1
BERKLEY RESOURCES INC. | ||||||||
BALANCE SHEETS | ||||||||
December 31, | ||||||||
2004 | 2003 | |||||||
$ | $ | |||||||
ASSETS | ||||||||
Current | ||||||||
Cash | 712,678 | 235,225 | ||||||
Accounts receivable | 145,422 | 100,003 | ||||||
Taxes recoverable | 31,079 | 44,492 | ||||||
Prepaid expenses | 17,500 | 29,149 | ||||||
Due from related party | 22,060 | 22,060 | ||||||
928,739 | 430,929 | |||||||
Prepaid oil and gas costs | 376,693 | — | ||||||
Oil and gas properties and equipment (Note 4) | 3,389,679 | 1,109,391 | ||||||
Rental property (Note 5) | 2,061,915 | 2,075,370 | ||||||
Other property plant and equipment (Note 6) | 2,320 | 1 | ||||||
6,759,346 | 3,615,691 | |||||||
LIABILITIES | ||||||||
Current | ||||||||
Accounts payable and accrued liabilities | 1,522,545 | 145,413 | ||||||
Bank loan (Note 7) | 446,056 | 565,809 | ||||||
1,968,601 | 711,222 | |||||||
Site restoration liabilities (Note 2(f)) | 43,030 | 136,502 | ||||||
2,011,631 | 847,724 | |||||||
SHAREHOLDERS’ EQUITY | ||||||||
Share capital (Note 8) | 5,734,921 | 3,254,426 | ||||||
Contributed surplus (Note 9) | 336,558 | 77,390 | ||||||
Deficit | (1,323,764 | ) | (563,849 | ) | ||||
4,747,715 | 2,767,967 | |||||||
6,759,346 | 3,615,691 | |||||||
Approved by the Directors:
Director | /s/ Matt Wayrynen | Director | /s/ Lindsay Gorrill | |||
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3
BERKLEY RESOURCES INC. | ||||||||||||
STATEMENTS OF OPERATIONS | ||||||||||||
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
$ | $ | $ | ||||||||||
OIL AND GAS REVENUE | 866,811 | 606,133 | 406,138 | |||||||||
Oil and gas production expenses | ||||||||||||
Operating costs | 416,254 | 243,717 | 189,681 | |||||||||
Amortization and depletion | 260,000 | 79,500 | 39,900 | |||||||||
Accretion of site restoration liabilities | 2,775 | 4,769 | — | |||||||||
679,029 | 327,986 | 229,581 | ||||||||||
NET OIL AND GAS INCOME | 187,782 | 278,147 | 176,557 | |||||||||
RENTAL REVENUE | 232,607 | 238,599 | 235,670 | |||||||||
Rental operations expenses | ||||||||||||
Operating costs | 209,229 | 198,596 | 168,608 | |||||||||
Interest on bank loan | 23,047 | 26,272 | 35,110 | |||||||||
Amortization | 13,455 | 14,016 | 14,600 | |||||||||
245,731 | 238,884 | 218,318 | ||||||||||
NET RENTAL (LOSS) INCOME | (13,124 | ) | (285 | ) | 17,352 | |||||||
GENERAL AND ADMINISTRATION EXPENSES | ||||||||||||
Administrative, office services and premises | 188,863 | 149,478 | 104,167 | |||||||||
Stock based compensation | 273,793 | 2,390 | — | |||||||||
Consulting and management fees | 310,270 | 252,027 | 159,000 | |||||||||
Professional fees | 101,121 | 54,342 | 65,959 | |||||||||
Filing and transfer agent fees | 19,413 | 12,176 | 9,467 | |||||||||
Shareholder information | 9,823 | 11,032 | 3,056 | |||||||||
Amortization | 409 | 20,354 | 3,413 | |||||||||
(903,692 | ) | (501,799 | ) | (345,062 | ) | |||||||
OTHER INCOME (EXPENSES) | ||||||||||||
Computer software written off | — | (54,988 | ) | — | ||||||||
Interest and other income | — | 23,469 | 23,506 | |||||||||
— | (31,519 | ) | 23,506 | |||||||||
LOSS FOR THE YEAR | (729,034 | ) | (255,456 | ) | (127,647 | ) | ||||||
LOSS PER SHARE | (0.10 | ) | (0.04 | ) | (0.02 | ) | ||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | 7,175,945 | 6,797,184 | 6,382,350 | |||||||||
4
BERKLEY RESOURCES INC. STATEMENTS OF DEFICIT |
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
$ | $ | $ | ||||||||||
DEFICIT, beginning of year | (563,849 | ) | (308,393 | ) | (180,746 | ) | ||||||
Retroactive adjustment | ||||||||||||
- Stock based compensation (Note 3a) | (30,881 | ) | — | — | ||||||||
(594,730 | ) | (308,393 | ) | (108,746 | ) | |||||||
Net loss for the year | (729,034 | ) | (255,456 | ) | (127,647 | ) | ||||||
DEFICIT, end of year | (1,323,764 | ) | (563,849 | ) | (308,393 | ) | ||||||
5
BERKLEY RESOURCES INC. STATEMENTS OF CASH FLOWS |
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
$ | $ | $ | ||||||||||
CASH PROVIDED BY (USED IN): | ||||||||||||
OPERATING ACTIVITIES | ||||||||||||
Loss for the year | (729,034 | ) | (255,456 | ) | (127,647 | ) | ||||||
Items not requiring cash in the year | ||||||||||||
Accretion of site restoration liability | 2,775 | 4,769 | — | |||||||||
Amortization and depletion | 273,864 | 113,870 | 57,913 | |||||||||
Computer software written off | — | 54,988 | — | |||||||||
Stock based compensation | 273,793 | 2,390 | — | |||||||||
(178,602 | ) | (79,439 | ) | (69,734 | ) | |||||||
Net change in non-cash working capital balances | ||||||||||||
Accounts receivable | (45,419 | ) | 11,155 | 6,955 | ||||||||
Prepaid expenses | 11,649 | (2,527 | ) | (25,131 | ) | |||||||
Due from related party | — | (12,060 | ) | — | ||||||||
Computer software held for resale | — | (4,008 | ) | (50,980 | ) | |||||||
Taxes recoverable | 13,413 | (40,370 | ) | — | ||||||||
Accounts payable and accrued liabilities | 1,377,239 | 62,545 | (43,225 | ) | ||||||||
1,178,280 | (64,704 | ) | (182,115 | ) | ||||||||
INVESTING ACTIVITIES | ||||||||||||
Prepaid oil and gas costs | (376,693 | ) | — | — | ||||||||
Oil and gas properties and equipment, net | (2,540,288 | ) | (582,707 | ) | (25,458 | ) | ||||||
Other capital assets | (2,728 | ) | — | (17,800 | ) | |||||||
Site reclamation recovery | (96,247 | ) | — | — | ||||||||
(3,015,956 | ) | (582,707 | ) | (43,258 | ) | |||||||
FINANCING ACTIVITIES | ||||||||||||
Repayment of bank loan | (119,753 | ) | (109,424 | ) | (107,690 | ) | ||||||
Issuance of common shares | 2,434,882 | 5,100 | 250,000 | |||||||||
2,315,129 | (104,324 | ) | 142,310 | |||||||||
Increase (decrease) in cash for the year | 477,453 | (751,735 | ) | (83,063 | ) | |||||||
CASH,beginning of the year | 235,225 | 986,960 | 1,070,023 | |||||||||
CASH,end of the year | 712,678 | 235,225 | 986,960 | |||||||||
CASH IS COMPRISED OF: | ||||||||||||
Cash | 712,678 | 235,225 | 36,230 | |||||||||
Bankers’ acceptances and treasury bills | — | — | 950,730 | |||||||||
712,678 | 235,225 | 986,960 | ||||||||||
6
BERKLEY RESOURCES INC.
STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
$ | $ | $ | ||||||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES | ||||||||||||
Site reclamation recovery | 96,247 | — | — | |||||||||
Stock option compensation | 273,793 | 2,390 | — | |||||||||
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURE | ||||||||||||
Interest on long term debt | 23,047 | 26,272 | 35,110 | |||||||||
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8
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 1 — NATURE OF OPERATIONS
Berkley Resources Inc. (“the Company or Berkley”) was created on the amalgamation of Fortune Island Mines Ltd., Kerry Mining Ltd. and Berkley Resources Ltd. under the Company Act (British Columbia) on July 18, 1986 The Company is in the business of acquisition, exploration, development and production from petroleum and natural gas interests in Alberta and Saskatchewan, Canada. The Company also rents commercial office space in a building it owns in Vancouver, Canada.
The Company will likely have to periodically raise additional funds to participate in future exploration and development work on its petroleum and natural gas properties. Management intends to issue additional shares in the upcoming year for this purpose.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements are prepared in accordance with Canadian generally accepted accounting principles, which do not materially differ from accounting principles generally accepted in the United States, except as disclosed in Note 14.
Certain comparative balances have been reclassified to conform with current year accounting policies and financial statement presentation.
(b) Currency
All amounts in these financial statements are expressed in Canadian dollars.
(c) Revenue recognition
Revenue associated with the sale of crude oil, natural gas and liquids represent the sales value of the Company’s share of petroleum production during the year received from third party purchasers on delivery. Differences between production and amounts delivered and sold are not significant.
Rental revenue is recognized on a monthly basis under the terms of lease agreements with tenants.
(d) Oil and gas properties and equipment
Berkley follows the full cost method of accounting for oil and gas properties and equipment whereby all costs of acquiring, exploring for and developing oil and gas reserves are capitalized. The Company does not capitalize interest or administrative expenses.
Capitalized costs of proven reserves and equipment are depleted using a unit of production method based upon estimated proven reserves (energy content) net of royalties.
Unless a significant amount of reserves is involved, proceeds received from the disposition of oil and gas properties are credited to the relevant cost centre. In the event of a significant sale of reserves, a proportionate amount of cost and accumulated depletion, based upon the ratio of reserves sold to total reserves, is removed from the appropriate cost centre and the resultant profit or loss taken into income.
In accordance with guidelines published by the Canadian Institute of Chartered Accountants, the company applies an annual “ceiling test” by cost centre to ensure that capitalized costs net of accumulated depletion do not exceed the estimated future net revenues from production of proven reserves (based on commodity prices in effect at the financial statement date and current operating costs) plus unproven reserves at cost less provisions for impairment. The aggregate future value for all cost centres is further reduced for recurring general and administrative costs, future financing costs and income taxes. Capitalized costs in excess of this ceiling test limit are written off as additional depletion.
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Oil and gas properties and equipment (continued)
Substantially all of the Company’s oil and gas interests are conducted jointly with others. The financial statements reflect only the Company’s share of assets, liabilities, and operations.
(f) Site restoration liability
In accordance with the new Handbook Section 3110 of the Canadian Institute of Chartered Accountants, the Company recognizes the fair value of its liability for asset retirement obligations, which in the oil and gas industry are categorized as “site restoration costs”, in the year in which such liability is incurred. Upon recognition of an asset retirement obligation, the capitalized cost of the oil and gas property is increased by the same amount as the liability. In periods subsequent to initial measurement, the asset retirement obligation is adjusted for both the passage of time and revisions to the original estimates. This policy has been applied prospectively commencing January 1, 2003. The Company evaluated its site restoration costs effective January 1, 2003 on a present value basis, giving regard to known estimated site restoration costs and the estimated time period in which the restoration work will need to be performed. The present value of the site restoration costs were added to the capitalized cost of the oil and gas properties and recorded as a liability at the equivalent amount.
The following table sets out the activity for the Company’s site restoration liabilities for the years ending December 31, 2004 and 2003:
2004 | 2003 | |||||||
$ | $ | |||||||
Opening balance | 136,502 | 55,200 | ||||||
Accretion | 2,775 | 4,769 | ||||||
Additions | 22,915 | 76,533 | ||||||
Reduction due to subsequent | ||||||||
Disposal (Note 15(a)) | (119,162 | ) | — | |||||
43,030 | 136,502 | |||||||
(g) Rental property and other capital assets
Land and building are recorded at cost, net of accumulated amortization on the building. The cost of the building is amortized over its estimated useful life, currently at the rate of 4% per annum by the declining balance method.
Other capital assets consist of computer equipment and is amortized at the rate of 30% per annum by the declining balance method.
(h) Financial instruments
The Company’s financial instruments include cash, accounts receivable, taxes recoverable, due from related party, accounts payable and accrued liabilities and bank loan. The carrying values of these financial instruments approximate their fair values.
The Company is not exposed to significant credit or currency risk on financial instruments. It is exposed to interest risk on its bank loan.
9
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
(i) Use of estimates
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant areas requiring the use of management estimates relate to the determination of useful lives of oil and gas properties and equipment and the rental property for purposes of calculating amortization and depletion.
(j) Stock based compensation plan
Compensation expense is recorded for the estimated fair value of stock options granted. The estimated fair value of the options at the date of grant is accrued and charged to operations, with an offsetting credit to contributed surplus, on a straight-line basis over the vesting period. If and when the stock options are ultimately exercised, the applicable amounts of contributed surplus are transferred to share capital (Note 3).
(k) Loss per share
Basic loss per share is calculated by dividing the loss for the year by the weighted average number of shares outstanding in the year. Diluted loss per share on the potential exercise of share options and warrants is not presented where it is anti-dilutive.
(l) Income taxes
Future income tax assets and liabilities are recorded where the accounting net book value of assets and liabilities differ from their corresponding tax bases. The benefit of future income tax assets is only recognized when their realization is considered more likely than not.
NOTE 3 — ACCOUNTING CHANGES
(a) | Effective January 1, 2004, the Company adopted the provisions ofCICA Handbook Section 3870 “Stock Based Compensation and Other Stock Based Payments”with respect to the fair market value accounting for stock options granted to employees. In prior years, the Company recorded the fair market value of the stock options granted to non-employees only as compensation expense. In 2003, the Company did not account for stock based compensation when stock options were granted to employees and directors, however, it disclosed the pro forma effect of the stock based compensation on its financial results. In 2004, the Company adopted the fair value based method of accounting for stock based compensation, as described in Note 2(j). This change has been applied retroactively, however, the financial statements for 2003 have not been restated. Rather, the opening retained earnings for 2004 has been adjusted to reflect the impact of the new accounting policy on the 2003 year. This accounting treatment is in keeping with Canadian generally accepted accounting principles. The effect of this change was to increase the deficit at January 1, 2004 by $30,881 to $594,730. |
(b) | Effective January 1, 2004, the Company adopted, on a prospective basis, the recommendations ofEmerging Issues Committee – 146with respect to flow-through shares. For all flow-through shares issued subsequent to December 31, 2003, the Company will recognize the future income tax liability and a corresponding decrease to shareholders equity on the date the company renounces the tax credits associated with the expenditures, provided there is reasonable assurance that the expenditures will be made. The recognition of any portion of previously unrecognized future income tax assets will be recorded as a reduction of income tax expenses. This policy has no impact on the December 31, 2004 financial statements. The Company will recognize the tax liability and the decrease in shareholders equity associated with the 2004 flow through shares in the first quarter of the 2005 year. |
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11
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 4 — OIL AND GAS PROPERTIES AND EQUIPMENT
2004 | 2003 | |||||||
$ | $ | |||||||
Oil and gas properties and equipment, cost | 6,633,806 | 4,093,518 | ||||||
Less: Accumulated amortization and depletion | (3,244,127 | ) | (2,984,127 | ) | ||||
3,389,679 | 1,109,391 | |||||||
Oil and gas properties and equipment includes the cost of unproven properties of approximately $188,918 (2003 — $208,000) which are currently not subject to depletion. The company expects to incur additional oil and gas expenditures in 2005 of approximately $2,000,000 to further develop its existing properties. The company expects to finance these expenditures through debt (Note 15b), existing production revenue and a farm out of a portion of its property interests (if required). In addition, the company may make further oil and gas expenditures on new properties as finances permit.
During the year ended December 31, 2004, four property areas produced 76% of the total oil and gas revenue. There is no guarantee that this revenue will continue in future periods.
NOTE 5 — RENTAL PROPERTY
2004 | 2003 | |||||||
$ | $ | |||||||
Building, at cost (Note 15(b)) | 447,652 | 447,652 | ||||||
Less: Accumulated amortization | (124,731 | ) | (111,276 | ) | ||||
322,921 | 336,376 | |||||||
Land, at cost | 1,738,994 | 1,738,994 | ||||||
2,061,915 | 2,075,370 | |||||||
NOTE 6 — OTHER PROPERTY PLANT AND EQUIPMENT
2004 | 2003 | |||||||||||||||
Accumulated | ||||||||||||||||
Cost | Amortization | Net | Net | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Computer equipment | 15,564 | (13,245 | ) | 2,319 | — | |||||||||||
Furniture and fixtures | 5,585 | (5,585 | ) | — | — | |||||||||||
Truck | 39,040 | (39,039 | ) | 1 | 1 | |||||||||||
60,189 | (57,869 | ) | 2,320 | 1 | ||||||||||||
NOTE 7 — BANK LOAN
The bank loan is payable to the Canadian Imperial Bank of Commerce (“CIBC”), bears interest at prime plus 0.50% per annum, is due on demand, and is secured by a first mortgage in the amount of $1,304,000 over the Company’s rental property (Note 5) and an assignment of rents and insurance. Also, two directors have supplied guarantees of $150,000 each. The Company is currently making monthly payments of $11,900 towards interest and reduction of principal.
In addition, the Company has a $50,000 revolving demand credit line with the CIBC that bears interest at prime plus 1% per annum. As at December 31, 2004, there was a nil balance outstanding with regard to the credit line.
12
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 8 — SHARE CAPITAL
(a) Authorized |
100,000,000 common shares, without par value |
2004 | 2003 | |||||||||||||||
Number of | Number of | |||||||||||||||
shares | Amount | shares | Amount | |||||||||||||
Issued and fully paid | $ | $ | ||||||||||||||
Balance, beginning of year | 6,810,934 | 3,254,426 | 6,795,934 | 3,249,326 | ||||||||||||
Issued in the year for cash: | ||||||||||||||||
Pursuant to private placements | ||||||||||||||||
- flow-through | 1,726,500 | 1,726,500 | — | — | ||||||||||||
- non flow-through | 811,543 | 819,800 | — | — | ||||||||||||
Exercise of stock options | 333,000 | 134,220 | 15,000 | 5,100 | ||||||||||||
Less share issuance costs | — | (245,638 | ) | — | — | |||||||||||
Add contributed surplus on | ||||||||||||||||
exercise of stock options (Note 9) | — | 45,613 | — | — | ||||||||||||
Balance, end of year | 9,681,977 | 5,734,921 | 6,810,934 | 3,254,426 | ||||||||||||
(b) Warrants | ||||||||||||||||
2004 | 2003 | |||||||||||||||
Number of shares | Number of shares | |||||||||||||||
subject to warrants | Exercise price range | subject to warrants | Exercise price range | |||||||||||||
Outstanding, beginning of year | — | — | — | — | ||||||||||||
Granted | 1,289,232 | $ | 1.10/$1.50 | — | — | |||||||||||
Outstanding, end of year | 1,289,232 | $ | 1.10/$1.50 | — | - | |||||||||||
At December 31, 2004, the following share purchase warrants were outstanding:
Number of | Exercise price | |||||
warrants | Expiry date | Range | ||||
241,110 | November 10, 2005/2006 | $ | 1.10/$1.25 | |||
553,750 | November 10, 2005/2006 | $ | 1.25/$1.50 | |||
129,000 | November 30, 2005/2006 | $ | 1.10/$1.25 | |||
319,500 | November 30, 2005/2006 | $ | 1.25/$1.50 | |||
45,872 | December 1, 2006 | $ | 1.36 | |||
1,289,232 | ||||||
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14
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 8 — SHARE CAPITAL (continued)
(c) Management incentive options
The Company has established a 2003 Stock Option Plan (“the Plan”) which provides for the granting of options to acquire up to 1,350,000 shares. The Plan provides for the granting of options to employees and service providers, with no single optionee to be granted options in excess of 5% of the number of issued shares of the Company. All options granted are to be with the allowable discount off market price and the term of the options granted is not to exceed five years. Options granted under the plan vest as follows:
1) 20% during the first six months after the date of the grant;
2) 20% at the end of nine months after the date of grant;
3) 20% at the end of the twelve months after the date of grant;
4) 20% at the end of the fifteen months after the date of grant;
5) 20% at the end of the eighteen months after the date of grant.
2004 | 2003 | |||||||||||||||
Number | Weighted | Number | Weighted average | |||||||||||||
of | Average exercise | of | exercise price per | |||||||||||||
shares subject to | price per share | shares | share | |||||||||||||
option | — | subject to | — | |||||||||||||
— | option | |||||||||||||||
Balance outstanding, beginning of year | 1,302,500 | $ | 0.49 | 437,500 | �� | $ | 0.34 | |||||||||
Activity in the year | ||||||||||||||||
Granted | 287,500 | 0.79 | 885,000 | 0.53 | ||||||||||||
Exercised | (333,000 | ) | 0.40 | (15,000 | ) | 0.34 | ||||||||||
Cancelled | (31,000 | ) | 0.64 | — | ||||||||||||
Lapsed | — | (5,000 | ) | 0.52 | ||||||||||||
Balance outstanding, end of year | 1,226,000 | $ | 0.57 | 1,302,500 | $ | 0.49 | ||||||||||
Vested, end of year | 808,347 | $ | 0.49 | 653,750 | $ | 0.40 | ||||||||||
The weighted average grant date fair value of options granted in 2004 was $0.51 per share (2003: $0.42).
A summary of management incentive options outstanding is as follows:
2004 | 2003 | |||||||||
Exercise Price Per Share | Expiry Date | Number of Shares Remaining Subject to Options at December 31 | ||||||||
$0.34 | April 25, 2005 | 197,500 | 422,500 | |||||||
$0.52 | September 19, 2008 | 614,000 | 730,000 | |||||||
$0.57 | September 19, 2008 | 150,000 | 150,000 | |||||||
$0.74 | September 19, 2008 | 27,000 | — | |||||||
$0.81 | October 19, 2009 | 200,000 | — | |||||||
$0.77 | October 29, 2009 | 37,000 | — | |||||||
1,226,000 | 1,302,500 | |||||||||
The fair value of the stock options granted were determined on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2004 | 2003 | |||||||
Risk free interest rate | 3.82 | % | 3.5 | % | ||||
Weighted average life | 3 years | 3 years | ||||||
Volatility factor | 62.87 | % | 85.95 | % | ||||
Dividend yield | 0 | % | 0 | % |
15
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 8 — SHARE CAPITAL (continued)
(c) Management incentive options (continued)
Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
NOTE 9 — CONTRIBUTED SURPLUS
2004 | 2003 | |||||||
$ | $ | |||||||
Balance, beginning of year | 77,390 | 75,000 | ||||||
Retroactive adjustment - | ||||||||
Stock-based compensation (Note 3a) | 30,988 | — | ||||||
Stock-based compensation on issue | ||||||||
Of options | 273,793 | 2,390 | ||||||
Exercise of stock options (Note 8(a)) | (45,613 | ) | — | |||||
Balance, end of year | 336,558 | 77,390 | ||||||
NOTE 10 — INCOME TAXES
The potential benefit of net operating loss carry forwards has not been recognized in the financial statements since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years. The components of the net deferred tax asset, the statutory tax rate, the effective rate and the elected amount of the valuation allowance are as follows:
December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Statutory rate | 35 | % | 40 | % | 44 | % | ||||||
$ | $ | $ | ||||||||||
Income taxes recovered at the Canadian statutory rate | 1,095,002 | 102,000 | 51,000 | |||||||||
Benefit of tax losses not recognized In year | (1,095,002 | ) | (102,000 | ) | (51,000 | ) | ||||||
¾ | ¾ | ¾ | ||||||||||
16
BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 10 – INCOME TAXES (continued)
The approximate tax effects of each type of temporary difference that gives rise to future tax assets are as follows:
December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
$ | $ | $ | ||||||||||
Operating loss carry forwards, expiring 2005-2011 | 302,542 | 66,000 | 1,000 | |||||||||
Property, plant and equipment | 333,262 | ¾ | ¾ | |||||||||
Undetected resource property acquisition and exploration expenditures | 2,492,774 | 500,000 | 244,000 | |||||||||
Deferred tax assets | 3,128,578 | 566,000 | 245,000 | |||||||||
Less: valuation allowance | (3,128,578 | ) | (566,000 | ) | (245,000 | ) | ||||||
Net deferred tax assets | ¾ | ¾ | ¾ | |||||||||
NOTE 11 — RELATED PARTY TRANSACTIONS
(a) As at December 31, 2004 there is $22,060 due from a Director (2003: $22,060).
(b) Accounts payable at December 31, 2004 includes $20,975 owed to Directors and or former Directors.
(c) Management and consulting fees totalling $193,257 were paid to Directors and their private companies
in 2004 (2003: $129,927).
(d) During the year, current and or former Directors and or Officers exercised 320,000 options for total
proceeds of $126,800 (2003: 15,000 options for total proceeds of $5,100). In addition, current and or former Directors and Officers subscribed for 476,000 shares of the Company for total proceeds of $476,000 (2003: none).
(e) Consulting fees totalling $96,000 were paid to a former Director and his spouse in 2004 (2003:
$96,000).
(f) Administrative services, office supplies and accounting charges totalling $79,200 were paid to a private
company owned by public companies having common Directors (2003: $55,592).
NOTE 12 — COMMITTMENTS
Under the terms of Consulting Agreements with a former Director and his spouse, the Company is required to make the following future payments, by fiscal year:
2005 | $ | 96,000 | ||
2006 | 96,000 | |||
$ | 192,000 | |||
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 — SEGMENT DISCLOSURE
The Company operates in two segments – oil and gas and real estate rental. Operating results by segment are reported in the statement of operations. Total assets and capital expenditures by operating segment are as follows:
2004 | 2003 | |||||||
Assets by operating segment | $ | $ | ||||||
Oil and gas | 4,520,389 | 1,251,126 | ||||||
Real estate | 2,010,262 | 2,076,203 | ||||||
Assets not allocated | ||||||||
Head office | 228,695 | 288,362 | ||||||
6,759,346 | 3,615,691 | |||||||
2004 | 2003 | |||||||
Capital expenditures by segment | $ | $ | ||||||
Oil and gas | — | 582,707 | ||||||
Head office | 2,728 | — | ||||||
2,728 | 582,707 | |||||||
All of the Company’s operations are in Canada. Rental revenue of $6,000 (2003: $6,000) has been eliminated on consolidation representing the rental of office premises by the corporate head office.
NOTE 14 — DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of Berkley have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) which differs in certain material respects from accounting principles generally accepted in the United States of America (“US GAAP”). The material differences between Canadian and US GAAP and their effect on Berkley’s financial statements are summarized below:
Statement of operations | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
$ | $ | $ | ||||||||||
Loss for the year under Canadian GAAP | (729,034 | ) | (255,456 | ) | (127,647 | ) | ||||||
(Additional) reduction in depletion of oil and gas Properties under US GAAP (a) | — | — | (14,200 | ) | ||||||||
Increase in compensation expense arising From stock options (b) | — | — | (50,000 | ) | ||||||||
Loss for the year under US GAAP | (729,034 | ) | (255,456 | ) | (191,847 | ) | ||||||
Loss per share under US GAAP | (0.10 | ) | (0.04 | ) | (0.03 | ) | ||||||
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BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 14 — DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
Statement of Cash Flows | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
$ | $ | $ | ||||||||||
Increase (decrease) in cash during the year - - Canadian GAAP | 477,453 | (751,735 | ) | (83,063 | ) | |||||||
Decrease (increase) in marketable securities (c) | — | 950,730 | (240,022 | ) | ||||||||
Increase (decrease) in cash during the year under US GAAP | 477,453 | 198,895 | (323,085 | ) | ||||||||
Balance Sheets | ||||||||||||||||
2004 | 2003 | |||||||||||||||
Canadian GAAP | US GAAP | Canadian GAAP | US GAAP | |||||||||||||
Oil and gas properties (a) | $ 3,389,679 | $ 3,487,479 | $ 1,109,391 | $ 1,207,191 | ||||||||||||
Shareholder’s equity (a) | 4,747,715 | 4,845,515 | 2,767,967 | 2,865,767 | ||||||||||||
(a) | Under US GAAP the ceiling test for impairment used in connection with the full cost method of accounting for oil and gas operations requires the discounting of future net operating revenues by 10%, but without taking into account provisions for future administrative costs. Under Canadian GAAP, the ceiling test is based on undiscounted future net operating revenues, but does require taking into account future administrative costs. The cumulative difference between Canadian and US GAAP since inception of oil and gas operations to December 31, 2004 is that additional depletion of $97,800 has been recorded under Canadian GAAP. There was no provision for impairment required in 2004 on the basis of the ceiling test applied by either of the Canadian or US methods. In 2002, additional depletion of $14,200 was required under US GAAP. |
(b) | During 2004, the Company adopted the fair value based method of accounting under Canadian GAAP for stock based compensation, as described in Notes 2(j) and 3, with retroactive application with restatement of the prior year’s statement of operations. Statement of Financial Accounting Standards (“SFAS”) No. 148,Accounting for Stock-based Compensation – Transition and Disclosure, issued by the United States Financial Accounting Standards Board (“FASB”) provides alternative methods of transition for entities that voluntarily change to the fair value based method of accounting and amends the disclosure provisions of SFAS No. 123,Accounting for Stock-based Compensation.For US GAAP purposes, the Company has adopted SFAS No. 123 prospectively as of January 1, 2003. As a result, the stock option compensation expense recognized in 2004 is not materially different between US and Canadian GAAP. |
In 2001, the stock compensation expense of $50,000 under US GAAP relates to the expense as measured by the intrinsic value method in accordance with SFAS No. 123 and Accounting Principles Board Opinion No. 25.
(c) | Under US GAAP, banker’s acceptances and treasury bills held at December 31, 2003 and 2002 would have been classified as marketable securities rather than cash. |
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BERKLEY RESOURCES INC. NOTES TO FINANCIAL STATEMENTS |
NOTE 14 — DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(d) Pro-forma disclosure of asset retirement obligations
SFAS 143 “Accounting for Asset Retirement Obligations” requires the recognition of the estimated fair value of asset retirement obligations as a liability commencing for all fiscal years beginning after June
15, 2002. The Company has adopted CICA Handbook Section 3110, which is in all material respects the same as FASB 143, effective January 1, 2003. Accordingly, there were no material differences between Canadian GAAP and US GAAP in respect of the accounting for asset retirement obligations.
(e) Under Canadian GAAP, the future income taxes are calculated based on enacted or substantially
enacted tax rates applicable to future years. Under US GAAP, only enacted rates are used in the calculation of future income taxes. This difference in GAAP did not result in a difference in the financial position, results of operations or cash flows of the Company for the years ended December 31, 2004, 2003 and 2002.
Under Canadian income tax legislation, a company is permitted to issue shares whereby the company agrees to incur qualifying expenditures and renounce the related income tax deductions to the investors. The Company has accounted for the issue of flow-through shares using a method in accordance with Canadian GAAP. At the time of issue, the funds received are recorded as share capital. For US GAAP, the premium paid in excess of the market value is credited to other liabilities and included in income as the qualifying expenditures are made. There was no premium on the flow-through shares issued for all periods presented.
Also, notwithstanding whether there is a specific requirement to segregate the funds, the flow through funds which are unexpended at the balance sheet dates are considered to be restricted and are not considered cash or cash equivalents under US GAAP. At December 31, 2004, unexpended flow through funds were $897,000 (2003 — $0).
(f) | In May 2003, the FASB issued Statement No. 150 (“SFAS No. 150”),Accounting for Certain Financial |
Instruments with Characteristics of both Liabilities and Equity.SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. The Company has not issued any financial instruments that fall under the scope of SFAS No. 150 and the adoption of this statement did not have a material impact on the Company’s financial position or results of operations.
NOTE 15 – SUBSEQUENT EVENTS
(a) | Effective March 1, 2005, the Company disposed of its interest in its Halkirk property for $112,500. In addition, the Company is in the process of disposing a second property, the final terms of which have not yet been determined. |
(b) | On March 16, 2005, the Company secured a mortgage to provide $1,000,000. The mortgage bears interest at prime plus 4% per annum (minimum 9.5% per annum) with monthly interest only payments of $7,917 and is secured by a second mortgage over the Company’s real estate and an assignment of rents and a general security agreement. |
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