-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G20/MFQEdgrOV5Bu+syAlvI7d9o1wtUZNrtDmKxzTJyQJXjCagl2bcdADneElrKT TqdVzyeqAYXr3PvwxJam/g== 0001015402-03-002079.txt : 20030520 0001015402-03-002079.hdr.sgml : 20030520 20030520162544 ACCESSION NUMBER: 0001015402-03-002079 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CADENCE RESOURCES CORP LP CENTRAL INDEX KEY: 0000933157 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 870306609 STATE OF INCORPORATION: UT FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25170 FILM NUMBER: 03712764 BUSINESS ADDRESS: STREET 1: 6 EAST ROSE ST CITY: WALLA WALLA STATE: WA ZIP: 99362 BUSINESS PHONE: 509-526-3491 MAIL ADDRESS: STREET 1: 6 EAST ROSE STREET STREET 2: NO SUITE CITY: WALLA WALLA STATE: WA ZIP: 99362 FORMER COMPANY: FORMER CONFORMED NAME: ROYAL SILVER MINES INC DATE OF NAME CHANGE: 19960223 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED ROYAL MINES INC DATE OF NAME CHANGE: 19950908 10-Q 1 doc1.txt 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: MAECH 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM: COMMISSION FILE NUMBER: 0-25170 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) (Exact name of registrant as specified in its charter) UTAH 87-0306609 (State or other jurisdiction of (I.R.S. Employer ID number) Incorporation or organization) 6 EAST ROSE STREET, P.O. BOX 2056 WALLA WALLA, WASHINGTON 99362 (Address of Principal Executive Offices, including Zip Code.) 509-526-3491 (Registrant's telephone number, including area code.) Indicate by check mark whether the registrant (1) 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 [ ] The number of shares outstanding at March 31, 2003: 9,162,526 shares CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) FINANCIAL STATEMENTS MARCH 31, 2003 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) C O N T E N T S Accountant's Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Statements of Operations and Comprehensive Loss. . . . . . . . . . . . . . . . 4 Statement of Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 5 Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Notes to the Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 8 The Board of Directors Cadence Resources Corp. (Formerly Royal Silver Mines, Inc.) Walla Walla, Washington ACCOUNTANT'S REVIEW REPORT We have reviewed the accompanying balance sheet of Cadence Resources Corporation (formerly Royal Silver Mines, Inc.) as of March 31, 2003, and the related statements of operations and comprehensive loss, stockholders' equity, and cash flows for the six months ended March 31, 2003, 2002 and 2001. All information included in these financial statements is the representation of the management of Cadence Resources Corporation. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America. The financial statements for the years ended September 30, 2002 and 2001 were audited by us and we expressed an unqualified opinion on them in our report dated January 9, 2003. We have not performed any auditing procedures since that date. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. Management's plans are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Williams & Webster, P.S. Certified Public Accountants Spokane, Washington May 16, 2003
CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) BALANCE SHEETS March 31, September 30, 2003 ---------------------- (Unaudited) 2002 2001 ----------- ----------- --------- ASSETS CURRENT ASSETS Cash $ 49,596 $ 40,011 $191,684 Oil & gas revenue receivable 16,964 26,123 - Receivable from working interest owners 12,873 16,037 - Notes receivable 16,319 13,078 18,000 Prepaid expenses 12,500 27,500 1,275 Other current assets 425 431 425 ----------- ----------- --------- TOTAL CURRENT ASSETS 108,677 123,180 211,384 ----------- ----------- --------- OIL AND GAS PROPERTIES, USING SUCCESSFUL EFFORTS ACCOUNTING Proved properties 208,694 48,694 - Unproved properties 96,992 78,997 - Wells and related equipment and facilities 106,841 67,374 - Support equipment and facilities 110,108 105,108 - Prepaid mineral leases 177,419 177,177 82,155 Less accumulated depreciation, depletion, amortization and impairment (21,444) (4,312) - ----------- ----------- --------- TOTAL OIL AND GAS PROPERTIES 678,610 473,038 82,155 ----------- ----------- --------- PROPERTY AND EQUIPMENT Furniture and equipment 1,440 1,440 1,440 Less accumulated depreciation (1,440) (1,440) (1,440) ----------- ----------- --------- TOTAL PROPERTY AND EQUIPMENT - - - ----------- ----------- --------- OTHER ASSETS Investments 403,759 448,793 104,343 ----------- ----------- --------- NONCURRENT ASSETS Net assets of discontinued operations 246,757 246,757 266,757 ----------- ----------- --------- TOTAL ASSETS $1,437,803 $1,291,768 $664,639 =========== =========== =========
See accountant's review report and accompanying notes to interim financial statements. 2
CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) BALANCE SHEETS March 31, September 30, 2003 ---------------------------- (Unaudited) 2002 2001 ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 140,290 $ 119,923 $ 158,857 Revenue distribution payable 16,149 14,835 - Payable to related party 2,500 2,500 8,231 Deferred working interest - 22,184 - Interest payable 2,433 - - Accrued compensation 105,761 66,261 50,000 Notes payable 300,000 - - ------------- ------------- ------------- TOTAL CURRENT LIABILITIES 567,133 225,703 217,088 ------------- ------------- ------------- COMMITMENTS AND CONTINGENCIES - - - ------------- ------------- ------------- STOCKHOLDERS' EQUITY Convertible preferred stock, $0.01 par value; 20,000,000 shares authorized, 34,950, -0- and -0- shares issued and outstanding, respectively 349 - - Common stock, $.01 par value; 100,000,000 shares authorized, 9,162,526, 6,866,210 and 2,453,890 shares issued and outstanding, respectively 91,625 68,662 24,539 Additional paid-in capital 13,829,320 13,291,965 12,198,855 Stock options 626,790 626,790 - Stock warrants 62,792 233,334 - Accumulated deficit (13,532,984) (12,906,132) (11,760,681) Accumulated other comprehensive income (loss) (207,222) (248,554) (150,162) ------------- ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 870,670 1,066,065 312,551 ------------- ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,437,803 $ 1,291,768 $ 664,639 ============= ============= =============
See accountant's review report and accompanying notes to interim financial statements. 3
CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Three Months Ended Six Months Ended March 31, March 31, ---------------------------------------- --------------------------------------- 2003 2002 2001 2003 2002 2001 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ------------ ------------ ------------ ----------- REVENUES $ 44,449 $ - $ - $ 77,825 $ - $ - ------------ ------------ ------------ ------------ ------------ ----------- GENERAL AND ADMINISTRATIVE EXPENSES Depreciation, depletion and amortization 8,496 - - 17,131 - 402 Officers' and directors' compensation 173,477 40,000 - 218,477 52,510 - Consulting 21,425 374,904 29,500 99,655 470,518 84,000 Professional fees 41,393 5,366 6,488 49,428 33,222 12,698 Oil and gas lease expenses 39,095 34,870 - 59,447 49,642 - Lease operating expenses 5,663 - - 42,179 - - Exploration and drilling - 177,038 - - 177,038 - General and administrative 26,222 7,396 4,280 62,425 20,317 14,292 ------------ ------------ ------------ ------------ ------------ ----------- Total expenses 315,771 639,574 40,268 548,742 803,247 111,392 ------------ ------------ ------------ ------------ ------------ ----------- OPERATING LOSS (271,322) (639,574) (40,268) (470,917) (803,247) (111,392) ------------ ------------ ------------ ------------ ------------ ----------- OTHER INCOME (EXPENSES) Interest income 46 11 20 126 24 49 Interest expense (81,762) (1,329) (1,186) (83,001) (2,389) (4,010) Partnership loss (159) - - (8,468) - - Gain on debt forgiveness - - - - 6,109 - Gain (loss) on disposition and impairment of assets (29,969) 11,265 (30,209) (64,592) (21,468) (27,797) ------------ ------------ ------------ ------------ ------------ ----------- Total other income (expense) (111,844) 9,947 (31,375) (155,935) (17,724) (31,758) ------------ ------------ ------------ ------------ ------------ ----------- LOSS BEFORE TAXES (383,166) (629,627) (71,643) (626,852) (820,971) (143,150) INCOME TAX BENEFIT - - - - 66,040 - ------------ ------------ ------------ ------------ ------------ ----------- LOSS FROM CONTINUING OPERATIONS (383,166) (629,627) (71,643) (626,852) (754,931) (143,150) GAIN (LOSS) FROM DISCONTINUED OPERATIONS Gain (Loss) from mining operations (net of income taxes) - - (64) - 264,158 (234) ------------ ------------ ------------ ------------ ------------ ----------- NET INCOME (LOSS) (383,166) (629,627) (71,707) (626,852) (490,773) (143,384) OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gain (loss) on market value of investments 32,655 3,215 (47,394) 41,332 13,675 (110,861) ------------ ------------ ------------ ------------ ------------ ----------- COMPREHENSIVE INCOME (LOSS) $ (350,511) $ (626,412) $ (119,101) $ (585,520) $ (477,098) $ (254,245) ============ ============ ============ ============ ============ =========== NET INCOME (LOSS) PER COMMON SHARE BASIC AND DILUTED Net loss from continuing operations $ (0.04) $ (0.16) $ (0.05) $ (0.07) $ (0.21) $ (0.11) Net income (loss) from discontinued operations nil nil nil nil 0.07 nil ------------ ------------ ------------ ------------ ------------ ----------- NET INCOME (LOSS) PER COMMON SHARE $ (0.04) $ (0.16) $ (0.05) $ (0.07) $ (0.14) $ (0.11) ============ ============ ============ ============ ============ =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 9,037,193 3,891,433 1,416,520 8,721,129 3,571,614 1,315,771 ============ ============ ============ ============ ============ ===========
See accountant's review report and accompanying notes to interim financial statements. 4
CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) STATEMENT OF STOCKHOLDERS' EQUITY Common Stock Preferred Stock ------------------ ------------------ Additional Number Number Paid-in Stock Stock of Shares Amount of Shares Amount Capital Options Warrants --------- ------- --------- ------- ------------ ------------ --------------- Balance, September 30, 2000 1,199,607 $11,996 - $ - $11,767,998 $ - $ - Shares issued to consultants and others for services at prices varying from $0.30 to $1.40 per share 174,375 1,744 - - 95,656 - - Shares issued to officers for investments at $0.40 per share 310,000 3,100 - - 120,900 - - Shares issued to officers for investment and cash at $0.25 per share 160,000 1,600 - - 38,400 - - Shares issued to officers and directors for services at $0.25 to $0.30 per share 110,000 1,100 - - 29,150 - - Adjustment for fractional shares issued 4,074 41 - - (41) - - Shares issued for loan consideration at $0.30 per share 62,500 625 - - 18,125 - - Shares issued for cash at $0.30 per share 393,334 3,933 - - 114,067 - - Shares issued for marketing services at $0.30 per share 40,000 400 - - 14,600 - - Net loss for year ended September 30, 2001 - - - - - - - Unrealized loss on market value of investments - - - - - - - --------- ------- --------- ------- ------------ ------------ --------------- Balance, September 30, 2001 2,453,890 24,539 - - 12,198,855 - - Shares issued for cash at $0.24 to $0.50 per share 783,000 7,830 - - 234,070 - - Shares issued to officer for debt at $0.30 per share 300,000 3,000 - - 87,000 - - Shares issued to officers, consultants and others for services, accrued compensation and prepaid expenses at $0.30 to $0.38 per share 589,184 5,892 - - 205,775 - - Shares issued for cash with warrants attached at $0.30 per unit 2,333,336 23,333 - - 443,333 - 233,334 Shares issued to officer for reimbursement of expenses paid for Company at $1.03 per share 6,800 68 - - 6,932 - - Shares issued for investment at $0.30 per share 400,000 4,000 - - 116,000 - - Options issued to directors and consultants for services - - - - - 626,790 - Net loss for the year ended September 30, 2002 - - - - - - - Unrealized loss on market value of investments - - - - - - - --------- ------- --------- ------- ------------ ------------ --------------- Balance September 30, 2002 6,866,210 68,662 - - 13,291,965 626,790 233,334 Shares issued for cash with warrants attached at an average of $0.52 per unit 212,500 2,125 - - 61,750 - 46,125 Shares issued to directors and others for services at $0.78 to $0.85 per share 168,500 1,685 - - 140,515 - - Shares issued for loan consideration at $0.78 per share 100,000 1,000 - - 77,000 - - Shares issued from exercise of warrants 1,815,316 18,153 - - 198,514 - (216,667) Preferred shares issued for cash at $1.50 to $2.00 per share - - 34,950 349 59,576 - - Net loss for the six months ended March 31, 2003 (unaudited) - - - - - - - Unrealized gain on market value of investments (unaudited) - - - - - - - --------- ------- --------- ------- ------------ ------------ --------------- Balance, March 31, 2003 (unaudited) 9,162,526 $91,625 34,950 $ 349 $13,829,320 $ 626,790 $ 62,792 ========= ======= ========= ======= ============ ============ =============== Accumulated Other Total Accumulated Comprehensive Stockholders' Deficit Loss Equity --------------- ---------- ---------------- Balance, September 30, 2000 $ (10,885,466) $ (34,389) $ 860,139 Shares issued to consultants and others for services at prices varying from $0.30 to $1.40 per share - - 97,400 Shares issued to officers for investments at $0.40 per share - - 124,000 Shares issued to officers for investment and cash at $0.25 per share - - 40,000 Shares issued to officers and directors for services at $0.25 to $0.30 per share - - 30,250 Adjustment for fractional shares issued - - - Shares issued for loan consideration at $0.30 per share - - 18,750 Shares issued for cash at $0.30 per share - - 118,000 Shares issued for marketing services at $0.30 per share - - 15,000 Net loss for year ended September 30, 2001 (875,215) - (875,215) Unrealized loss on market value of investments - (115,773) (115,773) Balance, September 30, 2001 (11,760,681) (150,162) 312,551 --------------- ---------- ---------------- Shares issued for cash at $0.24 to $0.50 per share - - 241,900 Shares issued to officer for debt at $0.30 per share - - 90,000 Shares issued to officers, consultants and others for services, accrued compensation and prepaid expenses at $0.30 to $0.38 per share - - 211,667 Shares issued for cash with warrants attached at $0.30 per unit - - 700,000 Shares issued to officer for reimbursement of expenses paid for Company at $1.03 per share - - 7,000 Shares issued for investment at $0.30 per share - - 120,000 Options issued to directors and consultants for services - - 626,790 Net loss for the year ended September 30, 2002 (1,145,451) - (1,145,451) Unrealized loss on market value of investments - (98,392) (98,392) --------------- ---------- ---------------- Balance September 30, 2002 (12,906,132) (248,554) 1,066,065 Shares issued for cash with warrants attached at an average of $0.52 per unit - - 110,000 Shares issued to directors and others for services at $0.78 to $0.85 per share - - 142,200 Shares issued for loan consideration at $0.78 per share - - 78,000 Shares issued from exercise of warrants - - - Preferred shares issued for cash at $1.50 to $2.00 per share - - 59,925 Net loss for the six months ended March 31, 2003 (unaudited) (626,852) - (626,852) Unrealized gain on market value of investments (unaudited) - 41,332 41,332 --------------- ---------- ---------------- Balance, March 31, 2003 (unaudited) $ (13,532,984) $(207,222) $ 870,670 =============== ========== ================
See accountant's review report and accompanying notes to interim financial statements. 5
CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) STATEMENTS OF CASH FLOWS Six Months Ended March 31, -------------------------------------- 2003 2002 2001 (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (626,852) $ (490,773) $(143,384) Adjustments to reconcile net loss to net cash used by operating activities: Loss (gain) on sale of equipment - - (115) Loss on sale of investments 64,592 21,468 27,912 Partnership loss 8,468 - - Gain from mining operations - (330,198) - Gain on debt forgiveness - 6,109 - Depreciation and amortization 17,131 - 402 Issuance of common stock for services 142,200 58,500 82,400 Issuance of common stock for loan consideration 78,000 - - Investment given for services 7,200 - - Issuance of stock options for consulting fees - 324,000 - Changes in assets and liabilities: Oil & gas revenue receivable 9,159 - - Receivable from working interest owners 3,164 (2,752) - Prepaid expenses 15,000 1,275 - Notes receivable (3,241) - - Deposit 6 - - Prepaid mineral leases 47,258 (88,350) - Deferred working interest (22,184) 38,527 - Accounts payable 20,367 (33,980) (2,248) Revenue distribution payable 1,314 - - Interest payable 2,433 - - Accrued expenses 39,500 52,510 - ------------ ------------ ---------- Net cash provided (used) by operating activities (196,485) (443,664) (35,033) ------------ ------------ ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (9,172) (21,677) (4,400) Sale of investments 15,279 79,124 31,590 Purchase of fixed assets (44,467) (17,086) - Purchase of proved and unproved properties (177,995) - - Purchase of mineral leases (47,500) - - Sale of fixed assets - - 3,000 ------------ ------------ ---------- Net cash provided (used) by investing activities (263,855) 40,361 30,190 ------------ ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of notes payable - (35,000) - Proceeds from notes payable 300,000 - - Issuance of preferred stock for cash 59,925 - - Issuance of common stock and warrants for cash 110,000 Issuance of common stock for cash - 374,900 - ------------ ------------ ---------- Net cash provided by financing activities 469,925 339,900 - ------------ ------------ ---------- Net increase (decrease) in cash $ 9,585 $ (63,403) $ (4,843) ------------ ------------ ----------
See accountant's review report and accompanying notes to interim financial statements. 6
CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) (AN EXPLORATION STAGE COMPANY) STATEMENTS OF CASH FLOWS Six Months Ended March 31, ------------------------------------- 2003 2002 2001 (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ---------- Net increase (decrease) in cash (balance forward) $ 9,585 $ (63,403) $ (4,843) Cash, beginning of period 40,011 191,684 15,915 ------------ ------------ --------- Cash, end of period $ 49,596 $ 128,281 $ 11,072 ============ ============ ========= SUPPLEMENTAL CASH FLOW DISCLOSURE: Income taxes paid $ - $ - $ - Interest paid $ - $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for services rendered and accrued compensation $ 142,200 $ 92,500 $ 82,400 Common stock issued for loan consideration $ 78,000 $ - $ - Common stock issued for debt $ - $ 90,000 $ - Common stock issued for investment and stock subscription receivable $ - $ - $124,000 Common stock issued for investment $ - $ 120,000 $ - Investment received for mining claims $ - $ 350,198 $ - Investment given for related party payable $ - $ 8,231 $ - Investment received for note receivable $ - $ 15,000 $ - Stock options issued for servies $ - $ 324,000 $ - Investment given for consulting services $ 7,200 $ - $ -
See accountant's review report and accompanying notes to interim financial statements. 7 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Cadence Resources Corporation (formerly Royal Silver Mines, Inc.) hereinafter ("Cadence" or "the Company") was incorporated in April of 1969 under the laws of the State of Utah primarily for the purpose of acquiring and developing mineral properties. The Company changed its name from Royal Silver Mines, Inc. to Cadence Resources Corporation on May 2, 2001 upon obtaining approval from its shareholders and filing an amendment to its articles of incorporation. The Company shall be referred to as "Cadence" or "Cadence Resources Corporation" even though the events described may have occurred while the Company's name was "Royal Silver Mines, Inc." The Company has elected a September 30 fiscal year-end. On July 1, 2001, Cadence developed a plan for acquisition, exploration and development of oil and gas properties and accordingly began a new exploration stage as an energy project development company. Prior to this, Cadence conducted its business as a "junior" mineral resource company, meaning that it intended to receive income from property sales or joint ventures of its mineral projects with larger companies. The Company continues to hold several mineral properties, which are described in Note 3. Celebration Mining Company ("Celebration"), currently a wholly owned subsidiary of Cadence, was incorporated for the purpose of identifying, acquiring, exploring and developing mining properties. Celebration was organized on February 17, 1994 as a Washington corporation. Celebration has not yet realized any revenues from its planned operations. On August 8, 1995, Cadence and Celebration completed an agreement and plan of reorganization whereby the Company issued 207,188 shares of its common stock and 72,750 warrants in exchange for all of the outstanding common stock of Celebration. Pursuant to the reorganization, the name of the Company was changed to Royal Silver Mines, Inc. Immediately prior to the agreement and plan of reorganization, the Company had 118,773 common shares issued and outstanding. The acquisition was accounted for as a purchase by Celebration of Cadence, because the shareholders of Celebration controlled the Company after the acquisition. Therefore, Celebration is treated as the acquiring entity. There was no adjustment to the carrying value of the assets or liabilities of Cadence in the exchange as the market value approximated the net carrying value. Cadence is the acquiring entity for legal purposes and Celebration is the surviving entity for accounting purposes. As a result of the Company's entering a new exploration stage as an energy project development company on July 1, 2001, the Company elected to dispose of its mineral properties and has accordingly reclassified these properties, which total $246,757 at March 31, 2003, as net assets of discontinued operations. The Company has not determined whether these mineral exploration properties contain ore reserves that are economically recoverable, and is in the process of disposing of these properties. The ultimate realization of the Company's investment in these properties cannot be determined at this time and, accordingly, no provision for any asset 8 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED) impairment that may result in the event the Company is not successful in selling these properties has been made in the accompanying financial statements. See Note 3. The $177,419 and $177,177, respectively, cost of prepaid mineral leases included in the accompanying balance sheets as of March 31, 2003 and September 30, 2002 are related to natural gas properties. The Company has not determined whether the properties contain economically recoverable gas reserves. The ultimate realization of the Company's investment in oil and gas properties is dependent upon finding and developing economically recoverable reserves, the ability of the Company to obtain financing or make other arrangements for development and upon future profitable production. The ultimate realization of the Company's investment in oil and gas properties cannot be determined at this time and, accordingly, no provision for any asset impairment that may result in the event the Company is not successful in developing these properties, has been made in the accompanying financial statements. The Company was in the exploration stage through June 30, 2002. During the fourth quarter of the year ended September 30, 2002, the Company entered a very brief development stage and is now considered an operating company. The Company is seeking additional capital through a private placement of its stock, or debt. Management plans to use the majority of such financing proceeds for landhold acquisition, and on drilling and possible completion of an oil well project in Texas. Management also plans to conduct a second financing, larger than the first, the proceeds of which will be used for drilling of wells on the Company's leased oil and gas property in Louisiana, as well as its newly acquired working interest participation in gas wells in Michigan. See Note 10. Management believes that such financing proceeds will enable the Company to continue its operations. However, there are inherent uncertainties in fund raising and in the sales of excess assets and management cannot provide assurances that it will be successful in these endeavors. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Cadence Resources Corporation is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements. Accounting Method - ------------------ The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. 9 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Exploration Stage - ------------------ The Company began a new exploration stage concerning the exploration of oil and gas leases on July 1, 2001, which ended during July 2002 with the commenced sale of oil and gas products. Estimates - --------- The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. Loss Per Share - ---------------- Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Outstanding warrants were not included in the computation of diluted loss per share because their inclusion would be antidilutive. Cash Equivalents - ----------------- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Mineral Properties - ------------------- Costs of acquiring, exploring and developing mineral properties are capitalized by project area. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves. At March 31, 2003 and September 30, 2002, the cost of the Company's mineral properties are included in net assets of discontinued operations in the accompanying financial statements, as the Company has changed its focus from minerals exploration to oil and gas. Mineral properties are periodically assessed for impairment of value and any losses are charged to operations at the time of impairment. Should a property be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area. 10 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Oil and Gas Properties - ------------------------- The Company uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. Other unproved properties are amortized based on the Company's experience of successful drilling and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated dismantlement and abandonment costs and estimated salvage values, are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives. Property leases are expensed ratably over the life of the lease. On the sale or retirement of a complete unit of a proven property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proven property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income. On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any unrecorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained. Provision For Taxes - --------------------- Income taxes are provided based upon the liability method of accounting pursuant to SFAS No. 109 "Accounting for Income Taxes." Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by SFAS No. 109 to allow recognition of such an asset. At March 31, 2003, the Company had net deferred tax assets of approximately $1,600,000, principally arising from net operating loss carryforwards for income tax purposes. During the year ending September 30, 2002, the Company utilized $66,040 of the net deferred taxes from previous net operating losses in the offset of the gain associated with the sale of mining property. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at March 31, 2003. 11 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Provision For Taxes (Continued) - ---------------------------------- At March 31, 2003, the Company has net operating loss carryforwards of approximately $8,000,000, which expire in the years 2002 through 2022. Additionally, the Company has capital loss carryovers of approximately $4,870,000. Environmental Remediation and Compliance - ------------------------------------------- Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures resulting from the remediation of existing conditions caused by past operations that do not contribute to future revenue generations are expensed. Liabilities are recognized when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of such liabilities are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors, and include estimates of associated legal costs. These amounts also reflect prior experience in remediating contaminated sites, other companies' clean-up experience and data released by The Environmental Protection Agency (EPA) or other organizations. Such estimates are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation. Recoveries are evaluated separately from the liability and, when recovery is assured, the Company records and reports an asset separately from the associated liability. At December 31, 2002, the Company had no accrued liabilities for compliance with environmental regulations. Investments - ----------- Investments, principally consisting of equity securities of private and small public companies, which are stated at current market value. Revenue Recognition - -------------------- Cadence began producing revenues during July 2002. Sales are recognized at the point of passage of title specified in the underlying contract. Impaired Asset Policy - ----------------------- The Company adopted financial Accounting Standard Board statement SFAS No. 121 titled "Accounting for Impairment of Long-Lived Assets," which has been replaced by SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets." In complying with this standard, the Company reviews its long-lived assets quarterly to determine if any events or changes in circumstances have transpired which indicate that the carrying value of its assets may not be recoverable. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by its assets to their respective carrying amount whenever events or changes in circumstances indicate that an asset may not be recoverable. Because of write-downs and write-offs taken in fiscal years 2000 and 2001, the Company does not believe any further adjustments are needed to the carrying value of its assets at March 31, 2003. See Note 3. 12 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value Standards - ---------------------- The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services. Principles of Consolidation - ----------------------------- The financial statements include those of the Cadence Resources Corporation and Celebration Mining Company. All significant inter-company accounts and transactions have been eliminated. The financial statements are not considered consolidated statements since Cadence Resources Corporation was the successor by merger to Celebration Mining Company. Reclassifications - ----------------- Certain amounts from prior periods have been reclassified to conform with the current period presentation. This reclassification has resulted in no changes to the Company's accumulated deficit and net losses presented. Fair Value of Financial Instruments - --------------------------------------- The carrying amounts for cash, receivables, deposits, payables, and advances from related parties approximate their fair value. Derivative Instruments - ----------------------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which is effective for the Company as of January 1, 2001. These standards establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes. At March 31, 2003, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities. 13 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Accounting Pronouncements - -------------------------- In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146," Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 was issued in June 2002, effective December 31, 2002 with early adoption encouraged. The impact on the Company's financial position or results of operations from adopting SFAS No. 146 has not been determined. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 44, 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which updates, clarifies and simplifies existing accounting pronouncements. FASB No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded. As a result, FASB No. 64, which amended FASB No. 4, was rescinded as it was no longer necessary. SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, established the accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Since the transition has been completed, SFAS No. 44 is no longer necessary and has been rescinded. SFAS No. 145 amended SFAS No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Management has not yet determined the effects of adopting this Statement on the financial position or results of operations, except for the need to reclassify debt extinguishments previously reported as extraordinary. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." This standard establishes a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations. SFAS No. 144 requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. This statement is effective beginning for fiscal years after December 15, 2001, with earlier application encouraged. The Company adopted SFAS No. 144 and the adoption did not have a material impact on the financial statements of the Company at March 31, 2003. 14 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Accounting Pronouncements (Continued) - --------------------------------------- In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 establishes guidelines related to the retirement of tangible long-lived assets of the Company and the associated retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets. This statement is effective for financial statements issued for the fiscal years beginning after June 15, 2002 and with earlier application encouraged. The Company adopted SFAS No. 143 and the adoption did not have a material impact on the financial statements of the Company at March 31, 2003. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 provides for the elimination of the pooling-of-interests method of accounting for business combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142 prohibits the amortization of goodwill and other intangible assets with indefinite lives and requires periodic reassessment of the underlying value of such assets for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. An early adoption provision exists for companies with fiscal years beginning after March 15, 2001. The adoption of these standards did not have any material effect on the Company's financial statements. In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities and also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000, and is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this standard did not have a material effect on the Company's results of operations or financial position. New Accounting Pronouncements - ------------------------------- In December 2002, the "FASB" Financial Accounting Standards Board, issued Statement of Financial Accounting Standards, No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for 15 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements (Continued) - -------------------------------------------- stock-based employee compensation and the effect of the method used on reported results. The provisions of the statement are effective for financial statements for fiscal years ending afterDecember 15, 2002. As the Company accounts for stock-based compensation using the intrinsic value method prescribed in APB No. 25, "Accounting for Stock Issued to Employee's", the adoption of SFAS 148 has no impact on the Company's financial condition or results of operations. Going Concern - -------------- As shown in the accompanying financial statement, the Company had limited revenues, has incurred a net loss of $626,852 for the six months ended March 31, 2003, and has an accumulated deficit of $13,532,984. Although the Company is considered an operating entity since July 1, 2002 when one of it exploration properties began producing reasonable revenue, the current projected revenues are still substantially less then the Company's historical operating expenses. These factors indicate that the Company may be unable to continue in existence. The financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. The Company's management has strong beliefs that significant and imminent private placements will generate sufficient cash for the Company to operate for the next few years. The Company also believes that the occasional sale of its equity investments will provide cash as needed for operations. NOTE 3 - MINERAL PROPERTIES The Company's mineral properties are being disposed of as discontinued operations pursuant to the Company's adoption of the plan for a new exploration stage concerning natural resource properties on July 1, 2001. In the future, the Company's management may elect to begin a new focus on mineral property development if conditions are warranted. Mineral Properties in North Idaho - ------------------------------------- At March 31, 2003, the Company, directly and through its subsidiary, Celebration Mining Company, held forty-three unpatented mining claims in the Coeur d'Alene Mining District in distinct groups called the South Galena Group, Moe Group, Rock Creek Group and Palisades Group. The Company has undertaken only minimal exploration and development work on these properties, such as general geological reconnaissance and claim-staking activities. The majority of these claims were written off as permanently impaired at September 30, 2001. In April 2003, the Company sold the South Galena Group to Caledonia Silver-Lead Mines, Inc. in exchange for 900,000 shares of its common stock valued at $90,000. See Note 5 and Note 17 regarding sale of South Galena Group in April 2003. 16 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 3 - MINERAL PROPERTIES (CONTINUED) Mineral Properties in North Idaho (Continued) - -------------------------------------------------- In September 2000, the Company, through its wholly owned subsidiary Celebration Mining Company, entered into a five-year lease agreement with an affiliated company, Oxford Metallurgical, Inc. on its eight-claim Palisades Group property. This lease was rescinded during the year ended September 30, 2002. The lease called for a semi-annual payment of $3,000, or alternatively, the semi-annual payment of 10,000 shares of the common stock of Oxford. Oxford had the right to explore and potentially develop the property under certain conditions. Utah Property - -------------- The Company has elected to retain its 25% undivided interest in the Vipont Mine located in northwest Utah, which is carried on the Company's books at $246,757 as assets of discontinued operations. Although this property has been the subject of litigation, the Company has and will continue to hold its undivided 25% interest in this property. See Note 13. Other Domestic Properties - --------------------------- In the fourth quarter of the year ended September 30, 2001, the Company elected to write off all of its interests in mineral properties except for the ViPont Mine, Kil Group Claims and West Mullan Group Claims. The net effect of this write down was to record a loss on asset impairment of $432,090 during the year ended September 30, 2001. On October 31, 2001, the Company sold its Kil Group and West Mullan Group claims to Caledonia Silver-Lead Mines, Inc., an affiliated company. The combined sale price for these claims was 3,501,980 shares of the common stock of Caledonia, having an estimated market value of $0.10 per share and valued at $350,198. The net effect of the transaction was a gain of $330,198. See Note 5. NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Major additions and improvements are capitalized. Minor replacements, maintenance and repairs that do not increase the useful life of the assets are expensed as incurred. Depreciation of property and equipment is determined using the straight-line method over the expected useful lives of the assets of five years. Depreciation expense for the six months ended March 31, 2003, 2002, and 2001 was $8,703, $-0- and $402, respectively. NOTE 5 - INVESTMENTS The Company's securities investments are classified as available for sale securities which are recorded at fair value on the balance sheet as investments. The change in fair value during the period is excluded from earnings and recorded net of tax as a component of other comprehensive income. The Company has no securities which are classified as trading securities. 17 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 5 - INVESTMENTS (CONTINUED) At March 31, 2003 and September 30, 2002, the market values of investments were as follows: March 31, September 30, 2003 2002 ---------- -------------- Elite Logistics, Inc. $ 874 $ 2,950 Ashington Mining Company 5,709 5,709 Sterling Mining Co. - 4,859 Cadence Resources Corp. LP 6,732 15,200 Exhaust Technology - 2,244 Enerphaze Corporation 2,620 5,400 Caledonia Silver-Lead Mines, Inc. 350,198 350,198 Metalline Mining 1,200 - Western Goldfields 11,258 866 Williams Companies 9,160 6,800 Trend Mining Company 16,008 54,567 ---------- -------------- $ 403,759 $ 448,793 ========== ============== Other information regarding the Company's investments follows: Enerphaze Corporation - ---------------------- During October 2001, the Company received 8,000 shares of Enerphaze Corporation common stock in payment of a $15,000 note receivable. During January and February 2002, the Company received 65,000 shares of Enerphaze Corporation common stock in exchange for 400,000 shares of the Company's common stock. No gain or loss was recognized on these transactions. Caledonia Silver-Lead Mines, Inc. - ------------------------------------ The Company on October 31, 2001 received 3,501,980 shares of the $0.10 par value common stock of Caledonia Silver-Lead Mines, Inc. (an affiliated company) in exchange for its Kil Group and West Mullan Group claims. The stock received was recorded at its par value of $350,198 which, in the opinion of management, approximates its fair value. The carrying value of these shares will be reevaluated at each reporting period and adjustments, if appropriate, will be made to the carrying value of these securities. The net effect of the transaction resulted in a gain of $330,198. Subsequent to the dates of these financial statements, during April 2003, the Company sold its South Galena claims to Caledonia for 900,000 shares of its common stock valued at $90,000. See Note 3. At March 31, 2003, management has determined that there is no impairment to these securities. Cadence Resources Corporation Limited Partnership - ----------------------------------------------------- On August 1, 2002, the Company formed a limited partnership in the state of Washington whereby the Company became the managing general partner and an outside individual investor became the initial limited partner. The entity, Cadence Resources Corporation Limited 18 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 5 - INVESTMENTS (CONTINUED) Cadence Resources Corporation Limited Partnership (continued) - ------------------------------------------------------------------ Partnership (hereinafter "CRCLP" or "the Partnership") was formed to invest in oil and gas properties in Texas and Louisiana. In connection with the formation of the Partnership, the Company agreed to contribute $12,500 and its leasehold interest in an oil well ("2B") in Wilbarger County, Texas and the limited partner contributed $250,000 in cash. During the six months ended March 31, 2003, the Company realized $8,468 in losses from its partnership investment. Other provisions of the Partnership are described in Notes 11, 12 and 14. NOTE 6 - COMMON STOCK During the year ended September 30, 2001, the Company issued 284,375 shares of common stock to officers, directors, consultants and others for services and 532,500 shares of common stock were issued to officers for loan consideration, investments and cash. The Company also issued 40,000 shares of its common stock pursuant to terms of a consulting agreement (Note 12) and sold 393,334 shares of its common stock for cash. The shares were valued at their fair market value at the date of issuance, which ranged from $0.25 to $1.40. On April 23, 2001, the Company's board of directors authorized a 1-for-20 reverse stock split of the Company's $0.01 par value common stock. All references in the accompanying financial statements and notes to the number of common shares and per-share amounts have been restated to reflect the reverse stock split. The Company also approved an increase in the number of its authorized common stock shares to 100,000,000. During the year ended September 30, 2002, the Company issued 589,184 shares of its common stock to officers, consultants and others for services and prepaid expenses valued at $211,667, 400,000 shares of its common stock for an investment, 6,800 shares of its common stock to an officer for reimbursement of expenses paid for the Company valued at $7,000 and 300,000 shares of its common stock to an officer in payment of a note payable. These transactions were valued in accordance with a plan for stock issuance previously approved by the board of directors. The Company also sold 783,000 shares of its common stock for $241,900. During the year ended September 30, 2002, the Company also sold 2,333,336 "units" to investors, two officers of the Company and another entity under common control at $0.30 per unit in a private placement. Each unit consists of one share of common stock and one warrant exercisable at $0.30 per common share for five years. Sales of these units generated cash proceeds of $700,000. Two officers of the Company and another entity under common control invested $50,000 in these common stock units. (See Note 9.) 19 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 6 - COMMON STOCK (CONTINUED) During the six months ended March 31, 2003, the Company sold 212,500 "units" to investors at prices ranging from $0.50 to $0.80 per unit in a private placement. Each unit consists of one share of common stock and one warrant exercisable at $1.35 per common share for three years. Sales of these units generated cash proceeds of $110,000. Warrants previously issued (2,166,668) were exercised for 1,815,316 shares of common stock in a "cashless" redemption. (See Note 9.) The Company also issued 168,500 shares of its common stock to directors and a consultant for services valued at $142,200 and 100,000 shares for loan consideration valued at $78,000. NOTE 7 - PREFERRED STOCK On April 23, 2001, the Company's board of directors authorized 20,000,000 shares of preferred stock with a par value of $0.01 per share and rights and preferences to be determined. No shares were issued and outstanding as of September 30, 2002. During the six months ended March 31, 2003, the Company issued 34,950 shares of its preferred stock to investors at prices ranging from $1.50 to $2.00 per share. The shares bear a preferred dividend of 15% per annum and are convertible to common stock at a price of $1.50 per share under certain terms and conditions. NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN In January 1992, the shareholders of Cadence approved a 1992 Stock Option and Stock Award Plan under which up to ten percent of the issued and outstanding shares of the Company's common stock could be awarded based on merit or work performed. As of September 30, 2002, only 638 shares of common stock had been awarded under the Plan. The Company has a stock-based compensation plan whereby the Company's board of directors may grant common stock to its employees and directors. At September 30, 2001, a total of 72,750 options have been granted under the plan. These options have been forfeited and none have been exercised through the year ending September 30, 2002. The old existing options are attributed to the merger of Celebration Mining Company with Royal in August 1995. During the year ended September 30, 2002, the Company's board of directors chose to make option awards to select officers, directors, consultants and shareholder/investors. These options were not awarded pursuant to a qualified plan and carry various terms and conditions. The Company granted a total of 750,000 options at an average exercise price of $1.08 per share. These options were exercisable immediately. The Company's board of directors has reserved the right to cancel these awards for non-performance or other reasons. The fair value of each option granted during fiscal 2002 was estimated on the grant date using the Black-Scholes Option Price Calculation. The following assumptions were made in 20 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN (CONTINUED) estimating fair value: risk-free interest of 5%, volatility of 100%, expected life of 3 to 5 years, and no expected dividends. The value of these options in the amount of $626,790 was included in operating expense in the financial statements. Following is a summary of the stock options during the six months ended March 31, 2003 and the years ended September 30, 2002, and 2001. Weighted Number Average of Exercise Options Price ----------- --------- Outstanding at 10/1/2000 60,000 $ 18.60 Granted - - Exercised - - Expired or forfeited - - ----------- --------- Outstanding at 9/30/2001 60,000 $ 18.60 =========== ========= Options exercisable at 9/30/2001 60,000 $ 18.60 =========== ========= Weighted average fair value of options granted during the year ended 9/30/2001 $ - =========== Outstanding at 10/1/2001 60,000 $ 18.60 Granted 750,000 1.08 Exercised - - Expired or forfeited ( 60,000) 18.60 ----------- --------- Outstanding at 9/30/2002 750,000 $ 1.08 =========== ========= Options exercisable at 9/30/2002 750,000 $ 1.08 =========== ========= Weighted average fair value of options granted during the year ended 9/30/2002 $ 0.84 =========== Outstanding at 10/1/2002 750,000 $ 1.08 Granted - - Exercised - - Expired or forfeited - - ----------- --------- Outstanding at 3/31/2003 750,000 $ 1.08 =========== ========= Options exercisable at 3/31/2003 750,000 $ 1.08 =========== ========= Weighted average fair value of options granted during the period ended 3/31/2003 $ - =========== 21 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN (CONTINUED) Weighted Average Exercise Date Number of Shares Price per Share -------------------------- ---------------- ---------------- On or before June 21, 2005 200,000 $ 1.50 On of before August 1, 2005 50,000 $ 1.50 On or before March 1, 2007 400,000 $ 0.75 On or before July 8, 2007 100,000 $ 1.35 Prior to April 2001, a total of 72,750 options were granted by the board to officers, directors and other consultants. As shown above, all of these options have been forfeited with none exercised through the period ending September 30, 2002. The following table gives information about the Company's common stock that may be issued upon the exercise of options under all of the Company existing stock option plans as of March 31, 2003.
Remaining Exercise Number of Weighted-average contractual life Number Weighted-average prices options exercise price (in years) exercisable exercise price - --------- ---------- ----------------- ----------------- ------------ ----------------- 0.75 400,000 $ 0.75 4.17 400,000 $ 0.75 1.35 100,000 1.35 4.50 100,000 1.35 1.50 200,000 1.50 2.50 200,000 1.50 1.50 50,000 1.50 2.58 50,000 1.50 ---------- ----------------- ----------------- ------------ ----------------- 750,000 $ 1.08 3.66 750,000 $ 1.08
Stock Award Plan - ------------------ During the year ended September 30, 2001, the Company's board of directors approved the issuance of 15,000 shares of the Company's common stock per quarter to each entitled director as compensation for service to the Company and 5,000 shares of the Company's common stock per quarter to officers in addition to their salaried compensation for services. NOTE 9 - WARRANTS During the year ended September 30, 2002, the Company issued 2,333,336 shares of stock with 2,333,336 warrants attached. These warrants were valued at $233,334 using the Black-Scholes Option Price Calculation. The following assumptions were made in estimating fair value: risk free interest is 5%, volatility is 100% and expected life is 5 years. These warrants may be used in a cashless exercise to purchase 2,333,336 shares of the Company's common stock at $0.30 per share. The warrants remain exercisable through April 15, 2007. During the quarter ended December 31, 2002, 2,166,668 of these warrants were exercised in a cashless exercise in accordance with the terms of the warrants and 1,815,316 shares of the Company's common stock 22 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 9 - WARRANTS (CONTINUED) were then issued to the warrant holders. As of the date of these financial statements, 166,668 of these warrants remain outstanding and unexercised. During the six months ended March 31, 2003, the Company issued 212,500 shares of stock with 212,500 warrants attached. The warrants were valued at $46,125 using the Black-Scholes Option Price Calculation. The following assumptions were made is estimating fair value: risk free interest is 5%, volatility is 100% and expected life is 3 years. These warrants may be used to purchase 212,500 shares of the Company's common stock at $1.35 per share. The warrants remain exercisable through October 15, 2005. As of the date of these financial statements, all of these warrants remain outstanding and unexercised. NOTE 10 - OIL AND GAS PROPERTIES The Company's oil and gas producing activities are subject to laws and regulations controlling not only their exploration and development, but also the effect of such activities on the environment. Compliance with such laws and regulations may necessitate additional capital outlays, affect the economics of a project, and cause changes or delays in the Company's activities. The Company's oil and gas properties are valued at the lower of cost or net realizable value. Louisiana - --------- During the fourth quarter of the year ended September 30, 2001, the Company began leasing acreage in a natural gas field in Desoto Parish, Louisiana. At least 51 drilled wells were previously commercially successful in adjacent acreage. As of the dates of these financial statements, the Company has leased over 3,000 acres. At March 31, 2003 and September 30, 2002, $129,557 and $169,077, respectively, of leases in Louisiana are included in the attached financial statements as prepaid mineral leases. Management has estimated a cost of $1,250,000 to drill the initial test well on this property. Subsequent to the date of these financial statements, in April 2003, the Company entered into a joint venture agreement with Bridas Energy USA for the development of the Louisiana property. See Note 17. Texas - ----- During the year ended September 30, 2002, the Company acquired an exploration permit and lease option agreement for an oil well project in Wilbarger County, Texas known as Pinnacle Reef. During the period ended March 31, 2002, the Company drilled its initial test well to a total depth of 4,237 feet and encountered four pay zones. The two lowest pay zones were completed and initial drill stem tests and flow tests were run. At March 31, the decision was made to run electricity to the site, install a pump jack and commence commercial production. At March 31, 2003 and September 30, 2002, $6,300 and $8,100 respectively is included in the attached financial statements as prepaid mineral leases relating to Texas property. See Note 13. 23 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 10 - OIL AND GAS PROPERTIES (CONTINUED) Texas (continued) - ------------------ During the year ended September 30, 2002, the Company sold 40% of the working interest in this initial well to private investors and two officers of the Company for $210,000. The Company's initial cost in the portion of the prospect sold totaled $3,200. Because the Company has received proceeds from the sales of the working interests in excess of exploration and development costs attributable to those working interests, the Company recorded a deferred credit. The balance of this credit at March 31, 2003 and September 30, 2002 is $-0- and $22,184, respectively. As exploration and development costs of $22,184 and $197,476, respectively, during the six months ended March 31, 2003 and the year ended September 30, 2002 were incurred on this prospect, they were charged against the original deferred credit. At March 31, 2003 and September 30, 2002, the Company recorded a receivable from working interest owners in the amount of $12,873 and $16,037, respectively, to reflect some sales of the prospect's partial interest. This initial well was placed in production during July 2002. Two additional exploratory wells have been drilled on the property with the Company retaining 100% of the working interest. During February 2003, the Company completed the West Electra Lake Well on the C Lease and had previously entered into a 50% working interest joint venture agreement with the Waggoner Ranch for the operations of this well. The other well was converted to a salt-water disposal well. Michigan - -------- During the six months ended March 31, 2003, the Company acquired for cash a 22.5% working interests in four gas wells located in Alpena County, Michigan. See Note 1. At March 31, 2003, $41,563 of leases in Michigan are included in the attached financial statements as prepaid mineral leases. NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES During the six months ended March 31, 2003, the Company purchased a 22.5% working interest before payout and a 20% after payout in four proved gas wells located in Alpena County, Michigan with the option to participate in any proposed subsequent wells. During September 2002, the Company began exploratory well "2B" which is funded through CRCLP. The Company acts as the managing general partner and may make contributions to this well under the same terms and conditions as the limited partner. Terms of the partnership provide funding traunches in $250,000 increments by the limited partner on selected drilling projects. Subsequent to the date of these financial statements, CRCLP has determined that well "2B" has no recoverable reserves and has written off $261,106 on this property. See Notes 5, 12 and 14. 24 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) The Securities and Exchange Commission defines proved oil and gas reserves as those estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recovered in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. The Company has not retained the services of an independent geologist to estimate its oil and gas reserves. Natural gas reserves and petroleum reserves are estimated by management. The estimates include reserves in which Cadence holds an economic interest under lease and operating agreements. Proved reserves do not include amounts that may result from extensions of currently proved areas or from application of enhanced recovery processes not yet determined to be commercial in specific reservoirs. Cadence has no supply contracts to purchase petroleum or natural gas from foreign governments. The changes in proved reserves for the six months ended March 31, 2003 and the year ended September 30, 2002 were as follows as estimated by the management of Cadence: Petroleum Liquids Natural Gas (barrels) (cubic feet) United States United States ------------------ -------------- Reserves at October 1, 2001 - - Purchases 100,485 - Sales (3,755) - ------------------ -------------- Reserves at September 30, 2002 96,730 - ================== ============== Reserves at October 1, 2002 96,730 - Purchases - 450,000,000 Sales (5,568) - ------------------ -------------- Reserves at March 31, 2003 91,162 450,000,000 ================== ============== 25 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion and amortization as of March 31, 2003 and September 30, 2002 were as follows: March 31, September 30, 2003 2002 ----------- --------------- Proved properties $ 208,694 $ 48,694 Unproved properties 96,992 78,997 Wells and related equipment and facilities 106,841 67,374 Support equipment and facilities 110,108 105,108 Prepaid mineral leases 177,419 177,177 Accumulated depreciation, depletion and amortization (21,444) (4,312) ----------- --------------- Total capitalized costs $ 678,610 $ 473,038 =========== =============== Costs both capitalized and expensed, which were incurred in oil and gas-producing activities during the six months ended March 31, 2003 and the years ended September 30, 2002 and 2001, are set forth below. Property acquisition costs represent costs incurred to purchase or lease oil and gas properties. Exploration costs include costs of geological and geophysical activity and drilling exploratory wells. Development costs include costs of drilling and equipping development wells and construction of production facilities to extract, treat and store oil and gas. March 31, September 30, September 30, 2003 2002 2001 ---------- -------------- -------------- Property acquisition costs: Proved properties $ 165,553 $ 8,000 $ - Unproved properties 11,995 245,483 84,503 Exploration costs - 456,086 - Development costs 4,465 306,761 - Operating expenses 42,179 12,279 - ---------- -------------- -------------- Total expenditures $ 224,192 $ 1,028,609 $ 84,503 ========== ============== ============== There were no results of operations for oil and gas producing activities (including operating overhead) for the six months ended March 31, 2002 and 2001 since exploration and development activities had not commenced. 26 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) Results of operation for oil and gas activities (including operating overhead) for the six months ended March 31, 2003 were as follows: Revenues $ 77,825 Exploration and development costs - Depreciation, depletion and amortization ( 17,131) Oil and gas lease expenses ( 59,447) Other operating expenses ( 42,179) ------------ Results before income taxes ( 40,932) Income tax expense - ------------ Results of operation from oil and gas producing activities $( 40,932) ============ The standardized measure of discounted estimated future net cash flows related to proved oil and gas reserves at March 31, 2003 was as follows: Future cash flows $ 6,720,000 Future development and production costs (1,100,000) Future income tax expense - ------------ Future net cash flows 5,620,000 10% annual discount 2,690,000 ------------ Standardized measure of discounted future net cash flows $ 2,930,000 ============ Future net cash flows were computed using quarter-end prices and gas to quarter-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is normally calculated by applying year-end statutory tax rates (adjusted for permanent differences and tax credits) to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis of the properties involved. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Estimates of future net cash flows presented do not represent management's assessment of future profitability or future cash flows to Cadence. Management's investments and operating decisions are based on reserves estimated that include 27 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 11 - OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) proved reserves prescribed by the SEC as well as probable reserves, and on different price and cost assumptions from those used here. It should be recognized that applying current costs and prices and a 10% standard discount rate does not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved reserves. NOTE 12 - NOTES PAYABLE All of the Company's notes payable are considered short-term. At March 31, 2003, notes payable consisted of the following: Nathan Low Family Trust (a shareholder of the Company), secured by assignment of a prorata interest in gas producing properties located in Alpena County, Michigan, interest at 8%, dated February 24, 2003, due on April 5, 2003. $ 100,000 Kevin Stulp (a shareholder of the Company), secured by assignment of a prorata interest in gas producing properties located in Alpena County, Michigan, interest at 8%, dated February 24, 2003, due on April 5, 2003. 50,000 Howard Crosby (an officer and shareholder of the Company), secured by assignment of a prorata interest in gas producing properties located in Alpena, County, Michigan, interest at 8%, dated February 24, 2003, due on April 5, 2003. 50,000 W. Paul Gatewood (a shareholder of the Company), unsecured, interest at 5%, dated January 9, 2003, due on February 28, 2003, delinquent. 30,000 Howard Crosby (an officer and shareholder of the Company), unsecured, interest at 5%, dated January 9, 2003, due on February 28, 2003, delinquent. 70,000 ----------- Total $ 300,000 =========== 28 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 13 - COMMITMENTS AND CONTINGENCIES Litigation - ---------- The Company was a defendant in a lawsuit alleging that the Company failed to transfer common stock in exchange for a mining property interest. In June 1999, Box Elder County Superior Court rejected the plaintiff's lawsuit and let stand the Company's countersuit alleging fraudulent misrepresentation. Although the plaintiff filed an appeal (regarding the originally filed lawsuit), the Utah Supreme Court rejected the appeal in a judgment rendered on July 31, 2001. The Company's countersuit, which sought both full title to the aforementioned mineral property and compensatory damages as well as punitive damages, was rejected in a jury trial in October 2002. The Company filed an appeal, and in October 2002, this countersuit was rejected in a jury trial. As a result, the Company has and will continue to hold an undivided 25% interest in the Vipont Mine. See Note 3. Environmental Issues - --------------------- The Company is engaged in oil and gas exploration and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof. In the Company's acquisition of existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. The Company was previously engaged in exploration of mineral properties. These properties are classified as assets from discontinued operations or were previously written off as permanently impaired. Although the Company has discontinued the exploration of mineral properties, the possibility exists that environmental cleanup or other environmental restoration procedures could remain to be completed or be mandated by law, causing unpredictable and unexpected liabilities to arise. At the date of this report, the Company is not aware of any environmental issues related to any of its assets from discontinued operations. Capital Commitments - -------------------- At March 31, 2003, the Company has estimated capital and investment commitments of $1,250,000 to drill its initial test well in Louisiana. In Texas and Michigan, future capital commitments are dependent upon the Company's decision to proceed with additional well development. See Note 10. No accruals have been made in the accompanying financial statements for these amounts. Lease Commitments - ------------------ The Company began leasing office facilities in Walla Walla, Washington commencing in June 2001. The agreement is a three-year lease with monthly payments of $400. Total rent paid for this office space during the six months ended March 31, 2003 and 2002 was $2,400. 29 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Cadence Resources Corporation Limited Partnership - ----------------------------------------------------- On August 1, 2002, the Company formed a limited partnership in the State of Washington whereby the Company became the managing general partner and an outside individual investor became the initial limited partner. The entity, Cadence Resources Corporation Limited Partnership ("CRCLP" or "the Partnership") was formed to invest in oil and gas properties in Texas and Louisiana. See Notes 5 and 10. In connection with the formation of the Partnership, the Company agreed to contribute $12,500 in cash and its leasehold interest in an oil well ("2B") in Wilbarger County, Texas and the limited partner contributed $250,000 in cash. The terms of the Partnership agreement provide that 90% of initial income and expenses will be allocated to the limited partner and further provide that, after the limited partner's receipt of funds invested and an 11% return on his investment, subsequent Partnership profits and losses will be allocated 90% to the general partner and 10% to the limited partner. In order to ensure repayment of the limited partner's investment, Cadence has agreed to grant to the limited partner a security interest in the equipment and fixtures affixed to wells 1A and 1B in Wilbarger County and agreed to contribute the Company's share of the cash flows it receives from these two wells to the Partnership. The Company holds a 60% working interest in well 1A and a 100% working interest in well 1B. See Notes 5, 11 and 14. Consulting Commitments - ----------------------- In June 2002, the Company entered into an agreement with Memphis Consulting Group ("Memphis") for financial consulting and public relations services beginning on August 1, 2002 through August 1, 2003. The agreement called for $3,000 per month, and an initial 50,000 stock options exercisable through August 1, 2005 at $1.50 per share. See Note 8. This agreement was terminated during the period ended March 31, 2003. In September 2001, the Company entered into a consulting agreement with American Financial Group for promotion to investors. The agreement called for monthly payments of $2,000 to cover all expenses, 20,000 shares of the Company's common stock (which were issued in October 2001) and an override of 2.5% of monies raised in private placements from referrals or directed business. The agreement was terminated during the period ended March 31, 2003. Other Commitments - ------------------ The Company entered into an exploration agreement with the W.T. Waggoner Estate (Waggoner) and its trustees on August 1, 2002. This agreement calls for exploration of the West Electra Lake Project located in Wilbarger County, Texas. The first well on the West Electra Lake Project was drilled and completed in February 2003. See Note 10. 30 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED) On August 13, 2002, the Company entered into a public relations retainer agreement for one year whereby the Company agreed to issue 60,000 shares of its common stock during this period for services received. The agreement also calls for reimbursement of expenses incurred pursuant to terms of this agreement. NOTE 14 - SETTLEMENT AGREEMENT Fausett International, Inc. - ----------------------------- During June 2001, the Company entered into a settlement agreement wherein the Company relinquished all claims to the Crescent Mine (located in Shoshone County, Idaho) under a previously executed lease and delivered to counsel for Fausett International, Inc. (hereinafter "Fausett"), a quitclaim deed to the Crescent Mine. Upon receipt of the quitclaim deed, Fausett transferred all interest in the Crescent Mine to Shoshone County and delivered to the Company for cancellation certificates for 8,600 shares of the Company's common stock held by Fausett and an officer of Fausett. The settlement agreement released the Company from further obligations under the lease agreement. It also contained a general release in favor of the Company from the Environmental Protection Agency and from Shoshone County. NOTE 15 - RELATED PARTY TRANSACTIONS The Company previously sublet office space on a month-to-month basis from one of its officers in Walla Walla, Washington for $400 per month through May 2001. Total rent paid for this office space during the six months ended March 31, 2002 was $2,400. During the year ended September 30, 2002, the Company sold several mineral properties located in Shoshone County, Idaho to Caledonia Silver-Lead Mines, Inc. See Note 5. During the year ended September 30, 2002, the Company loaned $35,000 to Dotson Exploration Company, a related party. The Company also repaid the amount of $10,000 due to Dotson pursuant to a loan made to the Company by Dotson. See Notes 14 and 18. Dotson repaid $33,380 of this loan by transferring marketable securities to the Company valued at that amount. At September 30, 2002, Dotson Exploration owed the Company $1,620 which is payable on demand and bears interest at 10% per annum. During the quarter ended December 31, 2002, the Company loaned Dotson an additional amount of $20,000 which is payable on demand and bears interest at the rate of 10% per annum. During the six months ended March 31, 2003, Dotson repaid $15,000 of this additional amount. 31 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 15 - RELATED PARTY TRANSACTIONS (CONTINUED) Because Dotson Exploration Company, Oxford Metallurgical, Inc. and Caledonia Silver-Lead are controlled by two officers of Cadence, these transactions cannot be considered to be the product of an arms-length negotiation. On August 1, 2002, the Company formed a limited partnership whereby the Company became the managing general partner and an outside individual investor became the initial limited partner. In connection with the formation of the Partnership, the Company contributed $12,500 and its leasehold interest in an oil well ("2B") in Wilbarger County, Texas. See Notes 5, 11 and 13. During the six months ended March 31, 2003, an officer of the Company advanced $50,000 to the Company. This is reflected in the attached financial statements as payable to related party. The amount advanced is unsecured, bears no stated interest rate, and is due on demand. Cadence Resources Corporation has notes payable to one officer and shareholders totaling $300,000. See Note 12. Other related party transactions are disclosed in Notes 3, 5, 6, 11 and 13. NOTE 16 - GAIN ON DEBT FORGIVENESS During the year ended September 30, 2002, an accounts payable vendor chose to reverse interest charges on its delinquent account. This transaction resulted in the recognition of other income of $6,109. NOTE 17 - SUBSEQUENT EVENTS Joint Venture Agreement - ------------------------- On April 30, 2003, the Company signed a joint venture agreement with Bridas EnergyUSA to develop its Louisiana property. Terms of the joint venture agreement call for Bridas to drill the first well on the property to a total depth not less than 10,000 feet with the Company carried for a 25% working interest. On subsequent wells within the 640-acre section containing the first well, the Company will earn a 25% working interest by funding 25% of the expenses. On other wells outside of the original 640-acre section, the Company will earn a 45% working interest by funding 45% of the expenses. 32 CADENCE RESOURCES CORPORATION (FORMERLY ROYAL SILVER MINES, INC.) NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2003 NOTE 17 - SUBSEQUENT EVENTS (CONTINUED) Investment - ---------- On April 24, 2003, the Company sold its South Galena claim group to Caledonia Silver-Lead Group, an affiliated company, in exchange for 900,000 shares of its common stock valued at $90,000. See Notes 3 and 5. Common Stock - ------------- On May 13, 2003, the Company sold 250,000 shares of its common stock to a non-affiliated investor for $1.00 per share. 33 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has had minimal revenues from operations during the last two years. The Company intends to spend its existing cash on exploration on its existing oil and gas leases in Texas and Louisiana. The Company may also spend funds on its working interest rights in shallow natural gas exploration in Michigan. All of these activities are highly speculative and in most instances, companies which expend monies on oil and gas exploration do not find wells which are commercially viable. As noted, the Company will need additional capital to continue to drill its wells. The amount of capital required is dependant on the success it has on its upcoming wells because the Company anticipates funding some future drilling of wells from cash flow out of these next wells if they are commercially successful. The Company hopes to reduce its dependence on new finances by completing sufficient wells to fund new wells out of cash flow. Due to the declining nature of oil & gas production, the Company must continue to explore and drill new wells to maintain its sources of revenue. There is no assurance, however, the Company's wells will provide sufficient revenue to fund other future wells. If they do not prove successful, the Company will have to rely upon future new finances from outside sources in order to both continue exploring for new oil and gas deposits, and to continue its operations. The Company has sold portions of working interest in its wells to finance drilling. Selling a portion of the working interest enables the Company to raise some of the risk capital to drill wells from outside investors and thus the "dry hole risk" to the Company is reduced and may be totally eliminated. The major disadvantage is that the Company gives up a percentage of its future cash flow to the working interest investors which will reduce Company revenues and profits in the future from successful wells. The Company may also enter into joint ventures with Companies whereby another company provides capital for drilling in exchange for an ownership position in the well or wells. As noted in the "Subsequent Events" section of this report, the Company has recently entered into such an agreement with Bridas USA on its De Soto Parish, Louisiana natural gas property. The Company management is proposing to spend in excess of several million dollars on drilling its projects in the next year. The Company has yet to raise this financing. In the event the Company is unsuccessful in raising these funds, management will have to scale back on the future business plans of the Company. This may have the effect of losing its rights, in some circumstances, to drill and development of some of the properties it now controls or has an interest in. The Company's auditors have issued a going concern opinion. This means that the Company's auditors believe there is substantial doubt that the Company can continue as an on-going business for the next twelve months unless it obtains additional capital. This is because the Company has generated only minimal revenues and its operating costs far exceed its revenues. Further, the Company is indebted to several of its major shareholders. Accordingly, the Company must raise cash from sources other than from the sale of oil or gas found on its property. That cash must be raised from other outside sources. The Company's only other source for cash at this time are investments or loans by others to the Company. The Company has inadequate cash to maintain operations during the next twelve months. In order to meet its cash requirements the Company may have to raise additional capital through the sale of securities or loans. As of the date hereof, the Company has no firm commitments for loans or for purchases of additional securities and there is no assurance that it will be able to raise additional capital through loans or the sale of securities in the future. In the event that the Company is unable to raise additional capital, it may have to suspend or cease operations. The Company does not intend to conduct any research or development during the next twelve months other than as described herein. See "Business." The Company does not intend to purchase a plant or significant equipment, other than oilfields equipment necessary to outfit its wells for production. The Company will hire employees on an as needed basis, however, the Company does not expect any significant changes in the number of employees. FORWARD-LOOKING STATEMENTS This Form 10-QSB contains forward-looking statements that involve substantial risks and uncertainties. Investors and prospective investors in our common stock can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," believe," "estimate," "continue" and other similar words. Statements that contain these words should be read carefully because they discuss our future expectations, make projections of our future results of operations or of our financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict accurately or control. The factors listed in the section captioned "Management's Discussion and Analysis or Plan of Operation," as well as any cautionary language in this Form 10-QSB, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors and prospective investors in our common stock should be aware that the occurrence of the events described in the "Management's Discussion and Analysis or Plan of Operation" section and elsewhere in this Form 10-QSB could have a material adverse effect on our business, operating results and financial condition. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company was a defendant in a lawsuit alleging that the Company failed to transfer common stock in exchange for a mining property interest. In June 1999, Box Elder County Superior Court rejected the plaintiff's lawsuit and let stand the Company's countersuit alleging fraudulent misrepresentation. Although the plaintiff filed an appeal (regarding the originally filed lawsuit), the Utah Supreme Court rejected the appeal in a judgment rendered on July 31, 2001. The Company's countersuit, which sought both full title to the aforementioned mineral property and compensatory damages as well as punitive damages, was rejected in a jury trial in October 2002. The Company filed an appeal, and in October 2002, this countersuit was rejected in a jury trial. As a result, the Company has and will continue to hold an undivided 25% interest in the Vipont Mine. The Company is unaware of any other pending or threatened litigation at the time of the filing of this report. ITEM 2. CHANGES IN SECURITIES. Common Stock - ------------ During the six months ended March 31, 2003, the Company issued 212,500 shares of stock with 212,500 warrants attached. The warrants were valued at $46,125 using the Black-Scholes Option Price Calculation. The following assumptions were made in estimating fair value: risk free interest is 5%, volatility is 100% and expected life is 3 years. These warrants may be used to purchase 212,500 shares of the Company's common stock at $1.35 per share. The warrants remain exercisable through October 15, 2005. As of the date of these financial statements, all of these warrants remain outstanding and unexercised. Options and Warrants - -------------------- See above for description of warrants issued during the six months ended March 31, 2003. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. None. SIGNATURES Pursuant to the requirements 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. Dated this 19th day of May, 2003. CADENCE RESOURCES CORPORATION By: /s/ Howard Crosby ----------------- Howard Crosby Its: Chief Executive Officer By: /s/ John Ryan ------------- John Ryan Its: Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying 10-QSB of Cadence Resources Corporation for the period beginning January 01, 2003 and ending March 31, 2003, Howard M. Crosby, Chief Executive Officer, and John P. Ryan, Chief Financial Officer of Cadence Resources Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1) such Form 10-QSB of Cadence Resources Corporation, for the period beginning January 01, 2003 and ending March 31, 2003, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Form 10-QSB of Cadence Resources Corporation for the period beginning January 01, 2003 and ending March 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of Cadence Resources Corporation. /s/Howard M. Crosby ------------------- Howard M. Crosby Chief Executive Officer /s/John P. Ryan --------------- John P. Ryan Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----