SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003 (with other information to January 15, 2004 except where noted)
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-27668
TRANS-ORIENT PETROLEUM LTD.
(Exact name of Registrant specified in its charter)
TRANS-ORIENT PETROLEUM LTD.
(Translation of Registrant's name into English)
YUKON TERRITORY, CANADA
(Jurisdiction of incorporation or organization)
1407-1050 Burrard Street, Vancouver, British Columbia, Canada | V6Z 2S3 | |
(Address of principal executive offices) | (Zip Code) |
COMMON SHARES WITHOUT PAR VALUE
(Title of Class)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class | Name of each exchange on which registered |
None | Not applicable |
Securities registered or to be registered pursuant to Section 12(g) of the Act
Common Shares without Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Number of outstanding shares of Trans-Orient's only class of capital stock as on July 31, 2003.
2,416,823 Common Shares Without Par Value
Indicate by check mark whether 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
NOT APPLICABLE
Indicate by check mark which financial statement item Registrant has elected to follow:
Item 17 x Item 18 ¨
(End of Cover Page)
Currency
All currency amounts are stated in United States dollars unless otherwise indicated. (Canadian dollars are denoted CAD.)
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable (this is an Annual Report only)
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable (this is an Annual Reporting only)
The selected historical financial information presented in the table below for each of the years ended July 31, 2003, 2002, 2001, 2000 and 1999, is derived from the audited consolidated financial statements of the Registrant. The audited financial statements of the Registrant for the years ended July 31, 2003, 2002 and 2001 are included in this Filing. The selected historical financial information for the years ended July 31, 2000 and 1999 presented in the table below are derived from audited financial statements of the Registrant that are not included in this Filing but were included in previous filings. The selected financial information presented below should be read in conjunction with the Registrant's consolidated financial statements and the notes thereto (Item 17) and the Operating and Financial Review and Prospects (Item 5) elsewhere in this Filing.
The selected consolidated financial data has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). The consolidated financial statements included in Item 17 in this filing are also prepared under Canadian GAAP. Included within these financial consolidated statements in Note 13 is a reconciliation between Canadian and US GAAP.
Under Canadian Generally Accepted Accounting Principles (in US$)
2003 | 2002 | 2001 | 2000 | 1999 | |
$ | $ | $ | $ | $ | |
Balance Sheet Data | |||||
Current Assets | 304,912 | 338,714 | 186,412 | 483,887 | 895,661 |
Investment in Associated Companies | 557,609 | 754,791 | 1,086,058 | 5,566,720 | 508,375 |
Property and Equipment | 120,761 | 127,483 | 139,870 | 153,893 | 54,502 |
Oil and Gas Interests | 1 | 1 | 2 | 2 | 2,873,752 |
Total Assets | 983,283 | 1,220,989 | 1,412,342 | 6,204,502 | 4,332,290 |
Share Capital | 13,145,075 | 13,145,075 | 12,945,075 | 12,453,075 | 8,946,390 |
Share Capital held by subsidiary | (11,993) | - | - | - | - |
Deficit | (12,254,541) | (11,993,534) | (11,595,970) | (6,330,492) | (4,805,611) |
Operating Data | |||||
Gross Revenue | 2,882 | 3,589 | 29,536 | 41,636 | 78,314 |
Net Loss | (261,007) | (397,564) | (5,265,478) | (1,524,881) | (1,108,218) |
Net Loss per Share | (0.11) | (0.26) | (3.78) | (1.32) | (1.32) |
Under U.S. Generally Accepted Accounting Principles (in US$)
2003 | 2002 | 2001 | 2000 | 1999 | |
$ | $ | $ | $ | $ | |
Balance Sheet Data | |||||
Current Assets | 304,912 | 338,714 | 186,412 | 483,887 | 895,661 |
Investment in Associated Companies | 757,324 | 754,791 | 1,537,954 | 6,141,739 | 3,832,500 |
Property and Equipment | 120,761 | 127,483 | 139,870 | 153,893 | 54,502 |
Oil and Gas Interests | 1 | 1 | 2 | 2 | 2,873,752 |
Total Assets | 1,181,529 | 1,220,989 | 1,864,238 | 6,779,521 | 7,656,415 |
Share Capital | 13,978,686 | 13,978,686 | 13,778,686 | 13,298,982 | 9,829,797 |
Deficit | (13,088,152) | (12,827,145) | (12,429,581) | (7,176,399) | (5,689,018) |
Accumulated Other Comprehensive Income (Loss) | 199,715 | - | 451,896 | 575,019 | 3,324,125 |
Operating Data | |||||
Gross Revenue | 2,882 | 3,589 | 29,536 | 41,636 | 78,314 |
Net Loss | (261,007) | (397,564) | (5,253,182) | (1,487,381) | (1,123,005) |
Comprehensive Income | |||||
(Loss) | (61,292) | (849,460) | (5,376,305) | (4,236,487) | 826,120 |
Net Loss per Share | (0.11) | (0.26) | (3.78) | (1.32) | (1.32) |
Although there are differences between Canadian GAAP and US GAAP there are no material differences for the years ended July 31, 2003 and 2002. (See also Item 17.)
The Registrant's financial statements, as provided under Item 8 and 17 are presented in United States Dollars. On July 31, 2003 the buying rate for Canadian dollars was US $1.00 for Cdn$1.4048. At the close of business on January 15, 2004 the buying rate for Canadian dollars was US$1.00 for Cdn$1.2959. Rates of exchange are obtained from the Bank of Canada and believed by the Registrant to approximate closely the rates certified for customs purposes by the Federal Reserve Bank in New York.
The following table sets out the buying rate for Canadian dollars for the last six months:
Feb 2003 | Mar 2003 | Apr 2003 | May 2003 | Jun 2003 | Jul 2003 | |
Month End | 1.4840 | 1.4678 | 1.4334 | 1.3685 | 1.3475 | 1.4048 |
Average | 1.5124 | 1.4751 | 1.4571 | 1.3833 | 1.3517 | 1.3811 |
High (2) | 1.5297 | 1.4944 | 1.4785 | 1.4197 | 1.3695 | 1.4163 |
Low (2) | 1.4840 | 1.4628 | 1.4334 | 1.3567 | 1.3350 | 1.3354 |
The following table sets out the buying rate for Canadian dollars for the last five fiscal years:
2003 | 2002 | 2001 | 2000 | 1999 | |
Year End (1) | 1.4048 | 1.5776 | 1.5325 | 1.4870 | 1.5063 |
Average | 1.4959 | 1.5700 | 1.5237 | 1.4722 | 1.5104 |
High (2) | 1.6010 | 1.6125 | 1.5793 | 1.5108 | 1.5795 |
Low (2) | 1.3323 | 1.5122 | 1.4730 | 1.4353 | 1.4465 |
Notes:
(1) Year end is July 31.
(2) The high and low buying rate figures are selected from daily high and low figures.
B. Capitalization and indebtedness
Not applicable (this is an Annual Report only)
C. Reasons for the offer and use of proceeds
Not applicable (this is an Annual Report only)
D. Risk Factors
The common shares of the Registrant must be considered a speculative investment due to a number of factors primarily related to the nature of its business (resource exploration) and its early stage of development and history of losses. An investment in the Registrant's common shares should only be made by persons who can afford to lose their entire investment and there can be no assurance that the Registrant's common shares will increase in value. The purchase of the common shares involves a number of significant risk factors. Purchasers of common shares should consider the following:
1. Need for New Exploration Prospects, Failure to Locate Commercial Quantities of Hydrocarbons
The Registrant currently has no directly-operated petroleum prospects and is searching for possible new projects. This will require additional funding. Exploration for hydrocarbons is a speculative venture necessarily involving substantial risk. There is no certainty that the expenditures the Registrant may incur on any exploration properties which may be acquired will result in discoveries of commercial quantities of hydrocarbons. In addition, even if hydrocarbons are discovered, the costs of extraction and delivering the hydrocarbons to market, and variations in the market price may render any deposit found uneconomic. Geological conditions are variable and unpredictable. Even if production is commenced from a well, the production will inevitably decline and may be affected or terminated by geological conditions that cannot be foreseen.
2. History of Losses
The Registrant has a history of losses from operations from failed investments in oil and gas and the internet. There is no assurance that the registrant will enjoy any success in any future business activity.
The Registrant has limited financial resources and it may not be able to raise sufficient funds to either acquire new oil and gas prospects or to maintain its corporate existence. The Registrant currently has no operating revenues and relies principally on the issuance of common shares and the sale of its assets (primarily securities) to raise funds to finance its business of seeking hydrocarbon prospects. There is no assurance that market conditions will continue to permit the Registrant to raise funds on acceptable terms or at all. Such financings will almost certainly result in equity dilution to existing shareholders.
3. Funding Through Equity and Asset Sales
The Company at this time expects to principally rely on selling its equity securities to raise funds to finance its business of seeking hydrocarbon prospects and to identify, finance and provide business development services to early-stage resource and technology businesses. The Registrant also expects that it will be likely that it will have to resell its holdings of securities in Austral Pacific Energy Ltd. ("Austral") (formerly "Indo-Pacific Energy Ltd.) as another source of funds. There can be no assurance that a market for Austral's common shares will be sufficiently liquid to permit such potential resales at prices which will be acceptable to management or which will not cause a loss on resale. It should be assumed that the market for the Austral's common shares may continue to be illiquid, sporadic and volatile.
4. Competition with Other Companies
Other companies with greater financial resources and/or expertise are in competition with the Registrant for oil and gas prospect and investment opportunities. The Registrant must compete with such companies in bidding for the acquisition of petroleum interests from various state authorities, in purchasing or leasing equipment necessary to explore for, develop and produce hydrocarbons and in obtaining the services of personnel in the exploration for, and development and production of, hydrocarbons.
5. Consequences of Failure to Satisfy Prescribed Permit or License Terms and Conditions
The Registrant may acquire or hold interests in unproven exploration permits and varying circumstances, including an inadequacy in the financial resources available to the Registrant to pay for the work required by the permit terms and conditions or, the inability of the Registrant to secure the required equipment such as a drilling rig at the time required, and or circumstances beyond the control or influence of the Registrant may result in the failure to satisfy the terms and conditions of the permit and could therefore result in the complete loss or surrender of the interest in the permit or license without compensation to the Registrant.
6. No Petroleum Reserves
The Registrant has no properties on which any petroleum or other hydrocarbon in commercial quantities is known to exist.
7. Thinly Traded Public Market
The Registrant's shares trade on the OTCBB. The Registrant has only 172 registered shareholders as at January 15, 2004, and its shares are relatively thinly traded. There can be no assurance that a stable market for the Registrant's common shares will ever develop or, if it should develop, be sustained. It should be assumed that the market for the Registrant's common shares will continue to be highly illiquid, sporadic and volatile. The Registrant is required to maintain its status as a "reporting issuer" under the Securities Exchange Act of 1934, in order to be traded by broker-dealers regulated by the National Association of Securities Dealers. If the Registrant fails to remain current in its filings with the Securities and Exchange Commission, the Registrant may be delisted and its shareholders may not be able to sell their shares in the public market within the United States.
8. Dealings With Associated Companies
The Registrant is associated through common directors, common officers and common shareholdings with other public junior resource companies disclosed herein. The Registrant may also hold equity investments in these other companies. In certain cases, the Registrant has previously been assigned interests from associated companies in compliance with applicable corporate law. The Registrant may also make application for interests in petroleum properties with associated companies. Persons who are not willing to rely on the discretion and judgment of management and the boards of directors of the Registrant and the associated companies should not consider a purchase of its securities.
See Item 7 - "Major Shareholders and Related Transactions"
9. Value of Properties
The amounts attributed to future properties in the Registrant's financial statements represent acquisition and exploration expenditures only, and should not be taken to in any way reflect realizable value.
10. Investment Companies Act
The Registrant may incur significant costs to avoid investment company status and may suffer other adverse consequences if deemed to be an investment company under the Investment Company Act of 1940 ("Investment Company Act"). Some of the Registrant's equity investments in other businesses may constitute investment securities under the Investment Company Act. A company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of its total assets, subject to certain exclusions. Investment companies are subject to registration under, and compliance with, the Investment Company Act unless a particular exclusion or safe harbor provision applies. If the Registrant were to be deemed an investment company, it would become subject to the requirements of the Investment Company Act. As a consequence, the Registrant would be prohibited from engaging in business or issuing securities as it has in the past and might be subject to civil and criminal penalties for non-comp liance. In addition, certain of the Registrant's contracts might be voidable, and a court-appointed receiver could take control of the Registrant and liquidate the business. Unless an exclusion or safe harbor was available to the Registrant, it would have to attempt to reduce its investment securities as a percentage of its total assets. This reduction can be attempted in a number of ways, including the disposition of investment securities and the acquisition of non-investment security assets. If the Registrant were required to sell investment securities, the Registrant may sell them sooner than it otherwise would have based on economic factors solely. These sales would likely be at depressed prices and the Registrant may never realize anticipated benefits from, or may incur losses on, these investments. The Registrant may be unable to sell some investments due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, the Registrant may incur tax liabilities when it sells as sets.
11. Penny Stock Regulation and Difficulties in Selling Shares
The Securities and Exchange Commission (the "SEC") has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the NASDAQ National Market System, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showin g the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that a penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements often have the effect of reducing the level of trading activity in any secondary market for a stock that becomes subject to the penny stock rules.
The Registrant's common stock is currently subject to the penny stock rules, and accordingly, investors may find it difficult to sell their shares, if at all.
12. Concentration of Ownership and Ineffective Voting Powers
The directors, officers and other affiliates of the Registrant beneficially own a sufficient number of the outstanding common shares of the Registrant to have substantial influence over matters which may require a majority vote of the Registrant's shareholders, such as the election of members of the board of directors or the sale of all or substantially all of the Registrant's assets. Should the directors, officers and affiliates vote their shares in a like manner on a matter requiring a majority vote of the Registrant's shareholders, it is most likely that their position on the matter would control the outcome of the vote. Additionally, because the directors, officers and affiliates posses substantial influence over the Registrant through their significant shareholdings, the value attributable to the right to vote is greatly reduced. This could result in a reduction in the market value to the shares owned by a shareholder because of the ineffective voting power.
ITEM 4.INFORMATION ON THE REGISTRANT
A. History and Development of the Registrant
The Registrant was incorporated on July 25, 1986 under the name Palo Duro Exploration Ltd. by the registration of memorandum and articles under the Company Act (British Columbia). The Registrant changed its name to Stoney Creek Mines Ltd. on July 15, 1988 and to Cyn-Tech Ventures Ltd. on June 30, 1992. On June 30, 1992 the Registrant consolidated its shares on a one new for three old basis. On June 29, 1995 the Registrant consolidated its shares on a one new for five old basis and changed its name to Consolidated Cyn-Tech Ventures Ltd. On June 27, 1996 the Registrant subdivided its shares on a three new for one old basis and changed its name to Trans-Orient Petroleum Ltd. On September 26, 1997 the Registrant was continued from a company subsisting under the Company Act (British Columbia) to a company subsisting under the Business Corporations Act (Yukon). On May 4, 1998 the Registrant subdivided its shares on a two new for one old basis and increased its authorized capital to 200,000,000 shares without par value. On January 17, 2001 the Registrant consolidated its common shares on a one new for twelve old basis, and increased its authorized capital from 200,000,000 to an unlimited amount without par value. The Registrant received shareholder approval at the Annual and Special meeting on January 18, 2002 to further consolidate all of its common shares on a one new for three old basis. The Registrant implemented this consolidation on April 5, 2002. The Company did not change its name as a result of the consolidation.
The Registrant became a public or "reporting company" in British Columbia on obtaining a receipt for its initial prospectus offering in British Columbia in April, 1989 and the trading of its shares through the facilities of the Vancouver Stock Exchange ("VSE") commenced about that time. On June 10, 1997 the shares of the Registrant commenced trading on the National Association of Securities Dealers' over-the-counter bulletin board (the "OTCBB") under the symbol TEPUF. On July 31, 1997 the shares of the Registrant were voluntarily delisted from trading through the facilities of the VSE. Currently the Registrants trading symbol on the OTCBB is "TOPTF".
On December 4, 2003, the Registrant sold 725,000 shares of its investment in Austral (formerly "Indo-Pacific Energy Ltd.") at a price averaging approximately $1.25 per share. The Registrant then replaced these shares on December 11, 2003 by participating in Austral's initial public offering to list on the New Zealand Stock Exchange. The Registrant acquired 765,500 units in Austral at a price of $1.30 (NZ$2.00), per unit. Each unit consists of one common share and a half share purchase warrant exercisable at a price of $1.37 (NZ$2.10) until January 5th, 2005. The Registrant also reached an agreement with Austral in December 2003 to amend the Registrants 836,845 Series A warrants. The Series A warrants expiry date was extended to January 5th, 2005 in consideration of the Client agreeing that the warrants would be exerciseable for a common share of Austral only and not the Austral share and series B warrant into which the Series A warrant was originally exerciseable.
On March 4, 2003, the Registrant acquired a 49.4% controlling interest in AMG Oil Ltd. ("AMG") resultant from AMG re-purchasing 3,000,000 shares of its own common stock for cancellation and return to treasury. AMG does not have significant assets or operations. As a result of the Registrant acquiring a controlling interest in AMG, the Company has therefore reported its investment in AMG on a consolidated basis for the Period from March 4, 2003 to July 31, 2003.
On September 6, 2002, the Registrant acquired, by way of private placement, 175,000 units of Austral (formerly "Indo-Pacific") at $0.80 per unit. Each unit consists of one common share and share purchase warrant, exercisable at $0.90 in the first year and $1.15 in year two ending September 6, 2004.
Overview of Operations
The Registrant is a Vancouver, British Columbia, Canada based company that previously relinquished its direct oil and gas prospect interests in exchange for securities in several affiliated companies the most important of which is Austral Pacific Energy Ltd. (formerly "Indo-Pacific Energy Ltd."). The Registrant holds share equity interests in two associated junior oil and gas exploration companies and holds a controlling interest in another associated company. In addition the Registrant currently plans to seek funds to invest directly into new exploration projects and to consider investing venture capital into existing exploration and technology companies.
During the year ended July 31, 1997 the Registrant changed the focus of its business from petroleum exploration in Canada to petroleum exploration in the Austral-Pacific region and began to acquire and explore petroleum interests in the region, often together with one or more associated companies, in particular Austral Pacific Energy Ltd. (formerly "Indo-Pacific Energy Ltd.")
Between July 1997 and January 2000, the Registrant's primary focus was on oil and gas exploration through varying participating interests in thirteen permits, located in New Zealand, Australia and Papua New Guinea. On May 23, 2000, the Registrant held a Special Meeting of Shareholders and the Registrant's shareholders approved the sale of its directly-held interests in its oil and gas permits located in New Zealand, Australia and Papua New Guinea to Austral (formerly "Indo-Pacific"), a company with certain common shareholders and directors. Under the terms of the sale (the "Indo-Pacific Sale"), a loan payable of approximately $1,042,000 owing to Austral by the Registrant was offset against the purchase price and the Registrant received 4,184,224 Austral units consisting of one common share and a Series "A" share purchase warrant of Austral which warrants have been amended as described above.
The Registrant also received under the Indo-Pacific Sale a gross overriding royalty over any future hydrocarbon production of the Australia and Papua New Guinea permits, however these royalties were surrendered for amended equity warrants in Indo-Pacific, which were further amended as described above and below.
The Registrant also received additional consideration for the sale of its oil and gas interests under the Indo-Pacific Sale as follows:
1,800,000 common shares of AMG Oil Ltd. ("AMG") valued at $720,000 for the transaction, and an option to purchase further shares of AMG which option has expired unexercised;
600,000 shares of Gondwana Energy, Ltd. valued at $20,000; and
517,020 shares of the Registrant which were surrendered for cancellation (originally valued at $222,319).
The Registrant's wholly owned subsidiaries, Trans-Orient Petroleum (PNG) Limited, Trans-Orient Petroleum (AUST) Pty. Ltd. and ZOCA 96-16 Pty. Ltd. were sold to Indo-Pacific Energy Ltd. pursuant to the transaction. The total purchase price for the assets sold to Indo-Pacific equated to $4,097,360.
During the Registrant's 2001 fiscal year, Indo-Pacific consolidated its common shares on a one new for five old basis resulting in the number of shares the Registrant owned of Indo-Pacific at that time being consolidated from 4,184,224 shares to 836,845 shares. As a result of this consolidation all warrants were also consolidated on a one new for five old basis but pursuant to the new agreement these warrants were repriced as described above.
The warrants received on the Indo-Pacific Sale were amended as per an agreement reached between the Registrant and Austral dated January 3, 2002 and were further amended per an agreement dated December 9, 2003 whereby their term was extended to January 5th, 2005 and their conversion was reduced to Austral common shares only (no Series B warrant in addition to such shares). Under these 2002 amending agreements the Registrant agreed to terminate all its royalty rights over exploration permits sold to Austral under the Indo-Pacific Sale. In return, Austral agreed to amend the terms of the warrants received by the Registrant.
Concurrent with the sale of the Registrant's oil and gas interests in May 2000, the Registrant implemented a new business plan to expand its investments in internet infrastructure and e-commerce. To this end the Registrant has written off its investment in Verida Internet Corp. in the amount of $3,225,869, which accounts for the majority of the loss recorded in fiscal 2001.
The Registrant, during the 2003 fiscal year, sold 119,800 (2002: 59,900) shares of Austral with a carrying value of $88,652 (2002: $67,075) for cash proceeds of $98,706 (2002: $76,908). In addition during the 2004 fiscal year to date the Registrant sold an additional 725,000 shares of Austral at approximately US$1.25 and acquired 765,500 units (each a common share and one-half share purchase warrant) of Austral as described above in Item 4A.
In summary, the Registrant's current primary asset is its approximately 6.8% interest in the equity of Austral (15.9% fully diluted). Austral has a market capitalization in the $17 million range. One director of the Registrant, Mr. Johnson, represents the Registrant on the board of Indo-Pacific.
C. Organizational Structure
The Registrant, during the 2003 fiscal year completed the liquidation of its inactive wholly-owned subsidiaries, being Reservoir Rock Holdings Ltd. and Trans-Orient Petroleum (NZ) Limited. The Company has one remaining active wholly owned subsidiary, being DLJ Management Corp. and has acquired a controlling interest in AMG Oil Ltd. Unless indicated otherwise, the terms "the Registrant" or any reference to its business and operations means Trans-Orient Petroleum Ltd. inclusive of its wholly-owned subsidiaries. For further information relating to the acquisition of a controlling interest in AMG Oil Ltd. and the effects on the Registrant, please refer to Item 17.
D. Property, Plant and Equipment
The Registrant has no direct oil and gas interests so it has no operational property, plant or equipment. The Registrant maintains a corporate office space at 1407-1050 Burrard Street, Vancouver, BC, Canada. The office space is shared with other public companies all of whom receive corporate services from the Registrant's wholly-owned subsidiary DLJ Management Corp. The Registrant also owns a 400 sq. foot office condominium located at 1406-1050 Burrard Street, Vancouver B.C. The office condominium was originally purchased for Cdn $147,000 and is held for investment purposes. In addition to its interest in Indo-Pacific, the Registrant also currently owns:
8,200,000 common shares with a current market bid price of $0.03 per share, and warrants and options to acquire a further 5,000,000 common shares, at a price of $1 per share, of AMG Oil Ltd, until April 10, 2005. AMG Oil Ltd. is a reporting company under the The Securities Exchange Act of 1934 that has shares, which have been quoted on the OTCBB since January 15, 2003. The registrant's interest in AMG Oil account for 49.40% (79.5% on a fully diluted basis) of the outstanding shares of AMG Oil. The registrant accounts for the investment in AMG Oil using the consolidation method however AMG does not have significant operations or assets but contributed to the Registrant's consolidated losses from operations to the extent of approximately $230,000 representing general corporate administration expenses.
2,400,000 common shares with a current market bid price of $0.25 per share of Gondwana Energy, Ltd. Gondwana Energy, Ltd. is a non-registered company quoted on the National Quotation Bureau's "Pink Sheets". The Registrant's interest in Gondwana accounts for 19.05% of the outstanding shares of Gondwana. The Registrant accounts for the investment in Gondwana using the cost method and as a result the carrying value of the investment is $40,000. The Registrant, through its acquisition of control of AMG, also holds an additional 600,000 common shares of Gondwana valued at $10,000.
As both the AMG and Gondwana markets are highly illiquid, the Registrant does not consider the currently quoted prices realizable.
ITEM 5.OPERATING, FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis is management's opinion of the Registrant's historical financial and operating results and should be read in conjunction with the audited consolidated financial statements of the Registrant (See Item 17) for the years ended July 31, 2003, 2002, and 2001, together with the notes related thereto. The financial statements have been prepared in accordance with Canadian GAAP, and a reconciliation to US GAAP is provided in the notes to the financial statements, under Item 17. All dollar values are expressed in United States dollars, unless otherwise stated.
Summary
The Registrant does not generate any sales or revenue from operations. It has experienced losses in each of its fiscal periods since incorporation. The Registrant's only source of capital currently is the issuance of equity securities and to a lesser extent the sale of assets, primarily its portfolio of it investments. Total losses incurred from incorporation to the fiscal period ending July 31, 2003 were $12.25 million. The level of future operations, if any, may be limited by the availability of capital resources, the sources of which are not predictable. As a consequence of not currently having any oil and gas prospects and the financial resources to explore them, the Registrant's results from operations are not meaningful and the primary financial information of relevance to investors, in management's opinion, are the measures of liquidity and solvency.
Results of Operations -2003 Compared to 2002 and 2001
The Registrant has not received any revenue from operations. Any revenue received by the Registrant was received as a result of interest income earned on cash balances.
Interest income was $2,882, $3,589 and $29,536 for the periods ending July 31, 2003, 2002 and 2001 respectively. The reduction in interest is primarily due to decreased balances of cash.
Overall, the Registrant's expenses, net of recorded gains, were $547,179 $497,953 and $5,295,014 for the periods ending July 31, 2003, 2002 and 2001 respectively. General and administrative expenses were $ 144,754, $224,676 and $297,237 for the periods ending July 31, 2003, 2002 and 2001 respectively. The decrease for 2003 compared to 2002 and 2001 was primarily due to decreased operational activities during the year, which is expected to continue unless greater funding permits increased business activity.
The Registrant's losses from continuing operations were $456,261, $388,480 and $5,265,478 for July 31, 2003, 2002 and 2001 respectively. The losses from continuing operations for 2003 consisted of general and administrative costs as described above of $144,754 (2002: $224,676 and 2001: $297,237), gain on forgiveness of debt of $37,556 (2002: Nil And 2001: Nil), gain on sale of investment in associated company of $10,054 (2002: $9,833 and 2001: Nil), interest income of $2,882 (2002: $3,589 and 2001: $29,536), recovery of loan previously written-off of $40,426 (2002: $86,967 and 2001: Nil), write-down of investment in associated companies of $258,529 (2002: $264,192 and 2001: $4,010,411) and write-off of oil and gas interest of $286,331 (2002: $1 and 2001: Nil)
These losses stated as a loss per share were $0.11, $0.26, and $3.78 for July 31, 2003, 2002 and 2001 respectively under Canadian generally accepted accounting principals (see reconciliation of net losses and losses per share to U.S. generally accepted accounting principles in note 13 of the Registrant's financial statements).
Inflation
Not applicable.
Foreign Currency Fluctuations
The Registrant holds its cash reserves primarily in US dollars and does not have significant obligations in other currencies so it does not perceive it is currently subject to significant exchange risks.
Government Regimes
The Registrant, through its equity holdings of Indo-Pacific, is indirectly subject to foreign governmental regulations that relate directly and indirectly to its operations including title to the petroleum interests acquired by the Registrant, production, marketing and sale of hydrocarbons, taxation, environmental matters, restriction on the withdrawal of capital from a country in which the Registrant is operating and other factors. There is no assurance that the laws relating to the ownership of petroleum interests and the operation of the Registrant's business in the jurisdictions in which it currently operates will not change in a manner that may materially and adversely affect its business. There is no assurance that the laws of any jurisdiction in which the Registrant carries on business may not change in a manner that materially and adversely affects its business.
Differences between Canadian and U.S. Generally Accepted Accounting Principles
The Registrant is subject to changes in accounting standards. These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which conform in all material respects with United States generally accepted accounting principles ("U.S. GAAP") However there are some exceptions and these are detailed below.
a) Assets
Investments. Under Canadian GAAP the Registrant's investments in associated companies are reported under the equity method or the cost method of accounting, or, for other than a temporary decline in value from cost, at market value. The equity method is used when the Registrant exercises significant influence over an associated company. The Cost method is used for associated companies over which the Registrant does not exercise significant influence. Under US GAAP the Registrant's investments in associated companies are classified as available-for-sale securities and reported at market value, with unrealized gains and losses included as a component of comprehensive income.
b) Stockholders' Equity
Contributed Surplus
Under Canadian GAAP, the Canadian Institute of Chartered Accountants ("CICA") issued a new accounting pronouncement that applies to the Registrant with respect to the 2002 and subsequent years. The general effect of the pronouncement is to:
require disclosure in its financial statements of various details relating to options issued.
The Registrant, has adopted a fair value based method for determining the cost of any options for Canadian reporting purposes but to date has not been affected as the Registrant has not revised or issued any options during the last fiscal year.
The Registrant for purposes of US GAAP follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) to account for all stock options granted to employees. Under APB 25, the intrinsic value model is followed and compensation cost is recognized if the market price of the Registrant's common shares exceeds the exercise price on the date of grant.
However, Statement of Financial Accounting Standards No. 123: Accounting for Stock Based Compensation (SFAS 123) requires additional disclosure to reflect the results of the Registrant had it elected to follow SFAS 123. SFAS 123 requires a fair value based method of accounting for stock options using the Black Scholes, or similar option pricing model.
For non-employees, the Registrant uses the fair value model for determining stock option compensation cost of options granted. Although similar to the fair value based method adopted for Canadian reporting purposes, US GAAP requires that the options be revalued each period (and cumulative compensation cost adjusted accordingly) until earned.
c) New Accounting pronouncements
In October 2002, FASB issued Statements of Financial Accounting Standards No. 147, "Accounting of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 44 and FASB Interpretation No. 9" ("SFAS 147"). SFAS 147 requires the application of the purchase method of accounting to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. SFAS 147 is effective for acquisitions for which the date of acquisition is on or after October 1, 2002 and will not affect the Company.
In November 2002, the FASB issued FASB Interpretation No (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize the liability for the fair value of the obligation it assumes under that guarantee. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31,2002, irrespective of a guarantor's year-end. The disclosure requirements of FIN 45 are effective for interim and annual periods ending December 15, 2002, and are applicable to product warranty liability and other guarantees. The adoption of FIN 45 did not have an effect on the Company.
In December 2002, FASB issued Statements of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123 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, SFAS 148 amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002.
In January 2003, the FASB issued FASB interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." FIN 46 establishes accounting guidance for consolidation of a variable interest entity (VIE), formerly referred to as special purpose entities. FIN 46 applies to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a VIE. FIN 46 provides guidance for determining when an entity (the Primary Beneficiary) should consolidate a VIE that functions to support the activities of the Primary Beneficiary. The Company has no contractual relationship or other business relationship with a VIE and therefore the adoption of this policy did not have an impact on the Company.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). This statement amends SFAS 133 by requiring that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and must be applied prospectively. There has been no impact on the Company's financial position or results of operations from adopting SFAS 149.
In May 2003, the FASB issued SFAS No. 150 "Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). This statement established standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 and must be applied prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. There has been no impact on the Company's financial position or results of operations from adopting SFAS 150.
Liquidity and capital resources -2003 Compared to 2002 and 2001
Currently, the Registrant has sufficient capital to satisfy its overhead expenditures for the 2004 fiscal year. The Registrant did not receive any revenue from its operations in 2003 and does not expect to receive any operational revenue during the fiscal 2004 year. Overhead expenditure needs after fiscal 2004 will likely require the Registrant to raise additional capital, from outside sources or sell assets, primarily its portfolio of investments. It is uncertain whether the Registrant will be able to secure outside sources of capital or sell its investments in amounts that are sufficient for the Registrant to continue with its expected operations. Due to the nature of its business, the Registrant does not believe that debt financing is available to it.
At July 31, 2003 the Registrant had $257,751 in working capital (July 31, 2002: $269,266, July 31, 2001: $123,175). Cash on hand was $227,289, $293,124, and $126,900 at July 31, 2003, 2002 and 2001 respectively. The Registrant had negative cash flow from operations of $129,366, $110,684, and $773,174 for the years ending July 31, 2003, 2002 and 2001 respectively.
The Company's investing activities for the year ended July 31, 2003 consisted of purchasing 175,000 units of Austral at $0.80 per unit, with each unit consisting of one common share and one share purchase warrant, exercisable at $0.90 in the first year and $1.15 in the second year, as well as selling 119,800 shares of Austral with a carrying value of $98,706, resulting in a gain of $10,054. In addition, investing activities of the Registrant were affected by the acquisition of a controlling interest in AMG, resulting in a net cash inflow totalling $104,825. A net provision of cash from investing activities totalling $76,908 was provided to the Registrant for the year ended July 31, 2002 as a result of the sale of Indo-Pacific shares versus a net use of cash for investing activities totalling $574 for July 31, 2001.
On August 30, 2000 the Registrant entered into a loan agreement with Verida Internet Corp. whereby the Registrant agreed to loan Verida Internet Corp. $500,000 in order to fund existing operations of Verida. The principal amount and accrued interest was due on February 27, 2001 and the loan and interest totalling $517,115 was written off as uncollectible as of July 31, 2001. Subsequent to the Registrant writing-off the loan and interest, the Registrant negotiated a compromise agreement with Verida and one of its debtors whereby the Registrant was to receive from monies owed to Verida by the debtor, monthly payments of approximately CAD$ 15,170 for a period of twenty four months. The total that was expected to be received per the agreement was CAD$ 363,982, including principal and interest. As of January 15, 2004 the Registrant has received a total of CAD$209,035. In October of 2002, the Registrant was advised by the debtor that they were not in a position to continue paying the Registrant. As a result the Re gistrant negotiated a revised loan repayment term sheet with an effective date of April 1, 2003 whereby the Company will receive a reduced monthly repayment amount over a period of five years. The Company will receive CAD$3,000 per month, which includes annual interest of 12% over this new repayment period. There is considerable doubt whether the Registrant will receive all future payments relating to the loan repayment schedule. (See Item 7 - "Major Shareholders and Related Transactions").
The Registrant's financing activities generated Nil, $200,000 and $492,000 at July 31, 2003, 2002 and 2001 respectively. Financing activities during fiscal 2002 and 2001 consisted solely of issuing equity securities by way of private placements with investors known to the Registrant's management.
During the 2002 fiscal year, the Registrant consolidated (reverse-split) its common shares on the basis of one new share for every three old shares. During the 2001 fiscal year, the Registrant increased its authorized share capital to an unlimited number of common stock without par value and consolidated (reverse-split) its shares of common stock on a basis of one new share for every twelve old shares. The effects of both consolidations have been applied on a retroactive basis for the affected transactions described below.
In June of 2002, the Registrant completed a private placement financing of 1,000,000 units in its capital stock at $0.20 per unit. Each unit consists of one share of common stock and one share purchase warrant to purchase one additional share at a price of $0.25 in the first year and $0.30 in year two. (See Item 7 - "Major Shareholders and Related Transactions")
Through two transactions dated September 12, 2000 and October 12, 2000, the Registrant issued a total of 125,000 units at a price of $2.40 per unit pursuant to private placement agreements for total proceeds of $300,000. Each unit consists of one share of common stock and one share purchase warrant to purchase one additional share at a price of $2.40 until September 12, 2001 and October 12, 2001 and thereafter at a price of $3.00 until expiry on September 12, 2002 and October 12, 2002.
On November 14, 2000, the Registrant issued a total of 50,000 units at a price of $1.92 per unit pursuant to a private placement agreement for total proceeds of $96,000. Each unit consists of one share of common stock and one share purchase warrant to purchase one additional share at a price of $1.92 until November 14, 2001 and thereafter at a price of $3.00 until expiry on November 14, 2002. On December 15, 2000, the Registrant issued a total of 133,333 units at a price of $0.72 per unit pursuant to a private placement agreement for total proceeds of $96,000. Each unit consists of one share of common stock and one share purchase warrant to purchase one additional share at a price of $0.72 until December 15, 2001 and thereafter at a price of $1.20 until expiry on December 15, 2002.
Our capital resources are comprised primarily of private investors who are either existing contacts of management or who come to our attention through brokers, financial institutions and other intermediaries. Management is of the view that conventional banking is unavailable to exploration stage resource companies. Our access to capital is always dependent upon general financial market conditions. Our capital resources have not changed during our 2003 fiscal year, nor are they anticipated to change during the 2004 fiscal year.
Our anticipated capital expenditures for the remainder of the 2004 fiscal year can be met by our current working capital.
Research and Development, Patents and Licences
Not applicable.
Trend Information
Not applicable.
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
At July 31, 2003, the directors and officers of the Registrant were:
Name and Municipality of Residence | Position Held | |
Mr. Peter Loretto, (1) (2) | President and Chief Executive Officer and a Director | |
Mr. Garth Johnson, (2) | Corporate Secretary, Chief Financial Officer and a Director | |
Michael Hart, (1) | Director |
Notes:
All directors were re-elected on January 5, 2004 and have a term of office expiring at the next annual meeting of the Registrant expected in January, 2005. All officers have a term of office lasting until their removal or replacement by the board of directors.
Mr. Peter Loretto obtained a Masters of Business Administration from Gonzaga University, Spokane Washington in 1984 and has been the Company's president, chief executive officer and a director since May 12, 2003. Mr. Loretto is also the principal shareholder of the Corporation. For the last fourteen years, Mr. Loretto has worked as an independent businessman and investor, within the securities sector as well as participating in other business opportunities. Mr. Loretto is also a former member of the boards of Indo-Pacific Energy Ltd. and TAG Oil Ltd.
Mr. Garth Johnson is a Certified General Accountant who was a Controller with a manufacturer in the lumber industry from 1994 to 1997 in Surrey, B.C. In 1997, Mr. Johnson joined the Registrant as the corporate accountant. He has been the Chief Financial Officer and Secretary of the Registrant since October 16, 2000 and has been a director of the Registrant since April 10, 2001. Mr. Johnson is also a director of Austral Pacific Energy Ltd, is the Chief Executive Officer, Corporate Secretary and a director of TAG Oil Ltd. and is the Corpoarate Secretary and Treasurer of Gondwana Energy, Inc.
Mr. Michael Hart became a director of the Registrant on December 13, 1999. Between September 1995 to April 1996, Mr. Hart was an employee of Balcomp Developments Ltd., a company located in Edmonton, Alberta, which provided road construction services to the pulp and paper industry. While at Balcomp Developments Ltd., Mr. Hart worked within research and development for the purpose of aiding the company to develop a new division which would provide a marketplace for the buying and selling of used construction equipment. In October of 1996, Mr. Hart went to work for, CanAfrica Mining Co. Ltd., a private mining company whose business consisted of gemstone and precious metals exploration within Kenya, South Africa and Mozambique. Mr. Hart's function at Can Africa Mining Co. Ltd. was as an assistant to the Managing Director. Mr. Hart's position with CanAfrica Mining Co. Ltd. continued until September 1997. Between September 1997 through early 1998, Mr. Hart worked with Scimtar Hydrocarbons Corp. as an investor rela tions officer and during the period in which Mr. Hart was employed, Scimtar Hydrocarbons Corp. was an Alberta Stock Exchange listed company whose business was oil and gas exploration primarily in the Middle East. Between March 1998 and March 1999, Mr. Hart was a partner in M. Nigro Consulting Ltd. a partnership formed for the purpose of providing investor relations services to public companies trading on the Alberta Stock Exchange. From April 1999 until present Mr. Hart has held the position of president of Hart-Byrne Enterprises Ltd. Hart-Byrne Enterprises Ltd. is a private company formed by Mr. Hart and other investors, which is developing specialized products for the music industry. Mr. Hart is also president of On The Wing Productions Inc., a private company which is also developing products for the music industry.
The Registrant does not have liability insurance to cover its directors and officers in the performance of their duties. To date, no agreements to contractually provide indemnities have been executed or delivered.
Compensation
The following table sets forth the aggregate compensation paid by our company for services rendered during the last full fiscal years indicated:
Named Executive Officer and Principal Position | Ended | Compensation | ||||
| Peter Loretto, President, Chief Executive Officer, Director (1) | ||||||
| Garth Johnson Secretary, Chief Financial Officer, Director (1) | ||||||
| Michael Hart, Director | ||||||
| Bernhard Zinkhofer, Director (2) | ||||||
Mr. Loretto became President and Chief Executive officer of the Registrant on May 12, 2003 replacing Mr. Johnson. Mr. Loretto also became a Director of the Registrant on May 12, 2003.
Represents legal fees paid to a law firm in which Mr Zinkhofer is a partner. Mr. Zinkhofer resigned as a Director of the Registrant on May 2, 2003.
The majority of the Registrant's executive officers and directors also serve as officers or directors of other companies or have other occupations.
With the exception of Mr. Johnson, the Registrant does not pay regular remuneration to its executive officers. Mr. Johnson is paid by the Registrant through its subsidiary, DLJ Management Corp. for his role in management and corporate reporting and accounting specifically for time spent on the Registrant.
No other cash compensation, including salaries, fees, commissions, and bonuses was paid or is to be paid to the directors and officers for services rendered, nor was any remuneration paid to directors except legal services provided by a law firm in which Bernhard Zinkhofer, is a partner. The cost of these legal services during the 2003 fiscal year was $1,781 (2002 fiscal year - $8,771). The Registrant currently does not offer profit sharing, pension or retirement benefit plans to its officers or directors and none are presently proposed. There are no arrangements for payments on termination for any officer in the event of a change of control.
Board Practices
All directors have a term of office expiring at our next annual general meeting, to be scheduled in January 2005, unless re-elected or unless a director's office is earlier vacated in accordance with our by-laws or the provisions of the Business Corporations Act (Yukon).
All officers have a term of office lasting until their removal or replacement by the board of directors. As of January 15, 2004 the following are the Company's officers and directors.
| Name | Period served in position |
| Peter Loretto (1), President, Chief Executive Officer and Director | 9 months |
| Garth Johnson, Secretary, Chief Executive Officer | 3.3 years and Director |
| Michael Hart (1), Director | 4.2 years |
(1) member of the audit committee |
Audit and remuneration committees
List of Audit Committee members as at January 15, 2004:
Peter Loretto
Michael Hart
The Company does not have a remuneration committee.
Employees and Consultants
The Registrant currently has no full-time employees. Two persons providing substantially all administrative services to the Registrant are employed through its wholly owned subsidiary DLJ Management Corp ("DLJ").
Share ownership by officers and directors
At July 31, 2003 Mr. Loretto owned 171,949 shares of the Registrant. In addition Mr. Loretto also owned 125,000 share purchase warrants entitling him to purchase an additional 125,000 shares of the Registrant at a price of $0.30 per share until June 12, 2004. No other shares were owned by any other directors' and officers.
On December 9, 2003, Mr. Loretto purchased an additional 1,022,000 shares of the Registrant from the Registrant's former principal shareholder, Mr. Alex Guidi in a private transaction. As a result of this transaction Mr. Loretto, now owns 49.4% of the Registrants outstanding shares.
There were no directors' and senior officers' options granted or exercised in the years ended July 31, 2003 or 2002 and there were no outstanding stock options to management.
The Registrant has no defined plan for involving employees in the capital of the Registrant. The Registrant may, at the discretion of the board of directors, grant incentive stock options to its officers, directors, employees and consultants, for the purchase of shares in the Registrant. Stock options are in consideration for services and are non-transferable. The Board of Directors of the Registrant determines the exercise price. Vesting of options may be made at the time of granting of the options or over a period of up to five years as set out in each option agreement. Once approved and vested, options are exercisable at any time until expiry or termination as above.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED TRANSACTIONS
Major shareholders
Beneficial Holders of More Than Five Percent of Outstanding Shares
The following schedule sets forth the common stock ownership of each person known by us to be the beneficial owner of 5% or more of the Registrant's common stock. All ownership shown is of record and reflects beneficial ownership as of January 28, 2004.
Security Held by Certain Beneficial Owners
Name and Address of Owner | Number of Shares | Percentage of Class | ||
| Alex Guidi Vancouver, B.C. | 922,484 (1) | 38.17% | ||
| Peter Loretto Richmond, B.C. | 1,318,949 (2) | 54.57% | ||
| Tanya Loretto Richmond, B.C. | 251,688 (3) | 10.41% |
Of the 922,484 common shares owned by Mr. Guidi, 750,000 are attributable to common shares that may be acquired within 60 days.
Of the 1,318,949 common shares owned by Mr. Loretto, 125,000 are attributable to common shares that may be acquired within 60 days under warrants.
Of the 251,688 common shares owned by Mrs. Loretto, 125,000 are attributable to common shares that may be acquired within 60 days under warrants.
To the knowledge of the Registrant, there have been no significant changes in percentage share ownership held by any major shareholders, during the last three years with the exception of Mr. Loretto's purchase of 1,022,000 shares of the Registrant from the Registrant's former principal shareholder, Mr. Guidi in December of 2003.
Insider Reporting
The Securities Act (Yukon) does not prescribe any reporting requirements for insiders of our company. We are a reporting issuer in British Columbia and insiders comply with the requirements of Part 12 of the Securities Act (British Columbia). Insiders (generally officers, directors and holders of more than ten percent of voting securities) are required to file individual insider reports of changes in their ownership within ten days after the month in which any trade in our securities occurs. Copies of the reports and summaries of the insider activity as well as issuer activity are available for public inspection at www.sedi.com, the Canadian regulatory website for insider trading.
The proportion and number of shareholders in the host country as at January 15, 2004 are as follows (based on a shareholders list provided by the Registrant's transfer agent):
| Proportion of shares held in the U.S. | 7.63% |
| Number of shareholders | 156 |
| Number of shares held | 184,593 |
Arrangements Affecting Shareholdings
There are no known arrangements, which would significantly affect the control of the major shareholder.
Associated Company/Related Party Shareholdings
At January 15, 2004 Mr. Loretto was a significant shareholder of Austral Pacific Energy Ltd. ("Austral") (formerly "Indo-Pacific Energy Ltd.") and personally held, 612,450 common shares and warrants to acquire a further 336,000 common shares, all of which collectively represents a 7.38% ownership interest of Austral on an undiluted basis. In addition, Mr Loretto beneficially owned, through his controlling interest in the Registrant, 872,645 common shares and warrants to acquire a further 1,394,595 common shares; At January 15, 2004, Mr. Garth Johnson is the Chief Financial Officer, Corporate Secretary and Director of TAG and is a director and beneficially owns 2,580 common shares and has options to acquire a further 10,000 common shares of Austral. At January 15, 2004, the Registrant was a controlling shareholder of AMG Oil Ltd. owning 8,200,000 common shares or 49.4% of AMG Oil Ltd. Mr. Michael Hart is the President, Chief Executive Officer, Corporate Secretary and a Director of AMG Oil Ltd. and owns a ful ly vested option to acquire up to 15,000 common shares. Mr. Johnson acts as, Gondwana Energy, Ltd.'s Corporate Secretary and Treasurer.
Related Party Transactions
The following are reported as Related Party Transactions. The nature of the transaction, the affiliate(s) who had an interest in the transaction and the nature of the interest are included in the description of each of the transactions:
On December 4, 2003, the Registrant sold 725,000 shares of its investment in Austral (formerly "Indo-Pacific Energy Ltd.") at a price averaging approximately $1.25 per share. The Registrant then replaced these shares on December 11, 2003 by participating in Austral's initial public offering to list on the New Zealand Stock Exchange. The Registrant acquired 765,500 units in Austral at a price of $1.30 (NZ$2.00), per unit. Each unit consists of one common share and a half share purchase warrant exercisable at a price of $1.37 (NZ$2.10) until January 5th, 2004. The Registrant also reached an agreement with Austral to amend the Registrants 836,845 Series "A" warrants, mentioned in (g) below. The Series "A" warrants expiry date was extended for one year to January 5th, 2004 in consideration of the Company renouncing the Series "B" warrant in to which the Series A originally (converted together with a common share) as well as increasing the exercise price of the Series "A" warrant s by $0.10 to $1.50 per Austral common share.
Since July 1, 2003, Austral pays $1,500 per month to DLJ Management Corp., a wholly owned subsidiary of the Registrant, for a portion of DLJ's overhead in relation to work performed by DLJ on Austral's behalf. The arrangement can be terminated by either party on 30 days notice.
On March 4, 2003, the Registrant acquired a 49.4% controlling interest in AMG Oil Ltd. ("AMG") resultant from AMG re-purchasing 3,000,000 shares of its own common stock for cancellation and return to treasury. As a result of the Registrant acquiring a controlling interest in AMG, the Company has therefore reported its investment in AMG on a consolidated basis for the Period from March 4, 2003 to July 31, 2003.
During the 2003, fiscal year, the Registrant sold 119,800 shares (2002: 59,900 shares) of Austral with a carrying value at that time of $88,652 (2002: $67,075), for cash proceeds of $98,706 (2002: $76,908), resulting in a gain of $10,054 (2002: $9,833).
On September 6, 2002, the Registrant acquired, by way of private placement, 175,000 units of Indo-Pacific at $0.80 per unit. Each unit consists of one common share and share purchase warrant, exercisable at $0.90 in the first year and $1.15 in year two.
During the 2003 fiscal year the Registrant paid $6,415 (2001: $6,115) in rent to a private company wholly owned by Mr. Alex Guidi. During the 2003 fiscal year the Registrant incurred $1,781 (2002: $8,771) in legal fees to a law firm in which Mr. Bernhard Zinkhofer is a partner. During the 2003 fiscal year, the Registrant also paid $15,317 (2001: $14,029) for wages and benefits to a director of the Company.
During the 2002 fiscal year, the Company entered into a rental agreement with a related company, TAG Oil Ltd., for the Company's use of office space owned by TAG. The agreement continued on a month-to-month basis at a rate of CAD$1,000 per month until termination of the agreement dated March 31, 2003. The Company paid TAG $8,000 (2002: $6,000) for the year ended July 31, 2003.
During the 2002 fiscal year, the Registrant completed a private placement financing of 1,000,000 units of its capital stock at $0.20 per unit. Each unit consists of one common share and one share purchase warrant, exercisable at $0.25 in year one and $0.30 in year two. The securities were placed with individuals that beneficially own 5% or more of the Registrants outstanding shares. Mr Alex Guidi, Mr. Peter Loretto and Mrs. Tanya Loretto acquired 750,000 units, 125,000 units and 125,000 units respectively.
During the 2001 fiscal year, the loan reported in the Registrants 20F for the period ended July 31, 2000, including principal and interest, made by the Registrant to Verida Internet Corp. ("Verida") came due. By letter dated March 12, 2001 Verida notified the Registrant that the Company was unable to pay the amount owed for principal and interest owed on the loan. As a result the Registrant wrote-off the loan receivable, totalling $517,115 consisting of principal and interest. Subsequent to the write-off, the Registrant, Verida and one of its directors came to a Compromise Agreement dated October 15, 2001 whereby Verida assigned specific amounts to the Registrant and two other persons entitling the Registrant to receive CAD$ 363,982 including principal and interest over a period of 24 months. As of January 15, 2004 the Registrant has received CAD$ 209,035. In October of 2002, the Registrant was advised by the debtor that they are not in a position to continue paying the Registrant. As a result the Registrant negotiated a revised loan repayment term sheet with an effective date of April 1, 2003 whereby the Company will receive a reduced monthly repayment amount over a period of five years. The Company will receive CAD$3,000 per month, which includes annual interest of 12% over this new repayment period. There is considerable doubt whether the Registrant will receive all payments relating to this revised compromise agreement.
On January 3, 2002, the Registrant and Indo-Pacific agreed to terminate the royalty agreement entered into as part of the sale of the Registrants exploration permits and assets located in Australia, New Zealand and Papua New Guinea to Indo-Pacific. In return for the Registrant agreeing to terminate the royalties, Indo-Pacific agreed to amend the terms of certain warrants received by the Registrant as a result of the sale. ( See Item 4 Business Overview)
During the 2002 fiscal year, the Company entered into a six-month executive employment contract with Mr. Frank Jacobs effective March 1, 2002. The executive contract consisted of Mr. Frank Jacobs replacing the Company's current President, CEO and Director effective March 1, 2002. In addition to the above, Mr. Jacobs received remuneration of approximately CAD$15,000 per month along with certain accommodation and travel allowances totalling approximately CAD$17,000 for the term of the contract. Under this contract the Company incurred costs of approximately CAD$26,246. On April 29, 2002 the Company entered into an agreement with Mr. Jacobs, assigning his employment obligations under the executive contract to TAG, resulting in the Company being reimbursed by TAG for all expenses. As a result of this assignment, Mr. Jacobs resigned as President, CEO and as a Director and was replaced as President and CEO, on an interim basis, by Mr. Johnson.
During the 2003 fiscal year, the Registrant's wholly owned subsidiary, DLJ Management Corp., provided corporate services consisting of accounting and administrative services to AMG Oil Ltd., Austral Pacific Energy Ltd., Gondwana Energy, Ltd. and TAG Oil Ltd. DLJ Management Corp. billed these companies on a cost recovery basis, the amount of which was determined by the amount of time devoted by DLJ Management Corp.'s staff to each company. These amounts were as follows in CAD$: $1,500 (2002: $Nil), $40,800 (2002: $94,558), $144,893 (2002: $129,629) and $Nil (2002: Nil) to Indo, AMG, TAG and Gondwana, respectively.
Interests of experts and counsel
Not applicable
Consolidated Statements and Other Financial Information
Consolidated financial statements are provided under PART III. Item 17. FINANCIAL STATEMENTS
There are no material legal proceedings to which the Registrant is subject or which are anticipated or threatened.
The Registrant has never paid dividends to shareholders nor is there a policy in place to do so. All cash flow derived by the Registrant is re-invested in the Registrant's operations.
(a) On December 4, 2003, the Registrant sold 725,000 shares of its investment in Austral (formerly "Indo-Pacific Energy Ltd.") at a price averaging approximately $1.25 per share. The Registrant then replaced these shares on December 11, 2003 by participating in Austral's initial public offering to list on the New Zealand Stock Exchange. The Registrant acquired 765,500 units in Austral at a price of $1.30 (NZ$2.00), per unit. Each unit consists of one common share and a half share purchase warrant exercisable at a price of $1.37 (NZ$2.10) until December 31, 2004. The Registrant also reached an agreement with Austral to amend the Registrants 836,845 Series "A" warrants as described herein.
No other significant changes material to the business of the Registrant has occurred since the date of the annual financial statements.
There is no offering of stock hereunder. This is an annual report only.
Price History of the stock
The Registrant voluntarily delisted its shares from the Vancouver Stock Exchange ("VSE") and ("CDNX"), the successor to the VSE, in Vancouver, British Columbia, Canada on July 31, 1997. Beginning on June 10, 1997, the Registrant's shares traded on the OTC Bulletin Board ("OTCBB") under the symbol "TEPUF" which was subsequently changed to "TOPXF" on March 1, 2001, concurrent with the 1 for 12 share consolidation approved by the shareholders on January 17, 2001. Concurrent with a further 1 for 3 share consolidation approved by shareholders on January 18, 2002 the Registrants symbol was changed to "TOPTF" on the effective date of the consolidation being April 4, 2002.
All values noted below are in US dollars per share:
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OTCBB quotations may reflect interdealer prices, without retail Markup, mark-down or commission and may not necessarily reflect actual transactions.
All quotations are from the Canada Stockwatch website located at www.canada-stockwatch.
Not applicable
The authorized capital of the Registrant consists of an unlimited number of Common Shares without par value, of which 2,416,823 Common Shares were issued on July 31, 2003 and January 15, 2004.
The Registrant's shares traded on the Vancouver Stock Exchange ("VSE") in Vancouver, British Columbia, Canada until July 31, 1997. Beginning on June 10, 1997 the Registrant's shares traded on the OTC Bulletin Board ("OTCBB") under the symbol "TEPUF", "TOPXF" effective March 1, 2001 and "TOPTF" effective April 5, 2002.
ITEM 10.ADDITIONAL INFORMATION
Not applicable
Memorandum and Articles of association
The Registrant's Articles of Association were previously filed with Form 20F for the Year Ended July 31, 2000. The provisions thereof have not changed since that time.
Attached as Exhibits in Item 19 is a list of material contracts the Registrant entered into during the period from the Registrants fiscal year ended July 31, 2001 up to January 15, 2004. All material contracts are filed under Form 6-K or with previous Annual reports under form 20F as noted in Item 19
There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of common shares of the Company, other than withholding tax requirements. See "Taxation".
There is no limitation imposed by Canadian law or by the charter or other constituent documents of the Company on the right of a non-resident to hold or vote common shares of the Company, other than as provided in the Investment Canada Act (Canada) (the "Investment Act").
The following discussion summarizes the principal features of the Investment Act for a non-resident who proposes to acquire common shares of the Company. It is general only, it is not a substitute for independent advice from an investor's own advisor, and it does not anticipate statutory or regulatory amendments.
The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture (each an "entity") that is not a "Canadian" as defined in the Investment Act (a "non-Canadian"), unless after review the Director of Investments appointed by the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. The size and nature of a proposed transaction may give rise to an obligation to notify the Director and seek an advance ruling. An investment in common shares of the Company by a non-Canadian other than a "WTO Investor" (as defined in the Investment Act and which term includes entities which are nationals of or are controlled by nationals of member states of the World Trade Organization) when the Company was not controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment to acquire control of the Company and the value o f the assets of the Company, as determined in accordance with the regulations promulgated under the Investment Act, was over a certain figure, or if an order for review was made by the federal cabinet on the grounds that the investment related to Canada's cultural heritage or national identity, regardless of the value of the assets of the Company. An investment in common shares of the Company by a WTO Investor, or by a non-Canadian when the Company was controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment to acquire control of the Company and the value of the assets of the Company, as determined in accordance with the regulations promulgated under the Investment Act, exceeds a specified amount, which in 2003 was Cdn$223 million. A non-Canadian would acquire control of the Company for the purposes of the Investment Act through acquisition of common shares if the non-Canadian acquired a majority of the common shares of the Company. The acquisition of less than a maj ority but one third or more of the common shares of the Company would be presumed to be an acquisition of control of the Company unless it could be established that, on the acquisition, the Company was not controlled in fact by the acquirer through the ownership of common shares.
Certain transactions relating to common shares of the Company would be exempt from the Investment Act, including
(a) acquisition of common shares of the Company by a person in the ordinary course of that person's business as a trader or dealer in securities,
(b) acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions on the Investment Act, and
(c) acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of common shares, remained unchanged.
Material Canadian Federal Income Tax Consequences for United States Residents
The following summarizes the material Canadian federal income tax consequences generally applicable to the holding and disposition of Common Shares by a holder (in this summary, a "U.S. Holder") who, (a) for the purposes of the Income Tax Act (Canada) (the "Tax Act"), is not resident in Canada, deals at arm's length with the Registrant, holds the Common Shares as capital property and does not use or hold the Common Shares in the course of carrying on, or otherwise in connection with, a business in Canada, and (b) for the purposes of the Canada-United States Income Tax Convention, 1980 (the "Treaty"), is a resident solely of the United States, has never been a resident of Canada, and has not held or used (and does not hold or use) Common Shares in connection with a permanent establishment or fixed base in Canada. This summary does not apply to traders or dealers in securities, limited liability companies, tax-exempt entities, insurers, financial institutions (including those to which the mark-to-market provis ions of the Tax Act apply), or any other U.S. Holder to which special considerations apply.
This summary is based on the current provisions of the Tax Act including all regulations thereunder, the Treaty, all proposed amendments to the Tax Act, the regulations and the Treaty publicly announced by the Government of Canada to the date hereof, and the current administrative practices of the Canada Customs and Revenue Agency. It has been assumed that all currently proposed amendments will be enacted as proposed and that there will be no other relevant change in any governing law or administrative practice, although no assurances can be given in these respects. The immediately following summary does not take into account Canadian provincial, U.S. federal (which follows further below), state or other foreign income tax law or practice. The tax consequences to any particular U.S. Holder will vary according to the status of that holder as an individual, trust, corporation, partnership or other entity, the jurisdictions in which that holder is subject to taxation, and generally according to that holder's pa rticular circumstances. Accordingly, this summary is not, and is not to be construed as, Canadian tax advice to any particular U.S. Holder.
Dividends
Dividends paid or deemed to be paid to a U.S. Holder by the Registrant will be subject to Canadian withholding tax. Under the Treaty, the rate of withholding tax on dividends paid to a U.S. Holder is generally limited to 15% of the gross amount of the dividend (or 5% if the U.S. Holder is a corporation and beneficially owns at least 10% of the Registrant's voting shares). the Registrant will be required to withhold the applicable withholding tax from any such dividend and remit it to the Canadian government for the U.S. Holder's account.
Disposition
A U.S. Holder is not subject to tax under the Tax Act in respect of a capital gain realized on the disposition of a Common Share in the open market unless the share is "taxable Canadian property" to the holder thereof and the U.S. Holder is not entitled to relief under the Treaty. A common share will be taxable Canadian property to a U.S. Holder if, at any time during the 60 months preceding the disposition, the U.S. Holder or persons with whom the U.S. Holder did not deal at arm's length alone or together owned, or had rights to acquire, 25% or more of the Registrant's issued shares of any class or series.
A U.S. Holder whose common shares do constitute taxable Canadian property, and who might therefore be liable for Canadian income tax under the Tax Act, will generally be relieved from such liability under the Treaty unless the value of such shares at the time of disposition is derived principally from real property situated in Canada. The value of the Registrant's common shares is not currently derived principally from real property situated in Canada.
United States Tax Consequences
United States Federal Income Tax Consequences
The following summarizes the material United States federal income tax consequences, under current law, generally applicable to a U.S. Holder (as hereinafter defined) of common shares of the Registrant. This discussion does not address all potentially relevant federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences. (see "Taxation - Canadian Federal Income Tax Consequences" above). Accordingly, holders and prospective holders of common shares of the Registrant should consult their own tax advisors about the specific federal, state, local, and foreign tax consequences to them of purchasing, owning and disposing of common shares of the Registrant, based upon their individual circumstances.
The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time and which are subject to differing interpretations. This discussion does not consider the potential effects, both adverse and beneficial, of any proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.
U.S. Holders
As used herein, a "U.S. Holder" means a holder of common shares of the Registrant who is a citizen or individual resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or of any political subdivision thereof, an estate whose income is taxable in the United States irrespective of source or a trust subject to the primary supervision of a court within the United States and control of a United States fiduciary as described Section 7701(a)(30) of the Code. This summary does not address the tax consequences to, and U.S. Holder does not include, persons subject to specific provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals, persons or entities that have a "functional currency" other th an the U.S. dollar, shareholders subject to the alternative minimum tax, shareholders who hold common shares as part of a straddle, hedging or conversion transaction, and shareholders who acquired their common shares through the exercise of employee stock options or otherwise as compensation for services. This summary is limited to U.S. Holders who own common shares as capital assets and who own (directly and indirectly, pursuant to applicable rules of constructive ownership) no more than 5% of the value of the total outstanding stock of the Registrant. This summary does not address the consequences to a person or entity holding an interest in a shareholder or the consequences to a person of the ownership, exercise or disposition of any options, warrants or other rights to acquire common shares. In addition, this summary does not address special rules applicable to United States persons (as defined in Section 7701(a)(30) of the Code) holding common shares through a foreign partnership or to foreign persons h olding common shares through a domestic partnership.
Distribution on Common Shares of the Registrant
In general, U.S. Holders receiving dividend distributions (including constructive dividends) with respect to common shares of the Registrant are required to include in gross income for United States federal income tax purposes the gross amount of such distributions, equal to the U.S. dollar value of such distributions on the date of receipt (based on the exchange rate on such date), to the extent that the Registrant has current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holder's federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's federal taxable income by those who itemize deductions. (See more detailed discussion at "Foreign Tax Credit" below). To the extent that distributions exceed current or accumulated earnings and profits of the Registrant, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the common shares and thereafter as gain from the sale or exchange of property. Preferential tax rates for long-term capital gains are applicable to a U.S. Holder which is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder which is a corporation.
In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss. However, an individual whose realized gain does not exceed $200 will not recognize that gain, provided that there are no expenses associated with the transaction that meet the requirements for deductibility as a trade or business expense (other than travel expenses in connection with a business trip) or as an expense for the production of income.
Dividends paid on the common shares of the Registrant generally will not be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. A U.S. Holder which is a corporation and which owns shares representing at least 10% of the voting power and value of the Registrant may, under certain circumstances, be entitled to a 70% (or 80% if the U.S. Holder owns shares representing at least 20% of the voting power and value of the Registrant) deduction of the United States source portion of dividends received from the Registrant (unless the Registrant qualifies as a "foreign personal holding company" or a "passive foreign investment company," as defined below). the Registrant does not anticipate that it will earn any United States income, however, and therefore does not anticipate that any U.S. Holder will be eligible for the dividends received deduction.
Under current Treasury Regulations, dividends paid on the Registrant's common shares, if any, generally will not be subject to information reporting and generally will not be subject to U.S. backup withholding tax. However, dividends and the proceeds from a sale of the Registrant's common shares paid in the U.S. through a U.S. or U.S. related paying agent (including a broker) will be subject to U.S. information reporting requirements and may also be subject to the 31% U.S. backup withholding tax, unless the paying agent is furnished with a duly completed and signed Form W-9. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder's U.S. federal income tax liability, provided the required information is furnished to the IRS.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of common shares of the Registrant may be entitled, at the option of the U.S. Holder, to either receive a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and generally applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States income tax liability that the U.S. Holder's foreign source income bears to his or its worldwide taxable income. In the determination of the application of this limitation, t he various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. In addition, this limitation is calculated separately with respect to specific classes of income such as "passive income, " "high withholding tax interest," "financial services income," "shipping income," and certain other classifications of income. Dividends distributed by the Registrant will generally constitute "passive income" or, in the case of certain U.S. Holders, "financial services income" for these purposes. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific, and U.S. Holders of common shares of the Registrant should consult their own tax advisors regarding their individual circumstances.
Disposition of Common Shares of the Registrant
In general, U.S. Holders will recognize gain or loss upon the sale of common shares of the Registrant equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholder's tax basis in the common shares of the Registrant. Preferential tax rates apply to long-term capital gains of U.S. Holders which are individuals, estates or trusts. In general, gain or loss on the sale of common shares of the Registrant will be long-term capital gain or loss if the common shares are a capital asset in the hands of the U.S. Holder and are held for more than one year. Deductions for net capital losses are subject to significant limitations. For U.S. Holders which are not corporations, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted. However the amount that can be carried back is limited to an amount that does not cause or increase a net operating loss in the carry back year.
Other Considerations
Set forth below are certain material exceptions to the above-described general rules describing the United States federal income tax consequences resulting from the holding and disposition of common shares:
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Registrant's outstanding shares is owned, directly or indirectly (pursuant to applicable rules of constructive ownership), by five or fewer individuals who are citizens or residents of the United States and 60% or more of the Registrant's gross income for such year is derived from certain passive sources (e.g., from certain interest and dividends), the Registrant may be treated as a "foreign personal holding company." In that event, U.S. Holders that hold common shares would be required to include in gross income for such year their allocable portions of such passive income to the extent the Registrant does not actually distribute such income. the Registrant does not believe that it currently qualifies as a foreign personal holding company. However, there can be no assurance that the Registrant will not be considered a foreign personal holding company for the current or any future taxable year.
Foreign Investment Company
If 50% or more of the combined voting power or total value of the Registrant's outstanding shares is held, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), and the Registrant is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, it is possible that the Registrant may be treated as a "foreign investment company" as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging common shares to be treated as ordinary income rather than capital gain. the Registrant does not believe that it currently qualifies as a foreign investment company. However, there can be no assurance that the Registrant will not be considered a foreign investment company for the current or any future taxable year.
Passive Foreign Investment Company
United States income tax law contains rules governing "passive foreign investment companies" ("PFIC") which can have significant tax effects on U.S. Holders of foreign corporations. These rules do not apply to non-U.S. Holders. Section 1297 of the Code defines a PFIC as a corporation that is not formed in the United States if, for any taxable year, either (i) 75% or more of its gross income is "passive income," which includes interest, dividends and certain rents and royalties or (ii) the average percentage, by fair market value (or, if the corporation is not publicly traded and either is a controlled foreign corporation or makes an election, by adjusted tax basis), of its assets that produce or are held for the production of "passive income" is 50% or more. the Registrant appears to have been a PFIC for the fiscal year ended July 31, 2000, and at least certain prior fiscal years. In addition, the Registrant expects to qualify as a PFIC for the fiscal year ending July 31, 2001 and may also qualify as a PFIC in future fiscal years. Each U.S. Holder of the Registrant is urged to consult a tax advisor with respect to how the PFIC rules affect such U.S. Holder's tax situation.
Each U.S. Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to United States federal income taxation under one of three alternative tax regimes at the election of such U.S. Holder. The following is a discussion of such alternative tax regimes applied to such U.S. Holders of the Registrant. In addition, special rules apply if a foreign corporation qualifies as both a PFIC and a "controlled foreign corporation" (as defined below) and a U.S. Holder owns, actually or constructively, 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation (See more detailed discussion at "Controlled Foreign Corporation" below).
A U.S. Holder who elects to treat the Registrant as a qualified electing fund ("QEF") will be subject, under Section 1293 of the Code, to current federal income tax for any taxable year to which the election applies in which the Registrant qualifies as a PFIC on his pro rata share of the Registrant's (i) "net capital gain" (the excess of net long-term capital gain over net short-term capital loss), which will be taxed as long-term capital gain, and (ii) "ordinary earnings" (the excess of earnings and profits over net capital gain), which will be taxed as ordinary income, in each case, for the shareholder's taxable year in which (or with which) the Registrant's taxable year ends, regardless of whether such amounts are actually distributed. A U.S. Holder's tax basis in the common shares will be increased by any such amount that is included in income but not distributed.
The procedure a U.S. Holder must comply with in making an effective QEF election, and the consequences of such election, will depend on whether the year of the election is the first year in the U.S. Holder's holding period in which the Registrant is a PFIC. If the U.S. Holder makes a QEF election in such first year, i.e., a "timely" QEF election, then the U.S. Holder may make the QEF election by simply filing the appropriate documents at the time the U.S. Holder files his tax return for such first year. If, however, the Registrant qualified as a PFIC in a prior year during the U.S. Holder's holding period, then, in order to avoid the Section 1291 rules discussed below, in addition to filing documents, the U.S. Holder must elect to recognize under the rules of Section 1291 of the Code (discussed herein), (i) any gain that he would otherwise recognize if the U.S. Holder sold his stock on the qualification date or (ii) if the Registrant is a controlled foreign corporation, the U.S. Holder's pro rata share of th e Registrant's post-1986 earnings and profits as of the qualification date. The qualification date is the first day of the Registrant's first tax year in which the Registrant qualified as a QEF with respect to such U.S. Holder. For purposes of this discussion, a U.S. Holder who makes (i) a timely QEF election, or (ii) an untimely QEF election and either of the above-described gain-recognition elections under Section 1291 is referred to herein as an "Electing U.S. Holder." A U.S. Holder who holds common shares at any time during a year of the Registrant in which the Registrant is a PFIC and who is not an Electing U.S. Holder (including a U.S. Holder who makes an untimely QEF election and makes neither of the above-described gain-recognition elections) is referred to herein as a "Non-Electing U.S. Holder." An Electing U.S. Holder (i) generally treats any gain realized on the disposition of his Registrant common shares as capital gain; and (ii) may either avoid interest charges resulting from PFIC status altoge ther, or make an annual election, subject to certain limitations, to defer payment of current taxes on his share of the Registrant's annual realized net capital gain and ordinary earnings subject, however, to an interest charge. If the U.S. Holder is not a corporation, any interest charge imposed under the PFIC regime would be treated as "personal interest" that is not deductible.
In order for a U.S. Holder to make (or maintain) a valid QEF election, the Registrant must provide certain information regarding its net capital gains and ordinary earnings and permit its books and records to be examined to verify such information. the Registrant intends to make the necessary information available to U.S. Holders to permit them to make (and maintain) QEF elections with respect to the Registrant. the Registrant urges each U.S. Holder to consult a tax advisor regarding the availability of, and procedure for making, the QEF election.
A QEF election, once made with respect to the Registrant, applies to the tax year for which it was made and to all subsequent tax years, unless the election is invalidated or terminated, or the IRS consents to revocation of the election. If a QEF election is made by a U.S. Holder and the Registrant ceases to qualify as a PFIC in a subsequent tax year, the QEF election will remain in effect, although not applicable, during those tax years in which the Registrant does not qualify as a PFIC. Therefore, if the Registrant again qualifies as a PFIC in a subsequent tax year, the QEF election will be effective and the U.S. Holder will be subject to the rules described above for Electing U.S. Holders in such tax year and any subsequent tax years in which the Registrant qualifies as a PFIC. In addition, the QEF election remains in effect, although not applicable, with respect to an Electing U.S. Holder even after such U.S. Holder disposes of all of his or its direct and indirect interest in the shares of the Registran t. Therefore, if such U.S. Holder reacquires an interest in the Registrant, that U.S. Holder will be subject to the rules described above for Electing U.S. Holders for each tax year in which the Registrant qualifies as a PFIC.
In the case of a Non-Electing U.S. Holder, special taxation rules under Section 1291 of the Code will apply to (i) gains realized on the disposition (or deemed to be realized by reasons of a pledge) of his Registrant common shares and (ii) certain "excess distributions," as defined in Section 1291(b), by the Registrant.
A Non-Electing U.S. Holder generally would be required to pro rate all gains realized on the disposition of his Registrant common shares and all excess distributions on his Registrant common shares over the entire holding period for the common shares. All gains or excess distributions allocated to prior years of the U.S. Holder (excluding any portion of the holder's period prior to the first day of the first year of the Registrant (i) which began after December 31, 1986, and (ii) for which the Registrant was a PFIC) would be taxed at the highest tax rate for each such prior year applicable to ordinary income. The Non-Electing U.S. Holder also would be liable for interest on the foregoing tax liability for each such prior year calculated as if such liability had been due with respect to each such prior year. A Non-Electing U.S. Holder that is not a corporation must treat this interest charge as "personal interest" which, as discussed above, is wholly non-deductible. The balance, if any, of the gain or the exc ess distribution will be treated as ordinary income in the year of the disposition or distribution, and no interest charge will be incurred with respect to such balance. In certain circumstances, the sum of the tax and the PFIC interest charge may exceed the amount of the excess distribution received, or the amount of proceeds of disposition realized, by the U.S. Holder.
If the Registrant is a PFIC for any taxable year during which a Non-Electing U.S. Holder holds Registrant common shares, then the Registrant will continue to be treated as a PFIC with respect to such Registrant common shares, even if it is no longer definitionally a PFIC. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules discussed above for Non-Electing U.S. Holders) as if such Registrant common shares had been sold on the last day of the last taxable year for which it was a PFIC.
Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S. Holders who hold (actually or constructively) marketable stock of a foreign corporation that qualifies as a PFIC may elect to mark such stock to the market annually (a "mark-to-market election"). If such an election is made, such U.S. Holder will generally not be subject to the special taxation rules of Section 1291 discussed above. However, if the mark-to-market election is made by a Non-Electing U.S. Holder after the beginning of the holding period for the PFIC stock, then the Section 1291 rules will apply to certain dispositions of, distributions on and other amounts taxable with respect to the Registrant common shares. A U.S. Holder who makes the mark-to-market election will include in income for each taxable year for which the election is in effect an amount equal to the excess, if any, of the fair market value of the common shares of the Registrant as of the close of such tax year over such U.S. Holder's adjusted basis in s uch common shares. In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in the common shares over the fair market value of such shares as of the close of the tax year, or (ii) the excess, if any, of (A) the mark-to-market gains for the common shares in the Registrant included by such U.S. Holder for prior tax years, including any amount which would have been treated as a mark-to-market gain for any prior tax year but for the Section 1291 rules discussed above with respect to Non-Electing U.S. Holders, over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years. A U.S. Holder's adjusted tax basis in the common shares of the Registrant will be adjusted to reflect the amount included in or deducted from income as a result of a mark-to-market election. A mark-to-market election applies to the taxable year in which the election is made and to each subsequent taxable year, unless the Registrant c ommon shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. Because the IRS has not established procedures for making a mark-to-market election, U.S. Holders should consult their tax advisor regarding the manner of making such an election. No view is expressed regarding whether common shares of the Registrant are marketable for these purposes or whether the election will be available.
Under Section 1291(f) of the Code, the IRS has issued Proposed Treasury Regulations that, subject to certain exceptions, would treat as taxable certain transfers of PFIC stock by Non-Electing U.S. Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. Generally, in such cases the basis of the Registrant common shares in the hands of the transferee and the basis of any property received in the exchange for those common shares would be increased by the amount of gain recognized. Under the Proposed Treasury Regulations, an Electing U.S. Holder would not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. The transferee's basis in this case will depend on the manner of the transfer. In the case of a transfer by an Electing U.S. Holder upon death, for example, the transferee's basis is generally equal to the fair market value of the Electing U.S. Holder' s common shares as of the date of death under Section 1014 of the Code. The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the common shares are transferred. Each U.S. Holder of the Registrant is urged to consult a tax advisor with respect to how the PFIC rules affect his or its tax situation.
Whether or not a U.S. Holder makes a timely QEF election with respect to common shares of the Registrant, certain adverse rules may apply in the event that both the Registrant and any foreign corporation in which the Registrant directly or indirectly holds shares is a PFIC (a "lower-tier PFIC"). Pursuant to certain Proposed Treasury Regulations, a U.S. Holder would be treated as owning his or its proportionate amount of any lower-tier PFIC shares, and generally would be subject to the PFIC rules with respect to such indirectly-held PFIC shares unless such U.S. Holder makes a timely QEF election with respect thereto. the Registrant intends to make the necessary information available to U.S. Holders to permit them to make (and maintain) QEF elections with respect to each subsidiary of the Registrant that is a PFIC.
Under the Proposed Treasury Regulations, a U.S. Holder who does not make a timely QEF election with respect to a lower-tier PFIC generally would be subject to tax (and the PFIC interest charge) on (i) any excess distribution deemed to have been received with respect to his or its lower-tier PFIC shares and (ii) any gain deemed to arise from a so-called "indirect disposition" of such shares. For this purpose, an indirect disposition of lower-tier PFIC shares would generally include (i) a disposition by the Registrant (or an intermediate entity) of lower-tier PFIC shares, and (ii) any other transaction resulting in a diminution of the U.S. Holder's proportionate ownership of the lower-tier PFIC, including an issuance of additional common shares by the Registrant (or an intermediate entity). Accordingly, each prospective U.S. Holder should be aware that he or it could be subject to tax even if such U.S. Holder receives no distributions from the Registrant and does not dispose of its commo n shares.
Certain special, generally adverse, rules will apply with respect to Registrant common shares while the Registrant is a PFIC unless the U.S. Holder makes a timely QEF election. For example under Section 1298(b)(6) of the Code, a U.S. Holder who uses PFIC stock as security for a loan (including a margin loan) will, except as may be provided in regulations, be treated as having made a taxable disposition of such shares.
Controlled Foreign Corporation
If more than 50% of the total combined voting power of all classes of shares entitled to vote or the total value of the shares of the Registrant is owned, actually or constructively, by citizens or residents of the United States, United States domestic partnerships or corporation, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), each of which own, actually or constructively, 10% or more of the total combined voting power of all classes of shares entitled to vote of the Registrant ("United States Shareholder"), the Registrant could be treated as a controlled foreign corporation ("CFC") under Subpart F of the Code. This classification would effect many complex results, one of which is the inclusion of certain income of a CFC which is subject to current U.S. tax. The United States generally taxes United States Shareholders of a CFC currently on their pro rata shares of the Subpart F income of the CFC. Such United States Shareholders are generally treated as having received a current distribution out of the CFC's Subpart F income and are also subject to current U.S. tax on their pro rata shares of increases in the CFC's earnings invested in U.S. property. The foreign tax credit described above may reduce the U.S. tax on these amounts. In addition, under Section 1248 of the Code, gain from the sale or exchange of shares by a U.S. Holder of common shares of the Registrant which is or was a United States Shareholder at any time during the five-year period ending on the date of the sale or exchange is treated as ordinary income to the extent of earnings and profits of the Registrant attributable to the shares sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the foreign corporation generally will not be treated as a PFIC with respect to United States Shareholders of the CFC. This rule generally will be effective for taxable years of United States Shareholders beginning after 1997 and for taxable years of foreign corporations ending with or withi n such taxable years of United States Shareholders. Special rules apply to United States Shareholders who are subject to the special taxation rules under Section 1291 discussed above with respect to a PFIC. Because of the complexity of Subpart F, a more detailed review of these rules is outside of the scope of this discussion. the Registrant does not believe that it currently qualifies as a CFC. However, there can be no assurance that the Registrant will not be considered a CFC for the current or any future taxable year.
The Registrant strongly urges each prospective U.S. Holder to consult a tax advisor with respect to the adverse rules applicable, under the Proposed Treasury Regulations, to U.S. Holders of lower-tier PFIC shares.
Not applicable
Not applicable
Documents concerning the Registrant which are referred to in this document may be inspected in its offices, 1407-1050 Burrard Street, Vancouver, B.C. Canada V6Z 2S3 or at the registered office at Suite 200 Financial Plaza, 204 Lambert Street, White Horse, YT, Y1A 3T2, Canada. Copies of the Registrant's financial statements and other continuous disclosure documents required under the British Columbia Securities Act may be viewed at www.sedar.com and documents referred to in this document are filed with the US Securities Commission and can be viewed on the SEC website at www.sec.gov.
A list of subsidiaries of the Registrant is identified in Note 2 (c) in the notes to the consolidated financial statements and in ITEM 4. ORGANIZATIONAL STRUCTURE.
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required as the Registrant is a small business issuer, in accordance with Section 12(b)-2 of the Act.
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
There are no securities in the Registrant other than equity securities, being Common Stock and Warrants to purchase Common Stock in the Registrant.
A. There has been no material default in any indebtedness, as the Registrant has no debt.
B. The Registrant has never paid nor declared a dividend, so there are no arrearages.
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
As required by Section 302(a) of the Sarbanes-Oxley Act of 2002, the Registrant's Chief Executive Officer and Chief Financial Officer have signed certifications attached hereto related to the information in our annual report on Form 20-F. As part of such certification, the Chief Executive Officer and Chief Financial Officer must certify that they are responsible for establishing and maintaining disclosure controls and procedures to ensure that material information with respect to the Registrant is made known to them and that they have evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to filing the Registrant's annual report. Disclosure controls and procedures are intended to ensure that information required to be disclosed by the Registrant in its annual report is recorded, processed, summarized and reported within the time periods required. The Registrant has adopted or formalized such controls and procedures as it believes are necessary and consistent with its business and internal management and supervisory practices.
Evaluation of Disclosure Controls and Procedures
The Registrant's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Registrant's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days prior to the filing date of this report, have concluded that, as of such date, the Registrant's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Registrant would be made known to them by others within the Company.
Changes in Internal Controls
There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect the Registrant's internal controls subsequent to the date of their evaluation, nor does the Registrant believe that there are any significant deficiencies or material weaknesses in its internal controls. As a result, no corrective actions were required or undertaken.
Not applicable
Financial Statements begin on page 33.
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The financial statements and Report of the independent Auditors are filed as part of the Registrant's Annual Report.
To the Shareholders of Trans-Orient Petroleum Ltd.
We have audited the consolidated balance sheets of Trans-Orient Petroleum Ltd. as at July 31, 2003 and 2002 and the consolidated statements of operations and deficit and cash flows for each of the years in the three-year period then ended July 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at July 31, 2003 and 2002 and the results of its operations and its cash flows for each of the years in the three-year period then ended July 31, 2003 in accordance with Canadian generally accepted accounting principles.
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by significant uncertainties and contingencies such as those referred to in Note 1 to these consolidated financial statements. Although we conducted our audits in accordance with both Canadian and U.S. generally accepted auditing standards, our report to the shareholders dated September 26, 2003 is expressed in accordance with Canadian reporting standards, which do not require a reference to such matters when the uncertainties are adequately disclosed in the financial statements.
"Sadovnick Telford + Skov"
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
Canada
September 26, 2003, except as to Note 12(a) which is as of October 6, 2003
Consolidated Balance Sheets |
(Expressed in United States Dollars) |
As at July 31, | 2003 | 2002 |
Assets | ||
Current | ||
Cash | $ 227,289 | $ 293,124 |
Accounts receivable | 2,155 | 2,555 |
Due from related company (Note 8(a)) | 11,443 | 10,685 |
Due from associated company (Note 8(a)) | 3,543 | |
Loan receivable (Note 3) | 30,000 | |
Prepaid expenses | 34,025 | 28,807 |
304,912 | 338,714 | |
Investment in associated companies (Note 4) | 557,609 | 754,791 |
Property and equipment (Note 7) | 120,761 | 127,483 |
Oil and gas interest (Note 10) | 1 | 1 |
Total Assets | $ 983,283 | $ 1,220,989 |
Liabilities | ||
Current | ||
Accounts payable and accrued liabilities | $ 45,692 | $ 55,122 |
Due to associated company (Note 8(a)) | 1,469 | 14,326 |
Total Liabilities | 47,161 | 69,448 |
Non-Controlling Interest in AMG Oil Ltd. | 57,581 | - |
Shareholders' Equity | ||
Common stock without par value; | ||
Unlimited number of shares authorized; | ||
Issued and outstanding at July 31, 2003 and 2002: | ||
2,416,823 shares (Note 9) | 13,145,075 | 13,145,075 |
Common stock held by subsidiary: 2,205 shares | (11,993) | - |
Deficit | (12,254,541) | (11,993,534) |
Total Shareholders' Equity | 878,541 | 1,151,541 |
Total Liabilities and Shareholders' Equity | $ 983,283 | $ 1,220,989 |
| Approved by the Directors: | |
| "Garth Johnson" | "Peter Loretto" |
| Director | Director |
See accompanying notes to the consolidated financial statements
Consolidated Statements of Operations and Deficit |
(Expressed in United States Dollars) |
For the Years Ended July 31, | 2003 | 2002 | 2001 |
Expenses | |||
General and administrative (Schedule) | $ 144,754 | $ 224,676 | $ 297,237 |
(144,754) | (224,676) | (297,237) | |
Other items: | |||
Equity in loss of associated company | - | - | (470,251) |
Gain on forgiveness of debt (Note 6) | 37,556 | - | - |
Gain on sale of investment in associated company (Note 4) | 10,054 | 9,833 | - |
Interest income | 2,882 | 3,589 | 29,536 |
Recovery of loan receivable previously written-off (Note 8(b)) | 40,426 | 86,967 | - |
Write-down of investment in associated companies (Note 4) | (258,529) | (264,192) | (4,010,411) |
Write-off of loan receivable from associated company (Note 8(b)) | - | - | (517,115) |
Write-off of oil and gas interest (Notes 5 and 10) | (286,331) | (1) | - |
Loss from operations | (598,696) | (388,480) | (5,265,478) |
Non-controlling interest | 142,435 | - | - |
Loss before income taxes and unusual item | (456,261) | (388,480) | (5,265,478) |
Provision for income taxes | (9,084) | ||
Loss before unusual item | (456,261) | (397,564) | (5,265,478) |
Gain on recognition of negative goodwill (Note 5) | 195,254 | - | - |
Net loss for the year | (261,007) | (397,564) | (5,265,478) |
Deficit - Beginning of year | (11,993,534) | (11,595,970) | (6,330,492) |
Deficit - End of year | $ (12,254,541) | $ (11,993,534) | $ (11,595,970) |
Loss per share -basic | $ (0.11) | $ (0.26) | $ (3.78) |
-diluted | $ (0.11) | $ (0.26) | $ (3.78) |
| Weighted-average number of common shares outstanding, net of reciprocal holdings | 2,415,917 | 1,553,809 | 1,389,700 |
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows |
(Expressed in United States Dollars) |
For the Years Ended July 31, | 2003 | 2002 | 2001 |
Net increase (decrease) of cash related to the following: | |||
Operating Activities | |||
Net loss for the year | $ (261,007) | $ (397,564) | $ (5,265,478) |
Items not affecting cash: | |||
Amortization | 12,430 | 12,387 | 14,597 |
Equity in loss of associated company | - | - | 470,251 |
Gain on recognition of negative goodwill | (195,254) | - | - |
Gain on forgiveness of debt in associated company | (37,556) | - | - |
Gain on sale of investment in associated company | (10,054) | (9,833) | - |
Non-controlling interest | (142,435) | - | - |
Recovery of loan receivable previously written-off | (40,426) | (86,967) | - |
Write-down of investment in associated companies | 258,529 | 264,192 | 4,010,411 |
Write-off of loan receivable from associated company | - | - | 517,115 |
Write-off of oil and gas interest | 286,331 | 1 | - |
Changes in non-cash working capital items: | |||
Accounts payable and accrued liabilities | 4,482 | 1,777 | (10,895) |
Accounts receivable | 458 | 314 | 11,112 |
Loan receivable | (30,000) | - | - |
Loan receivable from associated company | 40,426 | 86,967 | (517,115) |
Due from associated companies | 3,543 | 5,822 | 5,824 |
Due from related company | (758) | (3,980) | (4,825) |
Prepaid expenses | (5,218) | 11,766 | 3,616 |
Due to associated company | (12,857) | 4,434 | (7,787) |
Net cash used for operating activities | (129,366) | (110,684) | (773,174) |
Financing Activities | |||
Common stock issued for cash | - | 200,000 | 492,000 |
Net cash provided by financing activities | - | 200,000 | 492,000 |
Investing Activities | |||
Acquisition of control of subsidiary, net of cash acquired | 107,413 | - | - |
Proceeds from sale of investment in associated company | 98,706 | 76,908 | - |
Purchase of investment in associated companies | (140,000) | - | - |
Purchase of property and equipment, net | (2,588) | - | (574) |
Net cash provided by (used for) investing activities | 63,531 | 76,908 | (574) |
Net (decrease) increase in cash | (65,835) | 166,224 | (281,748) |
Cash - Beginning of year | 293,124 | 126,900 | 408,648 |
Cash - End of year | $ 227,289 | $ 293,124 | $ 126,900 |
TRANS-ORIENT PETROLEUM LTD. |
Consolidated Schedules of General and Administrative Expenses |
(Expressed in United States Dollars) |
For the Years Ended July 31, | 2003 | 2002 | 2001 |
General and Administrative Expenses | |||
Accounting and audit | $ 5,961 | $ 15,484 | $ 22,470 |
Amortization | 12,430 | 12,387 | 14,597 |
Consulting fees | - | 27,445 | 35,406 |
Corporate relations and development | 7,161 | 19,164 | 43,633 |
Corporation capital tax | - | 3,914 | - |
Filing and transfer agency fees | 10,164 | 9,288 | 8,496 |
Foreign exchange (gain) loss | (1,066) | 4,394 | 4,322 |
Investor relations | 24,188 | 8,120 | - |
Legal | 5,214 | 10,999 | 9,394 |
Office and miscellaneous | 15,817 | 26,222 | 32,595 |
Printing | 3,653 | 11,640 | 35,917 |
Rent | 16,575 | 18,176 | 18,352 |
Telephone | 7,353 | 10,252 | 8,783 |
Travel, promotion and accommodation | 12,082 | 10,076 | 15,780 |
Wages and benefits | 25,222 | 37,115 | 47,492 |
$ 144,754 | $ 224,676 | $ 297,237 | |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 1 - NATURE OF OPERATIONS
Trans-Orient Petroleum Ltd. (the "Company") was incorporated under the Company Act (British Columbia) on July 25, 1986 and continued its jurisdiction of incorporation to the Yukon Territory under the Business Corporations Act (Yukon). The Company is engaged in identifying, financing, and providing business development services for early-stage resource and technology businesses ("Associated Companies"). The Company's operating strategy is to acquire a significant equity interest in Associated Companies and to provide financial, managerial, and technical support to accelerate the achievement of the Associated Companies' business goals and objectives. At July 31, 2003, the Company held interests in three Associated Companies.
The Company's consolidated financial statements are presented on a going concern basis, which assumes that the Company will continue to realize its assets and discharge its liabilities in the normal course of operations. However, the Company does not generate sufficient cash flow from operations to adequately fund its activities and has therefore relied principally upon the issuance of securities for financing. Future capital requirements will depend on many factors including the Company's ability to execute its business plan. The Company intends to continue relying upon the issuance of securities to finance its future activities but there can be no assurance that such financing will be available on a timely basis under terms acceptable to the Company. Although these consolidated financial statements do not include any adjustments that may result from the inability to secure future financing, such condition would have a material adverse effect on the Company's business, results of operations and financia l condition.
Refer to Note 4
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Generally Accepted Accounting Principles
These consolidated financial statements are reported in United States dollars and have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). No material differences would result if these consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), except as disclosed in Note 13.
b) Use of Estimates
The preparation of these financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years. Actual results could differ from those estimates and could affect future operating results. Significant estimates include, but are not limited to, the accounting for amortization and the determination of net recoverable value of assets and income taxes. The Company's investments in associated companies are also items that, due to expected market volume and price fluctuation, may yield net realizable values that are materially different from their current carrying values at any point in time.
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
c) Basis of Consolidation
These consolidated financial statements include the accounts of Trans-Orient Petroleum Ltd. and its wholly-owned subsidiary, DLJ Management Corp., and the accounts of AMG Oil Limited, of which the Company holds a 49.4% controlling interest. All significant inter-company balances and transactions have been eliminated.
d) Principles of Accounting for Investment in Associated Companies
The Company's investments in Associated Companies are accounted for using either the equity method or the cost method of accounting. The equity method is used when the Company exercises significant influence over an associated company. The cost method of accounting is applied to Associated Companies over which the Company does not exercise significant influence.
e) Foreign Currency Translation
Transactions of the Company and its subsidiaries originating in foreign currencies are translated into U.S. dollars at the prevailing rates approximating those at the dates of the transactions. Monetary assets and liabilities are translated at the year-end rates of exchange and non-monetary items are translated at historical exchange rates. The resulting net gain or loss is included in the consolidated statements of operations and deficit.
f) Financial Instruments
Cash, accounts receivable, due from related company, loan receivable, accounts payable and accrued liabilities and due to associated company are carried at cost, which approximates their fair value due to the short-term nature of these instruments.
g) Property and Equipment
Property and equipment are stated at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the assets as follows:
| Apartment | 4% Declining Balance Method |
| Furniture and Office Equipment | 20% Declining Balance Method |
| Leasehold Improvements | Five-year Straight Line Method |
h) Basic and diluted net loss per common share
Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding, net of reciprocal holdings, during the year. Diluted net loss per common share is calculated by dividing the net loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common shares outstanding, net of reciprocal holdings, during the year. Potential common shares consist of the shares issuable upon exercise of stock options and warrants calculated using the treasury stock method and on the assumed conversion of convertible debentures.
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Potential common shares are not included in the calculation of the weighted average number of common shares outstanding, net of reciprocal holdings, for diluted net loss per common share when the effect would be anti-dilutive.
i) Stock-Based Compensation
The Company has adopted the new recommendations of CICA Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments. This section has been applied prospectively to all stock options granted on or after January 1, 2002. Section 3870 establishes standards for the recognition, measurement and disclosure of stock-option-based compensation and other stock-based payments made in exchange for goods and services. These standards require that all stock-based awards made to consultants and employees be measured on the date options are granted if the current fair value of the underlying stock exceeds the exercise price and be recognized as the services are provided and the options are earned in the financial statements using a fair-value-based method.
j) Income Taxes
The Company accounts for potential future tax assets and liabilities by recognizing the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates that are expected to apply when the asset is realized or the liability is settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that enactment or substantive enactment occurs. A valuation allowance is recorded for the portion of the future tax assets where the realization of any value is uncertain.
The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment of the change. When the future realization of income tax assets does not meet the test of being more likely than not to occur, a valuation allowance in the amount of the potential future benefit is taken and no net future tax asset is recognized. Such an allowance currently applies fully to all of the Company's potential income tax assets.
k) Oil and Gas Interest
The Company follows the full cost method of accounting for oil and gas operations whereby all costs associated with the acquisition, exploration and development of oil and gas reserves are capitalized in cost centers on a country-by-country basis. Such costs include property acquisition costs, geological and geophysical studies, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, and overhead expenses directly related to these activities.
Depletion is calculated for producing properties by using the unit-of-production method based on proved reserves, before royalties, as determined by management of the Company or independent consultants. Sales or dispositions of oil and gas properties are credited to the respective cost centers and a gain or loss is recognized when all properties in a cost center have been disposed of, unless such sale or disposition significantly alters the relationship between capitalized costs and proved reserves of oil and gas attributable to the cost center.
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Costs of abandoned oil and gas properties are accounted for as adjustments of capitalized costs and written off to expense.
A ceiling test is applied to each cost center by comparing the net capitalized costs to the present value of the estimated future net revenues from production of proved reserves discounted by 10%, net of the effects of future costs to develop and produce the proved reserves, plus the costs of unproved properties net of impairment, and less the effects of income taxes. Any excess capitalized costs are written off to expense. The calculation of future net revenues is based upon prices, costs and regulations in effect at the balance sheet date.
Unproved properties are assessed for impairment on an annual basis by applying factors that rely on historical experience. In general, the Company may write off an unproved property under one or more of the following conditions:
(i) there are no firm plans for further drilling on the unproved property;
(ii) negative results were obtained from studies of the unproved property;
(iii) negative results were obtained from studies conducted in the vicinity of the unproved property;
(iv)the remaining term of the unproved property does not allow sufficient time for further studies or drilling or is no longer financially able to continue as a party of the Joint Venture.
l) Environmental Laws and Regulations
The Company is not aware of any events of noncompliance in its operations with any environmental laws or regulations or of any potentially material contingencies related to environmental issues. However, the Company cannot predict whether any new or amended environmental laws or regulations introduced in the future will have a material adverse effect on the future business of the Company.
NOTE 3 - LOAN RECEIVABLE
During the fiscal year ended July 31, 2003, the Company, through its controlled subsidiary AMG Oil Ltd. ("AMG"), entered into a $30,000 loan agreement with The Innes Group Inc. ("Innes"), a private California-based company. The loan receivable is to be used as an initial payment against the acquisition price of Touchpoint Metrics, an asset solely owned by Innes. The original loan agreement had an expiry date of June 7, 2003, which was subsequently extended to February 6, 2004. In the event that an asset purchase agreement is not accomplished, the loan will be converted to a promissory note bearing interest at a rate of 5% per annum starting March 1, 2004, payable monthly over three years until the principal and interest is paid in full.
To secure the full and timely payment of the Innes' obligations under the promissory note, Innes hereby grants to AMG a security interest in the Touchpoint Metrics asset.
Refer to Note 12
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 4 - INVESTMENT IN ASSOCIATED COMPANIES
At July 31, 2003, the Company's ownership interests in Associated Companies accounted for under the equity method or cost method of accounting are as follows:
Consolidation Method: | |||||||
AMG Oil Ltd. | $ 1 | $ - | $ - | $ - | $ - | 49.40%/ | |
| Cost Method: | |||||||
| Verida Internet Corp. | 1 | - | - | - | - | 1 | 8.68%/ |
| Indo-Pacific Energy Ltd. | 714,789 | (88,652) | 140,000 | (258,529) | - | 507,608 | 10.75%/ |
| Gondwana Energy, Ltd. | 40,000 | - | - | - | 10,000 | 50,000 | 23.81%/ |
754,790 | (88,652) | 140,000 | (258,529) | 10,000 | 557,609 | ||
$ 754,791 | $ (88,652) | $ 140,000 | $ (258,529) | $ 9,999 | $ 557,609 | ||
On September 6, 2002, the Company acquired, by way of private placement, 175,000 units of Indo-Pacific at $0.80 per unit. Each unit consists of one common share and one share purchase warrant, exercisable at $0.90 in the first year and $1.15 in year two.
During the 2003 fiscal year the Company, wrote-down its investment in Indo-Pacific by $258,529 resulting from a decline in the market value of the shares of Indo-Pacific. The Company also sold 119,800 shares of Indo-Pacific with a carrying value at that time of $88,652 for cash proceeds of $ 98,706, resulting in a gain of $10,054.
At July 31, 2003, the Company held the following stock options and share purchase warrants to purchase shares of common stock:
Indo-Pacific Energy Ltd. - Series "A" | 836,845 | $1.40 | December 31, 2003 |
Indo-Pacific Energy Ltd. | 175,000 | $1.15 | September 6, 2004 |
In addition to the Series "A" warrants above, series "B" warrants come into effect in the event of a commercial discovery on any of the permits sold to Indo-Pacific. Upon a discovery being made, Indo-Pacific will issue the Company additional warrants to acquire shares at a price of $2.50 per share equal to the number of shares of Series "A" warrants exercised. These warrants will expire on December 31, 2003 in conjunction with the Series "A" warrants.
Refer to Note 5
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 5 - ACQUISITION OF BUSINESS
On March 4, 2003 the Company acquired a controlling interest of 49.4% in AMG Oil Ltd. ("AMG") and has therefore reported its investment in AMG on a consolidation basis for the period from March 4, 2003 to July 31, 2003. Upon the acquisition of control of AMG for a nominal amount, the resulting transaction required the Company to recognize a gain of negative goodwill totaling $195,254. Resulting from reporting its investment in AMG on a consolidation basis, the Company obtained an additional 600,000 shares of Gondwana Energy, Ltd. held by AMG, with a fair value of $10,000 as well as an oil and gas interest valued at $286,332 that was subsequently written-down to $1. The breakdown of the negative goodwill is as follows:
Total assets of AMG at March 4, 2003 | $ 418,915 |
Total liabilities of AMG at March 4, 2003 | (23,643) |
Net identifiable assets at the time of acquisition of control | 395,272 |
Controlling interest | 49.4% |
Net identifiable assets purchased | 195,255 |
Purchase price | (1) |
Negative goodwill upon acquisition | $ 195,254 |
Refer to Note 10
NOTE 6 - FORGIVENESS OF DEBT
During the 2003 fiscal year, the Company recorded a recovery of $15,067 from the extinguishment of certain accounts payable balances upon liquidation of its wholly-owned subsidiary, Trans-Orient Petroleum (NZ) Limited. The Company's management does not consider that these amounts are payable, although there is no assurance that formal claims will not be made against the Company for some or all of these balances in the future.
During the 2003 fiscal year, the Company recorded a recovery of $22,489 from the extinguishment of the amount payable to Indo-Pacific Energy Ltd., an associated company, upon liquidation of AMG Oil (NZ) Limited, a wholly-owned subsidiary of AMG Oil Ltd.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment are comprised as follows:
Apartment | $ 100,945 | $ 100,945 | |||
Furniture and office equipment | 108,325 | 102,617 | |||
Leasehold improvements | 2,337 | 2,337 | |||
211,607 | 205,899 | ||||
Accumulated amortization | (90,846) | (78,416) | |||
$ 120,761 | $ 127,483 | ||||
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 8 - RELATED AND ASSOCIATED COMPANIES TRANSACTIONS
Certain transactions of the Company involve publicly traded companies having directors, officers and/or principal shareholders in common with the Company. These companies are Indo-Pacific Energy Ltd. ("Indo-Pacific"), Gondwana Energy, Ltd. ("Gondwana"), Verida Internet Corp. ("Verida") and TAG Oil Ltd. ("TAG")
Transactions with related and associated parties have occurred in the normal course of operations and are measured at the exchange amount which is the amount of consideration established and agreed to by the related and associated parties. The year-end balances referred to below are non-interest bearing, unsecured and receivable or payable on demand, and have arisen from the provision of services and expense reimbursements or advances described.
a) Due from/to Related and Associated Companies
At July 31, 2003, the Company was owed $11,443 (July 31, 2002 - $10,685) by TAG, a related company.
At July 31, 2002, the Company was owed $3,543 by AMG Oil Limited ("AMG"), a formerly associated company. At July 31, 2003, the amount due from AMG was eliminated upon consolidation.
At July 31, 2003, the Company owed $1,469 (July 31, 2002 - $14,326) to Indo-Pacific, an associated company.
Refer to Notes 5 and 6
b) Loan Receivable from Associated Company
Subsequent to the write-off of the loan of $517,115 as reported in the 2001 fiscal year, the Company negotiated a loan repayment schedule with Verida allowing the Company to receive monthly payments of approximately CAD$15,170 (equivalent to US$10,799 as at July 31, 2003) for a period of twenty-four months. The total that was to be received, per the original agreement, was CAD$363,982 (equivalent to US$259,099 as at July 31, 2003), including principal and interest.
The Company did not receive any payments for the period between November 2002 and March 2003, and after receiving notice during the first quarter of the 2003 fiscal year from the payee that they were not in a financial position to continue paying the Company, the Company negotiated a revised loan repayment term sheet with an effective date of April 1, 2003 whereby the Company will receive a reduced monthly repayment amount over a period of five years. The Company will receive CAD$3,000 (equivalent to US$2,136 as at July 31, 2003) per month, which includes annual interest of 12%, over this new repayment period. There is considerable doubt whether the Company will receive all future payments relating to the loan repayment schedule. For the fiscal year ended July 31, 2003 the Company has received $40,426 (July 31, 2002 - $86,967).
Refer to Note 12
c) Other
During the 2003 fiscal year, the Company paid $6,415 (July 31, 2002 - $6,115) in rent to a private company wholly-owned by the former President of the Company.
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 8 - RELATED AND ASSOCIATED COMPANIES TRANSACTIONS (continued)
During the 2002 fiscal year, the Company entered into a rental agreement with a related company, TAG Oil Ltd., for the Company's use of office space owned by TAG. The month-to-month payments of CAD$1,000 continued until termination of the agreement in March 31, 2003. The Company paid TAG CAD$8,000 for the year ended July 31, 2003.
During the 2003 fiscal year, the Company incurred approximately $1,781 (July 31, 2002 - $8,771) for legal services to a law firm in which a former director of the Company is a partner.
During the 2003 fiscal year, the Company incurred $15,317 (July 31, 2002 - $14,029) for wages and benefits to a director of the Company.
NOTE 9 - SHARE CAPITAL
a) Authorized and Issued Share Capital
The authorized share capital of the Company consists of an unlimited number of common stock without par value.
Issued and fully paid: | of Shares | ||
Balance at July 31, 2001 | 1,416,823 | $ 12,945,075 | |
Shares issued during the 2002 fiscal year for cash: | |||
Issued for private placements | 1,000,000 | 200,000 | |
Balance at July 31, 2002 and 2003 | 2,416,823 | $ 13,145,075 | |
Pursuant to private placement agreements during the 2002 fiscal year, the Company completed a financing consisting of 1,000,000 units in its capital stock at US$0.20 per unit. Each unit consists of one common share and one share purchase warrant, exercisable at US$0.25 in year one and US$0.30 in year two.
b) Incentive Stock Options and Share Purchase Warrants
During the 2003 fiscal year, no stock options were granted or amended.
At July 31, 2003, the following stock options are outstanding:
27,777 | $31.50 | March 31, 2005 |
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 9 - SHARE CAPITAL (continued)
At July 31, 2003, the following share purchase warrants to purchase common shares are outstanding:
1,000,000 | $0.30 | June 12, 2004 |
NOTE 10 - OIL AND GAS INTEREST
AMG Oil (NZ) Limited, a wholly-owned subsidiary of AMG Oil Limited, had a 52.5% participating interest in Petroleum Exploration Permit 38256 ("PEP 38256") which was granted by the New Zealand government on August 25, 1997. On May 2, 2003, the Company, through AMG Oil Limited, gave notice to the operator of PEP 38256 that AMG Oil (NZ) Limited was no longer financially able to continue as a party of the joint venture and has therefore withdrawn from the joint venture and the permit. The notice of withdrawal constituted an offer of assignment to the other parties of the joint venture.
At July 31, 2003, the Company, after considering the upcoming financial requirements of PEP 38256, withdrew from the permit and wrote off $286,331 of the Company's capitalized costs relating to PEP 38256. For the 2003 fiscal year, the Company spent $Nil on activities related to PEP 38256 and no further costs are expected in the future.
NOTE 11 - INCOME TAXES
At July 31, 2003, the Company has approximately $2.54 million (July 31, 2002 - $2.54 million) of resource and other unused tax pools to offset future taxable income derived in Canada. Additionally, at July 31, 2003, the Company has non-capital losses of approximately $1.98 million (July 31, 2002 - $1.74 million) available for future deductions from taxable income derived in Canada, which expire as follows:
2004 | $ 180,333 |
2005 | 205,642 |
2006 | 326,719 |
2007 | 317,797 |
2008 | 676,232 |
2009 | 39,069 |
2010 | 238,498 |
$ 1,984,290 | |
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 11 - INCOME TAXES (continued)
Significant components of the Company's deferred tax assets are comprised of the following at July 31, 2003, calculated at 38.46%.
Net capital loss carry-forwards | $ 495,745 |
Net operating loss carry-forwards | 963,158 |
Resources and other unused tax pools | 976,673 |
2,435,576 | |
Valuation allowance | (2,435,576) |
$ - | |
A valuation allowance has been established, and accordingly, no benefit has been recognized for the Company's deferred tax assets. The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's current history of net losses and the expected near-term future losses. The Company will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results.
NOTE 12 - SUBSEQUENT EVENTS
a) Loan Receivable
On October 6, 2003, the Company and Innes, agreed to further extend their loan agreement to February 6, 2004. All other terms of the original agreement remain the same.
b) Loan Receivable from Associated Company
The Company, in addition to the payments received and referred to in Note 8(b), has received an additional $6,407 (CAD$9,000) to the date of this report. There is considerable doubt whether the Company will receive any further payments relating to the loan repayment schedule.
c) Associated Company Transactions
The Company and Indo-Pacific came to an agreement in August of 2003, with an effective date of July 1, 2003, whereby Indo-Pacific agreed to pay $1,500 per month to DLJ Management Corp. ("DLJ"), a wholly-owned subsidiary of the Company, for a portion of DLJ's overhead in relation to work performed by DLJ on Indo-Pacific's behalf.
NOTE 13 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which conform in all material respects with United States generally accepted accounting principles ("U.S. GAAP") except for the following differences:
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 13 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
a) Assets
Under Canadian GAAP, the Company's investments in Associated Companies accounted for under the cost method of accounting are valued at the lower of cost or market value. Under U.S. GAAP, such investments are classified as available-for-sale securities and reported at market value, with unrealized gains and losses included as a component of comprehensive income.
July 31, | July 31, | ||
2003 | 2002 | ||
Investments under Canadian GAAP | $ 557,609 | $ 754,791 | |
Adjustment required under U.S. GAAP | 199,715 | (451,896) | |
Cumulative historical adjustments to date | - | 451,896 | |
Investments under U.S. GAAP | $ 757,324 | $ 754,791 | |
Total assets under U.S. GAAP as at July 31, 2003 and 2002 are $1,181,529 and $1,220,989, respectively.
b) Stockholders' Equity
i) Common Stock
Under U.S. GAAP, compensation cost must be considered for all stock options granted requiring the Company to utilize both the intrinsic value-based and the fair value based methods of accounting and reporting stock-based compensation. Under Canadian GAAP, no such cost is recognized. The Company, if required to report under U.S. GAAP, would elect to apply Accounting Principles Board Opinion No. 25: Accounting for Stock Issued to Employees ("APB 25") to account for all stock options granted. Further, Statement of Financial Accounting Standards No. 123: Accounting for Stock-Based Compensation ("SFAS 123") requires additional disclosure to reflect the results of the Company as if it had elected to follow SFAS 123. SFAS 123 requires a fair value based method of accounting for stock options using the Black-Scholes option pricing model. This model is developed for use in estimating the fair value of traded options and requires the input of and is highly sensitive to subjective assumptions including the expected stock price volatility. Stock options granted by the Company have characteristics significantly different from those of traded options. In the opinion of management, the existing model does not provide a reliable single measure of the fair value of stock options granted by the Company.
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 13 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
Under APB 25, compensation cost must be recognized for all compensatory stock options granted whenever the market price of the Company's shares on the date of grant exceeds the exercise price.
July 31, | July 31, | ||
2003 | 2002 | ||
Common stock under Canadian GAAP | $ 13,145,075 | $ 13,145,075 | |
Cumulative historical adjustments to date | 833,611 | 833,611 | |
Common stock under U.S. GAAP | $ 13,978,686 | $ 13,978,686 | |
In accordance with SFAS 123, the following is a summary of the changes in the Company's stock options for the 2003, 2002 and 2001 fiscal years:
2003 | 2002 | 2001 | |||||||||
Balance at beginning of year | 88,333 | $ 45.63 | 88,333 | $ 45.63 | 89,027 | $ 45.72 | |||||
Granted | - | - | - | - | - | - | |||||
Exercised | - | - | - | - | - | - | |||||
Expired | (60,556) | 52.14 | - | - | (694) | 58.26 | |||||
Cancelled | - | - | - | - | - | - | |||||
Outstanding and exercisable | |||||||||||
at end of year | 27,777 | $ 31.50 | 88,333 | $ 45.63 | 88,333 | $ 45.63 | |||||
No stock options were granted during the 2003, 2002 or 2001 fiscal years.
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 13 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
The following is a summary of the Company's net loss and basic and diluted loss per share as reported and pro forma as if the fair value based method of accounting defined in SFAS 123 had been applied for the 2003, 2002 and 2001 fiscal years:
2003 | 2002 | 2001 | ||||||
Net loss for the year | $ (261,007) | $ (261,007) | $ (397,564) | $ (397,564) | $ (5,265,478) | $ (5,232,983) | ||
Basic and diluted | ||||||||
Loss per share | $ (0.11) | $ (0.11) | $ (0.26) | $ (0.26) | $ (3.78) | $ (3.78) | ||
ii) Accumulated Deficit
The effects of Note 13(b)(i) on accumulated deficit are as follows:
July 31, | July 31, | ||
2003 | 2002 | ||
Deficit under Canadian GAAP | $ (12,254,541) | $ (11,993,534) | |
Net loss under U.S. GAAP | (261,007) | (397,564) | |
Deduct net loss under Canadian GAAP | 261,007 | 397,564 | |
Cumulative historical adjustments to date | (833,611) | (833,611) | |
Accumulated deficit under U.S. GAAP | $ (13,088,152) | $ (12,827,145) | |
iii)Accumulated Other Comprehensive Income
The effects of Note 13(a) on accumulated other comprehensive income are as follows:
July 31, | July 31, | ||
2003 | 2002 | ||
Accumulated other comprehensive income under Canadian GAAP | $ - | $ - | |
Unrealized gain (loss) on investment in associated companies | 199,715 | (451,896) | |
Cumulative historical adjustments to date | - | 451,896 | |
Accumulated other comprehensive income under U.S. GAAP | $ 199,715 | $ - | |
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 13 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
As a result of these adjustments under U.S. GAAP, total stockholders' equity as at July 31, 2003 and 2002 are $1,078,256 and $1,151,451, respectively.
c) Net Loss and Comprehensive Loss for the Year
The following are the effects of Notes 13(a) and (b) on net loss and comprehensive income (loss) for the 2003, 2002 and 2001 fiscal years:
Net loss for the year under Canadian GAAP | $ (261,007) | $ (397,564) | $ (5,265,478) | ||
Compensation recovery from cancellation | |||||
of previously issued stock options | - | - | 12,296 | ||
Net loss for the year under U.S. GAAP | (261,007) | (397,564) | (5,253,182) | ||
Other comprehensive income (loss): | |||||
Unrealized gain (loss) on investment in associated companies | 199,715 | (451,896) | (123,123) | ||
Comprehensive loss for the year under U.S. GAAP | $ (61,292) | $ (849,460) | $ (5,376,305) | ||
d) Loss per Share
Statement of Financial Accounting Standards No. 128: Earnings per Share ("SFAS 128") replaces the presentation of primary earnings per share ("EPS") with a presentation of both basic and diluted EPS for all entities with complex capital structures including a reconciliation of each numerator and denominator. Basic EPS excludes dilutive securities and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if dilutive securities were converted into common stock and is computed similarly to fully-diluted EPS pursuant to previous accounting pronouncements. SFAS 128 applies equally to loss per share presentations.
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 13 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
The following is a reconciliation of the numerators and denominators of the basic and diluted loss per share calculations for the 2003, 2002 and 2001 fiscal years:
Numerator, net loss for the year | |||||
under U.S. GAAP | $ (261,007) | $ (397,564) | $ (5,253,182) | ||
Denominator: | |||||
Weighted-average number of shares, | |||||
net of reciprocal holdings, under U.S. GAAP | 2,415,917 | 1,553,809 | 1,389,700 | ||
Basic and diluted loss per share, | |||||
net of reciprocal holdings, under U.S. GAAP | $ (0.11) | $ (0.26) | $ (3.78) | ||
Stock options and share purchase warrants outstanding were not included in the computation of diluted loss per share as such inclusion would be antidilutive due to net losses incurred for the 2003, 2002 and 2001 fiscal years.
e) General and Administrative Expenses
The following are the effects of Note 13(b)(i) on expenses for the 2003, 2002 and 2001 fiscal years:
General and administrative expenses under Canadian GAAP | $ 144,754 | $ 224,676 | $ 297,237 | ||
Compensation recovery from cancellation of previously issued stock options | - | - | (12,296) | ||
General and administrative expenses under U.S. GAAP | $ 144,754 | $ 224,676 | $ 284,941 | ||
TRANS-ORIENT PETROLEUM LTD. |
Notes to the Consolidated Financial Statements |
(Expressed in United States Dollars) |
For the Years Ended July 31, 2003 and 2002 |
NOTE 13 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
f) Operating Activities
The following are the effects of the adjustments required to reconcile from Canadian to U.S. GAAP for the 2003, 2002 and 2001 fiscal years:
Net loss for the year under U.S. GAAP | $ (261,007) | $ (397,564) | $ (5,253,182) | ||
| |||||
Compensation recovery from previously | |||||
granted stock options | - | - | (12,296) | ||
Other components of operating activities | |||||
which are similar under Canadian and | |||||
U.S. GAAP | 239,054 | 286,879 | 4,492,304 | ||
Net cash used for operating activities | $ (21,953) | $ (110,685) | $ (773,174) | ||
Not applicable.
The following Exhibits have been filed with this 20-F:
Exhibit Reference | |
List of Wholly-Owned Subsidiaries of Trans-Orient Petroleum Ltd. | |
Section 302(a) Certification | |
Section 906 Certification - Sarbanes Oxley Act |
The following exhibits which have been filed with previous Annual Reports on Form 20-F or 6-K as noted and are incorporated by reference:
Type of Document | Document and Date filed | |
Articles of incorporation, bylaws and instruments defining rights of common shareholders have been previously filed with the 20F for fiscal 2000 filed January 29, 2001. | ||
Subscription agreements with Alex Guidi dated June 6, 2002. See "Item 7 - Major Shareholders and Related Transactions" | ||
Subscription Agreements with Peter Loretto dated June 6, 2002. See "Item 7 - Major Shareholders and Related Transactions" | ||
Subscription Agreement with Tanya Loretto dated June 6, 2002. See "Item 7 - Major Shareholders and Related Transactions" | ||
Agreement dated August 23, 2002 between the Registrant and Indo-Pacific Energy Ltd. for the purchase of 175,000 units Of Indo-Pacific at a price of US$.80 per unit. See "Item 7 - Major Shareholders and Related Transactions" | ||
Agreement dated February 14, 2002 between the Registrant and Indo-Pacific Energy Ltd. for the termination of the Registrants Royalty Rights and amendment of the warrants held by the Registrant to acquire additional shares in Indo-Pacific. See "Item 7 - Major Shareholders and Related Transactions" | ||
Subscription agreements with McLellan Investments Inc. dated September 12, 2000 | ||
Subscription Agreements with Ron Bertuzzi dated October 12, 2000 and December 20, 2000. | ||
Subscription Agreement with Peter Loretto dated November 15, 2000. | ||
Compromise Agreement between the Registrant and Verida Internet Corp. dated October 15, 2001. | ||
Investor relations service agreement with Republic Communications Ltd. dated January 1, 2002. |
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F at July 31, 2003 and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
January 30, 2004
TRANS-ORIENT PETROLEUM LTD.
| By: | "Garth Johnson" |
| Garth Johnson, Secretary, CFO and Director |
