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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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FORWARD LOOKING STATEMENTS
This annual report includes "forward-looking statements." All statements, other than statements of historical facts, included in this annual report that address activities, events or developments, which we expect or anticipate, will or may occur in the future are forward-looking statements.
The words "believe", "intend", "expect", "anticipate", "project", "estimate", "predict" and similar expressions are also intended to identify forward-looking statements.
These forward-looking statements address, among others, such issues as:
- Future earnings and cash flow, - future plans and capital expenditures, - expansion and other development trends of the Internet and high technology industry,
- Expansion and growth of our business and operations, and
- Our prospective operational and financial information.
These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties, which could cause actual results to differ materially from our expectations, including the risks set forth in "Item 3-Key Information-Risk Factors" and the following:
- Fluctuations in prices of our products and services,
- Potential acquisitions and other business opportunities,
- General economic, market and business conditions, and
- Other risks and factors beyond our control.
Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements. We cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations
Unless the context indicates otherwise, the terms "Bontan Coporation Inc." the "Company" and "Bontan" are used interchangeably in this Annual Report.
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FOREIGN PRIVATE ISSUER STATUS AND CURRENCY
Foreign Private Issuer Status
Bontan Corporation Inc., (the "Company"), is a Canadian corporation incorporated under the laws of the Province of Ontario. Approx. 84% of its common stock is held by non-United States citizens and residents; our business is administered principally outside the United States; and all of our assets are located outside the United States. As a result, we believe that we qualify as a "foreign private issuer" for continuing to report regarding the registration of our common stock using this Form 20-F annual report format.
Currency
The financial information presented in this Annual Report is expressed in Canadian dollars ("CDN $") and the financial data in this Annual Report is presented in accordance with accounting principles generally accepted in Canada ("Can. GAAP"). Such financial data conforms in all material respects with accounting principles generally accepted in the United States ("U.S. GAAP") except as disclosed in Note 14 of the Notes to Consolidated Financial Statements contained herein.
All dollar amounts set forth in this report are in Canadian dollars, except where otherwise indicated.
PART I
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 - KEY INFORMATION
(A) SELECTED FINANCIAL DATA
This Report includes consolidated financial statements of the Company for the years ended March 31, 2004, 2003 and 2002. These financial statements were prepared in accordance with accounting principles generally accepted in Canada. Reference is made to Financial Statement Notes for a discussion of the material differences between Canadian GAAP and U.S. GAAP, and their effect on the Company's financial statements.
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The following is a selected financial data for the Company for each of the last five fiscal years 2000 through 2004 on a consolidated basis. The data is extracted from the audited financial statements of the Company for each of the said years.
SUMMARY OF FINANCIAL INFORMATION IN THE COMPANY FINANCIAL STATEMENTS (Canadian $)
Operating data - Fiscal year ended March 31,
| 2004 | 2003 | 2002 | 2001 | 2000 | |
| Revenue | $46,958 | $15,256 | $66,860 | $351,242 | $35,861 |
| Loss from Continuing Operations & (Net Loss) | ($1,360,958) | ($319,363) | ($1,332,926) | ($1,717,204) | ($1,390,457) |
| Loss per share (1) | ($0.26) | ($0.04) | ($0.27) | ($0.40) | ($0.52) |
| Working capital (Deficit) | ($311,005) | ($314,491) | ($133,419) | $526,296 | $1,438,128 |
| Total Assets | $3,085,584 | $28,676 | $206,586 | $908,644 | $2,542,932 |
| Capital Stock | $24,287,903 | $20,393,106 | $20,393,106 | $19,814,829 | $19,660,724 |
| Shareholders' equity (Deficit) | $2,219,348 | ($314,491) | $4,872 | $759,251 | $2,322,620 |
| Weighted average number of shares outstanding (2 and 3) | 5,221,071 | 7,226,630 | 4,851,612 | 4,259,424 | 2,690,266 |
- The effect of potential share issuances pursuant to the exercise of options and warrants would be anti-dilutive and, therefore, basic and diluted losses per share are the same. The net loss per share prior to fiscal 2004 was based on the pre-reverse split number of shares issued and oustanding.
- Weighted average number of shares for a year was calculated by dividing the total of the number of shares outstanding at the end of each of the months by twelve.
- Decrease in the weighted average number of shares outstanding in fiscal 2004 compared to 2003 was due to a reverse stock split of 7 to 1 in fiscal 2004.
Selected Financial Data (U.S. GAAP) - As at March 31,
| 2004 | 2003 | 2002 | 2001 | 2000 | |
| Net Loss | ($1,360,958) | ($230,532) | ($1,358,366) | ($1,851,725) | ($1,400,457) |
| Loss per share | ($0.26) | ($0.03) | ($0.28) | ($0.43) | ($0.52) |
| Total assets | $3,085,584 | $28,676 | $28,676 | $774,123 | $2,532,932 |
| Sharholders' equity (Deficit) | $2,219,348 | ($314,491) | ($133,419) | $625,000 | $2,312,620 |
The Company has not declared or paid any dividends in any of its last five financial years.
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Exchange Rates
In this Annual Report on Form 20-F, unless otherwise specified, all monetary amounts are expressed in Canadian dollars. On August 5, 2004, the exchange rate, based on the noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York, for the conversion of Canadian dollars into United States dollars (the "Noon Rate of Exchange") was $1.3178.
The following table sets out the high and low exchange rates for each of the last six months.
| 2004 | July | June | May | April | March | February |
| High for period | 1.3348 | 1.3820 | 1.4003 | 1.3795 | 1.3570 | 1.3512 |
| Low for period | 1.3079 | 1.3326 | 1.3555 | 1.3037 | 1.3056 | 1.3090 |
The following table sets out the average exchange rates for the five most recent financial years calculated by using the average of the Noon Rate of Exchange on the last day of each month during the period.
| Year Ended March 31, 2004 | |||||
| 2004 | 2003 | 2002 | 2001 | 2000 | |
| Average for the year | 1.3530 | 1.5446 | 1.5672 | 1.5076 | 1.4713 |
(B) CAPITALIZATION AND INDEBTEDNESS
Not applicable.
(C) REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
(D) RISK FACTORS
The following is a brief discussion of those distinctive or special characteristics of the Company's operations and industry that may have a material impact on, or constitute risk factors in respect of, the Company's future financial performance.
Exploration and Development Risks
The Company plans to engage in the business of acquiring interests in resource properties in the hope of locating reserves. The Company's property interests
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will be in the exploration stage only. Accordingly, there is little likelihood that the Company will realize any profits in the short to medium term. Any profitability in the future from the Company's business will be dependent upon locating reserves, which itself is subject to numerous risk factors.
The business of exploring for and producing oil and gas involves a substantial risk of investment loss, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Drilling oil and gas wells involves the risk that the wells will be unproductive or that, although productive, the wells do not produce oil and/or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered, which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. As with any petroleum property, there can be no assurance that oil and gas will be produced from the properties in which the Company has interests. In addition, the marketability of oil and gas, which may be acquired or discovered, will be affected by numerous factors beyond the control of the Company. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. The extent of these factors cannot be accurately predicted, but the combination of these factors may result in the Company not receiving an adequate return on invested capital. There is no assurance that additional crude oil or natural gas in commercial quantities will be discovered by the Company.
Additional Funding Requirements
The Company has not received cash flow from operations in the past and cash flow is not expected in the next few years to satisfy the Company's operational requirements and cash commitments. In the past, the Company has relied on borrowings from the shareholders and sales of equity securities to meet most of its cash requirements. There can be no assurance that funding from these sources will be sufficient in the future to satisfy operational requirements and cash commitments. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern.
Based on its existing working capital, the Company expects to require additional financing for its currently committed interests in resource properties during the upcoming fiscal year. The development of the Company's properties depends upon the Company's ability to obtain financing through any or all of the joint venturing of projects, debt financing, equity financing or other means. There is no assurance that the Company will be successful in obtaining the required financing. Failure to obtain additional financing on a timely basis could cause the
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Company to forfeit its interest in its properties and reduce or terminate its operations on such properties.
History of Net Losses; Accumulated Deficit; Lack of Revenue From Operations
The Company has incurred net losses to date. Its deficit as of March 31, 2004, was approx. $22 million. The Company has not yet had any revenue from the exploration activities on its properties, nor has the Company yet found that development activity is warranted on any of its properties. Even if the Company does undertake development activity on any of its properties, the Company may continue to incur losses beyond the period of commencement of such activity. There is no certainty that the Company will produce revenue, operate profitably or provide a return on investment in the future.
Stock Subject to Penny Stock Rules
The capital stock of the Company would be classified as "penny stock" as defined in Reg. § 240.3a51-1 promulgated under the Securities Exchange Act of 1934 (the "1934 Act"). In response to perceived abuse in the penny stock market generally, the 1934 Act was amended in 1990 to add new requirements in connection with penny stocks. In connection with effecting any transaction in a penny stock, a broker or dealer must give the customer a written risk disclosure document that (a) describes the nature and level of risk in the market for penny stocks in both public offerings and secondary trading, (b) describes the broker's or dealer's duties to the customer and the rights and remedies available to such customer with respect to violations of such duties, (c) describes the dealer market, including "bid" and "ask" prices for penny stock and the significance of the spread between the bid and ask prices, (d) contains a toll-free telephone number for inqu iries on disciplinary histories of brokers and dealers, and (e) defines significant terms used in the disclosure document or the conduct of trading in penny stocks. In addition, the broker-dealer must provide to a penny stock customer a written monthly account statement that discloses the identity and number of shares of each penny stock held in the customer's account, and the estimated market value of such shares. The extensive disclosure and other broker-dealer compliance related to penny stocks may result in reducing the level of trading activity in the secondary market for such stocks, thus limiting the ability of the holder to sell such stock.
Uninsurable Risks
Although management believes the operator of any properties in which the Company and its subsidiaries may acquire interests, will acquire and maintain appropriate insurance coverage in accordance with standard industry practice, the Company and its subsidiaries may suffer losses from uninsurable hazards or from hazards which the operator has chosen not to insure against because of
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high premium costs or other reasons. The Company and its subsidiaries intend to engage in participating in the drilling of both exploratory and development wells. Exploratory wells have much greater dry hole risk than do wells, which are drilled offsetting established production. The Company and its subsidiaries may become subject to liability for pollution, fire, explosion, blow-outs, cratering and oil spills against which it cannot insure or against which it may elect not to insure. Such events could result in substantial damage to oil and gas wells, producing facilities and other property and personal injury. The payment of any such liabilities may have a material, adverse effect on the Company's financial position.
Foreign Countries and Regulatory Requirements
Company's current business strategy involves participation in overseas projects in the resource sector. Consequently, the Company will be subject to certain risks associated with foreign ownership, including currency fluctuations, inflation, political instability and political risk. Oil, gas and precious metal exploration and production activities in foreign countries may be affected in varying degrees by political stability and government regulations relating to the resource industry. Any changes in regulations or shifts in political conditions are beyond the control of the Company and may adversely affect its business. Operations may be affected in varying degrees by government regulations with respect to restrictions on production, price controls, export controls, restriction of earnings, taxation laws, expropriation of property, environmental legislation, water use and workplace safety.
It may be difficult for investors to effect service of process and to enforce judgments against the Company or those of its officers and Directors who are not resident in or citizens of the United States. The Company is an Ontario corporation. All of its Directors and officers are residents of Canada and all or a substantial portion of the assets of each of those persons and a substantial portion of the assets of the Company are located outside the United States. Consequently, it may be difficult for United States investors to effect service within the United States upon the Company or upon Directors or officers of the Company, or to satisfy judgments of courts of the United States predicated upon civil liabilities under United States federal securities laws.
Environmental and Other Regulatory Requirements
The current or future operations of the Company, including development activities and commencement of production on its properties, require permits from various governmental authorities and such operations will be subject to laws and regulations governing prospecting, development, mining, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection, safety and other matters. Companies engaged in the development and operation of oil and gas properties and related facilities generally experience increased costs, and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. There can be no assurance that approvals and permits required to commence production on its properties will be obtained. Additional permits and studies, which may include environmental impact studies conducted before permits can be obtained, may be necessary prior to operation of the properties in which the Company acquires interests and there can be no assurance that the Company will be able to obtain or maintain all necessary permits that may be required to commence construction, development or operation of oil and gas extraction facilities at these properties on terms which enable operations to be conducted at economically justifiable costs.
The Company's potential diamond production operations and mining activities in Brazil are subject to various federal and provincial laws governing land use, the
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protection of the environment, prospecting, development, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, workplace safety and other matters. Such operations and exploration activities are also subject to substantial regulation under these laws by governmental agencies and may require that the Company obtain permits from various governmental agencies. There can be no assurance, however, that all permits the Company may require for conduct of operations will be obtainable on reasonable terms or that such laws and regulations would not have a material adverse effect on any mining project the Company might undertake.
Failure to comply with applicable laws, regulations, and permitting requirements may result in enforcement actions there under, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in diamond exploration or extraction operations may be required to compensate those suffering loss or damage by reason of such activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Dividends
All of the Company's available funds will be invested to finance the growth of the Company's business and therefore investors cannot expect and should not anticipate receiving a dividend on the Company's common shares in the foreseeable future.
Share Price Volatility; Price Fluctuations
In recent years, the securities markets in Canada and the United States have experienced a high level of price and volume volatility, and the market prices of securities of many companies, particularly junior mineral exploration companies like the Company, have experienced wide fluctuations which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. In particular, the per share price of the Company's common stock fluctuated from a low of US$0.50 to a high of US$2.47 during the year ending on the date of this Annual Report. There can be no assurance that these price fluctuations will not continue to occur.
Company's Officers and Directors Resident Outside U.S.; Potential Unenforceability of Civil Liabilities and Judgments
The Company and its officers and all but one of its directors are residents of countries other than the United States, and all of the Company's assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or enforce in the United States against such persons judgments obtained in
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United States courts, including judgments predicated upon the civil liability provisions of United States federal securities laws or state securities laws.
The Company believes that a judgment of a United States court predicated solely upon civil liability under United States securities laws would probably be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that was recognized by a Canadian court for such purposes. However, there is doubt whether an action could be brought in Canada in the first instance on the basis of liability predicated solely upon such laws.
Dilution
The Company may in the future grant to some or all of its own and its subsidiaries' directors, officers, insiders and key consultants options to purchase the Company's Common Shares as non-cash incentives to those people. Such options may be granted at exercise prices equal to market prices at time when the public market is depressed. To the extent that significant numbers of such options may be granted and exercised, the interests of the then existing shareholders of the Company may be subject to additional dilution.
The Company is currently without a source of revenue and will most likely be required to issue additional securities to finance its operation and may also issue substantial additional securities to finance the development of any or all of its projects.
ITEM 4 - INFORMATION ON THE COMPANY
(A) HISTORY AND DEVELOPMENT OF THE COMPANY
Bontan Corporation Inc. ("the Company") was incorporated under the Business Corporation Act (Ontario) in 1973 and is based in Toronto, Ontario, Canada.
The Company's registered office is situated at 47 Avenue Road, Suite 200, Toronto, Ontario, Canada M5R 2G3. The Company is a reporting issuer in the provinces of Ontario. The Company's shares have been listed on the Over the Counter Bulletin Board ("OTCBB") under the symbol "BNTNF" in the United States.
The Company went through several name changes and five major changes in its business activities. Details of these changes were provided in the Registration Statement F-20 dated June 12, 2000 and the annual report F-20 dated September 23, 2003. The significant changes, briefly, were as follows:
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- The Company was incorporated under the name "Kamlo Gold Mines Limited" and remained an inactive shell from the date of incorporation to 1985.
- Between 1986 and 1982, the Company was involved in the development of a new technology for the marine propulsion business. During this period, the Company went through three name changes.
- Between 1993 and 1996, the Company was involved in the distribution and manufacture of a snack food. During this period, the Company went through two more name changes.
- The Company remained an inactive shell since the closure of snack food business in November 1996 until December 1998 when it changed its name to Dealcheck.com Inc. and agreed on a new business strategy. This strategy focused on investing in new and emerging technology oriented projects and businesses.
- In 1999, the Company successfully raised $3.2 million, which were invested in various projects and companies over the next two years as per the new business strategy of the company. Unfortunately, IT sector performed poorly since 2001 and new and emerging technology based businesses suffered significant losses, financial problems and bankruptcies. These factors adversely affected the Company's investments and its profitability. The company had to write off all its investments by the end of the fiscal 2003.
The management saw no sign of technology sector reviving in the near future and decided to change the business focus to resource industry. The new business strategy was discussed in the annual and special general meeting held in November 2002 and was accepted by the key shareholders of the company who have been providing the funding for its operational needs to date.
Accordingly, on April 21, 2003, the Company changed its name to Bontan Corporation Inc. and commenced a private placement to raise about US$2.8 million net of issue expenses by May 26, 2004 when the private placement was closed. These funds were invested in acquiring interest in oil exploration project in Papua New Guinea and a subsidiary in Brazil to acquire options in joint ventures for diamond exploration projects and also to fund the working capital requirements of the Company and its subsidiaries.
The Company had no significant revenue since April 1, 1996 except in the fiscal year 2001 and incurred significant losses since inception. Accumulated deficit at March 31, 2004 was approx. $22 million.
The Company relies principally on equity financing to fund its projects and expenditures.
The major expenditure during the fiscal year 2004 comprised funds advanced from time to time of approx. $2.5 million to a non-affiliated corporation, Advisory
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Group for the purpose of acquiring indirect participation interest of approx. 0.88% in phase one of an oil exploration program in Papua New Guinea.
(B) BUSINESS OVERVIEW
The Company changed its name to Bontan Corporation Inc. on April 21, 2003 and adopted a new business strategy that is focused on resource sector. The Company plans to be a diversified natural resource company that will operate and invest in major exploration and exploitation projects in countries around the globe through its subsidiaries by acquiring joint venture, indirect and direct participation interests and working interests in those projects.
The management is aware of the greater degree of uncertainty and risks associated with investments in resource sector and is also aware of a lack of any in-house expertise in the resource sector. It has therefore planned to take the following two measures to minimise the overall financial exposure and increase the possibility of success:
Diversification
The Company will not focus only on one segment of the resource sector but plans to diversify its investment in different segments. Currently, it is focused on opportunities in oil, gas and diamond exploration projects. The management believes that the diversification will provide a broader distribution of risk associated with project failures and costs overruns.
The diversification policy will also extend to undertaking projects in different countries rather than focusing only on one country.
Co-ownership
The Company does not plan to undertake any activities all by itself but would rather participate in joint ventures and /or acquire a percentage of direct, indirect or working interests in projects with others who have broader experience and financial abilities to complete the projects more successfully and in timely manner.
The new business strategy is focused on two broad operating segments -
Energy sector: This segment includes the Company's acquisition of interests in joint ventures and projects relating to exploration and commercial drilling of oil and gas and related products.
Mineral sector: This segment includes the Company's acquisition of interests in joint ventures and projects relating to exploration and commercial mining of diamond, gold and other precious metals.
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Overview of the fiscal year ended March 31, 2004
The Company had a name change on April 21, 2003 and adopted a new business strategy as explained earlier.
Company's auditors DMCT LLP resigned on March 5, 2004 and were replaced by Sloan Paskowitz Adelman LLP (SPA) of 7620 Yonge Street, Suite 400, Thornhill, Ontario, Canada L4J 1V9. DMCT decided not to register with the Public Company Accounting Oversight Board (USA), which became the requirement for all SEC reporting public companies effective March 1, 2004. SPA has been accepted by the Canadian Public Accountability Board and the Public Company Accounting Oversight Board (USA) as a registered member.
Most part of the fiscal 2004 was spent in pursuing two objectives, namely to raise fund and to find opportunity for investment in resource sector.
Fund raising activity
The Company needed funds to pursue its new business objectives. However, lack of any activities and the then market price of the Company's shares made it almost impossible to attract new equity fund. The Company therefore carried out a reverse stock split on April 21, 2003 under which one new common share was issued for every seven old common shares. At the same time, the Company dealt with fractional shares arising from the reverse stock split, the Holders of less than sixty-four common shares of Dealcheck.com Inc (previous name of the Company) were not issued any shares of Bontan Corporation Inc. Instead, they were entitled to a payment of $0.21US per common share. As a result, 3,255 common shares of Dealcheck.com Inc. being equal to 465 common shares of Bontan Corporation Inc. valued at $684US ($939CDN) became eligible under the buy-back plan. The Company set up an accrual for this liability. The actual payments made to March 31, 2004 were $212.
The above measures enabled the Company to achieve a better market price and On April 28, 2003, the Company reached an agreement with certain accredited investors for a private placement of up to 7,143,000 (seven million one hundred forty three thousand) Units at US$0.35 per Unit for a gross proceeds of about US$2.5 million. Each Unit included one common share and one common share purchase warrant. Each warrant entitled its holder to acquire one common share of the company at a price of US$1.00 within twenty-four months of the date of issuance of the Unit. The shares issued under this private placement would be restricted in terms of their transferability and saleability in accordance with the relevant regulatory requirements.
7,536,444 Units were subscribed and paid for up to March 31, 2004. Shares relating to 6,705,015 units were issued by that date while the shares relating to the balance of the subscription of 831,429 units were issued subsequent to March 31, 2004.
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Expenses relating to the private placement represented finder's fee of 10% of the subscription.
Private placement was over subscribed to 8,909,571 units and was closed on May 26, 2004.
Project Investment
Indirect participation Interest in oil exploration program in Papua New Guinea
In April 2003, the Company received an opportunity to participate in phase one of an oil exploration program carried out by InterOil Corporation, a non-affiliated public company over 9 million acres of land covered by three licences in Papua New Guinea. The Company opted to acquire approx. 0.88 % indirect participation interest (IPI) through PNG Venture Limited, a subsidiary of InterOil Corporation. The IPI agreement also provided option to the Company to convert its IPI share into the common shares of InterOil Corporation at a valuation of US$17.75 per share.
However, initially, the Company was not able to participate directly due to certain corporate conditions that InterOil was subject to. The Company therefore agreed to participate through another independent corporation, Advisory Group. The Company began lending funds to Advisory Group according to the funding requirement of IPI Agreement. Under the lending arrangement with Advisory Group, the Company's advances were fully secured by a first charge on the IPI and were fully convertible into such IPI at the option of the Company, once InterOil Corporation's corporate matters preventing direct participation by the Company were resolved.
By March 31, 2004, the Company advanced funds totalling $2.5 million to Advisory Group and on July 9, 2004, the Company exercised its option and converted its advances as follows:
- US$ 275,000 was converted into 15,493 shares of InterOil Corporation and
- The balance of US$1.6 million was converted into 0.75% indirect participation interest in the oil exploration program.
Diamond mining in Brazil
In the late March 2004, the Company began negotiations to acquire a Brazilian subsidiary from Mr. Francis Guardia, a geologist and options to participate in two joint ventures in Brazil to explore and commercially exploit diamonds. 13 No firm commitments were made as at March 31, 2004 except for an advance of US$10,000 to Mr. Francis to visit Brazil to review and complete the acquisitions of the Brazilian company and joint venture options and other related matters. As at March 31, 2004, the Company had the following wholly-owned subsidiaries: Mr. Francis Guardia and his group have a right to acquire 40% of Bontan Diamond Corporation upon successful completion of certain milestones. No such equity was acquired as at March 31, 2004. 14 The administrative head office of the Company is located in subleased premises at 47 Avenue Road, Suite 200, Toronto, Ontario, Canada. There is no long-term lease commitment. Total area of the premises is approximately 950 sq. ft., and about 30% of this premise is subleased to the Company. See Operating and Financial Review and Prospects - Item 5 for further details. The following discussion should be read in conjunction with the Audited Financial Statements of the Company and notes thereto contained elsewhere in this report. Overview The Company began a new business strategy coupled with consolidation of its share capital and a private placement campaign to raise funds to carry out its new strategy in fiscal year 2004. During the fiscal year 2004, the Company's key activities were the private placement campaign and review of business opportunities, which fall within the new business strategy. The key elements of income and expenses are discussed below in detail. Two new business segments emerged from the new business strategy during the fiscal 2004 namely, (i) energy sector - which will include the Company's planned 15 activities in acquiring interests in oil and gas projects and (ii) mineral sector - which will include the Company's planned initiatives in acquiring interests in projects involving exploration and commercial mining of diamond, gold and other precious metals. The Company's performance during the fiscal years 2003 and 2002 are discussed by each of the business segments under which the Company was operating during those years. These business segments were no longer relevant for the fiscal year 2004 as explained earlier. The performance by business segment was as follows: Incubation: This segment relates to investing mainly in start up companies with Internet and high technology oriented business plans. This segment did not generate any revenue. There was no major activity in this segment during the fiscal 2003. The net loss sustained by this segment was approx. $0.1 million in fiscal 2003 compared to $ 0.9 million in fiscal 2002. Commercial web sites and project development: This segment relates to the Company's investments in wholly owned commercial web sites and projects. The Biochex project, through an Ontario private company where the Company has full ownership equity, was the only project that was being carried over from the fiscal year 2002. The project cost was fully written off in fiscal 2003. This segment did not generate any revenue in fiscals 2003 and 2002. Net losses from this segment during fiscal 2003 were approx. $ 89,000 compared to losses of $300 in fiscal 2002. Fulfillment services: This segment provides administration and operational services to investee companies and other entities where the company may choose to invest in the future. There was no activity in this segment during the fiscal 2003 and it generated no revenue compared to the revenue of $60,000 in fiscal 2002. Income The revenue during the fiscal year 2004 results from exchange gains. The Company had significant transactions in US Dollars. It raised about $2.6 million in US Dollars through private placement and invested about $1.9 million dollars in oil exploration project. These transactions constituted over 90% of the transactions during the fiscal year and were converted into Canadian dollar at rates prevailing on the dates of the transactions as per the Company's accounting policy. The exchange rates between Canadian Dollar and US Dollar fluctuated significantly during the year from CDN$1.47 = US$1 at March 31, 2003 16 to CDN$1.31=US$1 at March 31, 2004 - almost 11% decline in US dollar value verses Canadian dollar. Overall revenue of the Company decreased significantly to $15,256 in fiscal 2003 compared to $66,860 in fiscal 2002. Various sources of income are discussed below. Operational services income
The company provided no operational services during the fiscal years 2004 and 2003 and had no income from this source. The company earned $60,000 in fiscal 2002 from providing management services to an Ontario affiliated shareholder corporation. These services comprised lending the services of two of its directors during the fiscal year in the finance and business development areas of the affiliate. The services were charged at the rate of $10,000 per month. The company earned $120,000 from similar services to the same corporation in the fiscal 2001. The management services agreement was cancelled effective October 1, 2001 which explains only six months revenue in fiscal 2002 compared to full year's revenue in fiscal 2001. Other income The other income totaled $46,958 in the fiscal 2004 compared to $15,256 in fiscal 2003 and $66,860 in fiscal 2002. The other income in all the three years comprise mainly of exchange gain. Expenses The overall analysis of the expenses is as follows: Operating Expenses 17 Travel, promotion and consulting- Travel, Meals and Entertainment Most of these expenses during the fiscal 2004 were incurred by the CEO of the Company, Mr. Terence Robinson in meeting with the prospective investors in connection with private placement campaign and also in pursuing leads provided by various consultants in business prospects, which conform to the new business strategy of the Company. There were no new initiatives during fiscal 2003. This explains the significantly lower travel and entertainment. During the fiscal 2002, the management continued to focus more on handling in -house projects and investments on hand than seeking new businesses due to lack of funding and adverse business climate. Hence travel, meals and entertainment costs declined in fiscal 2002 compared with those of fiscal 2001. Consulting costs The consulting fee costs have increased significantly during the fiscal 2004 compared to the prior years mainly due to commencement of new business activities, which required expertise of consultants with background in resource sector in selecting and negotiating appropriate projects for the Company. The total costs include the following three major items - 18 Consulting fees of $638,177 were paid to four independent consultants whose services have been retained to help management review projects in resource sector for potential participation and or acquisitions and to advise and negotiate terms and pricing most beneficial to the Company. The services of these consultants were originally retained for one year and thereafter would be extended only on a need basis. The fees to these consultants were payable entirely in the common shares of the Company registered under the "2001 Consultants' Stock Compensation Plan". The common shares were valued at US$0.50 per share for this purpose. The price represented the fair market value. Consulting fee of $267,894 was paid to a corporate shareholder, Snapper Inc. Of this amount, $81,180(US$ 60,000) (2003: $92,682 and 2002: $94,000) was paid under a Consulting Agreement. The services provided included arranging non-interest bearing working capital funds, introduction to business opportunities and public relations. The Company had successfully used the services of this corporation in the past. Originally, the agreement provided for payment of US$10,000 per month. However, the fee was revised down to US$5,000 per month effective April 1, 2002. The balance of $186,714 (US$138,000) represented one-time finders' fee charged for introduction to two new projects where the Company agreed to participate subsequent to the year-end date. Consulting fee was paid to chief executive officer under a consulting agreement revised on April 1, 2003 and which provided for a fee of $10,000 per month. Consulting fee for fiscal 2002 included approx. $250,000 in fees paid to current and past executives and other consultants of the company for services rendered during current and past years. Promotion costs There was no major promotional activity during fiscal years 2004 and 2003. Promotional costs for the fiscal 2002 consisted of $78,697US charged by a non-related European corporation, which was hired to conduct promotional work for the company and its projects in Europe for about six months. Professional fees Professional fees in fiscal 2004 were $110,547 compared to $45,339 in fiscal 2003 and $133,152 in fiscal 2002. Major item in fiscal 2004 consisted of fees of $93,135 for accounting services. Of this, $27,610 was paid to a shareholder corporation, Current Capital Corp. for providing financial and accounting services under an Expense Sharing Agreement dated April 1, 2003 for one year. The agreement was not renewed on expiry. The balance of $65,525 was paid to an executive by issuance of shares 19 under the "2001 Consultants' Stock Compensation Plan". The common shares were valued at their fair market value of US$0.50 per share. Increase in professional fees in the fiscal 2002 was due to payment of $47,820 in common shares of the company to an executive for the services rendered during current and past years. These shares were registered under the Securities Act of 1933 by filing of Form S-8 on March 28, 2002. Other professional fees comprise legal costs for filing of Form S-8 and audit costs. Shareholders information Shareholder information costs comprise investor relations fee, costs of holding annual general meeting of the shareholders and various regulatory filing fees. Total cost for fiscal 2004 was $165,431 compared to $63,657 for fiscal 2003 and $341,377 for fiscal 2002. Major item of cost was the investor relations fee of $80,314 and media relations fee of $80,314 charged by a shareholder corporation, Current Capital Corp. Which specializes in handing investor relation and media relations work for small-cap public companies. The fees were charged under an Investor relations contract dated April 1, 2003 and Media relation contract dated April 1, 2003. Both the contracts provide for a monthly fee of US$5,000 each. Fee for fiscal 2003 mainly includes fee of $60,000 for an investor relation services provided by Current Capital Corp. at the fee of $10,000 per month. The fee was only for the first six months period since the said contract was canceled effective October 1, 2002. Fee for the fiscal 2002 were $332,012. Majority of these costs were incurred towards investor relations and other shareholder information promotion contracts signed with three independent public relation firms. Other Operating Costs These costs include rent, telephone, Internet, transfer agents fees and other general and administration costs. Other operating costs in fiscal 2003 were $25,916 compared to $31,237 in fiscal 2002 and $156,143 in fiscal 2002. Major item is rent, which declined from about $57,000 in 2002 to $6,000 in 2003 and $5,300 in 2004. The company cancelled its existing lease and vacated its 5,000 sq.ft. leased premises at 65 Queen Street West in Toronto in February 2002 and moved as subtenant to under 300 sq ft of premises at 47 Avenue Road in Toronto without any long term lease commitment. 20 Another item - fees charged by transfer agents declined from about $13,500 in fiscal 2002 and 2003 to $7,800 in fiscal 2004. The significant reduction was achieved due to change in transfer agent in fiscal 2003. The above move together with substantial reduction in related office costs helped substantially reduce the overall operating costs and future operating cash requirements. The company received a Notice of Termination dated February 6, 2003 from the landlord, wherein the landlord claimed rent arrears of $28,924 and current plus next three months rent and damage for the loss of rent for the remaining term of the lease. The management is of the opinion that they have a strong case against the landlord for not paying such rent and penalty and considers the existing provision of approx. $37,000 adequate to cover any liability arising from the lease termination. Besides, no further communication was received from the landlord during the fiscal 2004. Working Capital As at March 31, 2004, the Company had a working capital deficit of $311,005. However, shareholders advances of $515,572 were subsequently used for participation in the private placement offer by the Company. Cash on hand as at March 31, 2004 was $500,541. The Company relies principally on equity financing to fund its projects and expenditures. The Company has no internal source of funding and thus it depends on the ability to finance by raising funds by the sale of shares. Operating Cash Flow For the year ended March 31, 2004, net cash inflows of $3,432,612 exceeded cash outflows of $2,951,919 resulting in a positive cash flow of $480,693, which when combined with the $19,848 cash balance from the fiscal year end 2003 results in an ending cash position of $500,541. The cash inflows were a result of a private placement of $ 3,546,704 net of related expenses of $ 354,670 for a total of 7,536,444 shares and net advances of $241,517 from shareholders. Cash outflows comprised principally of $2,530,353 being the advances for acquisition of indirect participation interest in oil exploration program in Papua New Guinea and general and administrative costs of $ 421,566. Financing Activities The following outlines the Company's financing activities for the year ended March 31, 2004: 21 There were no shares or financing activities for the fiscal year ended March 31, 2003. During the fiscal year ended March 31, 2002, the Company raised $101,884 by issuing 643,000 common shares upon conversion of warrants of the equal number by their holders and also issued 1,963,714 common shares in settlement of consulting fees of $476,393 22 The Company has not spent any funds on research and development during the fiscal years 2004 and 2003. In December 2002, the Company discontinued a project involving design and development of a prototype of a wireless and portable Internet appliance for medical data logging system on which the Company spent a net amount of $88,831. There are no trends, commitments, events or uncertainties presently known to management that are reasonably expected to have a material effect on the Company's business, financial condition or results of operation other than uncertainty as to the speculative nature of the business (Refer to the heading entitled "Risk Factors"). Not applicable. Not applicable. Not applicable. The following table sets forth all current directors and executive officers of the Company, with each position and office held by them in the Company, and the period of service as such: 23 Kam Shah joined the Company as a Chief Financial Officer and was appointed to the Board on January 3, 1999. He worked with Pricewaterhouse Coopers LLP and Ernst & Young. He is a US Certified Public Accountant and a Canadian Chartered Accountant. He has over fifteen years of international experience in corporate financial analysis, mergers & acquisitions. Mr. Shah is responsible for the financial and statutory matters of the Company and effective May 17, 2004, following resignation of the Chairman, Mr. Terence Robinson, has also assumed the responsibilities of the chairman of the Board and Chief Executive Officer of the Company until the next annual general meeting. Mr. Shah is also a consultant providing accounting and tax services to Current Capital Corp., (CCC) a private Ontario corporation, having its head office in Toronto. CCC provides investors' and media relations services to public companies including Bontan Corporation. Mr. Shah is a Chairman, CEO and CFO in First Empire Entertainment.com Inc., an Ontario reporting corporation engaged in the development, production, manufacture and distribution of commercial entertainment materials in all formats. Dean Bradley is a non-executive independent director based in Florida. He assists the Company from time to time in introducing new businesses and liaising with businesses in the USA in which the Company has equity interest. Mr. Bradley had been CEO of many corporations including real estate, mining, manufacturing, and import/export and financial services corporations. Kevin Markland is a non-executive independent director based in Toronto, Ontario. Mr. Markland also assists the company from time to time in liasing with businesses and making introductions on behalf of Bontan. Mr. Markland has experience in the entertainment industry and technology sector. Terence Robinson was Chairman of the Board and Chief Executive Officer of the Company since October 1, 1991. He resigned from the Board on May 17, 2004 but continues with the Company as a consultant. He will advise the board in the matters of shareholders relations, fund raising campaigns, introduction and evaluation of investment opportunities and overall operating strategies for the Company. He has over 18 years of experience as merchant banker and venture capitalist and has successfully secured financing for a number of start-up and small cap companies. 24 Management Team The Company's current management team consists only of Mr. Kam Shah whose background details are given above. Mr. Shah signed consulting agreements on April 1, 2000, for a term of five years. Copy of the agreement was included in the Exhibits attached to the annual report for the fiscal year 2001 submitted on July 23, 2001. The contract was ratified by the shareholders in their annual and special meeting on November 13, 2000. The compensation payable to directors and officers of the Company and its subsidiary is summarized below: 1. General The Company does not compensate directors for acting solely as directors. Except as described below, the Company does not have any arrangements pursuant to which directors are remunerated by the Company or its subsidiary for their services in their capacity as directors, other than options to purchase shares of the Company which may be granted to the Company's directors from time to time and the reimbursement of direct expenses. The Company does not have any pension plans. 2. Statement of Executive Compensation The Company had two named executive officers as at March 31, 2004. However, currently it has only one executive officer. The Statement of Executive Compensation required under Form 51-904F to the Securities Act requires disclosure of compensation for each Chief Executive Officer and for each of the Company's (including subsidiaries) four most highly compensated executive officers, other than the CEO, provided that disclosure is not required for an executive officer where total salary and bonus does not exceed $100,000. 25 Summary Compensation Table
Long Term Incentive Plan (LTIP) Awards The Company does not have a LTIP, pursuant to which cash or non-cash compensation intended to serve as an incentive for performance (whereby performance is measured by reference to financial performance or the price of the Company's securities) was paid or distributed to the Named Executive Officers during the most recently completed financial year. Defined Benefit or Actuarial Plan Disclosure There is no pension plan or retirement benefit plan that has been instituted by the Company and none are proposed at this time. Directors may be appointed at any time in accordance with the by-laws of the Company and then re-elected annually by the shareholders of the Company. Directors receive no compensation for serving as such, other than stock option and reimbursement of direct expenses. Officers are elected annually by the Board of Directors of the Company and serve at the discretion of the Board of Directors. The Company has not set aside or accrued any amount for retirement or similar benefits to the directors. Audit Committee The members of the audit committee consist of Terence Robinson and Dean Bradley. The audit committee is charged with overseeing the Company's accounting and financial reporting policies, practices and internal controls. The committee reviews significant financial and accounting issues and the services 26 performed by and the reports of our independent auditors and makes recommendations to our Board of Directors with respect to these and related matters. With the resignation of Mr. Robinson from the board effective May 17, 2004, the newly elected director, Kevin Markland became the member of the audit committee. Compensation Committee The Company does not currently have a Compensation Committee. The directors determined that, in light of the Company's size and resources, setting up such a committee would be too expensive for the Company at this time. The Company has, however, set up an Independent Review Committee of the Board to review and approve all non-arms' length contracts. This Committee has the same composition as the Audit Committee, and is currently comprised of all non-management directors and unrelated directors. The Company presently has no permanent employees. It uses the services of consultants from time to time. The company has "1999 Stock Option Plan" for its employees, consultants and directors under which it could issue up to 3 million options. The Company also has "2001 Consultant Stock Compensation Plan" under which it could issue up to 1.2 million common shares of the company to consultants for bona-fide services provided. Both the above plans have been registered with Securities and Exchange Commission on April 28, 2003. During the fiscal year 2004, 100,000 shares were issued to Mr. Kam Shah, CFO under 2001 Consultant Stock Compensation Plan. No options have been granted under 1999 Stock Option Plan. 27 The Company's securities are recorded on the books of its transfer agent in registered form. The majority of such shares are, however, registered in the name of intermediaries such as brokerage houses and clearing-houses on behalf of their respective clients. The Company does not have knowledge of the beneficial owners thereof. As at August 10, 2004, Intermediaries like CDS & Co, Toronto, Canada held approx. 20% of the issued and outstanding common shares of the company on behalf of several beneficial shareholders whose individual details were not available. The following are the other registered shareholders holding more than 5% of the common shares of the company as at August 10, 2004. At August 10, 2004, the Company had 11,211,386 shares of common stock outstanding, which, as per the details provided by the Transfer Agents, were held by 137 record holders excluding the beneficial shareholders held through the intermediaries, 82 of which, holding an aggregate of 1,747,573 shares (15.59%) of common stock, were in the United States. The Registrant is a publicly owned Canadian corporation, the shares of which are owned by Canadian residents, US residents, and residents of other countries. The Registrant is not owned or controlled directly or indirectly by another corporation or any foreign government. There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change of control of the Company. Transactions with related parties are incurred in the normal course of business and are measured at the exchange amount. Related party transactions and balances have been listed below: 28 Not applicable. Information regarding our financial statements is contained under the caption "Item 17. Financial Statements" below. Legal Proceedings There are no material legal proceedings in progress or to the knowledge of the Company, pending or threatened to which the Company is a party or to which any of its properties is subject. As explained under Item 5 - Operating and Financial Review and Prospects and in note 9(a) to the financial statements for the fiscal 2004, The Company received a Notice of Termination from a previous landlord, wherein the landlord claimed rent arrears of $28,924 and current plus next three months rent and damage for the loss of rent for the remaining term of the lease. The management is of the opinion that they have a strong case against the landlord for not paying such rent and penalty and considers the existing provision of approx. $37,000 adequate to cover any liability arising from the lease termination. Besides, no further communication was received from the landlord during the fiscal 2004. Dividend Policy Since its incorporation, the Company has not declared or paid, and has no present intention to declare or to pay in the foreseeable future, any cash dividends with respect to its Common Shares. Earnings will be retained to finance further growth and development of the business of the Company. However, if the Board of Directors declares dividends, all Common Shares will 29 participate equally in the dividends, and, in the event of liquidation, in the net assets, of the Company. The following is a summary of significant changes since the date of the financial statements included in this annual report. 30 The following table sets forth the reported high and low sale prices for the common shares of the Company as quoted on OTCBB or Pink Sheet. The following table outlines the annual high and low market prices for the five most recent fiscal years: The following table outlines the high and low market prices for each fiscal financial quarter for the two most recent fiscal periods and any subsequent period: The following table outlines the high and low market prices for each of the most recent six months: 31 Not applicable. The Company's common shares were traded on the Over The Counter Bulletin Board (OTCBB) under the symbol "Deal" and on Canadian Dealing Network (CDN) under the symbol "FDQI" until January 20, 1999. Effective January 21, 1999. The Company's shares were traded only on OTCBB. The symbol was further changed to "NMBC" on August 13, 1999 and then to "DCHK" on November 3, 1999. On May 26, 2000, the Company shares were de-listed from OTCBB and began trading on the "Pink Sheet" pending clearance of the Registration Statement, F-20 by Securities and Exchange Commission (SEC). The Company filed F-20 originally in December 1999 and then filed several amendments in response to the comments received from SEC to its submissions. The SEC clearance was finally received on June 16, 2000 and the common shares of the Company began trading again on OTCBB effective August 2, 2000. The company changed its name to Bontan Corporation Inc. On April 21, 2003 and its common shares began trading, and currently trade under a new symbol "BNTNF" on OTCBB. Not applicable. Not applicable. Not applicable. 32 This Form 20F is being filed as an Annual Report under the Exchange Act and, as such, there is no requirement to provide any information under this section. The Memorandum and Articles of the Company are incorporated by reference to the information in our registration statement on Form 20-F filed with the Securities and Exchange Commission, in Washington, D.C. on June 12, 2000 to which our Articles of Incorporation and Memorandum were filed as exhibits. No further changes have been made to the Company's Articles/Bylaws. Except for contracts entered into in the ordinary course of business, the Company has not entered into any material contracts in the preceding two years. There are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of the Company's common shares. Any remittances of dividends to United States residents are, however, subject to a 15% withholding tax (5% if the shareholder is a corporation owning at least 10% of the outstanding common shares of the Company) pursuant to Article X of the reciprocal tax treaty between Canada and the United States. See "Item 10 - Additional Information E. Taxation" - below. Except as provided in the Investment Canada Act (the "Act"), which has provisions which govern the acquisition of a control block of voting shares by non-Canadians of a corporation carrying on a Canadian business, there are no limitations specific to the rights of non-Canadians to hold or vote the common shares of the Company under the laws of Canada or the Province of Ontario or in the charter documents of the Company. Management of the Company considers that the following general summary fairly describes those provisions of the Act pertinent to an investment in the Company by a person who is not a Canadian resident (a "non-Canadian"). The Act requires a non-Canadian making an investment which would result in the acquisition of control of the Canadian business to notify the Investment Review Division of Industry Canada, the federal agency created by the Act; or in the case of an acquisition of a Canadian business, the gross value of the assets of which 33 exceeds certain threshold levels or the business activity of which is related to Canada's cultural heritage of national identity, to file an application for review with the Investment Review Division. The notification procedure involves a brief statement of information about the investment on a prescribed form, which is required to be filed with Investment Canada by the investor at any time up to 30 days following implementation of the investment. Once the completed notice has been filed, a receipt bearing the certificate date will be issued to the non-Canadian investor. The receipt must advise the investor either that the investment proposal is unconditionally non-reviewable or that the proposal will not be reviewed as long as notice of review is not issued within 21 days of the date certified under the receipt. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada's cultural heritage and national identity. If an investment is reviewable under the Act, an order for review must be issued within 21 days after the certified date on which notice of investment was received. An application for review in the form prescribed is required to be filed with Investment Canada prior to the investment taking place. Once the application has been filed, a receipt will be issued to the applicant, certifying the date on which the application was received. For incomplete applications, a deficiency notice will be sent to the applicant, and if not done within 15 days of receipt of application, the application will be deemed to be complete as of the date it was received. Within 45 days after the complete application has been received, the Minister responsible for the Investment Canada Act must notify the potential investor that the Minister is satisfied that the investment is likely to be of net benefit to Canada. If within such 45-day period the Minister is unable to complete the review, the Minister has an ad
ditional 30 days to complete the review, unless the applicant agrees to a longer period. Within such additional period, the Minister must advise either that he is satisfied or not satisfied that the investment is likely to be of net benefit to Canada. If the time limits have elapsed, the Minister will be deemed to be satisfied that the investment is likely to be of net benefit to Canada. The investment may not be implemented until the review has been completed and the Minister is satisfied that the investment is likely to be of net benefit to Canada. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian must not implement the investment or, if the investment has been implemented, could be penalized by being required to divest himself of control of the business that is the subject of the investment. To date, the only types of business activities which have been prescribed by regulation as related to Canada's cultural heritage or national identity deal largely with publication, film and music industries. Because the Company's total assets are less than the $5 million notification threshold, and because the Company's business activities would likely not be deemed related to Canada's cultural heritage or national identity, acquisition of a controlling interest in the Company 34 by a non-Canadian investor would not be subject to even the notification requirements under the Investment Canada Act.The following investments by non-Canadians are subject to notification under the Act: The following investments by a non-Canadian are subject to review under the Act: Generally speaking, an acquisition is direct if it involves the acquisition of control of the Canadian business or of its Canadian parent or grandparent and an acquisition is indirect if it involves the acquisition of control of a non-Canadian parent or grandparent of an entity carrying on the Canadian business. Control may be acquired through the acquisition of actual voting control by the acquisition of voting shares of a Canadian corporation or through the acquisition of substantially all of the assets of the Canadian business. No change of voting control will be deemed to have occurred if less than one-third of the voting control of a Canadian corporation is acquired by an investor. 35 A WTO investor, as defined in the Act, includes an individual who is a national of a member country of the World Trade Organization or who has the right of permanent residence in relation to that WTO member, a government or government agency of a WTO investor-controlled corporation, limited partnership, trust or joint venture and a corporation, limited partnership, trust or joint venture that is neither WTO-investor controlled or Canadian controlled of which two-thirds of its board of directors, general partners or trustees, as the case may be, or any combination of Canadians and WTO investors. The higher thresholds for WTO investors do not apply if the Canadian business engages in activities in certain sectors such as uranium, financial services, transportation services or communications. The Act specifically exempts certain transactions from either notification or review. Included among this category of transactions is the acquisition of voting shares or other voting interests by any person in the ordinary course of that person's business as a trader or dealer in securities. Material Canadian Federal Income Tax Consequences Management of the Company believes that the following general summary accurately describes all material Canadian federal income tax consequences applicable to a holder of common shares of the Company who is a resident of the United States and who is not a resident of Canada and who does not use or hold, and is not deemed to use or hold, his common shares of the Company in connection with carrying on a business in Canada (a "non-resident holder"). This summary is based upon the current provisions of the Income Tax Act (Canada) (the "ITA"), the regulations there under (the "Regulations"), the current publicly announced administrative and assessing policies of Canada, Customs and Revenue Agency, and all specific proposals (the "Tax Proposals") to amend the ITA and Regulations announced by the Minister of Finance (Canada) prior to the date hereof. This summary assumes that the Tax Proposals will be enacted in their form as of the date of this Annual Report. This description, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by legislative, government or judicial action, nor does it take into account provincial, territorial, or foreign tax considerations, which may differ significantly from those, discussed herein. Dividends Dividends paid on the common shares of the Company to a non-resident holder will be subject to withholding tax. The Canada-U.S. Income Tax Convention 36 (1980) (the "Treaty") provides that the normal 25% withholding tax rate under the ITA is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as the Company) to beneficial owners of the dividends who are residents of the United States, and also provides for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation that is a resident of the United States which owns at least 10% of the voting shares of the corporation paying the dividend. Capital Gains Under the ITA, a taxpayer's capital gain or capital loss from a disposition of a share of the Company is the amount, if any, by which his proceeds of disposition exceed (or are exceeded by) the aggregate of his adjusted cost base of the share and reasonable expenses of disposition. One half of a capital gain (the "taxable capital gain") is included in income, and one half of a capital loss in a year (the "allowable capital loss") is deductible from taxable capital gains realized in the same year. The amount by which a shareholder's allowable capital loss exceeds his taxable capital gains in a year may be deducted from a taxable capital gain realized by the shareholder in the three previous or any subsequent year, subject to certain restrictions in the case of a corporate shareholder. A non-resident holder is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of a share of a public corporation unless the share represents "taxable Canadian property" to the holder thereof. The Company is a public corporation for purposes of the ITA and a common share of the Company will be taxable Canadian property to a non-resident holder if, at any time during the period of five years immediately preceding the disposition, the non-resident holder, persons with whom the non-resident holder did not deal at arm's length, or the non-resident holder and persons with whom he did not deal at arm's length together owned not less than 25% of the issued shares of any class of shares of the Company. Where a non-resident holder who is an individual ceased to be resident in Canada, and at the time he ceased to be a Canadian resident elected to have his Company shares treated as taxable Canadian property, he will be subject to Canadian tax on any capital gain realized on disposition of the Company's shares, subject to the relieving provisions of the Treaty described below. Shares of the Company may also be taxable Canadian property to a holder if the holder acquired them pursuant to certain tax-deferred "rollover" transactions whereby the holder exchanged property that was taxable Canadian property for shares of the Company. Where the non-resident holder realized a capital gain on a disposition of the Company shares that constitute taxable Canadian property, the Treaty relieves the non-resident shareholder from liability for Canadian tax on such capital gains unless: 37 Material United States Federal Income Tax Consequences The following summary is a general discussion of the material United States Federal income tax considerations to U.S. holders of shares of the Company under current law. This discussion assumes that U.S. holders hold their shares of the Company's common stock as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). It does not discuss all the tax consequences that may be relevant to particular holders in light of their circumstances or to holders subject to special rules, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of shares of the Company is not effectively connected with the conduct of a trade or business in the United States, shareholders who acquired their stock through the exercise of employee stock options
or otherwise as compensation, shareholders who hold their stock as ordinary assets and not capital assets and any other non-U.S. holders. In addition, U.S. holders may be subject to state, local or foreign tax consequences. No opinion or representation with respect to the United States Federal income tax consequences to any such holder or prospective holder is being made by the Company herein. Holders and prospective holders should therefore consult with their own tax advisors with respect to their particular circumstances. This discussion covers all material tax consequences. The following discussion is based upon the sections of the Code, Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. This decision does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation that, if enacted, could be applied, possibly on a retroactive basis, at 38 any time. Accordingly, holders and prospective holders of shares of the Company should consult their own tax advisors about the Federal, state, local, estate, and foreign tax consequences of purchasing, owning and disposing of shares of the Company. U.S. Holders As used herein, a "U.S. Holder" includes a holder of shares of the Company who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, any entity that is taxable as a corporation for U.S. tax purposes and any other person or entity whose ownership of shares of the Company is effectively connected with the conduct of a trade or business in the United States. A U.S. Holder does not include persons subject to special provisions of Federal income tax law, such as tax exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of shares of the Company is not effectively connected with conduct of trade or business in the United States, shareholders who acquired their stock through the exercise of
employee stock options or otherwise as compensation and shareholders who hold their stock as ordinary assets and not as capital assets. Distributions on Common Shares of the Company U.S. Holders receiving dividend distribution (including constructive dividends) with respect to shares of the Company are required to include in gross income for United States Federal income tax purposes the gross amount of such distribution to the extent that the Company has current or accumulated earnings and profits as defined under U.S. Federal tax law, without reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holder's United States Federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's United States Federal taxable income by those who itemize deductions. (See more detailed discussion at "Foreign Tax Credit" below). To the extent that distributions exceed current or accumulated earnings and profits of the Company, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the shares and th
ereafter as gain from the sale or exchange of the shares. Preferential tax rates for long-term net capital gains are applicable to a U.S. Holder that is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a corporation. Dividends paid on the shares of the Company will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. A U.S. Holder that is a corporation may, under certain circumstances, be entitled to a 70% deduction of the United States 39 source portion of dividends received from the Company (unless the Company qualifies as a "foreign personal holding company" or a "passive foreign investment company", as defined below) if such U.S. Holder owns shares representing at least 10% of the voting power and value of the Company. The availability of this deduction is subject to several complex limitations that are beyond the scope of this discussion. In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally, any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss. However, for tax years after 1997, an individual whose realized foreign exchange gain does not exceed U.S. $200 will not recognize that gain, to the extent that there are not expenses associated with the transaction that meet the requirement for deductibility as a trade or business expense other than travel expenses in connection with a business trip (or as an expense for the production of income). Foreign Tax Credit A U.S. Holder who pays (or has withheld from distribution) Canadian income tax with respect to the ownership of shares of the Company may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States Federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the U.S. Holder during the year. There are significant and complex limitations that apply to the credit; among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States Federal income tax liability that the U.S. Holder's foreign source income bears to this or its worldwide taxable income. In the determination of the application of this limitation, t
he various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", "shipping income", and certain other classifications of income. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of shares of the Company should consult their own tax advisors regarding their individual circumstances. Information Reporting and Backup Withholding U.S information reporting requirements may apply with respect to the payment of dividends to U.S. Holders of the Company's common shares. Under Treasury 40 regulations currently in effect, non-corporate holders may be subject to backup withholding at a 31% rate with respect to dividends when such holder (1) fails to finish or certify a correct taxpayer identification number to the payor in the required manner, (2) is notified by the IRS that it has failed to report payments of interest or dividends properly or (3) fails, under certain circumstances, to certify that it has been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. Any amounts withheld under the backup withholding rules from a payment to a U.S. Holder generally will be allowed as a credit against the U.S. Holder's U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is furnished to the IRS. Certain U.S. Holders, including corporations, are not subject to backup withholding. Disposition of Common Shares of the Company A U.S. Holder will recognize a gain or loss upon the sale of shares of the Company equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholders tax basis in the shares of the Company. This gain or loss will be a capital gain or loss if the shares are a capital asset in the hands of the U.S. Holder, and will be a short-term or long-term capital gain or loss depending upon the holding period of the U.S. Holder. Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year. Deductions for net capital loss are subject to significant limitations. Corporate capital losses (other than losses of corporations electing under Subchapter S of the Code) are deductible to the extent of capital gains. Non-corporate taxpayers may deduct net capital losses, whether short-term or long-germ, up to U.S. $3,000 a year (U.S. $1,500 in the case of a
married individual filing separately). For U.S. Holders, which are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted. Currency Exchange Gains or Losses U.S. holders generally are required to calculate their taxable incomes in United States dollars. Accordingly, a U.S. holder who purchases common shares of the Company with Canadian dollars will be required to determine the tax basis of such shares in United States dollars based on the exchange rate prevailing on the settlement date of the purchase (and may be required to recognize the unrealized gain or loss, if any, in the Canadian currency surrendered in the purchase transaction). Similarly, a U.S. holder receiving dividends or sales proceeds from common shares of the Company in Canadian dollars will be 41 required to compute the dividend income or the amount realized on the sale, as the case may be, in United States dollars based on the exchange rate prevailing at the time of receipt in the case of dividends and on the settlement date in the case of sales on an established securities exchange. Gain or loss, if any, recognized on a disposition of Canadian currency in connection with the described transactions generally will be treated as ordinary gain or loss. Other Considerations In the following circumstances, the above sections of this discussion may not describe the United States Federal income tax consequences resulting from the holding and disposition of common shares of the Company (the Company does not believe that it will qualify in the next year, or has qualified within the past three fiscal years, as a "foreign personal holding company", "foreign investment company", "passive foreign investment company" or "controlled foreign corporation" as discussed below): Foreign Personal Holding Company If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Company's outstanding shares is owned, directly or indirectly, by five or fewer individuals who are citizens of the United States and 60% or more of the Company's gross income for such year was derived from certain passive sources (e.g., from dividends received from its subsidiaries), the Company would be treated as a "foreign personal holding company". In that event, U.S. Holders that hold common shares of the Company (on the earlier of the last day of the Company's tax year or the last date in which the Company was a foreign personal holding company) would be required to include in gross income for such year their allocable portions of such passive income to the extent the Company does not actually distribute such income. Foreign Investment Company If 50% or more of the combined voting power or total value of the Company's outstanding shares are held, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), and the Company is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, it is possible that the Company might be treated as a "foreign investment company" as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging common shares of the Company to be treated as ordinary income rather than capital gains. 42 Passive Foreign Investment Company As a foreign corporation with U.S. Holders, the Company could potentially be treated as a passive foreign investment company ("PFIC"), as defined in Section 1297 of the Code, depending upon the percentage of the Company's income which is passive, or the percentage of the Company's assets which are producing passive income (generally 75% or more of its gross income in a taxable year is passive income, or the average percentage of the Company's assets (by value) during the taxable year which produce passive income or which are held for production of same is at least 50%). Passive income is generally defined to include gross income in the nature of dividends, interest, royalties, rents and annuities; excess of gains over losses from certain transactions in any commodities not arising inter alia from a PFIC whose business is actively involved in such commodities; certain foreign currency gains; and other similar types of income. U.S. Holders owning shares of a PFIC are subject to an
additional tax and to an interest charge based on the value of deferral of tax for the period during which the common shares of the PFIC are owned, in addition to treatment of gain realized on the disposition of common shares of the PFIC as ordinary income rather than capital gain. However, if the U.S. Holder makes a timely election to treat a PFIC as a qualified electing fund ("QEF") with respect to such shareholder's interest therein, the above-described rules generally will not apply. Instead, the electing U.S. Holder would include annually in his gross income his pro rata share of the PFIC's ordinary earnings and net capital gain regardless of whether such income or gain was actually distributed. A U.S. Holder of a QEF can, however, elect to defer the payment of United States Federal income tax on such income inclusions. Special rules apply to U.S. Holders who own their interests in a PFIC through intermediate entities or person. Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S. Holders who hold, actually or constructively, marketable stock of a foreign corporation that qualifies as a PFIC may elect to mark such stock to the market (a "mark-to-market election"). If such an election is made, such U.S. Holder will not be subject to the special taxation rules of PFIC described above for the taxable year for which the mark-to-market election is made. A U.S. Holder who makes such an election will include in income for the taxable year an amount equal to the excess, if any, of the fair market value of the shares of the Company as of the close of such tax year over such U.S. Holder's adjusted basis in such shares. In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in the shares over the fair market value of such shares as of the close of the tax year, or (ii) the excess, if any of (A) the mark-to-m
arket gains for the shares in the Company included by such U.S. Holder for prior tax years, including any amount which would have been included for any prior year but for Section 1291 interest on tax deferral rules discussed above with respect to a U.S. Holder, who has not made a timely QEF election during the year in which he holds (or is deemed to have held) shares in the Company and the Company is a PFIC ("Non-Electing U.S. Holder"), over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years. A U.S. Holder's adjusted tax basis in the shares of the Company will 43 be increased or decreased to reflect the amount included or deducted as a result of mark-to-market election. A mark-to-market election will apply to the tax year for which the election is made and to all later tax years, unless the PFIC stock ceases to be marketable or the IRS consents to the revocation of the election. The IRS has issued proposed regulations that, subject to certain exceptions, would treat as taxable certain transfers of PFIC stock by a Non-Electing U.S. Holder that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. Generally, in such cases, the basis of the Company's shares in the hands of the transferee and the basis of any property received in the exchange for those shares would be increased by the amount of gain recognized. A U.S. Holder who has made a timely QEF election (as discussed below) will not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganization, and transfers at death. The transferee's basis in this case will depend on the manner of transfer. The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the shares of the Company are transferred. Each U.S. Holder should consult a tax advisor with respect to how
the PFIC rules affect their tax situation. The PFIC and QEF election rules are complex. U.S. Holders should consult a tax advisor regarding the availability and procedure for making the QEF election as well as the applicable method for recognizing gains or earnings and profits under the foregoing rules. Controlled Foreign Corporation If more than 50% of the voting power of all classes of stock or total value of the stock of the Company is owned, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom owns 10% or more of the total combined voting power of all classes of stock of the Company ("United States shareholder"), the Company could be treated as a "controlled foreign corporation" under Subpart F of the Code. This classification would effect many complex results including the required inclusion by such United States shareholders in income of their pro rata shares of "Subpart F income" (as specifically defined by the Code) of the Company. Subpart F requires current inclusions in the income of United States shareholders to the extent of a controlled foreign corporation's accumulated earnings invested in "excess passive" assets (as defined
by the Code). In addition, under Section 1248 of the Code, gain from sale or exchange of stock by a holder of common shares of the Company who is or was a United States shareholder at any time during the five year period ending with the sale or exchange is treated as ordinary dividend income to the extent of earnings and profits of the Company attributable to the stock sold or exchanged. Because of the complexity of Subpart F, and because it is not clear that Subpart F would apply to the holders of common shares of the 44 Company, a more detailed review of these rules is outside the scope of this discussion. If the Company is both a PFIC and controlled foreign corporation, the Company will generally not be treated as a PFIC with respect to United States shareholders of the controlled foreign corporation. This rule generally will be effective for taxable years of the Company ending with or within such taxable years of United States shareholders. The foregoing summary is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. This discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation that, if enacted, could be applied, possibly on a retroactive basis, at any time. Accordingly, holders and prospective holders of shares of the Company should consult their own tax advisors about the Federal, state, local, estate, and foreign tax consequences of purchasing, owning and disposing of shares of the Company. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF CANADIAN OR US FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF COMMON STOCK IN LIGHT OF SUCH HOLDER'S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES THAT WOULD RESULT FROM THEIR OWNERSHIP AND DISPOSITION OF COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN LAWS. Not applicable. Not applicable. The documents concerning the Company referred to in this Annual Report may be inspected at the Company's office at 47 Avenue Road, Suite 200, Toronto, Ontario, Canada, M5R 2G3. The Company may be reached at (416) 860-0211. Documents filed with the Securities and Exchange Commission ("SEC") may also be read and copied at the SEC's public reference room at Room 1024, 45 Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The Company is subject to reporting requirements as a "reporting issuer" under applicable securities legislation in Canada and as a "foreign private issuer" under the Securities Exchange Act of 1934 (the "Exchange Act"). As a result, we must file periodic reports and other information with the Canadian securities regulatory authorities and the Securities and Exchange Commission. A copy of this Annual Information Form/Form 20-F Annual Report and certain other documents referred to in this Annual Report and other documents filed by us may be retrieved from the system for electronic document analysis and retrieval ("SEDAR") system maintained by the Canadian securities regulatory authorities at www.sedar.ca or from the Securities and Exchange Commission electronic data gathering, analysis and retrieval system("EDGAR") at www.sec.gov/edgar. The documents concerning the Company's subsidiaries referred to in this Annual Report may be inspected at the Company's office at 47 Avenue Road, Suite 200, Toronto, Ontario, Canada, M5R 2G3. The Company holds no material financial instruments. The Company is exposed to foreign currency exchange rate risk as it currently incurs liabilities in United States dollars and Canadian dollars. Further, the Company also plans activities in different countries involving different local currencies. Exchange rates for these currencies in the future may have an adverse effect on our earnings or assets when these currencies are exchanged for Canadian dollars. The Company has not entered into forward foreign exchange contracts in an attempt to mitigate this risk. To date, losses and gains resulting from foreign exchange transactions have been included in our results of operations. Further discussion of foreign currency risk is set forth in Item 3 D under the heading, "Exchange Rate Risk". The Company has no debt instruments subject to interest payments, sales contracts, swaps, derivatives, or forward agreements or contracts, or inventory. The Company has no currency or commodity contracts, and the Company does not trade in such instruments. 46 The Company periodically accesses the capital markets with the issuance of new shares to fund operating expenses and new projects, and the Company does not maintain significant cash reserves over periods of time that could be materially affected by fluctuations in interest rates or foreign exchange rates. Not applicable. None. No modifications or qualifications have been made in the prior Fiscal Year to the instruments defining the rights of the holders of our Common Shares and no material amount of assets securing our securities has been withdrawn or substituted by us or anyone else (other than in the ordinary course of business). On April 21, 2003, certain corporate changes were made which involved a 7:1 reverse split, buy-back of fractional shares and a private placement offering. These changes and their effect have been fully explained under Item 5(B), Financing Activities. A. Evaluation of Disclosure Controls and Procedures The Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or the Company's consolidated subsidiaries) required to be included in the Company's periodic SEC filings. 47 B. Changes in Internal Controls There were no significant changes made in the Company's internal controls or, to the Company's knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation. On May 17, 2004, Mr. Terence Robinson resigned from the board as CEO. He was replaced by Mr. Kevin Markland as non executive independent director. Mr. Kam Shah assumed the dual role of CEO and CFO and is currently the only executive director of the Company. Given the current size and nature of operations of the Company, strong financial and business background of Mr. Shah and existence of two independent directors out of three, the Company believes that these changes would not adversely affect the Company's disclosure controls and procedures. As at the Company's financial year ended March 31, 2004, the audit committee consisted of two directors, one of whom, Mr. Dean Bradley would be determined as a financial expert, as that term is defined under Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Bradley's background is described under Item 6(A) Directors and senior management. Effective May 17, 2004, Mr. Kevin Markland, a newly appointed director was appointed to the audit committee to replace Mr. Terence Robinson, who resigned from the board effective that date. Mr. Dean Bradley continues as a financial expert. The Board of Directors has determined that, prior to the fiscal year end March 31, 2005, it will adopt a Code of Business Conduct and corporate governance mandate due to changes in its board in May 2004 and election of a new board in the forthcoming annual general meeting of its shareholders. The following outlines the expenditures for accounting fees for the last two fiscal periods ended: 48 Under our existing policies, the audit committee must approve all audit and non-audit related services provided by the auditors. The Company's auditors changed during the fiscal year 2004. Sloan Paskowitz Adelman LLP replaced DMCT LLP effective fiscal year ended March 31, 2004. See item 4(B) overview of the fiscal year ended March 31, 2004 for further details. The information referred to in this section is not required as to the fiscal year ended March 31, 2004, which is the period covered by this Annual Report on Form 20-F. The information referred to in this section is not required as to the fiscal year ended March 31, 2004, which is the period covered by this Annual Report on Form 20-F. See the Financial Statements and Exhibits listed in Item 19 hereof and filed as part of this Annual Report. These financial statements were prepared in accordance with Canadian GAAP and are expressed in Canadian dollars. Such financial statements have been reconciled to U.S. GAAP (see Note 14 therein). For a history of exchange rates in effect for Canadian dollars as against U.S. dollars, see Item 3(A) Exchange Rates of this Annual Report. Not applicable. 49 (a) Financial Statements (b) Exhibits 50 51 The Company hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
Dated at Toronto, Ontario, Canada, this 17th day of August, 2004. BONTAN CORPORATION INC. Per: /s/ Kam Shah 52 F-1 [LOGO] Sloan Paskowitz Adelman LLP AUDITORS' REPORT
To the Shareholders of Bontan Corporation Inc. We have audited the consolidated balance sheet of Bontan Corporation Inc. as at March 31, 2004 and the consolidated statements of operations, shareholders' equity and cash flows for the year then ended. 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 Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2004 and the results of its operations and cash flows for the year then ended, in accordance with Canadian generally accepted accounting principles.
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(C) ORGANIZATIONAL STRUCTURE
Subsidiary
Date of
incorporation /
acquisition
Comments on
current status
Foodquest Inc.
Inactive since 1998 is currently a shell with no assets or liabilities.
1388755 Ontario Inc.
Inactive since April 2003. The subsidiary was engaged in development of a prototype of a wireless and portable Internet appliance for medical data logging system. However, due to several technical problems, the project was shelved and all investment written off.
Bontan Diamond
Corporation
20-Feb-04
Will acquire a subsidiary in Brazil and will engage in Diamond mining in brazil through joint ventures.
Bontan Oil
& Gas Corporation
20-Feb-04
Indirect participation interest in oil exploration in Papua New Guinea.
Bontan Gold Corporation
20-Feb-04
Not yet active.
Bontan Mineral Corporation
20-Feb-04
Not yet active.
Bontan Trading Corporation
20-Feb-04
Not yet active.
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(D) PROPERTY PLANTS AND EQUIPMENT
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
(A) OPERATING RESULTS
Year Ended March 31,
2004
2003
2002
in 000' CDN$
Income
47
15
67
Expenses
1408
335
1400
Net Loss for year
(1,361)
(320)
(1,333)
Deficit at end of year
(22,069)
(20,708)
(20,388)
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Year Ended March, 31
2004
2003
2002
Operating expenses
$1,407,916
$245,788
$1,135,654
Net loss on investment
-
-
263,832
Product development costs
-
88,831
300
$1,407,916
$334,619
$1,399,786
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Year Ended March 31,
2004
2003
2002
Travel, meals and entertainment
$50,005
$871
$37,451
Consulting
1,055,341
104,684
344,205
Promotion
677
-
123,326
$1,106,023
$105,555
$504,982
% of operating expenses
79%
43%
44%
Fees charged by four independent consultants
638,177
Fees charged by a corporate shareholder, Snapper Inc.
267,894
Fees paid to Chief Executive Officer
112,150
$1,018,221
% of operating expenses
96%
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(B) LIQUIDITY AND CAPITAL RESOURCES
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i.
On April 21, 2003, the Company carried out a reverse stock split under which one new common share of the Company was issued for every seven old common shares.
ii.
Under the Company's policy to deal with fractional shares arising from the reverse stock split per i above, the Holders of less than sixty four old common shares of the Company were not issued any new shares Instead, they were entitled to a payment of $0.21US per common share. As a result, 3,255 old common shares being equal to 465 new common shares valued at $684US ($939CDN) became eligible under the buy-back plan. The Company set up an accrual for this liability. The actual payments made to March 31, 2004 were $212.
iii.
On April 28, 2003, the Company reached an agreement with certain accredited investors for a private placement of up to 7,143,000 (seven million one hundred forty three thousand) Units at US$0.35 per Unit for a gross proceeds of about US$2.5 million. Each Unit includes one common share and one common share purchase warrant. Each warrant entitles its holder to acquire one common share of the company at a price of US$1.00 within twenty-four months of the date of issuance of the Unit. The shares issued under this private placement would be restricted in terms of their transferability and saleability in accordance with the relevant regulatory requirements. 7, 536,444 Units were subscribed and paid for up to March 31, 2004. Shares relating to 6,705,015 units were issued by that date while the shares relating to the balance of the subscription of 831,429 units were issued subsequent to March 31, 2004. Expenses relating to the private placement represented finder's fee of 10% of the subscription
. Private placement was over subscribed to 8,879,571 units and was closed on May 26, 2004. None of the warrants were exercised as at March 31, 2004.
iv.
225,000 shares were issued to two consultants including 100,000 to an executive director under 2001 Consultant Stock Option Plan.
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(C) RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
(D) TREND INFORMATION
(E) OFF-BALANCE SHEET ARRANGEMENTS
(F) CONTRACTUAL OBLIGATIONS
(G) SAFE HARBOUR
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
(A) DIRECTORS AND SENIOR MANAGEMENT
Name and Position
Commencement of
With the Company
Service
Kam Shah
January 3, 1999
as Director and Chief Financial Officer
Director and Chairman,
Chief Executive Officer,
and Chief Financial Officer
May 17, 2004
as Chairman and Chief Executive Officer
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Dean Bradley
Director
November 13, 2000
Kevin Markland
Director
May 17, 2004
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(B) COMPENSATION
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Annual Compensation
Long term
Awards
Compensation
Payouts
Name and principal
position
Year
Fee $
Bonus
Other
Securities
under Options
(#)
Restricted
shares or
restricted
shares
units ($)
LTIP
payout
All other
compensation
Terence Robinson
CEO
2004
112,150
nil
4,500
Nil
Nil
N/A
nil
2003
nil
nil
Nil
Nil
N/A
nil
2002
118,100
nil
Nil
Nil
N/A
nil
Kam Shah
CFO
2004
65,525
nil
348
Nil
Nil
N/A
nil
2003
7,000
nil
Nil
Nil
N/A
nil
2002
121,811
nil
Nil
Nil
N/A
nil
(C) BOARD PRACTICES
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(D) EMPLOYEES
(E) SHARE OWNERSHIP
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ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
(A) MAJOR SHAREHOLDERS
Name of Shareholder
No. of Shares
% of Issued Shares
LOM Nominees Ltd.
642,271
5.73%
Snapper Inc.
1,756,706
15.67%
(B) RELATED PARTY TRANSACTIONS
•
Included in shareholders information expense is $160,627 (2003 - $60,000; 2002 - $120,000) to Current Capital Corp, which is a shareholder corporation and where the directors of the Company serve as consultants.
•
Rent and telephone expense are net of recoveries of $Nil (2003 - $nil; 2002 - $79494) from corporations, where the directors of the Company are consultants or directors.
•
Current Capital Corp charged approx. $62,000 towards the rental,
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telephone, consultants' fees and other office expenses (2003: $34,000 and 2002: $Nil).
•
Included in professional and consulting fees are fees of $111,377(2003: $nil, 2002 - $149,438) paid to an ex-director for consulting services.
•
Business expenses of $56,485 (2003 - $nil; 2002 - $32,451) were reimbursed to directors of the corporation.
•
Consulting fees include amounts to Snapper Inc., a shareholder corporation of $267,894 (2003 - $92,682; 2002 - $94,026).
(C) INTERESTS OF EXPERTS AND COUNSEL
ITEM 8 - FINANCIAL INFORMATION
(A) CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
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(B) SIGNIFICANT CHANGES
a.
On May 17, 2004, Mr. Terence Robinson resigned as a Chairman and CEO of the Company and in his place Mr. Kam Shah, the CFO assume the responsibilities of Chairman and CEO of the Company effective the same date until the next annual general meeting. Further, Mr. Kevin Markland was appointed as a non-executive, independent director to replace Mr. Terence Robinson.
b.
On May 26, 2004 the Company completed its private placement, which commenced on April 28, 2003, to accredited investors for 8,879,571 Units at US$0.35 per Unit.
c.
The Company's subsidiary, Bontan Diamond Corporation, acquired on June 14, 2004 100% equity in a Brazilian Corporation, Astrogemas Mineraçao Ltda ("AML"). The management of AML has the right to earn back a 40% interest subject to meeting certain agreed performance milestones. AML holds 50 per cent participation rights in two joint ventures to explore for and mine diamonds in the Coromandel region of Minas Gerais state in Brazil.
d.
On July 9, 2004, the Company converted its advances to a non-affiliated corporation for the purpose of acquiring indirect participation interest (IPI) in an oil exploration program in Papua New Guinea into (i) US$270,900 into 15,262 shares of InterOil Corporation according to the terms of the IPI agreement and (ii) the balance of the advances of approx. US$1.6 million in approx. 0.75% IPI. (See further details in Item 4(B) - overview of the fiscal year ended March 31, 2004.)
e.
On July 22, 2004, the Company registered with Securities and Exchange Commission, two new Plans by filing of the registration statement in Form S-8. The two Plans comprise the 2003 Stock Option Plan covering 2.5 million common shares of the Company and 2003 Consultant Stock Compensation Plan covering 1 million common shares of the Company.
f.
Issued the remaining 980,714 shares under the 2001 Consultant Stock Compensation Plan in May 2004.
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ITEM 9 - THE OFFER AND LISTING
(A) OFFER AND LISTING DETAILS
Fiscal year ended March 31
High
in US$
Low
in US$
2004
2.47
.03*
2003
.34
.03
2002
.69
.04
2001
2.88
.13
2000
7.06
2.16
Fiscal Quarter ended
High
in US$
Low
in US$
June 30,2004
2.05
.90
March 31, 2004
2.47
1.01
December 31, 2003
1.45
.80
September 30, 2003
2.05
.80
June 30, 2003
1.45
.03*
March 31, 2003
.07
.03
December 31, 2002
.29
.04
September 30, 2002
.34
.06
June 30, 2003
.28
.06
Month
High
in US$
Low
in US$
July 31, 2004
1.13
.50
June 30, 2004
1.68
.90
May 31, 2004
1.78
1.05
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April 30, 2004
2.08
1.45
February 28, 2004
2.47
1.75
(B) PLAN OF DISTRIBUTION
(C) MARKETS
(D) SELLING SHAREHOLDERS
(E) DILUTION
(F) EXPENSES OF THE ISSUE
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ITEM 10 - ADDITIONAL INFORMATION
(A) SHARE CAPITAL
(B) MEMORANDUM AND ARTICLES OF ASSOCIATION
(C) MATERIAL CONTRACTS
(D) EXCHANGE CONTROLS
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1.
An investment to establish a new Canadian business; and
2.
An investment to acquire control of a Canadian business that is not reviewable pursuant to the Act.
1.
Direct acquisition of control of Canadian businesses with assets of $5 million or more, unless the acquisition is being made by a World Trade Organization ("WTO") member country investor (the United States being a member of the WTO);
2.
Direct acquisition of control of Canadian businesses with assets of $237,000,000 or more by a WTO investor;
3.
Indirect acquisition of control of Canadian business with assets of $5 million or more if such assets represent more than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by a WTO investor, in which case there is no review;
4.
indirect acquisition of control of Canadian businesses with assets of $50 million or more even if such assets represent less than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by a WTO investor, in which case there is no review; and
5.
An investment subject to notification that would not otherwise be reviewable if the Canadian business engages in the activity of publication, distribution or sale of books, magazines, periodicals, newspapers, film or video recordings, audio or video music recordings, or music in print or machine-readable form.
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(E) TAXATION
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(a)
The value of the shares is derived principally from "real property" in Canada, including the right to explore for or exploit natural resources and rights to amounts computed by reference to production from natural resources, which is the case for the Company,
(b)
The non-resident holder is an individual who was resident in Canada for not less than 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he ceased to be resident in Canada or are property substituted for property that was owned at that time, or
(c)
The shares formed part of the business property of a "permanent establishment" or pertained to a fixed base used for the purpose of performing independent personal services that the shareholder has or had in Canada within the 12 months preceding the disposition.
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(F) DIVIDEND AND PAYING AGENTS
(G) STATEMENT BY EXPERTS
(H) DOCUMENTS ON DISPLAY
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(I) SUBSIDIARY INFORMATION
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15 - CONTROLS AND PROCEDURES
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ITEM 16 - RESERVED
ITEM 16 - (A) AUDIT COMMITTEE FINANCIAL EXPERTS
ITEM 16 - (B) CODE OF ETHICS
ITEM 16 - (C) PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
March 31
2004
March 31
2003
Audit Fees (1)
10,000
12,860
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Audit Related Fees
0
0
Tax Fees
0
0
All Other Fees (2)
0
875
(1)
Audit fee for the fiscal year 2004 has not yet been agreed. The amount shown is the management's estimate.
(2)
Other fees relate to services rendered in connection with opinions rendered and reviews carried out in respect of various filings with SEC.
ITEM 16 - (D) EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16 - (E) PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PART III
ITEM 17 - FINANCIAL STATEMENTS
ITEM 18 - FINANCIAL STATEMENTS
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ITEM 19 -- EXHIBITS
Description of Document
Page
No.
Cover Sheet
F-1
Independent Auditor's Report dated August 10, 2004
F-2
Comments by Auditors for US Readers on Canada-US
Reporting DifferencesF-3
Consolidated Balance Sheets as at March 31, 2004 and 2003
F-4
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 2004, 2003, and 2002F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2004, 2003, and 2002F-6
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended March 31, 2004, 2003, and 2002F-7
Notes to the Financial Statements
F-8
1.1
Articles of Incorporation of the Company - Incorporated herein by reference to Exhibit 1(ix) to the Company's Registration Statement on Form 20-F filed on June 12, 2000
1.2
By-Laws of the Company - Incorporated herein by reference to Exhibit 1(xi) to the Company's Registration Statement on Form 20-F filed on June 12, 2000
1.3
Certificate of name change from Kamlo Gold Mines Limited to NRT Research Technologies Inc. - Incorporated herein by reference to Exhibit 1(iii) to the Company's Registration Statement on Form 20-F filed on June 12, 2000.
1.4
Certificate of name change from NRT Research Technologies Inc. to NRT Industries Inc. - Incorporated herein by reference to Exhibit 1(iv) to the Company's Registration Statement on Form 20-F filed on June 12, 2000
1.5
Certificate of name change from NRT Industries Inc. to CUDA Consolidated Inc. - Incorporated herein by reference to Exhibit 1(v) to the Company's Registration Statement on Form 20-F filed on June 12, 2000
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1.6
Certificate of name change from CUDA Consolidated Inc. to Foodquest Corp. - Incorporated herein by reference to Exhibit 1(vi) to the Company's Registration Statement on Form 20-F filed on June 12, 2000
1.7
Certificate of name change from Foodquest Corp. to Foodquest International Corp. - Incorporated herein by reference to Exhibit 1(vii) to the Company's Registration Statement on Form 20-F filed on June 12, 2000
1.8
Certificate of name change from Foodquest International Corp. to Dealcheck.com Inc. - Incorporated herein by reference to Exhibit 1(viii) to the Company's Registration Statement on Form 20-F filed on June 12, 2000
1.9
Certificate of name change from Dealcheck.com Inc. to Bontan Corporation Inc. - Incorporated herein by reference to Exhibit 1(viii) to the Company's Annual Report on Form 20-F filed on September 23, 2003
2.(a).
Specimen Common Share certificate - Incorporated herein by reference to Exhibit 1(viii) to the Company's Annual Report on Form 20-F filed on September 23, 2003
2.(a)2
Share Buy-back Plan
4.(a)1
IPI Contract between PNG Venture Company and Advisory Group dated July 22, 2003 assumed by the Company
4.(a)1.i
Communication with Advisory Group dated July 9, 2004 regarding assignment of IPI to the Company
4.(a)2
Memorandum of Understanding with Astrogemas Mineracao Ltda and Francis Guardia dated February 17, 2004
4.(c)1
Consulting Agreement dated April 1, 2000 with Kam Shah - Incorporated herein by reference to Exhibit 4.(b).2) to the Company's annual report on Form 20-F for the fiscal year 2001 filed on July 23, 2001
4.(c)2
Consulting Agreement dated April 1, 2003 with Terence Robinson
4.(c)3
Consulting contract with Francis Guardia dated February 17, 2004
4.(c)(iv)1
2001 Consultant Stock Compensation Plan and 1999 Stock Option Plan - Incorporated herein by reference to Form S-8 filed on April 30, 2003
4.(c)(iv)2
2003 Consultant Stock Compensation Plan and 2003 Stock Option Plan - Incorporated herein by reference to Form S-8 filed on July 22, 2004
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
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32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Kam Shah
Chairman and CEO
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Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Consolidated Financial Statements
For the Years Ended March 31, 2004 and 2003
(Canadian Dollars)
CHARTERED ACCOUNTANTS
Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected results of operations for the year ended March 31, 2004 and the shareholders' equity as at that date to the extent summarised in Note 14 to the consolidated financial statements.
The consolidated financial statements for the years ended March 31, 2003 and 2002 were audited by another firm of Chartered Accountants, who expressed opinions without reservation on those financial statements in their reports dated June 16, 2003 and June 27, 2002.
| "Sloan Paskowitz Adelman LLP" Chartered Accountants |
|
| August 10, 2004 Thornhill, Ontario |
F-2
COMMENTS BY AUDITORS FOR U.S READERS ON CANADA - U.S
REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements.
The opinion on page 1 is expressed in accordance with Canadian reporting standards, which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the consolidated financial statements.
| "Sloan Paskowitz Adelman LLP" Chartered Accountants |
|
| August 10, 2004 Thornhill, Ontario |
F-3
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Consolidated Balance Sheets
(Canadian Dollars)
March 31, 2004 and 2003
| Note | 2004 | 2003 | |||||||||||||
| ASSETS | |||||||||||||||
| Current | |||||||||||||||
| Cash | $ | 500,541 | $ | 19,848 | |||||||||||
| Prepaid and other receivables | 3 | 54,690 | 1,184 | ||||||||||||
| 555,231 | 28,676 | ||||||||||||||
| Advances | 4 | 2,530,353 | - | ||||||||||||
| $ | 3,085,584 | $ | 28,676 | ||||||||||||
| LIABILITIES | |||||||||||||||
| Current | |||||||||||||||
| Accounts payable and accrued liabilities | $ | 350,664 | $ | 69,112 | |||||||||||
| Advances from shareholders, non-interest bearing | 515,572 | 274,055 | |||||||||||||
| 866,236 | 343,167 | ||||||||||||||
| SHAREHOLDERS' EQUITY (DEFICIT) | |||||||||||||||
| Capital stock | 5 | 24,287,903 | 20,393,106 | ||||||||||||
| Deficit | (22,068,555) | (20,707,597) | |||||||||||||
| 2,219,348 | (314,491) | ||||||||||||||
| $ | 3,085,584 | $ | 28,676 | ||||||||||||
Commitments and Contingent Liabilities (Note 9)
Related party transactions (Note 10)
| Approved by the Board | "Kam Shah" Director | "Dean Bradley" Director | ||
| (signed) | (signed) |
The accompanying notes form an integral part of these financial statements
F-4
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Consolidated Statements of Operations
(Canadian Dollars)
For the Years Ended March 31, 2004, 2003 and 2002
| Note | 2004 | 2003 | 2002 | |||||||||
| Income | ||||||||||||
| Operational Services | $ | - | $ | - | $ | 60,000 | ||||||
| Interest | 251 | 1,880 | - | |||||||||
| Exchange gain | 46,707 | 13,376 | 6,860 | |||||||||
| 46,958 | 15,256 | 66,860 | ||||||||||
| Expenses | ||||||||||||
| Travel, promotion and consulting | 1,106,023 | 105,555 | 504,982 | |||||||||
| Professional fees | 110,547 | 45,339 | 133,152 | |||||||||
| Net loss on investments | 11 | - | - | 263,832 | ||||||||
| Project development costs | - | 88,831 | 300 | |||||||||
| Bank charges and interest | 3,713 | 1,449 | 1,726 | |||||||||
| Rent | 5,390 | 5,942 | 57,447 | |||||||||
| Telephone, Internet and courier | 4,105 | 2,521 | 9,684 | |||||||||
| Transfer agent fees | 7,821 | 13,175 | 13,634 | |||||||||
| Shareholder's information | 165,431 | 63,657 | 341,377 | |||||||||
| Amortization | - | - | 36,746 | |||||||||
| Office and general | 4,886 | 8,150 | 36,906 | |||||||||
| 1,407,916 | 334,619 | 1,399,786 | ||||||||||
| Net loss for year | $ | (1,360,958) | $ | (319,363) | $ | (1,332,926) | ||||||
| Net loss per share | 7 | $ | (0.26) | $ | (0.04) | $ | (0.27) | |||||
Net loss per share for the fiscal years 2003 and 2002 was based on the (pre-reverse split) number of shares
issued and outstanding. (Note 5(i))
The accompanying notes form an integral part of these financial statements.
F-5
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Consolidated Statements of Cash Flows
(Canadian Dollars)
For the Years Ended March 31, 2004, 2003 and 2002
| 2004 | 2003 | 2002 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net loss for year | $ | (1,360,958) | $ | (319,363) | $ | (1,332,926) | ||||||
| Amortization | - | - | 36,746 | |||||||||
| Write-off of product development costs | - | 88,831 | 300 | |||||||||
| Other non-cash expenses | 703,702 | - | 476,393 | |||||||||
| Net loss on investments | - | - | 259,301 | |||||||||
| (657,256) | (230,532) | (544,609) | ||||||||||
| Prepaid and other receivable | (45,862) | 11,769 | 293,362 | |||||||||
| Accounts payable and accrued liabilities | 281,552 | 3,145 | 1,163 | |||||||||
| (421,566) | (215,618) | (250,084) | ||||||||||
| Investing Activities | ||||||||||||
| Purchase of property, plant and equipment | - | - | (352) | |||||||||
| Sale of property, plant and equipment | - | - | 9,813 | |||||||||
| Investments | - | - | 52,488 | |||||||||
| Advances | (2,530,353) | - | - | |||||||||
| Product development costs | - | 49,460 | (25,440) | |||||||||
| (2,530,353) | (49,460) | (36,509) | ||||||||||
| Financing Activities | ||||||||||||
| Net advances from shareholders | 241,517 | 138,298 | 51,438 | |||||||||
| Net advances to directors | - | - | 67,224 | |||||||||
| Common shares issued | 3,191,095 | - | 101,884 | |||||||||
| 3,432,612 | 138,298 | 220,546 | ||||||||||
| Increase (decrease) in cash during year | 480,693 | (27,860) | 6,971 | |||||||||
| Cash at beginning of year | 19,848 | 47,708 | 40,737 | |||||||||
| Cash at end of year | $ | 500,541 | $ | 19,848 | $ | 47,708 | ||||||
| Supplemental disclosures | ||||||||||||
| Non-cash operating activities | ||||||||||||
| Consulting fee settled for common shares | $ | 148,675 | $ | - | $ | 248,664 | ||||||
| Consulting fee accruals to be settled for common shares |
555,027 | - | - | |||||||||
| Investor relations fee settled for common shares | - | - | 227,729 | |||||||||
| $ | 703,702 | $ | - | $ | 476,393 | |||||||
| Non-cash investing and financing activities | ||||||||||||
| Conversion of loan to equity investment | $ | - | $ | - | $ | 215,431 | ||||||
| $ | - | $ | - | $ | 215,431 | |||||||
The accompanying notes form an integral part of these financial statements
F-6
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Consolidated Statement of Shareholders' Equity
(Canadian Dollars)
For the Years Ended March 31, 2004, 2003 and 2002
| Number of Shares |
Share Capital |
Contributed Surplus |
Shareholders' Equity (Deficit) |
|||||||||
| Balance March 31, 2001 | 4,619,316 | $ | 19,814,829 | $ | (19,055,308) | $ | (759,521) | |||||
| Issued on settlement of fees | 1,963,714 | 476,393 | - | 476,393 | ||||||||
| Exercise of warrants | 643,000 | 101,884 | - | 101,884 | ||||||||
| Net loss | - | - | (1,332,926) | (1,332,926) | ||||||||
| Balance March 31, 2002 | 7,226,030 | 20,393,106 | (20,388,234) | 4,872 | ||||||||
| Net loss | - | - | (319,363) | (319,363) | ||||||||
| Balance March 31, 2003 | 7,226,030 | 20,393,106 | (20,707,597) | (314,491) | ||||||||
| 7:1 reverse stock split | (6,193,746) | - | - | - | ||||||||
| Buy-back of fractional shares | (465) | (939) | - | (939) | ||||||||
| Issued under private placement | 6,705,015 | 3,153,591 | - | 3,153,591 | ||||||||
| Subscribed under a private placement | 831,429 | 393,113 | - | 393,113 | ||||||||
| Finder's fee paid on private placement | - | (354,670) | - | (354,670) | ||||||||
| Issued under 2001 Consultant Stock Compensation Plan | 225,000 | 148,675 | - | 148,675 | ||||||||
| Issued subsequent to the year end to consultants under 2001 Stock Compensation Plan in settlement of services rendered during the year | 806,190 | 555,027 | - | 555,027 | ||||||||
| Net loss | - | - | (1,360,958) | (1,360,958) | ||||||||
| Balance March 31, 2004 | 7,226,030 | $ | 20,393,106 | $ | (20,707,597) | $ | (314,491) | |||||
The accompanying notes form an integral part of these financial statements
F-7
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
1. NATURE OF OPERATIONS
Bontan Corporation Inc. ("the Company") changed its name on April 21, 2003 and adopted a new business strategy that is focused on the resource sector.
The Company is a diversified natural resource company that will operate and invest in major exploration and exploitation projects in countries around the globe through its subsidiaries by acquiring joint venture, indirect participation interest and working interest in those projects.
GOING CONCERN
The Company's new business strategy involves activities in the exploration and development of mineral resources. The business of exploring for minerals and mining involves a high degree of risk, and few properties that are explored are ultimately developed into producing mines. Major expenses may be required to establish ore reserves, to develop recovery processes, and to construct mining and processing facilities at a particular site. It is not possible to ensure that the current exploration programs planned by the Company will result in a profitable commercial mining operation.
Although the Company has taken steps to verify title to mineral properties in which it plans to acquire interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company's title. Property title may be subject to prior agreements and non-compliance with regulatory requirements.
The Company expects to selectively explore and develop the portfolio, through joint venture arrangements or otherwise. The scheduling and scale of such future activities will depend on results and market conditions. Repatriation of earnings and capital from overseas countries is subject to compliance with registration requirements. There can be no assurance that restrictions on repatriation will not be imposed in the future.
The Company has experienced negative cash flows from operating activities in recent years. The Company estimates that it will have adequate funds available from current working capital, operations, and committed and uncommitted financing to meet its existing corporate, administrative and operational obligations in the coming year. If adequate funds are not available from the sources noted above, then the Company may be required to raise additional financing. While the Company has been successful in the past in raising financing there is no assurance that the Company will be able to raise the necessary funding to meet its obligations (see note 15(a) for post balance sheet date financing activities).
These consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business.
F-8
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which do not materially differ from accounting principles generally accepted in the United States (U.S. GAAP) except as described in Note 14 "Differences from United States Generally Accepted Accounting Principles".
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as detailed below. All inter-company balances and transactions have been eliminated on consolidation.
Subsidiary Date of incorporation
/ acquisitionComments on current status Foodquest Inc. Inactive since 1998 1388755 Ontario Inc. Inactive since April 2003 Bontan Diamond Corporation 20-Feb-04 Diamond mining in Brazil through joint ventures Bontan Oil & Gas Corporation 20-Feb-04 Indirect participation interest in oil exploration in Papua New Guinea Bontan Gold Corporation 20-Feb-04 Not yet active Bontan Mineral Corporation February 20, 2004 20-Feb-04 Bontan Trading Corporation 20-Feb-04 Not yet active Use of Estimates
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
F-9
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mineral Properties
The cost of each mineral property, or interest therein, together with exploration costs are capitalized until the properties to which they relate are placed into production, sold or abandoned. These costs will be amortized on the basis of units produced in relation to the proven reserves available on the related property following commencement of production. Costs of abandoned properties are written off to operations.
The costs capitalized do not necessarily reflect present or future values. The ultimate recovery of such amounts depends on the discovery of economically recoverable reserves, successful commercial development of the related properties, availability of financing and future profitable production or proceeds from the disposition of the properties.
Although the Company has taken steps to verify the title to resource properties in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company's title. Property title may be subject to unregistered prior agreements, transfers or aboriginal land claims and title may be affected by undetected defects.
Foreign Currency Translation
The functional currency of the Company is the Canadian dollar. Monetary assets and liabilities are translated at exchange rates in effect at the balance sheet date. Non-monetary assets are translated at exchange rates in effect when they were acquired. Revenue and expenses are translated at the approximate average rate of exchange for the year, except that amortization is translated at the rates used to translate related assets. The resulting gains or losses on translation are included in the consolidated statement of operations.
Future Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, as well as for the benefit of losses available to be carried forward to future years for tax purposes. Future income tax assets and liabilities are measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Future income tax assets are recognized in the financial statements if realization is considered more likely than not.
F-10
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation Plan
During the year ended March 31, 2003, the Company adopted CICA Handbook Section 3870 Stock-based Compensation and Other Stock-based Payments which establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services provided by employees and non-employees. The standard requires that a fair value based method of accounting be applied to all stock-based payments to non-employees and to employee awards that are direct awards of stock that call for settlement in cash and other assets or are stock appreciation rights that call for settlement by the issuance of equity instruments. The new standard permits the Company to continue its existing policy of recording no compensation cost on the grant of stock options to employees but to disclose on a pro forma basis net earnings and earnings per share had the Company adopted the fair value method for accounting for options granted to employees. No rest atement of prior periods will be required as a result of the adoption of the new standard.
Loss Per Share
Basic loss per share is calculated by dividing net loss (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Diluted loss per share reflects the dilution that would occur if outstanding stock options and share purchase warrants were exercised or converted into common shares using the treasury stock method and are calculated by dividing net loss applicable to common shares by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued.
The inclusion of the Company's stock options and share purchase warrants in the computation of diluted loss per share would have an anti-dilutive effect on loss per share and are therefore excluded from the computation. Consequently, there is no difference between basic loss per share and diluted loss per share.
3. PREPAID AND OTHER RECEIVABLES
2004 2003 Due from director (i) $ 20,000 $ - Prepaid 7,868 - Other receivables 26,822 8,828 Due from director (i) $ 54,690 $ 8,828
- Funds advanced to a director during the year are interest-free and repayable on demand.
F-11
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
4. ADVANCES
The advances comprise funds provided to a non-affiliated corporation from time to time during the year for the purpose of acquiring indirect participation interest (IPI) of approx. 0.88% in phase one of an oil exploration program in Papua New Guinea.
The advances carry no interest, are secured by a first charge on the IPI and are convertible into such IPI at the option of the Company as per the terms of the loan agreement dated July 21, 2003.
Subsequent to the year-end date, the Company exercised its option and converted its advances into IPI. (See Note 15.b for further details)
5. CAPITAL STOCK
(a) Authorized
Unlimited number of common shares
(b) Issued
2004 2003 Common
SharesAmount Common
SharesAmount Beginning of year 7,226,030 $ 20,393,106 7,226,030 $ 20,393,106 Reverse stock split i (6,193,746) - - - Buy-back of fractional shares ii (465) (939) - - Issued under a private placement iii 6,705,015 3,153,591 - - Subscribed under a private placement iii 831,429 393,113 - - Expenses related to private placement iii (354,670) - - Issued under 2001 Consultant Stock Compensation Plan iv 225,000 148,675 - - Issued subsequent to the year end to consultants under 2001 Stock Compensation Plan in settlement of services rendered during the year v 806,190 555,027 - - 9,599,453 $ 24,287,903 7,226,030 $ 20,393,106
F-12
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
5. CAPITAL STOCK (b) (Continued)
i On April 21, 2003, the Company carried out a reverse stock split under which one common share of Bontan Corporation Inc. was issued for every seven common shares of Dealcheck.com Inc. ii Under the Company's policy to deal with fractional shares arising from the reverse stock split per (i) above, the Holders of less than sixty-four common shares of Dealcheck.com Inc were not issued any shares of Bontan Corporation Inc. Instead, they were entitled to a payment of $0.21US per common share. As a result, 3,255 common shares of Dealcheck.com Inc. being equal to 465 common shares of Bontan Corporation Inc. valued at $684US ($939CDN) became eligible under the buy-back plan. The Company set up an accrual for this liability. The actual payments made to March 31, 2004 were $212. iii On April 28, 2003, the Company reached an agreement with certain accredited investors for a private placement of up to 7,143,000 Units at US$0.35 per Unit for a gross proceeds of about US$2.5 million. Each Unit includes one common share and one common share purchase warrant. Each warrant entitles its holder to acquire one common share of the company at a price of US$1.00 within twenty-four months of the date of issuance of the Unit. The proceeds would be used for working capital and for the acquisition and financing of projects in the resource sector as per the new business plan. The shares issued under this private placement would be restricted in terms of their transferability and salability in accordance with the relevant regulatory requirements.
7,536,444 Units were subscribed and paid for up to March 31, 2004. Shares relating to 6,705,015 units were issued by that date while the shares relating to the balance of the subscription of 831,429 units were issued subsequent to March 31, 2004.
Expenses relating to the private placement represented finder's fee of 10% of the subscription.
Private placement was over subscribed to 8,879,571 units and was closed on May 26, 2004. (Note 15.a)
None of the warrants were exercised as at March 31, 2004.iv 225,000 shares were issued to two consultants including 100,000 to an executive director under 2001 Consultant Stock Compensation Plan. v 806,190 shares were issued in May 2004 to four consultants under 2001 Consultant Stock Compensation Plan for services rendered up to March 31, 2004.
F-13
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
6. STOCK PLANS
i On November 15, 1999, the shareholders approved the creation of the "1999 Stock Option Plan" pursuant to which the directors were authorized to issue stock options from time to time to employees, officers, consultants and directors of the Company up to 10% of the issued and outstanding common shares of the Company at the time of such issue, at a minimum price allowed under the applicable securities laws. At the annual general and special meeting held on November 13, 2000, the shareholders approved an increase in the limit of maximum number of stock options to 25% of the issued and outstanding common shares of the corporation at the time of such issue.
On April 30, 2003, the Company registered 3 million stock options exercisable at an option price of at least US$0.35 under the Plan with Securities and Exchange Commission of the United States of America as required under the Securities Act of 1933.
No options were allowed under the Plan during the period and no options were outstanding at March 31, 2004.ii In the special and annual general meeting held on October 30, 2001, the shareholders approved the creation of the "2001 Consultants' Stock Compensation Plan" to compensate consultants and contractors who have provided bona fide services to the Company through the award of up to 10 million common shares of the Company and authorised the directors to implement the said plan.
The Plan was adopted by the board of directors in their meeting on November 1, 2001. Subsequent to the adoption of the Plan, the Company carried out a 7: 1 reverse stock split (Refer to Note 5(b)i), which reduced the number of common shares to be issued under the Plan to 1,428,571.
On March 28, 2002, the Company registered 1,560,000 shares (222,857 post-reverse split shares) under the Plan with Securities and Exchange Commission of the United States of America as required under the Securities Act of 1933. These shares were issued to consultants for services rendered during the fiscal year 2002.
On April 30, 2003, the Company registered the remaining 1,205,714 shares priced at US$0.35 per share under the Plan with Securities and Exchange Commission of the United States of America as required under the Securities Act of 1933.
During the year, 225,000 shares were issued to two consultants under the Plan and the balance of 980,714 shares were set aside for issuance to four consultants of which 806,190 shares related to services rendered up to March 31, 2004 (see 5(b)v above).
F-14
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
7. LOSS PER SHARE
Loss per share is calculated on the weighted average number of common shares outstanding during the year, which were 5,221,071 shares for the year ended March 31, 2004 (2003 - 7,226,630 (pre-reverse split and buy back)).
Shares subscribed before March 31, 2004 but issued after that date were also included in the computation of average number of shares outstanding during the year.
8. INCOME TAXES
The effective tax rate of nil (2003 - nil) for income taxes varies from the statutory income tax rate of approx. 36 % (2003 - 38%) due to the fact that no tax recoveries have been recorded for losses incurred, as management has not determined whether it is more likely than not that the losses will be utilized before they expire.
The temporary differences that give rise to future income tax assets and future income tax liabilities are presented below:
2004 2003 Amounts related to tax loss and credit carry forwards $ 1,582,000 $ 1,332,000 Net future tax assets 1,582,000 1,332,000 Less: valuation allowance (1,582,000) (1,332,000) $ - $ - The Company has carry forward tax losses of approximately $3.7 million, which may be applied against future taxable income and expire as detailed below. The benefit arising from these losses has not been included in the financial statements.
2005 $ 536,000 2006 460,000 2007 687,000 2008 202,000 2009 1,007,000 2010 232,000 2011 639,000 2005 $ 3,763,000
F-15
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
9. COMMITMENTS AND CONTINGENT LIABILITIES
(a) The Company received a Notice of Termination dated February 6, 2003 from a previous landlord, wherein the landlord claimed rent arrears of $28,924 and current plus next three months rent and damage for the loss of rent for the remaining term of the lease. The management is of the opinion that they have a strong case against the landlord for not paying such rent and penalty and considers the existing provision of approx. $37,000 adequate to cover any liability arising from the lease termination. No further communication has been received from the previous landlord since February 6, 2003. (b) The Company entered into an investor relation contract with Current Capital Corp., a shareholder corporation effective April 1, 2003 initially for a period of one year and renewed automatically unless cancelled in writing by a 30-day notice for a monthly fee of US$10,000. (c) (c) The Company entered into a consulting contract with Snapper Inc., a shareholder corporation effective April 1, 2003 initially for a period of one year and renewed automatically unless cancelled in writing by a 30-day notice for a monthly fee of US$5,000. This contract was cancelled on May 31, 2004. (d) The Company entered into a consulting contract with Mr. Kam Shah, the Chief Financial Officer on April 1, 2003 for a five-year term up to March 31, 2008. The contract provides for a monthly fee up to $6,000 plus taxes subject to the actual time spent plus reimbursement of expenses and a lump sum compensation of $250,000 for early termination of the contract without cause. The contract provides for entitlement to stock compensation and stock options under appropriate plans as may be decided by the board of directors from time to time. (e) The Company entered into a consulting contract with Mr. Terence Robinson, the Chief Executive Officer on April 1, 2000 for a six-year term up to March 31, 2009. The contract provides for a monthly fee of $10,000 inclusive of taxes plus reimbursement of expenses and a lump sum compensation of $250,000 for early termination of the contract without cause. Mr. Robinson resigned as chief executive officer effective May 17, 2004 but continued as consultant under the same terms and conditions. (f) On February 19, 2004, the Company's subsidiary, Bontan Diamond Corporation entered into a Memorandum of Understanding ("MOU") with Mr. Francis Guardia and Astrogemas Mineração Ltda, a Brazilian corporation owned by Francis Guardia to acquire the said corporation and invest up to US$ 200,000 required to exercise the option in a Brazilian Joint venture to explore and mine diamonds in Brazil and also to explore opportunities for more licenses and/or joint ventures for diamond exploration in Brazil. The MOU also provides opportunity for Mr. Guardia to earn back up to 40% of the equity interest in Bontan Diamond Corporation on achievements of certain agreed milestones. (g) On February 17, 2004 the Company's subsidiary, Bontan Diamond Corporation entered into a five-year exclusive consulting contract with Mr. Francis Guardia to act as Chief Geologist for the company for a monthly fee of US$ 4,000 plus expenses and bonus.
F-16
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
10. RELATED PARTY TRANSACTIONS
Transactions with related parties are incurred in the normal course of business and are measured at the exchange amount. Related party transactions and balances have been listed below, unless they have been disclosed elsewhere in the financial statements.
• Included in shareholders information expense is $160,627 (2003 - $60,000; 2002 - $120,000) to Current Capital Corp, which is a shareholder corporation and where the directors of the Company serve as consultants. • Rent and telephone expense are net of recoveries of $Nil (2003 - $nil; 2002 - $79494) from corporations, where the directors of the Company are consultants or directors. • Current Capital Corp charged approx. $62,000 towards the rental, telephone, consultants' fees and other office expenses (2003: $34,000 and 2002: $Nil). • Finders fee of approx. $352,000 was charged by Current Capital Corp. in connection with the private placement. • Included in professional and consulting fees are fees of $177,675 (2002 - $nil; 2002 - $351,492) paid to directors of the Company and $111,377 (2003: $nil, 2002 -$149,438) paid to an ex-director for consulting services. • Business expenses of $56,485 (2003 - $nil; 2002 - $32,451) were reimbursed to directors of the corporation. • Consulting fees include amounts to Snapper Inc., a shareholder corporation of $267,894 (2003 - $92,682; 2002 - $94,026).
11. NET LOSS ON INVESTMENTS
2004 2003 2002 Holding losses $ - $ - $ 98,401 Provision for non-temporary impairment in value - - - Realized losses - - 165,431 $ - $ - $ 263,832
F-17
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
12. SEGMENTED INFORMATION
The Company changed its business plan during the year. The new business strategy is focused on the following two broad operating segments:Energy sector: This segment includes the Company's acquisition of interests in joint ventures and projects relating to exploration and commercial drilling of oil and gas and related products.
Mineral sector: This segment includes the Company's acquisition of interests in joint ventures and projects relating to exploration and commercial mining of diamond, gold and other precious metals.
The accounting policies of the segments are same as those described in Note 2. The Company evaluates each segment's performance based on its contribution to consolidated net earnings. There are no inter-segmental charges or transactions. The following table presents summarised financial information for the fiscal year ended March 31, 2004. The comparative information relating to fiscal year 2003 relates to the segments, which were discontinued and hence has not been presented.
Geographic Information
The Company operates from one location in Canada. Its assets are located as follows:
2004 2003 Canada $ 547,363 $ 28,676 Papua New Guinea 2,530,353 - Brazil 7,868 - $ 3,085,584 $ 28,676
F-18
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
12. SEGMENTED INFORMATION (Continued)
Business Segments
2004Energy
sectorMineral
sectorTotal revenue $ - $ - Earnings (losses) from operations $ - $ - Total assets $ 2,530,353 $ 7,868 Total liabilities $ - $ - 2003 Business
ServicesProduct
Development
IncubationTotal revenue $ - $ - $ - Earnings (losses) from operations $ - $ (89,089) $ (105,555) Total assets $ - $ - $ - Total liabilities $ - $ - $ - Reconciliation to Financial Statements 2004 2003 Revenue Total revenue from reportable segments $ - $ - Other 46,958 15,256 $ 46,958 $ 15,256 Net loss Total from continuing operations for reportable segments $ - $ (194,644) Other (1,360,958) (124,719) $ (1,360,958) $ (319,363) Assets Total assets for reportable segments $ 2,538,221 $ - Other 547,363 28,676 $ 3,085,584 $ 28,676 Liabilities Total liabilities for reportable segments $ - $ - Other 866,236 343,167 $ 866,236 $ 343,167
F-19
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
13. FINANCIAL INSTRUMENTS
The fair value for all financial assets and liabilities are considered to approximate their carrying values due to their short-term nature.
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP"). Material variations in the accounting principles, practices and methods used in preparing these consolidated financial statements from principles, practices and methods used in the United States ("US GAAP") and in SEC Regulation S-X are described and quantified below.
2004 2003 Balance
under
Canadian
GAAP
Adjustment
Balance
under US
GAAPBalance
under
Canadian
GAAP
Adjustment
Balance
under US
GAAPBalance Sheets Current assets $ 555,231 $ - $ 555,231 $ 28,676 $ - $ 28,676 Long term assets 2,530,353 - 2,530,353 - - - Total Assets $ 3,085,584 $ - $ 3,085,584 $ 28,676 $ - $ 28,676 Current liabilities 866,236 - 866,236 343,167 - 373,167 Capital stock 24,287,903 - 24,287,903 20,393,106 - 20,393,106 Deficit (22,068,555) - (22,068,555) (20,707,597) - (20,707,597) Liabilities and shareholders' equity $ 3,085,584 $ - $ 3,085,584 $ 28,676 $ - $ 28,676 Statements of operations 2004 2003 2002 Loss under Canadian GAAP $ (1,407,916) $ (319,363) $ (1,332,926) Write down of product development costs - 88,831 (25,440) Loss under US GAAP $ (1,407,916) $ (230,532) $ (1,358,366) Basic and diluted loss per share under US GAAP $ (0.26) $ (0.03) $ (0.27) Net loss per share for the fiscal years 2003 and 2002 was based on the pre-reverse split number of shares issued and outstanding
F-20
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
Diluted loss per share under US GAAP
The Company had 7.5 million share purchase warrants issued and outstanding as at March 31, 2004. Inclusion of these warrants in the computation of diluted loss per share would have an anti-dilutive effect on loss per share and is therefore excluded from the computation. Consequently, there is no difference between loss per share and diluted loss per share.
Statements of cash flows 2004 2003 2002 Operating activities under Canadian and US GAAP $ 421,566 $ (215,618) $ (250,084) Product development costs - - (25,440) Operating activities under US GAAP 421,566 (215,618) (275,524) Investing activities under Canadian GAAP (2,530,353) 49,460 36,509 Deferred development costs - - 25,440 Investing activities under US GAAP (2,530,353) 49,460 61,949 Financing activities under Canadian and US GAAP 3,432,612 138,298 220,546 Increase (decrease) in cash during year 480,693 (27,680) 6,971 Cash at beginning of year 19,848 47,708 40,737 Cash at end of year $ 500,541 $ 19,848 $ 47,708 Stock-Based Compensation
The Company accounts for common stock purchase options and warrants granted to non-employees pursuant to Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123") and Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. These standards require that the fair value of equity instruments, including options and warrants, be recognized in the financial statements. FAS 123 permits a company to account for employee stock options under the method specified by the previous standard, Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. Under APB 25, if the exercise price of fixed employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded. For such options, FAS 123 requir es disclosure of the fair value of options granted, the assumptions used in determining the fair value and the pro-forma effect on earnings as if measurement provisions of FAS 123 had been applied.
No options have been granted to date under the 1999 Stock Option Plan of the Company. The Company will apply the measurement principles of APB 25, supplemented by the required FAS 123 disclosures, for any stock options it grants to employees in the future.
F-21
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
Recent Accounting Developments
Under the Securities and Exchange Commission's Staff Accounting Bulletin No.74, the Company is required to disclose certain information related to recently issued accounting standards. Recently issued accounting standards are summarized as follows:
U.S. Standards
In January 2003, the FASB issued Interpretation ("FIN") - No. 46 "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 - Consolidated Financial Statements to those entities defined as "Variable Interest Entities" (more commonly referred to as special purpose entities) in which equity investors do not have the characteristics of a "controlling financial interest" or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to all Variable Interest Entities created after January 31, 2003, and by the beginning of the first interim or annual reporting period commencing after June 15, 2003 for Variable Interest Entities created prior to February 1, 2003. The Company does not expect that adoption of FIN 46 will have a material impact on its results from ope rations or financial position.
In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The amendments are intended to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative as discussed in SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The Company does not expect that adoption of SFAS 149 will have a material impact on its results from operations or financial position.
In May 2003, the FASB issued SFAS 150, which aims to eliminate diversity in practice by requiring that mandatorily redeemable instruments, forward purchase contracts, and certain financial instruments that include an obligation that (1) the issuer may or must settle by issuing a variable number of its equity shares and (2) has a "monetary value" at inception that (a) is fixed, (b) is tied to a market index or other benchmark (something other than the fair value of the issuer's equity shares), or (c) varies inversely with the fair value of the equity shares (e.g., a written put option) be reported as liabilities. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for (1) instruments entered into or modified after May 31, 2003 and (2) pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company does not expect that adoption of SFAS 150 will have a material impact on its res ults from operations or financial position.
F-22
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
Recent Accounting Development (Continued)
U.S. StandardsIn December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104 "Revenue Recognition", which codifies, revises and rescinds certain sections of SAB 101,"revenue Recognition", in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The Company does not expect that adoption of SAB 104 will have a material impact on its results from operations or financial position.
In March 2004, the SEC issued Staff Accounting Bulletin (SAB) No. 105 "Loan Commitments Accounted for as Derivative Instruments", which summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. SAB 105 must be applied to loan commitments entered into after March 31, 2004. The Company does not expect that adoption of SAB 105 will have a material impact on its results from operations or financial position.
Canadian Standards
In November 2002 and June 2003, the Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 13 Hedging Relationships (AcG-13), which requires that in order to apply hedge accounting, all hedging relationships must be identified, designated, documented, and effective. Where hedging relationships cannot meet these requirements, hedge accounting must be discontinued. AcG-13 is applicable for fiscal years beginning on or after April 1, 2004. The Company does not expect that adoption of AcG-13 will have a material impact on its results from operations or financial position.
In June 2003, the Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 14 Disclosure of Guarantees (AcG-14), which is generally consistent with the disclosure requirements in FASB Interpretation No. 45 Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, except it does not apply to product warranties. It requires entities to disclose key information about certain types of guarantee contracts that require payments contingent on specified types of future events. The Guideline is applicable to annual and interim periods beginning on or after January 1,2003. The Company does not expect that adoption of AcG-14 will have a material impact on its results from operations or financial position.
F-23
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
Recent Accounting Development (Continued)
Canadian StandardsIn July 2003, the CICA issued new Handbook Sections 1100, Generally Accepted Accounting Principles, and 1400 General Standards of Financial Statement Presentation. Section 1100 describes what constitutes Canadian GAAP and its sources, and provides guidance on sources to consult when selecting accounting policies and appropriate disclosure when a matter is not dealt with explicitly in the primary sources of GAAP, thereby recodifying the Canadian GAAP hierarchy. Section 1400 clarifies what is fair presentation in accordance with GAAP and provides general guidance on financial presentation. The Company does not expect any significant impact on its financial statements with the adoption on March 1, 2004 of these new Sections.
In December 2003, new disclosure requirements fro pensions and other employee future benefits were issued. The new required disclosure include items such as a narrative description of each type of plan, the measurement date of the plan asset and liability, the effective date of the last actuarial evaluation, and the details of the plan asset by major category. As the Company does not have such plans; therefore, it does not expect that adoption of the new disclosure requirements have a material impact on its results from operations or financial position.
In March 2004, the Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 15 Consolidation of Variable Interest Entities (AcG-15), in harmonized with FASB Interpretation No. 46, with the same title, to provide guidance for applying the principles in Subsidiaries, Section 1590, to certain special-purpose entities. The consolidation requirement in the Guideline will be effective for all annual and interim periods beginning on or after November 1, 2004. The Company does not expect that adoption of AcG-15 will have a material impact on its results from operations or financial position.
In March 2004, the Canadian Institute of Chartered Accountants issued Emerging Issues Committee Abstract, EIC-146 Flow-Through Shares, which required that the future income tax liability should be recognized, and the shareholders' equity reduced, on the date that the company renounces the flow-through shares tax credits associated with the expenditures. In addition, the Committee noted that the benefits of the loss carryforward to be recognized would have been recognized as a reduction of income tax expense included in the determination of net income or loss in the period incurred, except for the failure to meet the requirement of the "more likely than not" test. The Committee reached a consensus that entities should apply the accounting treatment initiated after the date of issue of the Abstract. The Company is going to apply the recommendation from March 19, 2004. However, the Company does not expect that adoption of EIC -146 will have a material impact on its results from opera tions or financial position.
F-24
Bontan Corporation Inc.
(Formerly Dealcheck.com Inc.)
Notes to Consolidated Financial Statements
(Canadian Dollars)
March 31, 2004 and 2003
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which establishes standards for reporting and presentation of comprehensive income. This standard defines comprehensive income as the changes in equity of an enterprise, except those resulting from shareholder transactions. For the years ended March 31, 2004,2003 and 2002, there is no difference between net loss and comprehensive loss.
15. SIGNIFICANT POST BALANCE SHEET EVENTS
The following is a summary of key corporate changes and other significant events that occurred subsequent to March 31, 2004:
a. On May 26, 2004 the Company completed its private placement to accredited investors for 8,879,571 Units at US$0.35 per Unit, (Note 5.iii) b. On July 9, 2004, the Company converted its advances to a non-affiliated corporation for the purpose of acquiring indirect participation interest (IPI) in an oil exploration program in Papua New Guinea (Note 4) into (i) US$270,900 into 15,262 shares of Interoil Corporation according to the terms of the IPI agreement and (ii) the balance of the advances of approx. US$1.6 million for a 0.75% IPI. c. Issued the remaining 980,714 shares under the 2001 Consultant Stock Compensation Plan. d. The Company's subsidiary, Bontan Diamond Corporation, acquired on June 14, 2004 100% equity in a Brazilian Corporation, Astrogemas Mineraço Ltda ("AML"). The management of AML has the right to earn back a 40% interest subject to meeting certain agreed performance milestones. AML holds 50 per cent participation rights in two joint ventures to explore for and mine diamonds in the Coromandel region of Minas Gerais state in Brazil. e. On May 17, 2004, Mr. Terence Robinson resigned as a Chairman and CEO of the Company and in his place Mr. Kam Shah became Chairman and CEO of the Company effective the same date. Further, Mr. Kevin Markland was appointed as a non-executive, independent director. f. On July 22, 2004, the Company registered with Securities and Exchange Commission, two new Plans by filing of the registration statement in Form S-8. The two Plans comprise - 2003 Stock Option Plan covering 2.5 million common shares of the Company and 2003 Consultant Stock Compensation Plan covering 1 million common shares of the Company.
F-26
B O N T A N C O R P O R A T I O N I N C .
Monday June 9, 2003
BONTAN CORPORATION INC.
(FORMERLY DEALCHECK.COM INC.)
Dear Sir or Madam:
On April 15, 2003 Dealcheck.Com Inc. effected a name change to Bontan Corporation Inc. and a 1 for 7 reverse stock split of its Common Stock. Our press release dated April 21, 2003 detailed the Corporation's policy with regards to fractional shares resulting from the reverse stock split.
According to this policy, Shareholders holding 64 or fewer Dealcheck.Com Inc. Common Shares, which otherwise would have resulted in 9 or less Bontan Corporation Inc. Common Shares, WILL NOT BE ISSUED NEW SHARES.
As a registered holder with less than 64 Dealcheck.Com Inc. shares, your shares will be converted into the right to receive cash and your payment consideration will be based on the average of the closing prices per share of Common Stock on OTCBB, NASDAQ for the period of 3 consecutive trading days ending on April 15, 2003 with no interest.
Please note you will not be charged any transaction or broker fee in accepting the cash settlement.
To receive your cash payment, please return the enclosed Entitlement Certificate along with your Share Certificate to the Corporation. FULL INSTRUCTIONS ARE ON THE FORM.
Sincerely,
BONTAN CORPORATION INC.
/s/ Kam Shah
Kam Shah CA, CPA
Chief Financial Officer
47 Avenue Road, Suite 200, Toronto, ON, M5R 2G3
416.860.0211 Fax 416.361.6228
INDIRECT PARTICIPATION INTEREST AGREEMENT
BETWEEN
PNG Drilling Ventures Limited
("PNGDV")
AND
Advisory Group Limited
("Investor")
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TABLE OF CONTENTS
| 1. | INTERPRETATION | 1 |
| 2. | INDIRECT PARTICIPATION INTEREST | 5 |
| 3. | BACKSTOP PAYMENT | 6 |
| 4. | PHASE ONE EXPLORATION PROGRAM | 6 |
| 5. | CONVERSION OPTION | 7 |
| 6. | CASH CALLS | 8 |
| 7. | PHASE TWO EXPLORATION PROGRAM AND INVESTOR OPTION | 9 |
| 8. | SUBSEQUENT WORK | 10 |
| 9. | ASSIGNMENT | 10 |
| 10. | CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS | 10 |
| 11. | TERM AND TERMINATION | 11 |
| 12. | FORCE MAJEURE | 11 |
| 13. | LIABILITY | 12 |
| 14. | NOTICES | 12 |
| 15. | AMENDMENT | 13 |
| 16. | ENTIRE AGREEMENT | 13 |
| 17. | ACKNOWLEDGMENT AND LEGEND | 13 |
| 18. | COSTS | 13 |
| 19. | GOVERNING LAW | 13 |
| 20. | RELATIONSHIP OF PARTIES | 13 |
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| 21. | COUNTERPARTS | 13 |
| 22. | TIME | 14 |
| 23. | SEVERABILITY | 14 |
DISTRIBUTIONS SCHEDULE
ANNEXURE I - EXPLORATION MAP AND PHASE ONE EXPLORATION
PROGRAM PROSPECTS
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INDIRECT PARTICIPATION INTEREST AGREEMENT
THIS AGREEMENT is made as of the 21st day of July 2003
BETWEEN:
PNG Drilling Ventures Limited, a Barbados company, with an office at 25025 I-45 North, Suite 410, The Woodlands, Texas, USA ("PNGDV")
AND:
Advisory Group Limited, of the British West Indies, ("Investor")
WHEREAS:
| A. | InterOil Corporation ("InterOil"), through its relevant Affiliate, intends to conduct exploration drilling programs within the area covered by PPLs 236, 237 and 238 (the "License Area") in Papua New Guinea and to develop and produce Petroleum in any new PDL issued from and out of that area. |
| B. | InterOil and PNGDV are, or will be, parties to the Drilling Participation Agreement pursuant to which PNGDV agrees to fund certain of InterOil's exploration drilling programs in the License Area and InterOil conveyed to PNGDV, as agent and trustee for one or more investors, a beneficial interest in InterOil's Participation Interest. |
| C. | Investor wishes to pay certain of PNGDV's funding obligations under the Drilling Participation Agreement in exchange for a beneficial interest in InterOil's Participation Interest pursuant to the terms of this Agreement. |
NOW THIS AGREEMENT WITNESSES that the parties hereby covenant and agree as follows:-
| 1. | INTERPRETATION |
| 1.1 | Unless a country intention appears, in this Agreement (including its Recitals):- |
| "Affiliate" means, when used with reference to a specified person, any person that directly or indirectly controls or is controlled by or is under common control with the specified person and, for the purposes of this definition, "control" shall mean the right to exercise control and direction over the management and policies of the relevant specified person whether directly or indirectly and whether through the ownership of voting securities or by contract or otherwise, and any person, or combination of persons, acting jointly or in concert or any combination of Affiliates holding more than 50% of the outstanding voting securities of the specified person shall be deemed to exercise control of that specified person; "Backstop Payment" has the meaning given to it in clause 3.1; |
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| "barrel" means that quantity of petroleum which will occupy a volume of 42 U.S. standard gallons measured at 60 degrees Fahrenheit (which volume shall be deemed equivalent to 0.158987 cubic metres when measured at 15.55 degrees Celsius): "Block" means a block as provided by Section 17 of the Oil and Gas Act; "Commercial Field" means a Petroleum Field with at least five million barrels of recoverable Petroleum; "Commercial Interest Rate" means the sum of (a) the Prime Rate as reported in the Wall Street Journal on every Tuesday in the Money Rates section; and (b) 250 basis points (or 2.5%); "Completion" has the meaning given to it in clause 4.4; |
||
| "Confidential Information" means: | ||
| (a) | information regarding the existence, terms or conditions of this Agreement; and | |
| (b) | all communications between the parties, all information concerning the Phase One Exploration Program and Phase Two Exploration Program, and all other information supplied to, or received by, any party from any other party in connection with this Agreement, which is either marked "confidential" or by its nature is intended to be for the knowledge of the recipient and/or any other person within clause 10.1. | |
| "Cost of IPI" has the meaning given to it in clause 2.2; "Discovery" means the discovery of Petroleum not previously known to have existed, recoverable at the surface of any well bore in a significant amount measurable by conventional petroleum industry testing methods and which may reasonably be considered to be an indication of a potentially commercial accumulation of Petroleum. The verb "Discover" means the act of making a Discovery; "Discovery Field" means a Petroleum Field Discovered as a result of the Phase One Exploration Program or the Phase Two Exploration Program within PPL236, 237 or 238 or any PDL issued from or granted out of the Participation Area; "Distributions" is defined in the attached Distributions Schedule; "Drilling Participation Agreement" means the agreement of that name between InterOil and PNGDV; "Field" means the volume of rock extending from the surface of the earth vertically down to the base of the earth's crust from a line enclosing the minimum surface area required to include, with respect to a Petroleum Pool created by a geological structure or a stratigraphic trap (whether or not compartmentalised by faulting), the maximum reasonably interpreted are included above the petroleum-water fluid contact or contacts on a structural map delineating the single structural closure of each known Zone. For the avoidance of doubt: |
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| (a) | where the surface area of a Zone overlaps the surface area of another Zone they comprise a single Field; | |
| (b) | where two or more Zones include a common Petroleum Pool these structures comprise a single Field; and | |
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| (c) | where two or more Zones are found adjacent to each other, with separate interpreted structural or stratigraphic closures and which do not include a common Petroleum Pool, such structures are separate Fields; | |
| "Indirect Participation Interest" or "IPI" means the IPI Percentage share of the whole (100%) of the undivided interest in the Participation Area, provided that such share shall only ever burden InterOil's Participation Interest in and Petroleum Share from the Participation Area, whatever that may be from time to time, and InterOil shall not transfer or assign such interest to any other party; "InterOil Refinery" means the oil refinery owned by InterOil or its Affiliate at Napa Napa near Port Moresby in Papua New Guinea, including the related storage tanks and marine terminal; "JVOA" means the Joint Venture Operating Agreement to be entered into by InterOil or its nominated Affiliate, and any other working interest parties, in respect of that Licence; "Non Consent Penalty" means for any payment that Investor was obligated to make in accordance with its IPI (exluding the Cost of IPI, the payment under clause 7.5 or debt financing under clause 5.4), but did not make for any reason, Investor will not receive any Distributions for its IPI from PNGDV until PNGDV has received from Distributions associated with Investor's IPI, or from Investor, the sum of: |
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| (a) | 350% of the total amount PNGDV paid on behalf of Investor's IPI; and | |
| (b) | interest on the total amount of payment(s) Investor would have made accruing at the Commercial Interest Rate, and | |
| thereafter, Investor will receive all Distributions in accordance with its IPI; "Oil and Gas Act" means the Oil and Gas Act, 1998 of Papua New Guinea as amended from time to time, and the regulations thereto; "Operator" means InterOil or its wholly owned affiliate, designated and acting as Operator under the terms of the JVOA; "Participation Area" means the area within the Licence Area in which Investor is entitled to the Indirect Participation Interest in accordance with this Agreement, including the full extent, regardless of the number of wells required to exploit fully all commercially recoverable Petroleum, of any and all Zones drilled pursuant to the Phase One Exploration Program and, if applicable, the Phase Two Participation Area; "Participation Interest" means, with respect to a party to the JVOA, that party's undivided interest, expressed as a percentage and determined in accordance with the JVOA, in all rights, |
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| interests, benefits, obligations and liabilities derived under and by virtue of the JVOA and the Licence; "PDL" means a Petroleum Development Licence granted under the Oil and Gas Act; "Petroleum" means: |
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| (a) | any naturally occuring hydrocarbons, whether in gaseous, liquid, or solid state; or | |
| (b) | any naturally occuring mixture of hydrocarbons, whether in gaseous, liquid, or solid state; or | |
| (c) | any naturally occuring mixture of one or more hydrocarbons, whether in gaseous, liquid, or solid state; or | |
| (d) | any fraction, mixture or product derived from sub-paragraphs (a), (b) or (c) as result of production or processing; or | |
| (d) | any Petroleum as defined in sub-paragraphs (a), (b), (c) or (d) which has been returned to a natural reservoir, | |
| but does not include coal or any other substance which can only be recovered by mechanical mining processes; "Petroleum Pool" means a naturally occurring discrete accumulation of Petroleum; "Petroleum Share" means the Participation Interest share of Petroleum to which a party is entitled pursuant to the JVOA; "Phase One Area" has the meaning given to it in clause 4.2; "Phase One Exploration Program" means the exploration program to be conducted by InterOil for Petroleum within the Licence Area comprising: (i) all necessary work relating to preparation for drilling exploration wells, which will include geological and other studies; and (ii) drill the well bore of up to 16 exploratory wells to the designated Target Depth of each such well on up to 16 separate, distinct, non-overlapping Zones within the Licence Area marked as separate drilling prospects on the Exploration Map attached as Annexure I. Each exploratory well must drill into a separate drilling prospect on the Exploration Map attached as Annexure I in the Phase One Exploration Porgram; "Phase One Participation Area" has the meaning given to it in clause 4.2; "Phase Two Exploration Program" means the exploration program to be conducted by InterOil for Petroleum wihint the Licence Area comprising: (i) all necessary work relating to preparation for drilling exploration wells, which will include geological and other studies; and (ii) drill the well bore of at least 8 exploratory wells to the designated Target Depth of each such well on at least 8 separate, distinct, non-overlapping Zones within the Licence Area that are separate, distinct, and non-overlapping from the Zones to be drilled during the Phase One Exploration Program. Each exploratory well must drill into a separate drilling prospect that has not been drilled by a previous exploratory well in either the Phase One Exploration Program or the Phase Two Exploration Program; "Phase Two Participation Area" has the meaning given to it in clause 7.3; "PPLs 236, 237 and 238" means Petroleum Prospecting Licences 236, 237 and 238 granted under the Oil and Gas Act, or top file licences 236, 237 and 238; "State" means the Independent State of Papua New Guinea; |
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| "Subsequent Work Program" has the meaning given to it in clause 4.4 and clause 8; "Target Depth" means the lesser of (a) 2,000 m; or (b) a depth sufficient to test the Pale Sandstone. In no way shall this definition limit or constrain the Operator from drilling deeper if it deems approriate; "Wilful Misconduct" means, in relation to any provision of this Agreement, such wanton or reckless act or omission not justified by any special circumstances as amounts to a wilful and utter disregard for the harmful and avoidable consequences thereof, but shall not include any error of judgment, mistake, act or omission, whether negligent or not, made by the Operator or any director, employee, agent or contractor of the Operator in the exercise, in good faith of any function, authority or discretion conferred upon the Operator; "Zone" means a geological structure containing or thought to contain a common accumulation of petroleum separately producible from any other common accumulation of Petroleum |
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| 1.2 | The parties agree that: (a) reference to the singular includes the plural and vice versa; (b) reference to a clause means a clause of this Agreement; and (c) reference to legislation or any documents includes any amendments or replacements to the legislation or document. |
2. INDIRECT PARTICPATION INTEREST
PNGDV hereby agrees to hold the Indirect Participation Interest for the Investor as agent and trustee. The Indirect Participation Interest is 3% of the undivided interest in the Participation Area, as further defined and adjusted in the definitions of "IPI" and "IPI Percentage". By way of example, subject to any adjustments pursuant to the definition thereof, the Indirect Participation Interest Percentage will be 1.5% if there are 16 exploratory wells drilled in the Phase One Exploration Program.
2.2 In consideration of PNGDV holding the IPI on behalf of Investor, Investor agrees to pay to PNGDV the amount of US$3,180,000 (the "Cost of IPI").
2.3 The Cost of IPI shall be paid in the following installments: (a) US$530,000.00 of the Cost of IPI (i.e. US $530,000.00) by July 25th, 2003, and (b) US$360,000.00 of the Cost of IPI (i.e. US$360,000.00) by August 20th, 2003 and (c) the balance of the Cost of IPI (i.e., being US$2,290,000.00) by the earlier of: i) 15 days after the listing of InterOil on the American Stock Exchange, ii) September 25, 2003, or iii) 21 days after Investor having received notice from PNGDV that InterOil has elected to proceed with Completion of a Well in the Phase One Area, in each case by wire transfer to PNGDV at the following trust account:
| Dale A. Dossey 25025I-45 North, Suite 410 The Woodlands, Texas 77380 Tel: 1-281-362-9909 |
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| Klein Bank & Trust ABA XXXXXXXXX Acct XXXXX |
2.4 If investor fails to pay when due any instalment of the Cost of IPI pursuant to clause 2.3, PNGDV may notify Investor that Investor has no further right or obligation to pay the balance of the Cost of IPI and upon such notice the IPI Percentage will be reduced pro rata to the portion of the Cost of the IPI that Investor paid prior to receiving such notice from PNGDV.
2.5 The IPI will be reduced proportionally to the reduction in InterOil's Participation Interest as a result of the State's election to participate in a PDL by taking a Participation Interest of up to 22.5% or any other State revisionary interest entitlement.
2.6 Investor shall be entitled to receive Distributions in accordance with the Distributions Schedule appended to this Agreement.
2.7 At any time after the grant of a PDL from the Participation Area, Investor may elect to convert its IPI to a direct working interest and PNGDV shall procure InterOil does all things reasonably necessary to give effect to this election, provided that all taxes, duties, fees and other third party charges and costs incurred by InterOil, PNGDV or Investor in relation to such conversion (including reasonable attorney's fees) shall be for the account of Investor and such amounts incurred by InterOil or PNGDV shall be reimbursed by Investor prompty upon demand.
3. BACKSTOP PAYMENT
PNGDV shall ensure that:
3.1 If the aggregate of all Discoveries resulting from the Phase One Exploration Program is less than 5 million barrels of recoverable Petroleum, InterOil shall exchange fully paid common shares in InterOil for Investor's IPI (a "Backstop Payment"), calculated by reference to the full paid in Cost of IPI.
3.2 The Backstop Payment will be paid in two equal instalments, the first comprised of the issuance on or about December 15th, 2005 of 14,930 shares per US$530,000 of the full paid in cost of Cost of IPI, the second comprised of the issuance on or about December 15th, 2006 of 14,930 shares per US$530,000 of the full paid in Cost of IPI.
4. PHASE ONE EXPLORATION PROGRAM
PNGDV represents, warrants and covenants that:
4.1 InterOil has agreed to conduct, at its own cost, the Phase One Exploration Program in the manner contemplated in this clause 4. InterOil will be the Operator of the Phase One Exploration Program.
4.2 The Phase One Exploration Program will be conducted within specific areas covering the proposed drilling prospects within the Licence Area as indicated on the Exploration Map attached as Annexure I, which may be one or more Blocks or portions of Blocks (the "Phase One Area"). Upon the Discovery of any Commercial Field(s) by wells drilled in the Phase One Exploration Program, InterOil will request the declaration of a location under the Oil and Gas Act, which will include sufficient Blocks or portions of Blocks to cover fully the Field(s) to the extent that such Blocks are in the Licence Area ("Phase One Participation Area").
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4.3 InterOil will perform all necessary work in preparation for drilling exploratory wells, including undertaking geological and other studies.
4.4 The Phase One Exploration Program in respect of each well drilled within that program ends upon that well reaching its Target Depth. If InterOil decides to continue operations on that Zone, it will design a work program which may include (a) logging or other evaluation or analysis, setting casing and or running tubing, perforating, and testing the well, ("Completion") and/or (b) appraisal drilling, extended well testing and full field development and production ("Subsequent Work").
4.5 Work on the Phase One Exploration Program will commence between 15th March 2003 and 15th April 2003 and, if reasonably possible, all drilling is to be completed by 30th September 2004.
4.6 InterOil will be responsible for all costs of the Phase One Exploration Program.
5. CONVERSION OPTION
PNGDV shall ensure that:
5.1 Upon InterOil's first election to proceed with Completion of a well in the Phase One Area, the following will occur:
| (a) | promptly after such election, InterOil shall give to PNGDV, and PNGDV will immediately forward to Investor, written notice of its Completion decision, together with technical, geological and other logging data and a proposal for such Completion, including cost estimates, that can reasonably be supplied which is relevant to Investor making its decision in paragraph (b); | ||
| (b) | within 48 hours of receiving any notice from PNGDV pursuant to paragraph (a), Investor must then either: | ||
| (i) | give written notice to PNGDV that Investor intends to participate in operations in the Phase One Participation Area by paying its IPI share of the costs of the aforementioned Completion and all other costs incurred or to be incurred by InterOil in relation to the Phase One Participation Area under the JVOA; or | ||
| (ii) | give written notice PNGDV that Investor intends to convert all or part of its IPI (valued at the full paid in Cost of IPI) for, in respect of each US$530,000 of full paid in Cost of IPI, 29,860 fully paid common shares of InterOil; | ||
| (c) | provided that: (A) if and to the extent the Investor does not notify PNGDV of its election within the aforementioned 48 hour period, Investor will be deemed to have elected to participate pursuant to clause 5.1(b)(i), and (B) InterOil shall not be obligated to issue shares to Investor pursuant to clause 5.1(b)(ii) until it has received full Cost of IPI. | ||
5.2 Notwithstanding anything else herein, no conversion into common shares of InterOil may occur prior to November 22, 2003, unless the certificates issued in respect thereof are legended as follows:
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| (a) | "UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THE SECURITIES OFFERED HEREBY SHALL NOT TRADE THE SECURITIES BEFORE NOVEMBER 28, 2004" and | |
| (b) | "WITHOUT PRIOR WRITTEN APPROVAL OF THE TSX VENTURE EXCHANGE AND COMPLIANCE WITH ALL APPLICABLE SECURITIES LEGISLATION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED, HYPOTHECATED OR OTEHRWISE TRADED ON OR THROUGH THE FACILITIES OF THE TSX VENTURE EXCHANGE OR OTHERWISE IN CANADA OR TO OR FOR THE BENEFIT OF A CANADIAN RESIDENT UNTIL THE DAY THAT IS FOUR MONTHS AFTER THE SECURITIES WERE ISSUED FROM TREASURY." | |
5.3 Notwitstanding anything else contained herein, until November 22, 2003, PNGDV or Investor may not exercise any rights to obtain common shares of InterOil.
6. CASH CALLS
6.1 PNGDV shall ensure that if Investor elects to participate in operations in the Phase One Participation Area by electing pursuant to clause 5.1(b)(i), before entering into any commitment or incurring any expenditure in respect of Completion, a Subsequent Work Program or otherwise relating to the JVOA in relation to the Phase One Participation Area, the following will occur:
| (a) | InterOil will submit an AFE (as defined in the JVOA) for that cost to PNGDV for its consideration. PNGDV will immediately forward that AFE to Investor and Investor must within 15 days after receipt of that AFE, and in accordance with the terms of the JVOA, either: | ||
| (i) | give written notice to PNGDV that Investor intends to pay its IPI share of the costs and make such payment within 30 days of notice given under this clause 6.1(a)(i); or | ||
| (ii) | give written notice PNGDV that Investor intends not to pay its IPI share of the costs and incur a Non-Consent Penalty. | ||
| (b) | In the event that Investor does not pay within the period referred to in clause 6.1(a)(i), for any reason except clause 6.2, all or part of its IPI share of the aforementioned costs: | ||
| (i) | Investor will incur a Non-Consent Penalty for the amount Investor would have paid for its IPI share of such costs; and | ||
| (ii) | if in any 60 day period such unpaid costs are in aggregate in excess of $500,000 (excluding costs in respect of which Investor has paid the Non Consent Penalty), then unless Investor pays the Non Consent Penalty relating to those unpaid costs within 60 days of receiving notice from PNGDV, Investor shall forfeit its IPI absolutely and this Agreement (other than clause 10) shall be deemed to be terminated immediately. | ||
6.2 In the event InterOil or one of its Affiliates raises debt financing (including principle, interest and fees) on behalf of InterOil and Investor's IPI share, for all or a portion of any
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expenditure related to the Participation Area, including any Completion work and/or a Subsequent Work Program, using as security the rights to the Participation Area, then the Non-Consent Penalty shall not apply to Investor's IPI share of the costs financed under any circumstances.
6.3 The parties agree that the financial integrity of each party, and the timely payment by each party of amounts due, are of essential importance in order that this Agreement, PNGDV's obligations under the Drilling Participation Agreement and InterOil's obligations under the JVOA, can be fully and completely performed. Each party agrees that it fully understands the remedy of forfeiture set forth in this clause 6 and the importance of such remedy and the reasons for it and agrees that such remedy is reasonable and equitable in view of such factors. Each party further agrees that it has had the advice of legal counsel with respect to the forfeiture remedy set forth in this clause 6 and that it has agreed to such forfeiture remedy on the basis thereof.
6.4 If Investor elects to participate in operations in the Phase Two Exploration Program pursuant to clause 7.4, this clause 6 shall apply mutatis mutandis.
7. PHASE TWO EXPLORATION PROGRAM AND INVESTOR OPTION
PNGDV represents, warrants and covenants that:
7.1 InterOil may decide in its absolute discretion to conduct, at its own cost, the Phase Two Exploration Program in the manner contemplated in this clause 7. InterOil will be the Operator of the Phase Two Exploration Program.
7.2 InterOil will not to make a decision to proceed with the Phase Two Exploration Program until the earlier of:
| (a) | 30 days after completion of Phase One Exploration Program; and | ||
| (b) | 30 days after the Discovery of a Commercial Petroleum Field from the Phase One Exploration Program. | ||
7.3 The Phase Two Exploration Program will be conducted within the Licence Area as indicated on the Exploration Map attached as Annexure I, which may be one or more portions of Blocks not included in the Phase One Exploration Program (the "Phase Two Area"). All drilling structures and locations will be nominated by InterOil prior to commencement of the drilling program, but may be modified by InterOil from time to time. Upon the Discovery of a commercial Field by wells drilled in the Phase Two Exploration Program InterOil will request the declaration of a location under the Oil and Gas Act, which will include sufficient Blocks or portions of Blocks to cover adequately the Field, to the extent such Blocks are the Licence Area ("Phase Two Participation Area").
7.4 Upon InterOil's decision to proceed with the Phase Two Exploration Program, it will give written notice to PNGDV, and PNGDV will immediately forward that notice to Investor, and, within 90 days of receiving such notice, Investor may give notice to PNGDV ("Phase Two Notice") that it wishes to participate in the Phase Two Exploration Program on the same cost terms as for the Phase One Exploration Program, or otherewise lose the right to participate in the Phase Two Exploration Program.
7.5 Within 15 days after giving the Phase Two Notice, Investor must pay to PNGDV US$530,000 for each 0.25% IPI it wishes to acquire, up to the IPI Percentage Investor initially held,
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in any Phase Two Participation Area resulting from the Phase Two Exploration Program, or otherwise lose the right to participate in the Phase Two Exploration Program. This payment cannot be subject to a Non-Consent Penalty.
8. SUBSEQUENT WORK
If a Discovery Field is estimated by InterOil to be 5 million barrels or greater, Investor will pay to PNGDV, in respect of each 0.5% of IPI Percentage held by it (as such IPI Percentage may be reduced pursuant to the definition thereof), 1.0% of the costs incurred in carrying out the Subsequent Work Program in respect of that Discovery Field from the time Total Depth is reached through to the grant of a PDL in respect of that Discovery Field, up to a maximum expenditure limit in respect of that Discovery Field of US$600,000 for each 0.5% of IPI Percentage (as such IPI Percentage may be reduced pursuant to the definition thereof) held by it. Upon the earlier of the grant of PDL and the maximum expenditure limit being reached in paying for the Subsequent Work Program in respect of that Discovery Field, all further operations carried out in respect of that Discovery Field, including any remaining Subsequen t Work Program, will be paid for in accordance with each party's Participation Interest and in accordance with the terms of the JVOA. The foregoing provisions of this clause shall apply mutatis mutandis to any Phase Two Exploration Program
9. ASSIGNMENT
9.1 Subject to clause 9.4, a party to this Agreement may assign or transfer or purport to assign or transfer any of its interests, rights and obligations in and under this Agreement to a person or entity without the prior written consent of the other party to this Agreement, provided that Investor may only do so after paying to InterOil and PNGDV all of the agreed amounts described herein.
9.2 An assignment or transfer pursuant to the provisions of this clause 9 shall not be effective until the assignee or transferee is bound by the provisions of this Agreement
9.3 Nothing contained in this clause 9 shall be deemed or construed so as to:
| (a) | prevent InterOil or PNGDV from freely mortgaging or encumbering its Petroleum Share of production and transferring or assigning to such mortgagee or lender the rights to the proceeds of sale of any Petroleum sold hereunder on behalf of InterOil as security for such debt. The provisions of this clause 9 shall not apply to the granting of any such security interest; or | ||
| (b) | prevent Investor from freely mortgaging or encumbering its IPI and assigning to such mortgagee or lender the rights to the proceeds from Investor's IPI as defined in this Agreement as security for such debt. | ||
9.3 Until November 22, 2003, Investor may not assign this agreement or any benefit hereunder to any Canadian entity or Canadian resident.
10. CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS
10.1 Confidential Information acquired or received by any party under this Agreement shall be held confidential during the continuance of this Agreement and until the cessation of commercial production of Petroleum from the Discovery Field plus a period of 2 years thereafter and shall not be
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divulged in any way to any third party, without the prior written approval of the other party (which shall not be unreasonably withheld) and such third parties as the other party may reasonably request, provided that any party to this Agreement may, without such approval, disclose Confidential Information:-
| (a) | to any Affiliate or bona fide intended assignee of such party upon obtaining a similar undertaking of confidentiality from such Affiliate or assignee in favour of the other party and such third parties as the othr party may reasonably request; | ||
| (b) | to any outside consultants, upon obtaining a similar undertaking of confidentiality from such consultants in favour of the other party and such third parties as the other party may reasonably request; | ||
| (c) | to any bank or financial institution from whom such party is seeking or obtaining finance, upon obtaining a similar undertaking of confidentiality from such bank or institution; | ||
| (d) | to the extent required by the Oil and Gas Act, the Licence, any other applicable laws or regulations or the Securities and Exchange Commission of Australia or any comparable government entity having jurisdiction over a party to this Agreement or the regulations of any recognised stock exchange on which are listed for quotation shares in the capital of such party or any Affiliate of such party; | ||
| (e) | in a prospectus registered by the Australian Securities Commission or any comparable government entity, or any delegate thereof, where such disclosure is required by law; | ||
| (f) | to the extent that the same has become generally available tot the public; or | ||
| (g) | to the extent acquired independently from a third party whom the disclosing party believed on reasonable grounds was under no obligation of confidentiality relating thereto. | ||
11. TERM AND TERMINATION
The term of this Agreement shall be for the period commencing on the date as of which this Agreement is made (nothwithstanding later execution hereof) and shall continue to be effective until 5 years from the date of first production from the Discovery Field or until the final Distributions after cessation of commercial production of Petroleum from the last Discovery Field, whichever is later.
12. FORCE MAJEURE
12.1 If any party to this Agreement is prevented or delayed, wholly or in p art, by Force Majeure (as defined in clause 12.2) from carrying out its obligations under this Agreement, other than the obligation to make payment of monies due, uon such party giving notice and reasonably full particulars of such Force Majeure, shall be suspended during but no longer than the continuance of the inability so caused and such further period thereafter as shall be reasonable in the circumstances provided always that the cause of the Force Majeure as far as possible shall be remedied with all reasonable dispatch by the party whose performance hereunder is adversely affected.
| PNGDV.Advisors Group LTD | 11 |
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12.2 "Force Majeure" shall mean, strike, lockout, ban and limitation of work, or other industrial disturbance; act of the public enemy, war, whether declared or undeclared, blockade, riot, insurrection; malicious damage; earthquake, landslide, lightning, fire, storm, flood, tidal wave, epidemic or other act of god; explosion; the order of any court or government authority; shortage or unavailability of equipment, materials or labour, or restriction thereon, or limitations upon the use thereof, delay in transportation or communication, breakage of or accidental damage to machinery or lines of pipe, freezing of well or delivery facilities, cratering, washout, well blowout, necessity for making repairs to or reconditioning wells, restraint on access to the Licence Area in the vicinity of a Discovery Field, termination or suspension of any licence concerning the Discovery Field and any other cause, whether of the kin d herein enumerated or otherwise, not reasonably within the control of the party to this Agreement concerned.
12.3 Not withstanding anything hereinbefore contained, the settlement of a strike, lockout, ban and limitation of work or other industrial disturbance shall be entirely within the discretion of the party to this Agreement concerned.
13. LIABILITY
PNGDV shall not be liable for any claim, action, loss, liability or cost or expense whatsoever arising out of, or in connection with, this Agreement and suffered or incurred by Investor except to the extent that it arises out of PNGDV's gross negligence or Wilful Miscondct.
14. NOTICES
14.1 Any notice (including invoices) given under this Agreement shall be given to a party in writing at its nominated address, and sent whenever practicable and possible by post, facsimile transmission, personal delivery or email. Such notices shall be effective upon receipt which shall be deemed to have occurred when confirmation of receipt has been received from the recipient. Such confirmation may be a reply to or acknowledgement of the notice sent by the recipient himself, or a return message automatically generated by the recipient's system.
14.2 The nominated addresses of theparties to this Agreement at the date hereof are as follows:
| Party PNGDV |
Address PNG Drilling Ventures Limited 25025 I-45 North Suite 410 The Woodlands TX 77380 USA Attention: Dale Dossey |
|
| Investor | Advisory Group Ltd. PO Box 127 Turks and Caicos Islands Providenciales British West Indies Attention: Robert S. Kennedy |
|
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14.3 Any party to this Agreement may at any time by notice, such address shall become the address of that party for the purposes of this Agreement.
15. AMENDMENT
15.1 This Agreement may be amended only by written agreement of all of the parties to this Agreement.
No waiver of any breach of this Agreement or of any provisions hereof shall be effective unless such waiver is in writing and signed by the party to this Agreement from whom such waiver is requested. No waiver of any breach shall be deemed to be a waiver of any other or subsequent breach.
16. ENTIRE AGREEMENT
This Agreement contains the entire agreement among the paties and supersedes and replaces all earlier agreements, documents, correspondence and conduct by the parties with respect to the subject matter hereof.
17. ACKNOWLEDGEMENT AND LEGEND
The parties hereto acknowledge that this Agreement constitutes a certificate for the securities offered hereby for the purposes of Multilateral Instrument 45-102 and subject to such other transfer and sale restrictions as may be agreed to by the parties, the parties hereto further acknowledge the existence and effect of the following legend:
UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THE SECURITIES OFFERED HEREBY SHALL NOT TRADE THE SECURITIES BEFORE the 28th of November 2003.
18. COSTS
Each party's costs of negotiating and entering into the Agreement, and any costs associated with obtaining authorisation or approval of this Agreement from any government or regulatory body shall be borne by the party accruing such costs.
19. GOVERNING LAW
This Agreement shall be governed by and construed in accordance wit the laws of the Province of Alberta and the laws of Canada applicable therein, excluding any conflict of laws rules thereof which would refer the matter to the laws of another jurisdiciton, and each party irrevocably attorns to the jurisdiciton of the courts of Alberta.
20. RELATIONSHIP OF PARTIES
Neither this Agreement nor any rights or obligations of any party under this Agreement shall constitute any of the parties as partners.
21. COUNTERPARTS
| PNGDV.Advisors Group LTD | 13 |
16
This Agreement may be executed in multiple counterparts, each such Agreement so executed shall have the effect of an original, but all such counterparts shall together constitute but one and the same instrument and this Agreement shall be binding on the Parties.
22. TIME
Time shall be of the essence hereof.
23. SEVERABILITY
Each provision of this Agreement is intended to be severable. If any provision hereof is illegal or invalid, such illegality or invalidity shall not effect the validity of the remainder hereof.
IN WITNESS WHEREOF the parties to this Agreement have executed this Agreement effective as of the day and year first hereinbefore mentioned.
| Signed for and on behalf of PNG Drilling Ventures Limited By: |
Signed for and on behalf of Advisory Group Limited By: |
|
| /s/ Dale Dossey | /s/ Robert Kennedy | |
| Name/Title | Name/Title | |
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DISTRIBUTIONS SCHEDULE
The Indirect Participation Interest ("IPI") shall entitle Investor to Distributions relating to the Phase One Participation Area and, if the Investor elects to participate therein, the Phase Two Participation Area, in accordance with its applicable IPI Percentage at the time of any Distribution. PNGDV shall make quarterly Distribution payments to Investor as soon as is reasonably practical. Investor will pay any and all income taxes due to the State related to Investor's Distributions. Investor will have the right to have the information audited by itself or a qualified agent. Distributions to Investor in accordance with its IPI shall be calculated as follows:
| + | Any and all proceeds associated with the Participation Area, including (if applicable) any and all funds borrowed using as security the rights to the Participation Area, but not used for expenditures related to the Participation Area | |
| - | Operator's Direct Charges, calculated in accordance with the Accounting Procedures in the JVOA, and including InterOil's actual direct costs to transport and sell Petroleum, including repayment of any and all borrowings (principal interest, and fees etc.) secured by the rights to the Participation Area | |
| - | Operator's Indirect Charges, calculated in accordance witht he Accounting Procedures in JVOA | |
| - | US$0.45 per barrel infrastructure fee for Petroleum produced and transported to the InterOil Refinery | |
| - | State royalties and other State imposts and levies (if any) | |
| = | Sub-total before State income tax | |
| x | Investor's IPI% | |
| = | Investor's Sub-total | |
| - | Non-Consent Penalty outstanding, (if any) | |
| - | Investor's IPI% share of abandonment security funding under the JOVOA (if any) | |
| = | Distribution to Investor | |
| PNGDV.Advisors Group LTD |
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| [LOGO] | Bontan Corporation Inc. 47 Avenue Road, Suite 200 Toronto, Ontario Canada M5R 2G3 T: 416-860-0211 F: 416-361-6228 W: www.bontancorporation.com |
July 9, 2004
Advisory Group Limited
P O Box 127
Turks and Caicos Islands
Providenciale
British West Indies
Dear Sirs:
We refer to our Agreement dated July 21, 2003.
As you are aware, we have lent a total sume of US$1,860,843 for investment into an Indirect Participation Agreement with PNG Drilling Ventures Limited. Further, you are aware that the funds lent by us are fully secured against such IPI interest in a drilling venture, which currently works out to 0.88%.
We now request as follows:
| 1. | Exercise the conversion option as per Clause 5.1 of the IPI Agreement dated July 21, 2003 and obtain 15,493 free-trading shares of InterOil Corporation in settlement of our loan by US$275,000. These shares should be issued in the name of Bontan Corporation Inc. and forwarded to us at our corporate address on this letterhead. | |
| 2. | Assign the remaining IPI interest, which works out to be 0.75%, to us in full settlement of the remaining loan to Bontan Oil and Gas Corporation. | |
Please consider the above matter as urgent.
Sincerely
/s/ Kam Shah
Kam Shah
Chief Executive Officer
Chief Financial Officer
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A D V I S O R Y G R O U P L T D .
July 9, 2004
Mr. Kam Shah, CEO and CFO
Bontan Corporation Inc.
47 Avenue Road, Suite 200
Toronto, Ontario
M5R 2G3
Dear Mr. Shah:
We are in receipt of your letter dated July 9, 2004.
As per your instructions, we confirm that we have advised PNG Drilling Ventures Limited to assign Advisory's IPI Interest to Bontan Oil & Gas Corporation and to issue 15,493 free-trading shares of InterOil Corporation.
Yours truly,
/s/ Robert Kennedy
Robert Kennedy
President
PO BOX 127, TURKS AND CAICOS ISLANDS
PROVIDENCIALES, BRITISH WEST INDIES
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February 17, 2004
MEMORANDUM OF UNDERSTANDING
BETWEEN
BONTAN MINERAL RESOURCES INC. (NEWCO)
AND
FRANCIS J.L.GUARDIA (FRANK)
(British/Canadian holding permanent residency status in Brazil)
AND
ASTROGEMAS MINERACAO LTDA (ASTROGEMAS)
(A corporation incorporated in Brazil and fully owned by Frank)
| A. Background: | |||
| 1. | Astrogemas holds an option to acquire 50% share in a joint venture (The JV) with Minabraz Mineracao Ltda, a Brazilian corporation (Minabraz). The option requires Astrogemas to invest about US$100,000 towards construction of a gravel suction dredge and a land based gravel washing plant and operating expenses for a year. The option expires on May 1, 2004. | ||
| 2. | The JV holds a licence licence on a 1,770.03 hectare area in the valley of the Paranaiba river in Coromandel region in Minas gerais State in Brazil to explore and produce diamonds from the alluvium of the valley. The licensed area is part of the geographic region known as the "Triangulo Mineiro", the important diamond producing center of southwest Minas gerais. The licence is valid for three years (estimated to expire in 2006) and is renewal automatically subject to fulfillment of certain conditions and commitments prescribed by the National Department of Mineral Production. | ||
| 3. | Frank also plans to explore and acquire new licenses and/or JV opportunities in "Traingulo Mineiro" area. Specifically, he plans to identify at least two such opportunities within six months provided a funding of up to US$100,000 is available to cover the exploration and living costs. | ||
| 4. | Newco has agreed to provide the funds up to US$200,000 required to exercise the option in the JV and also to explore opportunities for more licenses and/or Jvs as described in A3 above. However, the actual maximum funds required are estimated to be US$129,215 based on the details provided by Frank as further analyzed in the cash flow/income projections forming part of this Memorandum. | ||
| 5. | The Newco has also agreed to provide any future funding required to commercially explore the new opportunities to be identified as discussed in A.3 | ||
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| B. Corporate Structure: | |||
| 1. | A new company, Bontan Mineral Resources Inc. ( Newco) will be incorporated in Ontario, Canada upon signing of this memorandum. There will be two shareholders, namely - | ||
| Terence or any of his group companies - 600 common shares $60 | |||
| Frank or any of his group - 400 common shares $40 Ownership by Frank or any of his group is subject to certain conditions as discussed later in this memorandum. |
|||
| 2. | The Newco will acquire 100% of Astrogemas and will directly undertake other new exploration activities as discussed in A.3. | ||
| 3. | The Board of directors of the Newco will be as follows: Terence Robinson Chairman Kam Shah Director Francis J.L. Guardia Director Directors shall receive no fee or remuneration for acting as directors Minimum directors shall be three and maximum will be seven |
||
| 4. | The Board of Advisors of the Newco will consist of the following: Terence Robinson Kam Shah Francis J. L. Guardia Sethu Raman Bill Hamilton Any other persons nominated by Terence or Frank Maximum persons on the Board will be seven. The Board of Advisor will act in an advisory capacity to the Board of directors on technical matters concerning the exploration and related activities. |
||
| 5. | The Newco will open a US dollar account in Toronto. Terence and Kam will be the signing authority on that account. | ||
| 6. | Astrogemas, the subsidiary of Newco, will open an account in Brazil. This account will be an expense account. Frank and Fernando will be a joint signatories to this account. The account will be funded from time to time by the Newco. | ||
| 7. | 7. Newco will also open an account in Brazil. This account will be a collection or deposit account. Kam and Terence will be signatories to this account. All proceeds from JVs and other ventures in Brazil will be directly deposited into this account. | ||
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| 8. | The executive officers of the Newco will be: Terence Robinson Chief Executive Officer Kam Shah CFO & Secretary Francis J.L. Guardia President |
||
| 9. | Frank will maintain a complete and proper accounting records in Brazil for all the activities covered by this memorandum and will provide a weekly report in a format to be agreed between Frank and Kam. The Brazilian operations will be reviewed by a firm of accountant to be appointed by Kam or alternatively will be available for review by Kam whenever he decides. | ||
| 10. | The above are simply the broad outlines of the corporate structure. More detailed description of the procedures and rules are incorporated in the Articles of Incorporation and Bye-laws of the company. These documents will be part of the incorporation documents. | ||
| C. Frank's representations and commitments | |||
| 1. | That the information provided by Frank as outlined in A 1 to 3 are true and correct. | ||
| 2. | That the conditions prescribed by the National Department of Mineral Production of Brazil for renewing the license for the JV can be complied with without further expenditure, especially no further costs are anticipated as regards environmental or site clearance aspects of the JVs. | ||
| 3. | That Astrogemas has no liabilities or commitments, which would involve further expenditure or liabilities for the Newco other than what has been discussed in this memorandum. | ||
| 4. | That Frank has no personal commitments or any other reasons, which would not enable him to fulfill the terms of this Memorandum. | ||
| 5. | That Frank will ensure that all Brazilian laws in the matter are properly complied with and all taxes-corporate, payroll and others-payable have been paid. | ||
| 6. | That Frank will render proper and true accounting of all financial and other transactions in Brazil to the Board of Directors of the Newco and adhere to the periodic reporting as agreed. | ||
| 7. | That Frank has agreed to sign a five year contract with the newco to engage exclusively in the activities of the Newco as described in this Memorandum on terms outlined in the Consulting contract included as exhibit to this Memorandum | ||
| D. Newco/ Terence group representations and commitments | |||
| 1. | That it will provide the funds on a timely basis as required, to fulfill the business plans discussed in this memorandum. | ||
| 2. | That it will maintain true and correct accounting of all transactions and activities of the Newco in Canada. | ||
| 3. | That it will not engage in any activities which are contrary to the spirit of this memorandum and are detrimental to the interest of Frank and his group. | ||
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| E. Frank's and his Group's equity entitlement in the Newco | |||
| 1. | Frank and his Group will be entitled to a total equity share of 40% in the newco. This share will be allotted to Frank in stages according to the milestones outlined in the Milestones details included in the Exhibits to this memorandum. | ||
| 2. | The actual equity entitlement allocation will change proportionate to the achievement of the agreed milestones. | ||
| F. Contract with Current Capital Corp. (CCC) | |||
| 1. | Newco will enter into an exclusive contract with CCC for management services of Terence and Kam at a rate of US$2,500 per month for the first six months and $5,000 per month thereafter. This contract will be initially for a three-year period. CCC will be entitled to an additional fee at 10% of any future funds raised. |
||
| G. General Matters | |||
| 1. | Frank shall deliver to Newco a certificate or certificates representing all the Purchased Shares of Astrogemas, duly endorsed in blank for transfer, and will cause the transfer of such shares to be duly and regularly recorded on the books of Astrogemas in the name of the Newco in a manner which will enable the Newco to be the legal owner of Astrogemas according to the brazilian corporate laws. | ||
| 2. | All the representations and commitments outlined in sections C and D of this memorandum are considered integral part of the business arrangement envisaged by the parties in this Memorandum. Breach or non-fulfillment of any of the representations or commitments will render the business relationship null and void and will automatically entitle the aggrieved party to seek appropriate remedy and financial damages from the defaulting party. | ||
| 3. | The terms of this Memorandum shall be construed in accordance with the laws of the province of Ontario. | ||
This Agreement shall enure to the benefit of and be binding upon the respective parties hereto and their respective heirs, executors, administrators, successors and/or assigns, as the case may be.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto this 17th day of February, 2004.
| SIGNED, SEALED AND DELIVERED | ) | ||
| ) | |||
| /s/ Katherine Topelko | ) | /s/ Terence Robinson | |
| ) | |||
| Witness | ) | (Terence Robinson for Newco) | |
| ) | |||
| ) | |||
| /s/ Katherine Topelko | ) | /s/ Francis J.L. Guardia | |
| ) | |||
| Witness | ) | (Francis J.L. Guardia for himself and his Group and Astrogemas) |
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The exhibits forming part of this agreement:
| 1. | Diamond investment opportunity - Rio Paranaiba dated November 28, 2003 prepared by Frank | ||
| 2. | Astrogemas Mineracao Ltda - A New diamond strategy for Brazil prepared by Frank | ||
| 3. | Astrogemas Mineracao Ltda - coromandel property acquisition budget prepared by Frank | ||
| 4. | Projected cash flow /income statement for the year ending March 31, 2005 together with monthly analysis of joint venture projections for the same period. | ||
| 5. | Schedule of Milestones and equity release to Frank. | ||
| 6. | Consulting agreement with Frank. | ||
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CONSULTING AGREEMENT
THIS AGREEMENT made as of the 1st day of April, 2003 (the "Effective Date")
B E T W E E N:
| TERENCE ROBINSON (hereinafter referred to as the "Consultant") |
||
| OF THE FIRST PART | ||
| - and - | ||
| BONTAN CORPORATION INC., a corporation incorporated under the laws of the province of Ontario, (hereinafter referred to as the "Corporation") |
||
| OF THE SECOND PART | ||
WHEREAS the Consultant has certain considerable expertise in the area of corporate acquisitions and management.
WHEREAS the Corporation is engaged in the acquisition and investment in the natural resource industry (the "Corporation's Business").
AND WHEREAS the Corporation desires to obtain and apply the expertise of the Consultant to the Corporation's Business.
THIS AGREEMENT WITNESSES that in consideration of Ten Dollars ($10.00) paid by each party to the other, the receipt and sufficiency of which is hereby acknowledged by each, together with the convenants and agreements herein contained, the parties hereto agree as follows:
1. Consulting Services - The Corporation hereby retains the services of the Consultant, on a non-exclusive basis, and the Consultant hereby agrees to provide the consulting services to the Corporation described in this Agreement.
2. Scope of Services - The Consultant shall provide advisory and consulting services relating to potential business acquisitions and investments by the Company, which may include planning and development services, due diligence investigations, valuations and negotiations, as requested and instructed by the Corporation from time to time. The Consultant shall report to the Board of Directors of the Corporation.
3. Qualifications - The Consultant represents that he has all the necessary knowledge, experience, abilities, qualifications and contacts to effectively perform the Services. The Consultant represents that he shall provide the Services in such a manner as to permit the Corporation to have full benefit of the Consultant's knowledge, experience, abilities, qualifications and contacts and that it shall provide the Services in strict compliance with all applicable laws and regulations.
4. Term of Agreement - The provision of services by the Consultant to the Corporation hereunder shall commence on the Effective Date and shall, subject to Section 14 of this Agreement, remain in force until March 31, 2009. Thereafter, the Corporation may in its sole
1
discretion extend this Agreement for a further five-year term, with any additional extensions subject to Section 14.
5. Compensation - In full consideration of the Consultant's performance of the Services after the Effective Date, the Corporation shall pay the Consultant the sum of $10,000 per month, including GST, during the first year of this agreement. The Consultant's fee for the remaining years of the term shall be mutually agreed at the beginning of each of the years. The fee may be paid in cash and or common shares at the discretion of the Corporation. In addition, the Corporation shall grant to the Consultant options (the "Consultant Options") pursuant to and in accordance with the option Plan that may be approved by the shareholders from time to time. The Board of Directors of the Corporation will decide the number and price of the options.
6. Reimbursement of Expenses - The Consultant shall be entitled to full reimbursement of expenses incurred by him in connection with the affairs of the Corporation including travel, meals and entertainment, clubs, parking and cellular phone expenses.
7. Confidential Information
| (1) | As used herein the words "Confidential Information" include: | |||
| (a) | such information as a director, officer or senior employee of the Corporation may from time to time designate to the Consultant as being included in the expression "Confidential Information"; | |||
| (b) | any secret or trade secret or know how of the Corporation or any information relating to the Corporation or to any person, firm or other entity with which the Corporation does business which is not known to persons outside the Corporation including, without limitation, the commission of or results from any exploration conducted or authorized by the Corporation or its agents in connection with any of the Corporation's acquisitions or investments; | |||
| (c) | any information, process or idea that is not generally known outside of the Corporation; | |||
| (d) | all proprietary information relating to the Corporation; and | |||
| (d) | all proprietary information relating to the Corporation; and | |||
| (e) | all investor information now existing or currently under development by the Corporation. | |||
| The Consultant acknowledges that the foregoing is intended to be illustrative and that other Confidential Information may currently exist or arise in the future. | ||||
| (2) | The Corporation and the Consultant acknowledge and agree that the relationship between them is one of mutual trust and reliance. | |||
| (3) | The Consultant acknowledges that he may be exposed from time to time to information and knowledge, including Confidential Information, relating to all aspects of the business of the Corporation, the disclosure of any of which to the Corporation's competitors, customers, or the general public may be highly detrimental to the best interests of the Corporation. | |||
| (4) | The Consultant acknowledges that the business of the Corporation cannot be properly protected from adverse consequences of the actions of the Consultant other than by restrictions as hereinafter set forth. | |||
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| (5) | The Consultant agrees that he will not disclose at any time during the term of this Agreement or after termination of this Agreement any of the Confidential Information (whether or not conceived, originated, discovered or developed in whole or in part by the Consultant) it being expressly acknowledged and agreed by the Consultant that the Confidential Information shall not include any information which is already in the public domain or becomes so through no fault of the Consultant. | |||
| (6) | In the event this Agreement is terminated for any reason whatsoever, whether by passage of time or otherwise, the Consultant shall forthwith upon such termination return to the Corporation each and every copy of any Confidential Information (including all notes, records and documents pertaining thereto) in the possession or under the control of the Consultant at that time, and the Consultant shall continue to be subject to the restrictions of this Section 7 notwithstanding termination of this Agreement. | |||
| (7) | The Consultant hereby acknowledges that, as between the Consultant and the Corporation, the Corporation is and shall remain the sole owner of all right, title and interest in the Confidential Information, including, but not limited to any and all rights and copyright, patent, trade secret and trademark. In the event this Agreement is terminated for any reason whatsoever, whether by affluxion of time or otherwise, the Consultant shall forthwith upon such termination return to the Corporation each and every copy of any Confidential Information (including all notes, records and documents pertaining thereto) in the possession or under the control of the Consultant at the that time. | |||
| (8) | Non-Competition - The Consultant agrees with the Corporation that the Consultant will not, for the period commencing on the Effective Date and until six (6) months following the date of termination of this Agreement, participate directly or indirectly, in any business which is substantially similar to the Corporation's Business or competitive with the Corporation's Business anywhere within Canada whether: | |||
| (a) | as a principal or partner; | |||
| (b) | in conjunction or association with any incorporated or unincorporated entity as an officer, director or similar official of any incorporated or unincorporated entity (including, without restricting the generality of the foregoing any corporation, partnership, joint venture, association, syndicate or trust) engaged in any of the activities included as part of the Corporation's Business (each of which entities is hereinafter referred to as the "Other Entity"); | |||
| (c) | as the consultant or advisor to or agent of any Other Entity be engaged in any manner whatsoever, directly or indirectly, in the vermiculite industry; | |||
| (d) | as a holder of shares in any Other Entity engaged in a vermiculite-related business in such number which, together with all shares in such Other Entity which are subject to an agreement to, or which in fact, vote (or otherwise act) in concert with the Consultant, exercise the effective control of any such Other Entity; | |||
| (e) | by canvassing or soliciting on behalf of the Other Entity orders for the Corporation's Business; | |||
| (f) | or by providing, directly or indirectly, financial or other assistance to a business which is substantially similar to or competitive with the Corporation's Business. | |||
9. Consultant Not An Employee - The parties acknowledge and agree that the Consultant shall provide the Services to the Corporation as an independent contractor and not as an employee of the Corporation and that an employer-employee relationship is not created by this
3
Agreement. The Consultant shall have no power or authority to bind the Corporation or to assume or create any obligation or responsibility, expressed or implied, on the Corporation's behalf, or in its name, nor shall it represent to anyone that it has such power or authority, except as expressly provided in this Agreement. As the Consultant is not an employee of the Corporation, he shall not be entitled to receive from the Corporation any benefits whatsoever and the Corporation shall not be required to make contributions for unemployment insurance, Canada Pension, workers' compensation and other similar levies in respect of any fee for services to be paid to the Consultant pursuant to this Agreement.
10. No Derogatory Remarks - The Consultant agrees with the Corporation that from and after the Effective Date the Consultant and the Corporation shall not make any derogatory remarks regarding the Corporation and the Consultant, respectively, and that the Consultant will not take any act as a result of which the relations between the Corporation and its suppliers, customers, employees or others may be impaired or which act may otherwise be detrimental to the business of the Corporation as the same is now or may hereafter be carried on by the Corporation. The Corporation shall be affixed with the same policy as the Consultant in this regard.
11. Consultant Shall Not Contract on Behalf of Corporation - The Consultant shall not enter into any contract or commitment in the name of or on behalf of the Corporation or bind the Corporation in any respect whatsoever, nor shall he represent to anyone that he has such power or authority other than the powers and authority vested in him under the terms of this agreement.
12. Use of Consultant's Work - Notwithstanding any other provisions of this Agreement, the Corporation shall not be bound to act on or otherwise utilize the Consultant's advice or materials produced by the Consultant in the performance of the Services.
13. Termination -
| (a) | This Agreement shall, if not previously terminated as provided for herein, automatically be terminated at the close of business March 31, 2005, subject to the sole discretion of the Corporation to extend the Agreement for a further 5-year term. Thereafter, unless either party has given 10 days prior written notice, the Agreement will be automatically extended for further 5-year terms. . Any options not exercised at the time of notice of termination shall expire fourteen (14) days after the date of the written notice of termination. | |||
| (b) | This Agreement may be immediately terminated by mutual consent of the parties at any time during the term of this Agreement, except that if the agreement is terminated by the Corporation before the expiry of the term without any cause, Consultant shall be entitled to a lump sum compensation of the lower of $250,000 and fees for the remaining term. | |||
| (c) | The Corporation or the Consultant may immediately terminate this Agreement in the event that the other party is in breach of any of the terms or conditions of the Agreement applicable to that other party. | |||
| (d) | This Agreement shall be terminated automatically and with immediate effect if at any time either the Corporation or the Consultant becomes insolvent or voluntarily or involuntarily bankrupt, or makes an assignment for the benefit of either party's creditors. | |||
| (e) | Notwithstanding any other provision hereon, upon termination of this Agreement by the Corporation pursuant to subsections 14(a), (c) or (d) above, | |||
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14. Indemnification - The Corporation hereby agrees to indemnify the Consultant and save him harmless from and against any and all losses, expenses, liabilities, claims (including fines, penalties and interest thereon), costs (including legal costs on a solicitor client basis) and damages for or by reason of or in any way arising out of the Consultant's compliance with the terms of this Agreement.
15. Amendments and Waivers - No amendment to this Agreement shall be valid or binding unless set forth in writing and duly executed by both of the parties hereto. No waiver of any breach of any term or provision of this Agreement shall be effective or binding unless made in writing and signed by the party purporting to give the same and, unless otherwise provided in the written waiver, shall be limited to the specific breach waived.
16. Assignment - The Consultant shall not assign, transfer, sub-contract or pledge this Agreement or any rights or the performance of any obligation arising under this Agreement, with out the prior written consent of the Corporation.
17. Survival - Without limitation, the parties acknowledge that Sections 7, 8 and 14 shall survive the termination of this Agreement.
18. Severability - If any provision of this Agreement is determined to be invalid or unenforceable in whole or in part, such invalidity or unenforceability shall attach only to such provision or part thereof and the remaining part of such provision and all other provisions hereof shall continue in full force and effect.
19. Further Assurances - Each party hereto agrees from time to time, subsequent to the date hereof, to execute and deliver or cause to be executed and delivered to the other of them such instruments or further assurances as may, in the reasonable opinion of the other of them, be necessary or desirable to give effect to the provisions of this Agreement.
20. Governing Law- This Agreement and the rights and obligations and relations of the parties hereto shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein (but without giving effect to any conflict of laws rules). The parties hereto agree that the courts of Ontario shall have jurisdiction to entertain any action or other legal proceedings based on any provisions of this Agreement. Each party hereto does hereby attorn to the jurisdiction of the courts of the Province of Ontario.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written.
| SIGNED, SEALED AND DELIVERED | ) | ||
| ) | Per: | ||
| ) | |||
| ) | /s/ Terence Robinson | ||
| ) | |||
| ) | Terence Robinson | ||
| ) | Consultant | ||
| ) | |||
| ) | |||
| ) | Per: | ||
| ) | |||
| ) | /s/ Kam Shah | ||
| ) | |||
| ) | Kam Shah | ||
| ) | Chief Financial Officer AS APPROVED BY THE BOARD OF DIRECTORS |
5
CONSULTING AGREEMENT
THIS AGREEMENT made as of the 19th Day of February, 2004. B E T W E E N : WHEREAS the consultant is an experienced exploration geologist and has information and contacts in exploring diamond producing opportunities in Brazil. WHEREAS the parties have agreed that the Consultant shall be engaged by NewCo upon and subject to the terms and conditions herein. NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and mutual covenants herein contained, the parties hereto respectively covenant and agree as follows: I. THE CONSULTING TERMS NewCo hereby retains the services of the Consultant to manage a joint venture on diamond production in Brazil and to identify and explore new opportunities to commercially produce and sell diamonds in Brazil according to the details outlined in the Memorandum of Understanding dated February 17, 2004 and exhibits thereto, upon the following terms and conditions which the Consultant hereby accepts. 1 II. TERM The term of this agreement shall start from the date of this agreement and run for five years and renewed automatically for similar duration, unless terminated earlier as per Article V of the Agreement. III. DUTIES 2 3 IV. FINANCIAL TERMS The Consultant's compensation package will comprise the following; The consultant shall also be entitled to 40% equity in the Newco subject to terms and conditions more fully described in the documents referred to in IV 7.a. V. TERMINATION OF CONSULTING CONTRACT Notwithstanding the above, NewCo may terminate the agreement immediately if the Consultant - 4 VI. NOTICE Any notice required or contemplated by this Agreement shall be in writing and shall be sufficiently given if delivered personally or sent by prepaid registered mail to the Consultant at the Consultant's last known place of abode: VII. SEVERABILITY The parties agree that in the event that any provision, clause, article, or attachment herein, or part thereof, which form part of this Agreement, are deemed void, invalid, or unenforceable by a court of competent jurisdiction, the remaining provisions, clauses, articles, attachments or parts thereof shall be and remain in full force and effect. VIII. LAW OF ONTARIO This agreement shall be governed by and construed in accordance with the laws of the Province of ONTARIO. IX. NOT ASSIGNABLE Neither this Agreement nor any rights or obligations hereof shall be assignable by the Consultant without the prior written consent of NewCo. Subject thereto, this Agreement shall ensure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators and assigns. IN WITNESS WHEREOF, the parties hereto have hereunder set their hands and seals. 5 6
Bontan Mineral Resources inc.
(The "NewCo")
OF THE FIRST PART
- and -
Francis J.L. Guardia
(The "Consultant")
OF THE SECOND PART
1.
Reporting responsibilities
The Consultant shall report directly to the Chief Executive Officer and the Chief Financial Officer (CFO) of the NewCo.
2.
Disclosure
The Consultant shall not, either during the continuance of the Consultant's contract or at any time thereafter, disclose the private affairs or secrets of NewCo to any person other than properly and duly designated officers of NewCo and shall not use for the Consultant's own purposes or for any purpose other than that of NewCo, any information he may acquire in relation to the business and affairs of NewCo. This obligation shall survive the expiry or termination of this agreement
3.
Non-competition
The Consultant agrees that during the terms of the Consultant's agreement with NewCo and for a period of two years after the date of the termination thereof, the Consultant will not directly or indirectly, whether as a shareholder, advisor, employee, consultant or otherwise participate with or be interested in any business within North America and Brazil which competes with the business of NewCo.
4.
Intellectual and Industrial Property
The Consultant shall promptly disclose to NewCo any development containing, related to, or based upon any information obtained during the continuance of this contract, (the confidential information) including without limiting the generality of the foregoing, any inventions, discoveries,
improvements, addition, applications or works with respect to any exploratory projects, which are made by or on behalf of the Consultant or of which the Consultant becomes aware during the performance of the Consultant's duties. All such developments from their conception shall be deemed to be the property of NewCo.
The Consultant hereby assigns NewCo any rights, which the Consultant may have now or in the future in any such developments in regard to the confidential information and in any patents, industrial designs, copyrights, trademarks, or other intellectual property related thereto.
The Consultant acknowledges that all right, title and interest in and to all confidential information and in and to any patents, industrial designs, copyrights, trademarks, or other intellectual property related thereto vests in NewCo. The Consultant acknowledges that he does not have any right, title or interest in it. The Consultant acknowledges the validity of any patents, industrial designs, copyrights and trademarks related to the confidential information, which may now or in the future be owned by NewCo.
Forthwith after the Consultant has completed use of the confidential information or forthwith upon demand of NewCo, the Consultant shall deliver to NewCo all documents and other materials (including without limiting the generality of the foregoing, any drawings, notes, data, electronic or otherwise, reports, photographs, negatives, audio video records, equipment, models, samples and the like) , which may be in possession of or under the control of the Consultant relating to or based upon any confidential information. The Consultant acknowledges that NewCo is the owner of any and all such documents and materials.
Notwithstanding the above, it is hereby agreed and understood between the parties to this agreement that the Consultant will be entitled free of any cost or encumbrance, to use the information and intellectual properties referred to in this section solely for use in any publications in all media with prior written consent of the Newco. .Newco will have a first right of refusal to participate in such publication.
5.
The Consultant's obligation shall continue before and after he has used the confidential information and or NewCo ceases using his services and shall continue until such time as the Consultant is expressly released therefrom by NewCo in writing. The obligation of the Consultant shall be binding on the
assigns, executors, administrators or other legal representatives of the Consultant.
6.
The Consultant acknowledges that any breach by him of this agreement shall cause irreparable damage to NewCo and that any breach shall entitle NewCo to seek immediate injunctive relief from a court of competent jurisdiction.
Address:
117 The Close
Salisbury, Wiltshire
United Kingdom SP1 2EY
or to Newco to:
47 Avenue Road, Suite 200
Toronto, Ontario
Canada M5R 2G3
SIGNED, SEALED AND DELIVERED
In the presence of
)
Newco:
)
Per:
)
)
/s/ Kam Shah
)
)
Name: Kam Shah, CFO
Authorized Signing Officer
)
)
)
)
/s/ Katherine Topelko
)
/s/ Francis Guardia
)
Katherine Topelko
)
Name: Francis J.L. Guardia
WITNESS
)
Consultant