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Consolidated Financial Statements of CANARC RESOURCE CORP. (expressed
in thousands of United States dollars) Nine
Months Ended September 30, 2002 and 2001 G.
Ross McDonald* Chartered Accountant
*Denotes incorporated
professional
Suite 1402, 543 Granville
Street
Vancouver, B.C. V6C
1X8
Tel: (604)
685-8646
Fax: (604)
684-6334 NOTICE
TO READER I
have compiled the consolidated balance sheet of Canarc Resources Corp. as at
September 30, 2002 and consolidated statements of operations and deficit and
cash flows for the period then ended from information provided by the
Company. I have not audited,
reviewed or otherwise attempted to verify the accuracy or completeness of such
information. Readers are cautioned
that these statements may not be appropriate for their
purposes. �G. Ross McDonald� (signed) G.
Ross McDonald
Supplemental disclosure with respect to cash
flows (Note 9) 1.
Going concern
The Company is in the mineral exploration business and has
not yet determined whether its resource properties contain reserves
that are economically recoverable. The recoverability of amounts
capitalized for resource properties is dependent upon the existence
of economically recoverable reserves in its resource properties, the
ability of the Company to arrange appropriate financing to complete
the development of its properties, confirmation of the Company�s
interest in the underlying properties (Note 4(f)), the receipt
of necessary permitting and upon future profitable production or
proceeds from the disposition thereof.
The Company has incurred significant operating losses and has
an accumulated deficit of $33,272,000 at September 30, 2002.
Furthermore, the Company has working capital of $809,000 as
at September 30, 2002, which is not sufficient to achieve the
Company�s planned business objectives. These
financial statements have been prepared on a going concern basis,
which assumes the realization of assets and liquidation of
liabilities in the normal course of business. The
Company�s ability to continue as a going concern is dependent on
continued financial support from its shareholders and other related
parties, the ability of the Company to raise equity financing, and
the attainment of profitable operations, external financings and
further share issuances to meet the Company�s liabilities as they
become payable. These financial statements do not
include any adjustments to the recoverability and classification of
recorded asset amounts and classification of liabilities that might
be necessary, should the Company be unable to continue as a going
concern.
2.
Significant accounting
policies
(a)
Basis of presentation
These consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly-owned
except for Sara Kreek Resource Corporation N.V., in which the
Company holds an 80% interest, and Minera Aztec Silver Corporation,
in which the Company holds a 63% interest at September 30,
2002.
All significant intercompany transactions and balances have
been eliminated.
These consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting
principles.
The accompanying unaudited interim consolidated financial
statements are prepared in accordance with generally accepted
accounting principles (�GAAP�) in Canada. They do
not include all of the information and disclosures required by
Canadian GAAP for annual financial statements. In the
opinion of management, all adjustments considered necessary for fair
presentation have been included in these financial statements. The
interim consolidated financial statements should be read in
conjunction with the Company�s consolidated financial statements
including the notes thereto for the year ended December 31,
2001.
2.
Significant accounting policies
(continued)
(b)
Stock-based compensation On January 1, 2002, the Company adopted the new accounting standard of the Canadian Institute of Chartered Accountants, Section 3870 �Stock-Based Compensation and Other Stock-Based Payments� for accounting for stock-based compensation expense. Under this standard, stock-based payments to non-employees, and employee awards that are direct awards of stock, call for settlement in cash or other assets, or stock appreciation rights that call for settlement by issuance of equity instruments, are accounted for using the fair-value based method valued using the Black-Scholes Option Pricing Model. The Company has elected to follow the intrinsic value method of accounting for stock options granted to directors and employees whereby no compensation expense is recognized when stock options are granted if the exercise price of the stock options are granted at market value. Any consideration paid by directors and employees on exercise of stock options or purchase of shares is credited to share capital. However, additional disclosure of the effects of accounting for stock-based compensation to directors and employees as compensation expense, using the fair-value based method valued using the Black-Scholes Option Pricing Model, is disclosed as pro-forma information. 3.
Marketable securities
The quoted market value of marketable securities is
approximately $566,200 at September 30, 2002. Included in investment in shares of companies
is 689,791 shares of Skinny Technologies Inc. (formerly Consolidated
Magna Ventures Ltd.), (�Skinny�), a company which until
April 2, 2002, had certain directors in common. During
2002, the Company transferred 100,000 shares of Skinny to a related
party in settlement of Cdn $20,000 due to a related party. Also included in investment in shares of
companies is 215,375 shares of Endeavour Gold Corp., a company which
has a director and an officer in common. 4.
Resource properties
(a)
British Columbia
(i)
New Polaris:
The New Polaris property, which is located in the Atlin
Mining Division, British Columbia, is 100% owned by the Company
subject to a 15% net profit interest which may be reduced to a 10%
net profit interest within one year of commercial production by
issuing 150,000 common shares to Rembrandt Gold Mines Ltd.
During fiscal 2002, the Company wrote-down the property by
$5,474,782 to reflect management�s estimate of the property�s
recoverable value.
(ii)
Eskay Creek:
The Company owns a one-third carried interest in the Eskay
Creek property, Skeena Mining Division, British Columbia, pursuant
to a joint venture with Barrick Gold Corp. (formerly Homestake
Canada Inc.). The property is subject to a 2%
net smelter return in favour of a related company.
(b)
Bellavista, Costa Rica
The Company owns an 18.3% carried interest in this property,
which is located near San Jose, Costa Rica. A
property agreement giving Wheaton River Minerals Ltd. (�Wheaton�)
the right to earn a 100% working interest in the property calls for
pre-production payments to be made to the Company in the amount of
$117,750 annually up to and including the year commercial production
commences. During 2001, in addition to the
cash pre-production payment for 2001, Wheaton made the
pre-production payments due for the years ending December 31,
2002 and 2003 by paying cash of $58,875 and issuing 529,000 common
shares of Wheaton. 4.
Resource properties (continued)
(c)
Suriname:
(i)
Sara Kreek:
The Company holds 80% of the shares of Sara Kreek Resource
Corporation N.V., the company that holds the Sara Kreek
concession. The Company may be required to
issue an additional 200,000 shares to the vendor upon completing a
feasibility study and commencing commercial production of the
underground deposits.
(ii)
Benzdorp:
In April 1996, the Company entered into an option agreement
to earn up to an 80% interest in the Benzdorp property by making
cumulative cash payments of $750,000 and property expenditures
totalling $5 million over a four-year period.
(d)
Mexico
(i)
Clara:
In March 2001, pursuant to a Letter of Intent
with Teck Cominco Limited, the Company�s 63% owned subsidiary,
Minera Aztec Silver Corporation (�Aztec�) was granted an option to
acquire a 100% interest in two mineral claims located in Mexico in
consideration of incurring exploration expenditures on the property
in the aggregate of $500,000 and issuing an aggregate of 500,000
shares of Aztec over a four year period. If
Aztec is not listed on a stock exchange within two years, then Aztec
will have the option to pay a series of cash payments totalling
$185,000 over a four-year period. The optionor will retain a 2% net
smelter return royalty of which 50% may be purchased by the Company
for $1,000,000. Completion of this Letter of
Intent is subject to a due diligence review and the signing of a
formal agreement.
(ii)
Lobo:
The Company held a 100% interest in the Lobo Properties,
Mexico, which had been written-off as at December 31, 2000 upon the
cessation of exploration activity. In 2002, the Company paid $49,000
for additional costs related to the properties.
(e)
Expenditure options:
To maintain the Company's interest and to fully exercise the
options under various property agreements covering the properties
located in British Columbia, Suriname and Mexico, the Company must
incur exploration expenditures on the properties and make payments
in the form of cash and/or shares to the optionors as follows: 4.
Resource properties
(continued)
(i) The
timing of these option/advance royalty payments is dependent upon
the owner transferring the exploration rights to the Benzdorp
property to the corporate entity contemplated under the
agreement. Should this transfer not occur in
2002, these payments and the expenditure commitment, will each be
extended by one year.
(ii) Shares of
the Company�s subsidiary, Minera Aztec Silver Corporation, to be
issued.
These amounts may be reduced in the future as the Company
determines which properties to continue to explore and which to
abandon. These amounts do not include future cash payments payable
to the Company and related exploration expenditures on properties
optioned to third parties.
(f)
Resource properties contingencies
The Company has diligently investigated rights of ownership
of all of the resource properties/concessions to a level which is
acceptable by prevailing industry standards with respect to the
current stage of development of each property/concession in which it
has an interest and, to the best of its knowledge, all agreements
relating to such ownership rights are in good standing.
However, all properties/concessions may be subject to prior
claims, agreements or transfers, and rights of ownership may be
affected by undetected defects. 5.
Capital assets
6.
Share capital
(a)
Issued
(b)
Stock option plan
The Company has a stock option plan that allows it to grant
options to its employees, officers and directors to acquire up to
7,956,450 common shares. The exercise price of each option
equals the high/low average price for the common shares on the
Toronto Stock Exchange based on the last five trading days before
the date of the grant. At the discretion of the
Board, certain option grants provide the holder the right to receive
the number of common shares, valued at the quoted market price at
the time of exercise of the stock options, that represent the share
appreciation since granting the options. Options
have a maximum term of ten years and terminate 30 days following the
termination of the optionee�s employment, except in the case of
death, in which case they terminate one year after the event. Vesting
of options is made at the discretion of the Board at the time the
options are granted.
The continuity of stock options for the period ended
September 30, 2002 is as follows:
* cancelled pursuant to the exercise of share
appreciation rights
At September 30, 2002, the options outstanding are all
exercisable and expire at various dates from March 27, 2005 to
June 23, 2010 with a weighted average remaining life of
approximately 6 years. Pursuant to the new CICA policy of accounting for stock-based compensation, compensation expense on stock options granted to directors and employees using the fair-value based method is disclosed as pro-forma information.
The fair value of stock options used to calculate
compensation expense is estimated using the Black-Scholes Option
Pricing Model with the following assumptions:
The pro forma effect on net loss and loss per share for the
period ended September 30, 2002 of the actual results had the
Company accounted for the stock options granted to directors and
employees using the fair value method is as follows:
Option pricing models require the input of highly subjective
assumptions including the expected price volatility. Changes
in the subjective input assumptions can materially affect the fair
value estimate, and therefore the existing models do not necessarily
provide a reliable single measure of the fair value of the Company�s
stock options.
(c)
Warrants:
Each warrant entitles the holder to purchase one common share
of the Company. 6.
Share capital (continued)
(d)
Shares reserved for issuance
(e)
Shareholder rights plan
On October 25, 1995, the shareholders of the Company approved
a shareholders rights plan (the �Plan�). The
Plan became effective on November 14, 1995.
The Plan is intended to ensure that any entity seeking to
acquire control of the Company makes an offer that represents fair
value to all shareholders and provides the board of directors with
sufficient time to assess and evaluate the offer, to permit
competing bids to emerge, and, as appropriate, to explore and
develop alternatives to maximize value for shareholders. Under
the Plan, each shareholder at the time of the Plan�s adoption was
issued one Right for each common share of the Company held. Each
Right entitles the registered holder thereof to purchase from
treasury one common share at Cdn$25, subject to certain adjustments
intended to prevent dilution. The Rights are exercisable after
the occurrence of specified events set out in the Plan generally
related to when a person, together with affiliated or associated
persons, acquires, or makes a take-over bid to acquire, beneficial
ownership of 20% or more of the outstanding common shares of the
Company.
The Rights expire in November 2003. 7.
Related party transactions
At September 30, 2002, amounts due from related parties
comprise balances owing from companies with certain common
directors. The amounts were for
reimbursement of costs in the normal course of business.
General and administrative and property investigation costs
include Cdn $90,000 of consulting fees charged by a company
controlled by a director of the Company. 8 .
Segment disclosures
The Company has one operating segment, being mineral
exploration, and substantially all assets of the Company are located
in Canada except for certain resource properties as disclosed in
Note 4 and $58,000 of mining equipment and vehicles which are
located in Suriname. 9.
Supplemental disclosure with respect to cash
flows
Supplemental cash flow information:
10.
SUBSEQUENT EVENTS Subsequent to September 30, 2002 the Company
completed a private placement for the issue of 1,250,000 units at
Cdn $0.40 per unit for gross proceeds of Cdn $500,000. Each
unit consists of one common share and one-half common share purchase
warrant with each whole warrant exercisable to acquire one
additional common share at a price of Cdn $0.50 per share to
September 11, 2004. A 7.5% finders fee was paid on a
portion of the proceeds. The Company also issued a total of 174,105
common shares to two directors pursuant to the exercise of share
appreciation rights. The shares were issued for the
cancellation of 250,000 stock options previously granted to the
directors.
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