UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
OR
[] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell commpany report:
For the transition period from _________________ to _______________
Commission file number 000-50339
CAPITAL RESERVE CANADA LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
Alberta, Canada
(Jurisdiction of incorporation or organization)
4304 - 76 Avenue
Edmonton, Alberta T6B 2K3
(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
Class A Common Stock
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's capital or
common stock as of the close of the period covered by the annual report:
58,396,421 Class A common shares as of December 31, 2006.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. [ ] Yes [X] No
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. [X]Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer [] Accelerated filer [] Non-accelerated filer [X]
- --------------------------- --------------------- --------------------------
Indicate by check mark which financial statement item the registrant has elected
to follow. [] Item 17 [X] Item 18
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
--------------------------------
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [] Yes [] No
TABLE OF CONTENTS
PART I .....................................................................2
Item 1. Identity of Directors, Senior Management and Advisors..........2
Item 2. Offer Statistics and Expected Timetable........................2
Item 3. Key Information .............................................2
Item 4. Information on the Company.....................................8
Item 5. Operating and Financial Review and Prospects...................15
Item 6. Directors, Senior Management and Employees.....................18
Item 7. Major Shareholders and Related Party Transaction...............21
Item 8. Financial Information..........................................23
Item 9. The Offering and Listing .....................................23
Item 10. Additional Information.........................................23
Item 11. Quantitative and Qualitative Disclosures about Market Risk.....28
Item 12. Description of Securities Other than Equity Securities.........28
PART II.......................................................................28
Item 13. Defaults, Dividends Arrearages and Delinquencies...............28
Item 14. Material Modifications to the Rights of Security Holders
and use of proceeds...........................................28
Item 15. Controls and Procedures .....................................28
Item 16A. Audit Committee financial Expert.............................29
Item 16B. Code of Ethics...............................................29
Item 16C. Principal Accountant Fees and Services.......................29
Item 16D. Exemptions from the Listing Standards for Audit Committees...29
PART III......................................................................29
Item 17. Financial Statements...........................................29
Item 18. Financial Statements...........................................29
Item 19. Exhibits......................................................30
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
Exchange Rates
Financial statements are presented in Canadian dollars and all dollar amounts in
this document are in Canadian Dollars unless otherwise indicated.
The host country is the United States of America and therefore the Company
provides disclosure of the exchange rate between its financial reporting
currency which is in Canadian dollars and United States dollars ("US$") of the
host country based upon the exchange rate in effect at the end of the month or
of the calendar year to which the amount relates, or the exchange rate on the
date specified. For such purposes, the exchange rate means the noon buying rate
for United States dollars from the Bank of Canada (the "Noon Buying Rate").
These translations should not be construed as representations that the Canadian
dollar amounts actually represent such U.S. dollar amounts or that Canadian
dollars could be converted into U.S. dollars at the rate indicated or at any
other rate. The Noon Buying Rate at the end of each of the five years ended
December 31, the average of the Noon Buying Rates on the last day of each month
during each of such fiscal years and the high and low Noon Buying Rate for each
of such fiscal year's were as follows:
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2002 2003 2004 2005 2006
$ $ $ $ $
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At the end of period 0.63 0.77 0.83 0.858 0.862
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Average for period 0.64 0.72 0.77 0.825 0.882
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High for period 0.66 0.77 0.85 0.869 0.909
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Low for period 0.62 0.64 0.72 0.787 0.853
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Following is a table of the Noon Buying Rates on the last day of each month for
the four months ended April 30, 2007:
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January February March April
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At the end of period 0.847 0.855 0.867 0.904
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Average for period 0.851 0.854 0.856 0.881
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High for period 0.858 0.863 0.867 0.904
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Low for period 0.846 0.844 0.847 0.863
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The Noon Buying Rate as at May 9th, 2007 was 0.904
2
Change of Control
On August 8, 2005, the Company acquired 78.2% of KCP Innovative Services Inc.
for the issuance of 17,335,814 Class A common shares of the Company bringing the
total number of Class A shares issued and outstanding at that time to
19,335,814. This effected a change in control of the Company. Based on the
acquisition of the controlling interest in KCP Innovative Services Inc. as of
August 8, 2005, and reverse merger accounting applied to the transaction, the
following financial information reflects the financial information of KCP
Innovative Services Inc. for the fiscal years ended August 31, 2002 to December
31, 2006. KCP Innovative Services, Inc. changed its fiscal year end to the
fiscal year end of the Company which is December 31st.
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Year End Aug 31 Aug 31 Aug 31 Aug 31 Dec 31 Dec 31
2002 2003 2004 2005 2005 2006
(4 months)
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CAD CAD CAD CAD CAD CAD
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Operating Revenues 129,377 420,314 380,606 933,441 355,017 1,714,925
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Income (loss) from 15,787 47,304 (197,917) (862,266) (399,830) (188,745)
Operations
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Net Income (loss) 15,787 38,789 (178,084) (822,851) (330,069) (188,745)
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Net Income (loss) .001 .002 (.008) (.037) (.015) (.004)
from Operations Per
Share
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Total Assets 81,637 151,820 2,484,614 2,003,032 1,698,171 7,128,648
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Net Assets 24,279 63,068 2,048,488 291,726 883,308 5,818,271
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Capital Stock 2,320,783 2,320,783 2,320,783 2,320,783 3,242,434 8,381,142
- --------------------- ------------ -------------- -------------- -------------- -------------- --------------
- --------------------- ------------ -------------- -------------- -------------- -------------- --------------
Number of Shares 17,335,814 17,335,814 17,335,814 19,335,814 34,810,814 58,396,421
- --------------------- ------------ -------------- -------------- -------------- -------------- --------------
CAPITALIZATION AND INDEBTEDNESS
Not Applicable
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
RISK FACTORS
Our business will be subject to numerous risk factors, as more particularly
described below.
Our business operations are speculative. The failure of our plans could
ultimately force us to reduce or suspend operations and even liquidate our
assets and wind-up and dissolve our company.
Our shares should be considered highly speculative due to the proposed nature of
our business and the current stage of our development. Certain information set
out in this annual report includes or is based upon expectations, estimates,
projections or other "forward looking information". Such forward-looking
information includes projections or estimates made by us and our management as
to our future business operations. While statements concerning forward looking
information, and any assumptions upon which they are based, are made in good
faith and reflect our current judgment regarding the direction of our business,
actual results will almost certainly vary, sometimes materially, from any
estimates, predictions, projections, assumptions or other future performance
suggested herein. See "cautionary statement concerning forward - looking
information".
3
A significant or prolonged decrease in oil and natural gas prices will seriously
and negatively impact our business plans and operations.
Our revenues are dependent on the expenditures of oil and gas companies. The
demand for our tools and services are primarily influenced by current and
anticipated commodity prices, particularly oil and natural gas prices. Weakness
in commodity prices may cause our customers to reduce their capital and
operating expenditures as weaker commodity prices result in fewer wells being
drilled. Other factors that may affect demand for our tools and services
include:
o The level of development, exploration and production activity of, and
corresponding spending by, energy and resource companies, which in turn
is affected by conditions such as weather conditions, and seasonality,
government regulation of energy and resource companies, and
o Conditions in the worldwide energy and resources industry.
Periods of diminished or weakened demand for our tools and services may occur in
the future. In light of these factors, historical operating results may not be
indicative of our future performance. In addition, reductions in commodity
prices can result in a reduction in the trading prices and value of our
securities, even if the reduction in commodity prices does not affect our
business generally.
Seasonality may affect our performance.
In general, the level of activity in the oilfield service industry is influenced
by seasonal weather patterns. Wet weather and the spring thaw may make the
ground unstable. Consequently, municipalities and provincial transportation
departments enforce road bans that restrict the movement of rigs and other heavy
equipment, thereby reducing activity levels. Additionally, certain oil and gas
producing areas are located in areas that are inaccessible other than during the
winter months because the ground surrounding the drilling sites in these areas
consists of swampy terrain. Seasonal factors and unexpected weather patterns may
lead to declines in the activity levels of exploration and production companies
and corresponding declines in the demand for our tools and services.
We may be unable to continue as a going concern if we are unable to raise
additional capital.
The cost associated with further development of our business and our ability to
generate revenue will depend on a variety of factors, including our ability to
meet our development schedule and customer needs, changes in technology, and the
availability of additional funds that may be required to advance and expand our
business. Additional funds, whether through additional equity financing, debt
financing or other sources, may not be available on terms acceptable to us or at
all, or may result in significant dilution to our shareholders and/or a change
of control of the Company. The inability to obtain additional funds may have a
material adverse affect on our business, results of operations, and financial
condition.
There is no guarantee that we will generate profit. We have incurred losses and
anticipate losses will continue. This could have an impact on shareholders'
investments in our common stock.
Our business is capital intensive and we have no history of profit. Accordingly,
there can be no assurance that our future business activities will be
profitable. We have incurred costs to develop and enhance our tools and
services, to establish strategic relationships and to build an administrative
organization. Our ability to operate profitably and generate positive cash flow
in the future will be affected by a variety of factors, including our ability to
further develop and test our technology on schedule and on budget, the pace of
our entry into our target markets, consumer acceptance of our products, the
intensity of the competition experienced by us, the availability of additional
capital to pursue our business plans, including development of new products. An
inability to generate sufficient funds from operations will have a materially
adverse affect on our business, results of operations and financial condition.
4
Our ability to grow our business and meet our commitments to our customers is
dependent upon the availability of suppliers upon which we rely.
We will have to rely on suppliers for additional gauges, trucks and equipment in
order to expand, or to replace existing equipment. The availability of suppliers
could affect our ability to expand or to meet our commitment to existing
customers.
We are in an early stage of development and there are no guarantees that we will
be able to achieve our business objectives. This may have a material adverse
impact on our business and ability to continue as a going concern.
Our business prospects are subject to all of the risks inherent to a new
business. There can be no assurance that we will obtain market acceptance as
contemplated in our business objectives and any failure to sell our products or
services may have a material adverse effect on our business, results of
operations, and financial condition.
The industry in which we operate is marked by rapid technological change. Our
inability to adapt to such change(s) may have a material adverse impact on our
business and ability to continue as a going concern.
Our Industry is subject to rapid change, and any inability on our part to adapt
to such change may have an adverse affect on our business, results of operations
and financial condition. The effect of new developments and technological
changes on the business sector in which we will compete cannot be predicted. Our
failure to adapt to any of the above could have a material adverse effect on our
business, results of operations, and financial condition.
We compete directly with independent, technology-driven services companies. Our
inability to effectively compete with these companies could have a material
adverse impact on our business.
We expect to face significant competition from other organizations and there can
be no assurance that we will be able to compete effectively in our target
markets. In addition, new technologies may emerge that are competitive with our
tools and services. Advances in measurement tools as well as changes in the
market place and the regulatory and legislative environment are constantly
occurring and any such change could have a material adverse impact on us. We
expect that competition will intensify in the future, as our tools and services,
and the opportunities presented thereby, become better known.
There is continual need for innovative solutions. Our ability to develop new
solutions or refine our existing solutions could have a material adverse impact
on our business.
To achieve our business objectives and obtain market share and profitability, we
will need to continually research, develop and refine our tools and services.
Many factors may limit our ability to develop and refine existing tools and
services. We may also be exposed to marketplace resistance to new tools and
services. Any failure to develop or refine our existing tools and services, or
create new tools or offer new services could have a material adverse effect on
our business, results of operations, and financial conditions.
Our failure to protect our intellectual property could have a material adverse
impact on our business.
Our success will be largely dependent upon our ability to protect our
proprietary technology. We rely upon copyright law and trade secrets to protect
our intellectual property. We have not, to date, applied for or obtained any
patents or trademarks to protect our intellectual property. Where appropriate,
we also enter into non -disclosure agreements with persons to whom we reveal
proprietary information. Any failure to protect our intellectual property could
have a material adverse effect on our business, results of operations, and
financial condition.
5
We may have to engage in litigation in the future to enforce or protect our
intellectual property rights or to defend against claims of invalidity and we
may incur substantial costs as a result. Any claims or litigation initiated by
us to protect our proprietary technology could result in significant expense to
us and diversion of the efforts of our technical and management resources,
whether or not the claims or litigation are determined in favor of us.
A small number of shareholders own a significant number of our shares which
could make it difficult for other investors to make changes in our operations or
management, and therefore, shareholders would be subject to decisions made by
management and the majority shareholders.
A significant number of our 58,396,421, outstanding shares are owned by four (4)
shareholders, Messrs. Ken Pearson, James Baker, Steven Hoof and Fergus Ismond.
In total, these shareholders own 20,090,644 share of the total amount of
58,366,421 shares outstanding, which is approximately 34%. These shareholders
have the power to significantly influence our affairs and may be able to
influence the outcome of matters required to be submitted to shareholders for
approval, including the election of directors and the amendment of our articles
of incorporation and bylaws. Conversely, it may be difficult for the remaining
shareholders to influence the outcome of such matters.
Our business may attract uninsured liabilities which may have an adverse impact
on us.
Our products are used in processes of production of oil and gas. Though it is
unlikely that the products could cause damage, we may be subject to liability
for property damage, personal injury or other hazards. We are insured in
accordance with industry standards to address certain of these risks; however,
such insurance has limitations on liability that may not be sufficient to cover
the full extent of such liabilities. In addition, such risks may not in all
circumstances be insurable. The payment of such uninsured liabilities would have
an adverse effect on our business, results of operations and financial
conditions.
There may be environmental liability from our services. In the event that losses
or damages result from the operation of the assets that are not covered by the
operator's insurance, these losses or damages would become a liability for us.
It is possible that uncovered losses and damages could not be insured which
could cause us to have to file for bankruptcy protection from the courts.
Our inability to effectively manage our planned growth could have a material
adverse impact on our business.
Responding to consumer demands, expanding into other geographical markets and
targeting growth in our business is likely to place significant strains on our
administrative and operational resources and increased demands on our internal
systems, procedures and controls. If we experience rapid acceptance of our
technology, the need to manage such growth will add to the demands on our
management, resource, systems, procedures and controls. There can be no
assurance that our administrative infrastructure, systems, procedures and
control will be adequate to support our operations or that our officers and
personnel will be able to mange any significant expansion of operations. If we
are unable to manage growth effectively, our business, operating results, and
financial conditions will be materially adversely affected.
We are currently understaffed in our management. If our current essential
officers left prior to securing their replacements, we would be left without
adequate management and our business operations would cease.
We will be reliant upon company management personnel to anticipate and address
consumer demands and hire technical employees and contractors to provide our
service. There can be no assurance that qualified management or technical
personnel will be available to us in the future. The success of our operations
and activities will depend to a significant extent on the efforts and abilities
of our management and technical personnel. The loss of services of any of our
management or technical personnel could have a material adverse effect on our
business, results of operations, and financial condition.
6
Our day-to-day management and operations are dependent on the expertise of Ken
Pearson, our President. If Mr. Pearson were no longer able to provide services,
our operations could be threatened.
Currently, we are dependent on the expertise of Ken Pearson, who has an in-depth
knowledge of our technology and operations. He is also responsible for the
day-to-day management of our wholly-owned subsidiary KCP. Our ability to operate
would be severely curtailed if Mr. Pearson were to be unavailable.
Unpredictable events could cause fluctuations in our operating results which
could cause unanticipated losses and adversely impact our business.
We expect to be exposed to significant fluctuations in operating results caused
by many factors, including changes in the demand for our technology, the
introduction of competing technologies, market acceptance of such enhancements
or products, delays in the introduction of such enhancements or products,
changes in our pricing policies or those of our competitors, the mix of services
sold, foreign currency exchange rates and general economic conditions.
Our future operating results may fluctuate significantly depending upon a number
of factors, including industry conditions, prices of oil and natural gas, rate
of drilling success, rates of production from completed wells and the timing of
capital expenditures. This variability makes it very difficult to predict when
we might reach profitability and hence would have a serious impact on the value
of investor's investment in our company. In addition, any failure or delay in
the realization of expected cash flows from initial operating activates could
limit our future ability to continue exploration and to participate in an
economically attractive project.
The price of oil and natural gas is determined based on world demand and supply.
It is impossible to predict future oil and natural gas price movements with any
certainty, as they have historically been subject to wide fluctuations in
response to a variety of market conditions, including relatively minor changes
in the supply and demand for oil and natural gas, economic, political and
regulatory developments, and competitions from other sources of energy.
Any extended or substantial decline in oil and natural gas prices would have a
material adverse effect on our ability to negotiate favorable joint ventures
with viable industry participants, our cash flow and our access to capital. Our
business may be adversely impacted by the Kyoto Protocol and/or unforeseen
changing government regulations.
Canada is a signatory to the United Nations Framework Convention on Climate
Change and has ratified the Kyoto Protocol established hereunder. Canada, as an
Annex B party to the Kyoto Protocol, is required to set legally binding targets
to reduce nation-wide emissions of carbon dioxide, methane, nitrous oxide and
other so-called "greenhouse gases".
The direct or indirect costs of complying with emissions regulations may
adversely affect the oil and gas business in Canada, which in turn may adversely
affect the oil and gas services industry in which we will participate.
Other government regulations are subject to change at any time and are beyond
our control.
US investors face the risk that their investment may be subject to special US
federal income tax rules.
For any of our taxable years, if at least seventy-five percent (75%) of our
gross income is "Passive income" (as defined in the Internal Revenue Code of
1986, as amended (the "Code")), or if at least fifty percent (50%) of our
assets, by average fair market value, are assets that produce or are held for
the production of passive income, we will be a Passive Foreign Investment
Corporation ("PFIC").
If we are a PFIC for any taxable year during which an individual who is a
citizen or resident of the United States or a domestic corporation (a "US
Taxpayer") owns any common stock, the US Taxpayer will be subject to US federal
income tax rules, set forth in Sections 1291 to 1297 of the Code, with respect
to all of such US Taxpayers' common stock. For example, gifts and exchanges
7
pursuant to corporate reorganizations and use of the common stock as security
for a loan may be treated as a taxable disposition, and a stepped-up basis upon
the death of such US Taxpayer may be not available. Furthermore, in the absence
of an election by such US Taxpayer to treat us as a "qualified electing fund"
(the "QEF election"), as discussed below, the US Taxpayer would be required to
(i) report any gain on disposition of any common stock as ordinary income rather
than capital gain, (ii) to compute the tax liability on such gain and on certain
distributions as if the share had been earned pro rata over the US Taxpayer's
holding period (or a certain portion thereof) for the common stock, and (iii)
would be subject to the highest ordinary income tax rate for each taxable year
of the US Taxpayer in which the shares were treated as having been earned. Such
US Taxpayer would also be liable for interest (which may be non-deductible by
certain US Taxpayers) on the foregoing tax liability as if such liability had
been due with respect to each prior year.
US Taxpayers are strongly urged to consult his or her own tax advisor in this
regard.
The foregoing discussion of United States taxation is of a general and summary
nature only and is not intended to be, nor should it be considered to be, legal
or tax consequences of receiving dividends from us or disposing of their common
stock, and thus, any investment in our common stock could be illiquid for an
indefinite period of time.
You should not expect to receive dividends on your investment.
We have never paid any cash dividends on shares of our capital stock, and we do
not anticipate that we will pay any dividends in the foreseeable future. Our
current business plan is to retain any future earnings to finance the expansion
of our business. Any further determination to pay cash dividends will be at the
discretion of our board of directors, and will be dependent upon our financial
conditions, results of operations, capital requirements and other factors as our
board of directors may deem relevant at that time.
Our business may be adversely impacted by unforeseen changes in environmental
and safety requirements.
Environmental and safety regulations are extensive in the industry and subject
to change at any time. This may affect the development of our business. These
matters are more completely described in Item 4 of this document.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
Capital Reserve Canada Limited ("Capital Canada," the "Company", "we", "us" or
"our") was incorporated on December 8th, 1999 as a private corporation under the
Business Corporations Act (Alberta, Canada). On January 15, 2003, we amended our
articles of incorporation to enable us to be a public company under the laws of
the Province of Alberta. On May 28, 2003, we amended our Articles of
Incorporation to forward split issued and outstanding shares of class A common
stock on the basis of 2000 shares for every one (1) share held. From the date of
incorporation to November 1, 2004, we were a wholly owned subsidiary of FACT
Corporation. On November 1, 2004, FACT Corporation distributed our shares to the
FACT Corporation's shareholders and to a creditor and we ceased to be a
subsidiary of FACT Corporation.
Our principal place of business is located at 4304-76 Ave., Edmonton, Alberta,
T6B 2K3. Our telephone number is 780-428-6026.
On July 1, 2005, we entered in two (2) convertible loan agreements with FACT
Corporation in the principal amount of $533,527 USD and $152,997 CDN (approx
$126,222USD). The loan agreements were to mature on June 30, 2007 and interest
calculated at US prime plus one percent (1%). The loans were converted into our
Class A common shares at $0.05 USD per share. On November 22, 2005, FACT
Corporation advised us that it had assigned all of its rights and interest in
the convertible loan agreements. On November 23, 2005, we received notice of
8
election to convert a total of $772,550 USD owing for interest and principal and
issued a total of 15,451,000 Class A common shares pursuant to the conversion.
Also, on November 23, 2005, 24,000 Class A common shares were issued when
options were exercised. On February 15, 2006, we received notification of the
conversion of the remaining balance of the convertible loans in the amount of
$226,065 USD and issued a total of 4,521,307 Class A common shares. This
constituted full and final settlement of all outstanding debt under the
convertible notes.
On August 2, 2005, we incorporated a wholly owned subsidiary, Capital Reserve
Canada Projects Ltd., to effect the acquisition of an operating business in the
oil and gas services industry. On August 8, 2005, we issued a total of
17,335,814 of our Class A common shares and Capital Reserve Canada Projects Ltd.
acquired a 78.2% interest in KCP Innovative Services Inc. ("KCP"). After this
issuance, we had a total of 19,335,814 Class A common shares outstanding which
resulted in a change in control of the Company. On February 3, 2006, we issued
an additional 4,834,300 shares of Class A common stock for the remaining 21.8%
of the shares of KCP and Capital Reserve Canada Projects Ltd. This effected an
amalgamation with KCP, with KCP being the surviving entity. KCP is now a wholly
owned subsidiary of us. All of our operations are currently carried on by KCP.
As all of our operations are undertaken by KCP, management has applied reverse
merger accounting for the reporting of financial information. Unless otherwise
stated, all of the financial information included in this annual report is the
financial information of KCP, our wholly owned subsidiary, except for the
shareholders' equity which includes information for both us and KCP.
On June 13, 2006, we incorporated Two Hills Environmental Inc. in the Province
of Alberta, Canada as a wholly owned subsidiary to acquire the assets of
Southbend Power Ltd. ("Southbend"). On June 16, 2006, and then as amended on
July 5, 2006, Two Hills Environmental Inc. and Southbend entered into an asset
purchase agreement for the purpose of acquiring a water diversion permit, 147
acres of surface rights with water pumping station, and certain mineral rights
from Southbend, in exchange for 13,200,000 of our Class A common restricted
shares.
On August 11, 2006, we, through a newly formed subsidiary, Suncone Technologies
Ltd ("SUN"), entered into an agreement with Southbend whereby Southbend agreed
to sell to SUN an Infratronic Soil Sterilization Unit for $50,000 on the
condition that the unit passed a start-up and operational test to the sole
satisfaction of SUN no later than September 30, 2006. This was later extended to
November 30, 2006 after which the contract was cancelled by SUN. Southbend was
given until March 31, 2007 to repay the $50,000. On December 11, 2006, both
parties agreed to apply the $50,000 against work done by Southbend on the Two
Hills site. This work consisted of cleaning debris from the Two Hills site. SUN
was subsequently dissolved on Dec 18, 2006.
On October 20, 2006, we purchased salt rights to about four (4) sections of
adjacent land from Rich Resources Investment Ltd. in exchange for 1,000,000 of
our Class A common restricted shares.
Principal Capital Expenditures and Divestitures
The financial statements presented in this annual report relate to our
consolidated operations of our wholly owned subsidiaries, KCP and Two Hills
Environmental Inc. We have included the information as to capital expenditures
and divestitures in this section.
We were previously in the oil and gas industry by way of the ownership of
certain producing and non-producing oil and gas properties. On May 15, 2003, we
sold certain oil and gas producing properties to Hornet Energy Ltd. for
$150,000.00 CDN or approximately $113,920 USD. The funds received paid off
certain loans with Alberta Treasury Branches in full, funded the drilling of an
exploration well in Montana and paid down a total of $57,526 USD of debt with
FACT Corporation.
On June 10, 2003, we executed an agreement with FACT Corporation and Terra
Nostra Technology Ltd. whereby we acquired an interest in certain oil and gas
leases held in Rosebud and Garfield Counties, Montana for $10,000 USD. As part
of such agreement, we also took ownership of small producing oil and gas wells
in Colorado, known as the Kejr leases. We expended a total of $6,181 for the
9
drilling of an exploration well on the Montana leases during July, 2003. The
well was a dry hole. Our management determined to divest itself of the Kejr
leases and the Montana leases. On December 23, 2004 we entered into an agreement
with Stone Canyon Resources Inc. ("Stone Canyon") whereby we transferred to
Stone Canyon all rights and interest in and to the Kejr and Montana leases in
exchange for Stone Canyon assuming all current liabilities and any future
liabilities for the Kejr and Montana leases.
Effective January 1, 2004, KCP acquired from a group of individuals a computer
modeling system to analyze the underground formations that contain natural gas
and oil by way of the issuance of a total of 14,966,270 common shares of KCP.
On June 11, 2004, KCP acquired 100% of the issued and outstanding shares of Zone
Technologies Ltd. ("Zone") from an existing shareholder and an unrelated party.
Consideration for the acquisition was $782,500 which was paid by the way of
1,294,444 shares of KCP and $200,000 cash.
- ---------------------------- -------------------------- -------------------------- --------------------------
Vendor Percent Ownership Cash Consideration Share Consideration
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Darren Klassen 50% $200,000 425,000 KCP Shares
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Ken Pearson 50% - 869,444 KCP Shares
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Total 100% $200,000 1,294,444 KCP Shares
- ---------------------------- -------------------------- -------------------------- --------------------------
On September 26, 2005, Zone Technologies Ltd. was dissolved and the assets were
transferred directly to KCP.
During February and March 2005, KCP purchased two Slick Line Units at a cost of
approximately $650,000 for use in operation.
On June 13, 2006, we incorporated Two Hills Environmental Inc. in the Province
of Alberta, Canada as a wholly owned subsidiary to acquire the assets of
Southbend Powers Ltd. On June 16, 2006, Two Hills Environmental Inc. and
Southbend entered into an asset purchase agreement for the purchase of acquiring
certain surface and mineral rights from Southbend in exchange for 13,200,000 of
our Class A common restricted shares.
On October 20, 2006, we purchased salt rights from Rich Resources Investments
Ltd. for 1,000,000 of our Class A common restricted shares.
Principal Capital Expenditures and Divestitures in Progress
Not Applicable
BUSINESS OVERVIEW
We are an Alberta, Canada Corporation formed in December 1999 to locate and
acquire producing oil and gas assets in Canada. We disposed of our Canadian oil
and gas production on May 15, 2003, which consisted of a five percent (5%)
interest in an Alberta field. We divested of our interests in oil and gas
exploration and development leases in Montana and a producing oil and gas
property located in Colorado effective as of December 1, 2004. On August 12,
2005, we acquired a controlling interest in KCP, an oil and gas services
company, and we acquired a further interest in KCP on February 3, 2006, making
KCP our wholly owned subsidiary. All of our operations are presently undertaken
by KCP. On June 13, 2006, we acquired the assets of Southbend to assist the oil
and gas industry with problem waste and to provide underground storage.
Operations and Principal Activities
Since August 2000, we have been operating in the oil and gas services industry.
All of our present business is conducted in Alberta, Canada through wholly owned
subsidiaries KCP and Two Hills Environmental Inc. ("Two Hills")
10
KCP is a corporation that develops tools for, and provides services using such
tools to, businesses engaged in the exploration for energy. Specifically, KCP's
tools are used for measuring the flow and quantity of production of oil and gas
wells. KCP's measurement tools are used by oil and gas companies to measure
pressure and temperature of a well, which enables improved production
information on development life to assist the Alberta Energy and Utilities Board
to determine royalty payments and gas reserves.
For the three (3) fiscal years ending 2004, 2005 and 2006, about ninety-four
percent (94%) of our business was from the application of KCP's perforation
inflow diagnostics ("PID") technology.
KCP commenced operations in 2001. KCP was formed by Mr. Ken Pearson to develop
measurement tools with Mr. Pearson himself researching, developing and deploying
services using such tools. On January 1, 2004, KCP changed its size from a
single operator to a larger operation, to take advantage of the opportunities
Mr. Pearson identified in the market. KCP grew its management team adding Mr.
Baker and sought an experienced Board of Directors adding Messrs. Getty, Baker
and Hawkes. KCP refined its business plan and moved ahead with private
placements to raise capital for operations.
TOOLS AND SERVICES
Services
KCP provides services to oilfield operators. KCP's primary service uses a number
of proprietary processes as well as proprietary equipment. As described below,
the various measurement services offered by KCP are provided directly at client
well sites by a crew of one (1) or two (2) KCP employees or contractors. Crews
are primarily made up of KCP employees, but KCP also contracts out certain
services to wire line companies in the area of a particular client well site.
Provision of KCP's services to clients requires specialized staff with knowledge
of the oilfield services industry and KCP's technology. Basic wire line
knowledge and basic computer knowledge are required, with further training on
KCP's services provided by KCP.
KCP's primary tools are as follows:
Perforation Inflow Diagnostics ("PID")
PID testing is comprised of a set of tools and processes that determine the
permeability, skin, reservoir pressure, and gas and liquid inflow during a
perforating operation to the well site. Perforating is used to help determine
the size and viability of the well. Memory gauges are dropped from the surface
on a perforating drop bar using an electric line to convey the data. The
electric line conveys the data to a surface recorder at the well head so that
information of the well inflow may be evaluated by the user at the time of the
perforation. This information comes from an analysis of the data from the memory
gauges using KCP's proprietary software. The results are available in graphic
form, helping the user determine if the well is viable, and, if viable, which
drilling methodology should be used. Management of KCP believes that PID gives
more accurate measurement of pressure and temperature, and therefore better
production of the well, than traditional analysis. Neither the PID process nor
the tools and gauges are used in the process currently offered by KCP's
competitors. This product is targeted at all producers of natural gas. No
material regulatory approvals or documentations are required for KCP to achieve
its business objectives with respect to this product.
PID testing is achieved with two in-house PID slick line units, one drop spool
unit and by renting slickline trucks as required. Since the two PID Slickline
units were not available until March 29, 2005, most of KCP's revenue for the
first half of fiscal year 2005 was generated by KCP's drop spool unit and by
renting Slickline trucks as required. PID testing has created most of the
revenue.
Ninety four percent (94%) of sales in fiscal year 2006 were generated in the PID
market.
11
Injection Technology
Coal Bed Methane ("CBM") is a gas found in coal seams and is produced and sold
as natural gas. Coal beds, however, offer different challenges since they tend
to be saturated with water and the pressure tends to be much lower than in
natural gas wells. However, the water pressure is sufficient enough to hold the
CBM in solution and, once the pressure is reduced, CBM separates from the water
and is able to be piped away.
The challenge is to depressurize the well without dewatering below the coal seam
and running the risk of damaging the formation and preventing the recovery of
more CBM. A great deal of care is therefore needed to help determine the
profitability and achieve the production without damaging the well.
KCP's injection technology is used to determine the profitability of CBM
deposits and is composed of both hardware and software technologies and is
mounted in a trailer that is pulled by a pick-up truck. The unit injects fresh
water into the underground formation to help open the coal beds. Once flow can
be achieved, gauges then measure the flow rate for the methane gas. Since water
has to be removed from the well first, this process helps determine whether the
well will be profitable before the customer makes a significant investment in
the well. KCP is presently unaware of any companies that provide a competing
service to its injection technology. The technology is targeted to all producers
of methane gas and is currently in the commercial production stage. No material
regulator approvals or documentation are required for KCP to achieve its
business objectives with respect to this product.
Vent Gas Analyzer
The Vent Gas Analyzer (Turbine Meter) is intended to assist with well
abandonment by significantly reducing the time required to determine emissions
to the atmosphere. It uses a turbine meter and deadweight to accurately
calculate flow rates of gas to the atmosphere. This helps ensure that there are
no emissions above the regulatory guidelines. Management of KCP believes that
the process is more accurate and not as labor intensive as previous methods. The
technology is proprietary to KCP and, to the knowledge of KCP; there is no
utilized competitor in the industry that uses similar technology or products.
This product will be targeted to all oil and gas exploration companies No
material regulatory approvals or documentation are required for KCP to achieve
its business objectives with respect to this product. Turbine Meter sales in
2006 amounted to about one percent (1%) of total sales.
Electronic Shut-In-Tool
The electronic-shut-in-tool is a programmable tool intended to measure pressure,
volume and temperature for the purposes of determining the productivity of an
existing well. Management of KCP believes that it is the only tool available to
the industry that is programmable and has multi functions. It can be programmed
to open and close at certain intervals as compared to conventional tools that
are open or closed based on a fixed time. The programmable feature also allows
the tool to automatically shut-in based on pressure. This allows the pressure to
build up in the well, thus enhancing its life and production. The product is
targeted to oil and gas companies. There are no sales to date and this tool is
not scheduled to go into production until September 2007. No material regulatory
approvals or documentation are required for KCP to achieve its business
objectives with respect to this tool.
Principal markets
All of the operations of KCP are presently in the Province of Alberta, Canada.
About ninety-four percent (94%) of total revenues of KCP are derived from the
application of its PID technology. The other six percent (6%) of its total
revenues are derived from its injection technology (5%) and Turbine Meter (1%).
Seasonality
The oil and gas industry as a whole is affected by seasonal variation. Wet
weather can significantly impede the operations of players in all sectors of the
industry. If exploration and development operations are impeded by wet weather
12
or other seasonal weather conditions, it may be expected that sales of KCP's
products and services will be negatively affected.
Market
KCP conducts its own marketing as follows:
KCP's sales strategy to date has been driven primarily by personal contacts with
senior management. These contacts are derived from previous work projects. A
number of supplemental marketing methods have been contemplated. These include
referral fees, company brochures, exhibits at trade shows in Calgary,
advertisements in industry magazines, and a company website. KCP may also employ
a commissioned sales person or contact engineering offices at targeted companies
by telephone. In addition to pursuing and securing new accounts, KCP plans to
focus on widening existing accounts.
Market Competition
KCP's current market is the oil and gas industry in Alberta, Canada. This will
also be the immediate target market for KCP's tools and services. On completion
of its product development, it is anticipated that KCP will expand to the
regional Western Canada market and eventually, if successful, the worldwide
market.
KCP's prices are negotiated per job, depending on location, complexity, nature
of the service and availability. Some jobs may require some design and
investigation before proceeding. Rental of gauges over time is based on accepted
rental rates in the industry. After sales service, maintenance and warranties
are not a significant competitive factor in this market segment.
The oil and gas market continues to be strong. According to the Canadian
Association of Petroleum Producers ("CAPP") website, it is estimated that 23,920
new wells were drilled in Canada in 2004. CAPP also believes that Canada has
significant potential in emerging resources such as natural gas from CBM. KCP
estimates that while approximately fifty percent (50%) of wells are suitable for
measurement with KCP's products, only a small portion are customers. As
production declines in Western Canada, management of KCP believes that KCP will
maintain its growth, as customers will seek KCP's tools to enhance current
production wells, and to reactivate abandoned wells. In addition, exploration
and development companies require new data from all wells on an annual basis and
will have a use for KCP's tools.
A number of businesses operate or have operated in the oil and gas measurement
sector. Many of these no longer operate in the sector or have reorganized such
that the measurement niche is no longer their core business. KCP's primary
competitor in the field of oil and gas measurement is Lonkar Well Testing Ltd.
("Lonkar"). Management of KCP estimates that Lonkar is currently the largest
service provider in the market for this type of service. Lonkar has, in addition
to a dominant market share, a strong capital position. Management of KCP
believes, however, that KCP has more advanced proprietary technology, and that
this is a competitive advantage that will allow KCP to penetrate the market. It
should be noted that since some of the market is currently untapped, it is
possible that new competitors may enter the market. Management of KCP believes
that its products and services are more advanced than those of its competition
or any other potential competitor. Management of KCP intends to keep KCP at the
technological forefront of the sector by continuous research and development and
continuous improvements of existing products and services. Management of KCP
believes that the dedication of KCP to continuous technological advancement will
give it a competitive advantage.
Management of KCP further believes that market acceptance for KCP's tools and
services are growing as its products become more frequently utilized. However,
to date, no market testing or surveys have been carried out with respect to
market acceptance of KCP's tools and services.
KCP's tools and services are not affected by any market controls or regulations
directly. However, because KCP's clients and target clients, as exploration and
drilling companies, are subject to regulatory control, it is anticipated that
any future significant changes to the oil and gas regulatory scheme may have an
indirect effect on KCP'S ability to market its products and services.
13
Problem Waste and Underground Storage
Our second subsidiary, Two Hills, owns approximately 147 acres of industrial
land, salt rights, and a water diversion permit on the North Saskatchewan River,
near Two Hills, Alberta, Canada.
The Two Hills property sits above the Lotsburg salt formation running along the
eastern part of Alberta, Canada. Also, on the property are four (4) existing
salt caverns that were capped some time ago. We believe that three (3) of these
caverns are empty and have applied to the Energy and Utilities Board in Alberta,
Canada for permission to commence operations on the site. At the date of this
report, permission had not yet been granted. Caverns may be used for such things
as carbon dioxide or natural gas storage. Once granted, we will be able to
develop a comprehensive business plan for the site.
REGULATORY MATTERS AFFECTING OUR BUSINESS
Environment and Safety
Our operations will be subject to numerous federal, provincial and local laws
and regulations relating to environmental protection. These laws and regulations
govern, among other things, the amounts and types of substances and materials
that may be released into the environment, the issuance of permits in connection
with exploration, drilling and production activities, the release of emissions
into the atmosphere, the discharge and disposition of generated waste materials,
offshore oil and gas operations, the reclamation and abandonment of wells and
facility sites and the remediation of contaminated sites. In addition, these
laws and regulations may impose substantial liabilities for the failure to
comply with them or for any contamination resulting from the operations
associated with our assets. Laws and regulations protecting the environment have
become more stringent in recent years, and may in certain circumstances impose
"strict liability," rendering a person liable for environmental damage without
regard to negligence or fault on the part of such person. Such laws and
regulations may expose us to liability for the conduct of or conditions caused
by others, or for our acts which were in compliance with all applicable laws at
the time such acts were performed. The application of these requirements or the
adoption of new requirements could have a material adverse effect on our
financial position and results of operations.
The Oil Pollution Act of 1990 ("OPA") and regulations promulgated pursuant
thereto impose a variety of requirements on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills.
Few defenses exist to the liability imposed by the OPA, and such liability could
be substantial. A failure to comply with ongoing requirements or inadequate
cooperation in a spill event could subject a responsible party to civil or
criminal enforcement action.
We take the issue of environmental stewardship very seriously and work
diligently with our operators to ensure compliance with applicable environmental
and safety rules and regulations. Compliance with such laws and regulations has
not had a material effect on our operations or financial condition in the past.
However, because environmental laws and regulations are becoming increasingly
more stringent, there can be no assurances that such laws and regulations or any
environmental law or regulation enacted in the future will not have a material
effect on our operations or financial condition.
ORGANIZATIONAL STRUCTURE
Our subsidiaries, at December 31, 2006, were KCP and Two Hills. Both of these
companies are incorporated pursuant to the laws of the Province of Alberta,
Canada.
PROPERTY, PLANTS AND EQUIPMENT
Our principal corporate and administrative offices are located at 4304 - 76
Ave., Edmonton, Alberta, Canada.
Until June 1, 2006, this space was provided free of charge by LFC Corporation
("LFC"), one of our shareholders. On June 1, 2006, we agreed to pay LFC
Corporation rent of $2000 per month which includes telephone, computers,
14
photocopier, fax and reception. There is no formal rental agreement and the
rental is a verbal agreement on a month-to-month basis and is cancelable at any
time. We concluded our lease with LFC on December 31, 2006.
KCP leases 6,500 square feet of office space in Edmonton, Alberta, Canada at
4304-74 Ave, Edmonton, Alberta. The lease is a three (3) year term commencing on
October 15, 2004 and expiring on October 14, 2007. The base rent is $3,500 per
month net of taxes. Under the lease agreement, KCP is responsible for the costs
of all utilities, property taxes and business taxes.
KCP has a financing agreement with Canadian Western Bank for $423,500 dated
March 22, 2005 for the financing of two (2) PID trucks. The loan is a sixty (60)
month term bearing interest at 6.375% per annum. The monthly payment is $8,313.
The balance of the loan on May 18, 2007 was $250,955.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OPERATING RESULTS
The financial information as presented herein relates to our consolidated
financial statements.
Pursuant to a share exchange agreement dated August 12, 2005, we indirectly,
through our wholly owned subsidiary, Capital Reserve Projects Ltd., acquired a
78.2% interest in KCP. Because the shareholders of KCP became our controlling
shareholders, this transaction was accounted for as a reverse merger whereby KCP
is deemed to be the parent company and Capital Reserve Projects Ltd. is deemed
to be the subsidiary company for accounting purposes. The financial statements
of the combined entity are issued under our name, but are considered a
continuation of the financial statements of KCP.
Prior to the fiscal year ended August 31, 2005, KCP changed its fiscal year end
from August 31 to December 31. We have provided financial information for the
transitional four (4) month period ended December 31, 2005 and for the fiscal
years ended August 31, 2004, 2005 and December 31, 2006.
Comparison of 2006, 2005 and 2004
Revenues for the fiscal year ended December 31, 2006 were $1,714,925 and showed
a substantial increase over revenues from the previous fiscal years ended August
31, 2005 of $933,441 and August 31, 2004 of $380,606. The increase in revenues
for 2006 can be predominantly attributed to the availability of additional
equipment for operations in KCP and increased marketing efforts of management.
For the year ended December 31, 2006, we incurred operating losses of $188,745
as compared to operating losses of $862,266 for the fiscal year ended August 31,
2005 and operating losses of $197,917 for the fiscal year ended August 31, 2004.
Cost of sales for the year ended December 31, 2006 increased to $846,090 from
cost of sales of $605,370 and $186,501 for the fiscal years ended August 31,
2005 and 2004. This was mainly due to a corresponding increase in sales and from
economies of scale of a larger business. Expenses for December 31, 2006 fell to
$1,057,580 from August 31, 2005 expenses of $1,190,337 which had increased from
$392,022 in 2004. Salaries and benefits increased to $236,671 in 2006 from
$173,460 in 2005 and from $53,971 in 2004 due to the need to retain existing
staff. General and administrative expenses increased to $530,381 in 2006 from
$430,431 in 2005 and from $263,703 in 2004. This is due to higher administrative
costs with higher sales, and a need to retain management and consulting services
to maintain the public listing. Amortization decreased to $261,042 in 2006 from
$553,924 in 2005 which increased from $68,113 in 2004. The large amount in 2005
was due to onetime write downs.
15
During the fiscal year ended August 31, 2005, KCP raised a total of $142,179 by
way of a private placement of common shares and repaid a total of $70,000 to two
(2) investors pursuant to the cancellation of a private placement. During the
fiscal period ended August 31, 2004, KCP raised a total of $1,619,505 by way of
private placements of common shares.
During the fiscal year ended August 31, 2004, KCP issued a total of 14,966,270
common shares for the acquisition of technology. As the transaction did not
result in a change in ownership, the transaction is recorded at the nominal
carrying value of $1.00. Also, during the fiscal year ended August 31, 2004, KCP
issued a total of 1,294,444 common shares for the purchase of Zone and paid cash
consideration of $200,000. The transaction is valued at $782,500.
During fiscal year ended December 31, 2006, we issued 13,200,000 common shares
in exchange for the assets of Southbend. This transaction was valued at
$5,577,279. Also 1,000,000 of our common shares were issued to Rich Resource
Investments. This transaction was valued at $134,400.
As at the four (4) month period reflected on the financial statements for the
fiscal year ended December 31, 2005, we had revenues of $355,017. Costs of sales
were $184,165. Expenses for the four (4) month period were $570,682 and were
comprised of $54,358 for salaries and benefits, $279,027 for general and
administrative, $229,154 for amortization and interest costs of $8,143. There
are no comparable periods for 2004 as we effected a change in our fiscal year
end.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Working Capital and Stockholders' Equity
As of December 31, 2006, we had positive working capital of $314,184 compared to
$205,764 in December 31, 2005, and compared with positive working capital of
$281,857 (August 31, 2005) and $1,091,370 (August 31, 2004). As of December 31,
2006, stockholders' equity was $5,818,269 compared to $883,308 in December 31,
2005, $291,726 (August 31, 2005) and $2,048,488 (August 31, 2004). Stockholders'
equity and KCP's working capital increased in 2006 mainly because of the
acquisition of Southbend assets. It had decreased during 2005 due to the
acquisition of additional equipment and increased expenses as KCP increased
operations and undertook to become a public company.
Liquidity
We expect that we can meet our monthly overhead requirements from our current
cash and cash equivalents for the next twelve months. We expect to be able to
generate sufficient amounts of cash and cash equivalents, both in the short and
long term, to maintain our capacity, meet our planned growth and development
activities. Cash and cash equivalents are expected to come from offerings of the
Company's securities to the public and sales of its subsidiaries' tools and
services to its target customers.
Sources of Working Capital
During 2006, our primary sources of working capital have come from revenues
generated from our operations in KCP. As at December 31, 2006, we had cash on
hand of $391,528, term deposits of $21,259 and accounts receivable of $269,164.
Borrowings
KCP has an operating line of credit in the maximum amount of $95,000. Interest
is charged monthly on the outstanding balance at the rate of Bank of Canada
prime plus one percent (1%). As at December 31, 2006, the amount outstanding was
$0.
KCP has a demand bank loan repayable over sixty (60) months maturing February
2010. The loan has monthly blended payments of principal and interest of $8,313.
The interest rate on the loan is 6.375%. The loan is secured by two Sterling
Slick Line units. The balance as at December 31, 2006 was $285,354.
16
Two Hills assumed a $50,000 (maximum) loan, and a lien of $800,000 from
Southbend. The loan has monthly payments of interest and an interest rate of two
percent (2%) per month and is due March 5, 2011. The balance of the loan on
December 31, 2006 is $42,393.26. The lien may be converted to Class A common
shares on or before July 1, 2008.
Neither we nor our subsidiaries are in arrears on the payment of interest or
principal payments on borrowing. We are not, nor have we been during the fiscal
year ended 2006, in default on any debt covenants.
Material Capital Commitments
KCP has taken delivery of the two (2) PID trucks. One was delivered on February
18, 2005 and the other was delivered on March 29, 2005.
KCP has arranged capital lease financing for the trucks totaling $494,614
including interest, of which $250,956 was still outstanding at May 18, 2007. The
future commitments for these leases which commenced February 18, 2005, are
included in the contractual obligations outlined above.
KCP leases space in Edmonton at 4304-74 Ave. The lease is for a period of three
(3) years commencing on October 14, 2004 at $3500 per month.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
KCP invests in research and development, not only to refine its existing
products but to develop new products. KCP anticipates that one to five percent
(1-5%) of revenues to the company will be used for research and development. KCP
conducts its own research and development and it is anticipated that KCP will
also conduct in-house research and development.
Two Hills conducted no research and development in 2006.
The Company has no patents and licenses.
TREND INFORMATION
We are not aware as of the filing of this annual report of any known trends,
uncertainties, demands, commitments or events that are reasonably likely to have
a material effect on our financial condition.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL RESERVE CANADA
AS AT DECEMBER 31, 2006
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
- -------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------- ---------------------------------------------------------------------------
Payments due by period
- --------------------------------------------- ---------------------------------------------------------------------------
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
CONTRACTUAL OBLIGATIONS Total Less than 1-3 years 3-5 years More than
one year 5 years
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
KCP Lease Obligations (Office Space)(1) 33,250 33,250 0 0 0
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
Purchase Obligations(2) 285,354 83,998 201,356 0 0
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
Long Term Debt(3) 27,360 9,929 17,431 0 0
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
Two Hills BDC Loan(4) 52,567 8,868 43,699 0 0
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
Two Hills Lien (5) 800,000 0 800,000 0 0
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
Total 1,198,531 136,045 1,062,486 0 0
- --------------------------------------------- --------------- ---------------- ---------------- ---------- --------------
(1) Based on rent of $3,500 per month net of any taxes or operating costs.
(2) Bank loan for the purchase of two (2) Sterling Slick line units blended
monthly payments of $8,313.
17
(3) Vehicle loan with blended payments of $1,027.
(4) Per asset purchase agreement with Southbend, assuming interest only paid in
the first year, balance by 2011. (5) Per asset purchase agreement with
Southbend. Debt may be converted to shares before July 1, 2008.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth the names and ages of our current directors and
executive officers, the principal offices and positions held by each person and
the date such person became a director or executive officer. Our executive
officers are elected annually by our Board of Directors. The directors serve
one-year terms until their successors are elected. The executive officers serve
terms of one (1) year or until their death, resignation or removal by the Board
of Directors. Unless described below, there are no family relationships among
any of the directors and officers, and no persons have been elected as a
director or officer at the request of any shareholders, customers, suppliers or
others.
- ------------------------------------- ----------------------------------- -----------------------------------
Name Age Title
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
Donald Getty 73 Chairman of the Board and Director
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
Ken Pearson 56 Director, President and CEO
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
Robert Hawkes 50 Director of KCP
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
Rocky Rombs 49 Director and President of Two
Hills
- ------------------------------------- ----------------------------------- -----------------------------------
Donald Getty - Chairman of the Board, Director of Capital Reserve Canada Ltd.
and Director of KCP Innovative Services Inc.
Mr. Getty earned his Business Administration Degree from the University of
Western Ontario with honors in 1954. His positions with the Alberta Government
included two (2) terms as Premier of Alberta, the position of Energy Minister
and the position of Minister of Federal and Intergovernmental Affairs. In his
business career, Mr. Getty has served on the boards of distinguished companies
such as the Royal Bank of Canada, Nova Company, Genstar Company and
Interprovincial Pipe and Steel Corp. Mr. Getty joined us as a director and was
appointed Chairman of our Board of Directors on August 13, 2005. Mr. Getty
currently is a Director of Guyanor Resources (TSE), Nationwide Resources (TSE)
and Mera Petroleum's (TSX). Mr. Getty has been a director of KCP since January
28, 2004.
Ken Pearson - Director, President and CEO of Capital Reserve Canada Ltd. and
President and Director of KCP Innovative Services Inc.
Mr. Pearson has thirty-six (36) years experience in the oil and gas industry. He
has spent eleven (11) years in the research and development of high performance
methodologies to enhance measurement devices and the resulting information from
those devices. He is trained on full-bore tools, drill stem testing and
telemetry tools for case holes and has developed many measurement devices. Mr.
Pearson has been a director and the President of KCP Innovative Services Inc.
since inception. He became a director of Capital Reserve Canada Ltd. on August
12, 2005 and President and CEO of Capital Reserve Canada on December 28, 2006.
Robert Hawkes - Director of KCP Innovative Services Inc.
Robert Hawkes graduated from the Southern Alberta Institute of Technology in
1979 with a diploma in Petroleum Engineering. He began his career with Esso
Resources as a Reservoir Technologist in their testing department. Since that
time, he went on to establish himself as a specialist in Well Test Analysis. Mr.
Hawkes currently works for BJ Services Company Ltd. an oil & gas services
company located in Calgary, as a Team Leader, Reservoir Services. Mr. Hawkes has
published in CIM and SE and is a recognized expert in the field of pressure
18
transient analysis, reservoir characterization and short-term pre-frac buildup
and analysis. Mr. Hawkes was awarded the 2005 Presidents Award for technical and
presentation excellence in formation evaluation by the Canadian Well Logging
Society. He has been a director of KCP since January 28, 2004.
Rocky Rombs - Director and President of Two Hills Environmental Inc.
Mr. Rombs has over thirty (30) years experience with developing properties in
the oil and gas industry. He has extensive experience in drilling and has
achieved a license to drill in the Province of Alberta, Canada. Mr. Rombs has
recently been the Vice President of Operations for JMAC Drilling in Nisku,
Alberta. Mr. Rombs has numerous certificates for the oil and gas industry and is
a proponent of continuous education. Mr. Rombs became Director and President of
Two Hills on March 1, 2007.
None of our directors has been involved in any bankruptcy or criminal (excluding
traffic violations and other minor offenses) proceedings. None of our directors
is subject to any order, judgment or decree related to his or her involvement in
any type of business, securities or banking activities or has been found to have
violated a federal or state securities or commodities law.
COMPENSATION
The following table sets forth the compensation paid to our directors and
members of our management group for the last fiscal year.
- ----------------- ---------------------------- --------------------------------------------------------------
Annual Compensation Long Term Compensation
- ----------------- ---------------------------- --------------------------------------------------------------
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
Securities Long Term
Under Options Incentive
Name and to be Granted Plan Payouts All other
Principal Salary Bonus (#) (CDN$) Compensation
Position Year (CDN$) (CDN$) (CDN$)
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
James Baker 2006 60,000 - - - -
President and
Director
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
Donald Getty 2006 0 - - - -
Chairman of the
Board and
Director
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
Ken Pearson 2006 120,000 28,000 - - -
Director
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
Robert Hawkes 2006 0 - - - -
Director
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
Steven Hoof 2006 0 - - - -
Director
- ----------------- ------------- -------------- -------------- --------------- -------------- ----------------
We have not paid any other compensation to any other members of our management,
administrative or supervisory bodies. Faye Pearson earns $4,000.00 per month as
Office Manager.
19
MANAGEMENT CONTRACTS
KCP had a management contract with Projex Corporation Ltd., a company of which
James Baker is the sole officer and director, for the provision of Mr. Baker's
services as CEO for $5,000 per month on a part-time basis, commencing Feb 1,
2005. The contract has a ninety (90) day termination provision and there are no
company benefits. Mr. Baker recently devotes approximately fifty percent (50%)
of his time to us and KCP. The other fifty percent (50%) of his time is devoted
to his consulting business. The contract concluded on December 31, 2006.
KCP has an employment agreement with Ken Pearson, as President of KCP, for
$10,000 per month commencing on February 1, 2005. The contract has no specific
term of employment and no specific termination clause. Any termination would be
subject to the employment laws of the Province of Alberta, Canada. Employment
includes a company health plan covering healthcare supplemental coverage, dental
care, vision care, life insurance and disability. The cost of the plan for Ken
Pearson is $98.20 per month.
KCP has an employment agreement with Faye Pearson for Office Management Services
for $4,000 per month. The contract has no specific term of employment and no
specific termination clause. Any termination would be subject to the employment
laws of the Province of Alberta, Canada. Employment includes a company health
plan covering healthcare supplemental coverage dental care, vision care, life
insurance and disability. The cost of the plan for Faye Pearson is $168.40 per
month.
Compensation of Directors
No directors receive any form of compensation in their capacity as our
directors.
BOARD PRACTICES
Members of our Board of Directors are elected annually at the Annual
Shareholders' Meeting and hold their positions until the next Annual
Shareholders' Meeting. The last meeting was held November 7, 2006. We have not
entered into any formal service contracts with any off our directors for their
service as directors.
We do not have any standing audit, nominating or compensation committees of the
Board of Directors. Our Board of Directors undertakes the role of audit and
compensation committees at this time. Our executive officers are elected
annually by our Board of Directors and hold such positions until the following
year or until his or her successor is duly elected by our Board of Directors.
EMPLOYESS
As at December 31, 2006, KCP had eight (8) employees including one (1)
president, one (1) office manager, one (1) clerk, one (1) sales person and four
(4) field personnel all located in Edmonton, Alberta.
Presently we have a total of eight (8) employees.
SHARE OWNERSHIP
The following table sets forth information, as of May 10, 2007, with respect to
the beneficial ownership of Capital Reserve Canada Limited's Class A common
stock by each of our officers and directors, and by our officers and directors
as a group. Information is also provided regarding beneficial ownership of Class
A common stock if all outstanding options, warrants, rights and conversion
privileges are exercised, and additional shares of our Class A common stock are
issued.
20
TITLE OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL PERCENT OF
CLASS OWNER CLASS (1)
Class A Common Ken Pearson, Director, CEO and 7,840,644 common shares held 13.4%
President of Capital Reserve Canada directly
Limited and President and Director of
KCP Innovative Services Inc.;
c/o 4304-74 Avenue
Edmonton, Alberta, Canada
Class A Common Donald Getty, Director and Chairman of 1,410,900 common shares held 2.4%
the Board of Capital Reserve Canada indirectly. (2)
Limited, and Director and Chairman of
KCP Innovative Services Inc.;
c/o 1273 Potter Greens Dr
Edmonton, Alberta T5T 5Y8
Class A Common Robert Hawkes, Director of KCP 300,000 common shares held directly 0.5%
Innovative Services Inc.;
136 Woodford Close SW
Calgary, Alberta T2W 6E2
Class A Common Rocky Rombs, Director and President of 407,100 common shares held directly 0.7%
Two Hills; 1313-10th Ave. Nisku,
Alberta T9E 8L6
All Officers and Directors as a group 9,958,644 common shares 17.0%
(1) Based on 58,396,421 shares of Class A Common Stock.
(2) Held in Sunnybank Investments Ltd., a company of which Mr. Getty is the sole
shareholder.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The following table sets forth information, as of May 10, 2007, with respect to
the beneficial ownership of Capital Reserve Canada Limited's Class A common
stock by each person known to be the beneficial owner of more than five percent
(5%) of the outstanding Class A common stock. As at May 10, 2007 there were a
total of 887 shareholders holding 58,396,421 of our Class A common shares. Of
these shareholders, 124 of the registered shareholders are Canadian shareholders
holding a total of 33,535,317 of our Class A common shares.
Information is provided regarding beneficial ownership of Class A common stock
if all outstanding options, warrants, rights and conversion privileges are
exercised and additional shares of Class A common stock are issued.
21
TITLE OF BENFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNER PERCENT OF
CLASS CLASS (1)
Class A Common 1248629 Alberta Ltd. 4,500,000 common shares held directly(2) 7.7%
112 80 Chippewa Rd. Sherwood
Park, Alberta
Class A Common Steve Hoof Consulting Ltd. 3,750,000 common shares held directly(3) 6.4%
112 80 Chippewa
Rd Sherwood Park,
Alberta
Class A Common James Baker, former director 4,000,000 common shares held indirectly (4) 6.8%
of Capital Reserve Canada
Limited and President, c/o
4304 - 76 Ave, Edmonton,
Alberta
(1) Based on 58,396,421 shares of Class A common stock. (2) The beneficial owner
of 1248629 Alberta Ltd. is Fergus Ismond. (3) The beneficial owner of Steve Hoof
Consulting Ltd. is Steven Hoof. (4) The beneficial owner of Projex Corporation
Ltd. is James Baker.
RELATED PARTY TRANSACTIONS
On August 8, 2005, we issued a total of 7,585,814 Class A common shares to Ken
Pearson, a member of the Company's and KCP's Boards of Directors, and 4,000,000
Class A common shares to Projex Corporation Ltd., a company controlled by James
Baker, at that time, an officer and a member of the Company's and KCP's Boards
of Directors. The shares were issued as part of the acquisition transaction of
KCP.
On November 24, 2005, we issued a total of 1,000,000 Class A common shares to
Ken Pearson in settlement of $50,000 USD debt owed by the Company and a total of
500,000 Class A common shares to Sunnybank Investments Ltd., a company
controlled by Don Getty, a director of us and KCP, for settlement of $25,000 USD
debt.
KCP borrows funds from its shareholders, directors and employees from time to
time in order to meet working capital requirements and to ensure payment of
liabilities as they come due. As at December 31, 2006, the amount outstanding
under these loans was nil.
On January 28, 2004, KCP appointed an employee of one of KCP's customers as a
director, Mr. Robert Hawkes, who is an employee of BJ Services Company Ltd.
During the fiscal year ended December 31, 2006, KCP earned $231,286 of revenues
from this customer in the normal course of operations.
On February 1, 2005, KCP entered into a consulting management contract with
Projex Corporation Ltd., a company controlled by a shareholder, and at the time,
an officer and director of KCP. During the twelve (12) month period ended
December 31, 2006, we paid $60,000 (for the fiscal year ended August 31, 2005 -
$63,880), in consulting fees pursuant to this contract. Pursuant to the terms of
the contract, Projex Corporation Ltd. receives $5,000 per month and has been
paid up to date to December 31, 2006.
On February 1, 2005, KCP entered into an employment agreement with Ken Pearson.
During the twelve (12) month period ended December 31, 2006, we paid Mr. Pearson
$120,000 (for the fiscal year ended August 31, 2005 - $ 108,000) for services
rendered under this employment agreement. Pursuant to the terms of this
agreement, Mr. Pearson receives $10,000 per month and has been paid up to date
as of the date of filing of this report.
22
On February 1, 2005, KCP entered into an employment agreement with the wife of
Mr. Pearson. During the twelve (12) month period ended December 31, 2006, we
paid Mrs. Pearson $48,000 (for the fiscal year ended August 31, 2005 - $ 44,000)
for office management services. Pursuant to the terms of this agreement, Ms.
Pearson receives $4,000 per month and has been paid up to date as of the date of
filing of this report.
During the fiscal year 2006, KCP obtained key man insurance on Mr. Pearson in
the amount of $2,000,000 payable to KCP. The cost of this insurance was
$477.90/month and was paid for by KCP.
On December 1, 2006, we entered into an agreement with Southbend, a company
owned by two (2) of our shareholders, Fergus Ismond and Steven Hoof, for the
provision of services at the Two Hills site. The contract was for $150,000 and
is subject to financing. To date, $60,500 has been paid and payments are up to
date as of the date of filing of this report.
On August 11, 2006, we entered into an agreement with Southbend for the sale of
an infrared sterilization unit for $50,000 subject to the sole satisfaction of
the Company. We cancelled the contract on November 30, 2006. Southbend was given
until March 31, 2007 to refund the $50,000 payment. Both parties agreed later to
apply the $50,000 purchase price to work performed on the Two Hills' site by
Southbend.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The required financial statements are provided at the end of this Annual Report
starting on Page F-1.
SIGNIFICANT CHANGES
On June 13, 2006, we incorporated Two Hills in the Province of Alberta, Canada
as a wholly owned subsidiary for purposes of acquiring assets of Southbend. On
June 16, 2006, Two Hills and Southbend entered into an asset purchase agreement
whereby Two Hills acquired a water diversion permit, 147 acres of surface rights
and water pumping station and certain mineral rights from Southbend in exchange
for 13,200,000 of our Class A common shares for which we issued share
certificates.
ITEM 9. THE OFFER AND LISTING
OFFER AND LISTING DETAILS
Not Applicable
PLAN OF DISTRIBUTION
Not Applicable
MARKETS
Our Class A common shares trade on the NASDAQ Over-the-Counter Bulletin Board
Market under the symbol "CRSVF".
SELLING SHAREHOLDERS
Not Applicable
23
DILUTION
Not Applicable
EXPENSES OF THE ISSUE
Not Applicable
ITEM 10. ADDITIONAL INFORMATION
SHARE CAPITAL
Not Applicable
MEMORANDUM AND ARTICLES OF ASSOCIATION
We incorporate by reference herein the information set forth under the heading
"MEMORANDUM AND ARTICLES OF ASSOCIATION" located in our Amendment No. 4 to Form
20F/A filed with the Securities and Exchange Commission on March 16, 2004.
MATERIAL CONTRACTS
Since the date of our incorporation, we have not entered into any contracts
material to investors in the normal course of business other than the following:
1. The Zone Acquisition Agreement
KCP acquired all of the issued and outstanding shares of Zone on June 14, 2004
(the "Zone Acquisition"). Zone's primary asset was the Injection Technology. The
Zone Acquisition gave KCP the capacity to increase revenue and create synergy
with KCP's existing products and services, thereby helping fulfill our strategic
plan.
The vendors of Zone were Messrs. Darren Klassen and Ken Pearson. As Mr. Pearson
was an insider of KCP, the acquisition of Zone was considered a non-arms length
transaction. KCP's net cost for Zone was $156,000 cash and the issuance of
1,294,444 KCP common shares. The deemed value of the share consideration was
$582,500. The following table summarizes the key terms of the Zone Acquisition.
- ---------------- ----------------- ------------------ --------------------
Vendor Percent Ownership Cash Consideration Share Consideration
Darren Klassen.. 50% $200,000(1) 425,000 KCP Shares
Ken Pearson..... 50% $ 0 869,444 KCP Shares
Total........... 100% $200,000 1,294,444 KCP Shares
- ---------------- ----------------- ------------------ --------------------
Note:
(1) KCP paid $200,000 to Mr. Klassen as part of the Zone Acquisition. As Zone
had a cash balance of $44,000 on June 14, 2004, the net cost to KCP was
$156,000.
Consideration for the Zone Acquisition was negotiated between the parties, based
on a valuation of Zone by Evans & Evans Inc., an independent valuator. The
valuation focused on the existing cash, the contracts and the customer base of
Zone. Zone had as of the date of the Zone Acquisition, outstanding work of
approximately $196,600 which included work in progress. There are no material
obligations that KCP must comply with in order to keep the agreement relating to
the Zone Acquisition in good standing. On September 28, 2005, Zone was dissolved
and the assets of Zone were rolled directly into KCP.
24
2. The PID Acquisition Agreement
Effective January 1, 2004, KCP acquired from a group of individuals, one of whom
was Mr. Ken Pearson, a computer modeling system to analyze the underground
formations that contain natural gas and oil. This modeling system provides
information to engineers and geologists so they can complete the wells at a
higher production level than traditional analyses. See "Tools and Services".
Consideration consisted of 14,966,270 KCP common shares. As Mr. Pearson was an
insider of KCP, the acquisition of the PID Technology was considered to be a
non-arm's length transaction. As this related party transaction did not result
in a substantive change in the ownership interest of the technology, the
technology has been recorded at the nominal carrying value of $1.00.
3. The Canadian Western Bank Financing Dated March 22, 2005
KCP entered into a financing agreement with Canadian Western Bank for $423,500
on March 22, 2005 for the construction of the two (2) PID trucks. The loan is a
sixty (60) month term bearing interest at 6.375% per year. The monthly payment
is $8,313. The balance of the loan on May 18, 2007 was $250,956.
4. Our and KCP's Office Leases
Our principal corporate and administrative offices are located at 4304 - 76
Avenue, Edmonton, Alberta, Canada. Up to June 1, 2006, this space was provided
free of charge by LFC. On June 1, 2006, we agreed to pay LFC a monthly rent fee
of $2000 which includes telephone, computers, photocopier, fax and reception.
Rental is on a month-to-month basis and will be reviewed upon completion of the
Southbend agreement and once future requirements are determined. The lease with
LFC concluded on December 31, 2006.
KCP leases space in Edmonton at 4304-74 Ave. The lease payment is $3500 per
month and provides KCP with sufficient space to carry out its operations for the
foreseeable future. The lease commenced on October 15, 2004 provides for a three
(3) year term expiring on October 15, 2007.
5. Management and Employment Agreements with James Baker, Ken Pearson and Faye
Pearson
KCP had a management contract with Projex Corporation Ltd., a company of which
James Baker is the sole officer and director, for the provision of consulting
management services totalling $5,000 per month on a part-time basis, commencing
Feb 1, 2005. The contract has a ninety (90) day termination provision and there
are no company benefits. Mr. Baker devotes approximately fifty percent (50%) of
his time to us and KCP. This agreement ended on December 31, 2006.
KCP has an employment agreement with Ken Pearson, as President of KCP, for
$10,000 per month commencing on February 1, 2005. Employment includes benefits
and a company health plan.
KCP has an employment agreement with Faye Pearson for Office Management services
for $4,000 per month. Employment includes benefits and a company health plan.
6. The Purchase of KCP
On August 2, 2005, we incorporated a wholly owned subsidiary, Capital Reserve
Canada Projects Ltd., to effect the acquisition of KCP. On August 8, 2005, we
issued a total of 17,335,814 of our Class A common shares and Capital Reserve
Canada Projects Ltd. acquired a 78.2% interest in KCP. This effected a change in
our control.
On February 3, 2006, we issued a further 4,834,300 shares of our Class A common
stock for the remaining 21.8% of KCP and Capital Reserve Canada Projects Ltd.
25
effected an amalgamation with KCP with KCP being the surviving entity. KCP is
now one of our wholly owned subsidiaries which are responsible for carrying on
all of our operations.
7. The Agreement with Southbend Power Ltd. to Acquire All of Its Major Assets
On June 16, 2006 and as amended on July 5, 2006, we entered into an agreement to
acquire the predominant assets of Southbend, which included a water diversion
permit, 147 acres of surface rights with a water pumping station, and certain
mineral rights, in exchange for 13,200,000 of our Class A common shares. Share
certificates have been issued for these shares. We established Two Hills to
acquire these assets.
8. The Purchase of Salt Rights from Rich Resource Investments
On September 28, 2006, we entered into an agreement with Rich Resource
Investments Ltd., a company formed pursuant to the laws of Alberta, Canada,
whereby we acquired the mineral rights to approximately four sections of land
adjacent to the Two Hills site in exchange for 1,000,000 of our common shares.
EXCHANGE CONTROLS
There are no governmental laws, decrees, regulations or other legislation of
Canada that may affect the import or export of capital for our use.
Other than the withholding of any taxes due under the terms of specific treaties
between countries on dividends paid to our shareholders, there are no
restrictions on the remittance of dividends, interest or other payments.
TAXATION
The discussions below summarize the material tax considerations relevant to an
investment in common shares by individuals and corporations who, for income tax
purposes, are residents in the U.S. for purposes of the Convention (as
hereinafter defined) and are not residents of Canada, who hold common shares as
a capital asset, and who do not hold the common shares in carrying on a business
through a permanent establishment in Canada or in connection with a fixed base
in Canada (collectively, "Unconnected U.S. Shareholders," "Holder" or
"Holders"). The tax consequences of an investment in common shares by investors
who are not Unconnected U.S. Shareholders may differ substantially from the tax
consequences discussed herein. The discussion of U.S. tax considerations is
addressed only to Unconnected U.S. Shareholders whose "functional currency"
within the meaning of Section 985 of the Internal Revenue Code of 1986, as
amended (the "Code"), is the U.S. dollar, and to U.S. citizens who are not
residents in the U.S. for purposes of the Convention, but who otherwise meet the
definition of Unconnected U.S. Shareholders. Furthermore, the discussion of U.S.
tax considerations does not address the tax treatment of Unconnected U.S.
Shareholders that own, or are deemed for U.S. federal income tax purposes to
own, 10% or more of the total combined voting power of all classes of voting
stock of Capital Reserve Canada Limited. The discussion of Canadian tax
considerations does not address the tax treatment of a trust, company,
organization or other arrangement that is a resident of the U.S. and that is
generally exempt from U.S. tax.
This discussion does not address all of the income tax consequences that may be
applicable to any Holder subject to special treatment under the U.S. federal
income tax law or to any particular Holder in light of such Holder's particular
facts and circumstances. Some Holders, including tax exempt entities, banks,
insurance companies and persons who hold common shares as part of a hedging
transaction may be subject to special or different rules not discussed below.
The discussion of U.S. tax considerations is based on the provisions of the
Code.
The discussion of Canadian tax consideration is based upon the provisions of the
Income Tax Act (Canada), as amended from time to time (the "Tax Act"), the
Convention between Canada and the U.S. with Respect to Taxes on Income and
Capital, as amended from time to time (the "Convention"), and our understanding
of published administrative practices of Canada Customs and the Revenue Agency
26
and judicial decision, all of which are subject to change. The discussion does
not take into account the tax laws of the various provinces or territories of
Canada or the tax laws of the various state and local jurisdictions in the U.S.
U.S. Federal Income Tax Considerations
Unconnected U.S. Shareholders generally will treat the gross amount of the
distributions paid by us, including the amount of any Canadian tax withheld, as
foreign source dividend income for U.S. federal income tax purposes to the
extent of our current or accumulated earnings and profits, as computed for U.S.
federal income tax purposes. Distribution in excess of that amount will reduce
an Unconnected U.S. Shareholder's tax basis in the common shares, but not below
zero, and the remainder, if any, will be treated as taxable capital gains. In
general, in computing its U.S. federal income tax liability, an Unconnected U.S.
Shareholder may elect for each taxable year whether to claim a deduction or,
subject to the limitations described below, a credit for Canadian taxes withheld
from dividends paid on its common shares. If the Unconnected U.S. Shareholder
elects to claim a credit for such Canadian taxes, the election will be binding
for all foreign taxes paid or accrued by the Shareholder for such taxable year.
The Code applies various limitations on the amount of foreign tax credit that
may be available to a U.S. taxpayer based upon the segregation of foreign source
income into separate categories of income. The amount of credit which may be
claimed with respect to the category of income to which the dividend is
allocated, and to which the foreign taxes are attributable generally may not
exceed the same portion of the U.S. tax on worldwide taxable income, before
applying the foreign tax credit as the U.S. holder's foreign source taxable
income allocation to such category bears to such U.S. holder's entire taxable
income. The foreign tax credit is disallowed for dividends on stock unless a
minimum holding period is satisfied and additional limitations may restrict the
ability of some individuals to claim the foreign tax credit. Accordingly, we
urge investors to consult their own tax advisors with respect to the potential
consequences to them of the foreign tax credit limitations.
For U.S. federal income tax purposes, the amount of any distributions made on a
common share to an Unconnected U.S. Shareholder in Canadian dollars will equal
the U.S. dollar value of the Canadian dollars calculated by reference to the
appropriate exchange rate in effect on the date of receipt of the distribution,
regardless of whether the Canadian dollars are actually converted into U.S.
dollars upon receipt. Unconnected U.S. Shareholders are urged to consult their
own tax advisors regarding the treatment of foreign currency gain or loss, if
any, on any Canadian dollars which are converted into U.S. dollars subsequent to
receipt by the shareholder.
The sale of common shares generally will result in a gain or loss to the Holder
in an amount equal to the difference between the amount realized and the
Holder's adjusted cost basis in the shares. Provided that the Holder is not
considered a "dealer" in the shares sold, gain or loss on the sale of the common
shares will generally be capital gain or loss.
Capital losses are used to offset capital gains. Individual taxpayers may deduct
the excess of capital losses over capital gains of up to $3,000 USD a year,
$1,500 USD in the case of a married individual filing separately, from ordinary
income. Non-corporate taxpayers may carry forward unused capital losses
indefinitely. Unused capital losses of a corporation may be carried back three
(3) years and carried forward five (5) years.
Canadian Tax Considerations
Dividends received or deemed to be received, on the common shares by Unconnected
U.S. Shareholders will be subject to Canadian withholding tax at the rate of
twenty-five percent (25%), subject to reduction under the Convention. Under the
Convention, the maximum rate of withholding tax on such dividends is reduced to
fifteen percent (15%) if the beneficial owner of such dividends is an
Unconnected U.S. Shareholder. However, that rate is reduced to five percent (5%)
under the Convention if the beneficial owner of such dividends is an Unconnected
U.S. Shareholder that is a corporation that owns at least ten percent (10%) of
the voting stock of the company.
27
An Unconnected U.S. Shareholder will not be subject to tax in Canada on any
capital gain realized upon the disposition or deemed disposition of the common
shares, provided that the common shares do not constitute "taxable Canadian
property" of the shareholder within the meaning of the Tax Act.
Canada does not currently impose any estate taxes or succession duties.
DIVIDENDS AND PAYING AGENTS
Not applicable
STATEMENTS BY EXPERTS
Not Applicable
DOCUMENTS ON DISPLAY
All documents filed in connection with this registration statement have been
filed with the Securities and Exchange Commission using the EDGAR (Electronic
Data Gathering, Analysis and Retrieval) system. The Securities and Exchange
Commission maintains a web site on the Internet at the address
http://www.sec.gov that contains reports, proxy information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission.
SUBSIDIARY INFORMATION
As at May 10, 2007, we had two (2) subsidiaries, KCP and Two Hills, which was
formed on June 16, 2006, to receive the assets from Southbend.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
This annual report contains forward-looking statements as that term is defined
in Section 27A of the United States Securities Act of 1933 and Section 21E of
the United States Securities Exchange Act of 1934. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may", "should",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the section
entitled "Risk Factors" that may cause our or our industry's activity,
performance or achievements expressed or implied by these forward-looking
statements. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform these
statements to actual results.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
28
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None
ITEM 15. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act report is recorded,
processed, summarized and reported within the time periods specified in the
United States Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management, including our
President and acting Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
At the end of the period covered by this annual report we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and acting Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based upon the foregoing our President and our
acting Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
There were no changes in our internal control over financial reporting that
occurred during the year ended December 31, 2006, that have materially affected,
or are reasonably likely to materially affect, out internal controls over
financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We do not presently have an audit committee.
ITEM 16B. CODE OF ETHICS
As of the date of this report, we have not adopted a code of ethics that applies
to our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions. As we
have gone through a recent change of control, we did not finalize our adoption
of the Code of Ethics. Our present Board of Directors is presently preparing a
Code of Ethics for review and adoption. Upon adoption, we will file a copy of
our Code of Ethics with the Securities and Exchange Commission as an exhibit to
our annual report for the year ending December 31, 2007 and post it on our
website.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed to us and our subsidiary KCP for
professional services rendered by our principal accountant:
- ---------------------- -------------- -------------
Services 2005 2006
- ---------------------- -------------- -------------
- ---------------------- -------------- -------------
Audit Fees $27,435 $15,000
- ---------------------- -------------- -------------
- ---------------------- -------------- -------------
Audit related Fees $19,300 $15,000
- ---------------------- -------------- -------------
- ---------------------- -------------- -------------
Tax Fees 0 0
- ---------------------- -------------- -------------
- ---------------------- -------------- -------------
Total Fees $51,325 $30,000
- ---------------------- -------------- -------------
Audit fees consist of fees for the audit of our annual financial statements or
the financial statements of our subsidiaries or services that are normally
provided in connection with the statutory and regulatory filings of the annual
financial statements. Audit-related services include the review and preparation
of our financial statements and quarterly reports that are not reported as Audit
fees.
Tax fees included tax planning and various taxation matters.
29
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable
PART III
ITEM 17. FINANCIAL STATEMENTS
See Item 18 below.
ITEM 18. FINANCIAL STATEMENTS
The required financial statements are provided herein starting on page F-1.
ITEM 19. EXHIBITS
----------- ------------------------------------------------------------------------------------------------------------
Exhibit Exhibit
No.
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
1.1 Certificate of Incorporation of the company consisting of the Articles of Incorporation filed with the
Alberta Registries on December 8, 1999, filed with the
Registrant's Form 20-F filed on July 11, 2003 (file # 000-50339)
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
1.2 Amendment to Articles of Incorporation of the company filed with Alberta Registries on January 15, 2003,
incorporated by reference to the Exhibits filed with the
Registrant's Form 20-F filed on July 11, 2003 (file # 000-50339)
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
1.3 By-Laws of the company, dated December 8, 1999, incorporated by
reference to the Registrant's Form 20-F filed on July 11, 2003
(file # 000-50339)
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.1 Petroleum, Natural Gas, and General Rights Conveyance between
Capital Reserve Canada Limited and Stone Canyon Resources Ltd.
dated December 23, 2004, incorporated by reference to the
Exhibits filed with the Company's 20-F filed Annual Return for
the year ended December 31, 2004 (file # 000-50339)
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.2 Share Exchange Agreement between Capital Reserve Canada Ltd., Capital Reserve Canada Projects Ltd., KCP
Innovative Services In., and Ken Pearson, 966358 Alberta Ltd., 989320 Alberta Ltd., 332601 Alberta Ltd.
and Ben Marshall dated August 8, 2005, incorporated by reference to the Exhibit filed with the Company's
8K filed on August 12, 2005 (file # 000-50339)
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.3 Proxy and Information Circular of KCP Innovative Services Inc. with respect to the Amalgamation with
Capital Reserve Canada Projects Ltd. and Capital Reserve Canada Ltd. and Notice of Annual and Special
Meeting of Shareholders of KCP Innovative Services Inc., dated December 22, 2005, incorporated by
reference to the Exhibit filed with the Company's 6-K filed on February 8, 2006 (file # 000-50339)
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.4 Offer to lease office space entered into between Sabo Bros. and KCP Innovative Services Inc. dated August
24, 2004 and affected October 15, 2004, incorporated by reference to the exhibits filed with the
Registrant's
Form 20-F filed on July 17, 2006 (file #000-50039).
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.5 Management Agreement between KCP Innovative Services Inc. and Projex Corporation dated February 1, 2005,
incorporated by reference to the exhibits filed with the Registrant's Form 20-F filed on July 17, 2006
(file #000-50039).
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.6 Employment Agreement between KCP Innovative Services Inc. and Ken Pearson dated February 1, 2005,
incorporated by reference to the exhibits filed with the Registrant's Form 20-F filed on July 17, 2006
(file #000-50039).
----------- ------------------------------------------------------------------------------------------------------------
30
----------- ------------------------------------------------------------------------------------------------------------
4.7 Employment Agreement between KCP Innovative Services Inc. and Faye Pearson dated February 1, 2005,
incorporated by reference to the exhibits filed with the Registrant's Form 20-F filed on July 17, 2006
(file #000-50039).
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.8 Loan agreement between Canadian Western Bank and KCP Innovative
Services Inc. dated March 22, 2005, incorporated by reference to
the exhibits filed with the Registrant's Form 20-F filed on July
17, 2006 (file #000-50039).
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
4.9 Asset Purchase Agreement between Two Hills Environmental Inc. and South Bend Powers Ltd. dated June 16,
2006 and amendment dated July 5, 2006, incorporated by reference to the exhibits filed with the
Registrant's Form 20-F filed on July 17, 2006 (file #000-50039).
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
31 Certifications required by Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
----------- ------------------------------------------------------------------------------------------------------------
----------- ------------------------------------------------------------------------------------------------------------
32 Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States code (18 U.S.C. 1350), filed herewith.
----------- ------------------------------------------------------------------------------------------------------------
SIGNATURES
The registrant hereby certifies that it meets all the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
CAPITAL RESERVE CANADA LIMITED
/s/ Ken Pearson
Ken Pearson
Chief Executive Officer, principal executive officer
Date: June 20, 2007
31
CAPITAL RESERVE CANADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
[GRAPHIC OMITTED][GRAPHIC OMITTED]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Capital Reserve Canada Limited
We have audited the accompanying consolidated balance sheets of Capital Reserve
Canada Limited as of December 31, 2006 and 2005 and August 31, 2005 and 2004,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year ended December 31, 2006 and the four months
ended December 31, 2005, and for the years ended August 31, 2005 and 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capital Reserve
Canada Limited as of December 31, 2006 and 2005 and August 31, 2005 and 2004,
and the results of its operations, changes in stockholders' equity, and its cash
flows for the year ended December 31, 2006 and the four months ended December
31, 2005 and for the years ended August 31, 2005 and 2004, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company currently has cash flow
constraints and an accumulated deficit. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Child, Van Wagoner & Bradshaw
CERTIFIED PUBLIC ACCOUNTANTS
Salt Lake City, Utah
June 20, 2007
CAPITAL RESERVE CANADA LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND DECEMBER 31, 2005
AUGUST 31, 2005, AND 2004
ASSETS
Current December December August August
31, 2006 31, 2005 31, 2005 31, 2004
----------- ----------- ---------- -----------
Cash and cash equivalents $ 391,528 $ 24,768 $ 18,832 $ 1,209,552
Term deposits (Note 5) 21,259 436,445 600,554 20,300
Accounts receivable 269,164 247,604 134,798 70,044
Income taxes recoverable - 9,263 - 11,693
Work in process 40,000 - 45,270 -
Prepaid expenses 41,480 9,543 19,468 4,267
----------- ----------- ---------- -----------
763,431 727,623 818,922 1,315,856
Cash - restricted - 45,000 45,000 45,000
Retainer - on deposit with lawyer - - - 15,000
Intangible assets (Note 7) 166,509 281,759 320,175 612,426
Goodwill 125,502 138,155 138,155 138,155
Property, plant and equipment (Note 6) 6,073,206 505,634 680,780 358,177
----------- ----------- ---------- -----------
$ 7,128,648 $ 1,698,171 $2,003,032 $ 2,484,614
=========== =========== ========== ===========
LIABILITIES
Current
Bank indebtedness $ - $ 48,000 $ - $ 7,807
Accounts payable and accrued liabilities 139,204 102,771 117,059 145,518
Income and commodity taxes payable 14,760 - 21,186 37,514
Due to shareholder - (2) 130 6,723
Demand bank loan (Note 9) 285,354 364,040 312,167 -
Current portion of long-term debt 9,929 7,050 86,523 26,924
----------- ----------- ---------- -----------
449,247 521,859 537,065 224,486
Long-term
Long-term debt (Note 10) 861,130 31,962 31,962 131,340
Due to affiliated company - 258,426 1,101,394 -
Future tax liability (Note 12) - 2,616 40,885 80,300
----------- ----------- ---------- -----------
861,130 293,004 1,174,241 211,640
----------- ----------- ---------- -----------
1,310,377 814,863 1,711,306 436,126
SHAREHOLDERS' EQUITY
Share Capital 8,381,142 3,242,434 2,320,783 2,320,783
Stock Subscription receivable (15,000) - - -
Retained earnings (Deficit) (2,547,871) (2,359,126) (2,029,057) (272,295)
----------- ----------- ---------- -----------
5,818,271 883,308 291,726 2,048,488
----------- ----------- ---------- -----------
$ 7,128,648 $ 1,698,171 $2,003,032 $ 2,484,614
=========== =========== ========== ===========
The accompanying notes are a part of these
financial statements.
F-1
CAPITAL RESERVE CANADA LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
AS OF DECEMBER 31, 2006 AND DECEMBER 31, 2005
AUGUST 31, 2005, AND 2004
December December August August
31, 2006 31,2005 31, 2005 31, 2004
----------- ---------- ---------- -----------
Revenue $ 1,714,925 $ 355,017 $ 933,441 $ 380,606
Cost of sales 846,090 184,165 605,370 186,501
----------- ---------- ---------- -----------
Gross profit 868,835 170,852 328,071 194,105
Expenses
Salaries and benefits 236,671 54,358 173,460 53,971
General and administrative 530,381 279,027 430,431 263,703
Amortization 261,042 229,154 553,924 68,113
Interest 29,486 8,143 32,522 6,235
----------- ---------- ---------- -----------
1,057,580 570,682 1,190,337 392,022
Loss before income taxes
and minority interest (188,745) (399,830) (862,266) (197,917)
Income tax (recovery) (Note 12)
Current - (31,492) - (13,933)
Future - (38,269) (39,415) (5,900)
----------- ---------- ---------- -----------
Net loss before minority
interest (188,745) (330,069) (822,851) (178,084)
Minority interest - 71,955 179,382 -
----------- ---------- ---------- -----------
Net loss $ (188,745) $(258,114) $(643,469) $(178,084)
=========== ========== ========== ===========
Basic and diluted
earnings(loss) per share
Before income taxes and (0.00) (0.02) (0.04) (0.01)
minority interest
Before minority interest (0.00) (0.01) (0.04) (0.01)
Net Loss $ (0.00) $ (0.01) $ (0.03) $ (0.01)
=========== ========== ========== ===========
Weighted average number of
shares outstanding 46,603,617 24,155,896 21,792,268 17,335,814
The accompanying notes are a part of these
financial statements.
F-2
CAPITAL RESERVE CANADA LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended August 31, 2002,
2003, 2004 & 2005 And the four months ended December
31, 2005 and the year ended December 31, 2006
Common Shares Stock Retained Stock Total
Amount Earnings Subscription Stockholder's
Receivable Equity
------------- ------------- ---------------- ---------------- -----------------
Balance at August 31, 2004 17,335,814 $ 2,320,783 $ (272,295) $ - $ 2,048,488
Share issued to acquire subsidiary 2,000,000 - (933,911) - (933,911)
Net loss - - (643,469) - (643,469)
Net loss-minority interest - - (179,382) - (179,382)
------------- ------------- ---------------- ---------------- -----------------
Balance at August 31, 2005 19,335,814 2,320,783 (2,029,057) - 291,726
Share issued for debt settlement 15,451,000 921,411 - - 921,411
Options exercised 24,000 240 - - 240
Net loss - - (258,114) - (258,114)
Net loss-minority interest - - (71,955) - (72,955)
------------- ------------- ---------------- ---------------- -----------------
Balance at December 31, 2005 34,810,814 3,242,434 (2,359,126) - 883,308
Share issued to acquire minority
21.8% 4,834,300 - - - -
Share issued to acquire assets 13,200,000 4,730,882 - - 4,730,882
Share issued to acquire asset 1,000,000 134,400 - - 134,400
Share issued for debt settlement 4,521,307 258,426 - - 258,426
Share issued for restricted shares
30,000 15,000 - (15,000) -
Net Loss for year 2006 - - (188,745) (188,745)
------------- ------------- ---------------- ---------------- -----------------
Balance at December 31, 2006 58,396,421 $ 8,381,142 $ (2,547,871) $ (15,000) $ 5,818,271
============= ============= ================ ================ =================
The accompanying notes are a part of these
financial statements.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2004 AND 2005 AND
THE FOUR MONTHS ENDED DECEMBER 31, 2005
AND THE YEAR ENDED DECEMBER 31, 2006
December 31, December 31, August 31, August 31,
2006 2005 2005 2004
-------------- -------------- -------------- --------------
Operating Activities
Net Loss $ (188,745) $ (330,069) $ (822,851) $ (178,084)
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Amortization 261,042 229,154 553,924 68,113
Accrued interest - - (7,807) -
Future income taxes - (38,269) (39,415) (5,900)
Accounts receivable (21,560) (112,806) (64,754) 22,461
Corporation income taxes 9,263 (9,263) 11,693 (11,693)
Work in process (40,000) 45,270 (45,270) -
Retainer on deposit with lawyer - - 15,000 (15,000)
Prepaid expenses and deposits (31,937) 9,925 (15,201) (4,267)
Accounts payable and accrued liabilities 36,435 (14,287) (28,459) 129,386
Income and commodity taxes payable 12,144 (21,186) (16,328) (4,958)
-------------- -------------- -------------- --------------
Cash provided (used) by operating activities 36,642 (241,532) (459,468) 58
Financing Activities
Shares issuances - 921,651 (933,911) 997,800
Increase (decrease) in due to shareholder - (132) (6,593) 6,249
Increase (decrease) in bank indebtedness - 48,000 - (7,004)
Share subscriptions received in advance - - - 583,211
Change in long-term debt (94,639) (79,473) (39,779) (19,902)
Due to affiliated company - (842,968) 1,101,394 -
Change in demand bank loan - 51,873 312,167 -
-------------- -------------- -------------- --------------
Cash provided by financing activities (94,639) 98,951 433,278 1,560,354
Investing Activities
Decrease in restricted cash 45,000 - - (45,000)
Purchase of property, plant and equipment (87,780) (15,593) (584,276) (159,724)
Investment in Zone, net of cash acquired of
$43,954 - - - (156,046)
Proceeds from sale of fixed assets 52,351 - - -
Decrease in term deposit 415,186 164,109 (580,254) (300)
-------------- -------------- -------------- --------------
Cash provided (used) by investing activities 424,757 148,516 (1,164,530) (361,070)
-------------- -------------- -------------- --------------
Increase (decrease) in cash during the year 366,760 5,936 (1,190,720) 1,199,342
Cash and cash equivalents, beginning of year 24,768 18,832 1,209,552 10,210
-------------- -------------- -------------- --------------
Cash and cash equivalents, end of year $ 391,518 $ 24,768 $ 18,832 $ 1,209.552
============== ============== ============== ==============
Supplemental Information
Cash paid for interest $ 29,486 $ 8,143 $ 32,522 $ 6,235
Shares issued for assets $ 4,865,280 $ - $ 1 $ -
Shares issued for subsidiary $ 676,802 $ - $ 582,500 $ -
Shares issued for debt settlement $ 258,426 $ 921,411 $ 100,000 $ -
The accompanying notes are a part of these
financial statements.
F-4
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
1. Description of the Company
Capital Reserve Canada Ltd. ("CRC") was incorporated as a private
corporation in the Province of Alberta on December 8, 1999, and is a
reporting company registered with the U.S. Securities and Exchange
Commission. CRC provides minimal equipment and related rental services.
Pursuant to the share exchange agreement dated August 12, 2005, the Company
effected a share exchange indirectly with the shareholders of KCP
Innovative Services Ltd. ("KCP"), resulting the Company acquired 78.2% of
the outstanding shares of KCP through exchanging shares with the Company's
wholly owned subsidiary, Capital Reserve Canada Projects Ltd ("Project").
Subsequent to the Annual General Meeting of the company on January 12,
2006, the minority interest shareholders signed off and all minority
interest shares were exchanged for CRC shares. Because the shareholders of
KCP became the controlling shareholders of the Company, this transaction
was accounted for as a reverse takeover whereby KCP was deemed to be the
acquirer as described more fully in Note 2.
KCP Innovative Services Inc. was incorporated as a private corporation
named K C Pearson Consulting Inc. in the Province of Alberta on February
20, 1996. The name was changed to KCP Innovative Services Inc. on May 22,
2003. KCP has developed a series of devices that are used to diagnose the
pay zone in oil or gas wells. The diagnostic information collected from
these devices is used by production engineers to complete the well at the
most efficient level. KCP's customers are oil and gas companies.
Capital Reserve Canada Projects Ltd. was incorporated as a private
corporation in the Province of Alberta on August 2, 2005, and it has been
inactive since inception except for the share exchange as described.
Effectively on February 3, 2006 Capital Reserve Canada Projects Ltd.
amalgamated with KCP Innovative Services Inc.
Effective January 22, 2006, KCP Innovative Services Inc. became directly a
wholly owned subsidiary of Capital Reserve Canada Ltd.
2. Share exchange
On August 12, 2005, Project issued 17,335,814 common shares to exchange for
17,335,814 common shares (78.2%) from the shareholders of KCP Innovative
Services. CRC then issued 17,335,814 common shares in exchange for
17,335,814 common shares from Projects.
Subsequent to January 12, 2006, minority interest shareholders of KCP
signed off to exchange for shares in CRC. Minority interest of 21.8%
(4,834,300 shares) was exchanged for CRC shares. CRCP and KCP were
amalgamated on February 3, 2006. Following the transactions, CRC directly
owns 100% of KCP.
During the year CRC issued 4,521,307 common shares to FACT Corp. in
exchange for the debt of $258,426.
These share exchange transactions between CRC (legal parent) and KCP (legal
subsidiary) was accounted for as a reverse take over as a capital
transaction in accordance with Canadian generally accepted accounting
principles. As a result, no goodwill is accounted for in this transaction.
The reverse takeover accounting reports result in the following:
(a) KCP is deemed to be the parent company and CRC is deemed to be the
subsidiary company for accounting purposes;
F-5
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
(b) The financial statements of the combined entity are issued under
the name of the legal parent, CRC, but are considered a continuation of
the financial statements of the legal subsidiary, KCP; and
(c) Since KCP is deemed to be the acquirer for accounting purposes, its
assets and liabilities are included in its consolidated balance sheet
at their historical carrying values.
3. Summary of significant accounting policies
These consolidated financial statements include the accounts of the
company and its legal subsidiary, KCP Innovative Services Inc., its wholly
owned subsidiary, Two Hills Environmental Inc. and have been prepared in
accordance with Canadian generally accepted accounting principles. All
significant inter- company transactions and balances are eliminated in the
preparation of these consolidated financial statements.
(a) Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and short
term investments with original maturities of 90 days or less
and are recorded at the lower of cost and market value.
(b) Leases
Leases are classified as either capital or operating. Leases
which transfer substantially all of the benefits and risks of
ownership of property to the Company are accounted for as
capital leases. The capitalized lease obligation reflects the
present value of future rental payments, discounted at the
appropriate interest rates. The amount capitalized as the cost
of the asset is amortized as set out below under property,
plant and equipment. Rental payments under operating leases
are expenses as incurred.
(c) Property, plant and equipment
Property, plant and equipment are recorded at cost and are
being amortized using the following method at the rates set
out below which are estimated to be sufficient to amortize the
cost of the assets to residual value by the expiration of
their useful lives:
Building - 4% diminishing balance
Equipment - 20% diminishing balance
Furniture and fixtures - 20% diminishing balance
Vehicles - 30% diminishing balance
Computer and software - 30% diminishing balance
Mineral Rights - 0% diminishing balance
Water Permit - 0% diminishing balance
(d) Goodwill and intangible assets
The cost of intangible assets is amortized over the period in
which the benefits of such assets are expected to be realized,
principally on a straight line basis. The Company's policy is
to amortize client relationships with determinable lives over
four years. Contract backlog is amortized over the estimated
period of completion, generally less than one year. Technology
is being amortized
F-6
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
over an estimated life of four years. Goodwill is not
amortized but is evaluated annually for impairment by
comparing the fair value of the reporting unit, determined on
a discounted after tax cash flow basis, to the carrying value.
An impairment loss would be recognized if the carrying value
of the goodwill exceeds its fair value.
(e) Future income taxes
The Company uses the liability method of accounting for income
taxes. Under this method, future income tax assets and
liabilities are determined based on differences between
financial reporting and the tax bases of assets and
liabilities and measured using the substantively enacted rates
and laws that will be in effect when these differences are
expected to reverse.
(f) Revenue recognition
The Company's services are generally sold based upon purchase
orders or contracts with customers that include fixed or
determinable prices based upon daily, hourly or job rates.
Customer contract terms do not include provisions for
significant past service delivery obligations. Revenue is
recognized when services and equipment rentals are rendered
and only when collectability is reasonably assured.
(g) Statement of cash flows
The statement of cash flows has been prepared using the
indirect method.
3. Basis of presentation and going concern
These financial statements have been prepared on the basis of accounting
principles applicable to a going concern which assumes the Company will
continue in operation for the foreseeable future and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
Because of the operating losses of the past four periods, the Company's
continuance as a going concern is dependent upon its ability to obtain
adequate financing and to reach profitable levels of operation. Management
believes actions planned and presently being taken provides the opportunity
for the Company to continue as a going concern.
4. Acquisition of Zone Technologies Ltd.
On June 11, 2004, KCP acquired 100% of the issued and outstanding shares of
Zone Technologies Ltd. ("Zone") from an existing shareholder and an
unrelated party. The transaction was recorded at the exchange amount, as
the change in ownership interests in Zone was substantive.
Consideration for the acquisition was $782,500 and it consisted of
1,294,444 common shares of KCP, at a fair value of $0.45 per share and cash
of $200,000. Zone is an Alberta based company focused on providing
diagnostic and consulting services to customers exploring for coal based
methane gas. The fair value of the acquisition was determined through an
independent third party appraisal of Zone as at the date of acquisition.
The acquisition was accounted for using the purchase method and the results
of operations from June 11, 2004.
F-7
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
The fair value of the net assets acquired is summarized as follows:
Cash $ 43,954
Accounts receivable 21,414
Property, plant and equipment 48,000
Zone Technology (Note 7) 277,000
Backlog 196,600
Customer relationships 184,000
Goodwill 138,155
--------------
909,123
Accounts payable and accrued liabilities 4,407
Income and commodity taxes payable 36,016
Future income tax liability 86,200
--------------
126,623
--------------
Net assets acquired $ 782,500
==============
Cash consideration 200,000
Share consideration (Note 11) 582,500
--------------
Purchase price $ 782,500
==============
The goodwill is non-deductible for income tax purposes.
Subsequent to September 2005, Zone Technologies Ltd. was dissolved
as a corporate entity.
5. Term deposits
The term deposit of $21,259 matures on March 14, 2007 and bears interest at
1.4% per annum.
6. Property, plant and equipment
Net
Accumulated December 31,
Cost Amortization 2006
------------ ------------- ------------
Land $ 900,000 $ - $ 900,000
Water Permit & Salt Lease 4,677,679 - 4,677,679
Equipment 164,803 68,943 95,860
Furniture and fixtures 18,032 9,129 8,903
Vehicles 741,806 495,861 245,945
Computer and software 32,251 21,832 10,419
Mineral Rights 134,400 - 134,400
------------ ------------- ------------
$ 6,668,971 $ 595,765 $ 6,073,206
============ ============= ============
F-8
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
7. Intangible assets
Net
Accumulated December 31,
Cost Amortization 2006
------------ ------------ ------------
PID Technology $ 1 $ - $ 1
Zone Technology 277,000 176,951 100,049
Backlog 196,000 196,600 (600)
Customer relationships 184,000 116,941 67,059
------------ ------------ ------------
$ 657,601 $ 491.092 $ 166,509
============ ============ ============
Perforation Inflow Diagnostics ("PID")
Effective January 1, 2004, KCP acquired from a group of individuals, one of
which was a shareholder of KCP, a computer modeling system to analyze the
underground formations that contain natural gas and oil. Consideration
consisted of 14,966,270 common shares of KCP. As this related party
transaction did not result in a substantive change in the ownership
interest of the technology, the technology has been recorded at the nominal
carrying value of $1.
Zone Technology
Effective June 11, 2004, KCP acquired 100% of the outstanding shares
of Zone Technologies Ltd. Zone Technologies Ltd. has developed a
computer modeling system to explore the underground formations that
contain coal based methane gas. Zone Technologies Ltd. was dissolved on
September 26, 2005.
Southbend Power Ltd.
On June 16, 2006, Two Hills Environmental Inc., a wholly owned subsidiary
of CRC purchased 147 acres of land together with certain salt lease and
water permit rights from Southbend Power Ltd. for the consideration of CRC
to issue 13,200,000 common shares to Southbend Power Ltd. and the
assumption of certain liabilities. The transaction was completed on July
28, 2006. The company recorded the value of the purchase based on the
market share trading value of July 28, 2006 at US$ 0.32 per share. The
company recorded the land at its fair market value of $900,000 and the
value of the water permits and salt leases to be $4,677,279, the trading
value of the exchanged shares, less debt.
Rich Resources Limited
On October 20 2006, Two Hills Environmental Inc., wholly owned subsidiary
of CRC purchased a certain mineral rights from Rich Resources Limited. CRC
issued 1,000,000 common shares for the consideration. The company recorded
the transaction at the market trading value of US$0.12 per share at the
exchange rate of C$1.12 for a total of $134,000.
Suncone Technologies Ltd.
The company was formed to purchase the Infratronic Soil Sterilization
Unit in exchange for CRC shares and cash. $50,000 was paid to Southbend
Powers Ltd. for the unit for testing and evaluation. However, it was
determined that the unit was not consistent with the overall business
objectives. Suncone Technologies Ltd. was dissolved and the funds were
returned to CRC through a follow-on transaction subsequent to the year end.
F-9
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
8. Operating line of credit
The Company has an operating line of credit to a maximum of $95,000.
Interest is charged monthly on the outstanding balance at the rate of prime
plus 1%. It is secured by General Security Agreement. There is no
outstanding amount as of December 31, 2006.
9. Demand bank loan
2006
--------------
Vehicle loan $ 285,354
Current portion 83,998
--------------
$ 201,356
==============
The bank loan is repayable over 60 months commencing March 2005 and ending
in February 2010. Monthly blended payments of principal and interest are
$8,313 with an interest rate of 6.375%. The first payment was $4,130 and
was made on March 18, 2005. One half of the loan was drawn on February 18,
2005 upon completion of unit 101. The balance was drawn on March 31, 2005
upon completion of unit 102. Two Sterline Slick Line units, included in
property, plant and equipment, are pledged as collateral for this loan.
Aggregate principal payments required on the vehicle loan over the next
four fiscal years are as follows:
2007 $ 83,998
2008 89,478
2009 95,386
2010 16,492
-------------
$ 285,354
=============
10. Long-term debt
2006
--------------
Vehicle loan $ 27,360
--------------
27,360
Current portion 9,929
--------------
$ 17,431
==============
The vehicle loan is repayable over 72 months commencing in August 2003 and
ending in July 2009. The blended payments of principal and interest are
$1,027 per month with an interest rate of 7.99% per annum. A 2003 Dodge
truck, included in property, plant and equipment, is pledged as collateral
for this loan.
Aggregate principal payments required on the vehicle loan over the next
five fiscal years are as follows:
2007 $ 9,929
2008 10,500
2009 6,931
-------------
$ 27,360
=============
F-10
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
Summary of long Term Debt:
Vehicle Loan $ 17,431
Two Hills Lien $ 800,000
BDC Loan $ 43,699
---------
Total $ 861,130
=========
11. Share capital
Authorized
The authorized share capital of the Company consists of an unlimited number
of common shares without par value: Shares issued are as follows:
Dec. 2006
-----------
Shares already issued in CRC prior to Aug 8, 2005 2,000,000
Issued Nov 23, 2005 to purchase 78.2% of KCP 17,335,814
Issued Nov 23, 2005 as a Debt Settlement 15,451,000
Issued Nov 23, 2005 as an Option Exercise 24,000
Issued Feb 3, 2006 for the remaining 21.8% of KCP 4,834,300
Issued Feb 16, 2006 as a Debt Settlement 4,521,307
Issued June 15, 2006 Per Southbend Agreement 13,200,000
Issued Aug 6, 2006 30,000
Issued Oct 20, 2006 per Rich Resource agreement 1,000,000
-----------
TOTAL to Dec 31, 2006 58,396,421
===========
12. Income taxes
No provision has been calculated for income tax for current non-capital
losses.
The income tax effect of the significant components of the Company's future
tax assets and liabilities is as follows:
In assessing the valuation of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will be realized. The ultimate realization of future tax assets
is dependent upon the generation of future taxable income and tax planning
strategies.
Due to the KCP's stage of development and operation, the Company believes
there is significant uncertainty over the amount of and timing when
non-capital losses may be claimed against future taxable income.
Consequently, a valuation allowance has been provided against the value of
the future tax asset. The valuation allowance is reviewed periodically and
when and if the more likely than not criterion is met for accounting
purposes, the valuation allowance will be adjusted by a credit or charge to
earnings in that period.
The Company has non-capital losses carried forward for income tax purposes
in the amount of approximately $297,089 at December 31, 2006 that may be
F-11
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
applied against future taxable income. The losses expire in 2011 and 2012
respectively. The potential benefits relating to these amounts have not
been recognized in the financial statements.
13. Related party transactions
The amounts due to the shareholders are non-interest bearing, unsecured and
due on demand and are nil.
During the year ended December 31, 2006, the Company paid a shareholder,
director and officer reasonable comparable consulting fees of $60,000 which
are included in general and administrative expenses (2005 - $63,880, 2004 -
$43,976).
14. Commitment
The Company leases shop and office space under operating leases. The
future office and shop lease payments are as follows:
2007 $ 32,250
--------------
Total $ 32,250
==============
15. Financial instruments
Credit risk
The Company's sales are to customers in the oil and gas industry, which
results in a concentration of credit risk. The Company generally extends
unsecured credit to these customers, and therefore the collection of
receivables may be affected by changes in economic or other conditions and
may accordingly impact the Company's overall credit risk. Management
believes the risk is mitigated by size, reputation and diversified nature
of the companies to which the Company extends credit. As at December 31,
2006 one customer accounts for about 15% (2005, four customers account for
60%; 2004 two customers account for 94%) of the accounts receivable.
Interest rate risk
The Company is exposed to interest rate risk to the extent that it has bank
indebtedness that carries a variable rate of interest. Notwithstanding
this, unless otherwise indicated, it is management's opinion that the
Company's exposure to interest rate risk arising from these financial
instruments is insignificant.
Fair value of financial assets and liabilities
The Company has estimated the fair value of its financial instruments,
which include cash and cash equivalents, cash restricted, term deposit,
accounts receivable, bank indebtedness, accounts payable, accrued
liabilities, due to shareholder and long-term debt. The Company used
valuation methodologies and market information available at December 31,
2006 and has determined that the carrying amounts of such financial
instruments approximate fair value in all cases.
F-12
CAPITAL RESERVE CANADA LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
Change of year end date
KCP Innovative Services Inc. changed its year end date from August 31 to
December 31, effective in 2005 to be the same as Capital Reserve Canada
Ltd., its parent company.
16. Segmented information
The Company operates in one geographic segment within one industry segment.
Oilfield services are provided in Canada.
17. Subsequent events
Subsequent to the year end date, on February 2007, the company cancelled
30,000 restricted common shares for the subscription value of $15,000 as a
result of a cancelled contract by the other party.