WITS BASIN PRECIOUS MINERALS INC.
(f/k/a Active IQ Technologies, Inc.)
Annual Report on Form 10-K
For the Year Ended December 31, 2003
Table of Contents
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report and in the documents incorporated by reference into this Annual Report, which are forward-looking in nature, are based on the current beliefs of our management, as well as assumptions made by and information currently available to management, including statements related to the uncertainty of the quantity or quality of probable ore reserves, the fluctuations in the market price of such reserves, general trends in our operations or financial results, plans, expectations, estimates and beliefs. In addition, when used in this prospectus, the words “may,” “could,” “should,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict” and similar expressions and their variants, as they relate to us or our management, may identify forward-looking statements. These statements reflect our judgment as of the date of this prospectus with respect to future events, the outcome of which is subject to risks, which may have a significant impact on our business, operating results or financial condition. Readers are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. We undertake no obligation to update forward-looking statements. The risks identified in the section of Item 1 entitled “RISK FACTORS,” among others, may impact forward-looking statements contained in this Annual Report.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We are a precious minerals exploration company based in Minneapolis, Minnesota. For fiscal 2003, we held interests in two mineral exploration projects, one in South Africa and one in Canada. Our primary holding is a right to earn up to a 50 percent passive interest in Kwagga, which holds the rights and interests in the “FSC Project,” an exploration project covering 140,000 hectacres, adjacent to the Witwatersrand goldfields in South Africa. We also own the exploration rights of the “Holdsworth Project,” a property consisting of 19 contiguous patented mining claims covering approximately 304 hectacres, located in the Wawa area near the village of Hawk Junction, Ontario. In the future, we will continue to seek new areas for exploration and the rights that would allow us to be either owners or participants. These rights may take the form of direct ownership of mineral exploration or, like our interest in the FSC Project, these rights may take the form of ownership interests in entities holding exploration rights. Further, although our only current interests are gold exploration projects, future projects may involve other precious or base minerals.
We were originally incorporated under Colorado law in December 1992 under the name Meteor Industries, Inc. In conjunction with our April 2001 merger with activeIQ Technologies Inc., we reincorporated under Minnesota law and changed our name to Active IQ Technologies, Inc. On July 9, 2003, following our transaction to acquire the rights to the FSC and Holdsworth Projects, we changed our name to Wits Basin Precious Minerals Inc. in order to further associate our corporate name with our new business model.
Prior to April 30, 2003, we provided accounting software through our Accounting Software Business. In December 2002, our Board of Directors authorized a plan to sell the Accounting Software Business, which accounted for approximately 89 percent of our total revenues and represented approximately 75 percent of our total assets as of and for the year ended December 31, 2002. On April 29, 2003, at a special shareholder meeting, the shareholders of the Company approved the sale and on April 30, 2003, we completed the sale of substantially all of the assets of the Accounting Software Business to two key employees of that division.
Until March 14, 2003, we provided industry-specific solutions for managing, sharing and collaborating business information on the Internet though our Hosted Solutions Business. Following our decision to sell the Accounting Software Business, we came to the conclusion that, due to current market conditions for capital funding of Internet opportunities, it would be extremely unlikely for us to secure the financing necessary to fund our Hosted Solutions Business beyond the near term and thereby provide assurance to future customers of our long-term viability. Accordingly, on March 14, 2003, we sold all of our assets related to the Hosted Solutions Business, which accounted for approximately 25 percent of our total assets and accounted for approximately 11 percent of our consolidated revenues as and for the year ended December 31, 2002. The transaction did not require shareholder approval under Minnesota law since the assets relating to our Hosted Solutions Business did not constitute all or substantially all of the assets of our Company as a whole.
ACTIVE HAWK MINERALS, LLC
On June 26, 2003, pursuant to a joint venture and contribution agreement, the Company and Hawk Precious Minerals USA, Inc. (“Hawk USA”) formed a Minnesota limited liability company known as Active Hawk Minerals, LLC (“Active Hawk”). Hawk USA is a wholly owned subsidiary of Hawk Precious Minerals Inc., (“Hawk”) an Ontario, Canada based company. In exchange for receiving a 50 percent equity interest in Active Hawk, we contributed 3,750,000 shares of our common stock to Hawk USA, which represented an issuance of 28.2 percent of our total issued and outstanding common stock. In exchange for its 50 percent equity interest in Active Hawk, Hawk USA contributed all of its interest in its “Heads of
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Agreement” with Kwagga Gold (Proprietary) Limited (“Kwagga”), a wholly owned subsidiary of AfriOre International (Barbados) Ltd., (“AfriOre”), relating the FSC Project. Hawk USA also contributed to Active Hawk all of its interest in a 304 hectare gold exploration project located near Hawk Junction, Ontario, Canada. Pursuant to the terms of our agreement with Hawk USA, we also received an option to acquire Hawk USA’s entire 50 percent equity interest in Active Hawk in exchange for issuing to Hawk USA an additional 2,500,000 shares of our common stock. We exercised the option to purchase Hawk USA’s interest in Active Hawk on November 7, 2003, and issued the stock, which represented an issuance of 9.0 percent of our total issued and outstanding common stock. Active Hawk is now our wholly owned subsidiary.
HEADS OF AGREEMENT
The Heads of Agreement was entered into among Kwagga, AfriOre and Hawk on June 4, 2003. As indicated above, pursuant to our joint venture and contribution agreement with Hawk USA, Hawk assigned its rights under the Heads of Agreement to Hawk USA on June 26, 2003. As discussed above, since Active Hawk is now our wholly owned subsidiary, when we refer “our” rights and obligations under the Heads of Agreement, we are referring to the rights and obligations of Active Hawk.
The Heads of Agreement sets forth the parties’ rights and obligations with regard to exploring for, and if warranted, exploiting base or precious minerals discovered in the property covered by the FSC Project. In particular, through Active Hawk, we have the right to acquire an aggregate 50 percent passive equity interest in Kwagga in exchange for funding the exploration, development and maintenance of the FSC Project in an aggregate amount up to $3,500,000. The Heads of Agreement originally provided that we were to initially contribute the aggregate sum of $2,100,000 in three installments of $500,000, $1,000,000 and $600,000 in June 2003, September 2003 and November 2003, respectively. Kwagga subsequently agreed to allow us to pay one-half of the November installment by April 30, 2004. Accordingly, we have advanced $1,800,000 to date and are required to make a final $300,000 installment by April 30, 2004. If we fail to make the final $300,000 installment by the prescribed due date, Kwagga has specific rights to terminate our interests.
Kwagga is required to use our initial $2,100,000 contribution to incur expenditures for the exploration, development and maintenance of the FSC Project. Once Kwagga completes such expenditures in the aggregate amount of $2,100,000, we will be issued such number of shares of Kwagga’s capital stock representing a 35 percent interest. In the event Kwagga elects to discontinue incurring qualified expenditures or if less than $2,100,000 is expended prior to June 2006, then we have the right to either (a) direct Kwagga to retain the balance of the $2,100,000 then held, whereupon we will be issued shares of Kwagga capital stock representing a 35 percent interest, or (b) terminate the Heads of Agreement, whereupon Kwagga shall repay an amount equal to the remaining balance of our initial $2,100,000 contribution and our interest in the FSC Project will terminate.
AfriOre or one of its affiliates will be the operator of the FSC Project. As operator, AfriOre will have sole discretion to determine all work to be carried out on the FSC Project and will be responsible for ensuring that the property and the project are at all times in compliance with applicable laws. AfriOre is required to provide us with quarterly written reports describing the work completed and the funds expended therewith. As consideration for its role as the project operator, AfriOre will be entitled to a fee equal to 10 percent of all qualified expenditures made in connection with the FSC Project.
Upon completion of qualified expenditures in the aggregate amount of $2,100,000, AfriOre is required to deliver to us a report that details the expenditures incurred, the work carried out with respect to the Project and the results of such work. Within 120 days of our receipt of such report, we have the right to purchase an additional number of shares such that, in the aggregate, we would own a 50 percent passive equity interest in Kwagga in exchange for an additional $1,400,000. These additional funds would then be used to fund a second phase of exploration work on the FSC Project.
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If we determine not to elect to provide the funding for the second phase, we may request that AfriOre purchase our 35 percent interest for an aggregate price of $1,050,000. If AfriOre declines to purchase our 35 percent interest, we may elect to cease funding Kwagga. In that event, however, we no longer would have any rights to vote any shares of Kwagga’s capital stock owned by us and may be subject to dilution of our equity interest in Kwagga.
In accordance with South African legislation, the Heads of Agreement provides that Kwagga will offer to a black economic empowerment group an option to purchase a 28 percent equity stake in Kwagga at a price to be mutually agreed upon by us, Kwagga and AfriOre. See “—South African Black Economic Empowerment Legislation” below. If such empowerment groups exercises such right to be granted, our interest in Kwagga would be proportionately diluted. For example, if we own 50 percent of Kwagga’s outstanding capital stock prior to the time any black economic empowerment group purchases a 28 percent stake, we would own 36 percent of Kwagga’s outstanding capital after the sale.
After all of the funds contributed by us and any black empowerment group have been expended on the FSC Project, we, AfriOre and any such empowerment group will contribute on a pro rata basis all such further amounts necessary to continue funding the exploration work on the project on a pro rata basis. In the event any of the parties do not fully contribute in proportion to their respective equity interest in Kwagga, such party’s interest will be proportionately diluted.
Other than our right to receive quarterly reports concerning the completion of work on the FSC Project, we have no rights under the Heads of Agreement to direct any exploration activities, receive information concerning the project or any right to examine any records, data or other information concerning the project. Our participation is the FSC project and our relationship with Kwagga is essentially as a passive investor and we will therefore be substantially dependent on AfriOre, as the project operator. AfriOre is a wholly owned subsidiary of AfriOre Limited, a publicly-held company listed on the Toronto Stock Exchange (TSX: AFO). Historically, AfriOre Limited has operated coal and anthracite mines in South Africa, but more recently the company has been increasing its focus on gold exploration projects. AfriOre Limited’s management has significant experience in gold mining projects. For example, AfriOre Limited’s chairman, Stuart R. Comline, has been with the company since 1997, initially hired as vice-president, project development and in December 1999 was appointed president where he served until August 2002. From 1995 to 1997, Mr. Comline provided consulting and project management services in a private company he established. From 1981 to 1995, Mr. Comline served in various positions with JCI Company Limited and JCI Limited, including general manager of that company’s geology department. Michael van Aswegen, AfriOre Limited’s president and CEO, has over 20 years experience in with Anglovaal Mining Limited, a South African-based resource and exploration company. He joined AfriOre Limited in May 2001 as its vice president of exploration to lead the company’s gold exploration projects in South Africa. He was appointed president and CEO in August 2002. Based on the company’s history and its management, we believe AfriOre is well suited to serve as the operator of the FSC Project.
FSC PROJECT
Overview
AfriOre, through Kwagga, holds exclusive exploration rights to 140,000 hectacres area in South Africa known as the “FSC Project.” Located adjacent to the major goldfields discovered at South Africa’s Witwatersrand Basin, we believe the FSC Project may reveal extensions of the Witwatersrand Basin. The FSC Project encompasses an area in South Africa from Colesberg, Northern Cape Province in the south, stretching north-northeasterly across the Orange River to beyond Jagersfontein, Free State Province, a distance of approximately 140 kilometers. The region is generally comprised of well-established rural agricultural land, but with well-developed local resources and infrastructure.
The FSC Project area is easily accessible via the N-1 motorway, which is the main Cape Town-Johannesburg route, as well as a network of well-established secondary paved highways and other roads. The city of Bloemfontein, the capital of the Free State Province and sixth largest city in South Africa, is
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approximately 225 km to the northeast of Colesburg on the N-1 and about 125 km northeast of Jagersfontein. Bloemfontein is a major transportation hub with road, railroad and air links branching in all directions.
The FSC Project region has good existing infrastructure, including major arterial and secondary highways, railway lines, a modern electrical grid, a major nearby water supply, well-developed cities with modern necessities and conveniences, and a good pool of skilled and unskilled labor.
Geology
The geology of the FSC Basin is understood in only very simple terms. Geophyscial surveys covering the FSC Project area range from country-wide aeromagnetic and gravity surveys, to a detailed aeromagnetic survey of part of the southern margin of the FSC Basin, to reflection seismic profiles surveyed by a group of large mining companies. Since the 1940s, 39 boreholes have been drilled in the greater FSC Basin. All of these drilling programs were conducted outside of the FSC Project area, except one hole located on a farm east of Philipollis, which intersected the following lithostratigraphic units:
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| From | To | Description | |||
| 0 | 1,444,14 | m | Karoo Supergoup | ||
| 1,444.14m | 2,672.49 | m | Transvaal Supergroup, Chuniesport Group: interbedded dolomite, | ||
| shales and quartzite. | |||||
| 2,672.49m | 2,687.29 | m | Transvaal Supergroup, Chuniesport Group: Black Reef Quartzite | ||
| Formation, black shales at top followed by quartzite and pebble | |||||
| conglomerates. | |||||
| 2,687.29m | 2,731.01 | m | Ventersdorp Supergoup, Amygdaloidal lavas. |
Previous Exploration Efforts
AfriOre’s interest in the FSC Project began in 1996. Based largely on geophysical modeling government aeormagnetic and other published data, such as regional gravity maps and some borehole data, AfriOre’s consultants theorized about the possibility of a major extension of the Witwatersrand Basin to the south and east. In the past six years, AfriOre has compiled and interpreted geophysical data from government sources, geophysical and borehole data from previous mining company exploration programs and has conducted its own geophysical and drilling programs.
In 1999, AfriOre formed a joint venture with Iamgold Corporation, a Canadian-based gold mining company, to explore a portion of the FSC Project area. The AfriOre-Iamgold partnership commissioned the completion of two drillholes and other geological studies in order to ascertain the presence Witwatersrand rock extensions in the FSC Project area. Iamgold concluded, however, that the sequence was too young to correspond to the targeted Witwatersrand Basin rocks that might host gold mineralization Based on an evaluation of the seismic data in terms of this information, Iamgold concluded that the occurrence of mineralized Witwatersrand rocks within the joint venture project area was very unlikely Iamgold therefore withdrew from the joint venture in June 2002.
Current Exploration Program
In October 2003, supported by funding provided by us under the Heads of Agreement, AfriOre commissioned the first range-finding drillhole of an initial three range-finding drillhole program at the FSC Project. The initial program, which is expected to be completed by mid 2004, is anticipated to include total of approximately 6,200 meters of drilling and is aimed at establishing the presence of stratigraphic units related to Witwatersrand gold deposits in the depth range of 1,200 meters to 1,500 meters below surface. Previous drilling and geophysical mapping indicate that Witwatersrand rocks may be preserved under Mesozoic cover rocks in the project area.
The first drillhole has been sited after a comprehensive analysis of data from the recently completed aeromagnetic survey and the reprocessing of ground based gravity data. The aeromagnetic survey utilized the latest three sensor horizontal gradient technology to achieve a high resolution coverage over an area 1,231 square kilometers, which included 28,380 line kilometers, flown at a 500 meter line spacing. The resulting data set has been combined with similar data from a previous aeromagnetic survey completed by AfriOre, which covered an area of 290 square kilometers. The interpretation also incorporated updated ground gravity data, covering an area of 8,530 square kilometers, as well as information from AfriOre’s comprehensive database of historical drilling and seismic survey data.
The integrated geophysical interpretation has enhanced the signatures of the various anomalies, which were identified in AfriOre’s previous aeromagnetic survey and which are postulated to indicate the magnetic shale units of the Witwatersrand’s West Rand Group. Elsewhere in the Witwatersrand basin, similar anomalies occur below the upper Witwatersrand’s Central Rand Group, the host rocks to the mineralized gold reefs. In addition, gravity anomalies have also been delineated parallel to the strike of the magnetic high anomalies and are interpreted as possible manifestations of the Central Rand Group rocks.
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Although the interpretation of these anomalies is not certain, the anomalies can be traced through the cumulative 135 kilometers of strike of the three regional targets, which were originally identified by AfriOre. Previous drilling of similar anomalies elsewhere in the FSC Project Area has proved that such anomalies are caused by West Rand Group rocks. The recently interpreted data has refined the configuration of these three regional targets and AfriOre believes it is now possible to more accurately delineate five high priority targets in individual structural blocks with a cumulative strike length of 60 kilometers. The aim of the initial program is to drill within the higher priority targets to confirm the identity of the rocks, which cause the geophysical anomalies and to determine their stratigraphic setting. The three drillholes will be drilled sequentially and the initial drill hole will take some three months to complete. Regardless of the data amassed to date, the FSC Project is purely exploratory in nature as there are no known gold occurrences in the FSC Project area.
South African Black Economic Empowerment Legislation
In order to ensure that all South Africans eventually benefit from the exploration and exploitation of their country’s precious minerals, in October 1998 the government of South Africa issued a white paper concerning minerals and mining policy for South Africa. Although the paper addressed a full range of issues relating to South African mining, it primarily focused on ownership of mineral rights. Several forms of legislation covering South African mining policy were debated in the South African parliament in the following years, and eventually, South Africa enacted a mineral and petroleum resources development bill in 2002. Among the fundamental principals stated in the bill were that mineral resources are the common heritage of all South Africans and belong collectively to all peoples in South Africa, and that to redress the results of past racial discrimination and ensure that historically disadvantaged persons participate in the mineral and mining industry and benefit from the exploitation of the nation’s mineral resources. Most key provisions of this mining legislation are not operative but rather articulate objectives and direct that further action be taken. Nonetheless, the South African government has expressed a desire that black South Africans acquire and maintain certain levels of equity ownership in mineral and mining projects, including that each mining project have 26 percent ownership by black South Africans. The legislation contemplates that the transfer of ownership is to be done at fair market value.
In January 2004, the president of South Africa signed the “Broad-Based Black Economic Empowerment Act,” which is enabling legislation the purposes of which is to provide the framework needed for the promotion of black empowerment in order to redress the existing economic disparities that resulted from apartheid. The Act establishes the “Black Economic Empowerment Advisory Council,” which will be charged with, among other things, advising the government on black empowerment, reviewing progress in achieving black economic empowerment, advising on draft regulations to be implemented to achieve the legislative goals, facilitating partnerships between the government and private sector that will advance the objectives of the Act. The Act also directs the adoption of regulations by the Minister of Regulation and Trade that includes a strategy for an integrated and uniform approach to increasing black empowerment and developing a plan for financing such empowerment.
To date, much of South Africa’s mining and black empowerment legislation is not yet fully effective and often takes the form of policy statements. Accordingly, it is difficult for us to accurately assess the impact this or any new legislation will have on our interest in the FSC Project, including the approximate dates when these measures will become binding. Nevertheless, as discussed above, the Heads of Agreement contemplates that the South African government will eventually require that any precious mineral exploration or mining project to a level at least equal to 26 percent. Accordingly, in anticipation of these initiatives, the Heads of Agreement provides that at some point in the future Kwagga will offer up to 28 percent of its capital stock to a black empowerment group at a fair market value price. See “—Heads of Agreement.”
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HOLDSWORTH PROJECT
We have the rights to 19 contiguous patented mining claims covering approximately 304 hectacres in northern Ontario, Canada, which we refer to as the “Holdsworth Project.” We acquired our interest in the Holdsworth Project from Hawk USA, which had contributed its interest in the project in June 2003 in connection with the formation of Active Hawk Minerals, LLC. The mining claims that we hold allow us to conduct both exploration and exploitation activities in the oxide zone of the Holdsworth Project. As indicated below under “—Our Exploration Plans,” however, we do not have any current plans to begin exploration activities on the Holdsworth Project.
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The Holdsworth Project claims straddle Corbiere and Esquega Townships in northern Ontario. The property is located approximately 2 miles northwest of the town of Hawk Junction, Ontario, which is approximately 12 miles northeast of Wawa, Ontario. The terrain within the Holdsworth Project consists of rolling to steep rocky ridges separated by low lying to swampy valleys. The area is generally located in a forest with thick underbrush throughout the property.
The property is accessible by means of a 3.2 kilometer graveled bush road leading north from Hawk Junction and old skidder and backhoe roads provide access to a majority of the known mineralized zones on the property. Two paved highways connect Hawk Junction with Wawa to the west.
Hawk Junction is also a main stop on the Canadian National Railway and the Wisconsin Rail Line. The rail bed for a branch line extending from Hawk Junction to a shipping facility approximately 30 kilometers to the southwest at Michipicoten Harbor on Lake Superior, which handles ocean going and Great Lake freighters. This rail bed passes through the Holdsworth Project area. All of the requirements for a mining operation (electricity, infrastructure, personnel etc.) are readily available in the area.
Geological Setting and Gold Occurrences
Hawk commissioned a geologist’s report in October 2002, which presented a description of the geological setting and gold occurrences in the Holdsworth Project area and described the history of previous work on the property, including a summary of the results of such work. Summaries of portions of the report are described below.
The Holdsworth Project is located within the Michipicoten Greenstone Belt, an Archean aged member of the Superior Province of the Canadian Precambrian Shield. This belt consists of Michipicoten Group volcanic and sedimentary rocks, and subvolcanic intrusive bodies of variable size. A network of northwest to northeast trending diabase dykes cuts all of these units. Relatively small carbonatite intrusive complexes occur locally.
The Holdsworth Project is located on the south flank of the Michipicoten Greenstone Belt. Rocks on the property consist of greenstone facies mafic to felsic metavolcanics with local clastic and chemical (iron formation) metasedimentary rocks and mafic to felsic intrusive rocks. According to 1995 regional geological mapping, major iron formation in the area occurs at the contact between two volcanic cycles. On the Holdsworth Project property, the iron formation unit consists of massive pyrite deposits situated at the contact between felsic volcanics (mainly tuffaceous rocks) and overlying mafic volcanic flows. The stratigraphy is locally disrupted by small scale high angle faulting and subparallel folding and shearing.
There are two known gold prospects on the Property. These include the quartz vein hosted Soocana Quartz Vein and the Holdsworth Pyrite Prospect.
The Soocana Quartz Vein is a south dipping quartz-carbonate vein system, localized within an altered shear zone cutting mafic intrusive and extrusive rocks. The highly deformed core of the gold bearing quartz ankente vein is accompanied by sericite, tourmaline, pyrite, chalcopyrite and local green mica. This core is enveloped by less deformed bleached zones containing calcite, pyrite and chlorite. The surrounding rocks are dark grey-green, relatively undeformed mafic to intermediate intrusive and volcanic rocks. The vein system trends approximately east-west. It ranges from a few centimeters to several meters in width and has been traced by surface stripping for in excess of 300 meters. Near the centre of the stripped portion of the vein system lies a 51 meter long zone (the Central Zone) ranging from 0.5 to 1.5 meters in width and averaging 0.429 oz/ton, Au from surface; sampling. The Central Zone is bounded on both ends by diabase dykes. To the west of the Central zone, numerous gold values have been encountered including a value of 0.491 oz/ton across a 0.91 meter drill intersection (Hole 87-19) and 1.206 oz/ton from a grab sample in a surface trench. The quartz vein system remains open in both directions and at depth.
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The Holdsworth Pyrite Prospect consists of massive lenses of pyrite situated at the contact between mafic and felsic metavolcanic rocks. These lenses trend approximately east-west and dip steeply towards the north. They are locally cut and offset by north-northwest trending faults. At present, five related zones have been confirmed by surface stripping and prospecting and several others indicated by ground geophysical surveys. The five confirmed zones (the “East,” “East Extension,” “East Offset,” “West” and “West Offset”) have a combined strike length in excess of 2,200 meters. Two drill programs completed from 1918 to 1926 by the Algoma Steel Corp. and the Grasseli Chemical Co., respectively, identified an iron reserve of 1,019,273 tons of 46 percent sulphides within what is herein referred to as the East Pyrite Zone.
The Holdsworth Pyrite zones are of interest for their gold potential for two reasons. One of these is represented by the unoxidized portion of the sulphide zone and its surrounding rocks. A drill core sample taken by Falconbridge Nickel Mines Ltd. was reported to contain 0.15 oz/ton Au across 1.5 meters. Another sample from this hole taken from a pyritic shear in the hangingwall 6 meters above the Pyrite Zone was assayed four times yielding a range of assays from nil to 0.21 oz/ton, Au.
The second zone of interest on the Holdsworth Pyrite Prospect is a gold bearing, black colored “oxidized cap” that overlies the massive pyrite. This coarse sandy material is in excess of 8 meters thick in most locations, where sampled, and contains gold values in excess of 0.10 oz/ton. The oxidized material that forms a “cap” to the Holdsworth Pyrite deposit has been described by old-time prospectors as a ‘black sand’. It consists of siliceous grains and non magnetic iron oxide pellets ranging from a few centimeters to several microns in size. It is assumed to be the oxidized equivalent of the underlying massive iron sulphide. The underlying sulphides typically contain up to 5 percent sugary to greasy quartz stringers and ribbons. The sulphide zones are frequently anomalous in gold. Assays from a number of drill holes have ranged from nil to 0.056 oz/ton, Au. The best intersection to date was from Hole R26 (Reed Lake Exploration, 1988), which contained a 20 foot section assaying 1.06 gms/tonne (0.031) oz/ton, Au. The enriched gold values in the overlying material is assumed to be related to the oxidizing and weathering process.
Previous Work
In 1988, Reed Lake Exploration Ltd. carried out a stripping program over parts of the East and West Pyrite Zones. In the early part of the program, the overburden was stripped completely down to the black, oxidized granular material. When it was discovered that the overlying red and yellow soil was also highly elevated in gold, the remainder of the stripping stopped just below the overlying bouldery till. Sampling was then carried out by means of surface channels at regular intervals across the zone. Two blocks within the East pyrite zone in which the oxidized cap was exposed yielded assays ranging from trace to 0.284 oz/ton, Au and an average grade of 0.108 oz/ton, Au. The sampled width averaged 2.9 meters for a strike length of approximately 100 meters. The actual width of the underlying pyrite zone has a range of 2 to 10 meters. In several test locations, the bottom of the zone was not reached at a vertical depth of 8 meters.
During the 1988 program, sampling from the red, yellow and grey soil above the black oxidized zone was also found to contain elevated gold values, ranging from trace to 0.206 oz/ton, Au. This material extends throughout the area stripped, so it was assumed that the black granular oxide occurred beneath it at shallow depths. A very limited amount of stripping was completed on the West Zone to check for the existence of the oxidized cap material. Six grab samples were collected from two three-meter sections across this zone. Four of these consisted of brown soil and contained trace amounts of gold. The other two were of black-green material and contained 0.052 and 0.064 oz/ton, Au. These highly anomalous values indicate that there is an oxidized cap on the West Zone and it has excellent gold potential.
A 1999 work program on the Holdsworth Gold Prospect was carried out by Hawk Junction Capital Corp, the predecessor of Hawk Precious Minerals Inc., and included the following:
- Re-establishing a control grid over the “East Mineralized Zone” to facilitate
geological mapping, sample location and future development. Elevations of critical portions of the zone and
surrounding area were surveyed. Ground VLF-EM surveying was completed in overburden areas to pinpoint the Mineralized zone for stripping.
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- Systematic Sampling by backhoe of the central part of the East Zone was carried
out along with wide spaced testing of the eastern and western end of the East Zone. Prospecting confirmed the existence of four additional
black sand zones.
- Preliminary results from Mill testing of the material was obtained in preparation
for a bulk sampling program. A site has been selected and permitting initiated.
The 1999 work program was designed to systematically sample the auriferous black sands that overlie the Holdsworth Pyrite Zone. Previous work was limited to surface channel sampling, although several test pits were excavated to a depth of 8.5 meters. The purpose was to determine the grade of the zone in a vertical direction to eliminate the possibility that the mineralization was purely a surface phenomenon. The testing was initiated with a diamond drill rig in late July 1999. The intention was to set casing in the shallow overburden and recover regularly spaced sludge samples while defining the zone. However, the black sand material is very porous, and water return was lost immediately upon entering the zone. The drill rig was abandoned and an excavator hired. The excavator worked very well in the upper portions of the zone. Once the water table was encountered, the trenches began caving in, and material from above contaminated the lower samples. As a result sampling was limited to an average depth of 5.88 meters in the western part of the East Zone and 2.15 meters in the eastern part.
In addition to the material outlined by the 1999 trenching and sampling program, prospecting accompanied by ground VLF-EM surveying (in addition to data available from previous work) has located and partially delineated four other zones - the “East Extension,” “East Offset,” the “West Zone” (previously located and grab sampled, Reed Lake Exploration, 1988) and the “West Offset.” The total strike length of these zones is approximately 1540 meters. Assuming that these four cones have width and depth dimensions similar to the East Zone (4.5 m wide by 8 m deep), they have a potential for approximately 135,000 tonnes of black sand. Numerous other VLFEM conductors were detected by a 1983 geophysical survey. These may represent similar pyrite lenses offset by regional faulting and have excellent potential for additional similar gold mineralization. Other pyrite zones on adjacent properties offer additional potential for feed to a processing facility.
Metallurgical Test
A 9.36 kg sample of the mineralized black sand was tested to provide preliminary data on gold recovery rates and techniques. The material was found to be well suited for heap leach or vat leach processing. The tests indicate average recovery of 98.2 percent of the gold in a 48-hour cyanide leach.
Reserves
The Holdsworth Project has no known reserves, but based on the foregoing results, we believe further exploration is justifiable. We therefore conclude that until such time as we have secured financing and the operator to continue exploration on this project, we will continue to regard this asset as having the potential for future value to us.
Our Exploration Plans
To date we have not made any expenditures in connection with any exploration activates on the Holdsworth Project. We estimate that an exploration program would cost approximately $1,000,000. However, we currently have no plans to conduct exploration activities on the Holdsworth Project and we do not have the capability to conduct such exploration activities on our own. Instead, we would be required to engage a third party to undertake any exploration on the Holdsworth Project. We do not currently have the resources to devote to this project and do not plan to conduct exploration activities until such time as we locate a partner to conduct these activities and to fund, at least partially, their cost.
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BRAZMIN LTDA.
On February 6, 2004, we completed the acquisition of Brazmin Ltda, a precious minerals company located in Rio de Janeiro, Brazil. We acquired 99.99 percent of shares of quota capital of Brazmin. Brazil uses quota shares as its form of capital stock. Furthermore, Brazilian law forbids 100 percent ownership by a foreign entity; therefore, one of the principals, a Brazilian resident, remains a quota holder. Brazmin’s current property portfolio consists of 4 distinct land regions in Brazil: the Rio Maria Property – Pará State; Campo Grande, Minas Gerais State; SÃO JULIÃO, Piaui and Ceara States; and the Serrita, Pernambuco State.
Rio Maria Property – Pará State, Brazil
- Located in the highly prospective Carajás district of Brazil, exploration
rights for this 27,431 ha property was acquired after Canyon Resources had spent US$2.0 million defining gold targets prior to withdrawing
from Brazil after the Bre-X Minerals Ltd. gold scandal.
- The early stage project has easy access and is located approximately 20 km from
the town of Rio Maria, which is connected by paved highway to the state capital of Belem.
- The geology of the Rio Maria Property is dominated by the highly prospective Andorinhas
Greenstone Belt.
- An estimated 15 tonnes of gold have been produced by information miners (garimpeiros)
from alluvial and bedrock gold deposits within and adjacent to the Rio Maria property.
- Exploration work of the prior operators was focused for gold with no analyses
carried out for base metals. This work identified several high quality potential targets for gold, which requires additional exploration.
- While there is potential for gold related to shear zones cutting greenstone rocks,
the property has significant appeal due to its potential for large copper – gold mineralized systems of the iron oxide copper-gold
(IOCG) family similar to those found elsewhere in the Carajás district.
- Efforts will continue to locate and qualify a third party operator and funds source.
Campo Grande, Minas Gerais State, Brazil
- Campo Grande is an early stage exploration project previously owned by Barrick
and Western Mining Corporation who had spent a total of US$100,000 on the property.
- Brazmin has very recently successfully claimed exploration rights for 75 percent
of the land title directly and the remaining 25 percent through an option with a group of Brazilian geologists, who have the respective
title.
- Brazmin proposes to carry out further geochemical sampling to confirm the previous
work and also examine the area for extensions. Detailed follow-up would comprise geological mapping, geophysics (magnetics and IP),
more trenches and finally several shallow diamond drill holes to provide systematic sampling.
- According to Brazmin’s consultants, Campo Grande is a good early stage epithermal
gold opportunity, which could be substantial and should be relatively easy to test for ore-grade mineralization, thus providing a
project with good upside potential.
- Efforts will continue to locate and qualify a third party operator and funds source.
SÃO JULIÃO, Piaui and Ceara States, Brazil
- This project, located in Piaui and Ceara States in northeast Brazil, also targets
IOCG deposits, in this instance following on work performed by a major in 2002-2003.
- There is copper and gold mineralization known in the region, and the setting –
alkali granites, Proterozoic age, extensional tectonics, and hematite-rich breccias with copper, fits an IOCG model.
- The major’s work included satellite imagery processing, rock chip sampling
and airborne geophysics.
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- Three target areas remain to be investigated, all three have copper mineralization,
some geophysical responses, and display varying levels of alteration. Brazmin is recommending gravity, magnetics, IP and scout drilling
for detailed target definition.
- Efforts will continue to locate and qualify a third party operator and funds source.
Serrita, Pernambuco State, Brazil
- The Serrita project is located in the Serrita gold district, an area known to
host narrow high grade gold mineralized quartz veins, with and without associated polymetallic sulphides.
- The Serrita project includes the Mineração Serrita’s concessions
that were worked previously by CPRM. The latter found a number of high grade quartz veins of limited dimensions which they managed
to lump into an “inferred geological resource” of ~344,000 t @ 11 g/t.
- A number of the relatively shallow targets traced from surface to 50 meters in
depth on the concessions had been drilled by CPRM returning grades up to 10.20 g/t over 1.6meters, 29.80 g/t over 0.80 meters and
206.0 g/t over 0.30 meters.
- The Brazmin concessions cover several gold garimpos (artesinal workings), which
were apparently catalogued by Western Mining in the past. The garimpos have quartz veins with visible gold with grades from chip samples
reported up to 100g/t Au and 132 g/t Ag. With additional exploration, these zones may lead to the outlining of small tonnage high-grade
deposits similar to Mineração Serrita’s.
- Efforts will continue to locate and qualify a third party operator and funds source.
As with the Holdsworth Project, we have no current plans to conduct any exploration activities until such time as we can engage the services of a third party operator and provide the necessary financing.
INDUSTRY BACKGROUND
The exploration for and development of mineral deposits involves significant capital requirements. While the discovery of an ore body may result in substantial rewards, few properties are ultimately developed into producing mines. Some of the factors involved in determining whether a mineral exploration project will be successful include, without limitation:
- competition;
- financing costs;
- availability of capital;
- proximity to infrastructure;
- the particular attributes of the deposit, such as its size and grade;
- political risks, particularly in some in emerging third world countries; and
- governmental regulations, particularly regulations relating to prices, taxes,
royalties, infrastructure, land use, importing and exporting of gold, environmental protection matters, property title, rights and
options of use, and license and permitting obligations.
All of which leads to a speculative endeavor of very high risk. Even with the formation of new theories and new methods of analysis, unless the minerals are simply lying, unexposed on the surface of the ground, exploration will continue to be a “hit or miss” process.
PRODUCTS AND SERVICES
During fiscal 2003, we offered two types of business software and solutions: a traditional business and accounting software package through our Accounting Software Business subsidiaries and a hosted Internet suite of services through our Hosted Solutions Business. On March 14, 2003, we completed the sale of our Hosted Solutions Business, which was our only source of revenue from continuing operations. On April 30, 2003, we completed the sale of substantially all of the assets of our Accounting Software Business, in which the results of operations have been reported as discontinued operations, thereby providing no future
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benefit to our ongoing business plan; and our only current business model is our investment in minerals exploration projects in various foreign countries. Accordingly, we do not anticipate having any future revenues until an economic mineral deposit is discovered or unless we complete other acquisitions or joint ventures with business models that produce such results.
Accounting Software Business
We designed, developed, marketed and supported accounting software products through our Accounting Software Business (Red Wing and Champion) subsidiaries during the first half of fiscal 2003. Our original reason for acquiring these companies was to be able to utilize the businesses’ customer base in order to up-sell additional products and services. We concluded that these customers would not be prospects for any type of Web-based, hosted solution products or services. Therefore, a plan to sell the Accounting Software Business was initiated and on April 30, 2003, we completed the sale of substantially all of the assets of our Accounting Software Business.
As a result of the sale of the Accounting Software Business, the results of operations for the Accounting Software Business have been reported as Discontinued Operations and previously reported financial statements have been restated for the year ended December 31, 2001. During the years ended December 31, 2003, 2002 and 2001, revenues from our Accounting Software Business were $1,491,059, $4,179,547 and $2,248,060, respectively. See Footnote No. 3 of the notes to the Consolidated Financial Statements included elsewhere herein for further discussion and financial information regarding the Discontinued Operations of Accounting Software Business.
Hosted Solutions Business
Our Hosted Solutions Business offered Web-based content management solutions designed to improve the efficiency of business operations within selected vertical markets. We believed a hosted solutions model would be attractive to customers in specific markets who demand quicker deployment of new applications and more predictable costs with less financial risk. In early 2003, we came to the conclusion that due to current market conditions for capital funding, it would be extremely unlikely for us to secure the financing necessary to fund our Hosted Solutions Business beyond the near term and thereby provide assurance to future customers of our long-term viability. On March 13, 2003, our Board of Directors formally approved the sale of the Hosted Solutions Business. On March 14, 2003, we executed a definitive purchase agreement with Stellent, Inc. and completed the sale of the Hosted Solutions Business. We received $650,000 in cash for the assets used in the Hosted Solutions Business, plus we were reimbursed $150,000 for expenses we incurred as a result of the transaction.
During the years ended December 31, 2003, 2002 and 2001, revenues from our various Hosted Solutions Businesses were $132,455, $499,378 and $462,800, respectively.
Precious Minerals Exploration Projects
As of December 31, 2003, we held interests in two gold exploration projects that we acquired in a transaction completed on June 26, 2003 from Hawk Precious Minerals USA, Inc., a wholly owned subsidiary of Toronto-based Hawk Precious Minerals Inc. Subsequently, in February 2004, we acquired substantially all of the outstanding shares of capital stock of a Brazilian limited liability company named Brazmin Ltda., which holds the exploration rights to 4 distinct properties in Brazil, South America.
SALES AND MARKETING
Accounting Business Solutions
Distribution of our Red Wing software applications was managed through a reseller partner organization. The Red Wing partners were the retail distribution arm for software sales to customers. Along with the
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distribution of the software, our partners provided implementation and ongoing consulting services to the customers.
See Footnote No. 3 of the notes to the Consolidated Financial Statements included elsewhere herein for further discussion and financial information regarding the Discontinued Operations of Accounting Software Business.
Hosted Solutions Business
Our primary marketing objectives were to build awareness and continue to gain market share in select verticals. Accordingly, we did utilize a balanced mix of on and offline advertising and marketing efforts. On-line efforts did include website, affiliate partner links, product demos and industry specific on-line advertising. Offline efforts did include industry specific tradeshows, conferences, publications and vertically specific direct mail campaigns.
Precious Minerals Exploration Projects
Our intent is to provide sufficient capital in order to create awareness in the investment community of our presence in the field of precious minerals exploration. With the substantial risk inherent with any natural resource exploration project, comes the possibility of reward if a viable discovery is made and recovered. We plan to utilize marketing programs that will get our story in front of the eyes of those investors who have the tolerance for and the knowledge of the risks we will encounter in the foreign countries we currently have rights to explore, or the countries in which we could possible acquire rights to explore in.
INTELLECTUAL PROPERTY
Since we sold our Hosted Solutions Business and our Accounting Software Business in 2003, we no longer have any intellectual property at risk.
RESEARCH AND DEVELOPMENT
Hosted Solutions Business
Since inception, we made substantial investments in research and software product development. We believed that the timely development of additional services and enhancements to existing software products and the acquisition of rights to sell or incorporate complementary technologies and products into our software product offerings were essential to maintaining and increasing our competitive position in our market. The software services market is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and rapidly evolving industry standards. Our total research and development expense was $0, $134,217 and $562,762 in fiscal 2003, 2002 and 2001, respectively.
Precious Minerals Exploration Projects
Exploration costs incurred in the search for new minerals are charged to expense as incurred. Due to the early stage of our passive investment in the FSC Project, we do not qualify for capitalizing development costs at this time.
EMPLOYEES
We currently employ two people – our chief executive officer and our chief financial officer. None of our employees are represented by a labor union and we consider our employee relations to be good.
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FINANCIAL INFORMATION IN INDUSTRY SEGMENTS
During the year ended December 31, 2003, our continuing operations included one reportable segment: our precious minerals exploration projects.
AVAILABLE INFORMATION
The Company’s web site address is www.witsbasin.com.
We make available free of charge through our Internet web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material, or furnish it to the Securities and Exchange Commission. You can also request a free copy of the above filings by writing or calling us at:
Wits Basin Precious Minerals Inc.
Attention: Mark D. Dacko, Secretary
800 Nicollet Mall, Suite 2690
Minneapolis, Minnesota 55402
(612) 664-0570
RISK FACTORS
RISKS RELATING TO OUR COMMON STOCK
TRADING OF OUR COMMON STOCK IS LIMITED.
Trading of our common stock is conducted on the National Association of Securities Dealers’ Over-the-Counter Bulletin Board, or “OTC Bulletin Board.” This has an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.
BECAUSE IT IS A “PENNY STOCK” IT CAN BE DIFFICULT TO SELL SHARES OF OUR COMMON STOCK.
Our common stock is a “penny stock.” Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser’s written agreement to the purchase. The penny stock rules may make it difficult for you to sell your shares of our stock. Because of the rules, there is less trading in penny stocks. Also, many brokers choose not to participate in penny stock transactions. Accordingly, you may not always be able to resell our shares of common stock publicly at times and prices that you feel are appropriate.
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A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK ARE OR WILL BECOME AVAILABLE FOR SALE AND THEIR SALE COULD DEPRESS THE PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public market after this offering could adversely affect the market price for our common stock and make it more difficult for you to sell our shares at times and prices that you feel are appropriate. As of March 30, 2004, we have 33,275,181 shares of common stock and 690,000 redeemable warrants issued and outstanding. Furthermore, we have 5,520,434 stock options and 16,012,551 warrants issued.
RISKS RELATING TO OUR FINANCIAL CONDITION
WE CURRENTLY DO NOT HAVE ENOUGH CASH TO FUND OPERATIONS DURING 2004.
We expect that our cash expenditures for fiscal 2004 will be approximately $900,000 and, as of March 26, 2004, we had only approximately $240,000 of cash and other current assets on hand. Since we do not expect to generate any significant revenue from operations in 2004, we will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures. We expect to raise such additional capital by selling shares of our capital stock or by borrowing money. However, such additional capital may not be available to us at acceptable terms or at all. Further, if we sell additional shares of our capital stock, your ownership position in our company will be subject to dilution. In the event that we are unable to obtain additional capital, we may be forced to reduce our operating expenditures or to cease operations altogether.
WE HAVE NO OPERATING ASSETS.
On March 14, 2003, we completed the sale of our Hosted Solutions Business, which was our only source of revenue from continuing operations. On April 30, 2003, we completed the sale of substantially all of the assets of our Accounting Software Business, in which the results of operations have been reported as discontinued operations, thereby providing no future benefit to our ongoing business plan. Accordingly, we do not anticipate having any future revenues until an economic mineral deposit is discovered or unless we complete other acquisitions or joint ventures with business models that produce such results. Currently, we have rights in three projects: the FSC Project in South Africa (in which we are a passive investor), the Holdsworth Property near Wawa, Ontario, Canada and in February 2004, we acquired the 4 properties of Brazmin Ltda., located in South America. Presently, we do not have the capacity to commence any exploration on either Holdsworth or Brazmin. Furthermore, none of these projects may ever produce any significant mineral deposits, however.
WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.
Since our inception through December 31, 2003, we have incurred an aggregate net loss of $25,025,315. As of December 31, 2003, we had total current assets of $976,767. We expect operating losses to continue for the foreseeable future. There can be no assurance that we will ever be able to operate profitably.
OUR INDEPENDENT AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have had net losses for each of the years ended December 31, 2003, 2002 and 2001, and we had an accumulated deficit as of December 31, 2003. Since the financial statements for each of these periods were prepared assuming that we would continue as a going concern, in the view of our independent auditors, these conditions raise substantial doubt about our ability to continue as a going concern. Furthermore, since we do not expect to generate any significant revenues for the foreseeable future, our ability to continue as a going concern depends, in large part, on our ability to raise additional capital through equity or debt financing transactions. If we are unable to raise additional capital, we may be forced to discontinue our business.
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RISKS RELATING TO OUR BUSINESS
OUR SUCCESS IN CONNECTION WITH THE FSC PROJECT IS SUBSTANTIALLY DEPENDENT ON THE PROJECT’S OPERATOR.
Pursuant to the Heads of Agreement with Kwagga and AfriOre, the FSC Project’s operator has the sole discretion to formulate and carry out the work plans with regard to the manner in which the funds that we or Active Hawk forward to Kwagga. Further, we have only limited rights to receive information concerning the status of the FSC Project. We therefore are relying heavily on the ability of Kwagga and AfriOre, the FSC Project operator, to make prudent use of all funds in connection with the exploration phase of the FSC Project. If Kwagga and AfriOre do not use these funds wisely, we may not realize any return on our investment. Further, we are dependent on the financial health and condition of AfriOre. In the event AfriOre became insolvent or otherwise unable to carry out its obligations under the Heads of Agreement, we could lose the entire amount we have invested in exploration of the FSC Project. We also depend on the project’s operator to obtain and maintain various governmental licenses and permits necessary to explore and develop the properties. The failure to obtain and maintain such licenses and permits may cause significant delays in exploring and developing the properties, or even may prevent the completion of any of these activities altogether.
WE WILL REQUIRE ADDITIONAL FINANCING TO CONTINUE TO FUND OUR CURRENT EXPLORATION PROJECT INTERESTS OR TO ACQUIRE INTERESTS IN OTHER EXPLORATION PROJECTS.
Additional financing will be needed in order to fund beyond the initial 5 to 7 drillhole exploration program currently underway at the FSC Project, to fund exploration of the Holdsworth Project and Brazmin, or to potentially complete further acquisitions or complete other acquisitions or joint ventures with other business models. Our means of acquiring investment capital is limited to private equity and debt transactions. Other than the interest earned on our short-term investments or further financing, we have no other source of currently available funds to engage in additional exploration and development, which will be necessary to explore our current property interests or to acquire interests in other mineral exploration projects that may become available. See “—Risks Relating to Our Financial Condition – We Currently Do Not Have Enough Cash to Fund Operations During 2004.”
WE ARE SUBSTANTIALLY DEPENDENT UPON OUR CHIEF EXECUTIVE OFFICER.
We are substantially dependent on the expertise and industry knowledge of H. Vance White, our chief executive officer. The loss of his services could have an adverse effect on us and we do not currently have key person insurance with respect to Mr. White.
SOME OF OUR OFFICERS AND DIRECTORS MAY HAVE CONFLICTS OF INTEREST WITH REGARD TO CERTAIN TRANSACTIONS THAT WE MAY ENTER.
H. Vance White, who is a director and the chief executive officer of our Company, and Walter Brooks, a director of our Company, are both also officers and directors of Hawk Precious Minerals Inc., a junior exploration company and the parent company of Hawk USA, and partners in Brooks & White Associates, an unincorporated Canadian partnership that provides management, financial and investor relations services to junior mineral resource exploration companies. Mr. Brooks is also a board member of Rodinia Minerals Inc., a junior Canadian resources company. Michael Pickens, a director of ours, serves as president of Geoex Ltd., an integrated mining and exploration company in Canada. As a result of their positions with other companies that may, from time to time, compete with us, Messrs. White, Brooks and Pickens may
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have a conflict of interest to the extent the other companies with which they are affiliated acquire rights in exploration projects that may be suitable for us to acquire.
OUR PERFORMANCE MAY BE SUBJECT TO FLUCTUATIONS IN GOLD PRICES.
The profitability of a gold exploration project could be significantly affected by changes in the market price of gold. Mine production and the willingness of third parties such as central banks to sell or lease gold affect the supply of gold. Demand for gold can be influenced by economic conditions, attractiveness as an investment vehicle and the relative strength of the U.S. dollar and local investment currencies. Other factors include the level of interest rates, exchange rates, inflation and political stability. The aggregate effect of these factors is impossible to predict with accuracy. Worldwide production levels also affect gold prices. In addition, the price of gold has on occasion been subject to very rapid short-term changes due to speculative activities. Fluctuations in gold prices may adversely affect the value of any discoveries made at the sites with which we are involved.
THE NATURE OF MINERAL EXPLORATION IS INHERENTLY RISKY.
The exploration for and development of mineral deposits involves significant financial risks, which even experience and knowledge may not eliminate, regardless of the amount of careful evaluation applied to the process. While the discovery of an ore body may result in substantial rewards, very few properties are ultimately developed into producing mines.
Whether a gold deposit will be commercially viable depends on a number of factors, including:
- financing costs;
- proximity to infrastructure;
- the particular attributes of the deposit, such as its size and grade; and
- governmental regulations, including regulations relating to prices, taxes, royalties, infrastructure, land use, importing and exporting of gold and environmental protection.
The effect of these factors cannot be accurately predicted, and the combination of any of these factors may prevent us from not receiving an adequate return on invested capital.
MINERAL EXPLORATION IS EXTREMELY COMPETITIVE.
There is a limited supply of desirable mineral properties available for claim staking, lease or other acquisition in the areas where we contemplate participating in exploration activities. We compete with numerous other companies and individuals, including competitors with greater financial, technical and other resources than we possess, in the search for and the acquisition of attractive mineral properties. Our ability to acquire properties in the future will depend not only on our ability to develop our present properties, but also on our ability to select and acquire suitable producing properties or prospects for future mineral exploration. We may not be able to compete successfully with our competitors in acquiring such properties or prospects.
KWAGGA MAY BE REQUIRED TO SELL A SUBSTANTIAL AMOUNT OF ITS STOCK DUE TO LEGISLATION ENACTED IN SOUTH AFRICA, WHICH WOULD DILUTE OUR EQUITY POSITION IN KWAGGA.
The Republic of South Africa recently enacted the “Broad Based Black Economic Empowerment Act.” The aim of this and other legislation is to address the disparate economic impact on black South Africans that existed during apartheid and continues to exist today. When fully effective, the legislation is expected to require that all South African exploration and mining companies have at least 26 percent equity ownership by black South Africans, who have historically been the victims of social and economic injustices. In accordance with and anticipation of the effective date of certain requirements contemplated by this legislation, the Heads of Agreement provides that Kwagga will eventually offer up to 28 percent of its capital stock at fair market value to a black South African investor group. Any investment by such a
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group will dilute our ownership of Kwagga and, accordingly, the right to receive profits generated from the FSC Project, if any.
THE OPERATORS OF OUR EXPLORATION PROJECTS MAY NOT HAVE ALL NECESSARY TITLE TO THE MINING EXPLORATION RIGHTS.
We expect that Kwagga and AfriOre will have good and proper right, title and interest in and to the mining exploration rights they currently respectively own, have optioned or intend to acquire and that they will explore and develop. We are not certain, however, that such rights are not subject to prior unregistered agreements or interests or undetected claims or interests, which could be materially impair our ability to participate in the development of the FSC Project. The failure to comply with all applicable laws and regulations, including failure to pay taxes and to carry out and file assessment work, may invalidate title to portions of the properties where the exploration rights are held.
ITEM 2. PROPERTIES
As of December 31, 2003, our corporate office is located at 800 Nicollet Mall, Suite 2690, Minneapolis, Minnesota 55402, in which we occupy approximately 200 square feet of office space, together with the use of related adjacent common areas, pursuant to a month-to-month arrangement, which requires monthly payments of $1,500. We lease our executive offices from a company whose sole director is a former director and significant shareholder. We believe that our current facilities are adequate for our current needs.
With the sale of our Hosted Solutions Business and our Accounting Software Business, all prior leases have been assigned to the purchases of said businesses.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in a lawsuit pending in the Minnesota District Court in Hennepin County initiated by Jack A. Johnson. Mr. Johnson was formerly our President and CEO until he left our Company to accept employment with Stellent, Inc., in connection with the sale of our Hosted Solutions Business to Stellent in March 2003. Mr. Johnson has asserted claims for breach of an alleged employment contract. We have denied all liability and are vigorously defending against Mr. Johnson’s claims. In particular, we have denied the enforceability of the alleged employment agreement. According to Mr. Johnson’s pleadings, he claims to be entitled to damages in the total amount of $360,000, plus an undetermined amount for his attorneys’ fees and costs. Discovery has been completed and both party’s motions for summary judgment were denied. The court has scheduled trial to commence on April 19, 2004. We are unable to state, with any degree of certainty, the probable outcome of this matter.
In two separate and unrelated actions brought in District Court, City and County of Denver, Colorado, the Company was named a defendant. One such action was a proceeding brought by Farmers State Bank of Ft. Morgan, Colorado, in which is was alleged that the Company was liable to the plaintiff as a result of its guaranty of certain secured debt obligations in the aggregate amount of approximately $314,000 of Meteor Marketing, Inc. Meteor Marketing was formerly a subsidiary of Meteor Industries, Inc., until April 2001 when it was sold prior to the completion of the merger transaction between Meteor Industries and activeIQ Technologies Inc., (Old AIQ). In October 2003, Meteor Marketing reached a settlement with Farmers State Bank and the matter was dismissed without prejudice. To date, an aggregate of $223,400 remains outstanding and, pursuant to the settlement agreement, Meteor Marketing is required to make monthly payments of approximately $2,600. Although we were not obligated to make any payments to the bank, we remain contingently liable pursuant to the guaranty. In light of the size of Meteor Marketing’s monthly settlement payment obligations and our understanding of Meteor Marketing’s financial condition, we believe Meteor Marketing should be able to satisfy this obligation for the foreseeable future.
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The other legal proceeding involved an action brought by Timothy L. White against us and Meteor Marketing, Inc., in which the plaintiff alleged that we were liable in the amount of $102,750 for certain obligations of Meteor Marketing as a result of an April 1999 guaranty. The plaintiff obtained a default judgment against us, which was later vacated and the action dismissed for improper service of process. Mr. White and Meteor Marketing subsequently entered into a settlement and forbearance agreement with respect to Meteor Marketing’s outstanding obligations. The remaining amount owed to Mr. White is approximately $50,500 and Meteor Marketing is required to make monthly payments of $7,000 until the entire obligation is satisfied. Mr. White re-served us with a summons and complaint in November 2003, and has informed us that he wishes to maintain the action against us until Meteor Marketing fully satisfies the remaining indebtedness. The litigation is currently in its very early stages and discovery is just beginning. In light of the size of Meteor Marketing’s monthly settlement payment obligations and our understanding that both obligations are paid current, we believe Meteor Marketing is reasonably able to satisfy these obligations for the foreseeable future.
Neither of the guaranties, on which our potential liability to Farmers State Bank or Mr. White, were disclosed to us at the time the Meteor Industries-activeIQ Technologies (Old AIQ) merger was completed in April 2001. In connection with the merger and the sale by Meteor Industries of all of its operating subsidiaries to Capco Energy, Inc., the Meteor subsidiaries and Capco Energy agreed to indemnify us for any claims relating to any of the subsidiaries. Accordingly, in the event Farmers State Bank or Mr. White in the future seek to hold us liable under the guaranties, we will seek indemnification from the Meteor subsidiaries and Capco Energy.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the OTCBB under the symbol “WITM.” Prior to March 26, 2003, our common stock was quoted on the Nasdaq SmallCap Market under the symbol “AIQT.” Prior to May 1, 2001, our stock traded under the symbol “METR.” As of March 26, 2004 the last sale price of our common stock as reported by OTCBB was $.83 per share. The following table sets forth for the periods indicated the range of high and low bid prices of our common stock:
| Period | High | Low | |||
|
|
|||||
| Quarter Ended March 31, 2002 | $ | 4.75 | $ | 1.66 | |
| Quarter Ended June 30, 2002 | $ | 2.00 | $ | 0.69 | |
| Quarter Ended September 30, 2002 | $ | 1.00 | $ | 0.25 | |
| Quarter Ended December 31, 2002 | $ | 0.75 | $ | 0.16 | |
| Quarter Ended March 31, 2003 | $ | 0.29 | $ | 0.05 | |
| Quarter Ended June 30, 2003 | $ | 0.75 | $ | 0.07 | |
| Quarter Ended September 30, 2003 | $ | 0.71 | $ | 0.32 | |
| Quarter Ended December 31, 2003 | $ | 1.70 | $ | 0.41 | |
As of March 26, 2004, there were approximately 250 record holders of our common stock. Based on securities position listings, we believe that there are approximately 900 beneficial holders of our common stock.
DIVIDENDS
We have never paid cash dividends on our common stock and have no present intention of doing so in the foreseeable future. Rather, we intend to retain all earnings to provide for the growth of our Company. Payment of cash dividends in the future, if any, will depend, among other things, upon our future earnings, requirements for capital improvements and financial condition.
RECENT SALES OF UNREGISTERED SECURITIES
In addition to the sales of unregistered securities that we reported in our quarterly reports on Form 10-Q during fiscal 2003, we made the following sales of unregistered securities during the fourth quarter of fiscal 2003:
In October 2003, we completed a private placement of 10,190,000 units of our securities, each unit consisting of one share of common stock and a one-year warrant to purchase one-half of one share of common stock at a price of $0.75 per share. The units were sold at a price of $0.25 per unit, resulting in gross proceeds of $2,547,500 before agent commissions ($250,500) and other offering related expenses ($45,397). We relied on the exemption from registration provided by Section 4(2) and Rule 506 under the Securities Act, as each investor in the private placement was “accredited” (as defined by Rule 501(a)), no general solicitation was involved, and the private placement did not otherwise involve a public offering. We agreed to file a registration statement under the Securities Act of 1933 covering the resale of the shares purchased in the private placement. In accordance with the terms of the private placement, because such registration statement was not declared effective by the Securities and Exchange Commission by February 11, 2004, we issued to the investors an additional one-fifth of one share of our common stock for each unit purchased in the private placement, or 2,038,000 shares.
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On November 4, 2003, we sold 500,000 shares of common stock to a marketing/public relations consultant in exchange for services rendered. We relied on the exemption from registration provided by Section 4(2), as the consultant had such knowledge and experience in financial and business matters such that he was capable of evaluating the risks of the purchase, we had a reasonable basis to believe the consultant was an accredited investor and because the offer and sale did not otherwise involve a public offering.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data with respect to the statement of operations data for the years ended December 31, 2003, 2002 and 2001, and the balance sheets data as of December 31, 2003, 2002 and 2001 are derived from the Consolidated Financial Statements of the Company that have been audited by Virchow, Krause & Company, LLP, independent auditors. The data provided should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included in this Annual Report. The selected financial data presented below with respect to the statements of operations data for the years ended December 31, 2000 and 1999 and the balance sheets data as of December 31, 2000 and 1999 have been derived from the Consolidated Financial Statements of the Company that have been audited by Arthur Andersen LLP, independent public accountants.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share information)
| For the Years Ended December 31, | |||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||
| Revenue | $ | 132 | $ | 499 | $ | 463 | $ | — | $ | — | |||||
| Loss from operations | (3,075 | ) | (4,239 | ) | (7,941 | ) | (2,806 | ) | (414 | ) | |||||
| Other income (expense) | 570 | 326 | 152 | (34 | ) | (48 | ) | ||||||||
| Loss from continuing operations | (2,505 | ) | (3,913 | ) | (7,789 | ) | (2,840 | ) | (462 | ) | |||||
| Gain (loss) from discontinued operations | 61 | ||||||||||||||