated which requires payments of nil if the average price of copper trades below US$0.85 per pound, US$10,000 if the average price of copper trades between US$0.85 to $0.89 per pound and US$20,000 if the average price of copper trades above US$0.90 per pound.  In addition, the Company will be required to pay the lessors a sliding scale net smelter return royalty (“NSR”) of between 1% and 5% based on the realized price of copper to a maximum of US$2,000,000 (including the option payments).

There have been no payments due since the amended agreement was concluded. During the year ended February 29, 2004 the Company again amended the option agreement to extend the term for two - five year increments, and share on a 50/50 basis with the optioner any payments received from a joint venture partner.

(iii)

Badger Basin

The Company has a 100% interest, through staking, in these claims located in Lemhi County, Idaho.

(b)

Other Projects

(i)

Morning Glory/Wallace Creek

a)

Morning Glory

The Company has a 100% interest in certain mineral claims located in Lemhi, County Idaho.

The Company also has a 100% lease option on certain additional mineral claims located in the same area.  During the year ended February 28, 2001, the terms of the lease option were amended from a required minimum annual advance royalty payment of US$3,000 to annual payments based on the price of gold ranging from no payments to US$3,000.  The annual minimum advance royalty payment is applied against a 3% to 5% net smelter return.  A total of US$33,900 (2003 - US$32,400) has been paid to date.  To exercise the option, the Company must pay a total purchase price of US$1,000,000 which includes the advance annual minimum royalty payments.

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

4.

MINERAL PROPERTIES (Continued)

(b)

Other Projects (continued)

(i)

Morning Glory/Wallace Creek (continued)

b)

Wallace Creek

The Company has a 100% interest in certain mineral claims located in Lemhi County Idaho.

The Company also has a 100% lease option on certain additional mineral claims located in the same area.  During the year ended February 28, 2001, the terms of the lease option were amended from a required minimum annual advance royalty payment of US$8,000 to annual payments based on the price of gold ranging from no payments to US$8,000.  The annual minimum advance royalty payment is applied against a 3% to 5% net smelter return.  To exercise the option, the Company must pay a total purchase price of US$1,000,000 of which US$25,600 has been paid to date.

(ii)

Los Cocos

During the year ended February 29, 2004 the Company made a decision to abandon the property and terminate the agreement whereby the Company had a right to earn a 100% interest in certain mineral claims in the Xichu District, Mexico, by paying all staking, recording and out-of-pocket expenses along with the equivalent of US$20,000 in capital stock (minimum 5,000 shares/maximum 10,000 shares). The property was subject to a 5% NSR redeemable at $750,000 per percentage point down to a 2% NSR.

(iii)

El Milagro

During the year ended February 28, 1998, the Company entered into a purchase option agreement whereby the Company can earn a 100% interest in the El Milagro property in Tamaulipas, Mexico, by making equal semi-annual payments over four years totaling 800,000 pesos ($150,000).  During the year ended February 28, 2001, a revision of the agreement allows the remaining 300,000 pesos to be paid by making equal semi-annual payments of 50,000 pesos ($9,375) over three years.  As at February 29, 2004, a total of 800,000 pesos ($150,000) has been paid (2003 - 800,000 pesos ($150,000)) and the Company has an 100% interest in the property.

(iv)

Flin Flon

The Company has a 100% interest, subject to a 10% net profits interest, in certain claims in the Creighton area of Saskatchewan.

(v)

Queen of the Hills

The Company terminated an option agreement with a third party whereby the optionee could earn a 51% interest in the mineral claims by meeting the obligations under the lease and incurring US$150,000 on exploration and development over a three-year period, effective January 1, 2001.

The Company now holds a 100% lease option on certain mineral claims located in Lemhi County, Idaho.  During the year ended February 28, 2001, the terms of the lease option agreement were amended from a required minimum annual advance royalty payment of US$1,400 to annual payments based on the price of gold ranging from no payments to US$1,400.  A total of US $19,600 (2003 - US $19,600) has been paid to date.  To exercise the option, the Company must pay a total purchase price of US $1,000,000 including the advance annual minimum royalty payments.

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

4.

MINERAL PROPERTIES (Continued)

(b)

Other Projects (continued)

(vi)

Compass/Kernaghan

a)

Compass Lake

The Company granted an option whereby the optionee can earn a 70% interest in certain mineral claims by making certain annual payments (received) and upon development to a feasibility stage by the optionee.  The Company has certain participation options when the property reaches the mine development stage and will retain a sliding scale NSR, between 1% and 8%, based on the price of gold.  The optionee has the right to purchase one-half of the Company’s net smelter returns royalty for $1,000,000.

b)

Kernaghan Lake

The Company granted an option whereby the optionee has earned 80% interest in certain mineral claims by making certain payments (received), and completing exploration work totalling $1,000,000 (deemed completed).

b)

Kernaghan Lake (continued)

The Company can participate at the 20% level, or has the option to dilute to a 7% participation level which then becomes a net profit interest.  The optionee has the right to purchase all or part of the net profit interest during the first year of commercial production by paying $700,000 per percentage point which increases to $800,000 per percentage point during the second year of production.

(vii)

Virgin River

During the year ended February 28, 1999, the Company entered into a joint exploration agreement whereby the Company obtained a 2% interest carried through the first $10,000,000 of exploration expenditures and a right of first refusal to purchase an additional 8% interest in exchange for waiving all future work commitments on the Kernaghan Lake Project thereby vesting the optionee.

(viii)

Other

The Company has varying other interests of up to 100% in certain mineral claims located in Idaho, Saskatchewan, Manitoba and Mexico.

5.

PROPERTY, PLANT AND EQUIPMENT

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

6.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Included in accounts payable and accrued liabilities at February 28, 2003 is a capital lease obligation for a vehicle that the Company had acquired pursuant to a three-year lease agreement which terminated on September 22, 2003. The rate of interest in terms of the lease agreement was 10.75%.  For the year ended February 28, 2003, future minimum lease payments amounted to $5,197 which included an interest portion of $181.  The current portion of the capital lease obligation amounted to $5,016.

The net book value of the vehicle at February 29, 2004 is $13,695 (2003 - $18,928).

7.

DEFERRED FINANCING COST

During the year ended February 28, 2002, the Company issued promissory notes which were financed with warrants to purchase 1,333,333 common shares of the Company at $0.30 per share for five years. The warrants were valued at $140,000 using an option pricing model assuming no dividends are to be paid, vesting occurring on the date of the grant, exercising on the last day before expiry, a weighted-average volatility of the Company’s share price of 73% and a weighted-average risk free rate of 4.45%. The value attributed to the warrants has been recorded as contributed surplus with an offsetting amount being recorded as a deferred financing cost. The deferred financing cost was amortized into operations on a straight-line basis over the life of the promissory notes.

For the year ended February 29, 2004, deferred financing costs of $27,096 (2003 - $27,096) were charged to financing costs and $83,550 (2003 - $Nil) were charged to share capital upon conversion of the debentures.

8.

CONVERTIBLE DEBENTURES

On April 3, 2002, the Company closed a private placement of 800 units (where a unit consists of $1,000 principal amount and 3,333 warrants) consisting of 7.5% secured convertible (at $0.25 per share) redeemable debentures (“debentures”) in the total principal amount of $800,000 and 2,666,400 non-transferable share purchase warrants, each warrant entitling the holder to purchase one common share of the Company at a price of $0.30 per share for five years.  A fee comprised of 60 units (where a unit consists of $1,000 principal amount and 3,333 warrants) $60,000 debenture and 519,980 warrants, exercisable on the same terms as the private placement warrants.  The Debentures were accounted for as a compound financial instrument comprising both a financial liability and an equity instrument and the Company determined that the equity component of the debentures amounted to $325,000. This amount represented the fair value of the holder's option to convert the debentures into common shares.

On December 9, 2003 and February 24, 2004 the holders of the debentures exercised their options to convert the debentures into common shares at a rate of $0.25 per common share. The Company issued 3,440,000 common shares upon conversion of the debentures.

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

8.

CONVERTIBLE DEBENTURES (Continued)

At the time of conversion the carrying amount of the financial liability included accretion of $141,053 for the principal portion and $80,254 for the interest portion of the liability.  Deferred broker fees and expenses with a value of $36,000 were charged to financing costs and $111,000 were charged to share capital upon conversion of the debentures.

The share purchase warrants were valued at $369,405 using an option pricing model assuming no dividends are to be paid, vesting occurring on the date of the grant, exercising on the last day before expiry, a weighted-average volatility of the Company’s share price of 77% and a weighted-average risk free rate of 4.91%.  The value attributed to the warrants has been recorded as contributed surplus with an offsetting amount being recorded as a deferred financing cost (Note 7).  

For the year ended February 29, 2004, deferred financing costs of $73,880 (2003 - $67,723) were charged to financing costs and $227,802 was charged to share capital upon conversion of the debentures.

9.

FUTURE INCOME TAXES

The provision for income taxes reported differs from the amounts computed by applying aggregate Canadian federal and provincial income tax rates to the loss before tax provision due to the following:

The approximate tax effect of each type of temporary difference that gives rise to the Company’s future tax assets and liabilities are as follows:

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

9.

FUTURE INCOME TAXES (Continued)

At February 29, 2004, the Company had the following loss carry-forwards available to reduce future income taxes otherwise payable:

10.

SHARE CAPITAL

(a)

Stock options

(i)

As at February 29, 2004, outstanding, exercisable stock options were as follows:

(ii)

As at February 29, 2004, outstanding, exercisable stock options were as follows:

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

10.

SHARE CAPITAL (Continued)

(a)

Stock options (continued)

(iii)

During the year ended February 29, 2004, 505,000 (2003 - 250,000) stock options were issued to non-employees and non-directors.  Using the fair value method for stock based compensation, consulting costs of $48,840 (2003 - $38,876) were capitalized to mineral properties.  This amount was determined using an option pricing model assuming no dividends are to be paid, vesting occurring on the date of the grant, exercising on the last day before expiry, a weighted average volatility of the Company’s share price of 96% (2003 - 98%) and a weighted average risk free rate of 3.74% (2003 - 4.13%).

(iv)

When stock-based compensation awards are granted to employees, no compensation cost is recognized when their exercise price exceeds or equals the fair value of the Company’s common shares at the date of grant.  Accordingly, no compensation cost has been recognized for its stock option plan.  Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value based method of accounting for awards granted on or after January 1, 2002, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below:

The fair value of each option grant is estimated on the date of grant using an option-pricing model assuming no dividends are to be paid, vesting occurring on the date of the grant, a weighted average volatility of the Company’s share price of 84% (2003 - 96%) and an annual risk free interest rate of 3.59% (2003 - 4.16%).

FORMATION CAPITAL CORPORATION

Notes to the Consolidated Financial Statements

10.

SHARE CAPITAL (Continued)

(b)

Warrants

(i)

Warrants outstanding at February 29, 2004 were as follows: