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Can Cal Resources Ltd – ‘SB-2’ on 9/21/04

On:  Tuesday, 9/21/04, at 4:43pm ET   ·   Accession #:  1028269-4-85   ·   File #:  333-119159

Previous ‘SB-2’:  ‘SB-2/A’ on 6/23/04   ·   Latest ‘SB-2’:  This Filing

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

 9/21/04  Can Cal Resources Ltd             SB-2                   5:234K                                   Adamson Sharon R/FA

Registration of Securities by a Small-Business Issuer   —   Form SB-2
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: SB-2        Can-Cal Sb-2, September 21, 2004                      75    376K 
 2: EX-4.0      Form of Warrant                                        6     27K 
 3: EX-5        Opinion of Counsel                                     2     11K 
 4: EX-10.4     Amendment to Consulting Agmt. (Vega)                   2     10K 
 5: EX-23.0     Consent of Audit Firm                                  1      7K 


SB-2   —   Can-Cal Sb-2, September 21, 2004
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Calculation of Registration Fee
6Forward Looking Statements
7Summary Information
"The Company
8The Offering
"Risk Factors
"Losses to date and general risks faced by the company
9The audit report on the financial statements at December 31, 2003 has a 'going concern' qualification
10As an exploration company, we are subject to the risks of the minerals business
"A return to low gold prices could adversely impact the company
"Policy changes
"Environmental costs are not predictable
"Future reserve evaluations will only be estimates of potential value
11Substantial investments in exploration work could be lost
"We may not be successful in raising the capital necessary to explore, evaluate and exploit properties
12Terms of subsequent financings may adversely impact your investment
"Future sales by our stockholders may adversely affect our stock price and our ability to raise funds in new stock offerings
13Because the company's common shares are "penny stock," certain rules may impede the development of increased trading activity and could affect the liquidity for stockholders
"Use of Proceeds
"Market for Common Stock and Related Stockholder Matters
18Business
19Properties
20Arco Project
22Arco 2 Project
26Management
"Directors and Officers
29Executive Compensation
30Employment Agreement
31Agreements with Consultants
35Certain Relationships and Related Transactions
36Selling Shareholders
37Plan of Distribution
38Description of Securities
39Disclosure of Commission Position on Indemnification for Securities Act Liabilities
40Legal Proceedings
"Legal Matters
"Experts
66Item 24. Indemnification of Directors and Officers
"Item 25. Other Expenses of Issuance and Distribution
72Item 27. Exhibits and Financial Statement Schedule
74Item 17. Undertakings
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As filed with the Securities and Exchange Commission on September __, 2004 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CAN-CAL RESOURCES LTD. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Nevada 1000 88-0336988 ---------------------------- ------------------------- ------------------- (State or other jurisdiction (Primary standard (I.R.S. Employer of incorporation or industrial classification Identification No.) organization) code number) 8224 Ocean Gate Way, Las Vegas, Nevada 89128; Tel. 702.243.1849 -------------------------------------------------------------------------------- (Address, including zip code, and telephone number of issuer's principal executive offices) Anthony F. Ciali, President; 8224 Ocean Gate Way Las Vegas, NV 89128; Tel. 702.243.1849 -------------------------------------------------------------------------------- (Name, address, including zip code, and telephone number of agent for service) Copies to: Stephen E. Rounds, Esq. The Law Office of Stephen E. Rounds 1544 York Street, Suite 110, Denver, CO 80206 Tel: 303.377.6997; Fax: 303.377.0231 --------------- Approximate date of commencement and end of proposed sale to the public: From time to time after the registration statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(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:[ ] ________ 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. [ ] ________ 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. [ ] ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X]
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[Enlarge/Download Table] CALCULATION OF REGISTRATION FEE Proposed Proposed Maximum Amount of Maximum Aggregate Title of Each Class Securities Offering Dollar Price Amount of Securities to be Registered Price Per of Securities to of to be Registered in the Offering Security be Registered Fee ------------------- ---------------- --------- ---------------- --------- Common Stock 245,000 $0.185 $ 45,325.00 $ 5.74 Shares (1) Common Stock 490,000 $0.185 $ 90,650.00 $ 11.49 Shares (2) Total No. Securities 735,000 $ 135,975.00 $ 17.23 to be Registered Shares <FN> (1) These outstanding shares are registered for resale. (2) These shares, registered for resale, are issuable on exercise of outstanding warrants by shareholders. The registration fee is based on the $0.185 average of bid and ask prices on September 17, 2004, under rule 457(g). </FN> DELAYING AMENDMENT UNDER RULE 473(A): 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 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 section 8(a), may determine. The information in this prospectus is subject to completion or amendment. The securities covered by this prospectus cannot be sold until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that state.
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CAN-CAL RESOURCES LTD. Subject to Completion, dated September ___, 2004 735,000 SHARES OF COMMON STOCK This prospectus covers the resale of up to 735,000 restricted shares of common stock of Can-Cal Resources Ltd. (the "company"): 245,000 outstanding shares, plus 490,000 shares issuable on exercise of outstanding warrants (expiring July 9, 2006), by 6 persons, none of whom are affiliates of the company. The selling shareholders may sell the shares from time to time in negotiated transactions, brokers' transactions or a combination of such methods of sale at prevailing market prices, or at negotiated prices. See "Plan of Distribution." Although we will receive proceeds if and to the extent the warrants are exercised, we will not receive any proceeds from sale of the shares by the selling shareholders. None of the warrants have been exercised at prospectus date. The company's stock is quoted on the Over-the-Counter Bulletin Board ("CCRE"). On September 17, 2004, the last reported sale price was $0.22 per share. Brokers or dealers effecting transactions in these shares should confirm that the shares are registered under applicable state law or that an exemption from registration is available. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS SEPTEMBER __, 2004
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TABLE OF CONTENTS PAGE NO. Forward Looking Statements ....................................................4 Where You Can Find More Information............................................4 Summary Information............................................................5 Risk Factors ..................................................................6 Losses to date and general risks faced by the company.....................6 The audit report on the financial statements at December 31, 2003 has a 'going concern' qualification.....................7 As an exploration company, we are subject to the risks of the minerals business........................................8 We have not systematically drilled and sampled any of our properties to confirm the presence of any concentrations of precious metals, and drilling and sampling results to date on the U.S. properties have been inconclusive....................................................8 A return to low gold prices could adversely impact the company........................................................8 Policy changes............................................................8 Environmental costs are not predictable...................................8 Future reserve evaluations will only be estimates of potential value..............................................8 Substantial investments in exploration work could be lost........................................................9 We may not be successful in raising the capital necessary to explore, evaluate and exploit properties....................9 Stock may be issued as part of the purchase price for mineral properties, resulting in dilution to shareholders............10 Terms of subsequent financings may adversely impact your investment.........................................10 2
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Risk Factors Involving This Offering. Future sales by our stockholders may adversely affect our stock price and our ability to raise funds in new stock offerings............................10 Because the company's common shares are "penny stock," certain rules may impede the development of increased trading activity and could affect the liquidity for stockholders..........................11 Market for Common Stock and Related Stockholder Matters.......................11 Use of Proceeds...............................................................11 Management's Discussion and Analysis of Financial Condition and Results of Operations............................12 Business......................................................................16 Properties....................................................................17 Management....................................................................24 Directors and Officers...................................................24 Executive Compensation...................................................27 Agreements with Consultants ............................................29 Security Ownership of Certain Beneficial Owners and Management................31 Certain Relationships and Related Transactions................................32 Selling Shareholders..........................................................34 Plan of Distribution..........................................................35 Description of Securities.....................................................36 Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................37 Legal Proceedings.............................................................38 Legal Matters.................................................................38 Experts.......................................................................38 Financial Statements..........................................................39 3
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REPRESENTATIONS ABOUT THIS OFFERING We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus is not an offer to sell nor does it seek an offer to buy the shares in any jurisdiction where this offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus (or any supplement), regardless of when it is delivered or when any shares are sold. WHERE TO FIND MORE INFORMATION ABOUT US We have filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form SB-2 under the 1933 Act with respect to the shares offered by this prospectus. This prospectus, filed as a part of the registration statement, does not contain certain information contained in Part II of the registration statement or filed as exhibits to the registration statement. We refer you to the registration statement and exhibits which may be inspected and copied at the Public Reference Department of the Commission, 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. You can contact the Commission's Public Reference Department at (800) SEC-0330. The registration statement and exhibits also are available for viewing at and downloading from the Commission's internet website (http://www.sec.gov); go to "Search for Company Filings." Our common stock is registered with the Commission under section 12(g) of the Securities Exchange Act of 1934 (the "1934 Act"). Under the 1934 Act, we file with the Commission periodic reports on Forms 10-KSB, 10-QSB and 8-K, and proxy statements, and our officers and directors file reports of stock ownership on Forms 3, 4 and 5. These filings also may be viewed and downloaded from the Commission's internet website. Also, we will provide copies of these documents and any exhibits to them, without charge to prospective investors upon request addressed to Can-Cal Resources Ltd., 8224 Ocean Gate Way, Las Vegas, Nevada 89128, attention Ronald D. Sloan, Chairman of the Board of Directors. FORWARD LOOKING STATEMENTS Except for historical and current information, all the information in this prospectus are considered to be "forward looking" statements. Specifically, all statements (other than statements of historical and current information) regarding financial and business strategy and the performance objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to them. These statements involve known risks such as lack of capital to fully explore our properties; not finding enough precious metals mineralization in the properties to support a mining project; lack of capital to put properties into production; disappointing recoveries of precious metals from properties once put into production; higher than expected production costs; declining market prices for precious metals; and delays or increased costs to obtain production or mining permits. When we use the words "anticipate," "believe," "estimate," "expect," "may," "will," "should," "continue," "intend" and similar words or phrases, we are identifying forward-looking statements (also known as "cautionary statements" because you should be cautious in evaluating such statements in the context of all the information in this prospectus). These statements reflect our current views with respect to future events. However, the merit or validity of current views is subject to the realization in fact of assumptions we have made. What we now think will happen may turn out much different, and therefore our assumptions may prove to have been inaccurate or incomplete. The investment risks discussed under "Risk Factors" specifically address all of the material factors that may influence future operating results and financial performance. The investment risks are not "boiler plate;" they are intended to tell you about the uncertainties and risks inherent in our business at the present time which you need to evaluate carefully before making an investment decision. 4
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SUMMARY INFORMATION The following summarizes all material information found elsewhere in this prospectus, and is qualified by the more detailed information in this prospectus and in the exhibits to the registration statement of which this prospectus is a part. THE COMPANY Can-Cal Resources Ltd. is a Nevada corporation incorporated on March 22, 1995 under the name of British Pubs USA, Inc. as a wholly owned subsidiary of 305856 B.C., Ltd. dba N.W. Electric Carriage Company ("NWE"), a British Columbia, Canada company. On April 12, 1995, NWE exchanged shares of British Pubs USA, Inc. for shares of NWE held by its existing shareholders, on a share for share basis. NWE changed its name to Can-Cal Resources Ltd. on July 2, 1996. In January 1999 the company sold its wholly-owned Canadian subsidiary Scotmar Industries, Inc., which was engaged in the business of buying and salvaging damaged trucks from insurance companies for resale of guaranteed truck part components. The subsidiary was sold for a profit and the proceeds used to acquire and explore mineral properties. The company decided that the subsidiary would lose money in the vehicle salvage business unless more capital was obtained specifically for that business. The company is an exploration company. Since 1996, we have examined various mineral properties prospective for precious metals and minerals and acquired those deemed promising. We own, lease or have interests in one mineral property in Durango State, Mexico, and four mineral properties in the southwestern United States (California and Arizona). All the properties are "grass roots" because they are not known to contain reserves of precious metals or other minerals (a reserve is that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination). None of the properties are in production. In 2003, we sold $20,000 of volcanic cinders materials from the Pisgah, California property to an industrial user. We will pursue a diversified strategy over time. Management intends to maximize exploration expenditures by utilizing a focused approach to generative exploration, while simultaneously seeking to acquire potential near-term production properties. To the extent that financing is available, we will explore, develop, and, if warranted, bring into production precious metals properties for our own account or in conjunction with joint venture partners (in those instances where we acquire less than a 100% interest in a property). However, either due to the lack of available financing, or the number of properties which merit development, or the scope of the exploration and/or development work of a particular property being beyond the company's financial and administrative capacity, we may farm out one or more properties to other mining companies. Executive offices are located at 8224 Ocean Gate Way, Las Vegas, Nevada 89128 (tel. 702.243.1849; fax 702.243.1869). 5
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THE OFFERING This offering relates to the sale of shares, and additional shares which may be acquired on exercise of warrants, owned by shareholders. Securities Outstanding 17,154,718 shares of common stock, $0.001 par value. Securities To Be Outstanding 17,644,718 shares of common stock, assuming the selling shareholders exercise warrants to buy 490,000 shares. The number of shares to be outstanding does not include shares issuable under options held by an officer and by a consultant, and warrants held by others, including officers and directors. Securities Offered 735,000 shares (245,000 outstanding shares, plus up to 490,000 shares on exercise of warrants). Use of Proceeds We will not receive any proceeds from sale of shares by the selling shareholders. We will receive up to $183,750 from exercise of warrants held by the selling shareholders. See "Use of Proceeds." Plan of Distribution The offering is made by the selling shareholders. Sales may be made in the open market or in private negotiated transactions, at fixed or negotiated prices. See "Plan of Distribution." Risk Factors The securities offered hereby involve a high degree of risk. See "Risk Factors." Trading Symbol CCRE (Over-the Counter Bulletin Board) RISK FACTORS An investment in our common stock is speculative in nature and involves a high degree of risk. You should carefully consider the following risks and the other information in this prospectus (including the information incorporated by reference) before investing. RISK FACTORS INVOLVING THE COMPANY LOSSES TO DATE AND GENERAL RISKS FACED BY THE COMPANY. We are an exploration stage company engaged in the acquisition and exploration of precious metals mineral properties. To date, we have no producing properties. As a result, we have had minimal sources of operating revenue and we have historically operated and continue to operate at a loss. For the year ended December 31, 2003, the company recorded a net loss of $711,100 and had an accumulated stockholders' deficit of $5,392,300 at that date. For the six months ended June 30, 2004, we recorded a net loss of $648,000, and had an accumulated stockholders' deficit of $6,040,300. Our ultimate success will depend on our ability to generate profits from our properties. We lack operating cash flow and rely on external funding sources. If we are unable to continue to obtain needed capital from outside sources, we will be forced to reduce or curtail our operations. Further, exploration and development of the mineral properties in which we hold interests depends upon our ability to obtain financing through: 6
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o Bank or other debt financing, o Equity financing, or o Other means. As a mineral exploration company, our ability to commence production and generate profits is dependent on our ability to discover viable and economic mineral reserves. Our ability to discover such reserves is subject to numerous factors, most of which are beyond our control and are not predictable. Exploration for gold is speculative in nature, involves many risks and is frequently unsuccessful. Any gold exploration program entails risks relating to: o The location of economic ore bodies, o Development of appropriate metallurgical processes, o Receipt of necessary governmental approvals, and o Construction of mining and processing facilities at any site chosen for mining. The commercial viability of a mineral deposit is dependent on a number of factors including: o The price of gold, o Exchange rates, o The particular attributes of the deposit, such as its size, grade and proximity to infrastructure, financing costs, taxation, royalties, land tenure, land use, water use, power use, importing and exporting gold and environmental protection. All of the mineral properties in which we have an interest or right are in the exploration stages only and are without reserves of gold or other minerals. We cannot assure that current or proposed exploration or development programs on properties in which we have an interest will result in the discovery of gold or other mineral reserves or will result in a profitable commercial mining operation. THE AUDIT REPORT ON THE FINANCIAL STATEMENTS AT DECEMBER 31, 2003 HAS A 'GOING CONCERN' QUALIFICATION. There is substantial doubt that the company may be able to continue operations unless we obtain additional funding and are successful with our strategic plan. The company has experienced losses since inception. The extended period over which losses have been experienced is principally attributable to the fact that a lot of money has been spent exploring grass roots' mineral properties to determine if precious metals might be present in economic quantities. These efforts have been unsuccessful, so all the money spent has been written off (charged to expenses). In order to fund future activities until positive operating cash flow is achieved, the company must identify and acquire (or sign an agreement to earn interests in) mineral properties of sufficient geological merit to raise the capital necessary to explore the properties to determine if they contain economic amounts of precious metals. If economic deposits are identified, the company then would either seek to raise the capital itself to put those properties into production, or sell the properties to another company, or place the properties into a joint venture with another company funding pre-production capital and initial start up production costs. 7
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Attaining these objectives will require substantial capital, which the company will have to obtain principally by selling stock in the company. We have no definitive arrangements in place to raise the necessary capital to continue operations, but you should note that even if we raise the capital, the properties may not contain economic amounts of precious metals, or production may be disappointing. In January 2004, we engaged IBK Capital Corp. to assist the company in raising equity capital of up to $1 million and paid IBK Cdn$28,500 as a work fee and advance against out-of-pocket expenses. No capital has been raised with IBK and no terms of a proposed financing have been finalized. AS AN EXPLORATION COMPANY, WE ARE SUBJECT TO THE RISKS OF THE MINERALS BUSINESS. The exploration for minerals is highly speculative and involves risks different from and in some instances greater than risks encountered by companies in other industries. Most exploration programs do not result in the discovery of mineralization which is economic to mine, and most exploration programs never recover the funds invested in them. Without extensive technical and economic feasibility studies, no one can know if any property can be mined at a profit. Even with promising reserve reports and feasibility studies, profits are not assured. WE HAVE NOT SYSTEMATICALLY DRILLED AND SAMPLED ANY OF OUR PROPERTIES TO CONFIRM THE PRESENCE OF ANY CONCENTRATIONS OF PRECIOUS METALS, AND DRILLING AND SAMPLING RESULTS TO DATE ON THE U.S. PROPERTIES HAVE BEEN INCONCLUSIVE. Most of the sampling and exploration work prior to 2003 (all on properties in the United States) was not conducted by well-established, third party independent geologists or engineers, and from time to time we used non-standard procedures to sample and assay material from the properties. Some of these procedures could have introduced contamination into the tested materials, causing the assay results to be unreliable. There is substantial risk that standard and systematic testing on the United States properties would show limited concentrations of precious metals. Positive results from tests prior to 2003 only confirmed the presence of precious metals in the samples. You cannot safely assume that precious metals-bearing materials exist outside of the samples tested. A RETURN TO LOW GOLD PRICES COULD ADVERSELY IMPACT THE COMPANY. Gold prices reached a 15 year high of $432 per ounce on April 1, 2004, and were approximately $405 per ounce on September 17, 2004. If gold prices were to drop below $325 per ounce for any sustained period of time, the company could be unable to raise the capital needed to put properties into production. POLICY CHANGES. Changes in regulatory or political policy could adversely affect our exploration and future production activities. Any changes in government policy, in the United States, Mexico or other countries where properties are or may be held, could result in changes to laws affecting ownership of assets, land tenure, mining policies, taxation, environmental regulations, and labor relations. ENVIRONMENTAL COSTS ARE NOT PREDICTABLE. Compliance with environmental regulations could adversely affect our exploration and future production activities. There can be no assurance that future changes to environmental legislation and related regulations, if any, will not adversely affect our operations. We may not know what environmental compliance issues exist, or the costs to be compliant, until we seek to put a property into production. Compliance requirements imposed by United States or Mexican authorities could be costly, and could prevent putting a property into production. FUTURE RESERVE EVALUATIONS WILL ONLY BE ESTIMATES OF POTENTIAL VALUE. All of the mineral properties in which we have an interest or right are in the exploration stages only and are without reserves of gold or other minerals. If and when we can prove such reserves, reserve estimates may not be accurate. There is a degree of uncertainty attributable to the calculation of reserves or resources. Until reserves or resources are actually mined and processed, the quantity of reserves or resources must be considered as estimates only. In addition, the quantity of reserves or resources may vary depending on metal prices. Any material change in 8
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the quantity of reserves, resource grade or stripping ratio may affect the economic viability of our properties. In addition, there can be no assurance that mineral recoveries in small-scale laboratory tests will be duplicated in large tests under on-site conditions or during production. See the risk factor "We may not be successful in raising the capital necessary to explore, evaluate and exploit properties." SUBSTANTIAL INVESTMENTS IN EXPLORATION WORK COULD BE LOST. The exploration for minerals is highly speculative and involves risks different from and in some instances greater than risks encountered by companies in other industries. Most exploration programs do not result in the discovery of mineralization which is economic to mine, and most exploration programs never recover the funds invested in them. Without extensive technical and economic feasibility studies, no one can know if any property can be mined at a profit. Even with promising reserve reports and feasibility studies, profits are not assured. The company could spend millions of dollars to evaluate a property to the point where a determination can be made whether it would be economic to mine. Until such time as reserves are established for a property, all the exploration costs must be charged to expenses (written off). Exploration work on a property could be initially promising, but further work (and expense) could condemn the property because the mineralized body is not large enough to support mining. If a property is believed to be economic to mine, and reserves have been established, substantial capital would be required to put the property into production. Unless the property is put into production, all the money spent in evaluating the property could be lost. See the next risk factor. WE MAY NOT BE SUCCESSFUL IN RAISING THE CAPITAL NECESSARY TO EXPLORE, EVALUATE AND EXPLOIT PROPERTIES. For the foreseeable future, the company does not anticipate having positive cash flow from operations sufficient to pay for exploration and capital expenses. However, exploration is a critical and expensive component of our business: Typically, exploration-stage mineral properties (properties without known reserves) are acquired without extensive data about the possible existence of valuable minerals in place, and without knowledge that the minerals can be mined and processed at a profit. Each property has unique geological features (where are the minerals located and at what grades) and metallurgical features (what processing methods, if any, will extract the minerals from the host rock). Detailed exploration and feasibility studies must be conducted on each property before the cost of setting up a mining and processing operation can be justified. Exploration consists of drilling, sampling, and testing the samples from defined blocks on the property to determine the presence and extent of mineralization. Feasibility of mining a particular property requires, among other factors, an evaluation of mining costs, processing costs, including an evaluation of which metallurgical (processing) method will extract the minerals from the mined rock at the lowest cost, and the level of capital development expenditures and expected returns on that capital. Sometimes, a property may contain high grades of mineralization, but mining is not warranted because the metals can't be extracted economically. Mining and processing operations on any significant scale is capital intensive. To raise needed capital, investors must have reliable independent estimates of the quantity and recoverability in mining and processing of precious metals. For companies of Can-Cal's size and level of operations, it is not always cost effective to hire independent engineering firms to prepare independent feasibility studies before production starts. At least in some instances, we will most likely seek to raise the needed capital with estimates of the feasibility of the project prepared by employees, and (particularly for small scale projects) consultants which are not independent. If capital raising is not successful using our own estimates, we might have to spend the money and time to hire independent engineers to prepare a feasibility study. 9
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Exploration and feasibility budgets for new properties will vary, depending on the size of the property, location (accessability), drilling depths, the amount of reliable data (if any) available from prior owners, and other factors. After completion of exploration work, the company may build a small pilot processing plant on a property to evaluate what processing methods will work. The amounts to be spent on exploration and feasibility work for future properties we acquire can't be estimated, but could exceed millions of dollars per property. Additional capital to begin mining and build and start up a processing facility would be needed, if the company elects to hold a property and exploit its resources. We expect to rely on outside sources of capital for the foreseeable future. Sometimes we may seek industry partners to joint venture a project, or enter into a 'farm out' agreement. In a farm out agreement, typically, another company is responsible for funding exploration and development work, and we would either receive a royalty or small net profits interest. However, the strategy of lowering financial risk by enlisting participation of industry partners may not be successful, and we may not be successful in raising the capital required to develop and mine. Therefore, it is possible that some or all of the money invested by the company to acquire a property, and evaluate its mineral content and the economics of mining and processing, will be lost. STOCK MAY BE ISSUED AS PART OF THE PURCHASE PRICE FOR PROPERTIES, RESULTING IN DILUTION TO SHAREHOLDERS. In some instances, the sellers of properties we may seek to acquire may require the company to issue restricted stock in the company as part of the purchase price, in addition to the cash and royalty components of the purchase price. The amount of stock which might be issued could be substantial, as the company's stock price is low and the company has no properties in production. This could result in dilution to shareholders, which would not be recouped if exploration of the property is unsuccessful or a good property can't be put into production. TERMS OF SUBSEQUENT FINANCINGS MAY ADVERSELY IMPACT YOUR INVESTMENT. We will have to raise equity, debt or preferred stock financing in the future. Your rights and the value of your investment in the common stock could be reduced. For example, if we have to issue secured debt securities, the holders of the debt would have a claim to our assets that would be prior to the rights of stockholders until the debt is paid. Interest on these debt securities would increase costs and negatively impact operating results. Preferred stock could be issued in series from time to time with such designations, rights, preferences, and limitations as needed to raise capital. The terms of preferred stock could be more advantageous to those investors than you as holders of common stock. In addition, if we need to raise more equity capital from sale of common stock, institutional or other investors may negotiate terms at least and possibly more favorable than the terms of this offering. More common stock could be sold under these circumstances at prices lower than offered under this prospectus, which could result in dilution of the book value of shares bought in this offering. RISK FACTORS INVOLVING THIS OFFERING. FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. Sales of our common stock in the public market following this offering could lower the market price of our common stock. Sales may also make it more difficult for the company to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable, or at all. Of the 17,154,718 shares of common stock outstanding on September 17, 2004, approximately 11,996,000 shares could be sold under rule 144 or become free tradable by removal of restrictions under rule 144(k). 10
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BECAUSE THE COMPANY'S COMMON SHARES ARE "PENNY STOCK," CERTAIN RULES MAY IMPEDE THE DEVELOPMENT OF INCREASED TRADING ACTIVITY AND COULD AFFECT THE LIQUIDITY FOR STOCKHOLDERS. Penny stocks generally are equity securities with a price of less than $5.00 per share other than securities registered on certain national securities exchanges or quoted on the Nasdaq stock market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Our securities are subject to the SEC's "penny stock rules" that impose additional sales practice requirements on broker-dealers who sell penny stock securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of penny stock securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the "penny stock rules" require the delivery, prior to the transaction, of a disclosure schedule relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. And, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These rules may restrict the ability of broker-dealers to sell our securities and may have the effect of reducing the level of trading activity of our common stock in the secondary market. On January 12, 2004, the SEC proposed amendments to the penny stock rules to ensure that investors continue to receive the protections of those rules. The SEC also is proposing that broker-dealers be required to enhance their disclosure schedule to investors who purchase penny stocks, and that those investors have an explicit "cooling-off period" to rescind the transaction. These amendments could place further constraints on broker-dealers' ability to sell our securities. USE OF PROCEEDS We will not receive proceeds from the selling shareholders' sales, but we will receive up to $183,750 if they exercise all of the warrants covered by this prospectus. These funds will be applied to general working capital, consisting of corporate administrative expense, and exploration costs on the Arco property (and other properties which may be acquired). No exploration budgets have been prepared to date. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS The stock is traded on the Nasdaq Over-the-Counter Bulletin Board ("CCRE.OB"). The following shows the high and low market quotation for the shares for the last three years. Quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions, and do not necessarily represent actual transactions. Low High --- ---- 2001 ---- First Quarter $1.218 $1.75 Second Quarter $1.156 $1.813 Third Quarter $0.77 $1.563 Fourth Quarter $0.31 $0.90 11
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2002 ---- First Quarter $0.25 $0.51 Second Quarter $0.21 $0.51 Third Quarter $0.18 $0.48 Fourth Quarter $0.13 $0.43 2003 ---- First Quarter $0.10 $0.25 Second Quarter $0.07 $0.31 Third Quarter $0.10 $0.25 Fourth Quarter $0.14 $0.49 2004 ---- First Quarter $0.22 $0.49 Second Quarter $0.15 $0.37 The company has approximately 337 shareholders of record (approximately 1,000 beneficial owners). The stock transfer agent is Pacific Stock Transfer Company, 500 E. Warm Springs, Suite 240, Las Vegas, NV 89119. The company has never paid any dividends. There are no legal restrictions which limit the company's ability to pay dividends but, based on its present financial situation, it is extremely unlikely to do so in the near future. MANAGEMENT'S DISCUSSION AND ANALYSIS, AND PLAN OF OPERATIONS PLAN OF OPERATION. The company is engaged in the acquisition and exploration of precious metals mineral properties. As part of its growth strategy, the company will focus its future activities in the Western Hemisphere, with an emphasis on Latin America, particularly Mexico. The extent of these activities will be subject to available funding. Management intends to maximize exploration expenditures by utilizing a focused approach to generative exploration, while simultaneously seeking out potential near-term production properties. The company presently has gold exploration projects located in Mexico and in California and Arizona. The US projects are inactive. None of these properties has any proven or probable reserves and none of these properties is in production. All expenditures on all properties are expensed, not capitalized. Since June 2003, management has investigated several interesting mining properties in Mexico, which met the objectives of the company's future growth strategy. In September 2003, the company incorporated a wholly owned Mexican subsidiary, Sierra Madre Resources S. A. de C. V. ("SMR") which is the company's principal vehicle for future acquisitions in Mexico. In February 2004, SMR acquired a 100% interest in a gold-silver mineral concession, referred to as the Arco Project (the "Project"). The Project includes a land package of 463 hectares (approximately 1,140 acres), which is owned by a private Mexican individual. In June 2004, SMR applied for a new concession, Arco 2, which surrounds and is contiguous with the Arco concession and also extends, in part, 7 kilometers to the north. The Arco 2 concession includes a land package of 3,217 hectares (approximately 7,920 acres), bringing the total land package for the Project area to 3,680 hectares (approximately 9,060 acres). The Project is located in Durango State, approximately 120 kilometers north-northwest of the city of Durango, and lies in 12
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the Central Plateau Gold-Silver belt of the Sierra Madre Occidental, near the historic Silver-Lead-Zinc district of Tejamen. SMR is also actively pursuing additional property acquisitions, either by staking or options on third party concessions. Discussions are presently taking place with several concession owners, and SMR has identified a large number of areas of geological interest by way of satellite imaging, which will be examined in the coming months. Any areas of merit will be staked. During 2004, the company intends to continue to attempt to develop industrial sales for the volcanic materials located on the Pisgah property in California, as a follow up to the limited industrial sales attained in 2003 and 2002. No further testing is planned at this time with respect to developing a leaching process to extract precious metals contained in the cinder materials. The company presently has two full-time employees and two part-time geological consultants and will continue to rely on outside consultants and agents, in the near-term, to perform various administrative, legal and technical functions, as required. At June 30, 2004, we had approximately $89,400 cash available to sustain operations, which would cover the company's planned activities at least through September 2004. We may seek additional capital by sale of restricted stock in private placement transactions in Canada, loans from directors, or possible funding or joint venture arrangements with other mining companies. On January 29, 2004, the company entered into an agreement with IBK Capital Corp. ("IBK"), whereby IBK agreed to assist the company in arranging financing of up to $1,000,000 on terms to be negotiated. The agreement originally was effective through July 28, 2004, and has been extended for an additional six-month period, ending on January 27, 2005. The agreement may be terminated or extended by either party upon 15 days advance notice in writing. To date, no financing has been finalized. Other than the IBK agreement, there are no plans or arrangements now in place to fund the company or its operations, and the outcome of discussions with other companies cannot be predicted. LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 2004 COMPARED TO JUNE 30, 2003, AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003 As of June 30, 2004, the company had a working capital deficit of $367,000 and approximately $89,400 cash was available to sustain operations, which would cover the company's planned activities through September 2004, at a minimum. The working capital deficit as of December 31, 2003 was $661,000 and approximately $17,400 cash was available. We may seek additional capital by sale of restricted stock in private placement transactions in Canada, loans from directors, or possible funding or joint venture arrangements with other mining companies. The company had sales of $15,100 and gross profit of $6,900 from the sale of cinder materials during the six-month period ended June 30, 2004, compared with sales of $10,800 and gross profit of $5,000 for the six-month period ended June 30, 2003. The company sustained a net loss of $648,000 for the six-month period ended June 30, 2004, compared to a net loss of $302,700 for the six-month period ended June 30, 2003. The increased net loss in 2004 was principally due to a $267,900 increase in interest expense and a $89,300 increase in general and administrative expenses. The higher interest expense was entirely due to a $277,300 non-cash charge, using the Black Scholes model, to record the value of 1,233,127 warrants granted to various shareholders in March 2004 in connection with the conversion of $82,687 of related party notes payable and $225,595 of accrued salary into 1,233,127 restricted common shares of the company at $0.25 per share and an equal amount of warrants exercisable at $0.30 over a two-year term from March 1, 2004. These conversions eliminated $308,282 in liabilities from the company's balance sheet. 13
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The $89,300 increase in general and administrative expenses during the six-month period ended June 30, 2004 compared to the same period in 2003 was principally due to: o Professional fees increased by $48,100, principally due to payments to IBK amounting to $21,405, representing a non-refundable fee and an expense advance in connection with the IBK Agreement, and higher legal fees related to Mexico and to more SEC-related filings. o Consulting increased by $44,100 due to Mr. Ciali's employment agreement and expanded consulting geological and investor relation services. By comparison to the same period in 2003, Mr. Ciali was not appointed President of the company until March 2003. o Travel and Entertainment expenses increased by $3,400 due to international travel expenses, and Mr. Ciali's travel-related expenses, in general. o Office rent decreased by $6,300 based on the relocation of the company's Las Vegas office in October 2003 and the consolidation of rented space. Net cash used by operating activities amounted to $141,600 for the six-month period ended June 30, 2004, compared with $64,800 for the same period in 2003, principally reflecting the increased level of general and administrative expenses in 2004. The company financed its activities principally through the issuance of common stock, which amounted to $267,800 for the six-month period ended June 30, 2004 compared to $68,700 for the same period in 2003. Unless the company is able to establish the economic viability of its mining properties, the company will continue writing off its expenses of exploration and testing of its properties. Therefore, losses will continue unless the company locates and delineates reserves and initiates mining operations. If that occurs, the company may capitalize certain of those expenses. The company has no material commitments for capital expenditures other than expenditures it chooses to make with respect to testing and/or exploration of its mineral properties. LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 2003 COMPARED WITH DECEMBER 31, 2002, AND RESULTS OF OPERATIONS FOR THE TWO YEARS ENDED DECEMBER 31, 2003: Year ended December 31 ------------------------------ 2003 2002 ----------- ---------- Material sales $ 20,000 $ 300 Cost of sales 9,100 200 Gross profit 10,900 100 General & administrative expenses (586,300) (578,400) Other income (expenses) (135,700) (131,000) ---------- ---------- Net loss $ (711,100) $ (709,300) ========== ========== 14
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Mineral sales in 2003 and 2002 were related to limited industrial sales of cinder material from the Pisgah property. The following table summarizes working capital, total assets, accumulated deficit, and shareholders' equity: Year ended December 31 ---------------------------------- 2003 2002 ------------- ------------- Working capital $ (661,000) $ (358,500) Total assets $ 46,400 $ 72,200 Accumulated deficit $ (5,392,300) $ (4,681,200) Shareholders' deficit $ (1,019,700) $ (730,400) In 2002, additions to funds available for operations, in the amount of $399,600, were provided by: a.) $271,000 from the sale of 1,025,320 restricted common shares for proceeds of $260,900 and the sale of 67,960 restricted shares to Dutchess Private Equity Fund under the Investment Agreement for proceeds of $10,100 (net of offering costs of $900); b.) $79,000 in notes payable from related parties: $25,000 - First Colony Merchant, a shareholder, (secured, with an interest rate of 8.0%, due on demand), $19,908 - Landing Insurance Agency, a shareholder, (unsecured, with an interest rate of 5.0%, due July 15, 2003), $10,492 - Scott A. Nichols, a shareholder, (unsecured, with an interest rate of 24.0%, due May 26, 2002), $10,000 - James Dacyszyn, a director, (unsecured, with an interest rate of 7.50%, due with respect to $5,000 February 12, 2003 and with respect to $5,000 April 22, 2003), $5,000 - Brian Wolf, a director, (unsecured, with an interest rate of 7.50%, due July 1, 2003), $3,600 - Betty Ann Sloan, a shareholder, (unsecured, with an interest rate of 7.50%, due February 5, 2003), $3,000 - Barry Amies, a director, (unsecured, with an interest rate of 7.50%, due April 5, 2003), and $2,000 - Ronald D. Sloan, Chairman, (unsecured, with an interest rate of 7.50%, due July 1, 2003); and c.) $120,000 from a convertible debenture (unsecured, with an interest rate of 8.0%, due June 12, 2004, issued to Dutchess Private Equities Fund); offset by $70,400 principal payments on notes payable to related parties: $32,220 - Ronald D. Sloan, Chairman, $10,492 - Scott A. Nichols, a shareholder, $12,500 - First Colony Merchant, a shareholder, $10,000 - Owen Sequoia, a shareholder, $3,588 - Landing Insurance, a shareholder, and $ 1,600 - Betty Ann Sloan, a shareholder. In 2003, additions to funds available for operations, in the amount of $193,500, were provided by: a.) $164,700 from the sale of 823,410 restricted common shares; b.) $41,900 in notes payable from related parties: $25,000 - First Colony Merchant, a shareholder, (secured, with an interest rate of 8.0%, due January 2, 2004), $12,500 - James Dacyszyn, a director, (unsecured, with an interest rate of 7.50%, due with respect to $10,000 February 18, 2004 and with respect to $2,500 March 7, 2004), $3,000 - Barry Amies, a former director and a shareholder, (unsecured, with an interest rate of 7.50%, due with respect to $1,000 March 27, 2004 and with respect to $2,000 September 8, 2004), and $1,400 - Ronald D. Sloan, Chairman, (unsecured, with an interest rate of 7.50%, due June 30, 2004) (see notes to the audited financial statements), and c.) $13,100 principal payments on notes payable to related parties, Ronald D. Sloan, Chairman. We recorded a net loss from operations in 2003 of $711,100 compared to a net loss from operations of $709,300 in 2002. A $10,800 increase in gross profit on industrial sales in 2003, due to higher sales ($20,000 in 2003, compared to $300 in 2002), was offset by a $7,900 increase in general and administrative expenses and a $5,000 increase in interest expense in 2003 compared to 2002, respectively. 15
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General and administrative expenses increased by $7,900 in 2003 to $586,300, compared to $578,400 in 2002. The increase, stated as changes in 2003 compared to 2002, was due principally to: o A $104,000 increase in consulting expenses, principally due to a non-cash charge of $33,900, representing the value of the stock options granted to Mr. Ciali when he was appointed President of the company in March 2003, and an increase in overall consulting fees, as a result of Mr. Ciali's and third party geological and investor relations consulting services. o A $26,700 increase in travel and entertainment expenses due to international travel expenses, as part of the company's growth strategy to expand its mining-related activities into Latin America, and management travel-related expenses, in general. o A $10,700 increase in professional fees due to higher legal fees incurred both in the US and Mexico and somewhat higher audit fees. o A $ 59,300 decrease in bad debts expense, as no bad debts expense was incurred in 2003. o A $29,700 decrease in insurance expense because the company's insurance policy has not yet been renewed, as more reasonably priced bids coverage is being sought. o A $24,500 decrease in exploration expenses as there were only limited expenditures on the company's US-based exploration properties. o A $18,700 decrease in advertising and promotion expenses as part of the company's overall cost savings efforts. Interest expense increased by $5,000 in 2003 to $162,200 compared to $157,200 in 2002, due principally to a somewhat higher level of debt outstanding and equity conversions under the Dutchess Fund convertible debenture, which include an interest component to account for the difference in the share price of the company's common stock on the date of conversion compared to the discounted conversion share price pursuant to the convertible debenture agreement. Unless we can establish the economic viability of the company's exploration properties, we will continue writing off the expenses of exploration and testing. Therefore, losses will continue until such time, if ever, as we establish the economic viability of the properties. If viability is established for a property, some of the expenses related to that property would be capitalized instead of expensed. We have no material commitments for capital expenditures. BUSINESS The company is an exploration company. Since 1996, we have examined various mineral properties prospective for precious metals and minerals and acquired those deemed promising. We own, lease or have interests in one mineral property in Durango State, Mexico, and four mineral properties in the southwestern United States (California and Arizona). Prior to 2003, we performed more than 1,000 "in-house" assays on mineral samples from our properties in the United States. An assay is a test performed on a sample of minerals to determine the quantity of one or more elements contained in the sample. The in-house work was conducted with our equipment by persons with whom we contracted, who are experienced in performing assays, but were not independent of us. We 16
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also sent samples of materials from which we obtained the most promising results to outside independent assayers to confirm in-house results. All the United States properties, and the Mexico property, are "grass roots" because they are not known to contain reserves of precious metals or other minerals (a reserve is that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination). None of these properties is in production. In 2003, we sold $20,000 of volcanic cinders materials from the Pisgah, California property to an industrial user. The company's current focus is in Latin America, particularly Mexico. In 2003, the company hired a new chief executive officer (Anthony F. Ciali) and retained a consulting geologist (Luis Vega). A second consulting geologist (Terry Brown) was retained in 2004. All these individuals have extensive experience with large companies in locating, acquiring and putting precious metals properties into production in North and South America. See "Management." In 2003, the company incorporated a wholly-owned subsidiary in Mexico, Sierra Madre Resources S.A. de C.V. ("SMR"), to be our principal operating entity for mining-related acquisitions and activities in Mexico. In February 2004, SMR acquired a 100% interest in a gold-silver mineral concession, in Durango State, Mexico. This is an exploration stage property. See "Arco Project." In June 2004, SMR applied for another gold-silver exploration concession, also in Durango State, Mexico. See "Arco 2 Project." Other subsidiaries may be incorporated in other countries as needed. We will pursue a diversified strategy over time. Management intends to maximize exploration expenditures by utilizing a focused approach to generative exploration, while simultaneously seeking to acquire potential near-term production properties. To the extent that financing is available, we will explore, develop, and, if warranted, bring into production precious metals properties for our own account or in conjunction with joint venture partners (in those instances where we acquire less than a 100% interest in a property). However, either due to the lack of available financing, or the number of properties which merit development at any point in time, or the scope of the exploration and/or development work of a particular property being beyond the company's financial and administrative capabilities, the company may farm out one or more of its properties to other mining companies. PROPERTIES GENERAL. We own or have interests in six properties: The Arco and Arco 2 Projects in Durango State, Mexico, and four properties in the United States. Of the United States properties, one is owned (patented mining claims on a volcanic cinders property at Pisgah, California), one is leased with an option to purchase (the Cerbat property in Mohave County, Arizona), and two properties are groups of unpatented mining claims located on federal public land and managed by the United States Bureau of Land Management (the "BLM"): the Owl Canyon property (23 miles northeast of Baker, California); and the Wikieup property (in Mohave County, Arizona). In the United States, unpatented claims are "located" or "staked" by individuals or companies on federal public land. Each placer claim covers 160 acres and each lode claim covers 20 acres. The company is obligated to pay a maintenance fee of $100 per claim per year to the BLM and file an Affidavit of Assessment Work with the County showing labor and improvements of at least $100 for each claim yearly. If the statutes and regulations for the location and maintenance of a mining claim in the United States are complied with, the locator obtains a valid possessory right to the contained minerals. Failure to pay such 17
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fees or make the required filings may render the mining claim void or voidable. We believe we have valid claims, but, because mining claims are self-initiated and self-maintained, it is impossible to ascertain their validity solely from public real estate records. If the validity of an unpatented mining claim is challenged by the government, we would have the burden of proving the present economic feasibility of mining minerals located on the claims. ARCO PROJECT. On February 17, 2004, SMR acquired a 100% interest in a exploration stage gold-silver mineral concession, referred to as the Arco Project (the "Project"). The Project includes a land package of 463 hectares (approximately 1,140 acres), which is owned by a private Mexican individual (the "Concessionaire"). The Project is located in Durango State, approximately 120 kilometers north-northwest of the city of Durango, and lies in the Central Plateau Gold-Silver belt of the Sierra Madre Occidental, near the historic Silver-Lead-Zinc district of Tejamen. SMR acquired its 100% interest in the Project subject to a ninety days due diligence period, for which SMR paid the Concessionaire $1,000. If SMR elects to proceed with the Project, it will be required to pay an additional $1,000 to the Concessionaire and make future minimum semi-annual advance royalty payments ("Advance Royalty"), ranging from $2,000 initially to a maximum of $4,000 after 4.5 years. If production commences on the Project, the Concessionaire will receive a quarterly net smelter returns production royalty ("Production Royalty"), ranging from 1% at gold prices less than $300 to a maximum of 6% at gold prices of $450 or higher. SMR will be permitted to deduct all Advance Royalty payments against any future Production Royalty payments, on an unlimited carry-forward basis. In addition, SMR will be permitted to recoup all of its development capital expenditures from the Project's net operating cash flow, before being required to make any Production Royalty payments. During the recoupment period, the periodic Advance Royalty payments will be doubled. When the sum of all payments to the Concessionaire amounts to $3.5 million, SMR will obtain title to the Arco concession and be relieved of making any further payments to the Concessionaire. Initial geological work indicates that the Arco Project is a low-sulfidation epithermal gold-vein occurrence in Upper Series rhyolite formation, which is projected to be relatively shallow, especially on the northern and western margins of the swarm where apparent faults expose andesite flows supposed to be of the Lower Volcanic Sequence. Typically, it is the underlying andesite formations that are mineralized in Mexico. The fact that the veins occur in the rhyolite formation is unusual and indicates the potential for wider and stronger vein structures in the underlying Lower Series andesite formation. Although the exposed surface veins are narrow (from 2 to 100 centimeters for individual veins in zones of up to 20 meters), they have a strike length of over 2 kilometers and form vein swarms, suggesting that the veins may thicken at depth in the underlying andesite series rocks. The Arco outcrop quartz veins have been sampled in a triangular shaped area measuring more than 600 meters on each side. Three principal outcrop veins are present on the northwest portion of the Project. These veins tend to converge to the south, suggesting that they may intersect at depth in the underlying andesite series rocks. A total of 44 rock chip samples were taken perpendicularly across the veins, at approximately 25 meter intervals, with 34 of the 44 samples returning assays ranging in gold values from 0.10 g/t to 5.07 g/t and 21 of the samples assaying over 0.20 gt gold. The silver to gold ratio averaged 24 to 1. See the table below for all assay results. Of particular interest is the western most vein (the "West Vein"), where successive gold assay values of 0.425 g/t, 0.329 g/t, 5.070 g/t, 1.265 g/t and 0.848 g/t were reported over a strike length of approximately 125 meters. 18
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A second area of outcrop veining was discovered to the southeast, approximately 600 meters from the principal outcrop veins. A total of 3 rock chip samples were taken in this area, with reported gold assay values of 1.090 g/t, 1.945 g/t, and 1.460 g/t over a strike length of approximately 130 meters. All samples were shipped to ALS Chemex of Vancouver, Canada for assaying. The outcrop veins in the northwest portion of the Project appear to extend onto the Arco 2 concession (see below), as may the outcrop veining to the southeast. TABLE OF ROCK CHIP SAMPLE ASSAYS ARCO - NORTHWEST OUTCROP VEINS GOLD SILVER GOLD SILVER ---- ------ ---- ------ 0.005 <0.20 0.42* 1.18 0.065 3.20 0.32* 1.20 0.018 0.70 5.07* 17.10 0.801 10.20 1.26* 3.30 0.112 12.50 0.84 4.60 0.110 4.40 0.16 1.00 0.145 5.80 0.38 6.90 0.072 5.60 0.38 2.50 0.215 4.90 0.04 1.90 0.084 3.40 0.76 8.80 1.365 2.90 0.69 4.00 0.132 1.30 0.14 3.20 0.041 2.10 0.25 1.40 0.382 2.00 0.09 1.10 0.099 2.50 0.16 1.20 0.175 2.50 0.17 9.90 0.295 4.10 0.29 0.70 0.078 10.30 0.39 8.60 0.392 1.20 0.20 <0.20 0.105 1.60 0.30 <0.20 0.175 2.30 0.23 1.40 0.156 1.30 0.15 1.70 *West Vein - Assays reported over a strike length of approximately 125 meters. The principal focus of the second phase of sampling was to test for the potential extension of the West Vein to the southeast and to further test the newly discovered southeast vein area. An additional 8 rock chip samples were taken along the southeast extension of the West Vein, over a strike length of approximately 130 meters. The successive gold assay values for these samples were again encouraging, as follows: 20.9 g/t, 0.32 g/t, 1.12g/t, 1.99 g/t, 0.31 g/t, 0.07 g/t 0.78 g/t and 0.10 g/t. The overall strike length of the West Vein now approximates 320 meters. The 3 main outcrop veins converge to the southeast and dip below surface in what appears to be a faulted area. Very narrow outcrop veining just to the southeast of the faulted area was sampled, with reported gold assay values of 6.45 g/t and 4.39 g/t. The relationship between the convergence of the main outcrop veins to the southeast and the southeast vein area, some 600 meters away, requires further investigation. At present, it appears that the two vein structures are along the same strike line. 19
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Additional sampling of the southeast vein area has resulted in the discovery of a second vein structure, which strikes north versus northwest, as does the originally discovered southeast vein. A total of 5 rock chip samples were taken along this newly discovered vein with reported, successive gold assay values of 3.39 g/t, 0.32 g/t, 0.50 g/t, 0.37 g/t and 0.60 g/t. This new vein structure requires further investigation, as does the potential for the discovery of additional north-striking vein structures in the eastern portion of the Arco concession. Lastly, a new potential stockwork target has been identified in the northern most portion of the Arco concession, which will be further explored in the coming months. All samples were shipped to ALS Chemex of Vancouver, Canada for assaying. ARCO 2 PROJECT. On June 25, 2004, SMR made an application with the Mexican authorities to acquire a 3,217 hectares (7,920 acres) gold-silver exploration concession in Durango State. The concession surrounds and is contiguous with SMR's Arco Project and also extends, in part, approximately 7 kms to the north. In addition to providing a buffer zone around the Arco Project, SMR's initial sampling of the outcrop veins located on the Arco Project indicate that the veins may extend into the Arco 2 concession. When granted, the Arco 2 concession will have a six year exploration term. Under the Mining Law of Mexico, exploration concessions are granted for a period for six years and may not be renewed. Prior to the expiration of the six-year exploration term, a concessionaire may request to have all, or any portion, of the exploration concession substituted for an exploitation concession, which has a term of 50 years and may be renewed for an additional 50 years. To maintain the concessions in good standing, the concessionaire is required to perform certain annual exploration or exploitation work, and pay semi-annual mining duties based on the number of hectares per concession. The mining duty per hectare escalates over time and is greater for exploitation concessions; typically, companies will obtain concessions over a large area, then drop portions of the concessions to save on paying mining duties, as exploration work refines the best areas to keep. A concessionaire is not required to pay to the Mexican government any royalty on production from an exploitation concession. The exploration term of the Arco concession expires in 2009 (2010 for the Arco 2 portion, assuming the concession is granted in 2004). PISGAH, CALIFORNIA PROPERTY. GENERAL, TESTING. In 1997 we acquired fee title to a "volcanic cinders" property at Pisgah, San Bernardino County, California, for $567,000. The cinders material resulted from a geologically recent volcanic eruption. The property is privately owned and is comprised of approximately 120 acres located 10 miles southwest of Ludlow, California, with a very large hill of volcanic cinders, accessible by paved road from Interstate 40. An independent survey service hired by the company reported that there are approximately 13,500,000 tons of volcanic cinders above the surface. Approximately 3,500,000 tons of the cinders have been screened and stockpiled, the result of prior operations by Burlington Northern Railroad Co. which processed the cinders from the hill for railroad track ballast, taking all cinders above about one inch diameter and leaving the rest on the ground surface within one-quarter mile of the hill. The remaining material in the hill, and the material left over from Burlington's operations, can easily be removed by front end loaders and loaded into dump trucks for hauling. The Cinder and Cinder #2 patented mining claims contain morphologically young alkali basalt and hawaiite lava flows and cinder. The cinder and spatter cone is about 100 meters high and has a basal diameter of about 500 meters. The volcanic cone and crater consists of unsorted basalis tephra, ranging 20
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from finest ash, through scoriascious cinders and blocks, to dense and broken bombs up to two meters in dimension. The company owns equipment which was acquired with the property, and is located on the property: a ball mill for crushing cinders, truck loading pads, two buildings, large storage tanks, conveyors to load trucks, material silos and screening equipment. The Pisgah property consists of patented claims we own; no fees have to be paid to the BLM or work performed on the claims to retain title to the property. Electrical power presently is not available to the site, and is not expected to be needed. From 2000 through 2002, the company ran numerous tests on the "volcanic cinders" property (located on patented mining claims we own at Pisgah, California) to determine if the material contains precious metals. Although the program indicated precious metals may exist in material taken from the Pisgah property, overall the program results were inconclusive. There are no current plans to continue the analysis program at Pisgah. The company is evaluating the potential sale of the cinders as industrial minerals in the future. PISGAH PROPERTY MINING LEASE. To generate working capital, as of May 1, 1998 we signed a Mining Lease Agreement for the Pisgah property with Twin Mountain Rock Venture, a California general partnership ("Twin Mountain," a subsidiary of Rinker Materials, Fort Calhoun, Nebraska). The Agreement is for an initial term of 10 years, with an option to renew for an additional ten year term. Twin Mountain has the right to take 600,000 tons of volcanic cinders during the initial term, and 600,000 more tons during the additional term, for processing and sale as decorative rock. The material would be removed from the original cinder deposit, not the stockpiled material. Twin Mountain has not removed any material to date. The agreement provides Twin Mountain will pay minimum annual rental payments of $22,500 for the initial term and $27,500 per year for the additional term. Twin Mountain is also obligated to pay us a monthly production royalty for all material removed from the premises: The greater of 5% of gross sales f.o.b. Pisgah, or $.80 per ton for material used for block material; plus 10% of gross sales f.o.b. Pisgah for all other material. Against these payments, Twin Mountain will be credited for minimum royalty payments previously made. Twin Mountain is current in payments, which are pledged to service company debt. Twin Mountain has not yet removed any material from the property and has not indicated when it would do so. Twin Mountain does not have the right to remove or extract any precious metals from the property; it does have the right to remove cinder material which could contain precious metals (and Twin Mountain would have title to the removed cinder material), but it cannot process the materials for precious metals either on or off site. Mining and reclamation permits, and an air quality permit have been issued by the California regulatory agencies in the names of both Twin Mountain and the company. We posted a cash bond in the amount of $1,379 (1% of the total bond amount) and Twin Mountain has posted the remainder of the $137,886 bond. If Twin Mountain defaults, we would be responsible for reclamation of the property, but reclamation costs incurred in that event would be paid in whole or part by the bond posted by us and Twin Mountain. Reclamation costs are not presently determinable. PISGAH PROPERTY - DEBT TRANSACTIONS. In 1998, the company borrowed $100,000 from a private lender. The debt carried annual interest at 8%, was secured by a first deed of trust on the Pisgah property, plus our rights to payments under the Twin Mountain lease. This debt has been paid. 21
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At December 31, 2003, we owed a second private lender (First Colony Merchant) a total of $487,751 including accrued interest, secured by a deed of trust and assignment of rents (payments under the Twin Mountain lease) on the Pisgah property. For additional consideration for part of the amounts loaned, the company granted the lender a five year option to purchase 300,000 restricted shares of common stock, at the lower of $0.65 per share or 50% of the lowest trading price during the month before exercise, payable in cash. The option was exercised in 2000 at $0.52 per share. As further consideration, also in 2000 we issued 45,000 restricted shares of common stock to a corporate affiliate of the lender as a loan placement fee. The company is in default of interest payments totaling $100,000 and is negotiating forbearance on collection of the interest with the lender. OWL CANYON - S & S JOINT VENTURE In 1996, the company entered into a Joint Venture Agreement with the Schwarz family covering approximately 425 acres of unpatented placer and lode mining claims in the Silurian Hills of California, known as Owl Canyon. The S & S Joint Venture has since increased its holdings to 740 acres of lode claims and a five acre mill site claim. These claims are prospective for precious metals and some base metals. The property is located approximately 23 miles northeast of Baker, California, accessible by 23 miles of paved and dirt road. The company and the Schwarz family each have a 50% interest in the venture which is operated by a management committee, comprised of Ronald Sloan, a director of the company, and Ms. Robin Schwarz. Holding costs are approximately $3,809 per year for county and BLM filing fees, and work must be performed on the property each year to keep title to the claims. Pursuant to the Joint Venture Agreement, we are funding the venture's operations. Any income from the venture will first be paid to the company to repay funds advanced to the venture or spent on its account, with any additional income divided 50% to the company and 50% to the Schwarz family. As the acquisition price of its 50% interest in the S & S Joint Venture, in 1996 the company issued 500,000 restricted shares of common stock to the Schwarz family. The venture owns miscellaneous drilling, milling and assay and facilities, all stored at the property. The equipment is used but operational. Prior to 2003, the company conducted extensive preliminary testing and assaying on the Owl Canyon property. Results indicate precious metals may be present in material located on the Owl Canyon property, but the results are inconclusive and we have no current plans to continue exploration of this property. GEOLOGY OF OWL CANYON. Mineralization on the property migrates along north/south oriented faulting and at the contact point between metamorphic and dolomite rocks. Metalliferous deposits along these fractures are prevalent near the central area of Owl Canyon. Along the southern side of the property, fault contact areas exhibit localized zone alteration from migrating hydrothermal fluids producing a mineralized vein ranging in width from approximately 18 to 36 inches. We have performed external and in-house fire assays on material from the Owl Canyon property, sending both trench and rock samples to independent laboratories. Approximately 15 tons of material was removed to a depth of 3 to 4 feet to expose a continuation of one of the veins. Samples from this material were analyzed by an independent laboratory. 22
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A detailed structural and geologic mapping survey has been completed on the property, indicating some zones in certain areas are suitable exploration targets. Currently, work on this property has been suspended. This property is without known reserves and future work would be exploratory in nature. There was no significant activity on this property in 2003. CERBAT PROPERTY On March 12, 1998, we signed a Lease and Purchase Option Agreement covering six patented mining claims in the Cerbat Mountains, Hualapai Mining District, Mohave County, Arizona. The patented claims cover approximately 120 acres. We paid $10,000 as the initial lease payment and are obligated to pay $1,500 per quarter as minimum advance royalties. The company has the option to purchase the property for $250,000, less payments already made. In the event of production before purchase, we will pay the lessor a production royalty of 5% of the gross returns received from the sale or other disposition of metals produced. Except for limited testing and evaluation work performed in mid-2002, no work has been performed on this property since 1999. Access is north 15 miles from Kingman, Arizona on Highway 93, east from the historical market to Mill Ranch, then left three miles to a locked gate. The country rock is pre-Cambrian granite, gneiss and schist complex. It is intruded by dikes of minette, granite porphyry, diabase, rhyolite, basalt and other rocks, some of which are associated with workable veins and are too greatly serieitized for determination. The complex is also flanked on the west by masses of the tertiary volcanic rocks, principally rhyolite. The mineralized body contains principally gold, silver and lead. They occur in fissure veins, which generally have a north-easterly trend and a steep north-easterly or south-westerly dip. Those situated north of Cerbat wash are chiefly gold bearing while those to the south principally contain silver and lead. The gangue is mainly quartz and the values usually favor the hanging wall. The company has been informed by the owner that the property contains several mine shafts of up to several hundred feet in depth and tailings piles containing thousands of tons of tailings. The property has not produced since the late 1800's. The buildings on the property are practically valueless, owing to being in disuse for so many years. We conducted (in late June and July 2002) a limited number of preliminary tests and assays on material taken from mine dumps (material left on the property from mining by others many years ago). It was anticipated that this material could be economically processed. However, the dump material tonnage will not support a small-scale operation without being supplemented with additional underground ore. We are considering selling or farming out the property, as there have been expressions of interest in the property from time to time. There was no significant activity on Cerbat in 2003. WIKIEUP PROPERTY The Wikieup Arizona property consists of one unpatented lode mining claim namely the Brown Derby #25 located in Section 36, Township 160N and Range 140W. The 20 acre claim is accessed via gravel road just off Highway 93 at the town of Wikieup, Arizona. Holding costs are approximately $109.00 per year for county and BLM filing fees, and work must be performed on the property each year to keep title to the claims. The geology of the area is comprised of Precambrian granoids and gneiss. Outcrop is extensive on the property and rock units include diorite, gabbro and granitic dikes. The company has kept the claim in good standing by submission of the required rental fees. We have conducted very limited geologic examination and surface sampling of the rock units on the property. We are holding this property for possible limited exploration. This property is without known reserves. There was no significant activity on this property in 2003. 23
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PERMITTING Exploration and mining operations in the United States are subject to statutory and agency requirements which address various issues, including: (i) environmental permitting and ongoing compliance, including plans of operations which are supervised by the Bureau of Land Management ("BLM"), the Environmental Protection Agency ("EPA") and state and county regulatory authorities and agencies (e.g., state departments of environmental quality) for water and air quality, hazardous waste, etc.; (ii) mine safety and OSHA generally; and (iii) wildlife (Department of Interior for migratory fowl, if attractive standing water is involved in operations). The company has been added by San Bernardino County as a party to the Approved Mining/ Reclamation Plan and related permits, which have been issued for the Pisgah property. Operations in Mexico are subject to similar requirements for environmental permitting and compliance, which are administered by Mexican government agencies at various levels. Because any exploration (and future mining) operations of the company would be subject to the permitting requirements of one or more agencies, the commencement of any such operations could be delayed, pending agency approval (or a determination that approval is not required because of size, etc.), or the project might even be abandoned due to prohibitive costs. Generally, the effect of governmental regulations on the company cannot be determined until a specific project is undertaken by the company. In the United States, federal, state and local provisions regulating the discharge of material into the environment, or otherwise relating to the protection of the environment, such as the Clean Air Act, Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response Liability Act ("Superfund") affect mineral operations. For exploration and mining operations, applicable environmental regulation includes a permitting process for mining operations, an abandoned mine reclamation program and a permitting program for industrial development and siting. Other non-environmental regulations can impact exploration and mining operations and indirectly affect compliance with environmental regulations. For example, a state highway department may have to approve a new access road to make a project accessible at lower costs, but the new road itself may raise environmental issues. Compliance with these laws, and any regulations adopted thereunder, can make the development of mining claims prohibitively expensive, thereby frustrating the sale or lease of properties, or curtailing profits or royalties which might have been received therefrom. In 1997, the S & S Joint Venture spent approximately $32,000 to clean up areas of the Owl Canyon properties as requested by the BLM. The company cannot anticipate what the further costs and/or effects of compliance with any environmental laws might be. The BLM approved the S&S Joint Venture trenching program at Owl Canyon without a requirement for bonding. The BLM approved the reclamation of this trenching program in 2000. BLM demanded further clean up of the mill site and surrounding area, and the Joint Venture complied with their request in 2000. MANAGEMENT DIRECTORS AND OFFICERS Officers and directors of the company are listed below. Directors are elected to hold office until the next annual meeting of shareholders and until their successors are elected or appointed and qualified. Officers are appointed by the board of directors until a successor is elected and qualified or until resignation, removal or death. 24
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NAME AGE POSITION AND TENURE Anthony F. Ciali 59 President (since March 2003), and Chief Executive Officer and Director (since April 2003) Ronald D. Sloan 63 President from May 1996 to March 2003; Treasurer, and Chief Financial Officer since May 1996; Chairman of the Board since January 2001 John Brian Wolfe 52 Secretary and a Director since May, 1996 James Dacyszyn 72 Director since February, 1999 ANTHONY F. CIALI. Mr. Ciali is a senior mining executive with over twenty-three years of international mining industry experience. Mr. Ciali was appointed President of the company on March 24, 2003 and Chief Executive Officer and a director of the company on April 25, 2003. Prior to joining the company, Mr. Ciali was, from July 1999 to December 2002, EVP-COO and CFO of ACS Advanced Computer Systems, Inc., a computer related company. From July 1997 to September 1999, he was a mining industry consultant. Mr. Ciali was President and CEO, and a director of Monarch Resources Limited, an international gold mining company listed on The Toronto Stock Exchange, with exploration and mining operations in Venezuela and Mexico and approximately 700 employees, from May 1991 to June 1997. From 1977 to 1990, Mr. Ciali was Vice President Finance and Administration of Gold Fields Mining Corporation ("Gold Fields"), an international gold mining company and a wholly owned subsidiary of Consolidated Gold Fields PLC. Gold Fields had annual gold production of approximately 400,000 ounces from gold mines based in the western United States, and an annual exploration budget of approximately $20 million for exploration projects in North and South America. Gold Fields employed over 700 people. From 1976 to 1977, Mr. Ciali was Assistant Controller of Azcon Corporation, an affiliate of Gold Fields, which was involved in steel distribution and manufacturing. From 1972 to 1976, he was employed as an auditor with Price Waterhouse, in New York, New York, where he obtained a CPA license (no longer active). Mr. Ciali has a BSc. degree in Mechanical Engineering and a Masters degree in Business Administration. RONALD D. SLOAN. Mr. Sloan served as President, Treasurer and CEO from May 2, 1996 until his resignation as President on March 24, 2003 and as CEO on April 25, 2003. He is Chairman of the Board of Directors and Treasurer (and Chief Financial Officer) of the company. During the past twenty five years Mr. Sloan has been an entrepreneur as an owner and operator of several companies including: Atlas Insurance Adjusters Ltd, partner/president from 1977 to 1978; United Auto Parts, senior manager, parts sales and distribution, approximate staff of 100 from 1979 to 1984; Save-On Auto Parts Ltd., shareholder, president, secretary, parts sales and distribution, approximate staff of 40 from 1985 to 1989; Knight Auto Recyclers Ltd., owner/president, parts sales and distribution from 1990 to 1995; Scotmar Industries Ltd., D.B.A. Truck City Inc., senior management, parts sales and distribution from 1990-1995. Mr. Sloan spends his full time on the company's business and assists Mr. Ciali in operations. Mr. Sloan has no professional or technical credentials in the metals mining industry. JOHN BRIAN WOLFE. Since 1984, Mr. Wolfe has owned Wolfe & Associates Appraisal Services, which appraises damages sustained by vehicles, recreation vehicles, motorcycles and equipment for insurance companies throughout North America. From 1980 to 1984 he appraised damages to automobiles for ICBC (Insurance Corporation of British Colombia). Mr. Wolfe also managed McLaughlin Motors and Brasso Lincoln, both automotive companies where he was in charge of their full operation and payroll from 1977 to 1980. Mr. Wolfe has no direct metal mining experience, or any professional or technical credentials in the metals mining industry, however, he has experience in management affairs. Mr. Wolfe, Secretary, spends approximately 8 hours per month on the company's business. 25
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JAMES DACYSZYN. Mr. Dacyszyn is a Canadian citizen who is semi-retired. He owns and operates several concrete transit mix plants and gravel operations in central Alberta, Canada. He has no precious metal mining experience, or any professional credentials in the metals mining industry, but he does have extensive experience in Materials Engineering and holds a bachelor's degree in Civil Engineering. From 1954 to 1971 he managed a laboratory which tested gravels, asphalts, paints and coordinating quality control tests on earthwork. Mr. Dacyszyn also drilled and evaluated more than 500 gravel deposits in the Province of Alberta and has vast knowledge in crushing rock. From 1982 to 1995 he managed several concrete mixing plants and gravel operations, also producing aggregates as owner/operator. The companies are now being managed by his son, a professional engineer, and Mr. Dacyszyn is retained in a consulting capacity. Mr. Dacyszyn spends approximately 8 hours per month on the company's business. DIRECTOR COMPENSATION The directors do not now have any stock options or similar plans, annuities, pension, retirement incentive, deferred compensation or any arrangements whereby they have been paid or may receive compensation. Each of our present directors who is also an employee receives no additional compensation for acting as a director or attending meetings of directors. In the past, the company has not compensated outside (non-employee) directors for service but has reimbursed them for travel costs to attend Board meetings. In the future, the Board of Directors may issue non-qualified options to non-executive directors. The terms of such options to be granted have not yet been established. STOCK OPTION PLANS THE CAN-CAL 2003 QUALIFIED INCENTIVE STOCK OPTION PLAN. The 2003 Qualified Incentive Stock Option Plan was established by the Board of Directors in June 2003 and approved by shareholders in October 2003. A total of 1,500,000 shares of common stock are reserved for issuance under this plan, which will be used to compensate senior executives and mid-level employees in the future. An option on 500,000 shares has been granted to Mr. Ciali under this plan (see "Executive Compensation"). THE CAN-CAL 2003 NON-QUALIFIED STOCK OPTION PLAN FOR SENIOR EXECUTIVES, OUTSIDE DIRECTORS, AND CONSULTANTS. The 2003 Non-Qualified Option Plan was established by the Board of Directors in June 2003 and approved by shareholders in October 2003. A total of 1,500,000 shares of common stock are reserved for issuance under this plan, of which 300,000 shares are covered by an option granted to Anthony F. Ciali when he was appointed an officer of the company in March 2003 (see "Executive Compensation"), and 100,000 shares are covered by an option granted to Luis Vega when he signed a consulting agreement with the company in April 2003 (see "Agreements with Consultants"). The total number of options issued and outstanding at any time, under both the Qualified and Non-Qualified Stock Option Plans will not exceed 10% of the company's issued and outstanding common stock, calculated on a pro forma basis. CODE OF ETHICS The company has adopted a Code of Ethics. A copy of the Code of Ethics will be provided to any person, without charge, upon written request addressed to Ronald D. Sloan, Chairman, 8224 Ocean Gate Way, Las Vegas, Nevada 89128 26
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EXECUTIVE COMPENSATION The following table shows selected information about the compensation paid or accrued to or for the account of executive officers in 2003, 2002 and 2001 for services, and bonuses rendered in all capacities in those years. In 2002 and 2001, the company had one executive officer (Ronald D. Sloan). The company does not have a long-term compensation plan. [Enlarge/Download Table] SUMMARY COMPENSATION TABLE Long Term Compensation ---------------------------------- Annual Compensation Awards Payouts -------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Name Other All Other and Annual Restricted LTIP Compen- Principal Compen- Stock Options/ Payouts sation Position Year Salary Bonus sation Award SARs(#) ($) ($)(2) -------------------------------------------------------------------------------------------------------------------------- Anthony F. Ciali 2003 $79,435* $ 18,000*** $ -0- -0- 800,000(1) $ -0- $ -0- CEO and 2002 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0- President 2001 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0- Ronald D. Sloan 2003 $60,000** $ -0- $ -0- -0- -0- $ -0- $ -0- Treasurer (CEO 2002 $60,000** $ -0- $ -0- -0- -0- $ -0- $ -0- to April 25, 2003) 2001 $30,000** $ -0- $ -0- -0- -0- $ -0- $ -0- <FN> * Accrued (not paid) at the rate of $7,500 per month for March - August 2003, and $10,000 September - December 2003. See "Employment Agreement" below. This accrual was converted to equity in 2004. See "Certain Relationships and Related Transactions." ** Accrued (not paid) at the rate of $5,000 per month as of July 2001. These accruals were converted to equity in 2004. See "Certain Relationships and Related Transactions." *** Accrued (not paid) at not less than 15% of Mr. Ciali's annualized compensation on the fiscal year-end monthly fee in effect. See "Employment Agreement" below. (1) Stock options granted pursuant to the company's 2003 Stock Option Plans. See details of the options under "Employment Agreement" below. (2) Does not include (a) $38,332 paid as rent for a Las Vegas apartment for Mr. Sloan in 2001, 2002 and 2003; or $6,346 for a car allowance, automobile operating expenses, medical insurance and life insurance paid for Mr. Ciali during the four months ended December 31, 2003. </FN> In 2003, the company ceased renting a separate apartment for Mr. Sloan in Las Vegas. From the last quarter 2003, the company pays for the costs of maintaining one apartment in Las Vegas which serves as a company office and also for persons transacting business with the company to stay. 27
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[Enlarge/Download Table] PERCENT NUMBER OF OF ALL OPTIONS SHARES UNDER- GRANTED TO LYING OPTIONS EMPLOYEES EXERCISE EXPIRATION GRANT DATE NAME GRANTED IN 2002 PRICE DATE PRES. VALUE (1) Anthony F. Ciali 300,000 37.5% $0.14 March 23, 2006 $ 40,271 Anthony F. Ciali 500,000 62.5% $0.16 Oct. 14, 2013 $ 79,896 <FN> (1) The Black-Scholes option-pricing model was used to determine the grant date present value of the stock options that were granted to the named officer. The following facts and assumptions were used in making this calculation: Exercise prices of $0.14 and $0.16 which were equal to the market value of the stock on the grant dates (the average of the closing price for five days before the grant date for the first option (on 300,000 shares), March 24, 2003, and closing market price on the grant date for the second option, October 15, 2003); a zero dividend yield; expected volatility of 277.87%, risk-free interest rate of 3.0%, and an expected life of three and 10 years for each option. </FN> AGGREGATED OPTION/SAR EXERCISES IN 2003 AND OPTION/SAR VALUES AT 12/31/03 The following table shows options exercised during 2003, options exercisable at December 31, 2003, and the dollar values for in-the-money options at December 31, 2003 (closing market price on that date was $0.25). [Enlarge/Download Table] (a) (b) (c) (d) (f) Number Value of of Shares Unexercised Underlying In-the-Money Options/SARS Options/SARs Shares at 12/31/03 at 12/31/03 Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized ($) Unexercisable/ Unexercisable ---- --------------- ------------ -------------- ------------- Anthony F. Ciali -0- -0- 800,000/-0- $78,000 (1) CEO <FN> (1) Equal to $0.25, the closing market price on December 31, 2003, less the $0.14 exercise price, multiplied by 300,000 shares, and less the $0.16 exercise price, multiplied by 500,000 shares. </FN> EMPLOYMENT AGREEMENT On March 24, 2003 the company signed a Management Consulting Agreement with Anthony F. Ciali, to employ Mr. Ciali as President for a fee of $7,500 per month. The company issued an option to Mr. Ciali to purchase 300,000 shares at $0.14 per share (the average closing price for the five trading days preceding March 24, 2003); this option expires on March 23, 2006, and was fully vested upon grant. This is a non-qualified option. Mr. Ciali was appointed Chief Executive Officer and a director of the company on April 25, 2003. The original agreement contemplated re-negotiation in good faith between Mr. Ciali and the company, of certain terms after June 24, 2003. As result of re-negotiations after June 24, 203, on July 25, 2003, the agreement was amended to provide for: Monthly cash compensation of $10,000 from September 1, 2003 through December 31, 2003, and $12,500 starting January 1, 2004, with annual increases thereafter at the 28
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discretion of the board of directors (but not less than the annual rate of inflation); a cash bonus payable by January 30 of each year, with the amount determined at the discretion of the board of directors, but not less than 15% of the annualized compensation based on the fiscal year-end monthly fee in effect; medical and term life insurance, and a car lease allowance; the company establishing and paying for a branch office in Lawrenceville, New Jersey (the city of Mr. Ciali's residence); and the grant to Mr. Ciali of an option to purchase 500,000 shares (in addition to the prior option on 300,000 shares). The option was granted on October 15, 2003, is exercisable at $0.16 per share (market price on grant date), expires on October 15, 2013, and was fully vested upon grant. This is a qualified option. If the agreement (as amended) is terminated by the company other than for cause, or if Mr. Ciali terminates the agreement because he is paid less than the rate of cash compensation then in effect, or if there is a change in control of 25% or more of the combined voting power of the company, then Mr. Ciali will be entitled to 24 months severance pay at the monthly rate then in effect, payable monthly; payment of 24 months of continued medical and term life insurance, and the car lease allowance; and payment of annual bonuses for 24 months at the same amount paid prior to termination. If the agreement (as amended) is terminated by the company other than for cause, all of Mr. Ciali's stock options will remain exercisable for the balance of their terms. The agreement does not have a specific term, and will end only if either the company or Mr. Ciali terminate the agreement. In July 2004, the company established an office for Mr. Ciali's use on company business, located at 993 Lenox Drive, Suite 200, Lawrenceville, New Jersey. The office includes approximately 185 square feet on an annual lease at $895 per month. The lease may be terminated after the first six months by the company providing 90 days notice. The company does not have a written employment agreement with Ronald D. Sloan, Treasurer. AGREEMENTS WITH CONSULTANTS - LUIS A. VEGA. On April 21, 2003 the company signed a Management Consulting Agreement with Luis A. Vega; the agreement does not have a specific term, and will continue until termination by either party on 30 days written notice. Mr. Vega has been retained as Senior Consulting Geologist to the company. He has 30 years of international gold exploration experience with senior mining companies, including Utah International, Duval Corporation, and (most recently) Battle Mountain Gold, where he was Vice President - Manager, Latin American Exploration. His exploration experience has encompassed projects in the Western United States, Mexico, and Central and South America, including Bolivia (the Korri Kollo gold mine), Chile, Argentina, and the Dominican Republic, as well as project submittal evaluations for properties in Peru, Ecuador, Brazil, Uruguay and Venezuela. Mr. Vega holds a Bachelor of Science in Geology and a Masters of Science in Economic Geology. Under the agreement with the company, Mr. Vega is paid $500 per day of service (based on invoices showing service and time provided), payable in restricted shares of common stock of the company, calculated by dividing the amount owed by the average closing price of the company's stock for each day's service. He also is reimbursed travel and entertainment expenses (plus accountable out-of-pocket expenses). Through December 31, 2003, the company has issued 205,166 restricted shares of stock to Mr. Vega to pay $31,500 of consulting services. Between February 19 and June 7, 2004, an additional 60,001 restricted common shares were issued to Mr. Vega for consulting geological services, in the amount of $13,563. 29
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As additional compensation, the company has issued to Mr. Vega a non-qualified stock option to purchase 100,000 shares of common stock at $0.22 per share (the average closing price for the five trading days before April 21, 2003). This option will fully vest on April 21, 2004 (is not exercisable before that date) if the consulting agreement then still is in effect; this option expires April 21, 2006 unless sooner forfeited on termination of the consulting agreement. The consulting agreement provides for Mr. Vega to receive a finder's fee if the company acquires a mineral property presented to the company for consideration. The fee will be a 1% net smelter return ("NSR") royalty on any future sales of mineral products from the acquired property. The NSR royalty will be calculated as 1% multiplied by the reported sales from the property, less shipping and refining costs. The consulting agreement was amended on August 23, 2004 to provide for Mr. Vega to receive a 2% NSR on any future sales of mineral products from any property which, when acquired by the company, was free of any third party ownership and any form of underlying payment obligation at the time the company makes an application with the Mexican Government to acquire (stake ) the mineral property. - TERRY BROWN. On April 19, 2004 the company signed a consulting agreement with Terry Brown; the agreement does not have a specific term, and will continue until termination by either party on 60 days written notice. Mr. Brown has been retained as a Consulting Geologist to the company. Mr. Brown has over 20 years of international gold mining, exploration and development experience with international mining companies, including Glamis Gold, Eldorado gold, Alamos Minerals, and Niugini Mining. In addition to his exploration background in the Western United States and Latin America, he has been involved with the start up of six mines, both in the United States and Latin America, principally in the capacity of Project/Construction manager. Mr. Brown has resided in Mexico for more than the past ten years and is well acquainted with the deposits and potential of Mexico's Sierra Madre Occidental Gold-Silver Belt, which is the company's regional focus in Mexico. Mr. Brown holds a Bachelor of Science degree in geology. Under the consulting agreement, Mr. Brown will provide services to the company for up to 20 days per month, for $250 per day, initially payable $160 in cash and $90 in restricted shares of common stock (at the closing stock price averaged over the days of service). At such time as the company has raised $1 million of financing after April 19, 2004 (or in any event after December 31, 2004), the $250 day rate will be paid in cash only. He also will be reimbursed for travel and entertainment expenses and accountable out-of-pocket expenses. Between May 29, 2004 and July 20, 2004, 31,363 shares were issued to Mr. Brown for $5,535 of services. The consulting agreement provides for Mr. Brown to receive a finder's fee if the company acquires a mineral property formally presented to the company by Mr. Brown for acquisition consideration, based on a list of properties in Mexico he identified to the company when the consulting agreement was signed. The fee will be a 1% net smelter return ("NSR") royalty on any future sales of mineral products from a property on the list, if the company acquires the property. The NSR royalty will be calculated as 1% multiplied by the reported sales from the property, less shipping and refining costs. Mr. Brown will not be entitled to a finder's fee as to properties on the list if then already known to the company, or brought to his attention by the company or a third party even if on the list, or other properties on the list but which Mr. Brown has not formally presented to the company for acquisition consideration. 30
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information about beneficial ownership of our common stock as of May 25, 2004 by each officer and director, by any person or group who is known by us to own more than 5% of our common stock, and by the officers and directors as a group. The ownership information for officers and directors is based on the Forms 3 and 4 they have filed with the Securities and Exchange Commission pursuant to section 16(a) of the Securities Exchange Act of 1934. Based on the Forms 3 and 4, the beneficial owners have sole voting and dispositive power with respect to their shares except as otherwise noted. The number of shares shown as owned by the individual includes shares issuable on exercise of any options and warrants he holds. The percentage for each person has been determined by dividing (x) the shares owned by the individual plus the shares the person has the right to acquire on exercise of options and warrants by (y) the 17,154,718 shares outstanding at September 17, 2004, plus for each person with options and warrants, the number of shares the person has the right to acquire on exercise thereof. The shares shown as owned by officers and directors as a group includes shares issuable on exercise of the options and warrants, and the percentage of shares shown as owned by that group has been determined as if all of those options and warrants had been exercised. [Enlarge/Download Table] NAME AND ADDRESS AMOUNT AND NATURE TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER PERCENT OF CLASS Common stock Ronald D. Sloan* 1,954,711(1) 11.0% 4312-212 Street Langley, B.C., Canada Common Stock John Brian Wolfe* 893,211(2) 5.2% 3157 Silver Throne Drive Coquitlam, B.C., Canada Common Stock James Dacyszyn* 862,316 (3) 5.0% #64, 9703-41 Avenue Edmonton, A.B., Canada Common Stock Anthony F. Ciali* 1,435,480 (4) 7.9% 28 Lawrencia Drive Lawrenceville, NJ 08648 Common Stock All Officers and Directors 5,145,718 (5) 27.1% as a group <FN> * Director (1) Includes 584,640 shares underlying warrants. (2) Includes 53,890 shares underlying warrants. (3) 666,816 shares (including 98,408 shares covered by warrants) are owned directly by Mr. Dacyszyn and 195,500 shares are owned by a family company. Mr. Dacyszyn exercises investment and dispositive powers over 60,000 shares (31%) of those owned by the family company. The balance of shares in the </FN> 31
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family company are controlled by an adult son, who manages the family company and has a 25% pecuniary interest in these shares. (4) Includes 800,000 shares covered by options and 317,740 shares underlying warrants. (5) Assumes exercise of 1,054,678 warrants held by officers and directors (but not warrants on 178,449 shares held by a former director and his insurance agency), and the options on 800,000 shares held by Mr. Ciali. Equity Plan Compensation Information - Information about Compensation Plans as of December 31, 2003: [Enlarge/Download Table] Plan category Number of securities to Weighted average Number of securities be issued upon exercise exercise price of remaining available for of outstanding options outstanding future issuance under options equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) --------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders (shares reserved) 2003 Qualified ISOP 500,000 $0.16 1,000,000 (1,500,000 shares) 2003 Non-Qualified 300,000 $0.14 1,100,000 ISOP 100,000 $0.22 (1,500,000 shares) ---------------------------------------------------------------------------------------------------- Equity compensation -- -- -- plans not approved by security holders None ---------------------------------------------------------------------------------------------------- Total 900,000 $0.16 2,100,000 ---------------------------------------------------------------------------------------------------- Total shares underlying unexercised options (both plans) cannot exceed 10% of the company's total issued and outstanding shares of common stock, calculated on a pro forma basis. 32
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONVERSION OF SALARIES OWED TO OFFICERS AND LOANS OWED TO DIRECTORS In 2002 and 2003, the company borrowed money from directors. Salaries for the two officers in 2001, 2002 and 2003 were accrued but not paid. In 2003, premiums on a company insurance policy were paid for the company by an insurance agency owned by a director who resigned in 2003. On March 1, 2004, the company paid these loans (all unsecured, 7.5% annual interest, principal and accrued interest through February 29, 2004), the salaries accrued through December 31, 2003, and the advances for insurance premiums, by issuing restricted stock (at $0.25 per share, equal to the closing market price on March 1, 2004), and warrants to purchase common stock (for two years, at an exercise price of $0.30 per share), at the rate of one warrant to purchase one share, for each one share issued to pay the obligations. The issuance of shares and warrants was approved by the board of directors; the issuance for each director was approved by the other directors. The amounts of obligations so paid, and number of shares and warrants, is shown below. [Enlarge/Download Table] Loans Salary Total Shares Warrants ----- ------ ----- ------ -------- Directors and officers Ronald D. Sloan $ 146,160 $ 146,160 584,640 584,640 Anthony F. Ciali 79,435 79,435 317,740 317,740 John Brian Wolfe $ 13,472 13,472 53,890 53,890 James Dacyszyn 24,602 24,602 98,408 98,408 Others Barry Amies* 6,578 6,578 26,312 26,312 Landing Insurance Agency*: Loan 18,881 18,881 75,523 75,523 Loan 19,154 19,154 76,614 76,614 --------- ----------- ----------- --------- --------- $ 82,687 $ 225,595 $ 308,282 1,233,127 1,233,127 ========= =========== =========== ========= ========= * Mr. Amies was a director but resigned in 2003. Landing Insurance Agency is Mr. Amies' insurance agency which advanced the insurance premiums on behalf of the company. LOANS OWED TO OFFICER AND A SHAREHOLDER At December 31, 2003, the company owed Ronald D. Sloan, an officer and director, $56,691 for principal and accrued interest (at 7.5% per year) on various loans made by him to the company from 2001 through 2003. The amount of Mr. Sloan's obligation at December 31, 2003 is net of $13,100 of loans repaid to him by the company in 2003. At June 30, 2004 the company owed Mr. Sloan $34,151, after conversion of $1,000 owed to Mr. Sloan to 5,000 restricted shares of common stock at $0.20 per share and warrants to purchase an additional 5,000 shares at $0.25 per share expiring June 7, 2006. The company owes Robin Schwarz, an unaffiliated shareholder, $16,278 at December 31, 2003 ($14,137 at June 30, 2004) consisting of unsecured loans in various amounts made in 2001 and 2002, at various dates, and interest ranging from 13.24% to 27.99%, due on demand. 33
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SELLING SHAREHOLDERS This prospectus covers the resale of up 735,000 restricted shares of common stock (245,000 outstanding shares, plus 490,000 shares issuable on exercise of outstanding warrants, by the 6 persons shown in the table. All of the shares and warrants covered by this prospectus were purchased for $44,100 by the six selling shareholders in July 2004, at $0.18 per share. The selling shareholders may sell the shares from time to time in negotiated transactions, brokers' transactions or a combination of such methods of sale at prevailing market prices, or at negotiated prices. See "Plan of Distribution." The selling shareholders may offer shares for sale on a continuous basis pursuant to rule 415 under the 1933 Act. Information in the table has been provided to us by the selling shareholders. All numbers of shares owned, and percentage ownership, are stated on a pro forma basis to include the number of shares owned and shares issuable on exercise of their warrants. No other warrants held by non-selling shareholders or options held by Mr. Ciali or the two consultants are assumed to be exercised for purposes of the pro forma calculations. [Enlarge/Download Table] Number of Number of Shares Shares of of Common Stock Percent Owned Name and Address Common Stock Registered Prior to After of Beneficial Owner Owned(1) For Sale Offering Offering* ------------------------------------------------------------------------------------------------------ G. Michael Hogan 837,959 450,000 ** ** 30 Allangrove Cres. Toronto, Ontario Canada M1W 1S5 Bruce Taylor 68,000 60,000 ** ** 89 Hilton Avenue Toronto, Ontario Canada M5R 3E8 James W. Hogan 18,428 15,000 ** ** Lake Road, General Delivery Lasqueti Island British Columbia Canada V0R 2J0 Dennis P. Hogan 15,000 15,000 ** ** 2269 Bentim Road Mt. Brydges, Ontario Canada N0L 1W0 P. Maureen Hogan 15,000 15,000 ** ** 71 Foxglove Court Markham, Ontario Canada L3R 3Y3 William J. Hogan 180,000 180,000 ** ** 712 25th Street SW Calgary, Alberta Canada T3C 1J6 34
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<FN> * Assumes all shares offered by the selling shareholder are sold. ** Less than 1%. (1) Includes shares underlying warrants, in the amounts of 300,000 warrants for G. Michael Hogan; 40,000 for Bruce Taylor; 10,000 for James W. Hogan; 10,000 for Dennis P. Hogan; 10,000 for P. Maureen Hogan; and 120,000 for William J. Hogan. The warrants are exercisable until July 9, 2006, at an exercise price of $0.25 per share for one- half the warrants held by each person, and at $0.50 per share for the remaining warrants. </FN>
Resale of the shares owned or to be owned by the selling shareholders is registered under rule 415 of the Securities and Exchange Commission, concerning delayed and continuous offers and sales of securities. In regard to the offer and sale of such shares, we have made certain undertakings in Part II of the registration statement of which this prospectus is part, by which, in general, we have committed to keep this prospectus current during any period in which the selling shareholders make offers to sell the covered securities pursuant to rule 415. PLAN OF DISTRIBUTION The selling shareholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling shareholders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; o settlement of short sales entered into after the date of this prospectus (a short sale occurs when shares, not owned by the seller, are sold in hopes of a decline in market price so the seller can purchase in the market at a lower price to be able to deliver the shares sold); o broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; o through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; o a combination of any such methods of sale; or o any other method permitted pursuant to applicable law. The selling shareholders may also sell shares under rule 144 under the 1933 Act, if available, rather than under this prospectus. Broker-dealers engaged by the selling shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Broker-dealers may agree to sell a specified number of such shares at a stipulated price per share, and, to the extent such broker-dealer is unable to do so, acting as agent for a selling shareholder, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer commitment. Broker-dealers who acquire shares as principal may thereafter resell such shares from time to time in transactions, which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above, in the over-the-counter markets or otherwise at prices and on terms then prevailing at the time of sale, at prices than related to the then-current market price, or in negotiated transactions. In connection with such resales, broker-dealers may pay to or receive from the purchasers such share commissions as described above. 35
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In connection with the sale of our common stock or interests therein, the selling shareholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling shareholders may also sell shares short and deliver the shares to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling shareholders may also enter into option or other transactions with broker-dealers or other financial institutions, or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The selling shareholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The selling shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the 1933 Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the 1933 Act. The selling shareholders have informed the company that none of them have any agreement or understanding, directly or indirectly, with any person to distribute the common stock. The company has agreed to pay all fees and expenses incurred by the company incident to the registration of the shares. The company has agreed to indemnify one of the selling shareholders (Dutchess Fund) against certain losses, claims, damages and liabilities, including liabilities under the 1933 Act. In order to comply with the securities laws of certain states, if applicable, the shares will be sold in such jurisdictions, if required, only through registered or licensed brokers or dealers. In addition, in certain states the shares may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available. DESCRIPTION OF SECURITIES COMMON STOCK We are authorized to issue 100,000,000 shares of common stock ($.001 par value). Holders of common stock are entitled to one vote per share on each matter submitted to a vote at any meeting of shareholders. Cumulative voting is not permitted in elections of directors or otherwise. The presence in person or by proxy of the holders of a majority of the outstanding common stock is required to constitute a quorum at any shareholders meeting. If a quorum is present, proposals are passed if approved by the holders of a majority of the votes present, except for substantive corporate matters (such as a merger, sale of assets or amendment to articles of incorporation, which matters must be approved by the holders of a majority of outstanding shares under Nevada law). In addition, if there is preferred stock outstanding, the holders of the preferred stock would be entitled to vote as a separate class on such substantive corporate transactions. A minimum of 10 days notice is required to be given for any shareholders meeting. Our board of directors has authority, without action by the shareholders, to issue all or any portion of the authorized but unissued shares of common stock, which would reduce the percentage ownership of its present shareholders and which may dilute the book value of the common stock. Shareholders have no pre-emptive rights to acquire additional shares of common stock. The common stock is not subject to redemption and carries no subscription or conversion rights. In the event of liquidation, the shares of common stock are entitled to share equally in corporate assets after satisfaction of all liabilities. 36
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Holders of common stock are entitled to receive such dividends as the board of directors may from time to time declare out of funds legally available for the payment of dividends. We have not paid dividends and do not intend to pay dividends in the foreseeable future. PREFERRED STOCK We are authorized to issue 10,000,000 shares of preferred stock ($.001 par value). The board of directors has authority, without action by the shareholders, to issue preferred stock in one or more series and to determine the voting rights, preferences as to dividends and liquidation, conversion rights, and other rights of such series. Preferred stock may carry rights superior to those of the common stock. No series of preferred stock has been authorized, and no shares of preferred stock have been issued. Reference is made to our certificate of incorporation and by-laws which are available for inspection at our offices or which can be viewed through the EDGAR data base at http://www.sec.gov as exhibits to the registration statement on Form SB-2. Reference is also made to applicable statutes of the state of Nevada for laws concerning rights of shareholders. WARRANTS As of September 17, 2004, warrants (all presently exercisable) to purchase a total of 3,897,948 shares are outstanding (including the warrants held by the selling shareholders under this prospectus): Warrants on 3,407,208 shares are held by 103 Canadian investors; warrants on 442,740 shares are held by 12 United States investors; and warrants on 48,000 shares are held by a Great Britain investor. The warrants expire at various times up to September 13, 2006, and are exercisable at various prices from $0.20 to $0.50 per share. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our bylaws provide that we shall indemnify directors provided that the indemnification shall not eliminate or limit the liability of a director for breach of the director's duty or loyalty to the corporation or its stockholders, or for acts of omission not in good faith or which involve intentional misconduct or a knowing violation of law. Nevada law permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if these directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceedings, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agent in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnify for such expenses despite such adjudication of liability. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the company pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the 1933 Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the company of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of 37
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appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Securities Act, and will be governed by the final adjudication of such issue. LEGAL PROCEEDINGS The company is not a party to current litigation and no notice of possible claims against the company has been received. LEGAL MATTERS The legality of the issuance of the shares offered hereby will be passed upon for us by The Law Office of Stephen E. Rounds, Denver, Colorado. EXPERTS Our financial statements as of December 31, 2003, and for the two years then ended, have been audited by L.L. Bradford & Company, LLC, Las Vegas, Nevada, independent certified public accountants, as stated in their report on those financial statements, which financial statements and the report thereon have been included in this prospectus in reliance upon the authority of such firm as experts in accounting and auditing. 38
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Can-Cal Resources Ltd. Las Vegas, Nevada We have audited the accompanying balance sheet of Can-Cal Resources Ltd. as of December 31, 2003, and the related statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about 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. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Can-Cal Resources Ltd. as of December 31, 2003, and the results of its activities and cash flows for the years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered losses from operations and current liabilities exceed current assets, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. L.L. Bradford & Company, LLC March 4, 2004 Las Vegas, Nevada 39
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CAN-CAL RSOURECES LTD. BALANCE SHEET DECEMBER 31, 2003 [Download Table] ASSETS Current assets Cash $ 17,400 Accounts receivable 2,700 ----------- Total current assets 20,100 Fixed assets, net 20,800 Other assets, net 5,500 ----------- Total assets $ 46,400 =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable and accrued liabilities $ 440,900 Due to stockholder 16,300 Notes payable-related parties - current portion 223,900 ----------- Total current liabilities 681,100 Long-term liabilities Note payable-related party - long-term portion 300,000 Convertible note payable-related party 85,000 ----------- Total liabilities 1,066,100 Commitments and contingencies -- Stockholders' deficit Preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued an outstanding -- Common stock; $0.001 par value; 100,000,000 shares authorized, 13,252,962 shares issued and outstanding 13,300 Additional paid-in capital 4,366,300 Unamortized loan fees from stock issued and warrants granted in relation to convertible note payable-related party (7,000) Accumulated deficit (5,392,300) ----------- Total stockholders' deficit (1,019,700) ----------- Total liabilities and stockholders' deficit $ 46,400 =========== See Accompanying Notes to Financial Statements 40
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CAN-CAL RESOURCES LTD. STATEMETNS OF OPERATIONS [Download Table] For the year ended December 31, ------------------------------- 2003 2002 ------------- ------------- Material sales $ 20,000 $ 300 Cost of sales 9,100 200 ------------ ------------ Gross profit 10,900 100 General and administrative expenses 586,300 578,400 Loss from operations (575,400) (578,300) Other income (expense) Rental revenue 26,500 22,500 Interest income -- 4,200 Interest expense (162,200) (157,200) ------------ ------------ Loss on sale of fixed asset -- (500) Loss before provision for income taxes (711,100) (709,300) Provision for income taxes -- -- ------------ ------------ Net loss $ (711,100) $ (709,300) ============ ============ Basic and diluted loss per common share $ (0.06) $ (0.06) ============ ============ Basic and diluted weighted average common shares outstanding 12,203,600 11,031,600 ============ ============ See Accompanying Notes to Financial Statements 41
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CAN-CAL RESOURCES LTD. STATEMENT OF STOCKHOLDERS' DEFICIT [Enlarge/Download Table] Common Stock ----------------------- Additional Number of Paid-in Shares Amount Capital ---------- ------ ------------ Balance, December 31, 2001 10,158,738 $10,200 $ 3,490,100 Common shares issued for cash 1,025,320 1,000 259,900 Common shares issued for principal payment 309,677 300 119,500 including interest of $71,800 Common shares issued for services 92,292 100 23,800 Warrants granted for services -- -- 7,100 Common shares issued for loan fees related 30,000 -- 13,500 to convertible note payable-related party Warrants granted for loan fees related to -- -- 16,700 convertible note payable-related party Current period amortization of loan fees -- -- -- Deemed interest expense related to conversion -- -- 20,500 feature of note payable-related party Net loss -- -- -- ---------- -------- ----------- Balance, December 31, 2002 11,683,987 11,700 3,961,100 Common shares issued for cash 823,410 800 163,900 Common shares issued for services 381,260 400 63,800 Common shares issued for conversion of 364,305 400 77,900 convertible note payable, including interest of $43,300 Current period amortization of loan fees -- -- -- Options granted for services -- -- 55,400 Warrants granted for services -- -- 5,900 Deemed interest expense related to -- -- 38,300 conversion feature of note payable Net loss -- -- -- ---------- -------- ----------- Balance, December 31, 2003 13,252,962 $ 13,300 $ 4,366,300 ========== ======== =========== 42a
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[Enlarge/Download Table] Unamortized loan fees related to convertible Total note payable- Accumulated Stockholders' related party Deficit Equity -------------- -------------- ------------- Balance, December 31, 2001 $ -- $ (3,971,900) $ (471,600) Common shares issued for cash -- -- 260,900 Common shares issued for principal payment -- -- 119,800 including interest of $71,800 Common shares issued for services -- -- 23,900 Warrants granted for services -- -- 7,100 Common shares issued for loan fees related (13,500) -- -- to convertible note payable-related party Warrants granted for loan fees related to (16,700) -- -- convertible note payable-related party Current period amortization of loan fees 8,200 -- 8,200 Deemed interest expense related to conversion -- -- 20,500 feature of note payable-related party Net loss -- (709,300) (709,300) ----------- ------------- ------------ Balance, December 31, 2002 (22,000) (4,681,200) (730,400) Common shares issued for cash -- -- 164,700 Common shares issued for services -- -- 64,200 Common shares issued for conversion of -- -- 78,300 convertible note payable, including interest of $43,300 Current period amortization of loan fees 15,000 -- 15,000 Options granted for services -- -- 55,400 Warrants granted for services -- -- 5,900 Deemed interest expense related to -- -- 38,300 conversion feature of note payable Net loss -- (711,100) (711,100) ----------- ------------- ------------ Balance, December 31, 2003 $ (7,000) $ (5,392,300) $ (1,019,700) =========== ============= ============ See Accompanying Notes to Financial Statements 42b
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CAN-CAL RESOURCES LTD. STATEMETNS OF CASH FLOWS [Enlarge/Download Table] For the year ended December 31, ------------------------------- 2003 2002 ----------- ------------ Cash flows from operating activities: Net loss $ (711,100) $ (709,300) Adjustments to reconcile net loss to net cash used by operating activities: Stock based compensation 125,500 31,000 Depreciation and amortization 37,800 34,600 Stock issued for interest 43,300 71,800 Deemed interest expense 38,300 20,500 Loss on sale of fixed asset -- 500 Changes in operating assets and liabilities: Change in notes receivable-related parties -- 57,400 Change in accounts receivable (2,700) -- Change in prepaid expenses 10,800 2,300 Change in other assets (400) (13,400) Change in accounts payable and accrued expenses 271,400 118,100 ---------- ---------- Net cash used by operating activities (187,100) (386,500) Cash flows from investing activities: Purchase of fixed assets (600) (23,000) Sale of fixed asset -- 12,000 ---------- ---------- Net cash used by investing activities (600) (11,000) Cash flows from financing activities: Change in due to stockholder (1,700) (3,600) Proceeds from issuance of common stock 164,700 271,000 Proceeds from borrowing on notes payable-related parties 41,900 79,000 Principal payments on notes payable-related parties (13,100) (70,400) Proceeds from convertible debenture -- 120,000 ---------- ---------- Net cash provided by financing activities 191,800 396,000 ---------- ---------- Net increase (decrease) in cash 4,100 (1,500) Cash, beginning of period 13,300 14,800 ---------- ---------- Cash, end of period $ 17,400 $ 13,300 ========== ========== Supplemental disclosure of cash flow information: Cash paid for income taxes $ -- $ -- ========== ========== Cash paid for interest $ 4,900 $ 9,400 ========== ========== Schedule of non-cash financing activities: Issuance of common stock for principal payment on note payable - related party $ -- $ 48,000 ========== ========== Accrued interest added to principal on notes payable - related parties $ -- $ 22,600 ========== ========== Common shares issued for loan fees related to convertible note payable-related party $ -- $ 13,500 ========== ========== Loan fees related to warrants to purchase common stock $ -- $ 16,700 ========== ========== Issuance of common stock for conversion of convertible note payable-related party, excluding interest of $43,300 $ 35,000 $ -- ========== ========== Accrued interest added to principal on notes payable - related parties $ 12,300 $ -- ========== ========== See Accompanying Notes to Financial Statements 43
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CAN-CAL RESOUUCES LTD. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES -------------------------------------------------------------------- Description of business - Can-Cal Resources Ltd. (hereinafter referred to as the "Company") was incorporated in the State of Nevada on March 22, 1995. The Company is engaged in the exploration for precious metals, with gold exploration projects located in California and Arizona. Going concern - The Company incurred a net loss of approximately $711,000 for the year ended December 31, 2003. The Company's current liabilities exceed its current assets by approximately $661,000 as of December 31, 2003. These factors create substantial doubt about the Company's ability to continue as a going concern. The Company's management plans to continue to fund its operations in the short term with a combination of debt and equity financing, as well as revenue from operations in the long term. The ability of the Company to continue as a going concern is dependent on additional sources of capital and the success of the Company's plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Amended Articles of Incorporation - In October 2003, a Certificate of Amendment to the Articles of Incorporation changed the number of authorized shares of common stock from 15,000,000 to 100,000,000. Use of estimates - The preparation of financial statements in conformity with 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue and expense recognition - Precious metals and other materials sales are recognized when delivery has occurred, title passes and pricing is either fixed or determinable. Rental revenue is recognized over the term of the rental agreement. Expenses are recognized when they are incurred. Mine exploration costs are expensed as incurred. Fixed assets - Fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are generally 5 to 7 years. The amounts of depreciation provided are sufficient to charge the cost of the related assets to operations over their estimated useful lives. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable property, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income. The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability. Advertising costs - The Company recognizes advertising expenses in accordance with Statement of Position 93-7 "Reporting on Advertising Costs." Accordingly, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of communicating advertisements in the period in which the advertising space or airtime is used. 44
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued) -------------------------------------------------------------------- Income taxes - The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. As of December 31, 2003, the Company has available net operating loss carryovers that will expire in various periods through 2023. Such losses may not be fully deductible due to the significant amounts of non-cash service costs. The Company has established a valuation allowance for the full tax benefit of the operating loss carryovers due to the uncertainty regarding realization. Stock-based compensation - The Company applies Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations, in accounting for stock options issued to employees. Under APB No. 25, employee compensation cost is recognized when estimated fair value of the underlying stock on date of the grant exceeds exercise price of the stock option. For stock options and warrants issued to non-employees, the Company applies SFAS No. 123, Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value of stock options at the grant date using the Black-Scholes option pricing model. The following table represents the effect on net loss and loss per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation: [Download Table] 2003 2002 ---------- ---------- Net loss, as reported $ (711,100) $ 709,300) Add: Stock-based employee compensation expense included in reported loss, net of related tax effects -- -- Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects (79,900) -- ---------- ---------- Pro forma net loss $ (791,000) $ (709,300) ========== ========== Net loss per common share Basic and diluted loss, as reported $ (0.06) $ (0.06) ========== ========== Basic and diluted loss, pro forma $ (0.06) $ (0.06) ========== ========== In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure". SFAS No. 148 amends the transition and disclosure provisions of SFAS No. 123. The Company is currently evaluating SFAS No. 148 to determine if it will adopt SFAS No. 123 to account for employee stock options using the fair value method and, if so, when to begin transition to that method. 45
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued) --------------------------------------------------------------------- Fair value of financial instruments - The carrying amounts and estimated fair values of the Company's notes payable-related parties and convertible note payable-related party at December 31, 2003 are as follows: Carrying Estimated Amounts Fair Value ------------ ------------- Notes payable-related parties $ 523,900 $ 655,600 Convertible note payable-related party 85,000 94,100 ----------- ----------- $ 608,900 $ 749,700 =========== =========== The estimated fair values of the Company's long-term liabilities were based on quoted market rates. The carrying values of all other financial instruments approximate their fair value. Net loss per common share - The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128) and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS 128 and SAB 98, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents, however, potential common shares are excluded if their effect is antidilutive. For the years ended December 31, 2002 and 2001 no options and warrants were excluded from the computation of diluted earnings per share because their effect would be antidilutive. New accounting pronouncements - In July 2001, the FASB issued SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets. SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. The adoption of SFAS No. 143 did not have a material impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 superseded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS No. 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements for the years ended December 31, 2003 and 2002. In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructurings, involuntarily terminating employees, and consolidating facilities initiated after December 31, 2002. The implementation of SFAS No. 146 did not have a material effect on the Company's financial statements for the years ended December 31, 2003 and 2002. 56
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued) -------------------------------------------------------------------- New accounting pronouncements (continued) - In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133 for decisions made (1) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133, (2) in connection with other Board projects dealing with financial instruments, and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. The Statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative discussed in paragraph 6(b) of SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of underlying to conform it to language used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The implementation of SFAS No. 149 did not have a material on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In addition, the statement requires an issuer to classify certain instruments with specific characteristics described in it as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The implementation of SFAS No. 150 is not expected to have a material effect on the Company's financial statements. 2. FIXED ASSETS Fixed assets consist of the following as of December 31, 2003: Machinery and equipment $ 106,600 Transportation equipment 19,900 Furniture and fixtures 14,800 ---------- 141,300 Less: accumulated depreciation 120,500 ---------- Fixed assets, net $ 20,800 ========== 3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following as of December 31, 2003: Accrued officers salary payables $ 222,600 Accrued interest 133,200 Accounts payable 50,700 Accrued officer bonus 18,000 Unearned revenues 7,500 Other accrued liabilities 8,900 ---------- $ 440,900 ========== 4. DUE TO STOCKHOLDER As of December 31, 2003, due to stockholder totaling $16,300 consists of credit card debt incurred by the Company. The cards are owned by a stockholder of the Company and bear interest rates ranging from 13.24% to 27.99%. 47
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 5. NOTES PAYABLE-RELATED PARTIES Notes payable-related parties consist of the following as of December 31, 2003: Note payable to a stockholder, secured by real property, bearing interest at 16.0% per annum, interest only payments payable in semi-annual payments, maturing November 2005 (Note: The Company is in default of interest payments totaling $100,000 and is currently negotiating forbearance on collection of the interest) $ 300,000 Note payable to a stockholder, unsecured, bearing interest at 7.5% per annum, maturing June 2004 56,700 Note payable to a stockholder, secured by real property, bearing interest at 8.0% per annum, maturing February 2004 (As discussed in Note 9, the maturity date was extended to August 2004 in February 2004) 27,900 Note payable to a stockholder, secured by real property, bearing interest at 8.0% per annum, maturing January 2004 (As discussed in Note 9, the maturity date was extended to July 2004 in January 2004) 25,800 Note payable to an entity owned by a stockholder, unsecured, bearing interest at 5% per annum, maturing January 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 18,500 Note payable to an entity owned by a stockholder, unsecured, bearing interest at 5% per annum, maturing January 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 18,300 Note payable to a stockholder, secured by real property, bearing interest at 8.0% per annum, maturing June 2004 17,400 Note payable to a stockholder, secured by real property, bearing interest at 8.0% per annum, maturing May 2004 14,900 Note payable to a stockholder and director, unsecured, bearing interest at 7.5% per annum, maturing February 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 10,000 Note payable to a stockholder and director, unsecured, bearing interest at 7.5% per annum, maturing July 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 7,300 48
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 5. NOTES PAYABLE-RELATED PARTIES (continued) Note payable to a stockholder and director, unsecured, bearing interest at 7.5% per annum, maturing February 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 5,400 Note payable to a stockholder and director, unsecured, bearing interest at 7.5% per annum, maturing February 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 5,400 Note payable to a stockholder and director, unsecured, bearing interest at 7.5% per annum, maturing April 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 5,400 Note payable to a stockholder, unsecured, bearing interest at 7.5% per annum, maturing April 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 3,200 Note payable to a stockholder and director, unsecured, bearing interest at 7.5% per annum, maturing March 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 2,500 Note payable to a stockholder, unsecured, bearing interest at 7.5% per annum, maturing February 2004 (As discussed in Note 9, the maturity date was extended to July 2004 in February 2004) 2,200 Note payable to a stockholder, unsecured, bearing interest at 7.5% per annum, maturing September 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 2,000 Note payable to a stockholder, unsecured, bearing interest at 7.5% per annum, maturing March 2004 (As discussed in Note 9, the stockholder converted the outstanding balance and accrued interest into shares of the Company's common stock plus warrants) 1,000 ----------- 523,900 Less: amounts due within one year 223,900 ----------- Long-term portion of notes payable-related parties $ 300,000 =========== 49
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 5. NOTES PAYABLE-RELATED PARTIES (continued) Principal payments on notes payable-related parties are as follows as of December 31, 2003: 2004 $ 223,900 2005 300,000 ---------- $ 523,900 ========== 6. CONVERTIBLE NOTE PAYABLE-RELATED PARTY As of December 31, 2003, convertible note payable-related party totaling $85,000 consisted of an unsecured loan agreement with a stockholder. Upon closing, the Company paid $3,100 (net of amortization expense of $10,100) in loan fees and other expenses which were capitalized and reflected as part of other assets totaling $5,500 and will be expensed over the life of the loan using the straight-line method. The term of the loan is two years, with interest at 8.0%, and maturing in June 2004. The stockholder/lender has the option of converting this loan to free-trading common stock, at the lower of a) the initial purchase price, defined as the lower of $0.41 per share or 100% of the average of the lowest five closing bid prices of the fifteen trading days prior to closing, or b) 80% of average of the three lowest prices in fifteen closing bid prices prior to conversion. Due to the conversion feature of the debt and the Company's historical range of common stock prices, the Company recorded significant amounts of deemed interest totaling $38,300 In relation to the loan, the Company granted warrants to purchase 50,000 shares of the Company's common stock at the lower of 110% of the 5-day average closing bid prices a) preceding the date of issue, or b) 180 days after each closing. The warrants expire after three years. The fair value of the warrants as computed using the Black-Scholes option-pricing model was $16,700 and recorded as unamortized loan fees, of which $8,300 and $4,500 was expensed during the years ended December 31, 2003 and 2002, respectively. Additionally, the Company issued 30,000 shares of common stock to a third party for fees related to the loan. The 30,000 shares were valued at $13,500 and recorded as unamortized loan fees, of which $6,700 and $3,700 was expensed during the years ended December 31, 2003 and 2002, respectively. During the fiscal year 2003, the lender exercised the option to convert $35,000 in principal to 364,305 shares of the Company's common stock valued at $78,300, including interest of $43,300 which reflects the differential between market price and discounted conversion price. 50
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CAN-CAL RESOURCES LTD NOTES TO FINANCIAL STATEMENTS 7. OPTIONS AND WARRANTS Options granted for consulting services - During the year ended 2003, the Company granted 400,000 stock options with an exercise price ranging from $0.14 and $0.22 per share of its common stock. These stock options were granted in connection with consulting agreements with Anthony F. Ciali and a consulting geologist as discussed in Note 8. These stock options were exercisable upon issuance and expire in March and April 2006. The following table summarizes the Company's option activity related to consultants: Weighted Average Options Exercise Outstanding Price ----------- ------------ Balance, January 1, 2003 -- $ -- Granted 400,000 0.16 Cancelled -- -- Exercised -- -- Expired -- -- ----------- ------------ Balance, December 31, 2003, 400,000 $ 0.16 =========== ============ The weighted average fair value of warrants granted during 2003 was $0.15. The following table summarizes information about consulting options outstanding at December 31, 2003: [Download Table] Options Outstanding Options Exercisable --------------------------------------- ------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise as of Contractual Exercise as of Exercise Prices 12/31/03 Life Price 12/31/03 Price -------- ----------- ------------ -------- ----------- ----------- 0.14 300,000 2.2 years $ 0.14 300,000 $ 0.14 0.22 100,000 2.3 years 0.22 100,000 0.22 -------- ----------- ------------ -------- ----------- ----------- 400,000 $ 0.16 400,000 $ 0.16 =========== ======== =========== ========== The Company estimates the fair value of options at the grant date by using the Black-Scholes option pricing-model with the following weighted-average assumptions used for grants in 2003; no dividend yield; expected volatility of 271.4%; risk free interest rates of 1.7%, and expected lives of 2.0 years. Compensation expense relating to warrants granted for services in 2003 was $55,400. Option granted for employee services - During the year ended 2003, the Company granted a 500,000 stock option with an exercise price of $0.16 per share of its common stock. This stock option was granted to Anthony F. Ciali as discussed in Note 8. This stock option was exercisable upon issuance and expires in October 2013. The option totaled $-- under APB No. 25 as the exercise price was equal to the closing price on the day of grant. 51
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 7. OPTIONS AND WARRANTS (continued) -------------------- Warrants related to the sale of common stock - During fiscal years 2003 and 2002, the Company granted 823,410 and 1,025,300 stock warrants, respectively, with an exercise price ranging from $0.20 to $0.35 per share for its common stock. These stock warrants were granted in connection with common stock sold during fiscal years 2003 and 2002. These stock warrants were exercisable upon issuance and expire various times throughout 2004 and 2005. The following table summarizes the Company's warrant activity related to the sale of common stock: Weighted Average Warrants Exercise Outstanding Price ----------- -------- Balance, January 1, 2002 -- $ -- Granted 1,025,320 0.26 Cancelled -- -- Exercised -- -- Expired -- -- --------- ------- Balance, December 31, 2002 1,025,320 0.26 Granted 1,060,820 0.20 Cancelled -- -- Exercised -- -- Expired -- -- --------- ------- Balance, December 31, 2003 2,086,140 $ 0.23 ========= ======= Warrants granted for services and loan fees - During the year ended December 31, 2002, the Company granted 90,000 stock warrants with an exercise price ranging from $0.25 to $0.44 per share of its common stock. These stock warrants were granted in connection with consulting services rendered to the Company during fiscal year ended 2002 and loan fees in connection with the convertible note payable - related party (see Note 6). These stock warrants were exercisable upon issuance expiring in November 2004 and June 2005. The following table summarizes the Company's warrants activity not related to the sale of common stock: Weighted Average Warrants Exercise Outstanding Price Balance, January 1, 2002 -- $ -- Granted 90,000 0.36 Cancelled -- -- Exercised -- -- Expired -- -- ------- -------- Balance, December 31, 2002 90,000 Granted 31,200 0.23 Cancelled -- -- Exercised -- -- Expired -- -- ------- -------- Balance, December 31, 2003 90,000 $ 0.36 ====== ========= The weighted average fair value of warrants granted during 2003 and 2002 was $0.19 and $0.26, respectively. 52
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 7. OPTIONS AND WARRANTS (continued) -------------------- The following table summarizes information about warrants outstanding at December 31, 2003: Weighted Average Range of Remaining Exercise Number Contractual Number Price Outstanding Life Exercisable -------------- ----------- ----------- ----------- $ 0.20 - 0.25 71,200 1.3 years 40,000 0.44 50,000 1.5 years 50,000 -------------- ----------- ----------- ----------- 121,200 121,200 =========== =========== The Company estimates the fair value of warrants at the grant date by using the Black-Scholes option pricing-model with the following weighted-average assumptions used for grants in 2003 and 2002; no dividend yield; expected volatility of 393% and 265%; risk free interest rates of 1.4% and 1.9%, and expected lives of 1.0 and 1.0 years. Compensation expense relating to warrants granted for services in 2003 and 2002 was $5,900 and $7,100, respectively, while loan fees were valued at $16,700. 8. COMMITMENTS AND CONTINGENCIES ----------------------------- Mining claims - The Company has a lease and purchase option agreement covering six patented mining claims in the Cerbat Mountains, Hualapai Mining District, Mohave County Arizona. The Company pays $1,500 per quarter as minimum advance royalties. The Company has the option to purchase the property for $250,000 less payments already made. Auto lease - The Company has an operating lease for an automobile that expires during 2004. The monthly lease payment totals $ 650 per month. Lease payments for year ended December 31, 2003 and 2002 totaled $7,800 and $7,800, respectively. Future minimum lease payments required under the auto lease as of December 31, 2003 total $6,100 for the year ended December 31, 2004 Consulting agreements - In March 2003, the Company engaged Anthony F. Ciali as a management consultant of the Company. Under the agreement, Mr. Ciali is to provide consulting services, initially, in the capacity of President of the Company. Compensation is payable at a monthly rate of $7,500 and shall be reviewed by the Board of Directors in January 2004, with any adjustment not to be less than the rate of inflation during the previous twelve-month period, as measured by the U.S. Consumer Price Index. Further, the Company granted Mr. Ciali an option to purchase 300,000 shares of the Company's common stock with an exercise price equal to the average closing price of the Company's common stock, as quoted on the OTC BB, for the five trading days prior to the Effective Date or $0.142. The option is fully vested, has a three year term, and is valued at $33,900 using the Black Scholes Model. The agreement is continuous until either party terminates such services. During April 2003, the Company entered into a Management Consulting Agreement (the "Agreement") whereby the Company agreed to pay $500 per day of service provided by the consulting geologist payable in shares of the Company's common stock. Through December 31, 2003, the Company has issued 205,166 shares of the Company's common stock to the consultant totaling $31,500. The agreement may be terminated by either party. Additionally, the Company granted an option to purchase 100,000 shares of the Company's common stock with an exercise price of $0.22 per share. The option is fully vested in April 2004 and was valued at $21,500 using the Black Scholes model and will be forfeited if the Agreement is terminated prior to April 2004. 53
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 8. COMMITMENTS AND CONTINGENCIES (continued) ----------------------------- Consulting agreements (continued) - During July 2003, the Company amended their agreement with the CEO to increase his monthly compensation to $10,000 beginning September 1, 2003, and to $12,500 per month beginning January 1, 2004. The amended agreement also calls for an annual discretionary bonus to be determined by the board, which shall not be less than 15% of the CEO's annualized compensation based on the fiscal year-end monthly fee in effect. As discussed in note 3, the Company has accrued a bonus of $18,000 as of December 31, 2003. During October 2003, the Company also granted a ten-year option to the CEO to purchase 500,000 shares of its common stock, with an exercise price of $0.16 per share. The option is fully vested upon grant, expires in October 2013, and totaled $-- under APB No. 25 as the exercise price was equal to the closing market price on the day of grant. 9. SUBSEQUENT EVENTS ----------------- During January, February, and March 2004, various stockholders exercised their warrants to purchase 527,020 shares of the Company's common stock for $118,000 cash. During January 2004, the maturity date of note payable-related party totaling $25,800 was extended to July 2004. During January 2004, the Company entered into an agreement with IBK Capital Corp. ("IBK") whereby, IBK would assist the Company in a private placement of up to $1,000,000 of the Company's common shares or some other acceptable financing arrangement. The Company agreed to a non-refundable fee of CDN$25,000 as well as an expense advance of CDN$3,500, which the Company paid in February 2004. The agreement is effective through August 2004 and may be terminated or extended by either party upon 15 days advanced notice in writing. During February 2004, the maturity date of note payable-related party totaling $27,900 was extended to August 2004. During February 2004, the maturity date of note payable-related party totaling $2,200 was extended to August 2004. During March 2004, the Company issued 50,000 shares of its common stock for cash totaling $10,000. During March 2004, the Company issued 584,640 shares of common stock to an officer for accrued wages totaling $146,200. In addition, the Company granted the officer warrants to purchase an additional 584,640 shares of common stock at $0.30 per share. The warrants expire in March 2006 and totaled $131,500 using the Black Scholes model. The Company recorded the warrants as interest expense. During March 2004, the Company issued 317,740 shares of common stock to an officer for accrued wages totaling $79,400. In addition, the Company granted the officer warrants to purchase an additional 317,740 shares of common stock at $0.30 per share. The warrants expire in March 2006 and totaled $71,500 using the Black Scholes model. The Company recorded the warrants as interest expense. During March 2004, a stockholder and director of the Company converted $13,500 in notes payable - related parties and accrued interest into 53,890 shares of the Company's common stock. In addition, the Company granted the director warrants to purchase an additional 53,890 shares of common stock at $0.30 per share. The warrants expire in March 2006 and totaled $12,100 using the Black Scholes model. The Company recorded the warrants as interest expense. 54
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CAN-CAL RESOURCES LTD. NOTES TO FINANCIAL STATEMENTS 9. SUBSEQUENT EVENTS (continued) ----------------- During March 2004, a stockholder and director of the Company converted $24,600 in notes payable - related parties and accrued interest into 98,408 shares of the Company's common stock. In addition, the Company granted the director warrants to purchase an additional 98,408 shares of common stock at $0.30 per share. The warrants expire in March 2006 and totaled $22,100 using the Black Scholes model. The Company recorded the warrants as interest expense. During March 2004, a stockholder of the Company converted $6,600 in notes payable - related parties and accrued interest into 26,312 shares of the Company's common stock. In addition, the Company granted the stockholder warrants to purchase an additional 26,312 shares of common stock at $0.30 per share. The warrants expire in March 2006 and totaled $5,900 using the Black Scholes model. The Company recorded the warrants as interest expense. During March 2004, a stockholder of the Company converted $38,000 in notes payable - related parties and accrued interest into 152,137 shares of the Company's common stock. In addition, the Company granted the stockholder warrants to purchase an additional 152,137 shares of common stock at $0.30 per share. The warrants expire in March 2006 and totaled $34,200 using the Black Scholes model. The Company recorded the warrants as interest expense. 55
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CAN-CAL RESOURCES LTD. CONDENSED BALANCE SHEET (UNAUDITED) ASSETS [Download Table] June 30, 2004 ------------- Current assets Cash $ 89,400 Accounts receivable 4,400 ------------- Total current assets 93,800 Fixed assets, net 21,300 Other assets, net 2,400 ------------- Total assets $ 117,500 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable and accrued liabilities $ 341,700 Due to stockholder 14,100 Notes payable-related parties - current portion 105,000 ------------- Total current liabilities 460,800 Long-term liabilities Notes payable-related parties - long-term portion 300,000 ------------- Total liabilities 760,800 Commitments and contingencies -- Stockholders' deficit Preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued an outstanding -- Common stock; $0.001 par value; 100,000,000 shares authorized, 15,707,058 shares issued and outstanding 16,800 Additional paid-in capital 5,380,200 Accumulated deficit (6,040,300) ------------- Total stockholders' deficit (643,300) ------------- Total liabilities and stockholders' deficit $ 117,500 ============= See Accompanying Notes to Financial Statements 56
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CAN-CAL RESOURCES LTD. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) [Enlarge/Download Table] Three months ended June 30, Six months ended June 30, -------------------------------- ------------------------------ 2004 2003 2004 2003 -------------- -------------- ------------ ------------- Material sales $ 9,400 $ 4,600 $ 15,100 $ 10,800 Cost of sales 5,100 4,200 8,200 5,800 -------------- -------------- ------------ ------------- Gross profit 4,300 400 6,900 5,000 General and administrative expenses 160,500 136,000 347,800 258,500 -------------- -------------- ------------ ------------- Loss from operations (156,200) (135,600) (340,900) (253,500) Other income (expense) Rental revenue 11,600 5,700 21,300 11,300 Interest expense (22,000) (28,100) (328,400) (60,500) -------------- -------------- ------------ ------------- Loss before provision for income taxes (166,600) (158,000) (648,000) (302,700) Provision for income taxes -- -- -- -- -------------- -------------- ------------ ------------- Net loss $ (166,600) $ (158,000) $ 648,000) $ (302,700) ============== ============== ============ ============= Basic and diluted loss per common share $ (0.01) $ (0.01) $ (0.04) $ (0.03) ============== ============== ============ ============= Basic and diluted weighted average common shares outstanding 16,095,500 11,943,000 15,135,600 11,818,300 ============== ============== ============ ============= See Accompanying Notes to Financial Statements 57
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CAN-CAL RESOURCES LTD. CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED) [Enlarge/Download Table] Unamortized Common Stock Loan Fees Receivable --------------------- Related to Related to Number Additional Convertible Issuance of Total of Paid-in Note Payable Common Accumulated Stockholders' Shares Amount Capital Related Party Stock Deficit Deficit ---------- -------- ----------- ------------- ------------- ----------- ------------- Balance December 31, 2003 13,252,962 $ 13,300 $ 4,366,300 $ (7,000) $ -- $(5,392,300) $(1,019,700) Common shares issued for cash 715,700 700 142,400 -- -- -- 143,100 Exercise of warrants for cash 696,275 700 124,000 -- -- -- 124,700 Common shares issued for services 162,218 200 34,300 -- -- -- 34,500 Common shares issued for receivable 50,001 -- 10,000 -- (10,000) -- -- Current period amortization of -- -- -- 7,000 -- -- 7,000 loan fees Common shares issued in satisfaction of accounts payable and accrued liabilities 902,380 900 224,700 -- -- -- 225,600 Common shares issued in satisfaction of notes payable-related party 330,747 300 82,400 -- -- -- 82,700 Common shares issued in satisfaction of convertible debenture (including accrued interest of $14,700) 702,760 700 99,000 -- -- -- 99,700 Common shares received and cancelled related to receivable (50,001) -- (10,000) -- 10,000 -- -- Interest expense for warrants -- -- 277,300 -- -- -- 277,300 granted Warrants granted for services -- -- 12,200 -- -- -- 12,200 Deemed interest expense related to conversion feature of note payable-related party -- -- 17,600 -- -- -- 17,600 Net loss -- -- -- -- -- (648,000) (648,000) ---------- -------- ---------- --------- ---------- ----------- ------------ Balance June 30, 2004 16,763,042 $ 16,800 $ 5,380,200 $ -- $ -- $(6,040,300) $ (643,300) ========== ======== =========== ========= ========== =========== ============ See Accompanying Notes to Financial Statements 58
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CAN-CAL RESOURCES LTD. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) [Enlarge/Download Table] Six months ended June 30, -------------------------- 2004 2003 ----------- ----------- Cash flows from operating activities: Net loss $ (648,000) $ (302,700) Adjustments to reconcile net loss to net cash used by operating activities: Stock based compensation 46,700 64,800 Depreciation and amortization 15,600 19,900 Stock issued for interest -- 200 Interest expense for warrants granted 277,300 -- Deemed interest expense 17,600 19,200 Changes in operating assets and liabilities: Change in accounts receivable (1,700) (2,600) Change in prepaid expenses -- 10,000 Change in accounts payable and accrued expenses 150,900 126,400 ---------- ---------- Net cash used by operating activities (141,600) (64,800) Cash flows from investing activities: Purchase of fixed assets (6,000) (1,100) ---------- ---------- Net cash used by investing activities (6,000) (1,100) Cash flows from financing activities: Change in due to stockholder (2,200) (1,000) Proceeds from issuance of common stock 267,800 68,700 Proceeds from borrowing on notes payable-related parties 6,000 28,500 Principal payments on notes payable-related parties (52,000) (11,600) ---------- ---------- Net cash provided by financing activities 219,600 84,600 ---------- ---------- Net increase in cash 72,000 18,700 Cash, beginning of period 17,400 13,300 ---------- ---------- Cash, end of period $ 89,400 $ 32,000 ========== ========== Supplemental disclosure of cash flow information: Cash paid for income taxes $ -- $ -- ========== ========== Cash paid for interest $ -- $ -- ========== ========== Schedule of non-cash financing activities: Issuance of common stock for conversion of convertible note payable-related party, excluding interest of $200 $ -- $ 5,000 ========== ========== Issuance of common stock for satisfaction of accounts payable and accrued liabilities $ 225,600 $ -- ========== ========== Issuance of common stock for principal payment on notes payable-related parties $ 82,700 $ -- ========== ========== Issuance of common stock for receivable $ 10,000 $ -- ========== ========== Issuance of common stock for conversion of convertible note payable-related party, including accrued interest of $14,700 $ 99,700 $ -- ========== ========== See Accompanying Notes to Financial Statements 59
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CAN-CAL RESOURCES LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION --------------------- The accompanying unaudited financial statements have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial statements should be read in conjunction with the Form 10-KSB for the year ended December 31, 2003 of Can-Cal Resources Ltd ("the Company"). The interim financial statements present the condensed balance sheet, statements of operations, stockholders' deficit and cash flows of Can-Cal Resources Ltd. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The interim financial information is unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position as of June 30, 2004 and the results of operations and cash flows presented herein have been included in the financial statements. Interim results are not necessarily indicative of results of operations for the full year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Reclassification - Certain prior year balances have been reclassified to conform to the current year presentation, which have no effect on net income. 3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ---------------------------------------- Accounts payable and accrued liabilities consist of the following as of June 30, 2004: Accrued interest $ 139,700 Accrued officers salary payables 102,000 Accounts payable 51,700 Accrued officer bonus 18,000 Other accrued liabilities 11,500 Unearned revenues 18,800 --------- $ 341,700 ========= During March 2004, the Company issued 902,380 shares of Common stock to officers in satisfaction of $225,600 in accrued officers salary payables. Additionally, the Company granted warrants to purchase 902,380 shares of common stock at $0.30 per shares. The warrants expire in March 2006 and totaled $202,900 using the Black Scholes model. The Company recorded the warrants as interest expense. 60
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CAN-CAL RESOURCES LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 4. NOTES PAYABLE-RELATED PARTIES ----------------------------- Notes payable consisted of the following as of June 30, 2004: Note payable to a stockholder, secured by real property, bearing interest at 16.0% per annum, interest only payments payable in semi-annual payments, maturing November 2005 (Note: The Company is in default of interest payments totaling $120,000 but is currently negotiating forbearance on collection of the interest) $ 300,000 Note payable to a stockholder, unsecured, bearing interest at 7.5% per annum, maturing June 2005 34,200 Note payable to a stockholder, secured by real property, bearing interest at 8.0% per annum, maturing August 2004 29,000 Note payable to a stockholder, secured by real property, bearing interest at 8% per annum, maturing July 2004 26,800 Note payable to an stockholder, secured by real property, bearing interest at 8.0% per annum, maturing May 2005 7,700 Note payable to a stockholder, unsecured, bearing no interest and due on demand 5,000 Note payable to a stockholder, unsecured, bearing interest at 7.5% per annum, maturing February 2005 2,300 --------- 405,000 Less: amounts due within one year 105,000 --------- Long-term portion of notes payable $ 300,000 ========= During March 2004, the Company issued 330,747 shares of Common stock to various stockholders in satisfaction of $82,700 in principal on notes payable-related parties. Additionally, the Company granted warrants to purchase 330,747 shares of common stock at $0.30 per shares. The warrants expire in March 2006 and totaled $74,400 using the Black Scholes model. The Company recorded the warrants as interest expense. 61
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CAN-CAL RESOURCES LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 5. CONVERTIBLE NOTE PAYABLE-RELATED PARTY -------------------------------------- During April, May, and June 2004, the convertible note payable-related party totaling $85,000 as of December 31, 2003 which consisted of an unsecured loan agreement with a stockholder was converted into 702,760 shares of the Companies common stock, including accrued interest of $14,700. The Company recorded amortization expense totaling $3,100 and $3,400 for the six months ended June 30, 2004 and 2003, respectively, related to loan fees, which were capitalized and amortized over the life of the loan. Due to the conversion feature of the debt and the Company's historical range of common stock prices, the Company recorded deemed interest totaling $17,600 for the six months ended June 30, 2004. In relation to the loan, the Company granted warrants to purchase 50,000 shares of the Company's common stock at the lower of 110% of the 5-day average closing bid prices a) preceding the date of issue, or b) 180 days after each closing. The warrants expire after three years. The fair value of the warrants as computed using the Black-Scholes option-pricing model was $16,700 and recorded as unamortized loan fees, of which $3,900 and $4,200 was expensed during the six months ended June 30, 2004 and 2003, respectively. Additionally, the Company issued 30,000 shares of common stock to a third party (counsel to the lender) for fees related to the loan. The 30,000 shares were valued at $13,500 and recorded as unamortized loan fees, of which $3,100 and $3,400 was expensed during the six months ended June 30, 2004 and 2003, respectively. 6. GOING CONCERN ------------- The Company incurred a net loss of approximately $648,000 for the six months ended June 30, 2004. The Company's current liabilities exceed its current assets by approximately $367,000 as of June 30, 2004. These factors create substantial doubt about the Company's ability to continue as a going concern. The Company's management plans to continue to fund its operations in the short term with a combination of debt and equity financing, as well as revenue from operations in the long term. The ability of the Company to continue as a going concern is dependent on additional sources of capital and the success of the Company's plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 7. SUBSEQUENT EVENTS ----------------- During July 2004, the Company issued 250,000 shares of common stock for cash totaling $45,100. 62
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The bylaws provide that directors and officers shall be indemnified by the corporation against expenses incurred in connection with the defense of any action, suit or proceeding in which they are made parties by reason of being or having been directors or officers of the corporation, except in relation to matters as to which they are adjudged in such matter to be liable for negligence or misconduct in the performance of duty. Such indemnification is not exclusive of any other rights to which those indemnified may be entitled by agreement, vote of stockholders, or otherwise. In addition, the Nevada Corporation Act permits indemnification of directors and officers against such expenses. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Estimated expenses in connection with the issuance and distribution of the securities being registered: Securities and Exchange Commission registration fee...................$ 17.23 National Association of Securities Dealers, Inc. examination fee...... n/a Accounting ........................................................... 1,000.00 Legal fees and expenses............................................... 2,000.00 Printing ............................................................. 300.00 Blue Sky fees and expenses (excluding legal fees)..................... n/a Transfer agent ....................................................... n/a Escrow agent.......................................................... n/a Miscellaneous......................................................... n/a Total.................................................................$ 3,317.23 The Registrant will pay all of these expenses. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. From January 1, 2001 to September 17, 2004, the registrant has sold the following unregistered securities. Where shares were sold at a discount from market prices, the discount was made by the board of directors of the registrant for the restricted status of the shares as subject to Rule 144, except for the shares sold to Dutchess Fund under a prior investment agreement, which shares were sold at a 7% discount to market as provided in that agreement. a. 2001: (1) For cash: In August and September, 2001, a total of 82,888 shares to three Canadian investors and a private company owned and controlled by Canadian residents for $65,916 (an average share price of $0.80 per share, representing a discount of approximately 8% from market prices). These shares were sold pursuant to the exemption provided by Regulation S of the 1933 Act. Complete information about the company was provided to these investors. No commissions were paid. On October 2, 2001, 20,000 restricted shares to a Canadian investor for $10,000 ($0.50 per share, representing a discount of approximately 50% from market prices, as determined by the board of directors). These shares were sold pursuant to the exemption provided by Regulation S of the 1933 Act. Complete information about the company was provided to this investor. December 12, 2001, 40,000 restricted shares to a Canadian investor for $14,000 ($0.35 per share, representing a discount of 63
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approximately 50% from market prices). Complete information about the company was provided to this investor. These shares and warrants were sold pursuant to the exemption provided by Regulation S of the 1933 Act. No commissions were paid. (2) For services: In October 2001, 75,757 restricted common shares to Dutchess Private Equities Fund L.P., 227,272 restricted common shares to Dutchess Advisors, Ltd., as inducements for execution of Investment Agreement between issuer and Dutchess Fund and DRH Investment Company, LLC. 303,030 restricted common shares to May Davis Group, Inc., a securities broker-dealer, as a placement fee in connection with the Investment Agreement. 37,000 shares to Joseph B. LaRocco, attorney for Dutchess Fund and DRH Investment Company, LLC in connection with the Investment Agreement, for legal services to such entities, which the issuer agreed to pay pursuant to the Investment Agreement. These shares were sold pursuant to the exemption provided by section 4(2) of the 1933 Act. B. 2002 (1) For cash: On January 8, 2002, 36,000 restricted common shares to three investors (one Canadian resident, and two private companies controlled and owned by Canadian residents) for $12,600 cash ($0.35 per share, representing a discount of approximately 50% from market price). These investors also were issued warrants to purchase 36,000 additional restricted shares, at a price of $0.35 per share; the warrants expired January 8, 2004. On February 11, 2002, 10,000 restricted common shares to one investor (a Canadian resident) for $3,500 cash ($0.35 per share, representing a discount of approximately 50% from market price). This investor also was issued warrants to purchase 10,000 additional restricted shares, at a price of $0.35 per share; the warrants expired February 11, 2004. Complete information about the company was provided to these investors. These shares and warrants were sold pursuant to the exemption provided by Regulation S of the 1933 Act. No commissions were paid. From March 1, 2002 through June 3, 2002, 369,600 restricted common shares were issued to 48 investors (all Canadian residents or companies controlled and owned by Canadian residents) for $92,400 cash ($0.25 per share, representing discounts ranging from 0% to approximately 50% from market prices at the time of issuance). These investors also were issued warrants to purchase 369,600 additional restricted shares, at a price of $0.25 per share; the warrants will expire two years from the date of issuance. These shares and warrants were sold pursuant to the exemption provided by Regulation S of the 1933 Act. No commissions were paid. From June 5, 2002 through December 24, 2002, 609,720 restricted common shares were issued to 45 investors (all Canadian residents and companies controlled and owned by Canadian residents) for $152,430 cash ($0.25 per share, representing premiums and/or discounts of up to approximately 50% from market prices at the time of issuance). These investors were also issued warrants to purchase 605,720 additional restricted common shares, at a price of $0.25 per share; the warrants will expire two years from the date of issuance. These shares and warrants were sold pursuant to the exemption provided by Regulation S of the 1933 Act. No commissions were paid. 64
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(2) Debt payment: On January 31, 2002, 309,677 restricted common shares to lender (First Colony Merchant) for payment of interest on debt ($119,800). These shares were sold pursuant to the exemption provided by Regulation S of the 1933 Act. No commissions were paid. (3) For services: On June 21, 2002, 40,000 restricted common shares to Financial Communications Corp. for public relations services. These shares were sold pursuant to the exemption provided by section 4(2) of the 1933 Act. No commissions were paid. C. 2003 (1) For Cash: During 2003, 673,410 restricted common shares were issued to 19 Canadian resident or companies controlled and owned by Canadian resident investors for $134,682 and 150,000 restricted common shares were issued to 12 U.S. resident investors for $30,000 (all shares were priced at $0.20 per share, representing premiums of up to 25% and discounts ranging from 0% to approximately 25% from market prices at the time of issuance). With respect to 237,410 restricted common shares, the investors were also issued warrants to purchase 474,820 additional restricted common shares and with respect to 473,500 restricted common shares, the investors were also issued warrants to purchase 473,500 additional restricted common shares; all warrants were priced at $0.20 per share and will expire two years from the date of issuance. With respect to 112,500 restricted common shares, the investors were also issued 112,500 warrants to purchase additional restricted common shares, at a price of $0.25 per share for a period of two years from the date of issuance. The shares and warrants were sold to Canadian investors pursuant to the exemption provided by Regulation S of the 1933 Act, and the shares and warrants sold to U.S. investors were sold pursuant to the exemption provided by section 4(2) of the 1933 Act. No commissions were paid. (2) For Debt: 364,305 restricted common shares in conversion of $35,000 principal and interest on a debenture held by Dutchess Fund. The conversion prices were $0.099 for 50,710 shares ($5,000 of the debenture); $0.112 for 44,643 shares ($5,000 of the debenture); $0.061 for 81,433 shares ($5,000 of the debenture); $0.067 for 75,075 shares ($5,000 of the debenture); and $0.1334 for 112,444 shares ($15,000 of the debenture). All of the prices were determined by the conversion formula in the debenture (80% of the average bid prices for the three lowest trading days before conversion. These shares were sold pursuant to the exemption provided by section 4(2) of the 1933 Act. No commissions were paid. (3) For Services: 205,166 restricted common shares in payment of $31,500 of services by Luis Vega, consulting geologist. The per share price was determined by dividing the amount owed by the average closing price of the company's stock for each day's service. These shares were sold pursuant to the exemption provided by section 4(2) of the 1933 Act. On March 14, 2003, 24,960 restricted common shares were issued to Catherine Nichols, a Canadian resident, for marketing services amounting to $5,000. The price per share was based on the average closing share price for the period during which the services were rendered. These shares were sold pursuant to the exemption provided by Regulation S of the 1933 Act. 65
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During the period July 15-December 31, 2003, 112,326 restricted common shares in payment of $22,250 of investor relations services by Jeffrey Whitford, a Canadian resident who is a consultant to the company. The price per share was based on the average monthly closing share prices for the period. These shares were sold pursuant to the exemption provided by Regulation S of the 1933 Act. 33,600 restricted common shares were issued to pay $4,200 of legal services provided by Stephen E. Rounds, outside company counsel. The price per share was based on the average closing share price for the period during which the services were rendered. These shares were sold pursuant to the exemption provided by section 4(2) of the 1933 Act. On December 30, 2003, 5,208 restricted common shares were issued to Terry Brown, a Mexican resident, for technical consulting services amounting to $1,250. The price per share was based on the average closing share price for the period during which the services were rendered. These shares were sold pursuant to the exemption provided by Regulation S of the 1933 Act. (D) 2004 (1) For Cash: From January 1, 2004 through March 17, 2004, 696,275 restricted common shares were issued to 27 investors (26 Canadian residents, 658,775 shares, and one US resident, 37,500 shares) for $124,464 cash. The shares were issued pursuant to the exercise of two sets of warrants, which had original exercise prices of $0.20 on 295,820 shares and $0.25 on 261,200 shares; the original exercise prices represented discounts of 17% to 31% from market prices at the time of issuance. The warrants were exercised under a company incentive program, whereby shareholders with warrants outstanding as of January 1, 2004 were offered 1.25 shares for every warrant they exercised and received a commitment by the company to file a resale registration statement with the SEC with respect to the shares issued, by not later than June 30, 2004. The incentive program resulted in lowering the exercise price of the warrants to $0.16 and $0.20, respectively, and the issuance of the total 696,275 shares. These shares were issued in private transactions, with respect to the Canadian residents, in reliance on the exemption from registration with the SEC provided by Regulation S, and with respect to the U.S. citizen, in reliance on the exemption available under Section 4(2) of the 1933 Act. No commissions were paid. From January 1, 2004 through May 20, 2004, we sold 598,200 restricted common shares to 25 Canadian residents for $119,640 cash at $0.20 per share, representing discounts of 0% - 50% from market prices at the time of issuance. These investors also were issued warrants to purchase 598,200 additional restricted shares, at an exercise price of $0.25 per share for 538,200 shares, and $0.20 per share for 60,000 shares. The warrants will expire between February 23, 2006 and May 20, 2006. Complete information about the company was provided to these investors. These securities were sold to Canadian residents pursuant to the exemption provided by Regulation S of the 1933 Act. From May 28, 2004 though June 25, 2004, we sold 102,500 restricted common shares to 10 Canadian residents for $20,500 cash at $0.20 per 66
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share, representing discounts of 0%, 5% and premiums of 15%-33% from market prices at the time of issuance. These investors also were issued warrants to purchase 102,500 additional restricted shares, at an exercise price of $0.25 per share. The warrants will expire between May 27, 2006 and June 24, 2006. Complete information about the company was provided to these investors. These securities were sold to Canadian residents pursuant to the exemption provided by Regulation S of the 1933 Act. On July 9, 2004, the company sold 245,000 restricted shares of common stock, and warrants to purchase an additional 490,000 restricted shares of common stock, for $44,100 to six Canadian investors. The share prices represented a premium to market price of 38%. The warrants will expire July 9, 2006. One-half of the warrants held by each investor are exercisable at $0.25 per share, and one-half are exercisable at $0.50 per share. Complete information about the company was provided to these investors. These securities were sold to Canadian residents pursuant to the exemption provided by Regulation S of the 1933 Act. No commissions were paid. From August 3, 2004 through September 13, 2004, the company sold 35,000 restricted shares of common stock, and warrants to purchase an additional 35,000 restricted shares of common stock for $7,000 to three Canadian investors and one U.S. investor. The share prices represented a premium to market price of 11% to 26%. The warrants will expire two years from the date of grant and are exercisable at $0.25 per share. These shares were issued in private transactions, with respect to the Canadian residents, in reliance on the exemption from registration with the SEC provided by Regulation S, and with respect to the U.S. citizen, in reliance on the exemption available under Section 4(2) of the 1933 Act. No commissions were paid. (2) For Services: On February 4, 2004, 10,000 restricted common shares were issued to Yvonne St. Pierre, a Canadian resident, for computer-related services, in the amount of $2,500. These shares were issued pursuant to the exemption provided by Regulation S of the 1933 Act. Between February 10 and March 31, 2004, 75,000 restricted common shares were issued to Jeff Whitford, a Canadian resident, for investor relation services, in the amount of $15,000. In addition, Mr. Whitford received 50,000 warrants at an exercise price of $0.20 per share; the warrants will expire between February 2006 and March 2006. The warrants were valued at $12,200 utilizing the Black Scholes model. These shares were issued pursuant to the exemption provided by Regulation S of the 1933 Act. Between February 19 and September 17, 2004, 120,933 restricted common shares were issued to Luis A. Vega, a US resident, for consulting geological services, in the amount of $21,347. These shares were issued in reliance on the exemption available under Section 4(2) of the 1933 Act. Between May 3, 2004 and September 17, 2004, 62,533 restricted common shares were issued to Terry Brown, a Mexican resident, for consulting geological services, in the amount of $9,787. These shares were issued pursuant to the exemption provided by Regulation S of the 1933 Act. 67
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(3) For Debt: With respect to a debenture held by Dutchess Fund we issued: on April 13, 2004, 92,593 restricted common shares in conversion of $20,000 principal and interest, at a conversion price of $0.216 per share, b) on April 23, 2004, 31,250 restricted common shares in conversion of $5,000 principal and interest, at a conversion price of $0.16 per share, c) on May 28, 2004, 34,722 restricted common shares in conversion of $5,000 principal and interest at a conversion price of $0.144 per share. On June 14, 2004, we issued 544,195 common shares to Dutchess Fund, without restriction, in conversion (final payment) of the $69,657.00 outstanding balance and interest on the debenture, at a conversion price of $0.168 per share. The conversion prices were determined by the conversion formula in the debenture (80% of the average bid prices for the three lowest trading days before conversion). The shares were sold pursuant to the exemption available under Section 4(2) of the 1933 Act. No commissions were paid. (4) For Conversions: On March 1, 2004, in connection with the conversion of $82,687 in notes payable and $225,595 in accrued officers' salary payable, we issued 1,233,127 restricted common shares at $0.25 per share and 1,223,127 warrants, with an exercise price of $0.30 and expiring on March 1, 2006, to two officers, two directors, and a former director and his insurance agency. These persons and the insurance agency are accredited investors. No commissions were paid. On June 8, 2004, in connection with the conversion of $1,000 in notes payable, we issued 5,000 restricted shares at $0.20 per share and 5,000 warrants with an exercise price of $0.25, expiring on June 7, 2006, to a director (Ronald Sloan). No general solicitation or advertising was used in the preceding transactions, and all investors were provided with complete information about the company. The issuer believes all the investors are either sophisticated investors or accredited investors. Stop transfer instructions were issued to the issuer's transfer agent for the securities as "restricted" under rule 144. 68
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ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. EXHIBIT NO. TITLE OF EXHIBIT 3.0 Articles of Incorporation ...................................[1] 3.1 Amendment to the Articles of Incorporation ..................[1] 3.1(a) Further Amendment to the Articles of Incorporation ..........[2] 3.2 By-Laws .....................................................[1] 4.0 Form of warrant held by selling shareholders...................* 5.0 Opinion re legality............................................* 10.0 Joint Venture Agreement between Robin Schwarz, Aylward Schwarz, S&S Mining, a Nevada Corporation, and Can-Cal Resources Ltd. ..................................[1] 10.1 Mining Lease Agreement between Can-Cal Resources Ltd. and Twin Mountain Rock Venture dated May 1, 1998 ................[1] 10.2 Consulting Agreement (Luis A. Vega)..........................[8] 10.3 Consulting Agreement (Terry Brown)...........................[8] 10.4 Amendment to Consulting Agreement (Luis A. Vega)...............* 10.5 Deed of Trust, Security Agreement, Financing Statement, and Fixture Filing with Assignment of Rents .............................[1] 10.6 Lease and Purchase Option Agreement dated March 12, 1998 between Arthur James Good and Wanda Mae Good and Can-Cal Resources Ltd....................................[1] 10.7 Management Consulting Agreement with Anthony F. Ciali .......................................[4] 10.8-10.13 [intentionally left blank] 10.14 Loan Agreement between First Colony Merchant, Tobian Trading Limited and Can-Cal Resources, Limited (f/y 2000 loan, second lender on Pisgah property) ...........[5] 10.15 Deed of Trust Security Agreement, Financial Statement and Fixture Filing with Assignment of Rents .......[5] 10.16-10.18 [intentionally left blank] 69
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10.19 Forbearance Agreement with Lender (first lender (Owen Sequoia) on Pisgah property).............[6] 10.20 Forbearance Agreement with Lender (second lender (First Colony Merchant and Tobian Trading Limited) on Pisgah property)..................[6] 10.21-10.28 [intentionally left blank] 10.29 Arco Agreement...............................................[7] 23.0 Consent of Independent Auditors................................* 23.1 Consent of Counsel (with Exhibit 5.0)..........................* * Filed herewith. _____________________ [1] Incorporated by reference with the like-numbered exhibit filed with the company's Form 10-SB filed July 9, 1999. [2] [intentionally left blank] [3] [intentionally left blank] [4] Incorporated by reference from exhibit 10.7 to the company's Form 10-KSB filed April 14, 2004. [5] Incorporated by reference from the like-numbered exhibit from the company's Form 10-KSB for the fiscal year ended December 31, 2000, filed March 15, 2001. [6] Incorporated by reference from the like-numbered exhibit from the company's Form 10-QSB for the quarter ended June 30, 2001, filed August 13, 2001. [7] Incorporated by reference from the like-numbered exhibit from the company's Form 10-KSB for the fiscal year ended December 31, 2003, filed March 30, 2004. [8] Incorporated by reference from the like-numbered exhibit from the company's Form SB-2 registration statement filed June 2, 2004. 70
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ITEM 17. UNDERTAKINGS. (a) RULE 415 OFFERING. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or in the most recent post-effective amendment thereof) which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) For the purpose of determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering thereof. (3) File of a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) WARRANTS AND RIGHTS OFFERINGS. Not applicable. (c) COMPETITIVE BIDS. Not applicable. (d) EQUITY OFFERINGS OF NON-REPORTING SMALL BUSINESS ISSUERS. Not applicable. (e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification 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 (other than the payment by the small business issuer of expenses incurred or paid by a director, officer, or controlling person of the small business issuer in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue. 71
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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 of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Las Vegas, Nevada, on September 21, 2004. CAN-CAL RESOURCES LTD. (Registrant) Date: September 21, 2004. By: /s/ Anthony F. Ciali ------------------------------------ Anthony F. Ciali, CEO, Director Date: September 21, 2004. By: /s/ Ronald D. Sloan ------------------------------------ Ronald D. Sloan, Treasurer, Director Date: September 21, 2004. By: /s/ John Brian Wolfe ------------------------------------ John Brian Wolfe, Secretary, Director Date: September 21, 2004. By: /s/ James Dacyszyn ------------------------------------ James Dacyszyn, Director 72

Dates Referenced Herein   and   Documents Incorporated by Reference

Referenced-On Page
This ‘SB-2’ Filing    Date First  Last      Other Filings
10/15/1331
10/14/1330
9/13/0639
7/9/06370
6/24/0670
6/7/063571
5/27/0670
5/20/0669
4/21/0632
3/23/0630
3/1/0671
2/23/0669
1/27/0515
12/31/04325610KSB,  NT 10-K
Filed on:9/21/0475
9/17/04270
9/13/0470
9/8/0417
8/23/0432
8/3/0470
7/28/0415
7/20/0432
7/9/0470
6/30/0486910QSB
6/25/042269
6/14/0471
6/12/0417
6/8/04714
6/7/0431
6/2/0473SB-2
5/29/0432
5/28/046971
5/25/0433
5/20/0469
5/3/0470
4/23/0471
4/21/0432
4/19/0432
4/14/047310KSB
4/13/0471
4/1/0410
3/31/047010QSB
3/30/0473NT 10-K
3/27/0417
3/17/0469
3/7/0417
3/4/04414
3/1/0415714
2/29/0435
2/18/0417
2/17/04208-K
2/11/0467
2/4/0470
1/29/0415
1/12/0413
1/8/0467
1/2/0417
1/1/043069
12/31/0387310KSB,  NT 10-K
12/30/0369
10/15/0330314,  DEF 14A
9/1/033057
7/25/0330
7/15/0317
7/1/0317
6/30/03156510QSB
6/24/0330
6/15/0350
5/31/0350
4/25/0327308-K
4/22/0317
4/21/033132
4/5/0317
3/24/0327303
3/14/0368
2/12/0317
2/5/0317
1/1/0354
12/31/02165610KSB,  10KSB/A,  NT 10-K
12/24/0267
6/21/02683
6/15/0249
6/5/0267
6/3/0267
5/26/0217
3/1/0267
2/11/0267
1/31/0268
1/8/0267
1/1/0255
12/31/01454910KSB,  NT 10-K
12/15/0149
12/12/0166
10/2/0166
8/13/017310QSB
6/30/017310QSB
3/15/017310KSB
1/1/0166
12/31/007310KSB
7/9/997310SB12G
5/1/982372
3/12/982572
7/2/967
5/2/9627
4/12/957
3/22/95747
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