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Securities Law

NIN 96/38 - Form 61 - Quarterly Report - Staff Report on Schedule C - Management Discussion [NIN - Rescinded]

Published Date: 1996-11-01
Effective Date: 1996-10-31

On April 20, 1995 the Executive Director issued a notice (NIN#95/19) specifying a revised Form 61 - Quarterly Report for exchange issuers. The notice included a brief discussion of reporting problems identified by staff based on their ongoing review of Form 61 - Quarterly Reports and, in particular, the inadequate level of disclosure provided in Schedule C of the Quarterly Report - Management Discussion. With the introduction of the new Securities Regulation and Rules, NIN #95/19 lapsed.

Although the quality of disclosure in Quarterly Reports filed with the Commission has improved, staff continue to have concerns about recurring deficiencies. Staff have prepared a report, attached to this notice, discussing common deficiencies in Schedule C. This report is intended to assist issuers in properly completing the management discussion section of Form 61.

Meaningful and accurate disclosure in Schedule C of Quarterly Reports is important to shareholders and the investing public. Issuers can expect to receive deficiency letters when they fail to provide the level of disclosure required. Serious disclosure deficiencies in Schedule C may result in cease trade orders under section 146 of the Act.

For example, a Quarterly Report that discloses in Schedule C only that "management has nothing to report", "no change", or "management continues to conduct its business in the manner previously disclosed" does not contain adequate disclosure and may result in a cease trade order.

Directors of exchange issuers are reminded that the board of directors is required to approve the disclosure contained in Quarterly Reports. Serious recurring deficiencies in Quarterly Report disclosure may affect an issuer's ability to obtain a receipt for a prospectus or may affect the suitability of a director under section 120(2) of the Securities Rules.

Staff encourage issuers who require guidance in the preparation of their Quarterly Reports to contact the Statutory Filings branch at the Commission.

DATED at Vancouver, British Columbia, on October 31, 1996

Dean E. Holley
Executive Director

Reference: NIN#95/19





The Management Discussion section (Schedule C) of the Form 61 - Quarterly Report is intended to provide shareholders and prospective investors with a meaningful descriptive summary of the issuer's operations during the period under review. Where an issuer has active ongoing operations, this discussion would generally not exceed 2-4 pages for the quarter discussed. Where an issuer has limited operations, this discussion would generally not exceed 1 page. This report discusses a number of recurring deficiencies in Schedule C and provides guidance to issuers on how to properly complete Schedule C.


1. Nature of Busines

Schedule C should provide a brief description of the issuer's business. Staff have noted that inactive issuers often provide little or no meaningful discussion. If an issuer is inactive and has no business, the Quarterly Report should disclose that fact together with any plans for reactivating the issuer and, if known, a brief description of the business that the issuer intends to pursue.

2. Reporting Period

(a) Schedule C requires issuers to discuss financial transactions and events during the period covered by the financial statements and "up to the date of the report". The date of the report is the date that the two directors sign the Quarterly Report on behalf of the board of directors. Staff have noted several instances where management of an issuer has limited its discussion to the period ending at the balance sheet date and has failed to discuss material events or transactions occurring after that date.

(b) The instructions to Schedule A of the Quarterly Report require issuers to prepare financial statements on a fiscal year-to-date basis. While the instructions to Schedule C of Form 61 currently require information for the quarter under review, the discussion of significant transactions should relate to the year-to-date figures reported in the financial statements in Schedule A. Therefore, the instructions to Schedule C will be amended in the near future to require issuers to discuss operations on a year-to-date basis.

3. Use of Proceeds & Milestone

Schedule C requires issuers to reconcile intended "uses of proceeds" previously disclosed in offering documents, or other publicly disseminated documents, to the issuer's actual expenditures during subsequent reporting periods. Staff have noted instances where either no reconciliation is provided or the disclosure simply consists of the numerical differences. This discussion should explain any material variances, together with a brief description of the impact, if any, on the issuer's ability to achieve previously disclosed objectives and milestones.

4. Related Party Transactions

Schedule C requires issuers to disclose details of significant transactions with related parties, including the amount of consideration paid or received. Staff have noted that issuers have frequently disclosed the aggregate expenditures to non-arm's length persons in accordance with the instructions to Schedule B but fail to provide meaningful discussion of these transactions in Schedule C. Issuers should disclose details of significant transactions with non-arm's length persons that impact current operations or are expected to impact future operations. Both formal written contracts and informal, undocumented arrangements should be disclosed. Where a non-arm's length person provides services to an issuer, the nature of the services should be described.

5. Investor Relations Activities

Schedule C requires a brief summary of investor relation activities that have been undertaken by, or on behalf of, the issuer during the reporting period. The discussion should include, as a minimum, the names of the persons providing the service, the nature of the services provided, and the consideration paid or to be paid, including cash and/or securities. Issuers are reminded that the Vancouver Stock Exchange's Listing Policy 8 requires disclosure of the relationship between an issuer and a person providing investor relation services, including whether that person has any interest directly or indirectly in the issuer or its securities, or any right or intent to acquire such an interest. Staff recommends that this disclosure be provided in Schedule C.

6. Significant Events & Transactions

Schedule C requires issuers to discuss any significant event or transaction that occurred during the period. Quarterly Reports have often not included a discussion of significant events and transactions. Examples of significant events and transactions that issuers are required to discuss include:

(a) Acquisitions & Dispositions

Where an issuer has acquired or disposed of a material capital asset, the issuer is required to discuss the transaction. The discussion should include: the identity of the parties involved; the material terms of the agreement or arrangement; the total costs incurred; the details of any finder's fees; in the case of resource properties, the existence of any independent engineering reports, a brief description of any proposed exploration program and costs, and the source of funds to finance the programs; in the case of other material capital assets, the source of funds for the acquisition and the anticipated costs to integrate into the issuer's operations. This discussion would normally not exceed 1 or 2 paragraphs.

Where the issuer is negotiating to acquire or dispose of a material capital asset, the issuer should either have filed a confidential material change report or should discuss the proposed transaction to the extent reasonable under the circumstances.

Two examples of how disclosure should be provided are set out below. The examples assume that the transactions are material to the issuer's financial position and operating results.

Example #1 Junior Resource Issuer, Material Acquisition

By an agreement dated September 30, 1996, the issuer acquired from Company A, which had one common director, a 30% interest in the Golden mineral claims located in the Skeena Mining Division, British Columbia, for cash consideration of $50,000. The issuer can earn a further 30% interest in the property by spending $250,000 on the exploration of the property by September 30, 1997. An independent property report prepared by Joe Bloggs, P. Eng., dated April 10, 1996, recommends that the issuer carry out a $150,000 exploration program consisting of a VLF-EM Survey, trenching and mapping. The VSE has approved the acquisition. The issuer plans to commence the exploration program in the Spring of 1997. The issuer does not currently have sufficient funds to carry out the exploration program and will be required to raise additional funds to finance the program.

Example #2 Non-Resource Issuer, Material Disposition

By an agreement dated September 5, 1996, effective September 31, 1996, the issuer disposed of its 25% interest in Company X. The issuer disposed of this investment because it required additional capital to fund its ongoing business operations described later in this report. As disclosed in note X to the financial statements this investment was sold for $500,000 and resulted in an accounting gain of $100,000. The sale was made to an arm's length party for cash proceeds of $300,000 and a note receivable of $200,000 due December 31, 1996. The VSE approved this transaction on October 2, 1996.

(b) Material Expenditures

Schedule B requires a breakdown by major category of certain expenditures. Breakdowns should be provided for those expenditures included in deferred or expensed exploration and development, deferred or expensed research and development, cost of sales, marketing expenses, general, administrative and any other material expense classification or any other material deferred classification. A category of expenditure generally would be shown separately where it represents 20% or more of the total expenditures for a material classification. All other expenditures included in a material classification may be grouped together under the heading "miscellaneous costs". Examples of major categories for exploration and development include consulting, salaries and benefits, and drilling.

The material categories of expenditures required to be disclosed to comply with the requirements of Schedule B would generally be considered to be significant transactions and should be discussed in Schedule C. Where appropriate, the discussion should address the purpose of the expenditure.

Issuers in the development stage are reminded that, pursuant to section 3(9)(b) of the Securities Rules, their financial statements must provide an analysis of expenditures for each of exploration, research, development and administrative costs, whether expensed or deferred. This analysis would be included in the breakdown required by Schedule B; where the analysis is included in the financial statements the issuer is not required to repeat the breakdown in Schedule B. At this time, staff take the position that an issuer is in the development stage if it has not earned significant revenues during its two most recent financial years. The Canadian Institute of Chartered Accountants has recently published a Research Report on Accounting and Reporting for Development Stage Enterprises. The research report includes a definition of development stage enterprises. Staff is currently considering the appropriateness of the study's definition of development stage enterprises for the purpose of section 3(9)(b).(c) News Releases & Material Change Reports

Issuers should provide an update of significant events or transactions previously disseminated by news release or material change report where there are material variances. For example, if revenues and profits failed to materialize, contrary to management's earlier public announcements, Schedule C must discuss this fact and the reasons for the variance.

(d) Breaches

A breach of corporate, securities or other laws, or of an issuer's listing agreement with the Vancouver Stock Exchange may constitute a significant event that issuers are required to disclose in Schedule C. Management should describe the nature of the breach, alert investors to the potential ramifications of the breach and indicate what is being done to remedy it. In addition, financial statement disclosure may also be appropriate for a breach that represents a liability, contingency or commitment of the issuer.

(e) Regulatory Approval

Where a significant transaction required to be disclosed in the Quarterly Report is subject to regulatory approval, the Quarterly Report must disclose this fact, indicate whether the Issuer has obtained the required approval and, if not, whether it has filed an application to obtain the required approval.

(f) Working capital

If an issuer is unable to fund its operations, or in the case of an inactive issuer, is unable to fund its general and administration costs, that inability is a significant event. Management should discuss the steps it has taken, or proposes to take, to remedy the situation.

7. Update and Comparison of FOFI

Part 7 of National Policy #48 requires issuers to update previously released future oriented financial information when a change occurs in the events or assumptions used to prepare the FOFI that has a material effect on the previously issued FOFI. The need to update FOFI is a significant event and should be discussed in Schedule C. Updated FOFI must be included in the Quarterly Report filed immediately following the change in events or assumptions used to prepare the FOFI that triggers the need for update. If management considers that there are no changes in the events or in the assumptions used to prepare FOFI that have a material effect on FOFI, management should communicate its conclusion in the Quarterly Report immediately following the end of the FOFI period in accordance with Part 7 of National Policy #48. National Policy #48 also requires a comparison of actual results to previously issued FOFI. The Quarterly Report immediately following the end of the FOFI period must disclose material differences identified by this comparison.

8. Factual, balanced and non-promotional discussio

Disclosure contained in the Quarterly Report must be factual, balanced and non-promotional. The Quarterly Report should avoid the use of superlatives. The Quarterly Report must disclose all material facts where they are necessary to prevent statements made in the Quarterly Report from being misleading. For example, it would be misleading to disclose the potential value to the issuer of a sales contract and not also disclose the material terms of the contract that may impact on its value to the issuer, as well as the estimated associated costs. The issuer should also disclose whether the issuer has the resources, as of the date the Quarterly Report is signed, to meet its obligations under the contract.

Staff's ongoing review of Quarterly Reports indicates that the quality of disclosure in Schedule C has improved, however, staff continue to have concerns about the quality of information in Schedule C. Staff will continue to monitor the quality of disclosure issuers provide in Schedule C. Serious disclosure deficiencies may result in cease trade orders under section 146 of the Act. Issuers who have questions about their disclosure obligations are encouraged to contact staff.