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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-21968
STAR RESOURCES CORP.
(Exact Name of Registrant as Specified in Its Charter)
BRITISH COLUMBIA 76-0195574
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2000 South Dairy Ashford, Suite 510
Houston, Texas 77077
(Address of Principal Executive Offices, including Zip Code)
(281) 870-9882
(Registrant's Telephone Number, Including Area Code)
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
X No___________
Shares of Registrant's Common Stock outstanding as of December 6, 2002:
18,471,459
STAR RESOURCES CORP.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2002
and October 31, 2002 (Unaudited) . . . . . . . . . . . . . . . . . . . 1
Interim Consolidated Statements of Operations and Deficit Accumulated
During the Exploration Stage - Three and Nine Months Ended
October 31, 2002 and 2001 (Unaudited). . . . . . . . . . . . . . . . . 2
Interim Consolidated Statements of Cash Flows - Three and Nine Months
Ended October 31, 2002 and 2001 (Unaudited) . . . . . . . . . . . . . . 3
Notes to Interim Consolidated Financial Statements (Unaudited) -
October 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . 12
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . 12
PART II. Other Information.
Item 1. Legal Proceedings.. . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . 12
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
i
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, 2002 January 31, 2002
------------------ ------------------
(In Canadian Dollars)
ASSETS
Current assets:
Cash $ 175,209 $ 493,305
Accounts receivable 53,744 14,838
------------------ ------------------
Total current assets 228,953 508,143
Property, plant, and equipment, at cost:
Mineral properties and deferred expenditures (Note 2) - 2,942,086
Diamond sorting and recovery plant 1,905,873 1,905,873
Buildings, equipment and other 136,831 143,421
Accumulated depreciation (2,009,985) (1,995,438)
------------------ ------------------
32,719 2,995,942
Other assets 9,210 12,289
------------------ ------------------
Total assets $ 270,882 $ 3,516,374
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 172,258 $ 132,086
Interest payable (Note 3) 217,887 -
Debentures payable (Note 3) 1,278,595 -
------------------ ------------------
Total current liabilities 1,668,740 132,086
Debentures payable (Note 3) - 1,278,595
Interest payable (Note 3) - 122,604
Commitments and contingencies (Note 6)
Shareholders' equity (deficit):
Common share capital, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 18,471,459
(14,862,935 at January 31, 2002) (Note 5) 30,878,419 30,108,507
Deficit accumulated during the exploration stage (32,276,277) (28,125,418)
------------------ ------------------
Total shareholders' equity (deficit) (1,397,858) 1,983,089
Total liabilities and shareholders' equity (deficit) $ 270,882 $ 3,516,374
================== ==================
See accompanying notes.
1
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE EXPLORATION STAGE (UNAUDITED)
Three Months Ended October 31, Nine Months Ended October 31,
2002 2001 2002 2001
----------------- ----------------- ---------------- -----------------
(In Canadian Dollars)
Revenues:
Interest income $ 418 $ 850 $ 1,181 $ 5,898
----------------- ----------------- ---------------- -----------------
418 850 1,181 5,898
Expenses:
General and administrative (Note 7) 296,535 345,900 882,757 1,445,340
Finance charges - 1,725 23,110 40,779
Interest expense 32,228 32,513 95,283 90,663
Write-down of mineral properties 3,082,706 - 3,141,726 86,067
Translation (gains) losses 4,784 1,292 9,164 (22,581)
----------------- ----------------- ---------------- -----------------
3,416,253 381,430 4,152,040 1,640,268
----------------- ----------------- ---------------- -----------------
Loss before provision for income taxes (3,415,835) (380,580) (4,150,859) (1,634,370)
Provision for income taxes - - - -
----------------- ----------------- ---------------- -----------------
Net loss (3,415,835) (380,580) (4,150,859) (1,634,370)
Deficit accumulated during the exploration
stage at the beginning of the period (28,860,442) (27,418,544) (28,125,418) (26,164,754)
----------------- ----------------- ---------------- -----------------
Deficit accumulated during the exploration
stage at end of the period $ (32,276,277) $ (27,799,124) $ (32,276,277) $ (27,799,124)
================= ================= ================ =================
Net loss per common share $ (0.20) $ (0.04) $ (0.26) $ (0.18)
================= ================= ================ =================
Weighted-average common shares
outstanding 17,000,273 9,171,559 15,770,701 9,110,568
See accompanying notes.
2
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended October 31, Nine Months Ended October 31,
----------------- ----------------- ---------------- -----------------
2002 2001 2002 2001
----------------- ----------------- ---------------- -----------------
(In Canadian Dollars)
OPERATING ACTIVITIES
Net loss $ (3,415,835) $ (380,580) $ (4,150,859) $ (1,634,370)
Items not affecting cash:
Depreciation 7,177 9,484 21,900 79,450
Interest expense 32,228 32,227 95,283 90,377
Write-down of mineral properties 3,082,706 - 3,141,726 86,067
Other 989 (351) 3,929 (537)
----------------- ----------------- ---------------- -----------------
(292,735) (339,220) (888,021) (1,379,013)
Changes in noncash working capital:
Accounts receivable (46,907) 2,613 (38,906) 100,364
Accounts payable and accrued liabilities 2,078 (11,224) 92,672 (15,763)
----------------- ----------------- ---------------- -----------------
(44,829) (8,611) 53,766 84,601
----------------- ----------------- ---------------- -----------------
Net cash used in operating activities (337,564) (347,831) (834,255) (1,294,412)
INVESTING ACTIVITIES
Property acquisition and exploration (105,475) - (199,640) (501,877)
Buildings, equipment and other (1,613) - (1,613) (44,134)
----------------- ----------------- ---------------- -----------------
Net cash used in investing activities (107,088) - (201,253) (546,011)
FINANCING ACTIVITIES
Proceeds from issuance of convertible
debentures - - - 833,595
Proceeds from advances received - 306,057 - 306,057
Proceeds from issuance of common shares 563,955 - 717,412 313,660
----------------- ----------------- ---------------- -----------------
Net cash provided by financing activities 563,955 306,057 717,412 1,453,312
----------------- ----------------- ---------------- -----------------
Increase (decrease) in cash and temporary
cash investments 119,303 (41,774) (318,096) (387,111)
Cash and temporary cash investments,
beginning of period 55,906 121,240 493,305 466,577
----------------- ----------------- ---------------- -----------------
Cash and temporary cash investments, end
of period $ 175,209 $ 79,466 $ 175,209 $ 79,466
================= ================= ================ =================
See accompanying notes.
3
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2002
1. BASIS OF OPERATIONS
The accompanying interim unaudited consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements are presented in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the United States
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by Canadian and United States generally accepted accounting principles for
complete financial statements.
In the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month periods ended October 31, 2002 and 2001 are
not necessarily indicative of the results that may be expected for the year
ended January 31, 2003.
SIGNIFICANT ESTIMATES
The nature of the Company's operations result in significant expenditures for
the acquisition and exploration of properties. None of the Company's properties
have been proven to have economically recoverable reserves or proven reserves at
the current stage of exploration. The recoverability of the carrying value of
the Company's mineral properties and deferred expenditures is dependent upon a
number of factors including the existence of recoverable reserves, the ability
of the Company to obtain financing to renew leases and continue exploration and
development and the discovery of economically recoverable reserves. As
discussed in Note 2, the Company wrote off all costs capitalized as mineral
properties and deferred expenditures based upon exploration results.
Direct acquisitions, evaluation and exploration expenditures are capitalized,
reduced by sundry income, to be amortized over the recoverable mineral reserves
if a property becomes commercially developed. When an area is disproved or
abandoned, the acquisition costs and related deferred expenditures are written
off. Management's assessment of the net realizable value of mineral properties
and deferred expenditures requires considerable judgment and estimates which
could change significantly in the near term.
All amounts are in Canadian dollars unless noted otherwise. For further
information, refer to the consolidated financial statements and footnotes
thereto.
2. MINERAL PROPERTIES AND DEFERRED EXPENDITURES
ARKANSAS PROPERTIES
Black Lick and Twin Knobs II Properties
On February 5, 1999, the Company entered into an agreement with Potlatch
Corporation to purchase the surface rights to approximately 480 acres in Pike
County, Arkansas located adjacent to the Company's American Mine Property for a
total of approximately $313,000 (U.S.). In December 1999, the Company entered
into an agreement with a third party lessor to lease the undersurface rights
below the 480 acres described above. The consideration paid for the lease was
$50,000 (U.S.), 500,000 shares of the Company and the transfer to the lessor of
the surface rights which the Company purchased from Potlatch Corporation as
described above. The lease grants the rights to explore, develop and extract
diamond bearing material lying below overburden and the upper 50 feet of diamond
bearing material on those areas for which the surface rights have been acquired
and transferred to the lessor. The primary term of the lease is five years plus
two year extensions and will continue so long as there is commercial production.
Royalties include 2% of gross sales subject to a minimum of $48,000 (U.S.) per
year after the first seven years. The Company has the right to use the surface
for plant and other facilities for additional royalties.
4
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2002
2. Mineral Properties and Deferred Expenditures (continued)
During fiscal 2001, the Company commenced a drilling program to assess these
prospects. Core samples totaling 14,374 feet were taken from 40 drilling
locations on the Black Lick Property. Definition drilling commenced on the Twin
Knobs II Property in the third fiscal quarter of 2001, and core samples totaling
1,211 feet were taken from five drilling locations. An analysis of a total of
238kg of lamproite from three different core samples from the American Mine
Property and the Black Lick Property was performed and produced 14 microdiamonds
and one macrodiamond. In July 2001 the Company excavated a bulk sample of
approximately 10,000 tons on the Black Lick Property, and approximately 2,000
tons of the bulk sample was processed through the Company's diamond sampling
plant. Three diamonds with a total carat weight of 0.38 were recovered, which
is significantly less than the Company had anticipated.
During fiscal 2003, the Company recovered several microdiamonds from drill core
from the Black Lick and American Mine Properties which were processed at the
Diamond Recovery Plant. In May 2002 the Company drilled a total of 11 auger
holes, each five feet in diameter, on the American Mine, Black Lick and
Kimberlite Properties. Most of drilling was not successful as the holes were
terminated short of their target depths by hard sandstone blocks, which could
not be penetrated by the auger. In the third quarter of fiscal 2003 the Company
completed eleven wide diameter holes on the American Mine and Black Lick
Properties and bulk sampled approximately 900 tons of material. Bulk sampling
revealed no macrodiamonds. In December 2002, based upon the cumulative
exploration results obtained on the Arkansas Properties, the Company made the
decision to cease exploration efforts in Arkansas. Accordingly, the capitalized
costs related to the Black Lick and Twin Knobs II properties totaling $2,512,500
were written off in the third quarter of fiscal 2003.
American Mine Property
Pursuant to an agreement dated November 4, 1992, Diamond Exploration, Inc.
("DEI"), a wholly-owned subsidiary of the Company, was granted a permit to
explore a mineral property located in Pike County, Arkansas. The Company's
Diamond Recovery Plant ("the Plant") is located on this leased property. In
November 1996, the Company exercised its option to lease the property for 10
years upon the payment of $125,000 (U.S.). Yearly payments of $25,000 (U.S.)
were required for each of the four years after the first year and $40,000 (U.S.)
per year for the following five years, plus an additional $7,500 per year for
surface rentals related to the Plant. Sampling was resumed on the American Mine
property in the first quarter of fiscal 1998. The Company excavated a 100-ton
sample during fiscal 1998, and a total of 51 diamonds with a total carat weight
of 9.591 were recovered, including two stones greater than one carat. During
fiscal 2003 sampling was conducted on this property in conjunction with the
sampling performed on the Black Lick Property as discussed above. The lease
payment of $47,500, due November 1, 2003, has not been made by the Company. By
the terms of the lease, the Company has up to six months to remove all equipment
from the American Mine Property after the expiration of the lease or the
equipment becomes the property of the lessor. Due to the lease expiration and
the exploration results discussed above, the capitalized costs related to the
American Mine Property totaling $450,823 were written off in the third quarter
of fiscal 2003.
Kimberlite Mine Property
In November 1998, the Company executed a lease on certain property in Pike
County, Arkansas with a two-year term ending November 14, 2000 by payment of
$15,000 (U.S.). The Company extended the lease to November 14, 2002 by payment
of an additional $15,000 (U.S.) in November, 2000. The Company allowed this
lease to expire in November 2002, and the capitalized costs totaling $84,034
were written off in the third fiscal quarter of 2003.
5
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2002
2. Mineral Properties and Deferred Expenditures (continued)
Southwest Properties
In June 1994, the Company acquired from an unrelated company its rights under
fifteen mineral leases located in the southwestern region of Arkansas covering
approximately 2,000 acres. The original dates of the leases were from May 1992
to August 1992, with terms from 10 to 20 years. In fiscal 2002 and fiscal 2003
the Company elected not to renew selected leases, and, accordingly, write-downs
representing all prior acquisition costs totaling $86,067 and $59,020,
respectively, were recorded. The capitalized costs related to the remaining
active leases totaling $35,349 were written off in the third quarter of fiscal
2003 based upon the Company's decision to cease exploration efforts in Arkansas
as discussed above.
Mineral properties and deferred expenditures were as follows:
BALANCE AT BALANCE AT
JANUARY 31, IMPAIRED OCTOBER 31,
2002 ADDITIONS WRITE-OFFS 2002
Arkansas Properties:
Southwest Properties
Acquisition costs $ 92,103 $ 2,266 $ (94,369) $ -
---------- ---------- ------------ ----------
92,103 2,266 (94,369) -
American Mine Property
Acquisition costs 301,649 - (301,649) -
Exploration costs 134,467 14,707 (149,174) -
---------- ---------- ------------ ----------
436,116 14,707 (450,823) -
Black Lick and Twin Knobs II Properties
Acquisition costs 783,845 - (783,845) -
Exploration costs:
Consulting 224,381 53,446 (277,827) -
Drilling 706,298 112,512 (818,810) -
Excavation 547,751 - (547,751) -
Sample processing 84,267 - (84,267) -
---------- ---------- ------------ ----------
Total exploration costs 1,562,697 165,958 (1,728,655) -
---------- ---------- ------------ ----------
2,346,542 165,958 (2,512,500) -
Kimberlite Mine Property:
Acquisition costs 67,325 - (67,325) -
Exploration costs - 16,709 (16,709) -
---------- ---------- ------------ ----------
67,325 16,709 (84,034) -
---------- ---------- ------------ ----------
Total acquisition costs 1,244,922 2,266 (1,247,188) -
Total exploration costs 1,697,164 197,374 (1,894,538) -
---------- ---------- ------------ ----------
Total costs $2,942,086 $ 199,640 $(3,141,726) $ -
========== ========== ============ ==========
3. DEBENTURES
In February, 2002, the Company completed the issuance of $1,278,595 principal
amount of 10% secured convertible debentures ("the Debentures"). The Debentures
are convertible into units at the rate of one unit for each $2.87 principal
amount of Debenture until February 16, 2003. Each unit will consist of one
common share of the Company and one share purchase warrant with an exercise
price of $3.15, exercisable through August 16, 2003.
6
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2002
3. DEBENTURES (CONTINUED)
Upon conversion, $97,000 principal amount of 10% Debentures held by a director
will be convertible only into common shares of the Company on the basis on one
share for each $2.87 principal amount. The conversion and share purchase
warrant prices above have been adjusted to reflect the Company's seven for one
share consolidation as discussed in Note 5.
Interest at the rate of 10% is payable on conversion or maturity in cash, or at
the election of the Company, in common shares valued at the weighted average
trading price of the common shares of the Company for the ten trading days
preceding the interest payment date. The Debentures are secured by a general
security interest in the Company's current and future assets and by the stock of
Star U.S., Inc. ("Star"), a wholly-owned subsidiary of the Company, and a
wholly-owned subsidiary of Star.
4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")
The consolidated financial statements have been prepared in accordance with
Canadian GAAP which differs in some respects from United States GAAP. The
material differences in respect to these financial statements between Canadian
and United States GAAP, and their effect on the Company's financial statements,
are summarized below.
Mineral Properties and Deferred Expenditures
Under United States GAAP, the preferred method for accounting for evaluation and
exploration costs on properties without proven and probable reserves is to
expense all costs incurred, other than acquisition costs, prior to the
establishment of proven and probable reserves. The effect of the application of
this method to the financial statements would be to increase net loss by
$494,000 for the nine months ended October 31, 2001 and to decrease mineral
properties and deferred expenditures by approximately $1,697,000 January 31,
2002.
Foreign Currency Translation
Under United States GAAP, shareholders' equity would reflect a foreign currency
translation gain of $150,646 and $256,142 at October 31, 2002 and January 31,
2002, respectively.
5. SHARE CAPITAL
On October 15, 2001, the Company received shareholder approval to consolidate
the Company's share capital on a one for seven basis and to re-increase the
Company's authorized share capital back to 100,000,000 common shares on a
post-consolidated basis. Prior to the consolidation the Company had 64,200,916
common shares outstanding and the consolidation reduced that number to
9,171,559. The effective date of the consolidation was November 27, 2001. The
Company is listed on the TSX Venture Exchange.
On January 29, 2002, the Company completed a private placement of 5,691,376
units at a price of $0.20 per unit, each unit consisting of one common share and
one share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants had an expiration date of January 29, 2003 when issued. The
expiry date of the warrants was extended to January 29, 2004 in September 2002.
A total of $1,138,275 was received by the Company during fiscal 2002
representing subscriptions for the private placement. Included in that amount
was a total of $188,325 representing subscriptions for 941,625 units by three of
the Company's directors.
During June 2002, the Company received proceeds of $153,457, representing the
exercise by directors and employees of 570,000 common share options with
exercise prices from $0.24 to $0.28. On June 28, 2002, the Company issued
570,000 common share options with five-year terms and an exercise price of $0.27
to directors and employees. At the Company's annual meeting held July 23, 2002,
shareholders approved an amendment of the 2001 Stock Option Plan (the "Plan") to
7
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2002
5. SHARE CAPITAL (CONTINUED)
increase the number of shares reserved for issuance under the Plan from
1,142,857 to 3,000,000. On September 26, 2002, the Company issued 575,000
common share options with five-year terms and an exercise price of $0.18 to
directors and employees. As of October 31, 2002, the Company has 1,971,429
common stock options outstanding at prices ranging from $0.18 to $0.28.
On September 18, 2002, the Company completed a private placement of 2,819,774
units at a price of $0.20 per unit, each unit consisting of one common share and
one share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants have an expiration date of September 18, 2004. A total of
$563,955 was received by the Company during fiscal 2003 representing
subscriptions for the private placement. Included in that amount was a total of
$85,240 representing subscriptions for 426,200 units by three of the Company's
directors.
6. COMMITMENTS AND CONTINGENCIES
Except as described below, there are no material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of their
property is subject.
On May 15, 1998, a legal action styled James Cairns and Stewart Jackson vs.
------------------------------------
Texas Star Resources Corporation d/b/a Diamond Star, Inc. was filed in the 215th
-----------------------------------------------------
Judicial District Court of Harris County, Texas, Cause No. 9822760 wherein the
Plaintiffs allege, among other things, that the Company breached contractual
agreements and committed fraud by not timely releasing or causing to be released
from an escrow account required by Canadian law certain shares of the Company to
which Plaintiffs allege that they were entitled to receive in calendar 1995 and,
as a result of the Company's alleged actions with respect to the release of such
shares, the Plaintiffs sought monetary damages for losses in share value,
attorney's fees, court costs, expenses, interest and exemplary damages. In
1999, the litigation against the Company in Houston, Harris County, Texas, was
dismissed by the court with prejudice, leaving only the claims of James M.
Cairns, Jr. pending in British Columbia which is generally described below.
The legal action in Texas is similar to one filed against the Company in the
Supreme Court of British Columbia, Canada, in August 1996 styled Cause No.
C96493; James M. Cairns, Jr. vs. Texas Star Resources Corporation. In January
----------------------------------------------------------
1993, the Plaintiffs were issued common stock of the Company in escrow which
shares were to be released based on exploration expenditures by the Company on
certain of its properties in Arkansas. The escrow requirements were imposed by
the Vancouver Stock Exchange. Plaintiffs requested that all of the shares be
released in 1995. At that time the Company believed that the release of said
shares when requested by the Plaintiffs was inappropriate due to legal
requirements and regulatory concerns. The shares were subsequently released to
the Plaintiffs. The Company intends to vigorously defend the allegations of the
Plaintiffs in the pending litigation in British Columbia and in Texas (if the
case is appealed or refiled) and believes it has meritorious defenses to such
claims. No procedings in the action in British Columbia have been taken by the
Plaintiff since March 30, 2000. However, the Company cannot provide any
assurances that it will be successful, in whole or in part, with respect to its
defense of the claims of the Plaintiffs. If the Company is not successful, any
judgement obtained by Plaintiffs could have a material and adverse effect on its
financial condition.
(This portion of the page is intentionally left blank.)
8
7. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consisted of the following:
Three Months Ended October 31, Nine Months Ended October 31,
2002 2001 2002 2001
------------ ------------ ------------ -------------
Consulting fees $ 23,307 $ 38,765 $ 131,836 $ 109,999
Depreciation expense 7,177 9,484 21,900 79,450
Entertainment 11,625 8,753 27,987 33,638
Insurance 880 2,793 6,614 19,701
Office expenses 14,833 20,339 47,097 77,754
Professional fees 21,056 21,219 46,591 93,593
Rent 8,181 8,077 24,599 23,781
Repairs and maintenance 42,205 61,848 125,547 173,859
Salary 135,456 125,626 358,642 613,894
Shareholder relations 7,151 18,693 26,523 78,667
Travel 12,778 17,042 39,266 105,250
Utilities 11,886 13,261 26,155 35,754
------------ ------------ ------------ -------------
Total $ 296,535 $ 345,900 $ 882,757 $ 1,445,340
============ ============ ============ =============
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9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under "Part I - Item 1. Financial
Information," "Part I - Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Part II - Item 1. Legal
Proceedings" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; competition; success of operating
initiatives; the success (or lack thereof) with respect to the Company's
exploration and development operations on its properties; the Company's ability
to raise capital and the terms thereof; the acquisition of additional
properties; changes in business strategy or development plans; future rental
revenues; exploration and other property writedowns; the continuity, experience
and quality of the Company's management; changes in or failure to comply with
government regulations or the lack of government authorization to continue
certain projects; the outcome of litigation matters, and other factors
referenced from time to time in the Company's filings with the Securities and
Exchange Commission. The use in this Form 10-Q of such words as "believes",
"plans", "anticipates", "expects", "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. The success of the Company is dependent on the
efforts of the Company, its employees and many other factors including,
primarily, its ability to raise additional capital and establishing the economic
viability of any of its exploration properties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
Results of Operations - For the Three and Nine Month Periods Ended
October 31, 2002 and 2001
All dollar amounts referred to herein are in Canadian Dollars unless
otherwise stated. As of December 6, 2002, the exchange rate is $1.00 (Canadian)
= $0.6386 (U.S.)
The Company is in the exploration stage and has no revenues from operations
other than rental income related to the Diamond Recovery Plant totaling
approximately $1,079,000 from inception. The Company, at this time, does not
anticipate any future revenues from its Diamond Recovery Plant. None of its
mineral properties have proven to be commercially developable and as a result
the Company has not generated any revenue from exploration and development
activities. The Company capitalizes expenditures associated with the direct
acquisition, evaluation and exploration of mineral properties. When an area is
disproved or abandoned, the acquisition costs and related deferred expenditures
are written-off. The net capitalized cost of each mineral property is
periodically compared to management's estimation of the net realizable value and
a write-down is recorded if the net realizable value is less than the cumulative
net capitalized costs. During fiscal 2003 the Company recorded write-downs
totaling $3,141,726 representing all of the cumulative capitalized costs related
to the Arkansas properties as a result of the disappointing results of the
Company's diamond exploration program. The Company's present mineral properties
and interests consist entirely of diamond exploration properties or prospects in
the State of Arkansas. The Company has recorded cumulative write-offs of
mineral properties of approximately $15,366,000 during its exploration stage, a
period of approximately thirteen years, and cumulative writedowns of property,
plant and equipment of approximately $3,615,000.
Mineral properties and deferred expenditures decreased from $2,942,086 at
January 31, 2002 to a zero balance as of October 31, 2002 as a result of the
write-off of all acquisition and exploration costs due to the disappointing
exploration results as discussed in Note 2 to the Interim Consolidated Financial
Statements (Unaudited) above. During the three and nine months ended October
31, 2002, the Company capitalized costs as mineral properties and deferred
expenditures totaling $105,475 and $199,640, respectively, related to the
exploration program being conducted on the Arkansas Properties. The write-offs
recorded during the three and nine month periods ending October 31, 2002 were
$3,082,706 and $3,141,726, respectively. As of October 31, 2001 mineral
properties and deferred expenditures increased to $2,866,500 from $2,450,690 as
of January 31, 2001, primarily as a result of exporation costs related to the
Black Lick Property in Arkansas.
10
During the first three quarters of fiscal 2003 and 2002, the Company's
revenues were comprised entirely of interest income. For the three and nine
months ended October 31, 2002, the Company recorded net losses of $3,415,835 and
$4,150,859 compared with net losses of $380,580 and $1,634,370 for the same
periods last year, respectively. The increases in the net losses are primarily
due to the write-offs of mineral properties and deferred expenditures discussed
above. General and administrative expenses decreased by $562,583 or 39% for the
nine months ended October 31, 2002 as compared to the nine months ended October
31, 2001. The exploration program conducted during fiscal 2002 involved
extensive excavation activities, and the Company incurred significant salary
costs associated with the supervision of the excavation and the preparation of
the Diamond Recovery Plant for the bulk sample test conducted in July, 2002.
The sampling work performed in fiscal 2003 consisted of drilling, microdiamond
analysis and limited bulk sampling, which required less of a staffing
commitment. General and administrative expenses decreased by $49,365 or 14% for
the three months ended October 31, 2002 as compared to the same period last year
due to the reasons discussed above. The Company anticipates that general and
administrative expenses will decrease from their current level during the
remaining three months of fiscal 2003 as the Company has suspended its
exploration program in Arkansas.
LIQUIDITY AND CAPITAL RESOURCES.
As of October 31, 2002, the Company had a working capital deficit of
$1,439,787 as compared to working capital of $376,057 at January 31, 2002. The
decrease in working capital is primarily related to the reclassification of the
Debentures and related accrued interest of $1,278,595 and $217,887 respectively,
from long-term to current liabilities based upon their maturity date of February
16, 2003. For a description of the Debenture financing and the proceeds
therefrom, refer to Note 3 of Notes to Interim Consolidated Financial Statements
(Unaudited) which is incorporated in this part by reference.
At the present time all of the Company's mineral holdings are located in
Arkansas. Based upon the poor results of the exploration program in Arkansas,
it is unlikely that the Company will pursue additional exploration on its
existing properties. The Company's Diamond Recovery Plant is located on the
American Mine Property, which was under lease by the Company through October 31,
2002. The lease on the American Mine Property expired on November 1, 2002, and
the lease grants the Company six months after the lease expiration date to
remove all equipment from the leased premises. The Company intends to either
extend the lease or sell the Diamond Recovery Plant to a third party.
FUTURE OPERATIONS
The Company is currently reviewing new properties for acquisition and
exploration. The Company does not have sufficient capital to acquire, explore
and, if warranted, to develop, additional mineral holdings in the short- or
long-term and will require additional capital for exploration and development
and to fund general and administrative expenses. The Company has no properties
which have proven to be commercially developable and has no revenues from mining
operations other than the rentals received from the Diamond Recovery Plant. The
Company intends to seek additional equity financing during fiscal 2004 through
the potential exercise or conversion of the Debentures, warrants and outstanding
options. The inability of the Company to raise funds through the sale of the
Diamond Recovery Plant or equity financing will adversely effect the Company's
business plan, including its ability to acquire additional properties.
Historically, the Company has been able to successfully raise capital as
required for its business needs; however, no assurances are made by the Company
that it can continue to raise necessary resources for a number of reasons,
including its history of losses and property writedowns, the decline in the
price of its common stock, the number of shares outstanding and the Company's
limited and speculative asset base of exploration properties and prospects.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------------
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
--------------------------
(a) Evaluation of disclosure controls and procedures.
The term "disclosure controls and procedures" (defined in SEC
rule 13a-14(c)) refers to the controls and other procedures of a
company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded,
processed, summarized and reported within required time periods.
The Company's Chairman, who also serves as the Company's
principal financial officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures as of a date
within 90 days before the filing of this quarterly report, and he
concluded that, as of such date, the Company's controls and
procedures were effective.
(b) Changes in internal controls.
The Company maintains a system of internal accounting controls
that are designed to provide reasonable assurance that its books
and records accurately reflect its transactions and that
established policies and procedures are followed. There were no
significant changes to the Company's internal controls or in
other factors that could significantly affect its internal
controls subsequent to such evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-------------------
Except as described in "Part I - Item 1 - Financial Information - Note 6 of
Notes to Interim Consolidated Financial Statements (Unaudited)" which
description is incorporated in its entirety by this reference into this part,
there are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their property is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------------
Any issuances or sales of equity securities resulting in cash proceeds to
the Company described in "Part 1. Item 2. Liquidity and Capital Resources",
were made in reliance on Regulation S and/or Section 4 (2) of the Securities Act
of 1933, as amended, and the rules and regulations promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-----------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
-------------------
Not applicable.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------------
(a) Exhibits.
See Index of Exhibits.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STAR RESOURCES CORP.
(Registrant)
Dated: December 13, 2002 By: /s/ Mark E. Jones, III
--------------------------
MARK E. JONES, III
Chairman
(and principal financial officer)
13
CERTIFICATION
-------------
I, Mark E. Jones, III, Chairman of Star Resources Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Star Resources
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to me by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my evaluation
as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 13, 2002
/s/ Mark E. Jones, III
--------------------------
Mark E. Jones, III
Chairman
(and principal financial officer)
14