1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
(MARK ONE)
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
----------------------------------------------------
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 _________________________________________________________
GEOCAN ENERGY INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ALBERTA, CANADA
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(JURISDICTION OF INCORPORATION OR ORGANIZATION)
Suite 800, 717 - 7th Avenue S.W., Calgary, Alberta, Canada T2P 0Z3
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS "A" COMMON SHARES, NO PAR VALUE
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(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT:
NOT APPLICABLE
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(TITLE OF CLASS)
INDICATE THE NUMBER OF OUTSTANDING SHARES OF EACH OF THE ISSUER'S CLASSES OF
CAPITAL OF COMMON STOCK AS OF MARCH 31, 2001:
5,383,600 Class A Common Shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18
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TABLE OF CONTENTS
<Table>
<Caption>
Page
----
GENERAL INFORMATION/GLOSSARY...................................................................................1
PART I............................................................................................................5
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS..........................................................5
KEY INFORMATION................................................................................................6
RISK FACTORS...................................................................................................7
INFORMATION ON THE COMPANY....................................................................................13
BUSINESS OVERVIEW.............................................................................................16
OUR PROPERTIES................................................................................................18
RESERVES......................................................................................................22
OPERATING AND FINANCIAL REVIEW AND PROSPECTS..................................................................29
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....................................................................35
COMPENSATION..................................................................................................37
MAJORITY SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..........................................................44
FINANCIAL INFORMATION.........................................................................................46
LISTING.......................................................................................................46
ADDITIONAL INFORMATION........................................................................................48
TAXATION......................................................................................................54
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS....................................................62
PART III.........................................................................................................63
FINANCIAL STATEMENTS............................................................................................F-1
EXHIBITS.........................................................................................................64
</Table>
3
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Registration Statement are "forward-looking
statements". Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements, or other future events, to be materially different from any
future results, performances or achievements or other events expressly or
implicitly predicted by such forward-looking statements. Such risks,
uncertainties and other factors include, but are not limited to, our short
history of limited revenue, our limited cash resources and consequent need for
additional financing; uncertainties regarding the potential success of our oil
and gas exploration and development projects in Western Canada and the Czech
Republic; oil and natural gas price volatility; oil and gas industry operational
hazards and environmental concerns; government regulation and requirements for
permits and licenses, particularly in the foreign jurisdictions in which we
carry on business; title matters; risks associated with carrying on business in
foreign jurisdictions; conflicts of interests; competition for a limited number
of promising oil and gas exploration properties from larger more well financed
oil and gas companies, and other statements contained herein regarding matters
that are not historical facts. Forward-looking statements can often be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "estimate", "anticipate", "believe" or "continue" or the
negative thereof or variations thereon or similar terminology. Insofar as such
forward-looking statements involve risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those set forth in this registration statement
under "Key Information - Risk Factors" on page 7.
CURRENCY AND EXCHANGE RATES
The following table sets out the exchange rates for one Canadian dollar ("$")
expressed in terms of one United States dollar ("US$") in effect at the end of
the following periods, and the average exchange rates (based on the average of
the exchange rates on the last day of each month in such periods) and the range
of high and low exchange rates for such periods.
<Table>
<Caption>
U.S. DOLLARS PER CANADIAN DOLLAR
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TWELVE MONTH PERIOD TWELVE MONTH PERIOD TWELVE MONTH
ENDED ENDED PERIOD ENDED
MARCH 31, 1999 MARCH 31, 2000 MARCH 31, 2001
End of period 0.6861 0.6749 0.6344
High for the period 0.6975 0.6969 0.6899
Low for the period 0.6343 0.6607 0.6332
Average for the period 0.6624 0.6804 0.6650
</Table>
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Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York. The noon rate of exchange on March 31, 2001 as
reported by the United States Federal Reserve Bank of New York for the
conversion of Canadian dollars into United States dollars was US$o (US$1.00 = CD
$o). Unless otherwise indicated, in this registration statement on Form 20-F
(the "Registration Statement" or "Form 20-F") all references herein are to
Canadian Dollars.
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CONVERSION FACTORS
The following table sets forth certain standard conversion factors between the
imperial and metric measurement systems:
<Table>
<Caption>
TO CONVERT FROM TO MULTIPLE BY
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Barrels cubic metres ("m(3)") 0.159
cubic metres Barrels 6.290
Tonnes barrels, based on 23 degrees API oil 7.314
Feet Metres 0.305
Metres Feet 3.281
Miles kilometres ("km") 1.609
Kilometres Miles 0.621
Acres Hectares 0.405
Hectares Acres 2.471
Acres square kilometres 0.005
square kilometres Acres 247.0
</Table>
Unless otherwise specifically noted, all physical measure units in this
registration statement and the financial statements will be in the metric
system.
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GLOSSARY OF TERMS
Except as otherwise identified, the following terms, when used in this
registration statement shall have the following meanings:
"BBLS" means barrels.
"BBLS/D" means barrels per day.
"BOE" means barrels of oil equivalent.
"BOEPD" means barrels of oil equivalent per day.
"COMMON SHARES" means Class "A" common shares in the capital of the Company.
"COMPANY" refers to GEOCAN Energy Inc.
"EXCHANGE" refers to the Canadian Venture Exchange Inc.(formerly the Alberta
Stock Exchange).
"GRAVITY" refers the specific weight of oil measured on a scale based on the
weight of water.
"MBBL" means thousand barrels.
"MCF" means thousand cubic feet.
"MCF/D" means thousand cubic feet per day.
"MMCF" means million cubic feet.
"MMCF/D" means million cubic feet per day.
"REGISTRANT" refers to GEOCAN Energy Inc.
"SPROULE REPORT" refers to the report of Sproule Associates Limited, independent
petroleum engineers of Calgary, Alberta, dated April 1, 2001.
"WE," "US", "OUR", and the "COMPANY" refers to GEOCAN Energy Inc. and its
subsidiaries as the context requires. The Registrant is GEOCAN Energy Inc.
"WORKING INTEREST", means the interest held by a company in an oil or natural
gas property, which interest normally bears its proportionate share of the costs
of exploration, development, and operation as well as any royalties or other
production burdens.
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PART I
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
OUR DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth, in respect of each our directors and our senior
management team, each of whom is an executive officer, and all positions they
held with us as of March 31, 2001.
<Table>
<Caption>
NAME(1) POSITION
- ------------------------------------------- ---------------------------------------------------------
Wayne S. Wadley Director, President and Chief Executive Officer
Gary W. Lohuis Director and Vice-President Operations
Bradley J. Farris Director, Vice-President Finance and Chief Financial
Officer
William C. Guinan Director and Corporate Secretary
Larry McMinn Vice-President Exploration
</Table>
(1) Our business address is Suite 800, 717 - 7th Avenue S.W., Calgary,
Alberta T2P 0Z3. See, "Directors, Senior Management and Employees".
OUR ADVISORS
Our principal banker is Province of Alberta Treasury Branches, main branch,
located at 239 - 8 Avenue S.W., Calgary, Alberta T2P 1B9. The legal counsel to
the Company is the national Canadian law firm of Borden Ladner Gervais LLP with
an office located at 1000 Canterra Tower, 400 - 3rd Avenue S.W., Calgary,
Alberta, T2P 4H2.
OUR AUDITORS
Our auditors are, and at all times since our date of incorporation have been,
Davis Daignault Schick & Co. located at Suite 830, 840 - 7th Avenue S.W.,
Calgary, Alberta T2P 3G2.
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KEY INFORMATION
SELECTED FINANCIAL DATA
The following tables set forth selected financial data with respect to us for
the periods indicated. The information appearing below has been derived from and
should be read in conjunction with our financial statements and notes thereto as
well as the information appearing under the heading "Operating and Financial
Review and Prospects".
Our financial statements and the table set forth below have been prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"), which differ in certain respects from those principles that we would
have followed had our financial statements been prepared in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP"). See
"Financial Highlights".
<Table>
<Caption>
$ CDN
---------------------------------------------
YEARS ENDED MARCH 31
---------------------------------------------
2001 2000 1999
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Net Operating Revenue $1,905,775 $ 987,387 $ 179,579
Net Gain (Loss) from Operating activities 690,992 575,900 72,255
Gain (Loss) Per Common Share 0.14 0.14 0.03
TOTAL ASSETS 5,173,427 2,974,002 969,910
LONG TERM LIABILITIES 2,822,214 1,197,932 90,051
Cash Dividends per Common Share 0 0 0
OIL AND GAS PROPERTIES (NET OF DEPLETION)
(included in Total Assets) 4,232,145 2,637,849 787,833
SHARE CAPITAL
$ 1,416,122 1,079,451 825,293
Retained Earnings 207,070 162,850 4,082
Shareholders' Equity 1,623,192 1,242,301 829,375
Number of Securities 5,383,600 4,556,600 3,833,000
</Table>
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RISK FACTORS
Our securities are highly speculative. You should not purchase them unless you
can afford to lose your entire investment. It is important to consider that we
are in the growth stage of our operations as an oil and gas exploration and
production company and that there are numerous risks involved in such a venture.
Described below are specific risks that we believe are materially associated
with our business.
COMPANY SPECIFIC RISKS
ACTUAL RESERVES MAY NOT BE AS GREAT AS ESTIMATED RESERVES, RESULTING IN A LOWER
THAN ANTICIPATED REVENUE STREAM FOR US.
There is a risk that we may not be able to economically recover the oil, natural
gas and natural gas liquids in place. In addition, the recovery and reserve
estimates on our properties as described herein are estimates only. The actual
reserves on our properties may be greater or less than those calculated.
The estimates of proved reserves for our oil and gas properties that are
included in this registration statement and the estimates of future revenues
therefrom were prepared by Sproule Associates Limited, our petroleum engineering
consultants. These estimates are inherently imprecise and actual production, oil
and natural gas prices, revenues, taxes, development expenditures, operating
expenses and quantities of recoverable oil, natural gas and natural gas liquids
may vary substantially from the assumptions underlying the estimates. The reader
should expect that the estimates of proved reserves will be revised upward or
downward based upon the results of future exploration and development
activities, prevailing oil prices and other unforeseen factors. The present
value of estimated future net revenues as the current market value of should not
be construed as the Company's proved reserves. In compliance with applicable
Canadian regulatory requirements, the estimated discounted future net cash flows
from proved reserves are based on prices and costs as at April 1, 2001 even
though actual future prices and costs may prove to be materially higher or
lower. Other factors such as changes in governmental regulations or taxation and
the timing of development expenditures and production may also materially affect
the actual present value of proved reserves. See "Information on the Company -
Our Properties".
WE HOLD INTERESTS IN FOREIGN COUNTRIES AND MAY ACQUIRE MORE SUCH INTERESTS.
THESE HOLDING ARE SUBJECT TO THE LAWS OF VARIOUS COUNTRIES THAT MAY NOT ALWAYS
BE FAVOURABLE OR STABLE.
We hold rights to acquire interests in the Czech Republic through letter
agreements dated June 7, 2000, July 6, 2000 and March 7, 2001 (See "Information
on the Company - History and Development of the Company"). These interests are
governed by laws of the Czech Republic. We may enter into contractual
arrangements to acquire oil and gas properties in other foreign jurisdictions
with governments,
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governmental agencies or government-owned entities. The foreign legal framework
for these agreements, particularly in developing countries, is often based on
recent political and economic reforms and newly enacted legislation which may
not be consistent with long-standing local conventions and customs. As a result,
there may be ambiguities, inconsistencies and anomalies in the agreements or the
legislation upon which they are based which are atypical of more developed
western legal systems and which may affect the interpretation and enforcement of
our rights and obligations and those of its foreign partners. Local institutions
and bureaucracies responsible for administering foreign laws may lack a proper
understanding of the laws or the experience necessary to apply them in a modern
business context. Foreign laws may be applied in an inconsistent, arbitrary and
unfair manner and legal remedies may be uncertain, delayed or unavailable.
Foreign legal mechanisms for resolving legal and business disputes are not
necessarily comparable to typical dispute resolution mechanisms used in more
developed countries. We cannot be sure that we can enforce our legal rights in
foreign countries or that an effective legal remedy will be available to us in
any dispute governed by foreign law.
SOME OF OUR PROPERTIES ARE HELD UNDER LEASE AND THERE IS A RISK THAT WE WILL NOT
BE ABLE TO RENEW THESE LEASES AT THE END OF THEIR TERMS OR THAT THE LEASES WILL
BE LOST DUE TO A VIOLATION OF A TERM OF THE LEASE.
Some of our properties are held in the form of licenses and leases and working
interests in licenses and leases. If we or the holder of the license or lease
fail to meet the specific requirements of each license or lease, the license or
lease may terminate or expire. There can be no assurance that any of the
obligations required to maintain each license or lease will be met. The
termination or expiration of licenses or leases or working interest relating to
a license or lease may have a material adverse effect on the results of our
operations and business. Some of our property interests will terminate unless we
fulfil certain obligations under the terms of agreements related to such
properties. If we are not able to satisfy these conditions on a timely basis, we
may lose our rights in those affected properties. The termination of interests
in any of our properties may have a material adverse effect on our business and
results of operations.
WE HAVE RELIED ON FINANCING TO FUND OPERATIONS IN THE PAST AND MAY DO SO IN THE
FUTURE.
We have limited financial resources, and there is no assurance that additional
funding will be available to us for further development of our properties and to
explore for and develop reserves. We have relied on existing cash flow, together
with the issuance of common shares through private placements and bank debt to
fund our activities to date and will continue to require financing from all of
these sources. The exploration and development of our properties depends upon
our ability to continue to obtain financing through the joint venturing of
projects, debt financing, equity financing or other means. There is no assurance
that we will be successful in obtaining any required financing now or in the
future. If we fail to obtain funding when needed we may have to forego
potentially valuable opportunities to acquire new oil and gas interests.
EXISTING STOCK OPTIONS MAY BE EXERCISED AND COMMON SHARES SOLD, RESULTING IN
DILUTION OF SHAREHOLDERS' INTERESTS.
As at March 31, 2001, there were 550,720 stock options outstanding pursuant to
which common shares may be issued in the future. In addition, the Company
intends to sell common shares of the Company to raise capital for the operation
and potential expansion of the Company. Both the exercise of options and sale of
common shares will result in further dilution to our shareholders. See
"Directors, Senior Management and Employees - Share Ownership".
WE HAVE NO HISTORY OF DIVIDENDS AND ARE NOT LIKELY TO PAY DIVIDENDS IN THE NEAR
FUTURE.
We have not paid any dividends since incorporation and we have no plans to pay
dividends for some time. Our directors will determine if and when dividends
should be declared and paid in the future based on our
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financial position at the relevant time. All of the common shares are entitled
to an equal share of any dividends declared and paid.
CURRENCY FLUCTUATIONS MAY ADVERSELY IMPACT THE PRICE WE RECEIVE FOR OUR
PRODUCTS.
World oil prices are quoted in U.S. dollars and the price received by Canadian
producers is therefore affected by the Canadian/U.S. dollar exchange rate that
may fluctuate over time. A material increase in the value of the Canadian dollar
may negatively impact our net production revenue.
OUR SUCCESS DEPENDS ON OUR EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES.
We depend on a number of key employees: Wayne S. Wadley, President, C.E.O. and
director; Garry W. Lohuis Vice-President Operations and director; Bradley J.
Farris, Vice-President Finance, Chief Financial Officer and director; and Larry
McMinn Vice-President Exploration. The loss of any one of the named employees
could have an adverse effect on us. We have not entered into management
contracts with any officers or employees. We do not maintain key man insurance
on any of our management.
OUR DIRECTORS MAY FACE CONFLICTS OF INTERESTS IN SOME TRANSACTIONS DUE TO THEIR
ROLES WITH OTHER COMPANIES.
Certain of our directors and officers serve as directors or officers of other
reporting companies or have significant shareholdings in other reporting
companies and, to the extent that such other companies may participate in
ventures in which we may participate, our directors may have a conflict of
interest in negotiating and concluding terms respecting the extent of such
participation. See "Majority Shareholders and Related Party Transactions".
OPERATING RISKS
Our business is subject to operating risks associated with the oil and natural
gas industry and our operations. Set forth below are the material risks
associated with the operation of our business.
WE FACE STRONG COMPETITION IN THE OIL AND GAS INDUSTRY THAT MAY ADVERSELY AFFECT
OUR OPERATING RESULTS.
The oil and gas industry is intensely competitive and we must compete in all
aspects of our operations with many companies with greater financial strength
and technical resources. Generally, there is intense competition for the
acquisition of resource properties considered to have commercial potential. Our
ability
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to engage in future exploration and development activities may depend on the
availability of drilling rights and/or crews to operate drilling rigs.
OIL AND GAS PRICES ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS THAT MAY HAVE AN
ADVERSE IMPACT ON OUR RESULTS.
Our principal business risks arise from the nature of crude oil and natural gas
markets, uncertain results of capital expenditure programs and volatility of
interest and exchange rate.
Factors beyond our control may affect the marketability of any oil and gas
discovered. The prices of crude oil and natural gas have experienced volatile
and significant price movements over short periods of time, and are affected by
numerous factors beyond our control, including international economic and
political trends, expectations of inflation, currency exchange fluctuations
(specifically, the U.S. dollar relative to other currencies), interest rates and
global or regional consumption patterns, speculative activities and increased
production due to improved production methods. The prices which will be
available to us for sales of our production will be established by market forces
which can be affected by various factors, including political events, economic
conditions and production costs in major producing regions and governmental
policies with respect to holdings by a nation or its citizens. The market for
crude oil is influenced by global supply and demand considerations and by the
supply management practices of the world's dominant producers concentrated in
the Organization of Petroleum Exporting Countries. The natural gas market is
primarily influenced by North American supply and demand profile and by
competing fuels. There can be no assurance that the price of oil or gas will be
such that our leases can be produced at a profit.
WE FACE HIGH EXPLORATION COSTS AND UNCERTAIN RESULTS FROM EXPLORATION. THESE
UNCERTAINTIES MAY ADVERSELY AFFECT THE RESULTS OF OUR OPERATIONS.
We face a number of risks inherent in oil and gas exploration and development.
Exploration activities are expensive and consume significant financial
resources. Although we try to allocate our limited financial resources to those
properties which we believes are most likely to yield a discovery, we can never
be certain that our exploration activities on a particular property will be
successful. Like some other oil and gas exploration companies, we try to
mitigate our exploration risk by conducting activities jointly with other
exploration companies through joint ventures and farm-in/farm-out arrangements.
In carrying out exploration activities, we are also vulnerable to adverse
weather conditions, mechanical difficulties, delays in the delivery of equipment
and the risk of fire, explosions and blow-outs. We are insured against certain
risks such as fire, explosions and blowouts up to a maximum of $2,000,000 per
claim. However, losses or liabilities we incur as a result of risks against
which we are insured may exceed the maximum amount of insurance coverage.
Oil and gas exploration and development involves significant risks. Few wells
which are drilled are developed into commercially producing fields. Substantial
expenditures may be required to establish the existence of additional proven or
probable reserves, and there can be no assurance that commercial quantities of
oil and gas deposits will be discovered or, if found, will be present in
sufficient quantities to enable us to recover our exploration and development
costs. The estimates of exploration, development and production costs can be
affected by such factors as permitting regulations and requirements, weather,
environmental factors, unforeseen technical difficulties, and unusual or
unexpected formations, pressures and work interruptions. There can be no
assurance that actual exploration cost will not exceed projected cost.
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THE OIL AND NATURAL GAS INDUSTRY IS HIGHLY REGULATED. IF WE FAIL TO OBTAIN
NECESSARY GOVERNMENT APPROVALS, OUR OPERATIONS MAY SUFFER.
Our current or future operations, including development activities and
commencement of commercial production on our properties, requires permits from
various governmental authorities and such operations are and will be subject to
laws and regulations governing prospecting, development, production, exports,
taxes, labour standards, occupational health, waste disposal, toxic substances,
land use, environmental protection, restrictions and prohibitions on releases or
emissions of various substances produced in association with certain oil and gas
operations, safety and other matters. Companies engaged in the development and
operation of oil and gas properties and related facilities generally experience
increased costs and delays in production and other schedules as a result of the
need to comply with applicable laws, regulations and permits, the extent of
which cannot be predicted. There can be no assurance that approvals and permits
required to commence commercial production on our properties will be obtained.
Additional permits and studies, which may include the environmental impact
studies conducted before permits can be obtained, may be necessary prior to
operation of the properties in which we have interests and there can be no
assurance that we will be able to obtain or maintain all necessary permits that
may be required to commence construction, development or operation or production
facilities at these properties on terms which enable operations to be conducted
at economically justifiable costs.
Failure to comply with applicable laws, regulations and permitting requirements
may result in enforcement actions thereunder, including orders issued by
regulatory or judicial authorities causing operations to cease or be curtailed,
and may include corrective measures requiring capital expenditures, installation
of additional equipment or remedial actions. Parties engaged in oil and gas
operations may be required to compensate those suffering loss or damage by
reason of the production activities and may have civil or criminal fines or
penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing operations and
activities of petroleum companies, or more stringent implementation thereof,
could have a material adverse impact on our operations and cause increases in
capital expenditures or production costs or reduction in levels of production at
producing properties or abandonment or delays in development of new oil and gas
properties.
WE HAVE RISKS CAPABLE OF BEING INSURED AND OTHERS WHICH ARE NOT
We maintain a corporate insurance program consistent with industry practice to
protect against losses due to accidental destruction of assets, well blowouts,
pollution and other operating accidents or disruptions. We also have operational
and emergency response procedure and safety and environmental programs in place
to reduce potential loss exposure. To the best of our knowledge, we are
currently operating in compliance with all applicable environmental regulations.
We have insurance in amounts that we consider to be adequate to protect
ourselves against certain risks of carrying out our business. However, we may
become subject to liability for hazards against which we cannot insure ourselves
or which we may elect not to insure against because of premium costs or other
reasons. In particular, we are not insured for environmental liability or
earthquake damage.
COMPANY AND SECURITIES RELATED RISKS
WE ARE A FOREIGN CORPORATION AND ALL OF OUR DIRECTORS AND OFFICERS ARE OUTSIDE
OF THE UNITED STATES, WHICH MAY MAKE ENFORCEMENT OF CIVIL LIABILITIES DIFFICULT.
We incorporated under the laws of the Province of Alberta. All of our directors
and officers are residents of Canada, and substantially all of our assets are
located outside of the United States. Consequently, it
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may be difficult for United States investors to effect service of process within
the United States upon our directors or officers, or to realize in the United
States upon judgments of United States courts predicated upon civil liabilities
under the United States Securities Exchange Act of 1934, as amended. A judgment
of a U.S. court predicated solely upon such civil liabilities would probably be
enforceable in Canada by a Canadian court if the US court in which the judgment
was obtained had jurisdiction, as determined by the Canadian court, in the
matter. There is substantial doubt whether an original action could be brought
successfully in Canada against any of such persons or the Company predicated
solely upon such civil liabilities.
OUR SHARES HAVE A HISTORY OF WIDE PRICE FLUCTUATION AND MAY CONTINUE TO
FLUCTUATE IN THE FUTURE.
In recent years, the securities markets in the United States and Canada have
experienced a high level of price and volume volatility, and the market price of
securities of many petroleum companies have experienced wide fluctuations in
price which have not necessarily been related to the operating performance,
underlying asset values or prospects of such companies. In particular, the per
share price of the our Common Shares fluctuated from a high of $1.00 Cdn ($0.67
U.S.) to a low of $0.34 Cdn ($0.23 U.S.) within the twelve month period
preceding the date of this registration statement. There can be no assurance
that continual fluctuations in price will not occur.
WE MAY BE CLASSIFIED AS A PASSIVE FOREIGN INVESTMENT COMPANY FOR PURPOSES OF
UNITED STATES TAXES. SUCH A CLASSIFICATION MAY RESULT IN ADVERSE TAX
CONSEQUENCES FOR U.S. SHAREHOLDERS OF OUR SECURITIES.
As a foreign corporation having shareholders resident in the United States, and
not currently generating significant active income, we anticipate that we will
be classified as a passive foreign investment company ("PFIC"), as defined in
Section 1297 of the Internal Revenue Code of 1986, for the year 2001 (and
possibly for future taxation years); however, our anticipated status as a PFIC
depends upon the percentage of our income which is passive or the percentage of
our assets which produce passive income. If we are a PFIC, U.S. shareholders may
be subject to increased tax liability upon the sale of their Common Shares or
upon their receipt of certain dividends. See "Additional Information -
Taxation". Moreover, the PFIC rules are complex and may be unfamiliar to U.S.
shareholders. Accordingly, U.S. shareholders are urged to consult their own tax
advisors concerning the application of the PFIC rules to their investment in our
common shares.
BROKER-DEALERS MAY BE DISCOURAGED FROM EFFECTING TRANSACTIONS IN OUR COMMON
SHARES BECAUSE THEY ARE CONSIDERED PENNY STOCKS AND ARE SUBJECT TO THE PENNY
STOCK RULES.
The common shares are "penny stock" as defined by the Securities and Exchange
Commission. Penny stocks are generally equity securities with a price of less
than U.S. $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ National Market, provided that current price
and volume information with respect to transactions in such securities is
provided by the exchange or system). The Securities and Exchange Commission has
adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. 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 Securities and
Exchange Commission 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 current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and compensation information must be given to
the customer orally or in writing before or with the customer's confirmation. In
addition, the penny stock rules
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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 the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that is subject to the penny stock rules and therefore make
it more difficult to sell those shares.
INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated under the Business Corporations Act (Alberta) (Canada) on
January 12, 1998 under the name GEO-CAN Energy Inc. By Certificate of Amendment
dated February 11, 1998 we changed our name to GEOCAN Energy Inc. We removed the
private company restrictions from our Articles of Incorporation, which prevented
us from becoming a public company, by Certificate of Amendment dated April 20,
1998.
Our registered and records office is located at Suite 800, 717 - 7th Avenue
S.W., Calgary, Alberta T2P 0Z3.
We became a reporting issuer as a junior capital pool company in the Province of
Alberta, Canada on July 16, 1998 by obtaining a receipt for a final prospectus
dated July 16, 1998 from the Alberta Securities Commission. Pursuant to this
prospectus we raised $300,000 (before costs of issue) by issuing 1,000,000
Common Shares at $0.30 per common share. The proceeds of the offering were used
to identify and evaluate oil and gas businesses and assets in Canada. The
offering closed on July 16, 1998 and our common shares were listed on the
Alberta Stock Exchange on September 17, 1998.
On October 29, 1998, we acquired certain oil and gas interests in the Carson
Creek area and the Judy Creek area, Alberta from Timberwolf Production Fund #4
Limited Partnership. The purchase price was $1,030,000 and was paid by the
issuance of 1,500,000 common shares at a deemed price of $0.45 per share plus
$355,000 in cash. This acquisition constituted the Major Transaction of the
Company within the meaning of Policy 4.11 of the Alberta Securities Commission
and Circular No. 7 of the Alberta Stock Exchange. Upon the completion of this
acquisition, we ceased to be a junior capital pool company and immediately
became active in the oil and gas industry.
On November 13, 1998, we purchased a certain producing oil property located in
the Dina area of Alberta for $46,000 and on December 2, 1998 we purchased a
shut-in oil property located in the Neutral Hills area of Alberta for $5,000.
Effective March 1, 2001 the Neutral Hills area property was sold for a price of
$55,000.
In May and June 1999, we completed the acquisition of a certain oil producing
property located in the Deer Mountain area, Alberta in a series of transactions
from four vendors for an aggregate cash purchase price of $469,232.
On November 29, 1999, the Vancouver and Alberta stock exchanges merged to form
the Canadian Venture Exchange. It was launched with some 2,300 listed companies
active in the technology, resource, industrial and manufacturing sectors,
including the Company.
On December 3, 1999, we purchased interests from four parties in eight oil wells
together with associated battery and water disposal facilities located in the
Huntoon area, Saskatchewan. The purchase
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price was $490,000 payable by cash as to $425,000 and the balance by the
issuance of 162,500 common shares at a deemed price of $0.40 per share.
On December 31, 1999, we raised $61,105 for use in our drilling and exploration
activities by completing a private placement of 111,100 common shares as
flow-through shares at a price of $0.55 per share. These funds were utilized in
the drilling of the well 7-1-61-12-W5M located in the Carson Creek area of
Alberta.
On January 12, 2000, we purchased additional interests in the Huntoon,
Saskatchewan area property for a purchase price of $180,000. The purchase price
was paid by cash as to $80,000 and the balance by the issuance of 250,000 common
shares at a deemed price of $0.40 per share.
On March 29, 2000, we completed a private placement to Larry McMinn, our Vice-
President Exploration, for 100,000 common shares at $0.34 per share.
On June 6, 2000, we acquired interests in two petroleum and natural gas leases
from the Saskatchewan government. A 160 acre lease was acquired in the Gully
Lake, Saskatchewan area for $49,912 and a 160 acre lease was acquired in the
Dulwich area of Saskatchewan for gross proceeds of $81,085. We have a 70%
working interest in these leases. The leases are located in the heavy oil region
of Saskatchewan and are in the same general area as our other heavy oil
properties. In August, 2000, twenty-five kilometers of 2D seismic was acquired
over properties at Staplehurst and Dina areas in Alberta, and over the Gully
Lake and Dulwich areas in Saskatchewan. Based on the seismic results the
potential locations were hi-graded and five new wells were drilled, three at
Staplehurst, one at each of Dina and Dulwich. All five wells have been placed on
production and resulted in two new pool discoveries one at each of Staplehurst
and Dulwich. The Dina well was drilled into an existing pool. A re-entry of a
previously abandoned wellbore was completed at Dulwich and the well was placed
on production on December 1, 2000. Further follow-up locations are planned based
on the results mentioned above and will be considered after production results
obtained from the five new wells and one re-entry well have been further
reviewed.
On June 7, 2000, we entered into a letter agreement with two Czech Republic
companies thereby acquiring the right to jointly participate in the geological,
geophysical, drilling and development of oil and gas reserves in a 151 square
kilometre (37,000 acre) area on the Rostin Block in the Czech Republic. The
letter agreement was signed with local oil and gas producer, Unigeo a.s. and
with Ceska Naftarska Spolecnost SRO. The four year Mineral Oil/Gas Exploration
Permit was issued by Ministerstvo Zivotniho Prostredi, the Ministry of the
Environment of the Czech Republic. The award of the block does not carry a
seismic or drilling commitment. Under the terms of the letter agreement, we are
entitled to earn an 82.3524% working interest before payout and a 70% working
interest after payout. The block is located in a proven multi-zone oil and gas
producing basin in the southeastern area of the Czech Republic. The work
commitment includes an initial exploration fee of 151,000 Czech Koruna (CZK)
($5,600 Cdn) and annual mineral rental rates of less than $10,000 Cdn per annum.
The Rostin Block is located 220 km southeast of Prague. There is 270 kilometers
of existing 2D seismic on the block and we are presently evaluating this
information. Additional seismic may be shot across the lands to further
delineate the block's multi-zone potential. Wells were drilled on the block from
1972 to 1985 with varying oil and gas shows. Oil and gas is currently produced
directly adjacent to the block. The Czech Republic has a well developed gas
pipeline infrastructure. Specifically, there is a major gas pipeline running
through the block. The gas price is based on the Central European Border Price
and is currently CZK 5.49/m3 ($5.75 Cdn/Mcf). Government royalty rates are a
fixed 5%. Ownership of the reserves are guaranteed by the Czech Republic's
Mineral Law. The Czech Republic currency, the Koruna, is fully externally
convertible. The Czech Republic has a positive business environment, reflected
by its proposed 2003 entry into the
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European Union and recent NATO membership. Our management collectively has ten
years experience with oil and gas exploration and development in the Czech
Republic and Central Europe.
On July 6, 2000, we entered into a letter agreement to acquire the rights to
jointly participate in the geological, geophysical, drilling and development of
a 7,000 acre area in the Czech Republic called the Breclav Block. This three
year Mineral Oil/Gas Exploration Permit was issued by Ministerstvo Zivotniho
Prostredi, the Ministry of the Environment of the Czech Republic effective June
30, 2000. Like the Rostin Block referred to above, the granting of the Breclav
Block does not carry a seismic or drilling commitment and provides for joint
participation in the geological, geophysical, drilling and development of the 24
square kilometre (7,000 acre) Breclav Block. We are entitled to earn an 82.3524%
working interest before payout and a 70% working interest after payout. The
Breclav Block is adjacent to the city of Breclav, well situated in the oil and
gas producing region of the Vienna Basin. Geological interpretation, technical
assessment and project economics have already been undertaken by us and our
joint venture partners. There are existing seismic profiles within the Breclav
Block. Well depths are anticipated to be 1,500 meters (5,000 feet).
On October 17, 2000, we acquired Tri-Tech Resources Ltd., a private Alberta
corporation owned by Larry McMinn our Vice-President Exploration. The purchase
price of $210,000 was paid by cash as to $150,000 and the balance by the
issuance of 120,000 Common Shares at a deemed price of $0.50 per share.
Effective October 31, 2000 Tri-Tech Resources Ltd. was dissolved and all of its
assets and obligations were transferred to and assumed by us and we thereby
acquired interests in the Dina and Staplehurst areas of Alberta.
On November 29, 2000, we completed a private placement to Andrew Fisher our
Manager, Contracts and Negotiations, for 100,000 Common Shares at $0.50 per
share.
On December 13, 2000, we acquired each of 717365 Alberta Ltd. and of 742521
Alberta Inc., both private Alberta corporations. The aggregate purchase price
was $350,500. The aggregate purchase price was paid by cash as to $252,000 and
the balance by the issuance of 197,000 Common Shares at an assigned price of
$0.50 per share. Of the 197,000 Common Shares issued, 52,000 Common Shares were
issued to our Vice-President Finance as one of the vendors of the shares of
742521 Alberta Inc. Both of 717365 Alberta Ltd. and 742521 Alberta Inc. were
dissolved on December 31, 2000 and all of their respective assets and
obligations were transferred to and assumed by us. As a result, we acquired
further interests in the Dina and Staplehurst areas of Alberta.
On February 6th 2001 we acquired 262.5 gross acres (184 net acres) in the
Marsden area of Saskatchewan property for $52,552.
On March 7, 2001 the Company, together with Unigeo a.s. of the Czech Republic,
entered into a Letter Agreement to acquire the rights to earn an interest in the
12,355 acre Bucovice Block in the Czech Republic. The four year Mineral Oil/Gas
Exploration Permit was issued by Ministerstvo Zivotniho Prostredi, the Ministry
of the Environment of the Czech Republic effective October 30, 2000. The
Bucovice Block will be developed through joint participation in the geological,
geophysical, drilling and development of the 50.1 square kilometer (12,355 acre)
block. The terms of the agreement is substantially the same as that for the
Rostin Block. The Bucovice Block does not carry any seismic or drilling
commitment. We have the right to earn an 82.3524% working interest before payout
and a 70% working interest after payout. The block is situated east of the city
of Brno and within an existing oil and gas producing region. There are existing
seismic profiles across the Bucovice Block and these are available to us. Well
depths are anticipated to be less than 1000 meters (3,300 feet).
On May 3, 2001 we purchased 20,085 gross acres (14,343 net acres) of both
producing and undeveloped properties primarily located in the Carrot Creek,
Tomahawk, Manyberries and Elmsworth areas of Alberta,
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which included approximately 100 boepd. The transaction was effective as of
March 1, 2001. The purchase included a 50.6821485% interest in the Carrot Creek
Cardium Q Pool Unit #1, a 22.092% interest in the Cyn-Pem Cardium L Pool Unit #1
and a 81.25% operated interest in wells and facilities in the Tomahawk area. The
$802,373 purchase price was paid in cash.
It is our intention, upon this registration statement becoming effective, to
qualify our shares for listing on the National Association of Security Dealers,
Inc.'s Over the Counter Bulletin Board.
We have not been subject to any bankruptcy, receivership or similar proceedings.
We have not had indications of any public takeover by third parties with respect
to our shares and have not since our inception and have no present intention,
during the current fiscal year, to engage in any public takeovers of third
parties, although we do examine opportunities to do so, from time to time.
BUSINESS OVERVIEW
MARKET SEGMENTS AND REVENUE MIX
We are engaged in the exploration for and the development and production of oil
and natural gas, primarily in Western Canada. We also hold rights to acquire oil
and gas reserves in the Czech Republic as well as certain minor proven producing
reserves located in the Trava area of Wyoming. Our production mix is
approximately 30% natural gas and 70% oil and natural gas liquids. Substantially
all of our revenues arise from production from our properties located in Western
Canada. Our Canadian revenues for the year ended March 31, 2001 were $2,376,208
representing 99.9% of all our revenues for the year ended March 31, 2001.
SEASONALITY OF THE OIL AND GAS INDUSTRY
Oil and gas industry operations in Western Canada are affected by road bans
imposed from time to time, during the spring break-up and thaw period, which
restricts access to our well sites and production facility sites due to snow,
mud and rock slides and periods of high water. The imposition and the lifting of
road bans are monitored during the spring break-up period by our management to
allow us to optimize drilling and operating effectiveness.
PRICE AND MARKETING
Producers of oil in Canada negotiate sales contracts directly with purchasers
thereof, resulting in a market determined price. Price normally depends on
factors such as quality, price of competing oils, distance to market and value
of refined products. The price of natural gas is likewise market determined by
negotiation between buyers and sellers thereof and normally depends on factors
such as price of competing gas, distance to market, length of contract term and
other contractual terms. Our Carson Creek natural gas production is sold through
a reserves-based contract with Progas Limited and our Judy Creek natural gas and
natural gas liquids production is sold, on our behalf, by the operator of the
Carson Creek and Judy Creek area properties, into the spot market. Our oil
production is sold into the spot market through Canpet Energy Group Inc., under
contracts terminable by either party on 30 days notice.
INFORMATION SYSTEMS
We maintain our land administration information by using the DGL Land System.
Our financial and accounting information is managed by the DGL Production and
Financial Accounting Systems. Both information systems are leased from DGL
Software Services, Ltd. a Canadian software Company located in Calgary, Alberta
Canada.
SAFETY REGULATION
We are committed to protecting and promoting the health and safety of our
employees and other stakeholders in all of our operations. To that end, we have
implemented a formal safety program, applicable
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to our field personnel, that we will continue to monitor and upgrade. This
program is designed to ensure that we meet all applicable government regulations
relating to health and safety.
GOVERNMENT REGULATION GENERALLY
The oil and gas industry in Canada is subject to extensive controls and
regulations imposed by various levels of government. In addition to federal
regulation, each province has enacted legislation and regulations that govern
land tenure, production rates, royalties, environmental protection and other
matters. We do not expect these controls and regulations to affect our
operations in a manner significantly different than they will affect other oil
and gas companies of similar size. We believe that we are currently in
compliance with all governmental rules and regulations which govern our Business
and its operations.
LICENCES, LEASES AND LAND TENURE
The substantial majority of oil and natural gas rights in Canada are vested in
the government of the jurisdiction in which such rights are located. The normal
practice is that such government grants licences or leases to third parties,
such as us, to permit the exploration and development of the mineral rights. The
terms of such licences and leases normally require the timely and orderly
development of the relevant mineral rights. The leases to which the company is a
direct party are described in this registration statement in the section
entitled "Our Properties" on page 14.
PRODUCTION
The Alberta and Saskatchewan provincial governments regulate production in
accordance with sound engineering and conservation practices. Production is also
limited by pipeline capacities, demand for natural gas and various grades of
crude oil and, in limited circumstances, by maximum rate limitations imposed by
regulatory authorities, including the Alberta Energy and Utilities Board, to
encourage maximum recovery.
PROVINCIAL ROYALTIES AND INCENTIVES
The royalty regime applicable to particular Canadian oil and natural gas
production is a significant factor in determining its profitability. Royalties
payable on production from land other than Crown (government) lands are
determined by negotiations between the mineral owner and the lessee. Crown
royalties are determined by government regulation and are generally calculated
as a percentage of production and vary depending on factors such as prescribed
reference prices, well productivity, geographical location, field discovery
date, method of recovery and the type and quality of the petroleum product
produced. From time to time, the governments of Canada, Alberta and Saskatchewan
have established incentive programs for the purpose of encouraging oil and gas
exploration that have included royalty rate reductions, royalty holidays and tax
credits. Regulations made pursuant to the Mines and Minerals Act (Alberta)
provide various incentives for the exploration and development of oil reserves
in Alberta. These include oil royalty holidays for specific wells and royalty
reductions that reduce the amount of Crown royalties paid by us to the
provincial governments. In addition, a producer of oil or natural gas in Alberta
may be entitled to a rebate in respect of Crown royalties paid on eligible
producing properties by virtue of the Alberta Royalty Tax Credit ("ARTC")
program. The rebate available is based on a specified percentage (the "ARTC
Rate") of the Alberta Crown royalties paid by us, subject to a maximum amount.
The ARTC Rate is based on a royalty tax credit reference price which is derived
from heavy and non-heavy oil and natural gas par prices. The ARTC Rate varies
between 75% at prices below $15.90/Bbl and 25% at prices above $33.39/Bbl. The
ARTC Rate will be applied to a maximum of $2,000,000 of Alberta Crown royalties
payable for each producer or associated group of producers. Crown royalties on
production from producing properties acquired from a corporation claiming
maximum ARTC entitlements will generally not be eligible for
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ARTC. The ARTC Rate is established quarterly based on the average par price as
determined by the Department of Energy (Alberta) for the previous quarterly
period. Under the recently announced changes, the ARTC program will continue on
three year rolling terms and does not contain a sunset provision. Both royalty
holidays and reductions and the ARTC serve to increase investment and increase
our net income.
The letter agreements relating to oil and gas rights located in the Czech
Republic have recently been completed and no operations have commenced and
consequently no royalties are due or payable to the Czech Republic government.
EXPORTS
While we are not directly involved in the business of oil or gas exportation,
our sales are indirectly affected by governmental control and regulation of the
removal of oil and natural gas from Alberta into other parts of Canada and their
further exportation beyond the borders of Canada. The government of Alberta
regulates the volume of natural gas that may be removed therefrom based on
factors such as reserve availability, transportation arrangements and market
conditions. Crude oil and natural gas may be exported from Canada pursuant to
export contracts with terms not exceeding one year in the case of light crude,
and two years in the case of heavy crude and natural gas, provided that an
approval order has been obtained from the National Energy Board (the "NEB"). Any
export to be made pursuant to a contract of longer duration requires an export
license from the NEB, the issuance of which requires the approval of the
Governor in Council.
ENVIRONMENTAL REGULATIONS
The oil and gas industry in Canada is currently subject to environmental
regulation pursuant to both provincial and federal legislation. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced or utilized in association with oil and gas
operations. Legislation also requires that well and facility sites be abandoned
and reclaimed to the satisfaction of provincial authorities. A breach of any
such legislation may result in suspension or revocation of required licenses and
authorizations, civil liability for resulting damage and the imposition of fines
and penalties. In Alberta, environmental compliance is governed by the
Environmental Protection and Enhancement Act (Alberta) (the "EPEA"). In addition
to consolidating prior environmental legislation, the EPEA imposes certain new
environmental responsibilities on oil and natural gas operators in Alberta and
in certain instances also imposes significantly greater penalties for
non-compliance. We are committed to meeting our legal and moral responsibility
to protect the environment. We anticipate making increasing expenditures of both
a capital and expense nature as a result of the higher environmental standards
demanded of oil and gas companies by both legislation and the general public.
The amount of these expenditures cannot presently be determined.
The Czech Republic currently subjects oil and gas operations to certain
environmental rules and regulations including drilling, emission and handling
requirements. The Company anticipates being in compliance with all such rules
and regulations once it begins operations, however there can be no assurance
that this will occur or we will be capable of complying with stricter
environmental regulations in the future.
ORGANIZATIONAL STRUCTURE
The Company is a Canadian corporation and has no subsidiaries on material
interest in other business entities.
OUR PROPERTIES
We are a petroleum and natural gas resource company engaged in the acquisition,
exploration and development of oil and gas properties. The following is a
discussion of our principal producing properties. The term "net" when used to
describe our share of production means the total of the Company's working
interest before deducting royalties owned by others. Reserves described in this
section are gross reserves as assigned to our interest before deducting
royalties owned by others and are as at April 1, 2001 as evaluated
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in the Sproule Report. Recoverable Reserves referred to below are composed of
both proven reserves and probable reserves. Map references follow each property
description and include latitude/longitude and Canadian Township, Range and
Meridian land references.
ALBERTA
Carson Creek
Activity on this property during the year ended March 31, 2001 included the
construction of a six mile pipeline to a nearby gas processing facility which
began taking our volumes in October 2000. In March 2000 additional compression
was added to the Carson Creek East Gas Plant in order to service additional
throughput requirements. We are part owner in the facility and the additional
compression. In February 2000 the 14-8-61-11 W5M well was successfully drilled
and first production commenced in June 2000. We hold a 10% working interest in
the Carson Creek property.
A dual zone completion was undertaken on the 12-7-61-11 W5M well during the fall
of 2000 to access reserves in the Pekisko formation. After a successful initial
extended production test several years ago, the well turned to water shortly
after being put on production. The well was returned to a Nordegg producer and
continues at a rate of 20 boepd net to us.
We produced for the year ended March 31, 2001 exit volumes of 65 boepd from the
Carson Creek field. Remaining recoverable reserves to the Company at April 1,
2001 were 747 Mcf of gas and 3,200 Bbls of natural gas liquids. Carson Creek is
located approximately 100 miles northwest of Edmonton, Alberta, Canada at 54.28
(degrees) latitude and 115.57 (degrees) longitude (TWP. 61 RGE. 11W5).
Judy Creek
Initial production from this property was from the 7-8-63-11 W5M well which was
drilled in 1998. For the year ended March 31, 2000 activity at Judy Creek
included the drilling of two successful natural gas wells. The first well,
12-21-63-11 W5M, was brought into production in August 1999 at initial gross
production of 913 Mcf/d and 35 boepd of liquids and in October, 2000 was sold
for a price of $655,350. The 10-17-63-11 W5M well was successfully completed in
March 2000 and was brought on production in June 2000. We produced for the year
ended March 31, 2001 exit volumes of 8 boepd net to the Company from this field.
Remaining recoverable reserves to us at April 1, 2001 were 62 Mmcf of gas and
2,700 Bbls of natural gas liquids. Judy Creek is located approximately 110 miles
northwest of Edmonton, Alberta, Canada at 54.46 (degrees) latitude and 115.59
(degrees) longitude (TWP. 63 RGE. 11W5).
Deer Mountain
We acquired a 50% working interest in the Deer Mountain property, which is
located near the Swan Hills region of Alberta, in June 1999 with an effective
date of January 1, 1999. We took over operatorship of the property at that time.
For the year ended March 31, 2001 exit volumes were 42 boepd (21 boepd net to
the Company). The property continues to derive benefits from an adjacent
waterflood scheme. Minimal production declines have been experienced on this
property. Remaining recoverable reserves to the Company at April 1, 2001 were
105,500 Bbls of oil. The property is located approximately 121 miles northwest
of Edmonton, Alberta, Canada at 54.98 (degrees) latitude and 115.3 (degrees)
longitude (TWP. 69 RGE. 09W5).
Silverdale
In December 1999 we acquired a 200 acre heavy oil property at Silverdale near
Lloydminster, Alberta at a Crown land sale. The Company, which is the operator,
has a 70% working interest. The property has two existing wellbores that were
prematurely abandoned in 1970 and 1993, respectively. The first wellbore at
4A-14-49-1 W4M was successfully re-entered in February 2000 with first
production in March 2000 of 18 boepd (13 boepd net to us). Our management have
successfully undertaken this approach before and this
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has resulted in a cost effective producing well at approximately 50% of the cost
of a newly drilled well. Additionally, a 2D seismic program has been approved by
all partners which will help delineate the pool and identify additional drilling
locations. Remaining recoverable reserves to us at April 1, 2001 were 7,000 Bbls
of oil. Silverdale is located approximately 1 mile south of Lloydminster,
Alberta, Canada at 53.24 (degrees) latitude and 110.07 (degrees) longitude (TWP.
49 RGE. 01W4).
Dina
We originally held a 20% working interest in the Dina heavy oil property
located approximately 30 miles south of Lloydminster, Alberta. This property was
acquired in November 1998 effective as of September 1, 1998. For the year ended
March 31, 2001 exit volumes were 40 boepd (18 boepd net to us) during our fiscal
year ending March 31, 2001. We have now increased our working interest to 45%
following the acquisition of Tri-Tech Resources Ltd. and 717365 Alberta Ltd. in
the fall of 2000 and therefore estimated recoverable reserves to us are 103,400
Bbls of oil at April 1, 2001. The property is located approximately 25 miles
south of Lloydminster, Alberta, Canada at 52.89 (degrees) latitude and 111.07
(degrees) longitude (TWP. 45 RGE. 01W4).
Neutral Hills
We acquired an 18.75% working interest at the Neutral Hills property in December
1998. The seven (7) wells located on the property were shut-in at the time. We,
together with the operator, reactivated the field in September 1999 and it
averaged approximately 100 boepd (19 boepd net to us) since that time. Our
interest in this property was sold for a price of $55,000 effective March 1,
2001. Neutral Hills is located approximately 83 miles southwest of Lloydminster,
Alberta, Canada at 52.28 (degrees) latitude and 110.92 (degrees) longitude (TWP.
38 RGE. 07W4).
Staplehurst
We acquired a 31% working interest in the Staplehurst property as a result of
the acquisition of Tri-Tech Resources Ltd., 742521 Alberta Inc. and 717365
Alberta Ltd. in the fall of 2000 and as of March 31, 2001 this property was
producing 26 boepd from this property net to us. Remaining recoverable reserves
to us at April 1, 2001 are estimated to be 196,400 Bbls of oil. This property is
located approximately 1 mile north of Lloydminster, Alberta, Canada at 53.32
(degrees) latitude and 110.07 (degrees) longitude (TWP. 50 RGE. 01W4).
Carrot Creek/Tomahawk
We acquired 20,085 gross acres (14,373 net acres) of producing and undeveloped
lands, including a 50.6821485% interest in the Carrot Creek Cardium Q Pool Unit
No. 1, a 22.092% interest in the Cyn-Pem Cardium L Pool Unit #1 and an 81.25%
operated interest in wells and facilities in the Tomahawk Area. As of March 31,
2001 these properties were producing 110 boepd. Remaining recoverable reserves
to us as at April 1, 2001 are 97,300 Bbls of oil, 1,066 Mmcf of gas and 28,200
Bbls of natural gas liquids. The property is located approximately 66 miles west
of Edmonton, Alberta, Canada at 53.45 (degrees) latitude and 115.25 (degrees)
longitude (TWP. 52 RGE. 09W5).
SASKATCHEWAN
Huntoon/Viewfield
The Huntoon property, which we operate, produced approximately 40 boepd net to
us as at March 31, 2001. A geological assessment is underway to identify other
drilling locations. Effective February 1, 2000, we acquired various interests in
three (3) wells at Viewfield which is situated near Huntoon. We became operator
of the Viewfield property with working interests ranging from 31.5% to 45%. The
production from one (1) of the wells is now trucked to our Huntoon battery for
treating and sale while the remainder of the volumes continue to be processed at
a third party facility. March 31, 2001 year end exit
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volume for the Viewfield property was 6 boepd (3 boepd net to us). Remaining
recoverable reserves for the Huntoon and Viewfield properties at April 1, 2001
were 171,300 Bbls of oil. Huntoon is located approximately 60 miles southeast of
Regina, Saskatchewan, Canada at 49.57(degrees) latitude and 103.15(degrees)
longitude (TWP.07 RGE. 09W2).
GULLY LAKE
On June 6, 2000 we acquired a 70% working interest in a Saskatchewan Crown
lease covering 160 acres which is currently non-producing. Gully Lake has
estimated probable reserves, net to us, of 38,100 Bbls of oil and is located
approximately 30 miles east of Lloydminister, Alberta, Canada at 53.27(degrees)
latitude and 109.23(degrees) longitude (TWP.49 RGE. 23W3).
DULWICH
On June 6, 2000 we acquired a 70% working interest in a Saskatchewan Crown
lease covering 160 acres which is currently producing 9 boepd net to us.
Remaining recoverable reserves to us as at April 1, 2001 are estimated to be
25,500 Bbls of oil. Dulwich is located approximately 5 miles southeast of
Lloydminster, Alberta, Canada at 53.19(degrees) latitude and 109.92(degrees)
longitude (TWP.48 RGE. 27W3).
MARSDEN
On February 6, 2001 we acquired the Marsden area lease which constitutes
262.5 acres for which we paid $286 an acre and have a 70% undivided working
interest. The Company has not done any substantive geology on the property and
it is in the process of being evaluated by the Company. The Marsden property is
located approximately 25 miles south of Lloydminister, Alberta, Canada at
52.85(degrees) latitude and 110(degrees) longitude (TWP. 45 RGE. 28W3M).
U.S.A.
Trava, Wyoming
On January 25, 2000 we agreed to a farm-in arrangement, drilling a step out well
on the Trava field at Crook County, Wyoming. The well was within the Trava Unit
which is operated by a Calgary based oil company. We paid 50% of the costs
associated with the well to earn a 50% before payout and 25% after payout
working interest in the new well. In addition we also thereby acquired an
undivided 25% working interest in the 320 acre Trava Unit which comprises two
producing wells, a water injection well and related field facilities. The well
was spudded in February 2000. The step out well failed to produce economic
volumes of hydrocarbons and was abandoned. However, as a result of drilling the
well, we earned approximately 4 boepd of production commencing in April 2000.
Discussions are currently under way to reconfigure the water injection and
producing wells to more efficiently produce the field. Remaining recoverable
reserves to us at April 1, 2001 were 30,000 Bbls of oil. This property is
located approximately 20 miles northeast of Gillette, Wyoming at 45(degrees)
latitude and 104(degrees) longitude (TWP52N RGE67W6THPM).
OFFICE LEASE
The Company's executive offices are located at 717 7th Avenue S.W., Suite 800,
Calgary, Alberta, Canada T2P 0Z3 which the Company leases. The lease expires
June 30, 2002 and the Company pays $2,008 per month for the 3,264 square feet it
rents. The lease payments do not increase over the remaining term.
-21-
24
RESERVES
Sproule Associates Limited, independent petroleum engineers of Calgary, Alberta
("Sproule") conducted a third party independent appraisal of the oil and gas
reserves owned by the Company in Alberta, Saskatchewan and Wyoming effective
April 1, 2001 based on escalating and constant price assumptions. The Sproule
Report is summarized in the tables below. The following tables summarize the
evaluation of reserves prior to provision for income taxes and indirect costs.
It should not be assumed that the discounted future net production revenues
estimated by Sproule represent the fair market value of the reserves. The
definition of important terms such as "Proven Reserves" and "Proven Undeveloped
Reserves" follow in notes which appear after the last table on page 21. Other
assumptions and qualifications relating to costs, prices for future production
and other matters are summarized in the notes following the tables.
SUMMARY OF THE EVALUATION OF THE P&NG RESERVES
OF THE COMPANY - ALL PROPERTIES
(BASED ON ESCALATING PRICE ASSUMPTIONS)
<Table>
<Caption>
OIL & NATURAL GAS LIQUIDS PIPELINE & SOLUTION GAS NET PRESENT VALUES
REMAINING RESERVES REMAINING RESERVES BEFORE INCOME TAX
---------------------------- -------------------------- ----------------------------
COMPANY COMPANY COMPANY
GROSS GROSS COMPANY GROSS GROSS NET 0% 10% 12% 15%
MBBL MBBL NET MBBL MMCF MMCF MMCF M$ M$ M$ M$
----- ------- -------- ----- ------- ------- ---- ---- ---- ----
Proven Developed 759.2 336.4 301.5 9010 1002 697 7695 5677 5430 5111
Producing
Proven Developed 185.8 51.3 45.9 202 119 101 1132 780 734 676
Non-producing
Proven Undeveloped 192.4 113.8 89.3 563 284 223 2021 1265 1165 1036
TOTAL PROVEN 1137.4 501.5 436.7 9775 1405 1021 10848 7722 7329 6823
Probable 748.2 300.7 269.2 1382 502 413 5534 3092 2829 2503
TOTAL 1885.6 802.2 705.9 11157 1907 1434 16382 10814 10158 9326
</Table>
-22-
25
SUMMARY OF THE EVALUATION OF THE P&NG RESERVES
OF THE COMPANY - ALL PROPERTIES
(BASED ON CONSTANT PRICE ASSUMPTIONS)
<Table>
<Caption>
OIL & NATURAL GAS LIQUIDS PIPELINE & SOLUTION GAS NET PRESENT VALUES
REMAINING RESERVES REMAINING RESERVES BEFORE INCOME TAX
---------------------------- -------------------------- ----------------------------
COMPANY COMPANY COMPANY
GROSS GROSS COMPANY GROSS GROSS NET 0% 10% 12% 15%
MBBL MBBL NET MBBL MMCF MMCF MMCF M$ M$ M$ M$
----- ------- -------- ----- ------- ------- ---- ---- ---- ----
Proven Developed 761 340.6 303.8 9043 1012 703 10454 7367 6988 6502
Producing
Proven Developed 191.4 52.5 46.8 206 120 101 1349 972 920 853
Non-producing
Proven Undeveloped 188.4 112 86.9 563 276 219 2712 1653 1518 1345
TOTAL PROVEN 1140.8 505.1 437.5 9812 1408 1023 14515 9992 9426 8700
Probable 745.2 305.6 273.6 1382 502 413 6443 3637 3328 2941
TOTAL 1886 810.7 711.1 11194 1910 1436 20958 13629 12754 11641
</Table>
The foregoing summary includes all of the petroleum and natural gas reserves of
the Company, consisting of properties located in Western Canada, as well as our
minor interest in the property located in Trava, Wyoming. The reserves of the
Company attributable solely to the Trava, Wyoming property are summarized in the
following tables.
-23-
26
SUMMARY OF THE EVALUATION OF THE P&NG RESERVES
OF THE COMPANY - TRAVA, WYOMING ONLY
(BASED ON ESCALATING PRICE ASSUMPTIONS)
P&NG RESERVES
<Table>
<Caption>
NET PRESENT VALUES
REMAINING RESERVES BEFORE INCOME TAXES (M$)
---------------------------- ------------------------------------------
COMPANY
----- --------------- ------- -------- ------- -------
GROSS GROSS NET AT 0% AT 10% AT 12% AT 15%
----- ----- ----- ------- -------- ------- -------
OIL (MBBL)
Proven Developed Producing 21.0 5.2 4.2 24 20 19 18
Probable 98.9 24.7 19.8 220 139 127 112
TOTAL 119.9 30.0 24.0 243 159 147 131
</Table>
-24-
27
SUMMARY OF THE EVALUATION OF THE P&NG RESERVES
OF THE COMPANY - TRAVA, WYOMING ONLY
(BASED ON CONSTANT PRICE ASSUMPTIONS)
P&NG RESERVES
<Table>
<Caption>
NET PRESENT VALUES
REMAINING RESERVES BEFORE INCOME TAXES (M$)
--------------------------- --------------------------------------------
COMPANY
----- ---------------- ------- -------- -------- --------
GROSS GROSS NET AT 0% AT 10% AT 12% AT 15%
----- ----- ----- ------- -------- -------- --------
OIL (MBBL)
Proven Developed Producing 32.7 8.2 6.5 63 43 41 37
Probable 103.0 25.8 20.6 370 239 221 196
TOTAL 135.7 33.9 27.1 432 283 261 233
</Table>
Notes:
(1) Numbers may not add due to rounding.
(2) Probable reserves and values were not reduced to account for risk.
(3) Definitions:
"PROVEN RESERVES" are those quantities of crude oil, natural gas, and
natural gas by-products, which, upon analysis of geologic and
engineering data, appear with a high degree of certainty to be
recoverable at commercial rates in the future from known oil and gas
reservoirs under presently anticipated economic and operation
conditions. There is relatively little risk with these reserves.
Proven reserves are sub-divided into the following groups, depending on
their status of development.
"PROVEN DEVELOPED RESERVES". These are proven reserves that can be
expected to be recovered through existing wells with existing equipment
and operating methods. This group is further divided to include the
following:
"PROVEN DEVELOPED PRODUCING RESERVES". These are proven reserves that
are presently being produced from completion intervals open for
production in existing wells.
"PROVEN DEVELOPED NON-PRODUCING RESERVES". These are proven reserves
that are currently not being produced but do exist in completed but not
producing, intervals in existing wells, behind casing in existing wells
or at minor depths below the present bottom of existing wells. These
proven reserves are expected to be produced through the existing wells
in the predictable future. These reserves are classified as proven
developed because the cost of making such reserves available for
production is relatively small, compared to the cost of a new well.
"PROVEN UNDEVELOPED RESERVES". These are proven reserves that are
expected to be recovered from new wells on undrilled acreage, or from
existing wells where relatively major expenditures are required for
completion installation of processing and gathering facilities prior to
the production of the reserves. Reserves on undrilled acreage are
limited to those drilling units offsetting productive wells, where
there is reasonable certainty of production.
-25-
28
PROBABLE RESERVES" are those reserves that may be recoverable as a
result of the beneficial effects that may be derived from the future
institution of some form of pressure maintenance or other secondary
recovery method, or as a result of a more favourable performance of the
existing recovery mechanism than that deemed proven at the present
time, or that may reasonably be assumed to exist because of geophysical
or geological indications and drilling done in regions that contain
proven reserves. The risk associated with these reserves generally
ranges from 25 to 75 percent.
"PIPELINE GAS RESERVES" are gas reserves remaining after deducting
surface losses due to process shrinkage and raw gas used as lease fuel.
"UNPROVEN PROPERTIES" are defined as those holdings in zones to which
proven or probable reserves have not been assigned. In holdings where
proven or probable values have been included for one or more zones, an
additional value may have been assigned for interests in the remaining
potential zones.
The above reserves definitions are considered to be beyond those stated in
National Policy 2B. If the National Policy 2B reserves definitions were used,
Sproule would have classified the non-producing plus undeveloped reserves as
simply non-producing reserves.
The escalated price assumptions used in the Sproule Report are as follows:
SUMMARY OF SELECTED PRICE FORECASTS (EFFECTIVE APRIL 1, 2001)
<Table>
<Caption>
WTI CUSHING OKLAHOMA EDMONTON PAR PRICE ALBERTA INDEX HENRY HUB
YEAR ($US/BBL) 40 degrees ($CDN/BBL) ($CDN/MMBTU) ($US/MMBTU)
- ----------------- ---------------------- ------------------------- ----------------------- -------------------------
2001 27.18 40.69 7.32 5.36
2002 24.62 36.75 6.45 4.79
2003 21.12 31.38 4.92 3.80
2004 21.44 31.90 4.06 3.25
2005 21.76 32.42 4.13 3.29
2006 22.08 32.91 4.20 3.34
2007 22.42 33.41 4.28 3.39
2008 22.75 33.39 4.28 3.44
2009 23.09 33.89 4.36 3.50
2010 23.44 34.40 4.44 3.55
2011 23.79 34.93 4.52 3.60
Thereafter 1.5% Per Year
</Table>
-26-
29
The constant price assumptions used in the Sproule Report are as follows:
<Table>
<Caption>
NATURAL GAS NATURAL GAS LIQUIDS OIL
PROPERTY ($/MCF) ($/BBL) ($/BBL)
- ---------------------------------------- ----------------------- ------------------------------ ----------------------
Carson Creek 6.30 40.30
Judy Creek 9.73 34.23 34.23
Dina 18.11
Silverdale 18.04
Huntoon 36.23
Deer Mountain 40.94
Trava, Wyoming 34.91
Tomahawk 7.73 39.77 39.77
Carrot Creek Q Unit 40.30
Carrot Creek L Unit 39.29
Westlock 7.32
Gully Lake 18.21
Dulwich 18.21
Staplehurst 18.31
Viewfield 32.39
</Table>
The prices shown are constant, but adjustments have been made to the crude oil
price for quality and transportation, to the natural gas prices, and to the
natural gas by-products, to reflect actual prices included for each run.
PRODUCTION HISTORY
The following table summarizes our crude oil, natural gas and natural gas
liquids production, before deduction of royalties, for the period indicated:
-27-
30
<Table>
<Caption>
YEARS ENDED MARCH 31
-----------------------------------------------------
OIL 2001 2000 1999
-------- -------- ---------
Crude Oil and Natural Gas Liquids (Bbls) 39,645 19,362 683
Gas Liquids (Bbls) 1,611 1,000 1,303
Average production (Bbls/d) 113 56 16
GAS
Natural Gas (Mcf) 172,677 159,792 90,703
Average production (Mcf/d) 477 438 495
Total BOE 70,035 46,994 15,800
Total average boepd 192 129 99
</Table>
-28-
31
The mix of our daily oil production for the year ended March 31, 2001 was
approximately 30% light quality crude oil (35(degree) API or greater) and 30%
heavy quality crude oil (24(degree) API or less). Approximately 40% of our net
revenue is derived from natural gas production with the remainder from crude oil
and natural gas liquids. On a BOE basis, production is split between crude oil
and natural gas liquids as to approximately 60% and natural gas as to 40%.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are or are likely to
be a party or which any of our properties are or are likely to be the subject.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of the financial condition, changes in financial
conditions and results of our operations for the year ended March 31, 2001, the
year ended March 31, 2000 and the year ended March 31, 1999 should be read in
conjunction with our financial statements and related notes included therein.
Our financial statements are presented in Canadian dollars have been prepared in
accordance with Canadian GAAP.
We follow the full-cost method of accounting for oil and natural gas interests
whereby all costs relating to exploration and development of oil and natural gas
reserves are capitalized. Such costs include land acquisition costs, geological
and geophysical expense, engineering fees, related direct administrative
expenses and costs of drilling both productive and non-productive wells,
including the cost of production equipment.
Substantially all of our exploration, development and production activities are
conducted with others, and where applicable, the accounts reflect only our
proportionate interest in such activities.
Our estimate of recoverable oil reserves is subject to risk and uncertainties
affecting the recoverability of our investment in oil and natural gas
properties. Although we have made our best estimate of these factors based on
current conditions, it is reasonably possible that changes could occur in the
near term which could adversely affect our estimate of the recoverability of oil
and natural gas properties and the need for asset impairment write-downs.
Our operations may in the future be affected from time to time in varying
degrees by changes in environmental regulations. Both the likelihood of new
regulations and their overall affect upon us vary greatly from province to
province and are not predictable. See "Key Information- Risk Factors".
This discussion and analysis should be read in conjunction with our financial
statements included in this registration statement.
-29-
32
OVERVIEW
Our results of operations are influenced significantly by the business
environment in which we operate and, in particular, by crude oil and natural gas
prices and the costs to find and produce crude oil and natural gas, the demand
for and ability to deliver natural gas, the exchange rate between the Canadian
dollar and the U.S. dollar, refined product margins, the demand for pipeline
capacity, the demand for refined petroleum products and the interest rate
environment.
Oil and natural gas prices have been, and are expected in the future to be,
volatile and subject to fluctuations based on a number of factors beyond our
control. The prices received for the crude oil and natural gas liquids are
related to the price of crude oil in world markets. The market price of heavy
crude oil trades at a discount or differential to light crude oil.
World oil prices increased from late 1999 through 2000 as a result of increased
global demand, low petroleum inventories and better production management by the
Organization of Petroleum Exporting Countries ("OPEC"). The price for West Texas
Intermediate (WTI) crude oil, an industry benchmark, averaged $30.20 U.S. per
Bbl, $19.24 U.S. per Bbl and $14.43 U.S. per Bbl during 2000, 1999 and 1998
respectively. During 2000, the monthly average price per barrel of WTI
fluctuated between $25.54 U.S. per Bbl in April and $34.26 U.S. per Bbl in
November and ended the year at $28.40 U.S. per Bbl.
The demand for natural gas is affected by certain factors beyond our control,
such as weather patterns in North America, the availability of alternative
sources of energy supply and general industrial activity levels. There have been
and continue to be periodic imbalances between supply and demand for natural
gas.
Our results of operations are nominally affected by the exchange rate between
the Canadian dollar and the U.S. dollar. The exchange rate between the Canadian
dollar and the U.S. dollar has varied substantially over the past five years. A
small portion of our revenues, are received in or by reference to U.S. dollar
denominated prices, while the vast majority of our expenditures are in Canadian
dollars. Nevertheless, a change in the value of the Canadian dollar relative to
the U.S. dollar has the effect of increasing or decreasing revenues.
Inflation has impacted both capital and operating expenditures. The prices we
receive for our commodities may not move in direct relation to inflation-related
cost increases. Management currently does not anticipate that general inflation
will have a material effect on our operations.
RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES
Our financial statements have been prepared in accordance with accounting
principles generally accepted ("GAAP") in Canada, which differ in some respects
to those in the United States. Any differences in accounting principles as they
pertain to the accompanying financial statements are described in the auditor's
report and Footnote 10 to those financial statements except as described below:
-30-
33
(a) We perform a cost recovery ceiling test for each cost centre which
limits net capitalized costs to the undiscounted estimated future net
revenue from proved oil and gas reserves plus the cost of unproved
properties less impairment, using year end prices or average prices in
that year if appropriate. In addition, the aggregate value of all cost
centres is further limited by including financing costs, administration
expenses, future removal and site restoration costs and income taxes.
Under U.S. GAAP, companies using the full cost method of accounting for
oil and gas producing activities perform a ceiling test on each cost
centre using discounted estimated future net revenue from proved oil
and gas reserves using a discount factor of 10 percent. Prices used in
the U.S. GAAP ceiling tests performed for this reconciliation were
those in effect at the applicable year end. Financing and
administration costs are excluded from the calculation under U.S. GAAP.
(b) We have deferred unrealized gains and losses on translation of foreign
denominated long term monetary items which are amortized over the
remaining lives of the items. Under U.S. GAAP, gains or losses on
translation of foreign denominated long term monetary items, including
those on the capital securities, are credited or charged to earnings
immediately.
(c) We expense costs related to medical and dental post retirement benefits
as incurred. Under U.S. GAAP, companies are required to use the
projected benefit method prorated based on service.
(d) We record the capital securities as a component of equity and the
return thereon as a charge to retained earnings. Under U.S. GAAP, the
capital securities, the accrued return thereon and costs of the issue
would be classified outside of shareholders' equity and the related
return would be charged to earnings.
(e) We adopted the liability method of accounting for income taxes in the
first quarter of its fiscal year ending March 31, 1999. Canadian GAAP
liability method requires the measurement of future income tax
liabilities and assets using income tax rates that reflect enacted
income tax rate reductions provided it is more likely than not that the
Company will be eligible for such rate reductions in the period of
reversal. U.S. GAAP allows recording of such rate reductions only when
claimed.
OPERATING RESULTS
YEAR ENDED MARCH 31, 2001
The following discussion of the financial condition, changes in financial
condition and results of our operations for the year ended March 31, 2001
("Fiscal 2001"), the comparable year ended March 31, 2000 ("Fiscal 2000") and
the comparable year ended March 31, 1999 ("Fiscal 1999") should be read in
conjunction with our audited financial statements and related notes included
therein. Our financial statements are presented in Canadian dollars have been
prepared in accordance with Canadian GAAP.
We prepare our unaudited interim financial statements in accordance with
Canadian GAAP which differs in certain respects from those principals that we
would have followed had its financial statements been prepared in accordance
with U.S. GAAP.
-31-
34
REVENUES
Revenues totalled $2,376,208 for Fiscal 2001 compared to $1,179,325 for Fiscal
2000 and $200,093 for Fiscal 1999.
DIRECT COSTS
We incurred direct costs of $575,624 for 2001 compared to $232,313 for Fiscal
2000 and $41,175 for Fiscal 1999. The increases are attributable to increased
production, drilling and acquisitions.
GENERAL AND ADMINISTRATIVE EXPENSES
Non-capitalized general and administrative expenses were $541,907 for Fiscal
2001 compared with $140,702 for Fiscal 2000 and $66,149 for Fiscal 1999. The
increases were attributable to increased business activity.
INTEREST ON LONG TERM DEBT
We incurred interest expenses of $97,252 for 2001 as compared to $38,472 for
Fiscal 2000 and $0.00 for Fiscal 1999. These increases are attributable to the
extension and further utilization of our credit facility for both drilling and
other operations and for property acquisitions.
NET INCOME
After tax net income for Fiscal 2001 was $44,220 as compared to $158,768 for
Fiscal 2000 and $4,082 for Fiscal 1999.
INCOME TAXES
There were no current income taxes for Fiscal 2001, for Fiscal 2000 or for
Fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The funding of the our oil and gas activities is provided through the investment
of our cash flow from operations supplemented by the use of debt and equity
financing.
Our capital expenditures during Fiscal 2001 amounted to $1,873,286 compared to
$2,001,532 for Fiscal 2000 and $375,955 for 1999. We financed our Fiscal 2001
capital expenditure program through equity placements of $337,680, cash flow of
$402,975, bank debt of $1,132,631.
We entered into an agency agreement dated June 30, 1998 (the "Agency Agreement")
with Pacific International Securities Inc. ("PI") pursuant to which PI was
appointed to act as Agent for our initial public offering of 1,000,000 common
shares at a price of $0.30 per share. Under the Agency Agreement we also agreed
to grant to PI an option to purchase 100,000 common shares at a price of $0.30
per share. PI exercised these options on March 14, 2000 for gross proceeds to us
of $30,000.
At March 31, 2001, the outstanding options represented a total of 550,720 common
shares issuable for $258,532 if these options are exercised in full. The
exercise of these options are completely at the
-32-
35
discretion of the holders and we have had no indication that any of these
options will be exercised, if at all. See "Directors, Senior Management and
Employees - Share Ownership".
OPERATING LINE OF CREDIT
We have an authorized line of credit of $2,500,000 which bears interest at
Canadian prime plus one and one-half percent (8.25% as of March 31, 2001), is
payable on demand and is secured by a demand debenture granting a floating
charge on all of our present and future real and personal property and assets
and a general security agreement granting a security interest over all of our
present and after acquired personal property.
FUNDS PROVIDED BY OPERATIONS
Revenue from production for Fiscal 2001 was $2,376,208 ($33.93/BOE) compared to
$1,179,325 ($25.10/BOE) for Fiscal 2000 and $200,093 ($12.66/BOE) for Fiscal
1999. Gross revenues continue to increase every reporting period. Cash flow from
operating activities for Fiscal 2001 was $690,992 or $0.14 per share compared to
$575,900 or $0.14 per share for Fiscal 2000 and $72,255 or $0.03 per share for
Fiscal 1999.
FUNDS PROVIDED FROM FINANCING
During Fiscal 2001, we issued an aggregate of 417,000 common shares at a price
of $0.50 per common share for gross proceeds of $208,500, $158,500 of which was
in connection with the acquisition of three private Alberta corporations,
Tri-Tech Resources Ltd., 742521 Alberta Inc. and 717365 Alberta Ltd. See
"Information on the Company- History and Development of the Company". Another
410,000 common shares were issued on the exercise of stock options for gross
proceeds of $129,180.
During Fiscal 2000, the Company issued 512,500 common shares at prices ranging
from $0.34 to $0.55 per common share for gross proceeds of $260,105, $165,000 of
which was in connection with the acquisition of certain assets. See "Information
on the Company - History and Development of the Company".
During Fiscal 1999, we issued 111,100 common shares, on a flow-through basis, at
a price of $0.55 per common share for gross proceeds of $61,105. We also issued
100,000 common shares to PI, pursuant to the exercise of options, for gross
proceeds of $30,000.
All the financings were conducted outside the United States.
FUNDS USED FOR INVESTING
While we have been successful in raising the necessary funds to finance our
exploration and development activities, there can be no assurance that we will
be able to continue to do so. If such funds are not available or cannot be
obtained, we will be forced to curtail our exploration and development
activities to a level for which funding is available or can be obtained.
WORKING CAPITAL
At March 31, 2001, we had a working capital deficiency of $395,616. The Company
experienced a substantial decrease in its working capital in January through
March 2001 due to significant expenses (approximately $380,000) in drilling five
wells during this period. Although the drilling was successful the five wells
were not completed and brought into production until April/May 2001.
Consequently, the Company is just now beginning to receive additional revenues
to offset the drilling expenses. A portion of the shortfall in working capital
was relieved by drawing down funds available from the Company's revolving credit
line.
LONG-TERM DEBT
At March 31, 2001, we had long-term debt of $2,395,000 which was primarily used
for acquiring and developing oil and gas properties or interests.
-33-
36
INSURANCE
We maintain an insurance program consistent with industry practice to protect
against losses due to accidental destruction of assets, well blowouts, pollution
and other business interruptions. We also have an operational emergency response
plan in place. We believe we are in substantial compliance, in all material
respects, with current environmental legislation and we work closely with
governmental environmental agencies to maintain this level of compliance.
TREND INFORMATION
The consolidation of the oil and gas industry in Canada has resulted in the
emergence of larger companies which are inclined to develop larger prospects in
order to support their growth. We believe that this consolidation offers smaller
oil and gas companies, such as us, the opportunity to economically purchase
producing properties which do not meet the economic requirements of larger
companies. We further believe that we can leverage the experience of our
management and the economies of scale generated from consolidating properties in
certain of our core areas, to improve our profitability
OUTLOOK
We have developed our drilling prospects as well as our acquisition candidates
internally from analyses of geological and geophysical data together with a
review of drilling and production history in the target areas. The generation of
both play concepts as well as potential acquisition targets is followed by the
purchasing of land and then the subsequent drilling, in the case of new plays,
or, implementation of production optimizing practices for the subject lands, in
the case of acquisitions. We will continue to generate both drilling prospects
and acquisition candidates and strive to acquire a majority of the working
interest ownership therein. This allows us to manage all ongoing operations and
to maintain effective cost control.
-34-
37
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Set forth below are the names, ages, positions and work history of our
directors, executive officers and key employees:
-35-
38
Wayne S. Wadley, C.E.T., 42, - Mr. Wadley is a director and the President and
Chief Executive Officer of GEOCAN Energy Inc. and founder of the Company. Mr.
Wadley is a Certified Engineering Technologist receiving a Diploma in Petroleum
Resources Technology from the Northern Alberta Institute of Technology in
Edmonton in 1980. Mr. Wadley has been the President of Timberwolf Resources
Ltd., Timberwolf Energy Inc. since 1998 and, 4-Way Equipment Rentals Ltd. and
Timberwolf Technologies, Inc. since 1987. Mr. Wadley was the Vice-President,
Production/Operations for Danoil Energy Ltd. from September 1992 to April, 1997.
From 1989 to 1992 Mr. Wadley held the position of Production Superintendent with
OMV (Canada) Ltd. an Austrian based oil and gas production company with
operations in Canada.
Garry W. Lohuis, P.Eng.,43, - Mr. Lohuis is a director and the Vice-President
Operations and a founding shareholder of the Company. Mr. Lohuis received a
B.Sc. Petroleum Engineering from Montana College for Mineral Science and
Technology, Butte, Montana in 1982. Mr. Lohuis was employed by Canadian
Fracmaster Ltd. from 1986 to 1996. From 1992 to 1996 Mr. Lohuis was the Manager
of Fracmaster's business and marketing activities in Central and Eastern Europe.
Prior to his posting in Europe Mr. Lohuis was the Engineering Manager for
Fracmaster in Canada. From 1983 to 1986 Mr. Lohuis was employed by Geo Vann
Canada a completion engineering company and from 1977 to 1982 by Dome Petroleum
Ltd. a major oil and gas operator in Canada. Mr. Lohuis has extensive
international experience and was responsible for developing and procuring an
upstream oil and gas project in the Czech Republic for Gronarctic Energy Ind. In
addition to his European experience Mr. Lohuis has evaluated projects in Russia,
China, India, Oman, Libya, UAE, and Indonesia. Mr. Lohuis is a registered
professional engineer in the province of Alberta (APEGGA) and is an active
member of the Society of Petroleum Engineers (SPE) and is a member of the
Petroleum Economics Special Interest Group of the Canadian Institute of Mining,
Metallurgy & Petroleum.
Bradley J.S. Farris, B.Comm, G.Dip, 43, - Mr. Farris is a director and the
Vice-President Finance and Chief Financial Officer and a founding shareholder of
the Company. Mr. Farris earned a post graduate diploma in International
Economics from the University of East Anglia, Norwich, England in 1990 and a
B.Comm (Finance) from the University of Calgary in 1980. Mr. Farris spent three
years (1993 - 1996) with Canadian Fracmaster Ltd. as senior economist, focussing
on international projects in Russia, China, and the Middle East. From 1980 to
1992, Mr. Farris held various financial positions at Gulf Canada Resources Ltd.,
in the Frontier Development, Corporate Finance and the International Division,
concerning exploration and development opportunities in the Middle East,
Southeast Asia and Russia. Mr. Farris is the Vice President, Corporate
Development and Finance for Timberwolf Energy Inc., a private oil and gas
company with operations in Alberta and Saskatchewan.
William C. Guinan, B.B.A, M.B.A., LLB., 45, - Mr. Guinan is a director and the
Corporate Secretary and a founding shareholder of the Company. Mr. Guinan
graduated from Acadia University with a degree in
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Business Administration in 1977 and completed an M.B.A. and law degree at
Dalhousie University in 1982. Mr. Guinan is a partner with the national Canadian
law firm Borden Ladner Gervais LLP, formerly Howard, Mackie. Mr. Guinan has
extensive oil and gas experience in the areas of acquisitions and divestitures,
as well as in the areas of debt and equity financing. Mr. Guinan is currently a
director of a number of private and publicly listed companies that are active in
domestic oil and gas production. Mr. Guinan is not employed by the Company and
serves on the Company's audit committee.
Larry McMinn, 42, - Mr. McMinn is the Vice-President Exploration of the Company.
Mr. McMinn is the Vice-President Exploration of the Company. Mr. McMinn is a
Certified Engineering Technologist receiving a Diploma in Petroleum Resources
Technology from Northern Alberta Institute of Technology in Edmonton in 1980.
From 1980 to 1983 Mr. McMinn was a wellsite geologist and from 1983 to 1991 was
a staff geologist with Imperial Oil Resources Ltd. From 1992 until 2000 Mr.
McMinn was senior staff geologist for Danoil Energy Ltd.
None of our directors and/or executive officers have been the subject of any
order, judgment, or decree of any governmental agency or administrator or of any
court of competent jurisdiction, revoking or suspending for cause any license,
permit or other authority of such person or of any corporation of which he is a
director and/or executive officer, to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining or
enjoining any such person or any corporation of which he is an officer or
director from engaging in or continuing any conduct, practice, or employment in
connection with the purchase or sale of securities, or convicting such person of
any felony or misdemeanor involving a security or any aspect of the securities
business or of theft or of any felony.
There are no arrangements or understandings among any of our directors regarding
their election as director, and there are no family relationships. In addition,
the Company does not have any employment contracts with any of its employees or
officers and it has not purchased any key man insurance.
COMPENSATION
The aggregate amount of compensation paid by us during our most recent financial
year ended March 31, 2001 to all officers and directors, in their capacity as
such, as a group was $187,308. See "Executive Officers" below and "Majority
Shareholders and Related Party Transactions".
The Company is required, effective as of July 1, 2001, under applicable
securities legislation in Canada, to disclose to its shareholders details of
compensation paid to its directors and officers. The following fairly reflects
all material information regarding compensation paid to our directors and
officers, which information will be disclosed to our shareholders in accordance
with applicable Canadian law.
COMPENSATION OF DIRECTORS
Our directors do not receive any compensation as directors of the Company,
however, they are entitled to reimbursement for out of pocket expenses for
attendance at meetings of the board of directors or any committee of the board
of directors.
William C. Guinan, a director of the Company, is a partner with the law firm of
Borden Ladner Gervais LLP. Borden Ladner Gervais LLP has received fees from us
in the amount of $46,772 for legal services provided to us during Fiscal 2001
and continues to provide such services from time to time.
EXECUTIVE OFFICERS
During Fiscal 2001, we had four "executive officers" as defined in Form 40
prescribed by the Securities Regulation (Alberta): Wayne S. Wadley, the
Company's President and Chief Executive Officer, Garry W.
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Lohuis, the Company's Vice-President Operations, Bradley J. Farris, the
Company's Vice-President Finance and Chief Financial Officer and Larry McMinn,
the Company's Vice-President Exploration. The following table sets forth
particulars concerning the compensation of the executive officers for the
Company's three financial years ended March 31, 2001, 2000 and 1999.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------- ------------------------------------------------------
AWARDS
------------------------------------------------------
SECURITIES
OTHER UNDER ALL
BONUS ANNUAL OPTIONS/ RESTRICTED OTHER
NAME OF FOR THE COMPEN- SARS SHARES/ COMPEN-
PRINCIPAL AND SALARY YEAR SATION GRANTED UNITS LTIP SATION
POSITION YEAR ($) ($) ($) (#) AWARDS PAYOUTS ($)(1)
- ------------- ---- -------- ---------- -------- --------- ---------- ------- ----------
Wayne S. Wadley 2001 $43,065 -- -- 153,098 -- -- $1,380
President and 2000 $35,367 -- -- 14,000 -- -- --
C.E.O. 1999 $ 7,500 -- -- 109,000 -- -- --
Garry W. Lohuis 2001 $49,005 -- -- 153,098 -- -- $1,440
Vice-President 2000 $35,367 -- -- 14,000 -- -- --
Operations 1999 $ 7,500 -- -- 109,000 -- -- --
Bradley J. Farris 2001 $49,005 -- -- 153,098 -- -- $1,440
Vice-President 2000 $35,367 -- -- 14,000 -- -- --
Finance and C.F.O. 1999 $ 7,500 -- -- 109,000 -- -- --
Larry McMinn 2001 $46,233 -- -- 8,000 -- -- $1,328
Vice-President 2000 -- -- -- -- -- -- --
Exploration 1999 -- -- -- -- -- -- --
</Table>
Notes:
(1) Representing other compensation from employee stock purchase plan.
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Stock Options Granted
The following table sets out incentive stock options granted to the executive
officers during the financial year ended March 31, 2001.
OPTION/SAR GRANTS
DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
<Table>
<Caption>
MARKET VALUE OF
SECURITIES
UNDERLYING
SECURITIES % OF TOTAL OPTIONS/SARS
UNDER OPTIONS/SARS EXERCISE OR ON THE DATE OF
OPTIONS/SARS GRANTED IN BASE PRICE GRANT
NAME GRANTED (#) FINANCIAL YEAR ($/SECURITY) ($SECURITY) EXPIRATION DATE
Wayne S. Wadley 153,098 27.91% $0.47 - December 4, 2005
Garry W. Lohuis 153,098 27.91% $0.47 - December 4, 2005
Bradley J. Farris 153,098 27.91% $0.47 - December 4, 2005
Larry McMinn 8,000 1.46% $0.47 - December 4, 2005
</Table>
The following table sets out incentive stock options exercised by the executive
officers during the year-ending March 31, 2001 as well as the fiscal year-end
value of stock options held by the executive officers.
AGGREGATE OPTION/SAR EXERCISES
DURING THE YEAR ENDED MARCH 31, 2001 AND
FINANCIAL YEAR-END OPTION/SAR VALUES
<Table>
<Caption>
UNEXERCISED VALUE OF UNEXERCISED IN
SECURITIES OPTIONS/SARS AT THE MONEY OPTIONS/SARS
ACQUIRED ON AGGREGATE VALUE MARCH 31, 2001 AT MARCH 31, 2001
EXERCISE REALISED ($) EXERCISABLE/ ($) EXERCISABLE/
NAME (#) (CDN $)(1) UNEXERCISABLE UNEXERCISABLE(1)(2)
---- ------------- --------------- ------------------ -----------------------
Wayne S. Wadley 123,000 $22,960 153,098/0 $16,840.78/0
Garry W. Lohuis 123,000 $22,570 153,098/0 $16,849.78/0
Bradley J. Farris 123,000 $22,570 153,098/0 $16,849.78/0
Larry McMinn - - 8,000/0 $880.00/0
</Table>
Notes:
(1) Based on the difference between the option exercise price and the sale
of such shares at $0.50 per share.
(2) In-the-Money Options are those where the market value of the underlying
securities as at March 31, 2001 exceeds the option price. The closing
price of the Company's shares as at March 31, 2001 was $0.58.
Employment Contracts
There are no compensatory plans or arrangements between us and the executive
officers with respect to the resignation, retirement or other termination of
employment of the executive officers, a change in control of
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the Company or a change in the executive officers' responsibilities following a
change in control of the Company involving an amount, including all periodic
payments or installments, exceeding $100,000.
BOARD PRACTICES
All of the members of our board of directors are elected by the shareholders and
hold office until their successors are duly elected and qualified, unless they
sooner resign or cease to be directors in accordance with our articles of
incorporation.
CONFLICT OF INTEREST TRANSACTIONS
Certain of our directors and officers serve as directors or officers of other
reporting companies or have significant shareholdings in other reporting
companies and, to the extent that such other companies may participate in
ventures in which we may participate, our directors may have a conflict of
interest in negotiating and concluding terms respecting the extent of such
participation . In the event that such a conflict of interest arises at a
meeting of our directors, a director who has such a conflict will abstain from
voting for or against the approval of such a participation or such terms. From
time to time several companies may participate in the acquisition, exploration
and development of natural resource properties thereby allowing for their
participation in larger programs, permitting involvement in a greater number of
programs and reducing financial exposure in respect of any one program. It may
also occur that a particular company will assign all or a portion of its
interest in a particular program to another of these companies due to the
financial position of the company making the assignment. Under the laws of
Alberta, our directors are required to act honestly, in good faith and in the
best interests of the Company. In determining whether or not we will participate
in a particular program and the interest therein to be acquired by it, the
directors will primarily consider the degree of risk to which we may be exposed
and its financial position at the time.
Our plan currently in place to resolve actual and potential conflicts of
interest requires (1) full disclosure from directors, officers and key employees
with respect to any potentially competitive interests; and (2) the board of
directors to assess each actual or potential conflict of interest on a
case-by-case basis. If the board of directors determines that an actual or
potential conflict of interest exists, it will act to mitigate or remove the
conflict. There have been no actual conflicts of interest issues to date.
COMPENSATION COMMITTEE
We do not have a compensation committee of our board of directors and therefore
our whole board comprised of Wayne S. Wadley, Garry W. Lohuis, Bradley J. Farris
and William C. Guinan are considered to be our compensation committee.
Of the members of the compensation committee, Wayne S. Wadley also serves as our
President and Chief Executive Officer, Garry W. Lohuis serves as our
Vice-President Operations, Bradley J. Farris serves as our Vice-President
Finance and Chief Financial Officer and William C. Guinan serves as our
Corporate Secretary.
The compensation of executive officers is composed primarily of two elements:
namely a base salary and the allocation of incentive stock options. In addition,
all executive officers, other than the Corporate Secretary, participate in our
employee stock purchase plan. To date, we have not awarded any bonuses nor is
there currently any intention by the compensation committee to do so. In
establishing levels of remuneration and in granting stock options, the
compensation committee takes into consideration an
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individual's performance, level of expertise, responsibilities, length of
service to the Company and comparable levels of remuneration paid to executives
of other companies of comparable size and development within the industry. The
individual interested executive does not participate in review, discussion or
decisions of the compensation committee regarding this remuneration.
OUR EMPLOYEES
We currently have sixteen full and part time employees and independent
consultants, including five employees in management and two full time employees
in administration and four part time employees in administration, and five
independent contractors providing services in the field.
The following is a breakdown of our the average number of employees and
independent contractors providing services to us by geographic location over the
last three years:
AVERAGE NUMBER OF FULL TIME OFFICE EMPLOYEES AND INDEPENDENT FIELD CONTRACTORS
<Table>
<Caption>
GEOGRAPHIC LOCATION DURING THE YEAR ENDED DURING THE YEAR ENDED DURING THE YEAR ENDED
MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 1999
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Calgary, Alberta 7 6 4
Swan Hills, Alberta 3 2 2
Midale, Saskatchewan 2 2 2
</Table>
None of our employees are subject to collective bargaining agreements, and we
believe we have a positive relationship with our employees and independent
contractors.
SHARE OWNERSHIP
BENEFICIAL SHARE OWNERSHIP OF OUR DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth the beneficial ownership of our directors and
senior management as at the date hereof:
<Table>
<Caption>
NUMBER OF COMMON SHARES OWNED
BENEFICIALLY OR SUBJECT TO CONTROL
IDENTITY OF PERSONS OR GROUP OR DIRECTION(1) PERCENTAGE OF CLASS (1)
---------------------------- ----------------------------------- -----------------------
DIRECTORS AND EXECUTIVE OFFICERS
---------------------------------
Wayne S. Wadley 984,298 16.3%
Garry W. Lohuis 404,863 6.70%
Bradley Farris 431,864 7.2%
William C. Guinan 142,366 2.39%
Larry McMinn 277,214 4.6%
Directors & officers as a group (5 persons) 2,240,605 37.19%
</Table>
Notes:
(1) The figures reflect both shares actually owned and options held by each
individual that are exercisable within 60 days from the date hereof.
The following table sets out the options held by each individual used in
calculating the beneficial ownership amounts listed above.
-41-
44
<Table>
<Caption>
OPTIONEE POSITION NUMBER OF OPTIONS PRICE EXPIRY DATE
- ------------------------- --------------------------------- --------------------- ------------- ----------------------
Wayne S. Wadley President 153,098 $0.47 December 4, 2005
Garry W. Lohuis Vice-President Operations 153,098 $0.47 December 4, 2005
Bradley J. Farris Vice-President Finance 153,098 $0.47 December 4, 2005
William C. Guinan Corporate Security 51,366 $0.47 December 4, 2005
Larry McMinn Vice-President Exploration 8,000 $0.47 December 4, 2005
TOTAL 518,660
</Table>
OUR EMPLOYEE STOCK OPTION PLAN
Pursuant to a resolution of the board of directors dated as of April 6, 1998 we
established a stock option plan (the "Plan") for our directors, officers and
employees under which we may grant options to acquire our common shares,
provided that the aggregate number of common shares issuable on the exercise of
all outstanding options does not exceed 10% of our issued and outstanding common
shares at the time of grant as determined from time to time. The Plan provides
that the terms of the option and the option price shall be fixed by the
directors subject to the price restrictions and other requirements imposed by
the Exchange. The Plan also provides that no option shall be granted to any
person except upon recommendation of our directors, and only our directors,
officers, employees and consultants or our subsidiaries may receive stock
options. Stock options granted under the Plan may not be for a period longer
than five years and the exercise price must be paid in full upon exercise of the
option.
The options are adjusted in the event of a share consolidation, subdivision, or
other similar change to our share capital.
As of March 31, 2001, 518,660 incentive stock options were granted to our
directors and officers as follows:
<Table>
<Caption>
DIRECTOR/OFFICER NUMBER GRANTED(1) EXERCISE PRICE PER SHARE DATE OF GRANT
- ------------------------------ ---------------------------- --------------------------- ----------------------------
Wayne S. Wadley 153,098 $0.47 December 4, 2000
Garry W. Lohuis 153,098 $0.47 December 4, 2000
Bradley J. Farris 153,098 $0.47 December 4, 2000
William C. Guinan 51,366 $0.47 December 4, 2000
Larry McMinn 8,000 $0.47 December 4, 2000
</Table>
Notes:
(1) Includes the options granted to executive officers previously disclosed.
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45
During Fiscal 2001, 518,660 incentive stock options were granted to our
directors and officers. As at March 31, 2001, incentive stock options to
purchase 550,720 common shares were outstanding as follows:
<Table>
<Caption>
NUMBER OF OPTIONS
OUTSTANDING AS AT
EXERCISE PRICE MARCH 31, 2001 EXPIRY DATE
-------------- ------------------ -----------
Options held by Directors and Officers $0.47 518,660 December 4, 2005
as a Group (5 people)
Options held by Employees/Consultants $0.34 2,360 January 24, 2005
as a Group (5 people) $0.47 29,700 December 4, 2005
</Table>
OUR EMPLOYEE STOCK PURCHASE PLAN
A stock purchase plan (the "Purchase Plan") was established on April 1, 2000 in
which our key employees, consultants and contractors are entitled to
participate. Two Calgary, Alberta brokerage firms have been retained by us to
administer the Purchase Plan. The intent of the Purchase Plan is to allow
employees, consultants and contractors to take an active role in our growth and
to be able to share in our success. The Purchase Plan allows each participant to
contribute 8% of their monthly salary, consulting fees or contractor invoice
amounts, as the case may be, toward the purchase of our common shares. The
common shares are purchased on the open market. We match the contribution at
$0.50 on the $1.00 to a maximum of 4% on an 8% participant contribution. The
Purchase Plan took effect on, April 1, 2000 with participant contributions being
retained from month end salaries, consulting fees or contractor invoices, as the
case may be. Our contribution is a taxable benefit to the participants. If the
participant terminates their involvement in the Purchase Plan at any time, they
will forfeit our contribution. Forfeited Company contributions will be retained
in the Purchase Plan and redistributed among the participants remaining in the
Purchase Plan. As of March 31, 2001, 49,300 common shares were purchased under
the Purchase Plan on behalf of the following employees:
<Table>
<Caption>
NUMBER OF COMMON PURCHASE PRICE OF
EMPLOYEE SHARES PURCHASED COMMON SHARES(1) DATE OF PURCHASE
-------- ---------------- ----------------- ----------------
Wayne S. Wadley 8,035 $0.52 February 21, 2001
Garry W. Lohuis 8,382 $0.52 February 21, 2001
Bradley J. Farris 8,383 $0.52 February 21, 2001
Larry McMinn 7,357 $0.54 February 21, 2001
Other Employees as a Group 17,143 $0.53 February 21, 2001
(9 people)
</Table>
Notes:
(1) Average of purchase price per share over the purchase period.
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46
MAJORITY SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJORITY SHAREHOLDERS
We are currently a publicly held corporation, with our common shares held by
residents of Canada, the United States and other countries. To the best of our
knowledge, we are not controlled, directly or indirectly, by another corporation
or any government.
As of the date hereof, to the best of our knowledge, no person or corporation or
other entity owns, directly or indirectly, or controls more than 5% of our
common shares except for the persons or groups listed below:
<Table>
<Caption>
NUMBER OF COMMON SHARES OWNED
BENEFICIALLY OR SUBJECT TO CONTROL
IDENTITY OF PERSONS OR GROUP OR DIRECTION (1) PERCENTAGE OF CLASS(1)
---------------------------- ---------------------------------- ----------------------
Wayne S. Wadley 984,298 16.3%
Bradley J. Farris 431,864 7.2%
Garry W. Lohuis 404,863 6.7%
</Table>
Notes:
(1) Includes options exercisable within 60 days of the date hereof.
None of the above shareholders have different voting rights than our other
shareholders.
There are no arrangements, known to us that may at a subsequent date result in a
change in our control.
RELATED PARTY TRANSACTIONS
Certain of our directors and officers serve as directors or officers of other
reporting companies or have significant shareholdings in other reporting
companies and, to the extent that such other companies may participate in
ventures in which we may participate, our directors may have a conflict of
interest in negotiating and concluding terms respecting the extent of such
participation. In the event that such a conflict of interest arises at a meeting
of our directors, a director who has such a conflict will abstain from voting
for or against the approval of such a participation or such terms. From time to
time several companies may participate in the acquisition, exploration and
development of natural resource properties thereby allowing for their
participation in larger programs, permitting involvement in a greater number of
programs and reducing financial exposure in respect of any one program. It may
also occur that a particular company will assign all or a portion of its
interest in a particular program to another of these companies due to the
financial position of the company making the assignment. Under the laws of
Alberta, our directors are required to act honestly, in good faith and in our
best interests. In determining whether or not we will participate in a
particular program and the interest therein to be acquired by it, the directors
will primarily consider the degree of risk to which we may be exposed and its
financial position at the time.
Other than disclosed elsewhere in this registration statement, none of our
directors, senior officers, principal shareholders named in "Directors, Senior
Management and Employees" or above in "Major Shareholders", or any relative or
spouse of the foregoing, have had an interest, direct or
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47
indirect, in any transaction, within the three fiscal years prior to the date of
this registration statement, or in any proposed transaction which has materially
affected or will materially affect us or any of our subsidiaries except for the
following:
(a) Pursuant to Loan Agreements dated November 23, 2000 between us and each
of our directors, namely, Wayne S. Wadley, Garry W. Lohuis, Bradley J.
Farris and William C. Guinan, we made loans in the amounts of $38,540
to each Mr. Wadley, Mr. Lohuis and Mr. Farris and a loan in the amount
of $12,780 to Mr. Guinan for an aggregate amount of $128,400. The loan
proceeds were provided on an interest-free basis and applied by all of
the directors to pay to us the exercise price of all of the stock
options in us held by each director as of that date. The resulting
common shares are held by each director for use at our direction from
time to time, in connection with the Investor Relations Services
Agreement dated November 30, 2000 between us and FPI, Inc. Until such
time as the directors were directed by us to transfer the foregoing
common shares to FPI, Inc., the foregoing common shares were pledged by
each director as security for the balance owing under the said Loan
Agreements. The loan amount was to be repaid using share sale proceeds
paid by FPI, Inc. to each director. Our recourse for the liability of
our directors is limited to the common shares. The loan to Mr. Guinan
was repaid in full on June 1, 2001. The loans to each of Mr. Wadley and
Mr. Lohuis were repaid and on June 11, 2001. The amount owing by Mr.
Farris on the date hereof is $3,930.
(b) Pursuant to a Loan Agreement dated March 29, 2000 between us and Larry
McMinn our Vice-President Exploration, we loaned $34,000 to Mr. McMinn
for use by Mr. McMinn in paying the subscription price of $0.34 for
100,000 common shares. The 100,000 common shares are pledged as
security for the loan amount. The loan was provided on an interest-free
basis and our recourse for the liability of Mr. McMinn for the loan is
limited to the 100,000 common shares.
(c) Timberwolf Resources Ltd., a private Alberta corporation, of which
Wayne Wadley, our President and C.E.O. is the sole officer, director
and shareholder, is a party to the following agreements with us namely:
Participation and Operating Agreement dated June 1, 1995 relating to
our Dina area property and a Farm-out and Participation Agreement dated
January 17, 2000 relating to our Staplehurst area property. Timberwolf
Resources Ltd. was also both the general partner as well as a limited
partner of Timberwolf Production Fund #4 Limited Partnership which
entered into an Agreement of Purchase and Sale dated October 29, 1998
with us respecting the Carson Creek area property.
(d) Bradley J. Farris, our Vice-President Finance is a party to the 742521
Alberta Inc. Share Purchase Agreement dated October 31, 2000 among
Bradley J. Farris, Julie Farris and Brendan Farris, as vendor, and us,
as purchaser. Mr. Farris and his family received 52,000 common shares
of the Company and $64,000 in cash.
(e) Larry McMinn, our Vice-President Exploration, is a party to the
Tri-Tech Resources Ltd. Share Purchase Agreement dated October 1, 2000
between Larry McMinn, as vendor, and us, as purchaser.
(f) Wayne S. Wadley, Bradley J. Farris and William C. Guinan, are all
directors and officers of the Company are also the directors, officers
and principal shareholders of Timberwolf Energy Inc., a private Alberta
corporation, which is a party to the following agreements with us
namely: Participation and Operating Agreement dated June 1, 1995
relating to our Dina area property and a Farm-out and Participation
Agreement dated January 17, 2000 relating to our Staplehurst area
property.
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FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the financial statements and Exhibits listed herein and filed as part of
this registration statement.
LISTING DETAILS
DESCRIPTION OF SECURITY TO BE LISTED
We are authorized to issue an unlimited number of Class "A" common voting
shares, Class "B" common voting shares, Class "C" common non-voting shares and
preferred shares. As at the date hereof, 5,383,600 Class "A" common shares were
issued and outstanding as fully paid and non-assessable shares of the Company.
To date, no Class "B" common voting shares, no Class "C" common non-voting
shares and no preferred shares have been issued and all references to common
shares herein refer to the Class "A" common shares.
CLASS "A" COMMON VOTING SHARES
The holders of our Class "A" common voting shares have the following attributes:
(a) to receive notice of and to attend and vote at all meetings of
shareholders, except meetings at which only holders of a special class
of shares are entitled to vote;
(b) to receive any dividend declared by us on the class of shares; provided
that we shall be entitled to declare dividends on the Class "B" common
voting shares, the Class "C" common non-voting shares and the preferred
shares, or on any of such classes of shares without being obliged to
declare any dividends on the Class "B" common voting shares of the
Company;
(c) subject to the rights, privileges, restrictions and condition attaching
to any other class of shares of the Company, to receive the remaining
property of the Company upon dissolution in equal rank with the holders
of all other common shares of the Company; and
(d) to the rights, privileged and restrictions normally attached to common
shares.
EFFECT OF ACCUMULATED DIVIDENDS
If any cumulative dividends or amounts payable on the return of capital in
respect of a series of preferred shares are not paid in full, all series of
preferred shares shall participate ratably in respect of accumulated dividends
and return of capital.
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49
We have not paid any dividends since incorporation and we have no plans to pay
dividends for some time. The directors of the Company will determine if and when
dividends should be declared and paid in the future based on our financial
position at the relevant time. All of the common shares are entitled to an equal
share of any dividends declared and paid.
NATURE OF TRADING MARKET
Our common shares are traded on the Canadian Venture Exchange under the symbol
GCA. Set forth below are the trading prices for our common shares on the
Exchange for the last five months and for the previous two calendar years.
THE CANADIAN VENTURE EXCHANGE
<Table>
<Caption>
1999 HIGH (CDN$) LOW (CDN$) VOLUME
- ---------------------------- -------------------------- ------------------------- --------------------------
First Quarter 0.33 0.26 23,000
Second Quarter 0.40 0.24 64,500
Third Quarter 0.46 0.35 70,000
Fourth Quarter 0.53 0.34 59,000
</Table>
<Table>
<Caption>
2000 HIGH (CDN$) LOW (CDN$) VOLUME
- ---------------------------- -------------------------- ------------------------- --------------------------
First Quarter 0.41 0.26 233,500
Second Quarter 0.40 0.28 142,500
Third Quarter 0.50 0.28 66,467
Fourth Quarter 0.74 0.45 98,700
</Table>
<Table>
<Caption>
2001 HIGH (CDN$) LOW(CDN$) VOLUME
- ---------------------------- -------------------------- ------------------------- --------------------------
First Quarter 0.95 0.58 203,900
</Table>
<Table>
<Caption>
2001 HIGH (CDN $) LOW(CDN $) VOLUME
- ---------------------------- -------------------------- ------------------------- --------------------------
MAY 0.98 0.82 45,700
</Table>
Based on our knowledge, after reasonable inquiry as of June 19, 2001, according
to the records of the Company's registrar and transfer agent, Computershare
Trust Company of Canada the total number of common shares held of record by
residents in the United States is 268,815 common shares representing
approximately 4.97% of the 5,383,600 common shares issued and outstanding which
are held by four United States residents.
We have not paid any dividends since incorporation, and it has no plans to pay
dividends for some time. Our directors will determine if and when dividends
should be declared and paid in the future based on our financial position at the
relevant time. All of the common shares are entitled to an equal share in any
dividends declared and paid thereon.
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50
We are required to file annual reports on Form 20-F and periodic reports on Form
6-K. As a foreign private issuer, we will not be subject to the reporting
obligations of Exchange Act Section 14's proxy rules or Section 16's insider
short-swing profit rules.
ADDITIONAL INFORMATION
SHARE CAPITAL - DESCRIPTION OF SECURITIES TO BE REGISTERED
We are authorized to issue an unlimited number of Class "A" common voting
shares, Class "B" common voting shares, Class "C" common non-voting shares and
preferred shares. As at March 31, 2001, 5,383,600 Class "A" common shares were
issued and outstanding as fully paid and non-assessable shares of the Company.
To date, no Class "B" common voting shares, no Class "C" common non-voting
shares and no preferred shares have been issued.
ARTICLES OF INCORPORATION AND BY-LAWS
Our articles of incorporation were filed with the Alberta Registrar of
Corporations on January 12, 1998 and amended by Certificates of Amendment dated
February 11, 1998 and April 20, 1998. Our Bylaws were approved on March 25, 1998
by a resolution of the directors.
REGISTRATION AND CORPORATE PURPOSE
Corporate Registration
We are a corporation currently incorporated under the laws of the Province of
Alberta, Canada and extra-provincially registered to carry on business in the
Province of Saskatchewan, Canada.
Purpose
We have the capacity and, subject to the Business Corporations Act (Alberta),
the rights, powers and privileges of a natural person.
DIRECTOR POWERS AND QUALIFICATIONS
Interested Transaction
A director or officer of ours who, either directly or indirectly, is a party to
a material contract or proposed material contract with us shall disclose in
writing to us and request to have entered in the minutes of meetings of
directors the nature and extent of his interest and, in respect of a director,
shall not vote on any resolution to approve a contract in which he has an
interest except as permitted under the Business Corporations Act (Alberta).
Board Compensation
The board of directors has the power to vote compensation to themselves or any
member of their body without requiring an independent quorum.
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Borrowing Power
We have the corporate power and authority to borrow money upon our credit and to
provide security therefor.
Director Age Limit Requirement
A director cannot be less than 18 years of age.
Number Of Shares Required For Director Qualification
There is no requirement that directors hold our shares.
RIGHTS AND PREFERENCES OF SHARES
Common Shares
Class "A" Common Voting Shares And Class "B" Common Voting Shares
The holders of our Class "A" common voting shares or Class "B" common voting
shares are entitled:
(a) to receive notice of and to attend and vote at all meetings of
shareholders, except meetings at which only holders of a special class
of shares are entitled to vote;
(b) in the case of the Class "A" common voting shares, to receive any
dividend declared by us on the class of shares; provided that we shall
be entitled to declare dividends on the Class "B" common voting shares,
the Class "C" common non-voting shares and the Preferred Shares, or on
any of such classes of shares without being obliged to declare any
dividends on the Class "B" common voting shares of the Company;
(c) in the case of the Class "B" common voting shares, to receive any
dividend declared by us on the class of shares; provided that we shall
be entitled to declare dividends on the Class "A" common voting shares,
the Class "C" common non-voting shares and the preferred shares, or on
any of such classes of shares without being obliged to declare any
dividends on our Class "B" common voting shares;
(d) subject to the rights, privileges, restrictions and condition attaching
to any other class of our shares, to receive our remaining property
upon dissolution in equal rank with the holders of all other common
shares of the Company; and
(e) to the rights, privileged and restrictions normally attached to common
shares.
Class "C" Common Non-Voting Shares
The holders of our Class "C" common non-voting shares are entitled:
(a) to receive any dividends declared by us on this class of shares;
provided that we shall be entitled to declare dividends on the Class
"A" common voting shares, the Class "B" common voting shares and the
preferred shares, or on any of such classes of shares without being
obliged to declare any dividends on our Class "C" common non-voting
shares; and
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(b) subject to the rights, privileges, restrictions and conditions
attaching to any other class of our shares, to receive the remaining
property of the Company upon dissolution in equal rank with the holders
of all our other common shares.
Preferred Shares
Issuable In Series
The preferred shares may be issued from time to time in one or more series, each
series consisting of a number that preferred shares as determined by our board
of directors who may also fix the designations, rights, privileges, restrictions
and conditions attaching to the shares of each series of preferred shares,
including any voting rights, the rate or amount of dividends or the method of
calculating dividends, the dates of payment thereof, the terms and conditions of
redemption, purchase and conversion, if any, and sinking fund or other
provisions. There are no preferred shares issued and outstanding.
Priority
The preferred shares of each series shall, with respect to payment of dividends
and distributions of assets in the event of our liquidation, dissolution or
winding-up, whether voluntary or involuntary, or any other distribution of our
assets among our shareholders for the purpose of winding-up our affairs, rank on
a parity with the preferred shares of every other series and shall be entitled
to preference over our voting and non-voting common shares and the shares of any
other class ranking junior to the preferred shares of that series.
Accumulated Dividends
If any cumulative dividends or amounts payable on the return of capital in
respect of a series of preferred shares are not paid in full, all series of
preferred shares shall participate ratably in respect of accumulated dividends
and return of capital.
We have not paid any dividends since incorporation and we have no plans to pay
dividends for some time. Our directors will determine if and when dividends
should be declared and paid in the future based on our financial position at the
relevant time. All of the common shares are entitled to an equal share of any
dividends declared and paid.
CHANGING RIGHTS OF SHARES
Our articles of incorporation may by a resolution passed by a majority of not
less than 2/3 of the votes cast by the shareholders be amended to change the
designation of all or any of its shares, and add, change or remove any rights,
privileges, restrictions and conditions.
SHAREHOLDER MEETINGS
Annual Meetings - Time And Place
The annual meeting of shareholders shall be held at such time in each year and
in Calgary, Alberta, Canada as our President may from time to time determine.
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Notice Of Meeting
Notice of the time and place of each meeting of shareholders shall be given not
less than 21 days nor more than 50 days before the date of the meeting to each
director, to the auditor and to each shareholder who at the close of business on
the record date for notice, is entered in the securities register as the holder
of one or more shares carrying the right o vote at the meeting.
Record Date
Our board of directors may fix in advance a record date, preceding the date of
any meeting of the shareholders by not more than 50 days and not less than 21
days, for the determination of the shareholders entitled to notice of the
meeting, provided that notice of any such record date is given, not less than 14
days before such record date, by newspaper advertisement in the manner provided
in the Business Corporations Act (Alberta). If no record date is so fixed, the
record date for the determination of the shareholders entitled to notice of the
meeting shall be the close of business on the last business day immediately
preceding the day on which the notice is sent, or, if no notice is sent, the day
on which the meeting is held.
Right To Vote
Subject to the provisions of the Business Corporations Act (Alberta) as to
authorized representatives of any other body corporate, at any meeting of
shareholders, every person who is named in the list we prepared in accordance
with its By-laws shall be entitled to vote the shares shown thereon opposite his
name except, where we have fixed a record date in respect of such meeting, to
the extent that such person has transferred any of his shares after such record
date and the transferee, upon producing properly endorsed certificates
evidencing such shares or otherwise establishing that he owns such shares,
demands not later than 10 days before the meeting that his name be included to
vote the transferred shares at the meeting. In the absence of a list prepared as
aforesaid in respect of a meeting of shareholders, every person shall be
entitled to vote at the meeting who at the time is entered in the securities
register as the holder of one or more shares carrying the right to vote at such
meeting.
Meetings Without Notice
A meeting of shareholders may be held without notice at any time and place
permitted by the Business Corporations Act (Alberta) (a) if all the shareholders
entitled to vote thereat are present in person or represented by proxy or if
those not present or represented by proxy waive notice of or otherwise consent
to such meeting being held, and (b) if the auditors and the directors are
present or waive notice of or otherwise consent to such meeting being held. At
such meeting any business may be transacted which we, at a meeting of
shareholders, may transact. If the meeting is held at a place outside Alberta,
shareholders not present or represented by proxy, but who have waived notice of
or otherwise consented to such meeting, shall also be deemed to have consented
to the meeting being held at such place.
MATERIAL CONTRACTS
The Company believes it has no material contracts which occurred outside of its
normal course of business. All material contracts which occurred in the ordinary
course of business are attached to this registration statement as exhibits.
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EXCHANGE CONTROLS
Canada has no system of exchange controls. There are no exchange restrictions on
borrowing from foreign countries or on the remittance of dividends, interest,
royalties and similar payments, management fees, loan repayments, settlement of
trade debts, or the repatriation of capital. However, any dividends remitted to
U.S. Holders, as defined below, will be subject to withholding tax.
There are no limitations under the laws of Canada or Alberta or in our
memorandum and articles on the rights of non-Canadians to hold or vote our
common shares. Under the provisions of the Investment Canada Act (the "ICA"), as
amended by the Canada-United States Free Trade Implementation Act (Canada), and
the Canada-United States Free Trade Agreement, review and approval of the
transaction by the Investment Canada Agency ("Investment Canada"), the federal
agency created by the ICA are required where a U.S. person directly acquires
control of a Canadian business with assets of more than Cdn$184 million (1999).
The term "control" is defined as any one or more non-Canadian persons acquiring
all or substantially all of the assets used in the Canadian business, or the
acquisition of the voting shares of a Canadian corporation carrying on the
Canadian business or the acquisition of the voting interest of an entity
controlling or carrying on the Canadian business. The acquisition of the
majority of the outstanding shares is deemed to be an "acquisition of control"
of a corporation unless it can be established that the purchaser will not, in
fact, control the Canadian corporation.
Subject to the comments contained in the following paragraph regarding WTO
investors, investments requiring notification and review are all direct
acquisitions of Canadian businesses with assets of Cdn$5,000,000 or more and all
indirect acquisitions of Canadian businesses with assets between Cdn$5,000,000
and Cdn$50,000,000 which represent more than 50% of the value of the total
international transaction. (Indirect acquisition means the acquisition of the
voting rights of an entity controlling the Canadian corporation.) In addition,
specific acquisitions or new businesses in designated types of business
activities related to Canada's cultural heritage or national identity, which
would normally only be notifiable, could be reviewed if the Government of Canada
considers it in the public interest to do so.
The Act was amended with the implementation of the agreement establishing the
World Trade Organization ("WTO") to provide for special review thresholds for
"WTO investors", as defined in the Act. "WTO investor" generally means (i) an
individual, other than a Canadian, who is a national of a WTO member (such as,
for example, the United States), or who has the right of permanent residence in
relation to that WTO member, (ii) governments of WTO members, and (iii) entities
that are not Canadian controlled, but which are WTO investor controlled, as
determined by rules specified in the Act. The special review thresholds for WTO
investors do not apply, and the general rules described above do apply, to the
acquisition of control of certain types of businesses specified in the Act,
including a business that is a "cultural business". If the WTO Investor rules
apply, an investment in shares of the Issuer by or from a WTO investor will be
reviewable only if it is an investment to acquire control of the Issuer and the
value of the assets of the Issuer is equal to or greater than a specified amount
(the "WTO Review Threshold"). The
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WTO Review Threshold is adjusted annually by a formula relating to increases in
the nominal gross domestic product of Canada. The WTO Review Threshold is
Cdn$152,000,000 (in 2000).
If any non-Canadian, whether or not a WTO Investor, acquires control of the
Issuer by the acquisition of shares, but the transaction is not reviewable as
described above, the non-Canadian is required to notify the Canadian government
and to provide certain basic information relating to the investment. A
non-Canadian, whether or not a WTO investor, is also required to provide a
notice to the government on the establishment of a new Canadian business. If the
business of the Issuer is a prescribed type of business activity relating to
Canada's cultural heritage or national identity, and if the Canadian government
considers it to be in the public interest to do so, then the Canadian government
may give a notice in writing within 21 days requiring the investment be
reviewed.
For non-Canadians (other than WTO investors), an indirect acquisition of
control, by the acquisition of voting interests of an entity that directly or
indirectly controls the Issuer, is reviewable if the value of the assets of the
Issuer is then Cdn$50,000,000 or more. If the WTO investor rules apply, then
this requirement does not apply to a WTO investor, or to a person acquiring the
entity from a WTO investor. Special rules specified in the Act apply if the
value of the assets of the Issuer is more than 50% of the value of the entity so
acquired. By these special rules, if the non-Canadian (whether or not a WTO
investor) is acquiring control of an entity that directly or indirectly controls
the Issuer, and the value of the assets of the Issuer and all other entities
carrying on business in Canada, calculated in the manner provided in the Act and
the regulations under the Act, is more than 50% of the value, calculated in the
manner provided in the Act and the regulations under the Act, of the assets of
all entities, the control of which is acquired, directly or indirectly, in the
transaction of which the acquisition of control of the Issuer forms a part, then
the thresholds for a direct acquisition of control as discussed above will
apply. That is, a WTO Review threshold of Cdn$192,000,000 (in 2000) for a WTO
investor or a threshold of Cdn$5,000,000 for a non-Canadian other than a WTO
investor. If the value exceeds that level, then the transaction must be reviewed
in the same manner as a direct acquisition of control by the purchase of shares
of the Issuer.
If an investment is reviewable, an application for review in the form prescribed
by regulations is normally required to be filed with the agency established by
the Act (the "Agency") prior to the investment and the investment may not be
consummated until the review has been completed. There are, however, certain
exceptions. Applications concerning indirect acquisition may be filed up to 30
days after the investment is consummated and applications concerning reviewable
investments in culture-sensitive sectors are required upon receipt of a notice
for review. There is, moreover, provision for the Minister (a person designated
as such under the Act) to permit an investment to be consummated prior to
completion of review, if he is satisfied that delay would cause undue hardship
to the acquirer or jeopardize the operation of the Canadian business that is
being acquired. The Agency will submit the application to the Minister, together
with any other information or written undertakings given by the acquirer and any
representation submitted to the Agency by a province that is likely to be
significantly affected by the investment.
The Minister will then determine whether the investment is likely to be of net
benefit to Canada, taking into account the information provided and having
regard for other factors where they are relevant. Some of the factors to be
considered are the effect of the investment on the level and nature of economic
activity in Canada, including the effect on employment, on resource processing,
on the utilization of parts, components and services produced in Canada, and on
exports from Canada.
Additional factors of assessment include (i) the degree and significance of
participation by Canadians in the Canadian business and in any industry in
Canada of which it forms a part; (ii) the effect of the investment on
productivity, industrial efficiency, technological development, product
innovation and product variety in
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Canada; (iii) the effect of the investment on competition within any industry or
industries in Canada; (iv) the compatibility of the investment with national
industrial, economic and cultural policies taking into consideration industrial,
economic and cultural objectives enunciated by the government or legislature of
any province likely to be significantly affected by the investment; and (v) the
contribution of the investment to Canada's ability to compete in world markets.
To insure prompt review and decision, the Act sets certain time limits for the
Agency and the Minister. Within 45 days after a completed application has been
received, the Minister must notify the acquirer that (a) he is satisfied that
the investment is likely to be of net benefit to Canada, or (b) he is unable to
complete his review, in which case he shall have 30 additional days to complete
his review (unless the acquirer agrees to a longer period), or (c) he is not
satisfied that the investment is likely to be of net benefit to Canada.
Where the Minister has advised the acquirer that he is not satisfied that the
investment is likely to be of net benefit to Canada, the acquirer has the right
to make representations and submit undertakings within 30 days of the date of
the notice (or any further period that is agreed upon between the acquirer and
the Minister). On the expiration of the 30-day period (or the agreed extension),
the Minister must quickly notify the acquirer (a) that he is now satisfied that
the investment is likely to be of net benefit to Canada or (b) confirming that
he is not satisfied that the investment is likely to be of net benefit to
Canada. In the latter case, the acquirer may not proceed with the investment or,
if the investment has already been consummated, must relinquish control of the
Canadian business. The Act authorizes the Minister to give written opinions,
binding the Minister, on the application of the Act or regulations to the
persons seeking the opinions to the Agency or a designated official. The Act
also authorizes the Minister to issue guidelines and interpretations with
respect to the application and administration of any provision of the Act or the
regulations.
The Act provides for civil penalties for non-compliance with any provision
except breach of confidentiality or provision of false information, for which
there are criminal penalties.
TAXATION
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of all material United States federal
income tax consequences, under current law, generally applicable to a U.S.
Holder (as hereinafter defined) of our common shares. 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 "Canadian Federal Income Tax
Consequences" above).
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. This discussion is for general information only and it is
not intended to be, nor should it be construed to be, legal or tax advice to any
holder or prospective holder of our common shares and no
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opinion or representation with respect to the United States federal income tax
consequences to any such holder or prospective holder is made. Accordingly,
holders and prospective holders of our common shares should consult their own
tax advisors about the federal, state, local, and foreign tax consequences of
purchasing, owning and disposing of our common shares.
U.S. Holders
As used herein, a "U.S. Holder" means a holder of our common shares who is (i) a
citizen or individual resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) an estate whose income is taxable in
the United States irrespective of source or (iv) 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,
persons or entities that have a "functional currency" other than the U.S.
dollar, shareholders subject to the alternative minimum tax, shareholders who
hold common shares as part of a straddle, hedging, conversion transaction,
constructive sale or other arrangement involving more than one position, 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 within the meaning of
Section 1221 of the Code. 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.
Distributions On Common Shares Of The Company
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to our common shares 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 we have
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 our current or accumulated earnings and profits, 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 the
common shares. 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, to the extent 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.
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Dividends paid on our common shares 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 our voting power and value may,
under certain circumstances, be entitled to a 70% (or 80% if the U.S. Holder
owns shares representing at least 20% of our voting power and value) deduction
of the United States source portion of dividends received from us (unless we
qualify as a "foreign personal holding company" or a "passive foreign investment
company," as defined below). The availability of this deduction is subject to
several complex limitations which are beyond the scope of this discussion.
Under current Treasury Regulations, dividends paid on our 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 our 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
or the recipient is exempt from such procedures. 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. Additionally, Treasury Regulations
effective January 1, 2001 would modify some of the rules discussed above
generally with respect to payments with respect to common shares made after
December 31, 2000. In particular, a payer or middleman within the U.S. will be
required to withhold 31% of any payments to a holder of common shares of
dividends on, or proceeds from the sale of, common shares within the U.S.,
unless the holder is an exempt recipient, if the holder fails to furnish its
correct taxpayer identification number or otherwise fails to comply with, or
establish an exemption from, the backup withholding tax requirements. Because
the current and pending Treasury Regulations are fact specific and complex, U.S.
Holders are urged to consult their own tax advisors regarding the information
reporting and backup withholding rules applicable to our common shares.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of our common shares 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 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, the 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 us will generally constitute "passive income" or, in the case of
certain U.S. Holders, "financial services income" for these purposes. In
addition, U.S. Holders which are corporations that own 10% or more of our voting
stock may be entitled to an "indirect" foreign tax credit under Section 902 with
respect to the payment of dividends by us under certain circumstances and
subject to complex rules and limitations. The availability of the foreign tax
credit and the application of the limitations on the credit are fact specific,
and U.S. Holders of our common shares should consult their own tax advisors
regarding their particular circumstances.
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Disposition Of Common Shares Of The Company
A U.S. Holder will recognize gain or loss upon the sale of our common shares
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
our common shares. Preferential tax rates apply to long-term capital gains of
U.S. Holders which are individuals, estates or trusts. This gain or loss will be
capital gain or loss if the common shares are a capital asset in the hands of
the U.S. Holder, which will be long-term capital gain or loss if our common
shares 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.
Other Considerations
In the following circumstances, the above sections of this discussion may not
describe 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 (i) more than 50% of the total combined
voting power or the total value of our outstanding shares is owned, directly or
indirectly, by five or fewer individuals who are citizens or residents of the
United States and (ii) 60% (50% in some circumstances) or more of our gross
income for such year was "foreign personal holding company income" (e.g.
dividends, interest and similar income), we 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 "foreign personal holding company income" to the extent we do
not actually distribute such income. We do not believe that it currently
qualifies as a foreign personal holding company. However, there can be no
assurance that we 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 our outstanding
shares are 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 we are found to be engaged primarily in the business of
investing, reinvesting, or trading in securities, commodities, or any interest
therein, it is possible that we 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. We do not believe that it currently qualifies
as a foreign investment company. However, there can be no assurance that we will
not be considered a foreign investment company for the current or any future
taxable year.
Passive Foreign Investment Company
A U.S. Holder who holds stock in a foreign corporation during any year in which
such corporation qualifies as a passive foreign investment company ("PFIC") is
subject to U.S. federal income taxation of that foreign
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corporation under one of two alternative tax methods at the election of each
such U.S. Holder. Our directors believe that we have and do qualify as a Passive
Foreign Investment Company for U.S. shareholders.
Section 1296 of the Code defines a PFIC as a corporation that is not formed in
the United States and, 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 value (or, if the company is a
controlled foreign corporation or makes an election, adjusted tax basis), of its
assets that produce or are held for the production of "passive income" is 50% or
more. For taxable years of U.S. persons beginning after December 31, 1997, and
for tax years of foreign corporations ending with or within such tax years, the
Taxpayer Relief Act of 1997 provides that publicly traded corporations must
apply this test on a fair market value basis only. We believe that we are a
PFIC.
As a PFIC, each U.S. Holder must determine under which of the alternative tax
methods it wishes to be taxed. Under one method, a U.S. Holder who elects in a
timely manner to treat us as a Qualified Electing Fund ("OEF"), as defined in
the Code, (an "Electing U.S. Holder") will be subject, under Section 1293 of the
Code, to current federal income tax for any taxable year in which we qualify as
a PFIC on his pro-rata share of our (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 to the Electing U.S. Holder and (ii) "ordinary earnings"
(the excess of earnings and profits over net capital gain), which will be taxed
as ordinary income to the Electing U.S. Holder, in each case, for the U.S.
Holder's taxable year in which (or with which) our taxable year ends, regardless
of whether such amounts are actually distributed.
A QEF election also allows the Electing U.S. Holder to (i) treat any gain
realized on the disposition of his common shares (or deemed to be realized on
the pledge of his common shares) as capital gain; (ii) treat his share of our
net capital gain, if any, as long-term capital gain instead of ordinary income,
and (iii) either avoid interest charges resulting from PFIC status altogether
(see discussion of interest charge below), or make an annual election, subject
to certain limitations, to defer payment of current taxes on his share of our
annual realized net capital gain and ordinary earnings subject, however, to an
interest charge. If the Electing U.S. Holder is not a corporation, such an
interest charge would be treated as "personal interest" that is not deductible
at all in taxable years beginning after 1990.
The procedure a U.S. Holder must comply with in making an timely QEF election
will depend on whether the year of the election is the first year in the U.S.
Holder's holding period in which we are a PFIC. If the U.S. Holder makes a QEF
election in such first year, (sometimes referred to as a "Pedigreed 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 its tax return for such
first year. If, however, we qualify as a PFIC in a prior year, then in addition
to filing documents, the U.S. Holder must also elect to recognize as an "excess
distribution" (i) under the rules of Section 1291 (discussed below), any gain
that he would otherwise recognize if the U.S. Holder sold his stock on the
application date or (ii) if we are a controlled foreign corporation ("CFC"), the
Holder's pro rata share of the corporation's earnings and profits. (But see
"Elimination of Overlap Between Subpart F Rules and PFIC Provisions"). Either
the deemed sale election or the deemed dividend election will result in the U.S.
Holder being deemed to have made a timely QEF election.
With respect to a situation in which a Pedigreed QEF election is made, if we no
longer qualify as a PFIC in a subsequent year, normal Code rules and not the
PFIC rules will apply.
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If a U.S. Holder has not made a QEF Election at any time (a "Non-electing U.S.
Holder"), then special taxation rules under Section 1291 of the Code will apply
to (i) gains realized on the disposition (or deemed to be realized by reason of
a pledge) of his common shares and (ii) certain "excess distributions", as
specially defined, by the Registrant.
A Non-electing U.S. Holder would be required to pro-rate all gains realized on
the disposition of his common shares and all excess distributions over the
entire holding period for the common shares. All gains or excess distributions
allocated to prior years of the U.S. Holder (other than years prior to our first
taxable year during such U.S. Holder's holding period and beginning after
January 1, 1987 for which it 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 of the gain or the excess 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.
If we are a PFIC for any taxable year during which a Non-electing U.S. Holder
holds common shares, then we will continue to be treated as a PFIC with respect
to such common shares, even if it is no longer by definition 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 common shares had been sold on the last
day of the last taxable year for which it was a PFIC.
Under Section 1291 (f) of the Code, the Department of the Treasury has issued
proposed regulations that would treat as taxable certain transfers of PFIC stock
by Non-electing U.S. Holders that are not otherwise taxed, such as gifts,
exchanges pursuant to corporate reorganizations, and transfers at death.
If a U.S. Holder makes a QEF Election that is not a Pedigreed Election (i.e., it
is made after the first year during which the Registrant is a PFIC and the U.S.
Holder holds shares of the Registrant) (a "Non-Pedigreed Election"), the QEF
rules apply prospectively but do not apply to years prior to the year in which
the QEF first becomes effective. U.S. Holders should consult their tax advisors
regarding the specific consequences of making a Non-Pedigreed QEF Election.
Certain special adverse rules will apply with respect to the common shares while
we are a PFIC whether or not it is treated as a QEF. For example under Section
1297(b)(6) of the Code (as in effect prior to the Taxpayer Relief Act of 1997),
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 stock.
The foregoing discussion is based on currently effective provisions of the Code,
existing and proposed regulations thereunder, and current administrative rulings
and court decisions, all of which are subject to change. Any such change could
affect the validity of this discussion. In addition, the implementation of
certain aspects of the PFIC rules requires the issuance of regulations which in
many instances have not been promulgated and which may have retroactive effect.
There can be no assurance that any of these proposals will be enacted or
promulgated, and if so, the form they will take or the effect that they may have
on this discussion. Accordingly, and due to the complexity of the PFR rules,
U.S. Holders of the Registrant are strongly urged to consult their own tax
advisors concerning the impact of these rules on their investment in the
Registrant. For a discussion of the impact of the Taxpayer Relief Act of 1997 on
a U.S. Holder of a
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PFIC, see "Mark-to-Market Election For PFIC Stock Under the Taxpayer Relief Act
of 1997" and "Elimination of Overlap Between Subpart F Rules and PFIC
Provisions" below.
Mark-to-Market Election For PFIC Stock Under The Taxpayer Relief Act Of
1997
The Taxpayer Relief Act of 1997 provides that a U.S. Holder of a PFIC may make a
mark-to-market election with respect to the stock of the PFIC if such stock is
marketable as defined below. This provision is designed to provide a current
inclusion provision for persons that are Non-Electing Holders. Under the
election, any excess of the fair market value of the PFIC stock at the close of
the tax year over the Holder's adjusted basis in the stock is included in the
Holder's income. The Holder may deduct any excess of the adjusted basis of the
PFIC stock over its fair market value at the close of the tax year. However,
deductions are limited to the net mark-to-market gains on the stock that the
holder included in income in prior tax years, or so called "unreversed
inclusions."
For purposes of the election, PFIC stock is marketable if it is regularly traded
on (1) a national securities exchange that is registered with the SEC, (2) the
national market system established under Section 1111A of the Securities
Exchange Act of 1934, or (3) an exchange or market that the IRS determines has
rules sufficient to ensure that the market price represents legitimate and sound
fair market value.
A Holder's adjusted basis of PFIC stock is increased by the income recognized
under the mark-to-market election and decreased by the deductions allowed under
the election. If a U.S. Holder owns PFIC stock indirectly through a foreign
entity, the basis adjustments apply to the basis of the PFIC stock in the hands
of the foreign entity for the purpose of applying the PFIC rules to the tax
treatment of the U.S. owner. Similar basis adjustments are made to the basis of
the property through which the U.S. persons hold the PFIC stock.
Income recognized under the mark-to-market election and gain on the sale of PFIC
stock with respect to which an election is made is treated as ordinary income.
Deductions allowed under the election and loss on the sale of PFIC with respect
to which an election is made, to the extent that the amount of loss does not
exceed the net mark-to-market gains previously included, are treated as ordinary
losses. The U.S. or foreign source of any income or losses is determined as if
the amount were a gain or loss from the sale of stock in the PFIC.
If PFIC stock is owned by a CFC (discussed below), the CFC is treated as a U.S.
person that may make the mark-to-market election. Amounts includable in the
CFC's income under the election are treated as foreign personal holding company
income, and deductions are allocable to foreign personal holding company income.
The above provisions apply to tax years of U.S. persons beginning after December
31, 1997, and to tax years of foreign corporations ending with or within such
tax years of U.S. persons.
The rules of Code Section 1291 applicable to nonqualified funds do not apply to
a U.S. Holder for tax years for which a mark-to-market election is in effect. If
Code Section 1291 is applied and a mark-to-market election was in effect for any
prior tax year, the U.S. Holder's holding period for the PFIC stock is treated
as beginning immediately after the last tax year of the election. However, if a
taxpayer makes a mark-to-market election for PFIC stock that is a nonqualified
fund after the beginning of a taxpayer's holding period for such stock, a
coordination rule applies to ensure that the taxpayer does not avoid the
interest charge with respect to amounts attributable to periods before the
election.
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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 our shares is owned, actually or
constructively, 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)), 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 Company ("United States
Shareholder"), we 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 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
Company which is or was a United States Shareholder at any time during the
five-year period ending with the sale or exchange is treated as ordinary income
to the extent of our earnings and profits 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 within 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. We do not
believe that we currently qualify as a CFC. However, there can be no assurance
that we will not be considered a CFC for the current or any future taxable year.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Canadian federal income tax
considerations generally applicable in respect of your common shares of the
Company. The tax consequences to any particular holder of common shares will
vary according to the status of that holder as an individual, trust, corporation
or member of a partnership, the jurisdiction in which that holder is subject to
taxation, the place where that holder is resident and, generally, according to
that holder's particular circumstances. This summary is applicable only to
holders who are resident in the United States, have never been resident in
Canada, deal at arm's length with the Company, hold their common shares as
capital property and who will not use or hold the common shares in carrying on
business in Canada. Special rules, which are not discussed in this summary, may
apply to a United States holder that is an issuer that carries on business in
Canada and elsewhere.
This summary is based upon the provisions of the Income Tax Act of Canada and
the regulations thereunder (collectively, the "Tax Act", or "ITA") and the
Canada-United States Tax Convention as amended by the Protocols thereto (the
"Tax Convention") as at the date of the Form 20-F and the current administrative
practices of the Canada Customs and Revenue Agency. This summary does not take
into account Canadian provincial income tax consequences.
This summary is not exhaustive of all possible income tax considerations
pertaining to the common shares. It is not intended as legal or tax advice to
any particular holder of common shares and should not
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be so construed. Each holder should consult their own tax advisor with respect
to the income tax consequences applicable to them in their own particular
circumstances.
Disposition Of Common Shares
Under the Tax Act, a gain from the sale of common shares by a non-resident will
not be subject to Canadian tax, provided the shareholder (and/or persons who do
not deal at arm's length with the shareholder) have not held a "substantial
interest" in the Company (25% or more of the shares of any class of the
Company's stock) at any time in the five years preceding the disposition.
Generally, the Tax Convention will exempt from Canadian taxation any capital
gain realized by a resident of the United States, provided that the value of the
common shares is not derived principally from real property situated in Canada.
Since resource property is considered real property for this purpose, it is
unlikely that this exemption would apply to the common shares of the Company.
Where a holder disposes of common shares to the Company (unless the Company
acquired the common shares in the open market in the manner in which shares
would normally be purchased by any member of the public), this will result in a
deemed dividend to the U.S. holder equal to the amount by which the
consideration paid by the Company exceeds the paid-up capital of such stock. The
amount of such dividend will be subject to withholding tax as described below.
Dividend
In the case of any dividends paid to non-residents, the Canadian tax is withheld
by the Company, which remits only the net amount to the shareholder. By virtue
of Article X of the Tax Convention, the rate of tax on dividends paid to
residents of the United States is generally limited to 15% of the gross dividend
(or 5% in the case or certain corporate shareholders owning at least 10% of the
Company's voting shares). In the absence of the Tax Convention provisions, the
rate of Canadian withholding tax imposed on non-residents is 25% of the gross
dividend.
DOCUMENTS ON DISPLAY.
The documents incorporated as exhibits to this registration statement are
available for inspection at our principal business office located at Suite 800,
717 - 7th Avenue S.W. Calgary, Alberta, Canada T2P 0Z3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are an oil and gas exploration and production company that currently produces
approximately 305 boepd. Like all exploration and production companies in the
oil and gas industry, we are exposed to the significant risk that exploration
activities will not necessarily result in a discovery of economically
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extractable reserves. We currently have 100% of our production exposed to
commodity price risks. We are exposed to the risk that we will be unable to
engage competent cost-effective contractors and suppliers in the foreign
countries in which we operate, risks that damage to, or malfunction of,
equipment will hinder our ability to carry out our exploration activities and
risks that foreign laws may not adequately protect our interests in disputes
with foreign partners and others.
We currently have 161,130 net BOE's of proved undeveloped reserves in Canada.
These reserves have been valued in the Sproule Report, discounted at a net
present value of 10% at the escalated price forecast set out therein at
$1,265,000. This valuation is sensitive to changes in oil prices and each $1.00
change in oil price and each $0.10 change in the price of natural gas would
result in the discounted value of the proved undeveloped reserves changing by
approximately $79,000. In the international petroleum industry, most production
is bought and sold in United States currency or with reference to United States
currency. Accordingly, we do not expect to face foreign exchange risks. Most of
our business transactions are conducted in United States currency in the
countries in which we operate, except for Canada.
We currently have minimal debt obligations and, therefore, we do not believe
that we face any undue financial risk from interest rate fluctuations and we are
not currently involved any transactions of a hedging nature.
PART III
ITEM 17. FINANCIAL STATEMENTS
Audited Financial Statements for the years ended March 31, 2001, 2000 and 1999.
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- --------------------------------------------------------------------------------
AUDITORS' REPORT
To the shareholders of
GEOCAN ENERGY INC.
We have audited the balance sheets of GEOCAN ENERGY INC. as at March 31, 2001,
March 31, 2000, and March 31, 1999, and the statements of income and retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We have conducted our audit in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurances 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 financial statements present fairly, in all material
respects, the financial position of the company as at March 31, 2001, March 31,
2000, and March 31, 1999, and the results of its operations and cash flows for
the years then ended, in accordance with Canadian and United States generally
accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected the calculation of diluted net income per share as shown on
the statement of income and retained earnings for the years ended March 31,
2001, March 31, 2000, and March 31, 1999, to the extent summarized in Note 10 to
the financial statements.
Calgary, Alberta signed "Davis, Daignault, Schick & Co."
June 18, 2001 Chartered Accountants
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================================================================================
[GECAN ENERGY INC. LOGO]
BALANCE SHEET AS AT
(EXPRESSED IN CANADIAN DOLLARS)
<Table>
<Caption>
MARCH 31 MARCH 31 MARCH 31
2001 2000 1999
------------ ------------ ------------
ASSETS
CURRENT
Cash $ -- $ -- $ 108,608
Accounts receivable 803,838 251,337 47,595
Prepaid expenses 38,564 35,936 10,994
------------ ------------ ------------
842,402 287,273 167,197
------------ ------------ ------------
Capital assets - net of depletion (note 3) 4,232,145 2,637,849 787,833
Investments (note 4) 98,880 48,880 14,880
------------ ------------ ------------
$ 5,173,427 $ 2,974,002 $ 969,910
============ ============ ============
LIABILITIES
CURRENT
Bank indebtedness $ 54,089 $ 19,350 $ --
Accounts payable 673,932 514,419 50,484
------------ ------------ ------------
728,021 533,769 50,484
Long-term debt (note 5) 2,395,000 980,000 --
Site restoration provision 57,400 17,300 2,400
Future income taxes 369,814 200,632 87,651
------------ ------------ ------------
3,550,235 1,731,701 140,535
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Share capital (note 6) 1,416,122 1,079,451 825,293
Retained earnings 207,070 162,850 4,082
------------ ------------ ------------
1,623,192 1,242,301 829,375
------------ ------------ ------------
$ 5,173,427 $ 2,974,002 $ 969,910
============ ============ ============
</Table>
See accompanying notes
Approved on behalf of the Board:
"Wayne S. Wadley" "Brad J.S. Farris"
------------------- --------------------
Wayne S. Wadley Brad J.S. Farris
Director Director
================================================================================
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================================================================================
[GECAN ENERGY INC. LOGO]
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED MARCH 31,
(EXPRESSED IN CANADIAN DOLLARS)
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
REVENUE:
Oil and gas sales $ 2,376,208 $ 1,179,325 $ 200,093
Less: Royalties (net of ARTC) 470,433 191,938 20,514
------------ ------------ ------------
1,905,775 987,387 179,579
------------ ------------ ------------
EXPENSES:
Operating 575,624 232,313 41,175
General and administration 541,907 140,702 66,149
Interest on long-term debt 97,252 38,472 --
Depletion and amortization 477,590 304,151 69,150
------------ ------------ ------------
1,692,373 715,638 176,474
------------ ------------ ------------
Income before income taxes 213,402 271,749 3,105
Provision for income taxes
Future (note 7) 169,182 112,981 (977)
------------ ------------ ------------
Net income for the year 44,220 158,768 4,082
Retained earnings, beginning of year 162,850 4,082 --
------------ ------------ ------------
Retained earnings, end of year $ 207,070 $ 162,850 $ 4,082
============ ============ ============
Net earnings per share
Basic $ 0.01 $ 0.04 $ 0.00
Fully diluted $ 0.01 $ 0.03 $ 0.00
============ ============ ============
</Table>
See accompanying notes
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================================================================================
[GECAN ENERGY INC. LOGO]
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31,
(EXPRESSED IN CANADIAN DOLLARS)
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income for the year $ 44,220 $ 158,768 $ 4,082
Adjustments to reconcile income from
operations to net cash provided:
Depletion and amortization 477,590 304,151 69,150
Future income taxes 169,182 112,981 (977)
----------- ----------- -----------
690,992 575,900 72,255
Change in operating assets and liabilities(1) (395,616) 235,251 (8,105)
----------- ----------- -----------
Cash flows from operating activities 295,376 811,151 64,150
----------- ----------- -----------
INVESTING:
Additions of capital assets (1,873,286) (2,001,532) (375,955)
Investment (50,000) (34,000) (14,880)
----------- ----------- -----------
Cash flows used in investing activities (1,923,286) (2,035,532) (390,835)
----------- ----------- -----------
FINANCING:
Accounts receivable -- -- 11,000
Proceeds of long-term debt 1,415,000 980,000 --
Issuance of common shares 178,171 116,423 235,343
----------- ----------- -----------
Cash flows from financing activities 1,593,171 1,096,423 246,343
----------- ----------- -----------
Net decrease in cash and cash equivalents (34,739) (127,958) (80,342)
Cash and cash equivalents, beginning of year (19,350) 108,608 188,950
----------- ----------- -----------
Cash and cash equivalents, end of year $ (54,089) $ (19,350) $ 108,608
=========== =========== ===========
Cash flow from operation per share:
Basic $ 0.14 $ 0.14 $ 0.03
Fully diluted $ 0.12 $ 0.12 $ 0.02
=========== =========== ===========
Note(1)
Increase in accounts receivable $ (552,501) $ (203,742) $ (47,595)
Increase in prepaid expenses $ (2,628) $ (24,942) $ (10,994)
Increase in accounts payable $ 159,513 $ 463,935 $ 50,484
=========== =========== ===========
Supplementary information:
Interest paid $ 97,252 $ 38,472 $ --
=========== =========== ===========
Income taxes paid $ -- $ -- $ --
=========== =========== ===========
</Table>
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[GECAN ENERGY INC. LOGO]
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AND 1999
(EXPRESSED IN CANADIAN DOLLARS)
1. ACCOUNTING POLICIES
a) FINANCIAL STATEMENT PRESENTATION
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP). The significant
differences between these principles and those that would be accepted under
United States generally accepted accounting principles (US GAAP) are disclosed
in Note 10.
b) PROPERTY AND EQUIPMENT
The Corporation follows the full cost method of accounting for its oil and gas
operations. All costs related to the acquisition of and exploration for
petroleum and natural gas interests are capitalized. Such costs include land and
lease acquisition costs, geological and geophysical costs, costs of drilling and
equipping productive and non-productive wells and overhead directly related to
acquisition, exploration and development activities.
Proceeds from disposals are recorded as a reduction of the related expenditures
without recognition of a gain or loss unless the disposal would result in a
change of 20% or more in the depletion rate.
Capitalized costs are depleted using the unit-of-production method based on the
estimated proven reserves of oil and gas. For the purpose of this calculation,
reserves and production of natural gas are converted to equivalent units of oil
using a ratio of 6 to 1. The costs of unevaluated properties are excluded from
this calculation until proved reserves are established or impairment occurs.
The Corporation applies an annual ceiling test to ensure that capitalized costs
do not exceed estimated future net revenues from production of proven reserves
at year end market prices less future production, administrative, financing,
site restoration and income tax costs.
Office equipment is depreciated using the declining balance method at annual
rates of 20% to 30%.
c) FUTURE REMOVAL AND SITE RESTORATION
Estimated future site restoration and removal costs, net of salvage values, are
provided for using the unit of production method based on estimated proven
reserves remaining. Costs are estimated by the Corporation based on current
regulations, costs, technology and industry standards. The annual charge is
accounted for as an expense and the accumulated provision is accrued as a
liability. Actual site restoration costs are deducted from the accumulated
provision in the year incurred.
d) JOINT OPERATIONS
The majority of the oil and gas operations of the Corporation are conducted
jointly with others and accordingly these financial statements reflect only the
proportionate interests of the Corporation in such activities.
e) MEASUREMENT UNCERTAINTY
The amount recorded for depletion and deprecation of the oil and gas properties
and for site restoration are based on estimates of reserves and future costs.
The ceiling test is based on estimates of proven reserves, production rates,
product prices, production costs and other assumptions. By their nature, these
estimates are subject to measurement uncertainty and the impact on the financial
statements of changes in such estimates in future periods could be material.
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71
1. ACCOUNTING POLICIES - CONTINUED
f) INVESTMENTS
Long-term investments are carried at cost less permanent declines in value.
g) FLOW THROUGH SHARES
The Corporation has financed a portion of its exploration and development
activities through the issue of flow through shares. Under the terms of these
share issues, the related income tax deductions are renounced to investors.
Accordingly, when the expenditures are incurred, share capital is reduced by the
estimated tax benefits renounced to investors.
h) STOCK BASED COMPENSATION PLAN
The Corporation has a stock based compensation plan which is described in Note 6
e). No compensation expense is recorded when stock options are issued.
Consideration received on exercise of stock options is credited to share
capital.
i) INCOME TAXES
The asset and liability method is used for determining income taxes. Temporary
differences arising from the difference between the tax basis of an asset or
liability and its carrying amount on the balance sheet are used to calculate
future income tax liabilities or assets. Future income tax liabilities or assets
are calculated using tax rates anticipated to apply to the periods that the
temporary differences are expected to reverse.
j) PER SHARE AMOUNTS
Earnings per share have been computed using the weighted average number of
shares outstanding during the year of 4,893,268 (2000 - 4,045,999; 1999 -
2,483,685). Fully diluted per share amounts assume the exercise of options.
2. ACQUISITIONS
a) ACQUISITION OF 742521 ALBERTA INC.
Effective October 1, 2000, the Corporation acquired all of the issued and
outstanding shares of 742521 Alberta Inc. (742521), a corporation which was
controlled by a director of Geocan, in exchange for $64,000 in cash and 52,000
common shares at an ascribed price of $0.50 per share. It is the opinion of
management that the consideration given represented fair market value.
b) ACQUISITION OF 717365 ALBERTA LTD.
Effective October 1, 2000, the Corporation acquired all of the issued and
outstanding shares of 717365 Alberta Ltd. (717365). Consideration given for the
acquisition was $188,000 in cash and 145,000 common shares at an ascribed price
of $0.50 per share.
c) ACQUISITION OF TRI-TEC RESOURCES LTD.
Effective October 1, 2000, the Corporation acquired all of the issued and
outstanding shares of Tri-Tec Resources Ltd. (Tri-Tec). Consideration given for
the acquisition was $150,000 in cash and 120,000 common shares at an ascribed
price of $0.50 per share.
These acquisitions have been accounted for using the purchase method of
accounting with results of operations included in the financial statements from
the date of acquisition. Details are as follows:
F-6
72
2. ACQUISITIONS - CONTINUED
<Table>
<Caption>
742521 717365 Tri-Tec
------------ ------------ ------------
Net assets acquired:
Working capital $ (14,979) $ 13,244 $ 14,743
Oil and gas properties 104,979 247,256 195,257
------------ ------------ ------------
$ 90,000 $ 260,500 $ 210,000
============ ============ ============
Consideration:
Cash $ 64,000 $ 188,000 $ 150,000
317,000 common shares at an ascribed
price of $0.50 per share 26,000 72,500 60,000
------------ ------------ ------------
$ 90,000 $ 260,500 $ 210,000
============ ============ ============
</Table>
Subsequent to their acquisition and prior to year end, these subsidiaries were
wound up.
d) ACQUISITION OF HUNTOON PROPERTY
On December 3, 1999, the Corporation acquired a 75.25% interest in the Huntoon
property situated in Southeast Saskatchewan from a series of private companies
for a cash consideration of $412,726 and the issuance of 162,500 common shares
valued at $0.40 per share. Subsequent to this, the Corporation acquired the
remaining 24.75% for a further $91,751 in cash and 250,000 shares valued at
$0.40 per share.
3. CAPITAL ASSETS
<Table>
<Caption>
Accumulated
Depreciation Net Book
At March 31, 2001 Cost and Depletion Value
- ----------------- ------------ ------------- ------------
Oil and gas properties $ 3,668,912 $ 570,187 $ 3,098,725
Production equipment 1,301,289 204,313 $ 1,096,976
Office equipment 55,435 18,991 36,444
------------ ------------ ------------
$ 5,025,636 $ 793,491 $ 4,232,145
============ ============ ============
</Table>
<Table>
<Caption>
Accumulated
Depreciation Net Book
At March 31, 2000 Cost and Depletion Value
- ----------------- ------------ ------------- ------------
Oil and gas properties $ 2,182,741 $ 257,713 $ 1,925,028
Production equipment 766,169 92,001 674,168
Office equipment 44,940 6,287 38,653
------------ ------------ ------------
$ 2,993,850 $ 356,001 $ 2,637,849
============ ============ ============
</Table>
<Table>
<Caption>
Accumulated
Depreciation Net Book
At March 31, 1999 Cost and Depletion Value
- ----------------- ------------ ------------- ------------
Oil and gas properties $ 518,241 $ 42,723 $ 475,518
Production equipment 327,944 23,277 304,667
Office equipment 8,398 750 7,648
------------ ------------ ------------
$ 854,583 $ 66,750 $ 787,833
============ ============ ============
</Table>
A provision for site restoration costs totalling $40,100 (2000 - $14,900; 1999 -
$2,400) is included in depletion and amortization expense. The estimated future
site restoration costs to be accrued over the remaining proved reserves are
approximately $432,250.
F-7
73
3. CAPITAL ASSETS - CONTINUED
During the period, general and administrative expenses of $178,849 (2000 -
$93,809; 1999 - $26,142) were capitalized pertaining to the Corporation's
exploration, development and property acquisition programs. Oil and gas
properties with a book value of $151,382 (2000 - $166,881; 1999 - $183,892) have
no tax base. Future development costs related to proven undeveloped reserves of
$728,000 are included in the 2001 depletion calculation.
4. INVESTMENTS
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Share purchase loan receivable $ 84,000 $ 34,000 $ --
Investment in private company - not subject
to significant influence 14,880 14,880 14,880
------------ ------------ ------------
$ 98,880 $ 48,880 $ 14,880
============ ============ ============
</Table>
The Corporation has non-interest bearing notes receivable of $84,000 (2000 -
$34,000; 1999 - $nil) from certain of its officers relating to advances to those
individuals, or corporations controlled by them, for purposes of purchasing in
total 200,000 Geocan common shares.
The notes are due in 2005, are secured by the common shares purchased, and do
not bear interest unless they remain outstanding past the due date.
5. LONG-TERM DEBT
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Revolving production loan facility $ 1,290,000 $ 980,000 $ --
Payables related to acquisition and
development costs 1,105,000 -- --
------------ ------------ ------------
$ 2,395,000 $ 980,000 $ --
============ ============ ============
</Table>
The Corporation has available a revolving production loan facility of $2,500,000
bearing interest at bank prime plus 1.5%. The facility is secured by a general
security agreement and a floating charge debenture in the amount of $2,500,000
over all property and assets of the Corporation. The credit facility is reviewed
annually by the bank and, pursuant to their satisfactory review, no principal
repayments will be required subject to the revolving nature of this facility.
6. SHARE CAPITAL
a) AUTHORIZED
Unlimited number of Class A voting common shares
Unlimited number of Class B non-voting common shares
Unlimited number of preferred shares issuable in series
b) ISSUED
Class A common shares balance
<Table>
<Caption>
At March 31, 2001 # $
------------- -------------
Balance, beginning of year 4,556,600 $ 1,079,451
Issued for cash 100,000 50,000
Issued for purchase of oil and gas assets 317,000 158,500
Issued for cash on exercise of options 410,000 129,180
Share issuance costs -- (1,009)
------------- -------------
Total 5,383,600 $ 1,416,122
============= =============
</Table>
F-8
74
6. SHARE CAPITAL - CONTINUED
<Table>
<Caption>
At March 31, 2000 # $
- ----------------- ------------ ------------
Balance, beginning of year 3,833,000 $ 825,293
Issued for cash 211,100 95,105
Issued for purchase of oil and gas assets 412,500 165,000
Issued for cash on exercise of options 100,000 30,000
Tax effect of flow through -- (27,265)
Share issuance costs -- (8,682)
------------ ------------
Total 4,556,600 $ 1,079,451
============ ============
</Table>
<Table>
<Caption>
At March 31, 1999 # $
- ----------------- ------------ ------------
Balance, beginning of year 1,333,000 $ 199,950
Issued for cash 1,000,000 300,000
Issued for purchase of oil and gas assets 1,500,000 390,000
Share issuance costs -- (64,657)
------------ ------------
3,833,000 $ 825,293
============ ============
</Table>
c) ESCROW
586,504 of the issued shares are subject to escrow or trading restrictions.
d) FLOW THROUGH
During 2000, the Corporation incurred $61,105 of qualifying expenditures
associated with a flow through share issue on December 31, 1999. As a result of
incurring these expenditures and renouncing them to the flow through share
subscribers, share capital has been reduced by the tax effect of the
renunciation.
e) STOCK OPTIONS
The following stock options are outstanding to certain officers, directors,
employees and consultants as of March 31, 2001.
<Table>
<Caption>
Balance Exercised Balance
March 31 Exercise During March 31
2000 Price Expiry Date Issued Expired The Period 2001
- -------- ----------- ----------------- -------- -------- ---------- --------
-- $ 0.47 December 4, 2005 548,360 -- -- 548,360
218,000 0.30 April 6, 2003 -- -- (218,000) --
165,000 0.33 November 3, 2003 -- (15,000) (150,000) --
52,360 0.34 January 24, 2005 -- (8,000) (42,000) 2,360
- -------- ----------- ----------------- -------- -------- -------- --------
435,360 548,360 (23,000) (410,000) 550,720
======== =========== ================= ======== ======== ======== ========
</Table>
<Table>
<Caption>
Balance Exercised Balance
March 31 Exercise During March 31
1999 Price Expiry Date Issued Expired The Period 2000
- -------- ---------- ----------------- -------- -------- ---------- --------
100,000 $ 0.30 March 14, 2000 -- -- (100,000) --
218,000 0.30 April 6, 2003 -- -- -- 218,000
165,000 0.33 November 3, 2003 -- -- -- 165,000
-- 0.34 January 24, 2005 52,360 -- -- 52,360
- -------- ---------- ----------------- -------- -------- -------- --------
483,000 52,360 -- (100,000) 435,360
======== ========== ================= ======== ======== ======== ========
</Table>
F-9
75
6. SHARE CAPITAL - CONTINUED
f) LEGAL CAPITAL
The Corporation's legal stated capital is $285,000 greater than the value of the
share capital as shown in these financial statements. The difference arose
because of the method of accounting for the acquisition of oil and gas
properties during the year ended March 31, 1999, which ascribed a lower value to
the share consideration than the stated value of the shares which were issued
pursuant to the terms of the acquisition agreement.
7. INCOME TAXES
The provision for (recovery of) income taxes differs from the amount that would
have been expected by applying combined federal and provincial corporate income
tax rates to income before taxes. The principal reasons for these differences
are as follows:
<Table>
<Caption>
At March 31, 2001 2000 1999
- ------------- --------- --------- ---------
Income before taxes $ 213,402 $ 271,749 $ 3,105
Statutory income tax rate 45.03% 44.94% 44.62%
Anticipated tax provision (recovery) 96,094 122,124 1,385
Increase (decrease) in income tax resulting from:
Non-deductible payments 198,206 80,412 19,213
Alberta royalty tax credit (34,884) (25,594) (13,070)
Resource allowance (83,535) (57,985) (2,721)
Share issue costs (6,709) (6,605) (5,784)
Other 10 629 --
--------- --------- ---------
Income taxes (recovery) $ 169,182 $ 112,981 $ (977)
========= ========= =========
</Table>
8. RELATED PARTY TRANSACTIONS
The Corporation entered into consulting contracts with companies wholly owned by
its president, chief financial officer and vice president. Payments made under
these contracts totalled $147,000 (2000 - $106,100; 1999 - $22,500).
9. FINANCIAL INSTRUMENTS
Financial instruments of the Corporation consist of accounts receivable,
accounts payable, investments, bank indebtedness, and long-term debt.
a) FAIR VALUE
The fair value of financial instruments approximate their carrying value, due to
the short term maturity or capacity for prompt liquidation. The carrying value
of long-term debt approximates fair value as it bears interest at a floating
rate.
b) CREDIT RISK
All of the Corporation's accounts receivable are with customers in the oil and
gas industry and are subject to normal credit risks.
c) INTEREST RATE RISK
As at March 31, 2001, all of the long-term debt was floating rate debt. A
variation in the interest rate would result in a variance in interest expense.
d) FOREIGN CURRENCY RISK
The Corporation is exposed to foreign currency fluctuations as oil and gas
prices received are based on U.S. dollar denominated world prices.
F-10
76
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The financial statements of the Corporation have been prepared in accordance
with Canadian GAAP which differs in certain material respects from US GAAP.
Material differences between Canadian GAAP and US GAAP and their effect on the
Corporation's financial statements are summarized in the tables below.
<Table>
Statement of Income and Retained Earnings
At March 31, 2001 2000 1999
------------- ------------- -------------
Weighted average number of diluted common
shares outstanding under US GAAP(a) 4,923,247 4,109,958 2,486,781
============= ============= =============
Diluted net earnings per share under US
GAAP $ 0.01 $ 0.04 $ 0.00
============= ============= =============
</Table>
a) DILUTED EARNINGS PER SHARE
Under US GAAP, weighted average number of diluted common shares outstanding is
calculated using the treasury stock method which assumes the proceeds from the
exercised options shall be used to purchase common stock at the average market
price during the respective period.
b) CEILING TEST ON PETROLEUM INTERESTS
US GAAP requires that the net book value of proved petroleum interests not
exceed the sum of the present value of estimated future net revenues (determined
using current prices of petroleum production less estimated future expenditures
to be incurred in developing and producing the proved reserves, discounted at
ten percent). This ceiling test was performed effective March 31, 2001, March
31, 2000, and March 31, 1999, and it was determined that no write-down of proved
petroleum interests was necessary.
c) EMPLOYEE STOCK OPTIONS
The Corporation grants stock options which reserves common shares for issuance
to employees and directors. Under Canadian GAAP, the issuance of stock options
is not recognized for accounting purposes. Under US GAAP, the issuance of stock
options requires an assessment to determine stock based compensation.
Accordingly, the Corporation has applied the provisions of APB 25 and SFAS 123
to calculate stock based compensation under US GAAP using the fair value method.
As these options were issued to employees with an exercise price equal to the
fair value on the date of grant, no compensation expense is required to be
recorded under US GAAP.
F-11
77
EXHIBITS
Exhibit
Number Description
------- -----------
*3.1 Articles of Incorporation of GEOCAN Energy Inc.
*3.2 Articles of Amendment of GEOCAN Energy Inc.
*3.3 By-laws of GEOCAN Energy Inc.
*10.1 Incentive Stock Option Plan
*10.2 Stock Purchase Plan
*10.3 Carson/Judy Acquisition
*10.4 Dina Acquisition
*10.5 Deer Mountain Acquisition
*10.6 Huntoon Acquisition 12/99
*10.7 Huntoon Acquisition 1/00
*10.8 Saskatchewan Leases
*10.8.1 Gully lake
*10.8.2 Dulwich
*10.8.3 Marsden
*10.9 Alberta Lease/Silverdale
*10.10 Carrot Creek Purchase Agreement
*10.11 Czech Letter Agreements
*10.11.1 Czech Agreement 6/2000
*10.11.2 Czech Agreement 7/2000
*10.11.3 Czech Agreement 1/2001
*10.12 CanPet Energy Marketing Agreement
*10.13 ProGas Marketing Agreement
*10.14 Purchase Agreement 717365 Alberta Ltd.
*10.15 Escrow Agreement between Major Shareholders
*10.16 Indemnity Agreement (Form)
*10.17 Trava Participation Agreement
*10.18 Revolving Loan Facility Agreement
*10.19 Office Lease
*99.1 Sproule Reserves Report April 1, 2001
* Exhibits previously filed with our initial 20-F filing on June 28, 2001.
-64-
78
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, we certify that we meet all of the requirements for filing on Form 20-F
and have duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
GEOCAN ENERGY INC.
Date: August 16, 2001 By: /s/ WAYNE S. WADLEY
---------------- ------------------------------------
Wayne S. Wadley
President and Chief Executive Officer
-65-
79
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT SEQUENTIAL NUMBER
NUMBER DESCRIPTION* PAGE
------ ------------ -----------------
*3.1 Articles of Incorporation of GEOCAN Energy Inc.
*3.2 Articles of Amendment of GEOCAN Energy Inc.
*3.3 By-laws of GEOCAN Energy Inc.
*10.1 Incentive Stock Option Plan
*10.2 Stock Purchase Plan
*10.3 Carson/Judy Acquisition
*10.4 Dina Acquisition
*10.5 Deer Mountain Acquisition
*10.6 Huntoon Acquisition 12/99
*10.7 Huntoon Acquisition 1/00
*10.8 Saskatchewan Leases
*10.8.1 Gully lake
*10.8.2 Dulwich
*10.8.3 Marsden
*10.9 Alberta Lease/Silverdale
*10.10 Carrot Creek Purchase Agreement
*10.11 Czech Letter Agreements
*10.11.1 Czech Agreement 6/2000
*10.11.2 Czech Agreement 7/2000
*10.11.3 Czech Agreement 1/2001
*10.12 CanPet Energy Marketing Agreement
*10.13 ProGas Marketing Agreement
*10.14 Purchase Agreement 717365 Alberta Ltd.
*10.15 Escrow Agreement between Major Shareholders
*10.16 Indemnity Agreement (Form)
*10.17 Trava Participation Agreement
*10.18 Revolving Loan Facility Agreement
*10.19 Office Lease
*99.1 Sproule Reserves Report April 1, 2001
</Table>
* Exhibits previously filed with our initial 20F filing on June 28, 2001.
80
* Schedules and attachments to Exhibits are omitted. We will submit
schedules and attachments at the request of the Securities and Exchange
Commission