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 AUGUST 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 000-30196
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
(Exact name of Registrant as specified in its charter)
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
(Translation of Registrant's name into English)
YUKON TERRITORY, CANADA
(Jurisdiction of incorporation or organization)
1305 - 1090 WEST GEORGIA STREET, VANCOUVER, BRITISH COLUMBIA, V6E 3V7
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act.
COMMON STOCK, NO PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
NOT APPLICABLE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
2,926,859 COMMON SHARES AS OF AUGUST 31, 2002
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18
------- -------
Page 1 of 82
General Information:
Unless otherwise indicated, all references herein are to Canadian dollars.
GLOSSARY
The following is a glossary of oil and gas terms used in this report:
BBL or barrel 34.972 Imperial gallons or 42 U.S. gallons.
BCF One billion cubic feet.
BO Barrels of oil.
BOE Barrels of oil equivalent.
BOPD Barrels of oil per day.
BW Barrels of water.
BWPD Barrels of water per day.
gross acres The total number of acres in which the Company
holds a working interest or the right to earn a working
interest.
gross reserves The total reserves estimated to be economically
recoverable.
gross wells The total number of wells in which the Company has a
working interest.
liquids Crude oil and natural gas liquids.
MBO One thousand barrels of oil.
MCF One thousand cubic feet.
MCFE One thousand cubic feet equivalent.
MMBOE One million barrels of oil equivalent.
MMCF One million cubic feet.
MMCFE One million cubic feet equivalent.
MMCF/D One million cubic feet per day.
net acres The gross acres multiplied by the percentage working
interest therein owned or to be owned by the Company.
net reserves The Company's lessor royalty, overriding royalty, and
working interest share of reserves from the properties,
after deduction of all freehold, and overriding
royalties payable to others.
net revenue interest The percentage interest in which the lessor has the
right to receive a specified fractional share of the
mineral produced from the property or value thereof. net
wells The gross wells multiplied by the percentage
working interest therein owned or to be owned by the
Company.
NGLs Natural gas liquids.
-2-
present value The present value of estimated future net revenues
computed by applying current prices of oil and gas
reserves to estimated future production of proved oil
and gas reserves as of the date of the latest balance
sheet presented, less estimated future expenditures
(based on current costs) to be incurred in developing
and producing the proved reserves computed using a
discount factor of ten percent and assuming continuation
of existing economic conditions.
proved oil and Proved oil and gas reserves are the estimated quantities
gas reserves of crude oil, natural gas, and natural gas liquids which
geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and
operating conditions, i.e. prices and costs as of the
date the estimate is made. Prices include consideration
of changes in existing prices provided only by
contractual arrangements, but not on escalations based
upon future conditions.
(i) Reservoirs are considered proved if economic
producibility is supported by either actual
production or conclusive formation test. The area
of a reservoir considered proved includes:
(A) that portion delineated by drilling and
defined by gas-oil and/or oil-water contacts,
if any; and
(B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged
as economically productive on the basis of
available geological and engineering data. In
the absence of information on fluid contacts,
the lowest known structural occurrence of
hydrocarbons controls the lower proved limit
of the reservoir.
(ii) Reserves which can be produced economically
through application of improved recovery
techniques (such as fluid injection) are included
in the "proved" classification when successful
testing by a pilot project, or the operation of an
installed program in the reservoir, provides
support for the engineering analysis on which the
project or program was based.
(iii) Estimates of proved reserves do not include the
following:
(A) oil that may become available from known
reservoirs but is classified separately as
"indicated additional reserves",
(B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to
reasonable doubt because of uncertainty as to
geology, reservoir characteristics, or
economic factors,
(C) crude oil, natural gas, and natural gas
liquids, that may occur in undrilled
prospects, and
(D) crude oil, natural gas, and natural gas
liquids, that may be recovered from oil
shales, coal, gilsonite and other such
sources.
-3-
proved developed oil Reserves that can be expected to be recovered through
and gas reserves existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other
improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should
be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an
installed program has confirmed through production
response that increased recovery will be achieved.
proved undeveloped Reserves that are expected to be recovered from new
reserves wells on undrilled acreage, or from existing wells where
a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be
limited to those drilling units offsetting productive
units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units are
claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing
productive formation. Under no circumstances are
estimates for proved undeveloped reserves attributable
to any acreage for which an application of fluid
injection or other improved recovery technique is
contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same
reservoir.
proved properties Properties with proved reserves.
unproved properties Properties with no proved reserves.
undeveloped acreage Lands on which there are no current reserves assigned.
working interest The interest held by a company in an oil or natural gas
property, which interest normally bears its
proportionate share of the costs of exploration,
development, and operation as well as any royalties or
other production burdens.
FORWARD LOOKING STATEMENTS
Pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 (the "PSLRA"), the Company cautions readers regarding forward
looking statements found in the following discussion and elsewhere in this
registration statement and in any other statement made by, or on the behalf of
the Company, whether or not in future filings with the SEC. Forward looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which, with respect to future business decisions, are subject to
change. These uncertainties and contingencies can affect actual results and
could cause actual results to differ materially from those expressed in any
forward looking statements made by or on behalf of the Company. The Company
disclaims any obligation to update forward looking statements. Readers should
also understand that under Section 27A(b)(2)(D) of the Securities Act, and
Section 21E(b)(2)(D) of the Securities Exchange Act, the "safe harbor"
provisions of the PSLRA do not apply to statements made in connection with an
initial public offering.
-4-
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 3. KEY INFORMATION.
- --------------------------------------------------------------------------------
Selected Financial Data
- -----------------------
The selected financial data of the Company for the years ended August 31, 2002,
2001 and 2000, was derived from the financial statements of the Company which
have been audited by D & H Group, independent Chartered Accountants, as
indicated in their report which is included elsewhere in this report. The
selected financial data set forth for the years ended August 31, 1999 and 1998
are derived from the Company's audited financial statements, not included
herein.
The information in the following table was extracted from the more detailed
consolidated financial statements and related notes included herein and should
be read in conjunction with such financial statements and with the information
appearing under the heading "Item 5. Operating and Financial Review and
Prospects".
Reference is made to Note 11 of the Company's consolidated financial statements
included herein for a discussion of the material differences between Canadian
generally accepted accounting principles ("GAAP") and U.S. GAAP, and their
effect on the Company's financial statements.
($ in 000, except per share data)
---------------------------------------------------------------
Year Ended August 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
Revenues $163 $635 $398 $143 $232
Production $135 $185 $155 $132 $107
Depreciation, depletion and impairment $6,011 $5,168 $78 $1,703 $1,983
General and administrative $242 $330 $462 $350 $217
Net income (loss) $(6,567) $(5,048) $(297) $(2,042) $(2,076)
Income (loss) per share $(2.24) $(2.03) $(0.14) $(2.80) $(5.88)
Weighted average number of shares 2,927 2,480 2,110 723 351
Dividends per share $0.00 $0.00 $0.00 $0.00 $0.00
Working capital (deficiency) $77 $6 $1,262 $1,338 $(471)
Resource assets $1,111 $7,022 $7,795 $5,096 $2,169
Other assets $115 $619 $773 - -
Shareholders' equity $528 $7,094 $9,830 $6,434 $1,698
Total assets $1,631 $8,168 $10,137 $6,698 $2,225
Adjustment to United States Generally Accepted Accounting Principles
- --------------------------------------------------------------------
The consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP which differ in certain material respects from US
GAAP. Material differences between Canadian and US GAAP and their effect on the
Company's consolidated financial statements are summarized in the tables below.
-5-
Consolidated Statement of Loss
2002 2001 2000
$ $ $
Net loss as reported under Canadian GAAP (6,566,673) (5,048,280) (296,849)
Adjustments for related party
transactions (ii) 1,928,229 815,793 -
Stock-based compensation (iv) (74,614) (316,069) (98,126)
Other compensation expense (vii) - (172,720) (134,742)
------------- ------------- -------------
Net loss under US GAAP (4,713,058) (4,721,276) (529,717)
============= ============= =============
Weighted average number of
common shares outstanding (i) 2,926,859 17,361,325 15,012,218
============= ============= =============
Loss per share under US GAAP (1.61) (0.27) (0.04)
============= ============= =============
Consolidated Balance Sheet
2002 2001
$ $
Total assets under Canadian GAAP 1,631,221 8,168,171
Adjustments for related party transactions (ii) - (1,928,229)
Deferred tax asset (v) 3,662,000 2,490,000
Less: Valuation allowance (v) (3,662,000) (2,490,000)
------------- -------------
Total assets under US GAAP 1,631,221 6,239,942
============= =============
Total liabilities under Canadian GAAP 1,103,552 1,073,829
------------- -------------
Total liabilities under US GAAP 1,103,552 1,073,829
============= =============
Total shareholders' equity under Canadian GAAP 527,669 7,094,342
Adjustments for related party transactions (ii) - (1,928,229)
------------- -------------
Total shareholders' equity under US GAAP 527,669 5,166,113
============= =============
(i) Earnings per Share
Under US GAAP outstanding special warrants are included in the calculation
of loss per share.
(ii) Capital Contributions with Respect to Related Party Transactions
During the year ended August 31, 1999, the Company acquired and disposed of
certain petroleum interests with Hilton Inc. for a combination of monetary
and non-monetary consideration.
US GAAP requires that certain transfers of non-monetary assets to a company
by its promoters or shareholders, in exchange for stock, should generally
be recorded at the transferor's historical cost basis, whereas under
Canadian GAAP, transfers of non-monetary assets may be recorded based on
the fair value of either the stock issued or the assets acquired under
certain circumstances. Under Canadian GAAP these transactions were recorded
at their fair values. The transactions have been adjusted to reflect the
transactions based on the historical cost basis.
The net loss under US GAAP has also been adjusted for the subsequent
amortization and impairment charges of these petroleum interest
acquisitions costs.
-6-
(iii)Ceiling test on petroleum interests
US GAAP requires that the net book value of proved petroleum interests not
exceed the sum of the present value of estimated future net revenues
(determined using current prices of petroleum production less estimated
future expenditures to be incurred in developing and producing the proved
reserves, discounted at ten percent). This ceiling test was performed
effective August 31, 2002 and it was determined that no additional
write-down of proved petroleum interests was necessary.
(iv) The Company grants stock options which reserves common shares for issuance
to employees and directors. Under Canadian GAAP, the issuance of stock
options is not recognized for accounting purposes. Under US GAAP, the
issuance of stock options requires an assessment to determine stock based
compensation. Accordingly, the Company has applied the provisions of
Financial Accounting Standards ("SFAS") 123 Accounting for Stock-Based
Compensation to calculate stock-based compensation under US GAAP using the
fair value method.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants in 2002, 2001 and 2000:
2002 2001 2000
---------- ------------- -------------
Risk-free interest rate 4.54% 4.81% - 6.47% 5.63% - 5.79%
Expected volatility 118% 124% 87%
Expected lives 3 years 3 years 2 - 3 years
(v) Income Tax
Under Canadian GAAP, deferred tax assets relating to the potential benefit
of income tax loss carryforwards are not recognized unless there is virtual
certainty of realization of the benefit. US GAAP provides similar
treatment, but requires the benefit be recognized and a valuation allowance
be recognized to fully offset the deferred tax asset.
As at August 31, 2002, the Company has fully reserved the $3,662,000 tax
benefit of operating loss carryforwards, by a valuation allowance of the
same amount, because the likelihood of realization of the tax benefit
cannot be determined. Of the total tax benefit, $1,172,000 is attributable
to the year ended August 31, 2002.
(vi) Private Placements of Common Stock and Special Warrants with Related
Parties
US GAAP requires disclosure of private placements conducted by the Company
where directors and officers of the Company are participants. During the
year ended August 31, 2001, directors, officers and companies controlled by
the directors or officers acquired 623,429 shares (2000 - 198,256) of the
Company, pursuant to private placements conducted by the Company, for cash
proceeds of $2,312,560 (2000 - $1,116,952). No private placement
transactions were conducted by the Company during the year ended August 31,
2002.
(vii) Private Placements of Common Stock
The Company conducts the majority of its equity financings pursuant to
private placements. Under the policies of the TSX Venture, the Company may
provide a discount off the market price of the Company's common stock. US
GAAP does not permit a discount from the market price. US GAAP requires the
recognition of the market value of the Company's common stock as a credit
to share capital, with a charge to operations for the portion of the
discount relating to equity financings conducted with officers and
directors of the Company and a charge to shareholders' equity, as a capital
distribution, for the discount relating to the remaining portion of the
equity financings.
-7-
Under US GAAP, loss and capital distributions for the year ended August 31,
2002 would increase by $ nil (2001 - $172,720; 2000 - $134,742) and $ nil
(2001 - $140,700; 2000 - $184,919), respectively, and share capital, as at
August 31, 2002 would increase by $961,402 (2001 - $961,402; 2000 -
$647,982). There is no net change to shareholders' equity.
The Company's consolidated statements of cash flow comply with US GAAP.
New Technical Pronouncements
- ----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB"), issued SFAS
143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS 143
generally requires obligations associated with asset retirements to be
recognized earlier and displayed as liabilities rather than as contra-assets.
The pronouncement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Management does not believe that the adoption of
SFAS 143 will have any impact on its financial position or results of
operations.
In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. SFAS 144 establishes a single
accounting model for long-lived assets to be disposed of by sale. The
pronouncement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management does not believe that the adoption
of SFAS 144 will have any impact on its financial position or results of
operations.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities." SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." SFAS 146 generally
requires a liability for a cost associated with an exit or disposal activity to
be recognized and measured initially at its fair value in the period in which
the liability is incurred. The pronouncement is effective for exit or disposal
activities initiated after December 31, 2002. Management does not believe that
the adoption of SFAS 146 will have any impact on its financial position or
results of operations.
In September 2000, SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - A Replacement of FASB
Statement No. 125" was issued. Adoption of SFAS No. 140 is not expected to have
an impact on the Company's financial statements.
Exchange Rate History
- ---------------------
The following table sets forth the average exchange rate for one Canadian dollar
expressed in terms of one U.S. dollar for the fiscal years ended August 31,
2002, 2001, 2000, 1999 and 1998.
Period Average
------ -------
September 1, 2001 - August 31, 2002 0.6355
September 1, 2000 - August 31, 2001 0.6537
September 1, 1999 - August 31, 2000 0.6805
September 1, 1998 - August 31, 1999 0.6682
September 1, 1997 - August 31, 1998 0.6901
The following table sets forth high and low exchange rates for one Canadian
dollar expressed in terms of one U.S. dollar for the six-month period ended
January 31, 2003.
Month High Low
----- ------ ------
August 2002 0.6442 0.6264
September 2002 0.6433 0.6304
October 2002 0.6407 0.6272
November 2002 0.6440 0.6288
December 2002 0.6461 0.6329
January 2003 0.6570 0.6349
-8-
Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
The noon rate of exchange on January 31, 2003, reported by the United States
Federal Reserve Bank of New York for the conversion of Canadian dollars into
United States dollars was CDN$0.6542 (US$1.5286 = CDN$1.00).
RISK FACTORS
- ------------
Due to the nature of the Company's business and the present stage of exploration
on its oil and gas prospects, the following risk factors apply to the Company's
operations:
CESSATION OF FUNDING OF THE COMPANY'S CALIFORNIA PETROLEUM PROPERTIES
Since 1999, the Company has devoted its activities towards the funding of its
interests in the exploration and development of oil and gas leases in
California, which are held by the Company's wholly-owned subsidiary, Trimark
Resources Inc. The recorded costs relating to these acquisitions, exploration
and development costs represented a significant portion of the Company's assets.
The ongoing difficulties and lack of success at East Lost Hills, San Joaquin and
Regional California has had a significant impact on the Company's continued
ability to raise funds to continue participation in these projects. Due to the
lack of financial resources, the Company ceased funding of its share of costs at
the East Lost Hills Prospect and San Joaquin Joint Venture in January 2002. In
February 2002, the Company withdrew from participation in the San Joaquin Joint
Venture. In May 2002, the Company, the operator of the East Lost Hills Project
and certain other participants in the East Lost Hills Project , concluded an
agreement on the then ongoing evaluation of the ELH #4 and #9 wells, as
described in "Item 4. Information on the Company. Principal Oil and Gas
Properties - East Lost Hills Joint Venture and San Joaquin Joint Venture,
California". In December 2002, the Company was informed by the operator that it
had proposed the plugging and abandonment of the ELH #4 and #9 wells.
In light of these results, uncertainties of any further activities of East Lost
Hills and the uncertainty of raising further funds to participate in any further
exploration or development in the East Lost Hills Project, the Company has
determined to write-off its remaining net investment in Trimark Resources Inc.,
resulting in an impairment charge of approximately $1.2 million for recorded
costs of $1.1 million at August 31, 2002. As a result the Company will have
written-off all of its petroleum and natural gas interests other than its costs
relating to the West Ranch Field Prospect.
ACCUMULATED LOSSES
During the year ended August 31, 2002, the Company incurred a loss of
approximately $6.6 million, and as at August 31, 2002, the Company had an
accumulated deficit of approximately $19.0 million. To date the Company's oil
and gas production has not generated sufficient operating cash flows to provide
working capital for the Company's ongoing overhead, the funding of its petroleum
property acquisitions and the exploration and development of these properties.
There can be no assurances that the Company will be able to successfully develop
its properties and achieve profitability from its operations.
FINANCING RISKS
As at January 31, 2003, the Company had a working capital deficiency of
approximately $237,000.
The Company has primarily relied on the sale of its equity capital and
disposition of petroleum interests to fund the acquisition, exploration and
development of its petroleum properties. It has no assurance that additional
funding will be available to it for exploration and development of its projects
or to fulfil its obligations under any applicable agreements. There can be no
assurance that the Company will be able to generate sufficient operating cash
flow or obtain adequate financing in the future or that the terms of such
financing will be favourable. Failure to generate additional operating cash flow
or obtain additional financing could result in substantial dilution of the
Company's petroleum interests, or delay or indefinite postponement of further
exploration and development of its projects with the possible loss of such
properties.
-9-
EXPLORATION AND PRODUCTION RISKS
The business of exploring for and producing oil and gas involves a substantial
risk of investment loss which even a combination of experience, knowledge and
careful evaluation may not be able to overcome. Drilling oil and gas wells
involves the risk that the wells will be unproductive or that, although
productive, the wells do not produce oil and/or gas in economic quantities.
Other hazards, such as unusual or unexpected geological formations, pressures,
fires, blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well. Adverse weather
conditions can also hinder drilling operations. A productive well may become
uneconomic in the event water or other deleterious substances are encountered,
which impair or prevent the production of oil and/or gas from the well. In
addition, production from any well may be unmarketable if it is impregnated with
water or other deleterious substances. As with any petroleum property, there can
be no assurance that oil and gas will be produced from the properties in which
the Company has interests. In addition, the marketability of oil and gas which
may be acquired or discovered, will be affected by numerous factors beyond the
control of the Company. These factors include the proximity and capacity of oil
and gas pipelines and processing equipment, market fluctuations of prices,
taxes, royalties, land tenure, allowable production and environmental
protection. The extent of these factors cannot be accurately predicted, but any
one or a combination of these factors may result in the Company not receiving an
adequate return on invested capital. There is no assurance that additional crude
oil or natural gas in commercial quantities will be discovered by the Company.
NON-OPERATOR STATUS
At this stage of its business, the Company relies upon other project
participants to provide and complete all project operations and responsibilities
including operating, drilling, marketing and project administration. As a
result, the Company has only a limited ability to exercise control over a
significant portion of a project's operations or the associated costs of those
operations. The success of a project is dependent upon a number of factors that
are outside of the Company's area of expertise and project responsibilities.
These factors include: (1) the availability of favorable term leases and
required permitting for projects, (2) the availability of future capital
resources by the Company and the other participants for the purchasing of leases
and the drilling of wells, (3) the approval of other participants to the
purchasing of leases and the drilling of wells on the projects, and (4) the
economic conditions at the time of drilling, including the prevailing and
anticipated prices for oil and gas. The Company's reliance on other project
participants and its limited ability to directly control certain project costs
could have a material negative effect on the Company's receipt of expected rates
of return on the Company's investment in certain projects.
UNINSURABLE RISKS
Although management believes the operator of any properties in which the Company
and its subsidiaries may acquire interests, will acquire and maintain
appropriate insurance coverage in accordance with standard industry practice,
the Company and its subsidiaries may suffer losses from uninsurable hazards or
from hazards which the operator has chosen not to insure against because of high
premium costs or other reasons. The Company and its subsidiaries intend to
continue to engage in the drilling of both exploratory and development wells.
Exploratory wells have much greater dry hole risk than do wells which are
drilled offsetting established production. The Company and its subsidiaries may
become subject to liability for pollution, fire, explosion, blow-outs, cratering
and oil spills against which are in excess of coverages, if any, maintained by
the operator. Such events could result in substantial damage to oil and gas
wells, producing facilities and other property and personal injury. The payment
of any such liabilities may have a material, adverse effect on the Company's
financial position.
As of the date of this report the Company is not the operator of any of its
petroleum and natural gas interests and does not maintain insurance coverage
relating thereto.
NO ASSURANCE OF TITLES
It is the practice of the Company in acquiring oil and gas leases or undivided
interests in oil and gas leases not to undergo the expense of retaining lawyers
to examine the title to the mineral interest to be placed under lease or already
placed under lease. Rather, the Company will rely upon the judgment of oil and
gas lease brokers or landsmen who perform the field work in examining records in
the appropriate governmental office before attempting to place under lease a
specific mineral interest. This practice is widely followed in the oil and gas
industry. Prior to the drilling of an oil and gas well, however, it is the
normal practice in the oil and gas industry for the person or company acting as
-10-
the operator of the well to obtain a preliminary title review of the spacing
unit within which the proposed oil and gas well is to be drilled to ensure there
are no obvious deficiencies in title to the well; however, neither the Company
nor the person or company acting as operator of the well will obtain counsel to
examine title to such spacing unit until the well is about to go into
production. It frequently happens, as a result of such examinations, that
certain curative work must be done to correct deficiencies in the marketability
of the title, and such curative work entails expense. The work might include
obtaining affidavits of heirship or causing an estate to be administered. It
does happen, from time to time, that the examination made by the title lawyers
reveals that the oil and gas lease or leases are worthless, having been
purchased in error from a person who is not the owner of the mineral interest
desired. In such instances, the amount paid for such oil and gas lease or leases
is generally lost. To date the Company has not lost title to any of its oil and
gas leases, nor is it aware that any of its currently held properties is subject
to being lost as a result of faulty titles.
ENVIRONMENTAL REGULATIONS
In general, the exploration and production activities of the Company are subject
to certain federal, state and local laws and regulations relating to
environmental quality and pollution control. Such laws and regulations increase
the costs of these activities and may prevent or delay the commencement or
continuance of a given operation. Compliance with these laws and regulations has
not had a material effect on the Company's operations or financial condition to
date. Specifically, the Company is subject to legislation regarding emissions
into the environment, water discharges, and storage and disposition of hazardous
wastes. In addition, legislation has been enacted which requires well and
facility sites to be abandoned and reclaimed to the satisfaction of state
authorities. However, such laws and regulations are frequently changed and the
Company is unable to predict the ultimate cost of compliance. Generally,
environmental requirements do not appear to affect the Company any differently
or to any greater or lesser extent than other companies in the industry.
The Company believes that its operations comply, in all material respects, with
all applicable environmental regulations.
GOVERNMENTAL REGULATIONS
Oil and gas exploration, development and production are subject to various types
of regulation by local, state and federal agencies. Legislation affecting the
oil and gas industry is under constant review for amendment and expansion. Also,
numerous departments and agencies, both federal and state, are authorized by
statute to issue and have issued rules and regulations binding on the oil and
gas industry and its individual members, some of which carry substantial
penalties for failure to comply. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and, consequently,
affects its profitability. There is no assurance that laws and regulations
enacted in the future will not adversely affect the oil and gas industry.
However, since these regulations generally apply to all oil and gas producers,
management of the Company believes that these regulations should not put the
Company at a material disadvantage to other oil and gas producers.
Most states in which the Company and its subsidiaries own and operate properties
have statutes, rules and regulations governing conservation matters including
the unitization or pooling of oil and gas properties, establishment of maximum
rates of production from oil and gas wells and the spacing of such wells.
Oil and gas mineral rights may be held by individuals or corporations and, in
certain circumstances, by governments having jurisdiction over the area in which
such mineral rights are located. As a general rule, parties holding such mineral
rights grant licenses or leases to third parties to facilitate the exploration
and development of these mineral rights. The terms of the leases and licenses
are generally established to require timely development. Notwithstanding the
ownership of mineral rights, the government of the jurisdiction in which mineral
rights are located generally retains authority over the manner of development of
those rights.
In addition to royalties paid to freehold owners, each state generally imposes a
production or severance tax with respect to production and sale of crude oil,
natural gas and natural gas liquids within their respective jurisdictions. For
the most part, state production taxes are applied as a percentage of production
or sales. Payment of these taxes are in the normal course of operations in the
oil and gas industry and should not have a material impact on the Company's
financial condition.
-11-
NATURAL GAS AND OIL PRICES
In recent decades, there have been periods of both worldwide overproduction and
underproduction of hydrocarbons and periods of both increased and relaxed energy
conservation efforts. Such conditions have resulted in periods of excess supply
of, and reduced demand for, crude oil on a worldwide basis and for natural gas
on a domestic basis. These periods have been followed by periods of short supply
of, and increased demand for, crude oil and, to a lesser extent, natural gas.
The excess or short supply of crude oil has placed pressures on prices and has
resulted in dramatic price fluctuations even during relatively short periods of
seasonal market demand. The price of natural gas has exhibited market demand
fluctuations; however, because most of the natural gas consumed within the
United States is produced within the United States, the price of natural gas did
not historically exhibit the dramatic price fluctuations that crude oil prices
have experienced under conditions of high import levels. Recently, the price of
natural gas has fluctuated dramatically due to changes in demand and significant
fluctuations of supplies. The Company's financial results can be significantly
affected by prices received from production of oil and gas as commodity prices
fluctuate widely in response to changing market forces. Specifically, a decrease
in the price of oil or gas may reduce the revenue the Company receives from its
oil and gas operations and/or may increase the Company's impairment or depletion
expenses for a given period. In addition, a decrease in price may cause a
decrease in the present value of the Company's estimated oil and gas reserves.
Conversely, an increase in the price of oil or gas may increase the revenue
received from the Company's oil and gas operations and/or may decrease the
Company's impairment or depletion expenses for a given period. An increase in
price may cause an increase in the present value of the Company's estimated oil
and gas reserves.
COMPETITION
The oil and gas industry is intensely competitive and the Company competes with
other companies which have greater resources. Many of such companies not only
explore for and produce crude oil and natural gas but also carry on refining
operations and market petroleum and other products on a worldwide basis. Such
companies may be able to pay more for productive oil and natural gas properties
and exploratory prospects, and to define, evaluate, bid for and purchase a
greater number of properties and prospects than the Company's financial or human
resources permit. The Company's ability to acquire additional properties and to
discover reserves in the future will be dependent upon its ability to evaluate
and select suitable properties and to consummate transactions in a highly
competitive environment. There is also competition between the oil and gas
industry and other industries with respect to the supply of energy and fuel to
industrial, commercial and individual customers. There is no assurance that the
Company will be able to effectively compete against such companies.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
Because of its small size, the Company desires to grow rapidly in order to
achieve certain economies of scale. Although there is no assurance that this
rapid growth will occur, to the extent that it does occur, it will place a
significant strain on the Company's financial, technical, operational and
administrative resources. As the Company expands its activities and increases
the number of projects it is evaluating or in which it is participating, there
will be additional demands on the Company's financial, technical and
administrative resources. The failure to continue to upgrade the Company's
technical, administrative, operating and financial control systems or the
occurrence of unexpected expansion difficulties, including the recruitment and
retention of geoscientists and engineers, could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company's operations and activities is dependent to a
significant extent on the efforts and abilities of its management. The loss of
services of any of its management could have a material adverse effect on the
Company. The Company has not obtained "key man" insurance for any of its
management.
Mr. Busby is the Chairman, President and Chief Executive Officer of the Company.
The loss of the services of Mr. Busby may adversely affect the business and
prospects of the Company. Mr. Busby's services are provided through DWB
Management Ltd. See "Item 7. Major Shareholders and Related Party Transactions -
Related Party Transactions."
-12-
ADEQUATE LABOR
Corporate accounting, management and administration are provided, in part, by
Chase Management Ltd. ("Chase"), a company owned by Mr. Nick DeMare, a director
of the Company. As of the date of this report, the Company does not employ any
personnel. In the event the Company needs to employ personnel, it will need to
recruit qualified personnel to staff its operations. The Company believes that
such personnel currently are available at reasonable salaries and wages in the
geographic areas in which the Company and its subsidiaries operate. There can be
no assurance, however, that such personnel will be available in the future. In
addition, it cannot be predicted whether the labor staffing at any of the
Company's projects will be unionized, which may result in potentially higher
operating costs.
DIVIDEND RISKS
The Company has not paid any dividends on its common shares and does not intend
to pay dividends on its common shares in the immediate future. Any decision to
pay dividends on its common shares in the future will be made by the board of
directors on the Company on the basis of earnings, financial requirements and
other such conditions that may exist at that time.
PRICE FLUCTUATIONS: SHARE PRICE VOLATILITY
In recent years, the securities markets in Canada have experienced a high level
of price and volume volatility, and the market prices of securities of many
companies, particularly junior resource exploration companies like the Company,
have experienced wide fluctuations which have not necessarily been related to
the operating performance, underlying asset values or prospects of such
companies. In particular, the per share price of the Company's common stock on
the TSX Venture Exchange fluctuated from a low of $0.06 to a high of $1.40
during the 12-month period ending January 31, 2003 and closed at $0.12 on
January 31, 2003. There can be no assurance that these price fluctuations will
not continue to occur.
CURRENCY FLUCTUATIONS
Presently, the Company's petroleum activities are conducted in the United States
and all petroleum revenues and expenditures are conducted in United States
dollars. To date, all equity financing conducted by the Company has been
conducted in Canadian dollars. The Company maintains its head office in
Vancouver, Canada, and may, from time-to- time, maintain cash holdings in
Canadian dollars. Recently the Canadian dollar has experienced a devaluation
against the United States dollar. Continued devaluation of the Canadian dollar
may have a material and adverse effect on the Company's operations.
CONFLICTS OF INTEREST
Certain of the directors also serve as directors of other companies or have
significant shareholdings in other companies and, to the extent that such other
companies may participate in ventures in which the Company may participate, the
directors of the Company may have a conflict of interest in negotiating and
concluding terms relating to the extent of such participation. In the event that
such a conflict of interest arises at a meeting of the board of directors, a
director who has such a conflict will disclose the nature and extent of his
interest to the board of directors and abstain from voting for or against the
approval of such a participation or such terms.
In accordance with the laws of the Yukon Territory, the directors of the Company
are required to act honestly and in good faith with a view to the best interests
of the Company. In determining whether the Company will participate in a
particular program and the interest therein to be acquired by it, the directors
will primarily consider the degree of risk to which the Company may be exposed
and its financial position at that time.
See also "Item 7. Major Shareholders and Related Party Transactions - Related
Party Transactions."
PENNY STOCK REGULATION
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stock". Generally, penny stocks are equity
securities with a price of less than US$5.00 (other than securities registered
on certain national securities exchanges or quoted on the NASDAQ system). If the
-13-
Company's shares are traded for less than US$5 per share, as they currently are,
the shares will be subject to the SEC's penny stock rules unless (1) the
Company's net tangible assets exceed US$5,000,000 during the Company's first
three years of continuous operations or US$2,000,000 after the Company's first
three years of continuous operations; or (2) the Company has had average revenue
of at least US$6,000,000 for the last three years. The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document prescribed by
the SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from those rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. As a result, the holders of the Common Stock
may find it difficult to sell the Common Stock of the Company. These rules may
restrict the ability of brokers to sell the common stock and may reduce the
secondary market for the common stock. A limited secondary market may result in
a decrease in the shareholder value and/or a partial or total loss of an
investor's investment.
ENFORCEMENT OF LEGAL PROCESS
Service of process upon individuals or firms that are not resident in the United
States may be difficult to obtain within the United States. Some of the members
of the Board of Directors and senior management of the Company reside outside
the United States. Any judgment obtained in the United States against the
Company or such persons may not be collectible within the United States. The
Company has not appointed anyone to accept service of process on its behalf.
ITEM 4. INFORMATION ON THE COMPANY.
- --------------------------------------------------------------------------------
HISTORY AND DEVELOPMENT OF THE COMPANY
Name and Incorporation
- ----------------------
The head office and principal address of the Company is located at #1305 - 1090
West Georgia Street, Vancouver, British Columbia, V6E 3V7.
The Company was incorporated under the laws of British Columbia, Canada, under
the name of Golden Chance Resources Inc. on June 16, 1983. On December 14, 1993,
the Company was continued under the Business Corporations Act (Yukon Territory).
On the continuance the Company changed its authorized capital into "unlimited
common shares without par value." On June 16, 1997, the Company changed its name
to, "Trimark Oil & Gas Ltd." On March 21, 2002, the Company changed its name to
its current name, "Trimark Energy Ltd."
The Company's common shares are listed for trading on the TSX Venture Exchange
(the "TSX Venture"). The TSX Venture classifies listed companies into two
different tiers based on standards, which include historical financial
performance, stage of development, and financial resources of the listed
company. Tier I is the TSX Venture's premier tier and is reserved for the TSX
Venture's most advanced issuers with the most significant financial resources.
Tier I issuers benefit from decreased filing requirements and improved service
standards. The majority of the companies listed on the TSX Venture are Tier II
companies. The Company trades on theTSX Venture under the symbol "TRK" and is
classified as a Tier II company.
Effective August 7, 2000, the Company's common stock was listed for quotation on
the Over-the-Counter Bulletin Board operated by the National Association of
Securities Dealers, where is currently trades under the symbol "TRKEF".
The Company has two wholly-owned subsidiaries, Trimark Resources Inc. ("Trimark
Inc."), which was incorporated on June 4, 1993, under the laws of the state of
Colorado, and TMK Oil & Gas Inc. ("TMK Inc."), which was incorporated on
December 11, 2001, under the laws of the state of California. Trimark Inc. has
one wholly-owned subsidiary, Safari Petroleum LLC ("Safari"), a limited
-14-
liability company formed on June 14, 1995, under the laws of the state of
Colorado. The Company, through Trimark Inc., Safari, and TMK Inc. engages in oil
and gas activities in the United States.
The Company's corporate office is located at Suite 1305 - 1090 West Georgia
Street, Vancouver, British Columbia, V6E 3V7.
The Company's registered office is located at 3081 - 3rd Avenue, Whitehorse,
Yukon, Canada. The phone number of the Company's registered office is (867)
668-4405 and the corporate office is (604) 685-9316.
The Company does not have a registered agent in the United States.
Exploration Expenditures
- ------------------------
During fiscal 2000, 2001 and 2002, the Company incurred $2.8 million, $4.4
million and $100,000, respectively, on the acquisition, exploration and
development of its petroleum interests. During the past three fiscal years, the
Company has devoted its resources in developing its petroleum and natural gas
prospects in California, as described in "Item 4. Information on the Company -
Material Properties". With the disappointing results at East Lost Hills, San
Joaquin and Regional California, the Company has had to reassess its options and
alternatives. In January 2003, the Company acquired an interest in an oil and
gas prospect located in Texas. See "Item 4. Information on the Company - Other
Properties".
Business Overview
- -----------------
Since October 1990, the Company has been active in the business of acquiring,
exploring and developing oil and gas prospects in the United States. As
described in "Item 4. Information on the Company - Material Properties", the
Company's principal assets during 2002 were its interests in the East Lost Hills
Joint Venture, the San Joaquin Joint Venture and in Regional California. As of
the date of this annual report the Company has determined not to participate
further in any of these interests. As of the date of the annual report the
Company has acquired an interest in oil and gas leases in Texas. These assets
are described in detail in "Item 4. Information on the Company - Material
Properties."
2003 Exploration Budget
- -----------------------
As of the date of this annual report the Company has determined not to
participate in any further exploration or development at East Lost Hills. In
January 2003, the Company paid $70,000 to fund the initial development costs for
its interest in the West Ranch Field Prospect. No other property acquisitions or
exploration expenditures are currently contemplated.
These projections and work schedules are contingent on many factors, many of
which are beyond the Company's control. Work schedules can and will change based
on results in the field. Actual costs may vary significantly from current
estimates. The estimates provided are management's estimates of expenditures to
be incurred.
Sales and Revenue Distribution
- ------------------------------
During 2002, the Company sold its share of petroleum, natural gas and natural
gas liquids produced from its wells to a variety of purchasers at the wellhead
in the United States. All of its sales were conducted with unaffiliated
customers. These purchasers provided a ready market for all of the Company's
production and paid the local market price, which fluctuated based upon
prevailing market conditions. Due to the number of purchasers in each area,
management does not believe that the loss of one or a number of purchasers would
pose a significant risk to the continuity of the Company's operations. The
Company does not maintain significant inventories of petroleum or natural gas
liquids.
-15-
Total revenues reported for fiscal 2002, 2001 and 2000, were as follows:
($ in 000)
--------------------------------------------
Years Ended August 31,
--------------------------------------------
2002 2001 2000
$ $ $
Oil and Gas Sales
- United States 126 521 203
----------- ----------- -----------
Interest and Other
- United States 14 15 58
- Canada 23 99 137
----------- ----------- -----------
37 114 195
----------- ----------- -----------
Total Revenues 163 635 398
=========== =========== ===========
Competitive Business Conditions,
Competitive Position in the Industry and Methods of Competition
- ---------------------------------------------------------------
The Company's petroleum and natural gas exploration activities in the state of
California are being undertaken in a highly competitive and speculative business
atmosphere. In seeking any other suitable petroleum and natural gas properties
for acquisition, the Company is competing with a number of other companies
located in the state of California and elsewhere, including large oil and gas
companies and other independent operators with greater financial resources.
Management does not believe that the Company's initial competitive position in
the petroleum and natural gas industry will be significant.
Management does not foresee any difficulties in procuring drilling rigs or the
manpower to run them in the area of its operations; however, several factors,
including increased competition in the area, may limit the availability of
drilling rigs, rig operators and related personnel and/or equipment; such an
event may have a significant adverse impact on the profitability of the
Company's operations.
Competition in the petroleum and natural gas exploration industry exists in the
form of competition to acquire the most promising acreage blocks and obtaining
the most favorable prices for transporting the product. The Company, and
ventures in which it participates, is relatively small compared to other
petroleum and natural gas exploration companies and may have difficulty
acquiring additional acreage and/or projects and arranging for the
transportation of product, in the event the Company, or ventures in which it
participates, is successful in its exploration efforts.
Governmental Regulations and Environmental Laws
- -----------------------------------------------
The Company and any venture in which it participates, is required to obtain
permits for drilling oil or gas wells.
Exploration and production activities relating to oil and gas leases are subject
to numerous environmental laws, rules and regulations. The Federal Clean Water
Act requires the Company to construct a fresh water containment barrier between
the surface of each drilling site and the underlying water table.
Various federal, state and local laws and regulations covering the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect the Company's operations and costs through their effect
on oil and gas exploration, development and production operations. Environmental
laws and regulations have changed substantially and rapidly over the last 20
years, and the Company anticipates that there will be continuing changes. Laws
and regulations protecting the environment have generally become more stringent
in recent years, and may in certain circumstances impose "strict liability,"
rendering a corporation liable for environmental damages without regard to
negligence or fault on the part of such corporation. Such laws and regulations
may expose the Company to liability for the conduct of operations or conditions
caused by others, or for acts of the Company which were in compliance with all
applicable laws at the time such acts were performed. Increasingly strict
environmental restrictions and limitations have resulted in increased operating
costs for the Company and other businesses throughout the United States, and it
is possible that the costs of compliance with environmental laws and regulations
will continue to increase. The modification of existing laws or regulations or
-16-
the adoption of new laws or regulations relating to environmental matters could
have a material adverse effect on the Company's operations. In addition, the
Company's existing and proposed operations could result in liability for fires,
blowouts, oil spills, discharge of hazardous materials into surface and
subsurface aquifers and other environmental damage, any one of which could
result in personal injury, loss of life, property damage or destruction or
suspension of operations.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, requires payments for cleanup of
certain abandoned waste disposal sites, even though such waste disposal
activities were undertaken in compliance with regulations applicable at the time
of disposal. Under the Superfund legislation, one party may, under certain
circumstances, be required to bear more than its proportional share of cleanup
costs at a site where it has responsibility pursuant to the legislation, if
payments cannot be obtained from other responsible parties. Other legislation
mandates cleanup of certain wastes at facilities that are currently being
operated. States also have regulatory programs that can mandate waste cleanup.
CERCLA authorizes the Environmental Protection Agency ("EPA") and, in some
cases, third parties to take actions in response to threats to the public health
or the environment and to seek to recover from the responsible classes of
persons the costs they incur. The scope of financial liability under these laws
involves inherent uncertainties.
It is not anticipated that the Company will be required in the near future to
expend amounts that are material in relation to its total capital expenditures
program by reason of environmental laws and regulations, but inasmuch as such
laws and regulations are frequently changed, the Company is unable to predict
the ultimate cost of compliance.
The Company believes it is presently in compliance with all applicable federal,
state or local environmental laws, rules or regulations; however, continued
compliance (or failure to comply) and future legislation may have an adverse
impact on the Company's present and contemplated business operations.
The foregoing is only a brief summary of some of the existing environmental
laws, rules and regulations to which the Company's business operations are
subject, and there are many others, the effects of which could have an adverse
impact on the Company. Future legislation in this area will no doubt be enacted
and revisions will be made in current laws. No assurance can be given as to what
effect these present and future laws, rules and regulations will have on the
Company's current and future operations.
PRINCIPAL OIL AND GAS PROPERTIES
- --------------------------------
MATERIAL PROPERTIES
East Lost Hills Joint Venture and San Joaquin Joint Venture, California
- -----------------------------------------------------------------------
During fiscal 2002, the Company was faced with significant funding commitments
for its continued participation in the East Lost Hills and San Joaquin Joint
Venture's exploration programs. The continued complications encountered at East
Lost Hills had a negative impact on the Company's common share price and on the
Company's ability to conduct either equity or debt financing. In addition, the
combination of reduced commodity prices and constrained production at ELH #1
further reduced the Company's ability to meet its funding commitments. Due to
the lack of financial resources, the Company ceased further funding of its share
of costs at the East Lost Hills Prospect and San Joaquin Joint Venture. As a
result, in February 2002, the Company withdrew from participation in the San
Joaquin Joint Venture and, in May 2002, concluded an agreement with Berkely
Petroleum, Inc. (a subsidiary of Anadarko) and certain other participants on the
ongoing evaluation of the ELH #4 and ELH #9 wells, whereby the funding parties
have assumed all of the unpaid amounts, estimated to be $613,288 at the time of
the agreement, and future costs in completing the evaluation of these wells. In
return, they would be entitled to recover their costs, plus a penalty of 300% of
the costs, from production from these wells.
The Company acquired its interests in various oil and gas leases located in Kern
County, California (the "East Lost Hills Joint Venture") and in oil and gas
leases located in the San Joaquin Basin, California (the "San Joaquin Joint
Venture"), in July 1999.
As of August 31, 2002, the Company had spent approximately $1.9 million in
leasehold acquisition costs and $1.5 million in exploration and development
expenditures on the East Lost Hills Joint Venture. In addition, the Company had
spent approximately $2.2 million in leasehold acquisition costs and $1.1 million
in exploration and development expenditures on the San Joaquin Joint Venture.
-17-
See "Item 4. Information on the Company - Principal Properties - Petroleum and
Natural Gas Properties - Material Properties - East Lost Hills Joint Venture and
San Joaquin Joint Venture, California."
OTHER PROPERTIES
Regional California
- -------------------
The Company participated in a regional exploration program in the San Joaquin
Basin of California. The prospects had much shallower target horizons than the
East Lost Hills Joint Venture and the San Joaquin Joint Venture. The Company
originally held approximately between 36% - 44% capital interest before payout
(27% - 33% working interest after payout) in the prospects tested. See "Item 4.
Information on the Company - Principal Properties - Other Properties - Regional
California".
EMPLOYEES
The Company's management functions are provided by private companies owned by
officers and directors of the Company. See "Item 7. Major Shareholders and
Related Party Transactions - Related Party Transactions." In addition, the
Company employs a number of consultants to perform specific functions, on an as
needed basis.
ORGANIZATIONAL STRUCTURE
The following chart sets forth the names of the Company and the significant
subsidiaries, their respective jurisdictions of incorporation and the Company's
ownership interests therein as of the date of this report. Unless otherwise
indicated herein, the term "Company" means collectively the Company and its
subsidiaries.
Organization Chart
---------------------------
TRIMARK ENERGY LTD.
(Yukon)
---------------------------
|
|
-------------------------------------------------------
| |
------------------------- ----------------------
TRIMARK RESOURCES INC. TMK OIL & GAS INC.
(Colorado) (California)
100% 100%
------------------------- ----------------------
|
|
-----------------------
SAFARI PETROLEUM LLC
(Colorado)
100%
-----------------------
SUBSIDIARIES
Trimark Resources Inc.
- ----------------------
The Company owns all of the outstanding common shares of Trimark Resources Inc.
("Trimark Inc."), a Colorado corporation, which was incorporated on June 4,
1993. As of the date of this report, Trimark Inc. holds the interest in the East
Lost Hills properties. The Company has written-off its investment in Trimark
Inc. See "Item 3. Key Information. Risk Factors - Cessation of Funding of the
Company's California Petroleum Properties".
-18-
Safari Petroleum LLC
- --------------------
Trimark Inc. owns all of the interests in Safari Petroleum LLC ("Safari"), a
Colorado limited liability company, which was formed on June 14, 1995. As of the
date of this report, Safari holds interests in minor oil and gas properties in
the United States.
TMK Oil & Gas Inc.
- ------------------
The Company owns all of the outstanding common shares of TMK Oil & Gas Inc.
("TMK Inc."), a California corporation, which was incorporated on December 11,
2001. As of the date of this report, TMK Inc. holds the interest in the West
Ranch Field Prospect.
PRINCIPAL PROPERTIES
Petroleum and Natural Gas Properties
- ------------------------------------
The Company's principal business is the acquisition of leasehold interests in
petroleum and natural gas rights, and the exploration for and development,
production and sale of petroleum and natural gas. All of the Company's
properties are located in the continental United States. The Company is a
minority interest owner in its petroleum and natural gas interests and is not an
operator an any of these prospects.
The Company owns interests in petroleum and natural gas properties in the United
States, identified as follows:
Material Properties
- -------------------
East Lost Hills Joint Venture and San Joaquin Joint Venture, California
Location and Interest
- ---------------------
The Company holds a 1.0% working interest (0.96% net revenue interest) in the
East Lost Hills Joint Venture which is situated in the San Joaquin Basin,
approximately 45 miles northwest of Bakersfield, California.
Property Description
- --------------------
The San Joaquin Basin has proved to be one of the most productive hydrocarbon
producing basins in the continental United States. To date, the approximately
14,000 square mile basin has produced in excess of 13 MMBOE, and contains 25
fields classified as giant, with cumulative production of more than 100 MMBOE.
The San Joaquin Basin contains six of the 25 largest oil fields in the U.S.A.
and produces more than 75% of California's oil and gas production.
The Lost Hills Field is an anticlinal structure formed by what appears to be a
combination of compressional forces from the west, as well as right-lateral
motion associated with movement of the San Andreas fault system. The Monterey
and Temblor formations are broken by a high angle thrust fault on the west side
of the structure. The East Lost Hills Joint Venture lies in the footwall side of
this thrust fault, directly east of and structurally below the existing Lost
Hills field. To date, the Lost Hills Field has produced over 115 MBO and 120 BCF
of gas from Pleistocene, Pliocene and Miocene-age sands buried at depths of
between 2,000 to 6,000 feet.
The geological objectives at the East Lost Hills Joint Venture are stacked sands
(layers of sand stacked one over the other) within the Temblor Group which are
buried between 16,500 to 19,000 feet. The uppermost sand encountered by drilling
in the Temblor Group is called the Temblor Sand. Other sands which lie below
this interval have various local names, and vary in thickness and lateral
distribution from well to well. The Temblor sands lie beneath the Miocene-age
Monterey shale, which is a proven source rock, as well as an excellent vertical
reservoir seal. Two dimensional ("2-D") seismic data reveals the presence of a
fault-bounded structural high at Temblor level situated southeast of a well
drilled by Shell and Arco (Shell-Arco #1-23-22, T25S, R20, section 22). An
interpretation made by Armstrong suggests that this well did not penetrate the
Temblor sands, but reached total depth while still drilling in steeply dipping
Monterey shales in the hanging wall of the Lost Hills thrust block.
-19-
EXPLORATION
East Lost Hills Joint Venture Work Program
- ------------------------------------------
The East Lost Hills Joint Venture holds an interest in a significant number of
leases totaling in excess of 40,000 acres. In order to maintain these leases the
East Lost Hills Joint Venture has committed to drill certain lands.
The initial test well, the Bellevue #1-17, commenced drilling in May 1998, and
was designed to test prospective Miocene sandstone reservoirs in the Temblor
formation at depths to an anticipated 18,500 feet. On November 23, 1998, while
drilling at 17,640 feet, the well blew out and ignited. An expert well control
team was engaged to contain the fire.
A relief well, the Bellevue #1R-ST-3, was commenced on December 18, 1998, in
order to "kill" the flow of water and hydrocarbons flowing out of the Bellevue
#1-17 well. On May 29, 1999, the kill operation was successfully completed.
After the successful kill operation, the Bellevue #1R-ST-3 relief well continued
with drilling towards a bottom hole location approximately 800 feet away from
the bottom hole location of the Bellevue #1-17 well. On August 24, 1999, the
operator announced that the well would be completed, having reached a total
depth of 17,428 feet, approximately 180 feet into the Temblor formation. Between
October 1, 1999, and October 22, 1999, the Bellevue #1R-ST-3 well was prepared
for a completion test. On October 23, 1999, the completion test was implemented
by perforating the casing and establishing communication with the pay zones so
that gas could flow from the pay zones into the casing. Initial results were
positive and the well flowed gas, albeit at restricted rates. The gas flowed,
but only for a short period of time as the flow was cut off when the
perforations were plugged off. In an attempt to re-establish communication,
larger perforations were made but this too was unsuccessful and the well bore
was plugged with formation sand, shale, and perforating debris. The well bore
was cleaned up and in December 1999 was production tested and flowed gas at
rates ranging between 1.3 and 5.0 MMCFPD. Condensate and water was obtained
during the test. Pressure build-up analysis indicated that only the uppermost
sand unit encountered in the Bellevue #1R-ST-3 well was contributing to the
flow.
On August 26, 1999, drilling began on the ELH #1 well, approximately two miles
northwest of the Bellevue #1-17R well. On April 12, 2000, this well had drilled
to a total depth of 19,724 feet. Production testing began on May 28, 2000 and,
based on the results of the production testing and other analysis, a natural gas
discovery was determined at the East Lost Hills field. After completion of
production facilities and a connection pipeline, this well commenced first
production on February 6, 2001. The ELH #1 well is currently producing from a
zone in the lower portion of the Temblor formation. Production from the ELH #1
well remains constrained, at current levels of approximately 1.8 MMCFE gas per
day, still requiring water disposal facilities. The Company expects this
production curtailment to continue until a disposal well is drilled. The
operator was unable to negotiate a contract with the owner of the land at the
original proposed site of the disposal well. The operator has indicated that it
has contracted an alternate surface owner in the same area and that it is
attempting to negotiate access to this surface for a water disposal well. The
inability to demonstrate what production could be, if a proper water disposal
system were in place, has had a negative impact on this project and a
significant downgrade on the estimated proven reserves for the ELH #1 well has
been made.
It is not known when this disposal well will be completed or, once completed,
the impact the availability of this extra capacity will have on production from
the ELH #1 well.
The ELH #2 well, located approximately 1.5 miles northwest of the ELH #1 well,
was drilled and cased to a total depth of 18,011 feet. Initial production
testing of the upper Temblor interval in the well resulted in limited wellbore
influx of hydrocarbons (approximate flow rate of 3 MMCF/d), higher than expected
fluid content, and poorer than expected pressure response. Many of the initial
production test results on the well have been influenced by mechanical
difficulties associated with drill pipe that was inadvertently cemented across
the testing interval. The ELH #2 well is currently suspended as a potential
producer pending availability of water disposal facilities.
The ELH #3R west flank exploration well was drilled to a total measured depth of
21,769 feet to test the Temblor interval in a separate, seismically defined
structure from the East Lost Hills structure. Due to steep dips encountered in
the lower portion of the well, it was determined that the underlying secondary
objective, the Point of Rocks formation, could not be reached in the existing
wellbore. The well was plugged back to 19,370 feet measured depth for testing of
the lower Temblor. Multiple zones in the lower Temblor section were perforated
and tested in the well. Communication was established with the formation during
testing and no hydrocarbons were recovered. The well has been suspended pending
analysis of new seismic data and additional offset well information.
-20-
The ELH #4 well commenced drilling on November 26, 2000 and reached total depth
of 20,800 feet on August 7, 2001. The ELH #4 well was completed and tested in
the Kreyenhagen shale and Phacoides sands. Gas and pressures began low peaking
at 1.56 MMCFPD with 16.9 BWPD and 2.3 BCPD at a flowing tubing pressure of 90
psi. From the peak, rates declined to zero and the well was dead. The well was
cleaned out of possible plugging slugs. The ELH #4 well remains shut-in awaiting
results from the ELH #9 well. Significant shows were observed over several
hundred feet of the Agua sands.
The ELH #9 well commenced drilling in early August 2001, at a location
approximately two miles southeast of the ELH #4 well. This well was drilled to
21,100 feet and was designed to test the continuation of the East Lost Hills
structure in the south easterly direction. The ELH #9 well was completed in the
Kreyenhagen shale and Phacoides sands. Testing commenced with rates generally
less than 1 MMCFPD with one peak of 2.37 MMCFD. Rates continued to decline below
500 MCFPD. The Kreyenhagen was stimulated with acid to attempt improved
production. Upon re-testing, rates remained well below 300 MCFGPD. The zones
were re-perforated with no improvement in production. The results are negative
indicators of prolonged economic production from the Kreyenhagen or Phacoides
sands. Management believes some additional potential remains in the upper Agua
sand that remains to be tested. Gas shows in the Agua sands are limited to a 20
foot zone.
The Company is, however, also aware that there exists a difference of opinion as
to whether the testing procedures employed by the operator were the appropriate
ones. It has been stated that a proper test has not completed on these wells and
conclusions based on the test results to date cannot be relied upon.
Due to the lack of financial resources, the Company ceased further funding of
its share of costs at the East Lost Hills Prospect and San Joaquin Joint
Venture. As a result, the Company concluded an agreement with Berkely Petroleum,
Inc. (a subsidiary of Anadarko) and certain other participants on the ongoing
evaluation of the ELH #4 and ELH #9 wells, whereby the funding parties have
assumed all of the unpaid amounts, estimated to be $4.9 million at the time of
the agreement, and future costs in completing the evaluation of these wells. In
return, they will be entitled to recover their costs, plus a penalty, of 300% of
the costs, from production from these wells. See "Item 4. Information on the
Company - Business Overview - Principal Oil and Gas Properties - Material
Properties - East Lost Hills Joint Venture and San Joaquin Joint Venture,
California."
In December 2002, the Company was informed that Anadarko had formally notified
the participant group that it proposed the plugging and abandonment of the ELH
#4 and #9 wells. The funding parties have not yet consented to the operator's
proposal.
San Joaquin Joint Venture Work Program
- --------------------------------------
With respect to the San Joaquin Joint Venture, the operator commenced drilling
the initial exploratory well on the first of the three initial prospects, Cal
Canal, in June 1999. The Cal Canal well penetrated 1,230 feet of the Temblor
formation with 775 feet of net sand and was drilled to a total depth of 18,100
feet. The well completion commenced on January 20, 2000. Non-commercial
hydrocarbon flow rates were obtained from the initial perforated 10 foot zone.
The leases were ultimately terminated by the San Joaquin Joint Venture in 2002.
The participants in the San Joaquin Joint Venture, on the recommendations of the
operator, Anadarko, determined that the Lucky Dog Prospect would not be drilled
and accordingly, the San Joaquin Joint Venture relinquished its interest in this
prospect.
Drilling of the Pyramid Hills Prospect commenced in December 2001. In February
2002, the Company withdrew from participation in the San Joaquin Joint Venture
and, accordingly, no longer has an interest in the Pyramid Hills Prospect.
OTHER PROPERTIES
Regional California
- -------------------
The Company participated in a regional exploration program in the San Joaquin
Basin of California and a number of prospects were drill tested. The prospects
had much shallower target horizons that the East Lost Hills Joint Venture and
the San Joaquin Joint Venture and the costs to drill were substantially less
than the East Lost Hills prospects.
-21-
Drilling of exploratory test wells commenced in fiscal 2001 on the Mica,
Sequoia, Parsley and the Merlot Prospects and were completed in fiscal 2002. No
hydrocarbon bearing sands were encountered and the wells were plugged and
abandoned. The Company had approximately a 36% - 44% capital interest before
payout (27% - 33% after payout) in the prospects tested.
During fiscal 2002, the Company also participated in the drilling of an
exploratory well on the Basil Prospect, located in the southern portion of the
Sacramento Basin. This prospect is believed to be a structural fault trap
documented with seismic and well data. This well had to be drilled directional
under a body of water from a land based position. The targets were believed to
be at 4,500 feet but the well had to be drilled 6,000 feet laterally to the
target. The initial test well on the Basil Prospect, the Suisun #25 well,
commenced drilling on July 25, 2001 and was completed on August 28, 2001 at a
depth of 7,829 feet. The Basil Prospect is adjacent to the Suisun producing
field and separated by a fault. The Suisun #25 well was directionally drilled to
a measured depth of 7,829 feet to test the Suisun and Domengine Sands for
natural gas. At 5,550 feet the well encountered the trapping fault with a 440
unit gas spike supporting the sealing ability of the fault. The Suisun Sands
were encountered at 6,545 feet - 132 feet high to prognosis. The first sands
coming in high supports throw on the fault to be greater than expected. Once the
sands were encountered the background gas increased by nearly 200 units (1 unit
= 50 ppm Methane). Throughout the Suisun Sands the background gas remained
between 100 and 200 units with several connection gas readings in excess of 300
units. The Domengine Sands were encountered at a measured depth of 7,120 feet -
162 feet high to prognosis. In the lower Domengine Sands, background gas
readings remained in excess of 500 units. When pulling out of the hole the drill
pipe became stuck at approximately 2,300 feet and after three days of recovery
efforts the pipe, below 3,216 feet remained stuck. It was therefore determined
to temporarily suspend the well.
On August 19, 2002, the operator commenced the sidetrack of the well from the
same surface location using the existing casing down to 2,114 feet. The
side-track parallelled the original hole to the same total depth of 7,829 feet.
Only the Suisun sands were encountered in this well. Gas shows were present
throughout the Suisun Sands from 6,480 feet to 7,170 feet measured depth. Once
again, hole problems were encountered while pulling out to log preventing any
open hole logs. While performing the clean-out trip for casing the drill pipe
became stuck at 6,248 feet. Coiled tubing was run through drill pipe to 7,500
feet and cemented in place. Case hole logs and perforations were accomplished to
test several zones within the shallow objective of the Suisun Sands. Gas was
flowed to the surface at very low pressures. It was determined that there was
insignificant pressure and volume to be economic. The well was plugged and
abandoned September 21, 2002.
Texas Properties
- ----------------
In December 2002, the Company identified an oil and gas development opportunity
and effective as of January 1, 2003, acquired a 3% working interest in certain
oil and gas leases known as the West Ranch Field from an arm's-length private
oil and gas company. To acquire its interest, the Company has agreed to fund
about $70,000 of initial development costs. A cash call was received and paid
from working capital on hand.
The West Ranch Field is located approximately 25 miles southeast of Victoria, in
Jackson County, Texas. The field was discovered in 1938 by Mobil Oil and has
produced in excess of 300 BCF gas and 300 MMBO from hundreds of wells. The
geology of the West Ranch Field consists of typical Gulf Coast sand sequences
with numerous stacked sand pays of both Miocene and Frio age rocks. Over 25 main
producing sands have been identified within the West Ranch Field production
limits with the Greta, Glasscock, 41-A, 98-A and Ward sands being the most
prolific producers. These sands are historically high permeability, high
porosity sands capable of producing high fluid rates.
In the early 1980's the previous operator became active in the region through
acquisition of a few old producing well bores. After reworking geological
structure and net sand maps, the operator was able to extend the southwest
production limits of the field by the drilling of infield wells targeting
structural highs. The current operator purchased the West Ranch Field and took
over its operation on January 1, 2003. The property includes 35 wells with only
a small number currently producing on gas lift. After a detailed engineering
analysis of the property, the operator has developed a plan, which focuses on
the re-establishing of shut-in wells to active status by adding compression,
salt water handling and disposal. The implementation of the re-work of these
shut-in wells will be conducted over the next seven months. It is expected that
any additional capital expenditures which may be required will be funded from
cash flow generated from the reactivation of the shut-in wells.
-22-
OTHER
During the year ended August 31, 2002 the Company also held minor interests in
other oil and gas leaseholds, known as the South Haskell Field (Haskell County,
Texas). On September 1, 2002, the South Haskell Field was sold to an arms-length
party for $85,000.
Oil and Gas Reserves
- --------------------
The following tables set forth information regarding the Company's share of
estimated proven oil and gas reserve quantities, reserve value and discounted
future net revenues. The reserve related information for the years ended August
31, 2002 and 2001 were determined through independent engineering evaluations
completed by Petrotech Engineering Ltd. ("Petrotech"), an independent petroleum
consulting firm. The reserve related information for the year ended August 31,
2000 was determined through independent engineering evaluations completed by Lee
Keeling and Associates, Inc. ("Lee Keeling"), a firm of independent petroleum
consultants. The Company does not have any long- term supply or similar
agreements with foreign governments or authorities in which the Company acts as
producer.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projecting future rates of production and timing of development
expenditures. The following reserve information represents estimates only and
should not be construed as being exact:
Present Value of
Estimated Future
Estimated Net Revenues
Gas Future Net Before Income Taxes
Gas Oil Equivalent Revenues (2) Discounted at 10%
Period (MMCF) (MBO) (MMCFE)(1) (US$000) (US$000)
Year Ended August 31, 2002
- --------------------------
Proved developed reserves 23.9 1.0 30.9 17.0 13.4
Proved undeveloped reserves - - - - -
-------- -------- --------- -------- --------
23.9 1.0 30.9 17.0 13.4
======== ======== ========= ======== ========
Year Ended August 31, 2001
- --------------------------
Proved developed reserves 533.5 27.9 700.9 1,638.4 793.0
Proved undeveloped reserves - - - - -
-------- -------- --------- -------- --------
533.5 27.9 700.9 1,638.4 793.0
======== ======== ========= ======== ========
Year Ended August 31, 2000
- --------------------------
Proved developed reserves 77.6 10.5 140.6 228.4 221.3
Proved undeveloped reserves 1,104.6 8.0 1,152.6 4,533.2 1,922.1
-------- -------- --------- -------- --------
1,182.2 18.5 1,293.2 4,821.6 2,143.4
======== ======== ========= ======== ========
(1) Oil production is converted to MCFE at the rate of six MCF of natural gas
per barrel of oil. Liquids are converted to MCFE at the rate of seven
gallons of liquids per MCF of natural gas. These conversions are based upon
the approximate energy content of natural gas, liquids and oil.
(2) Estimated future net revenue represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated
production and future development costs, using oil and gas prices received
and costs in effect as of the date of the estimates. The amounts shown do
not give effect to non-property related expenses, such as general and
administrative expenses, debt service and future income tax expense or
depreciation, depletion and amortization.
During the year ended August 31, 2002, the Company recorded an impairment charge
of $5.8 million. The impairment charge reflected a number of significant
developments which occurred in fiscal 2002. Production at the ELH #1 well was
significantly curtailed in 2002 as a result of the lack of adequate water
disposal facilities. In addition, management believes that there has been an
inability to demonstrate what production could be, if a water disposal facility
was put in place. As a result, the estimated proven reserves at ELH #1 were
significantly downgraded in 2002 based on current production levels. As a result
of the write-off of the Company's net investment in the East Lost Hills Project
in December 2002, the Company is no longer recognizing these reserves.
-23-
Acreage
- -------
The following table sets forth as of January 31, 2003, the gross and net acres
of developed and undeveloped oil and gas acreage that the Company holds.
Developed Undeveloped
---------------------- ---------------------
Gross Net Gross Net
State Acres Acres Acres Acres
- ----- ------- ------- ------- ------
Texas 1,000 800 500 400
===== ===== ===== =====
Productive Oil and Gas Wells
- ----------------------------
As of January 31, 2003, the Company does not hold any productive oil and gas
wells, operated and non-operated, other that the interest in the ELH #1 well.
Volumes, Prices and Production Costs
- ------------------------------------
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of oil and gas for the periods.
Year Ended August 31,
----------------------------------------------
2002 2001 2000
Net production:
Oil (Barrels) 2,821 2,851 3,069
Gas (MCF) 13,805 48,379 24,399
Average sales price:
Oil (per Barrel) $31.74 $42.90 $36.98
Gas (per MCF) $3.55 $9.16 $3.66
Average production cost (MCF) $4.64 $2.88 $3.61
Principal Offices
- -----------------
The Company's corporate office is located at Suite #1305, 1090 West Georgia
Street, Vancouver, British Columbia, Canada. The corporate office facility is
provided on a month-to-month basis by Chase as part of its agreement with the
Company. See "Item 7. Major Shareholders and Related Party Transactions -
Related Party Transactions."
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
- --------------------------------------------------------------------------------
The following discussion of the results of operations of the Company for the
fiscal years ended August 31, 2002, 2001, and 2000 should be read in conjunction
with the consolidated financial statements of the Company and related notes
included therein.
The Company's consolidated financial statements are prepared in accordance with
Canadian GAAP, the application of which, in the case of the Company, conforms in
all material respects for the periods presented with U.S. GAAP except for the
differences referred to in Note 11 of the consolidated financial statements of
the Company included herein. The noon rate of exchange on January 31, 2003,
reported by the United States Federal Reserve Bank of New York, for the
conversion of Canadian dollars into United States dollars was CDN$0.6542
(US$1.5286 = CDN$1.00). The effects of inflation and price changes have not had
a material impact on the Company's income or net sales revenues during the past
three years.
The Company's consolidated financial statements were prepared on a going concern
basis which assumes that the Company will be able to realize assets and
discharge liabilities in the normal course of business. Accordingly, the
financial statements do not give effect to adjustments, if nay, that would be
-24-
necessary should the Company be unable to continue as a going concern and,
therefore, be required to realize its assets and liquidate its liabilities in
other than the normal course of business and at amounts which may differ from
those shown in the financial statements.
Overview
- --------
The Company, through its subsidiaries, Trimark Inc., Safari and TMK Inc., is
engaged in the business of exploring for and development of oil and gas
prospects in the United States. Substantially all of the Company's oil and gas
exploration activities are conducted jointly with others. Because the Company
owns an undivided interest in each asset and is proportionately liable for its
share of each liability, the consolidated financial information reflects the
Company's proportionate interest in such activities. The Company sells all of
its oil and gas production on a spot basis and does not utilize forward sales
contracts.
Under the full cost method, all costs related to the exploration for and
development of petroleum and natural gas reserves are capitalized on a
country-by-country basis. Costs include lease acquisition costs, geological and
geophysical expenses, overhead directly related to exploration and development
activities and costs of drilling both productive and non-productive wells.
Proceeds from the sale of properties are applied against capitalized costs,
without any gain or loss being recognized, unless such a sale would
significantly alter the rate of depletion and depreciation.
Depletion of exploration and development costs and depreciation of production
equipment is provided using the unit-of- production method based upon estimated
proven petroleum and natural gas reserves. The costs of significant unevaluated
properties are excluded from costs subject to depletion. For depletion and
depreciation purposes, relative volumes of petroleum and natural gas production
and reserves are converted at the energy equivalent conversion rate of six
thousand cubic feet of natural gas to one barrel of crude oil.
In applying the full cost method, the Company performs a ceiling test whereby
the carrying value of petroleum and natural gas properties and production
equipment, net of recorded future income taxes and the accumulated provision for
site restoration and abandonment costs, is compared annually to an estimate of
future net cash flow from the production of proven reserves. Net cash flow is
estimated using year end prices, less estimated future general and
administrative expenses, financing costs and income taxes. Should this
comparison indicate an excess carrying value, the excess is charged against
earnings.
Results of Operations
- ---------------------
Year Ended August 31, 2002 Compared to Year Ended August 31, 2001
- -----------------------------------------------------------------
During the year ended August 31, 2002, the Company recorded a loss of $6,566,673
($2.24 per share) compared to a loss of $5,048,280 ($2.04 per share) for the
2001 fiscal year.
A number of significant transactions have occurred which affect the
comparability of the Company's performance to prior periods. Over the past three
years the Company's focus has been on the exploration and development of its
East Lost Hills Joint Venture and San Joaquin Joint Venture prospects.
Production commenced from the ELH #1 on February 6, 2001, and represented the
only significant producing petroleum and natural gas interest to the Company
during fiscal 2002. Production from the ELH #1 well, during fiscal 2002, has
been significantly curtailed as a result of water disposal problems. As a result
of the production curtailment in ELH #1, petroleum and natural gas revenues
decreased by 76%, from $521,322 during 2001 to $125,749 in 2002. Revenue from
oil sales decreased 30%, from $116,910 in 2001 to $81,512 in 2002. Oil
production decreased 1%, from 2,851 BBLS in 2001 to 2,821 BBLS in 2002 and
average selling prices received decreased 26%, from $42.90/BBL in 2001 to
$31.74/BBL in 2002. Revenue from natural gas sales decreased 89%, from $404,412
in 2001 to $44,237 in 2002. Natural gas production decreased 71%, from 48,379
MCF in 2001 to 13,805 MCF in 2002. In addition, the average selling price of
natural gas during 2002 received by the Company decreased 61%, from $9.16/MCF in
2001 to $3.55/MCF in 2002.
On an MCFE basis, production costs increased 61%, from $2.88/MCFE in 2001 to
$4.64/MCFE in 2002, resulting primarily from the costs associated with disposing
of the water produced at ELH #1 and the impact of the reduced production in
2002. The depreciation and depletion rate increased 3%, from $5.88/MCFE in 2001
to $6.08/MCFE in 2002. In addition, the Company recorded an impairment of
$5,834,318 in 2002 as a result of the ceiling test performed effective August
31, 2002. The impairment charge in 2002 reflects a number of significant
developments which have occurred. Production at the ELH #1 well was
-25-
significantly curtailed during 2002 as a result of the lack of adequate water
disposal facilities. In addition, management believes there has been an
inability to demonstrate what production could be if a water disposal facility
was put in place. As a result, the estimated proven reserves at ELH #1 has been
significantly downgraded based on current production levels. During 2002, the
Company withdrew from participation in the Greater San Joaquin Joint Venture.
The Company had recorded a total of $3,149,431 relating to its costs for the
Greater San Joaquin Joint Venture. The Company also participated in the drilling
of exploratory wells on four prospects namely, Mica, Sequoia, Paisley and
Merlot. Drilling was completed in 2002. These wells were plugged and abandoned.
Costs totalling $1,792,345 were incurred relating to these prospects. The
ceiling test is a cost recovery test and is not intended to result in an
estimate of fair market value.
General and administrative costs decreased by $88,456, from $330,245 in 2001 to
$241,789 in 2002. The decrease was primarily attributed to the effect of
unrealized foreign exchange rate fluctuations on U.S. dollar denominated
balances in 2002 compared to 2001 and the reduced spending in 2002 as a result
of the Company's finances and reduced corporate activities.
During fiscal 2002, the Company recorded $99,517, net of the $169,385 reversal
of accounts payable, in expenditures on its petroleum interests compared to
$4,415,135 in fiscal 2001. Additions recorded for 2002 comprised of $5,473 on
the East Lost Hills Project, and $203,360 for the exploration of the Regional
California Prospects and $60,069 for the Big Springs Project. Overall, the level
of capital expenditures in 2002 decreased as a result of the lack of progress at
East Lost Hills and the resulting negative impact on the Company's ability to
raise financing to continue funding of its share of costs. As at result, in May
2002, the Company concluded an agreement on the ongoing evaluation of the ELH #4
and #9 wells, whereby the funding participants have assumed all of the unpaid
amounts and future costs in completing evaluation of these wells. Unpaid
billings for the ELH #4 and #9 wells at the time of the agreement totalled
$613,288, of which $169,385 was billed and had been recorded as accounts payable
at August 31, 2001. During 2002, the Company reversed the $169,385, with an
offsetting credit to petroleum and natural gas interests.
Year Ended August 31, 2001 Compared to Year Ended August 31, 2000
- -----------------------------------------------------------------
During the year ended August 31, 2001, the Company recorded a loss of $5,048,280
($2.04 per share), an increase in loss of $4,751,431 from the loss of $296,849
($0.14 per share) incurred in 2000. The increase in loss for 2001 was due to a
writedown of $4,790,379 relating to the Company's petroleum and natural gas
interests.
Revenue from oil and gas sales increased by 157% during 2001, from $202,714 in
2000 to $521,322 in 2001. The increase in 2001 was due to a combination of high
commodity prices received during the first half of fiscal 2001 and increased
production. Production commenced from the ELH #1 on February 6, 2001, and
represented the only significant producing property interest to the Company
during fiscal 2001.
Revenue from oil sales increased 3% from $113,481 in 2000 to $116,910 in 2001.
Oil production decreased 7% from 3,069 BBLS in 2000 to 2,851 BBLS in 2001 and
average selling prices received increased 16%, from $36.98 /BBL in 2000 to
$42.90/BBL in 2001, offsetting the decrease in production. Revenue from natural
gas sales increased 353%, from $89,233 in 2000 to $404,412 in 2001. Natural gas
production increased 98%, from 24,399 MCF in 2000 to 48,379 MCF in 2001. In
addition, the average selling price of natural gas during 2001 received by the
Company increased 150%, from $3.66/MCF in 2000 to $9.16/MCF in 2001. The
increase in the average natural gas price was due to the demand for energy,
particularly in California, from late 2000 to early 2001. The Company sells its
oil and gas on a spot basis.
The Company's production expenses increased 20% to $185,037 in 2001 from
$154,529 in 2000 due to increased production. On a per unit basis, production
expenses decreased to $2.88/MCF in 2001 from $3.61/MCF in 2000.
During 2001, the Company recorded depreciation and depletion charges of
$378,039, compared to $78,340 in 2000. The depreciation and depletion rate
increased from $1.83/MCFE in 2000 to $5.88/MCFE in 2001, and reflects the
unsuccessful exploration results in Regional California and other prospects
during 2001. In addition, the Company recorded a non-cash impairment charge of
$4,790,379 in 2001 as a result of the ceiling test performed effective August
31, 2001. The ceiling test is a cost recovery test and is not intended to result
in an estimate of fair market value.
General and administrative costs decreased by $132,184, from $462,429 in 2000 to
$330,245 in 2001. Of the decrease, $113,332 is attributed to the effect of
unrealized foreign exchange rate fluctuations on U.S. dollar denominated
balances.
-26-
The Company recorded a $56,600 foreign exchange loss in 2000, compared to
foreign exchange gain of $56,732 in 2001. Audit and legal fees decreased by
$16,832, from $76,082 in 2000 to $59,250 in 2001.
During 2001, the Company expended $4,415,135 in expenditures on its petroleum
interests, which was primarily comprised of the funding of: i) $852,502 towards
the East Lost Hills and San Joaquin Projects, mainly in the funding of
completion of the ELH #1 well, the drilling of the ELH #2, #3, #4 and #9 wells
and the completion of the gas facility; ii) $3,516,024 for the acquisition,
exploration and drilling costs of the Regional California Prospects; and iii)
$46,609 on other minor prospects.
Liquidity and Capital Resources
- -------------------------------
As at August 31, 2002, the Company had working capital of $77,134 and $775,534
of debt outstanding.
With the disappointing developments at the East Lost Hills and San Joaquin Joint
Ventures and at Regional California, the Company has had to review and reassess
its options and alternatives. Subsequent to August 31, 2002, the operator of the
East Lost Hills Project formally proposed the plugging and abandonment of the
ELH #4 and #9 wells. The remaining funding parties have not yet consented to the
operator's proposal. However, in light of the ongoing difficulties encountered
and uncertainties at East Lost Hills, the Company has determined that it will
record a further non-cash impairment charge, estimated at approximately $1.3
million, during fiscal 2003. See "Item 8. Financial Information - Significant
Changes".
The Company is currently not able to generate sufficient cash flow from its
operations to meet ongoing corporate overhead, capital commitments and discharge
its liabilities as they come due. The future viability of the Company is
dependent upon its ability to generate additional financing to satisfy future
working capital requirements and debt repayment obligations and, in the longer
term, the generation of profit and positive cash flow from business operations.
Unless the Company is able to obtain additional financings, it does not have
sufficient working capital to continue funding the continued exploration and
development of its petroleum interests or discharge its ongoing liabilities as
they come due. There is no assurance that the Company will be able to obtain
sufficient financings.
Research and Development
- ------------------------
During fiscal 2000, 2001 and 2002, the Company incurred $2.8 million, $4.4
million and $100,000, respectively, on the acquisition, exploration and
development of its petroleum interests. During the period from September 1, 2002
to January 31, 2003, the Company had incurred approximately $300,000 in
acquisition costs, and exploration and development expenditures.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
- --------------------------------------------------------------------------------
Directors and Senior Management
- -------------------------------
The names, positions held with the Company and principal occupation during the
five years prior to the date of this report of each director and officer of the
Company as of the date of this report, are as follows:
Name Position with the Company Term of Office (for each office held)
- -------------------------------- ------------------------- -------------------------------------
DONALD W. BUSBY(1) Chairman From April 1999 - present
Bakersfield, California, U.S.A.
President From September 1999 - present
Chief Executive Officer From February 1997 - present
Director From December 1988 - present
Promoter From December 1988 - present
NICK DEMARE(1) Director January 1996 - present
Burnaby, British Columbia, Canada
GEORGE MUSCROFT(1) Director From February 1997 - present
Portland, Ontario, Canada
HARVEY LIM Corporate Secretary From December 1988 - present
Burnaby, British Columbia, Canada
(1) Member of the Audit Committee.
-27-
Each officer's and director's term of office shall expire at the Company's next
annual general meeting. The Company does not have an executive committee or a
compensation committee. The Company's audit committee is responsible for
reviewing the Company's financial statements before they are approved by the
Company's directors.
There are no family relationships between any directors or executive officers of
the Company. To the best of the Company's knowledge, there are no arrangements
or understandings with major shareholders, customers, suppliers, or others,
pursuant to which any of the Company's officers or directors was selected as an
officer or director of the Company.
Set forth below are brief descriptions of recent employment and business
experience of the Company's officers and directors.
Donald W. Busby (Age 65), Chairman,
Chief Executive Officer, Promoter and Director
- --------------------------------------------------
Since June 1988, Mr. Busby has been the president and owner of DWB Management
Ltd. Mr. Busby, through DWB, provides marketing, financial management and
consulting services to various mineral exploration companies, including the
Company. Since August 1990, Mr. Busby has been the owner and president of Boone
Petroleum Inc., a private company owned by Mr. Busby. Mr. Busby currently serves
as an officer and director of other public reporting companies. See "Item 7.
Major Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest."
Nick DeMare (Age 48), Director
- ------------------------------
Mr. DeMare holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. Since May, 1991, Mr. DeMare has been the
President of Chase Management Ltd., a private company which provides a broad
range of administrative, management and financial services to private and public
companies engaged in mineral exploration and development, gold and silver
production, oil and gas exploration and production and venture capital. Mr.
DeMare indirectly owns 100% of Chase. Mr. DeMare currently serves as an officer
and director of other public reporting companies. See "Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest."
George Muscroft (Age 73), Director
- ----------------------------------
Mr. Muscroft holds a Bachelor of Science degree from the University of Toronto
(1953) and has been a professional engineer since 1954. Since 1984, Mr. Muscroft
has been the President of Modnar Enterprises, an independent consulting
engineering firm.
Harvey Lim (Age 44), Corporate Secretary
- ----------------------------------------
Mr. Lim holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. Mr. Lim was employed by Coopers & Lybrand (now
PricewaterhouseCoopers LLC) from 1981 to 1988. From 1988 to 1991, Mr. Lim was
employed as controller with Ingot Management Ltd. Since 1991, Mr. Lim has been
employed by Chase Management Ltd. as controller. Mr. Lim currently serves as an
officer and director of other public reporting companies.
Compensation
- ------------
During the fiscal year ended August 31, 2002, the directors and officers of the
Company, as a group, had received or charged the Company a total of $185,020 for
services rendered by the directors and officers or companies owned by the
individuals.
The Company is required, under applicable securities legislation in Canada, to
disclose to its shareholders details of compensation paid to its directors and
officers. The following fairly reflects all material information regarding
compensation paid by the Company to its directors and officers, which
information has been disclosed to the Company's shareholders in accordance with
applicable Canadian law.
-28-
"Named Executive Officers" means the Chief Executive Officer ("CEO") of the
Company, regardless of the amount of compensation of that individual, and each
of the Company's four most highly compensated executive officers, other than the
CEO, who were serving as executive officers at the end of the most recent fiscal
year and whose total salary and bonus amounted to $100,000 or more. In addition,
disclosure is also required for any individuals whose total salary and bonus
during the most recent fiscal year was $100,000 whether or not they are an
executive officer at the end of the fiscal year.
The Company currently has one Named Executive Officer, Donald W. Busby (the
"Named Executive Officer"). The following table sets forth the compensation
awarded, paid to or earned by the Named Executive Officer during the financial
years ended August 31, 2000, 2001 and 2002:
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------- --------------------------------
Awards Payouts
----------------------- -------
Securities Restricted
Under Shares or All
Other Options/ Restricted Other
Name and Annual SARs Share LTIP Compen-
Principal Salary Bonus Compensation granted Units Payouts sation
Position Year(1) ($) ($) ($) (#)(2) ($) ($) ($)
- ------------------- ------ ------ ----- ------------ ---------- ---------- ------- ---------
Donald W. Busby 2002 Nil Nil Nil Nil/Nil N/A N/A 132,082(3)
Chairman, President, 2001 Nil Nil Nil 56,142/Nil N/A N/A 105,296(3)
CEO and Director 2000 Nil Nil Nil Nil/Nil N/A N/A 60,000(3)
(1) Financial years ended August 31, 2000, 2001 and 2002.
(2) Figures represent options granted during a particular year; see "Aggregate
Option" table for the aggregate number of options outstanding at year end.
(3) Amounts paid to private companies wholly owned by Mr. Busby.
Long Term Incentive Plan Awards
- -------------------------------
Long term incentive plan awards ("LTIP") means "any plan providing compensation
intended to serve as an incentive for performance to occur over a period longer
than one financial year whether performance is measured by reference to
financial performance of the Company or an affiliate, or the price of the
Company's shares but does not include option or stock appreciation rights plans
or plans for compensation through restricted shares or units". The Company has
not granted any LTIP's during the financial year ended August 31, 2002.
Stock Appreciation Rights
- -------------------------
Stock appreciation rights ("SAR's") means a right, granted by an issuer or any
of its subsidiaries as compensation for services rendered or in connection with
office or employment, to receive a payment of cash or an issue or transfer of
securities based wholly or in part on changes in the trading price of the
Company's shares. No SAR's were granted to or exercised by the Named Executive
Officer or directors during the financial year ended August 31, 2002.
Option Grants in Last Fiscal Year
- ---------------------------------
No incentive stock options were granted to the Named Executive Officer during
the past fiscal year ended August 31, 2002.
Repricing of Options in Last Fiscal Year
- ----------------------------------------
The following table sets forth details of all repricings of stock options during
the past fiscal year ended August 31, 2002 in respect to the Named Executive
Officer:
-29-
Length of
Securities Market Price Original
Under of Securities at Exercise Price Option Term
Options/SARs Time of at Time of Remaining at
Repriced or Repricing or Repricing or New Exercise Date of
Date of Amended Amendment Amendment Price Repricing or
Name Repricing (#) ($/Security) ($/Security) ($/Security) Amendment
- --------------- --------- ------------ --------------- ------------- ------------ -------------
Donald W. Busby Jul.15/02 41,000 0.30 1.05(1) 0.40 1 month
Jul.15/02 56,142 0.30 1.05(2) 0.40 6 months
(1) Initially repriced from $7.98 per share to $1.05 per share on December 31,
2001. The market price of the shares at the time of initial repricing was
$0.98 per share.
(2) Initially repriced from $4.20 per share to $1.05 per share on December 31,
2001. The market price of the shares at the time of initial repricing was
$0.98 per share.
Aggregated Option Exercises
in Last Fiscal Year and Fiscal Year-End Option Values
- -----------------------------------------------------
The following table sets forth details of all exercises of stock options during
the financial year ended August 31, 2002 by the Named Executive Officer and the
fiscal year-end value of unexercised options on an aggregated basis:
Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year-End at Fiscal Year-End
Securities Aggregate (#)(3) ($)(3)(4)
Acquired on Value
Exercise Realized Exercisable/ Exercisable/
Name (#)(1) ($)(2) Unexercisable Unexercisable
- --------------- ----------- --------- --------------------- --------------------
Donald W. Busby Nil Nil 56,142/Nil 0(5)/Nil
(1) Number of common shares of the Company acquired on the exercise of stock
options.
(2) Calculated using the closing price of common shares of the Company on the
TSX Venture .
(3) As freestanding SARs have not been granted, the number of shares relate
solely to stock options.
(4) Value of unexercised in-the-money options calculated using the closing
price of common shares of the Company on the TSX Venture on August 31, 2002
of $0.19 per share, less the exercise price of in-the-money stock options.
Pension Plans
- -------------
The Company does not provide retirement benefits for directors or executive
officers.
Termination of Employment, Change in Responsibilities and Employment Contracts
- ------------------------------------------------------------------------------
The Company has no plans or arrangements in respect of remuneration received or
that may be received by the Named Executive Officer in the Company's most
recently completed financial year or current financial year in respect of
compensating such officers in the event of termination of employment (as a
result of resignation, retirement, change of control, etc.) or a change in
responsibilities following a change of control, where the value of such
compensation exceeds $100,000 per executive officer.
Compensation of Directors
- -------------------------
No incentive stock options were granted to current and former directors who are
not Named Executive Officers of the Corporation.
The following table sets forth details of all repricing of stock options during
the financial year ended August 31, 2002 in respect of current and former
directors who are not Named Executive Officers of the Company:
-30-
Length of
Securities Market Price Original
Under of Securities at Exercise Price Option Term
Options/SARs Time of at Time of Remaining at
Repriced or Repricing or Repricing or New Exercise Date of
Date of Amended Amendment Amendment Price Repricing or
Name Repricing (#) ($/Security) ($/Security) ($/Security) Amendment
- --------------- --------- ------------ --------------- -------------- ------------ ------------
Nick DeMare Jul.15/02 21,429(1) 0.30 1.05(2) 0.40 1 month
Jul.15/02 14,286(1) 0.30 1.05(2) 0.40 3 months
Jul.15/02 14,286 0.30 1.05(3) 0.40 6 months
George Muscroft Jul.15/02 3,571 0.30 1.05(2) 0.40 3 months
Jul.15/02 8,571 0.30 1.05(3) 0.40 6 months
Richard Darrow Jul.15/02 14,286 0.30 1.05(3) 0.40 6 months
NOTES:
(1) Granted to Chase Management Ltd., a private company wholly-owned by Mr.
DeMare.
(2) Initially repriced from $7.98 per share to $1.05 per share on December 31,
2001. The market price of the shares at the time of the repricing was $0.98
per share.
(3) Initially repriced from $4.20 per share to $1.05 per share on December 31,
2001. The market price of the shares at the time of the repricing was $0.98
per share.
The following table sets forth details of all exercises of stock options/SARs
during the financial year ended August 31, 2002 by current and former directors
who are not Named Executive Officers of the Company and the financial year-end
value of unexercised options/SARs:
Value of Unexercised
Unexercised In-the-Money Options/
Options/SARs at Fiscal SARs at Fiscal Year-End
Securities Aggregate Year-End ($)(3)(4)
Acquired on Value (#)(3)
Exercise Realized Exercisable/ Exercisable/
Name (#)(1) ($)(2) Unexercisable Unexercisable
- ---------------- ----------- ---------- ----------------------- ------------------------
Nick DeMare Nil Nil 28,572(5)/Nil Nil/Nil
George Muscroft Nil Nil 12,142/Nil Nil/Nil
Richard Darrow Nil Nil 14,286 (6)/Nil Nil/Nil
(1) Number of common shares of the Company acquired on the exercise of stock
options.
(2) Calculated using the closing price of common shares of the Company on the
TSX Venture on the date of the exercise, less the exercise price per share.
(3) As freestanding SARs have not been granted, the numbers relate solely to
stock options.
(4) Value of unexercised in-the-money options calculated using the closing
price of common shares of the Company on the TSX Venture on August 31, 2002
of $0.19 per share, less the exercise price of in-the-money stock options.
(5) Includes 14,286 options granted to Chase Management Ltd. ("Chase"), a
private company wholly owned by Mr. DeMare. (6) Expired on November 7,
2002.
During the most recently completed financial year ended August 31, 2002, current
and former directors received compensation for services provided to the Company
in their capacities as directors and/or consultants and/or experts as follows:
-31-
Compensation Table
- ------------------
Annual All other
Compensation compensation
Name of Director Year(1) - Directors fees - Consulting fees
- ---------------- ------- ---------------- -----------------
Nick DeMare 2002 $Nil $46,080(2)
George Muscroft 2002 $Nil $4,500
Richard Darrow 2002 $Nil $2,358
(1) Financial year ended August 31, 2002.
(2) Paid to Chase for accounting and professional services rendered by Chase
personnel.
Employment Agreements
- ---------------------
The Company has directly entered into management contracts with companies
controlled by Messrs. Busby and DeMare for accounting, professional and
management services provided to the Company. Specifically, the Company has a
management contract with DWB, a private company owned by Mr. Busby, at a rate of
US$7,000 per month and with Chase, a company indirectly owned by Mr. DeMare, at
a rate of $3,000 per month. In addition, the Company may be charged for
additional services performed by DWB and Chase. See "Item 7. Major Shareholders
and Related Party Transactions - Related Party Transactions."
BOARD PRACTICES
Audit Committee
- ---------------
The Company's Audit Committee must be comprised of at least three directors, the
majority of whom are not employees, control persons or members of management of
the Company or any of its associates or affiliates. The board of directors of
the Company, after each annual shareholder' meeting must appoint or re-appoint
an audit committee. As of the date of this annual report, the members of the
audit committee were Mr. Busby, Mr. DeMare and Mr. Muscroft.
The Audit Committee must review the annual financial statements of the Company
before they are approved by the board of directors of the Company. The board of
directors of the Company must review, and if considered appropriate, approve the
annual financial statements of the Company before presentation to the
shareholders of the Company.
Termination of Employment or Change of Control
- ----------------------------------------------
Other than as described in the Summary Compensation Table and above, the Company
has no plans or arrangements in respect of remuneration received or that may be
received by the Named Executive Officer in the Company's most recently completed
financial year or current financial year in view of compensating such officers
in the event of termination of employment (as a result of resignation,
retirement, change of control, etc.) or a change in responsibilities following a
change of control, where the value of such compensation exceeds $100,000 per
executive officer.
Employees
- ---------
During the years ended August 31, 2002, 2001 and 2000, the Company had no
full-time or part-time employees in the area of management and administration.
Corporate accounting, management and administration are provided, in part, by
Chase, a company owned by Mr. Nick DeMare, a director of the Company. In the
event the Company needs to employ personnel, it will need to recruit qualified
personnel to staff its operations. The Company believes that such personnel
currently are available at reasonable salaries and wages in the geographic areas
in which the Company and its subsidiaries operate. There can be no assurance,
however, that such personnel will be available in the future. Exploration
activities are conducted by consultants, laborers and technicians hired for the
duration of the exploration program.
-32-
Share Ownership
The following table sets forth certain information regarding ownership of the
Company's shares by the Company's officers and directors as of January 31, 2003.
Shares and Rights Beneficially
Title of Class Name and Address of Owner Owned or Controlled (1) Percent of Class (1)
- -------------- ------------------------- ------------------------------ --------------------
Common Stock Donald W. Busby 402,718(2)(3) 13.04%
Bakersfield, California
Common Stock Nick DeMare 93,984(4)(5) 03.17%
Burnaby, British Columbia
Common Stock George Muscroft 8,571(6) 00.29%
Portland, Ontario
Common Stock Harvey Lim 4,429(7) 00.15%
Burnaby, British Columbia
(1) Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants, these additional shares are deemed to be outstanding for the
purpose of computing the percentage of common stock owned by such persons,
but are not deemed to be outstanding for the purpose of computing the
percentage owned by any other person. Based on 2,926,859 shares of common
stock outstanding as of January 31, 2003.
(2) Includes 144,005 shares of common stock held by Boone Petroleum Inc.
("Boone"), a private company wholly-owned by Mr. Busby and 96,285 shares
held by the Donald W. Busby 1999 Irrevocable Trust ("Busby Trust").
(3) Includes warrants held by Boone to acquire an additional 106,286 common
shares. and options held by Mr. Busby to acquire 56,142 common shares.
(4) Includes 857 common shares held directly by Mr. DeMare, 20,404 shares held
by DNG Capital Corp. ("DNG"), a private company wholly-owned by Mr. DeMare,
and 37,294 shares held by 888 Capital Corp. ("888"). 888 is a private
company 50% owned by Mr. DeMare.
(5) Includes warrants held by DNG to acquire an additional 8,286 common shares,
warrants held by 888 to acquire 12,857 common shares and options to acquire
an additional 14,286 shares.
(6) Consists of options to acquire 8,571common shares. (7) Consists of options
to acquire 4,429 common shares.
Stock Options
- -------------
Stock options to purchase securities from the Company are currently granted to
directors, employees and consultants of the Company on terms and conditions
acceptable to the regulatory authorities in Canada, notably the TSX Venture.
Stock options must be approved by the Company's shareholders at an Annual
General Meeting. The Company has no formal written stock option plan.
Under the TSX Venture stock option program, stock options for up to 10% of the
number of issued and outstanding shares of common stock may be granted from time
to time, provided that stock options in favor of any one individual may not
exceed 5% of the issued and outstanding shares of common stock. No stock option
granted under the stock option program is transferable by the optionee other
than by will or the laws of descent and distribution, and each stock option is
exercisable during the lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the stock option program
must be at least equal to the fair market value of such shares of common stock
on the date of grant less a discount allowed by the TSX Venture, and the maximum
term of each stock option may not exceed five years.
Stock options to purchase securities from the Company are granted to directors
and employees of the Company on terms and conditions acceptable to the
regulatory authorities in Canada, notably the TSX Venture. Stock options must be
approved by the Company's shareholders at an Annual General Meeting. The Company
has no formal written stock option plan.
-33-
As of January 31, 2003, the Company had granted an aggregate of 92,857 incentive
stock options to purchase shares of the Company's common stock to the following
persons:
Nature No. of Exercise
Optionee of Option Options Price/Share Expiry Date
- ---------------- --------- ------- ----------- -----------
Donald W. Busby Director 56,142 $0.40 Jan. 25/04
George Muscroft Director 8,571 $0.40 Jan. 25/04
Nick DeMare Director 14,286 $0.40 Jan. 25/04
Betty L. Moody Employee 2,143 $0.40 Jan. 25/04
Harvey Lim Officer 4,286 $0.40 Jan. 25/04
Arabella Smith Employee 2,143 $0.40 Jan. 25/04
Rosanna Wong Employee 2,143 $0.40 Jan. 25/04
Linda Liu Employee 2,143 $0.40 Jan. 25/04
Jacqueline Hibbs Employee 1,000 $0.40 Jan. 25/04
-------
TOTAL 92,857
=======
All of these options are non-transferable and currently terminate on the earlier
of the expiry date or the 30th day following the day on which the director,
officer or employee, as the case may be, ceases to be either a director, officer
or employee of the Company.
As of January 31, 2003, the directors and officers of the Company, as a group (4
persons), held options to purchase 83,285 shares of the Company's common stock.
In order to comply with recent amendments to the TSX Venture rules, the Company
proposes to adopt a stock option plan (the "Plan") at the next annual general
meeting of its shareholders. The purpose of the Plan will be to provide the
Company with a share related mechanism to enable the Company to attract, retain
and motivate qualified directors, officers, employees and other service
providers, to reward directors, officers, employees and other service providers
for their contribution toward the long term goals of the Company and to enable
and encourage such individuals to acquire shares of the Company as long term
investments.
The Plan will provide that it is solely within the discretion of the Board of
Directors (the "Board") to determine who should receive options and in what
amounts. The Board will be able to issue a majority of the options to insiders
of the Company. However, the Plan will provide that in no case will the Plan or
any existing share compensation arrangement of the Company result, at any time,
in the issuance to any option holder, within a one year period, of a number of
shares exceeding 5% of the Company's issued and outstanding share capital.
The following information is a brief description of the proposed Plan:
1. The maximum number of common shares that may be issued upon exercise of
stock options granted under the Plan will be that number of shares which is
10% of the issued and outstanding shares of the Company. As at January 31,
2003, the Company had 92,857 options outstanding which were granted prior
to the adoption of the Plan. These options form a part of the foregoing
10%. The exercise price of the stock options, as determined by the Board in
its sole discretion, shall not be less than the closing price of the
Company's shares traded through the facilities of the TSX Venture on the
date prior to the date of grant, less allowable discounts, in accordance
with the policies of the TSX Venture or, if the shares are no longer listed
for trading on the TSX Venture, then such other exchange or quotation
system on which the shares are listed and quoted for trading.
2. The Board will not grant options to any one person which will, when
exercised, exceed 5% of the issued and outstanding shares of the Company.
3. Upon expiry of the option, or in the event an option is otherwise
terminated for any reason, without having been exercised in full, the
number of shares in respect of the expired or terminated option shall again
be available for the purposes of the Plan. All options granted under the
Plan may not have an expiry date exceeding ten years from the date on which
the Board grants and announces the granting of the option.
-34-
4. If the option holder ceases to be a director of the Company or ceases to be
employed by the Company (other than by reason of death), as the case may
be, then the option granted shall expire on the 90th day following the date
that the option holder ceases to be a director or ceases to be employed by
the Company, subject to the terms and conditions set out in the Plan.
The Plan may be administered by the Company's secretary or such other senior
officer or employee as may be designated by the Board from time to time. Upon
the approval of the Plan by the Company's shareholders, shareholder approval
will not be required or sought on a case-by-case basis for the purpose of the
granting of options to and the exercise of options by employees of the Company
regularly employed on a full-time or part-time basis, directors of the Company
and persons who perform services for the Company on an ongoing basis or who have
provided, or are expected to provide, services of value to the Company.
Warrants
- --------
As of January 31, 2003, there were non-transferable common share purchase
warrants exercisable for the purchase of 397,428 common shares, which expire at
various times until August 15, 2003 and may be exercised at various prices
ranging from $3.64 per share to $4.34 per share, as follows:
Common Shares Issuable Exercise
On Exercise of Warrants Price/Share Expiry
----------------------- ----------- ----------
242,857 $3.64 Mar. 06/03
154,571 $4.34 Aug. 15/03
-------
397,428
=======
As of January 31, 2003, the directors and officers of the Company, as a group (4
persons), held warrants to purchase 127,428 shares of the Company's common
stock.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
- --------------------------------------------------------------------------------
Principal Holders of Voting Securities
- --------------------------------------
To the best of the Company's knowledge, it is not directly or indirectly owned
or controlled by another corporation or by any foreign government. The following
table sets forth certain information regarding ownership of the Company's shares
by all persons who own greater than five percent (5%) of the Company's
outstanding shares, as of January 31, 2003.
Shares and Rights Beneficially
Title of Class Name and Address of Owner Owned or Controlled (1) Percent of Class (1)
- -------------- ---------------------------- ------------------------------- --------------------
Common Stock Hilton Petroleum Ltd. 504,285(2) 15.77%
Vancouver, British Columbia
Common Stock Donald W. Busby 402,718(3)(4) 13.04%
Bakersfield, California
(1) Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants, these additional shares are deemed to be outstanding for the
purpose of computing the percentage of common stock owned by such persons,
but are not deemed to be outstanding for the purpose of computing the
percentage owned by any other person. Based on 2,926,859 shares of common
stock outstanding as of January 31,2003.
(2) Includes 234,285 shares of common stock and warrants to acquire an
additional 270,000 common shares.
(3) Includes 144,005 shares of common stock held by Boone and 96,285 shares
held by the Busby Trust.
(4) Includes warrants held by Boone to acquire an additional 106,286 common
shares and options held by Mr. Busby to acquire 56,142 common shares.
None of the Company's principal shareholders have different voting rights than
any of the Company's other common shareholders.
-35-
Changes in Shareholdings
- ------------------------
There have been no significant changes to the above listed persons' ownership
during the past three fiscal years.
Change of Control
- -----------------
As of the date of this annual report, there are no arrangements known to the
Company which may at a subsequent date result in a change of control of the
Company.
United States Shareholders
- --------------------------
As of January 31, 2003, there were approximately 6 registered holders of the
Company's common shares in the United States, with combined holdings of 490,733
shares, representing 16.8% of the issued shares of the Company.
Control by Foreign Government or Other Persons
- ----------------------------------------------
To the best of the Company's knowledge, the Company is not directly or
indirectly owned or controlled by another corporation, any foreign government,
or any other natural or legal person.
Related Party Transactions
- --------------------------
Other than as disclosed below, for the year ended August 31, 2002 and the period
from September 1, 2002 to January 31, 2003, the Company has not entered into any
transactions or loans between the Company and any (a) enterprises that directly
or indirectly through one or more intermediaries, control or are controlled by,
or are under common control with, the Company; (b) associates; (c) individuals
owning, directly or indirectly, an interest in the voting power of the Company
that gives them significant influence over the Company, and close members of any
such individuals' family; (d) key management personnel and close members of such
individuals' families; or (e) enterprises in which a substantial interest in the
voting power is owned, directly or indirectly by any person described in (c) or
(d) or over which such a person is able to exercise significant influence.
1. The Company has retained DWB, a private company wholly-owned by Donald
Busby, the Chairman, President, Chief Executive Officer and a director of
the Company, to provide marketing, consulting and management services. See
"Item 6. Directors, Senior Management and Employees - Compensation." In
consideration therefor, DWB is currently paid a monthly fee of US$7,000 and
out-of-pocket disbursements incurred by DWB on behalf of the Company.
Management believes the arrangement with DWB is fair to the Company and
similar to terms which could be obtained from unrelated third parties.
During the year ended August 31, 2002, and the period from September 1,
2002 to January 31, 2003, the Company paid or was charged by DWB $132,082
and $44,275, respectively.
2. The Company has retained Chase, a company wholly-owned by Mr. Nick DeMare,
a director of the Company, to provide office premises, administrative,
accounting and management services. In consideration therefor, Chase is
paid a monthly fee of $3,000 and out-of-pocket disbursements incurred by
Chase on behalf of the Company. In addition, Chase may also provide the
Company additional services which are billed at rates which Chase charges
to unrelated third parties. Management believes the arrangement with Chase
is fair to the Company and similar to terms which could be obtained from
unrelated third parties. During the year ended August 31, 2002 and the
period from September 1, 2002 to January 31, 2003, the Company paid or was
charged by Chase $46,080 and $17,400 respectively.
See also "Item 6. Directors, Senior Management and Employees - Compensation."
Indebtedness of Directors, Officers, Promoters and Other Management
- -------------------------------------------------------------------
During the fiscal year ended August 31, 2000, the Company provided a relocation
loan of US$125,000 to Mr. Busby to assist him in relocating to Bakersfield,
California from Conifer, Colorado. The loan originally bore interest at 5% per
annum, compounded monthly, and was to mature on March 27, 2002. During the year
ended August 31, 2002, the Company agreed to extend the term of the loan to
-36-
January 24, 2004. In addition the loan now bears interest at 10% per annum,
payable quarterly. During the year ended August 31, 2002, interest income of
$8,831 and principal repayment of $78,620 was received. Subsequent to August 31,
2002, the loan was repaid in full, along with $2,242 interest.
Other than as described above, none of the directors, officers, promoters or
other members of management or their associates or affiliates of the Company was
indebted to the Company during the fiscal year ended August 31, 2002 and the
period from September 1, 2002 to January 31, 2003.
Conflicts of Interest
- ---------------------
The table below shows that certain directors of the Company are also directors,
officers or shareholders of other companies which are engaged in the business of
acquiring, developing and exploiting natural resource properties. Such
associations may give rise to conflicts of interest from time-to-time. The
directors of the Company are required by law to act honestly and in good faith
with a view to the best interest of the Company and to disclose any interest
which they may have in any project or opportunity of the Company. However, each
director has a similar obligation to other companies for which such director
serves as an officer or director. The Company has no specific internal policy
governing conflicts of interest. As of the date of this report, no conflicts of
interest have arisen, except as described below and above. Where conflicts of
interests arose, the directors of the Company disclosed their interests and
abstained from voting on the transaction.
The following table identifies the name of each director of the Company and any
company, which is a reporting issuer in Canada, and for which such director
currently serves as an officer or director:
PRINCIPAL REPORTING COMPANY CAPACITY PERIOD
- ---------------- ------------------------------ ---------------------- -----------------------
Donald W. Busby Aladdin Resources Corp. President and Director January 2001 - present
Hilton Petroleum Ltd. Director September 1995 - present
Chairman April 1999 - present
Nick DeMare Aguila American Resources Ltd. Director January 2003 - present
Aladdin Resources Corp. Director January 2001 - present
Andean American Mining Corp. Director August 2002 - present
Secretary December 1995 - present
California Exploration Ltd. Director October 2002 - present
GGL Diamond Corp. Director May 1989 - present
Golden Peaks Resources Ltd. Director January 1992 - present
Hilton Petroleum Ltd. Director October 1989 - present
Hydromet Technologies Limited Director September 2000 - present
Kookaburra Resources Ltd. Director June 1988 - present
Tinka Resources Limited President and Director October 2002 - present
Tumi Resources Limited Director January 2000 - present
George Muscroft Fenway Resources Ltd. Director September 1991 - present
Harvey Lim Aladdin Resources Corp. Secretary November 2001 - present
Hilton Petroleum Ltd. Secretary June 1997 - present
Tinka Resources Limited Secretary and Director December 2002 - present
Tumi Resources Limited Director January 2000 - present
There are no known existing or potential conflicts of interest among the
Company, promoters, directors, officers, principal holders of securities and
persons providing professional services to the Company which could reasonably be
expected to affect an investor's investment decision except as described in this
section.
The Company does not have any agreements with its officers or directors,
including any officers or directors with a conflict of interest, with respect to
the amount of time they must spend on the Company's business.
-37-
ITEM 8. FINANCIAL INFORMATION.
- --------------------------------------------------------------------------------
Description Page
- ----------- -----------
Audited Consolidated Financial Statements for the Years
Ended August 31, 2002, 2001 and 2000 F-1 to F-21
Significant Changes
- -------------------
During the three month period ended November 30, 2002, the Company incurred
petroleum expenditures of $232,502 on the unsuccessful drilling of a side-track
well on the Basil Project. These costs have been written off as an impairment
charge. During this period the Company did not participate in the funding of any
exploration activities or holding costs relating to the East Lost Hills Project.
On December 2, 2002, the Company received confirmation from the operator of the
East Lost Hills Project that it had formally proposed the plugging and
abandonment of the ELH #4 and #9 wells. The remaining funding parties have not
yet consented to the operator's proposal.
In light of the results, uncertainties of any further activities at East Lost
Hills and the uncertainty of raising funds to participate in any further
exploration or development in the East Lost Hills Project, the Board of
Directors of the Company has determined that the Company will no longer provide
further funding to Trimark Resources Inc. ("Trimark Inc."), a wholly-owned
subsidiary which holds the Company's East Lost Hills petroleum interests.
Accordingly, during the three month period ended November 30, 2002, the Company
recorded a further impairment charge of $1,022,667, representing the Company's
net investment in Trimark Inc. Effective November 30, 2002, the Company ceased
to record the activities of Trimark Inc.
Dividend Policy
- ---------------
The Company has not paid any dividends on its common shares and does not intend
to pay dividends on its common shares in the immediate future. Any decision to
pay dividends on its common shares in the future will be made by the board of
directors on the Company on the basis of earnings, financial requirements and
other such conditions that may exist at that time.
Legal Proceedings
- -----------------
As of the date of this annual report, there are no legal proceedings.
ITEM 9. THE OFFER AND LISTING.
- --------------------------------------------------------------------------------
Price History
- -------------
The TSX Venture classifies listed companies into two different tiers based on
standards, which include historical financial performance, stage of development,
and financial resources of the listed company. Tier I is the TSX Venture's
premier tier and is reserved for the TSX Venture's most advanced issuers with
the most significant financial resources. Tier I issuers benefit from decreased
filing requirements and improved service standards. The majority of the
companies listed on the TSX Venture are Tier II companies. The Company trades on
theTSX Venture under the symbol "TRK" and is classified as a Tier II company.
There have been no trading suspensions imposed by the TSX Venture or any other
regulatory authorities in the past three years.
The following table sets forth the market price ranges and the aggregate volume
of trading of the common shares of the Company on the VSE and, subsequently the
CDNX, and subsequently the TSX Venture for the periods indicated:
-38-
TSX VENTURE STOCK TRADING ACTIVITY
Sales Price
--------------------
Year Ended Volume High Low
- --------------- --------- --------------------
August 31, 2002 934,326 $1.89 $0.12
August 31, 2001 2,925,311 $7.49 $1.40
August 31, 2000 5,257,977 $20.37 $2.59
August 31, 1999 1,964,840 $12.25 $1.47
August 31, 1998 120,720 $11.90 $1.75
Sales Price
--------------------
Quarter Ended Volume High Low
- ----------------- --------- --------------------
November 30, 2002 155,872 $0.18 $0.06
August 31, 2002 119,963 $0.40 $0.19
May 31, 2002 188,064 $0.53 $0.12
February 28, 2002 262,567 $1.40 $0.35
November 30, 2001 363,732 $1.89 $0.84
August 31, 2001 284,247 $4.27 $1.40
May 31, 2001 1,231,810 $7.49 $3.72
February 28, 2001 1,152,172 $5.74 $2.45
Sales Price
--------------------
Month Ended Volume High Low
- ------------------ --------- --------------------
January 31, 2003 68,532 $0.15 $0.10
December 31, 2002 47,823 $0.12 $0.06
November 30, 2002 50,079 $0.10 $0.06
October 31, 2002 29,995 $0.15 $0.08
September 30, 2002 75,798 $0.18 $0.15
August 31, 2002 23,288 $0.29 $0.19
On August 7, 2000, the Company's common shares were approved for quotation on
the Over-the-Counter Bulletin Board ("OTC") system operated by the National
Association of Securities Dealers. The Company currently trades on the OTC under
the symbol "TRKEF".
OTC-BB TRADING ACTIVITY
Sales Price (US $)
--------------------
Year Ended Volume High Low
- ----------------- --------- --------------------
August 31, 2002 309,935 $1.19 $0.06
August 31, 2001 504,571 $4.27 $1.12
Sales Price (US $)
--------------------
Quarter Ended Volume High Low
- ----------------- --------- --------------------
November 30, 2002 24,000 $0.09 $0.05
August 31, 2002 22,900 $0.22 $0.09
May 31, 2002 60,797 $0.37 $0.06
February 28, 2002 128,524 $0.77 $0.26
November 30, 2001 97,714 $1.19 $0.42
August 31, 2001 214,229 $2.80 $1.12
May 31, 2001 124,100 $4.27 $2.59
February 28, 2001 132,957 $3.71 $1.61
-39-
Sales Price (US $)
--------------------
Month Ended Volume High Low
- ----------------- --------- --------------------
January 31, 2003 - (1) - (1) - (1)
December 31, 2002 17,100 $0.05 $0.01
November 30, 2002 9,100 $0.07 $0.05
October 31, 2002 14,900 $0.09 $0.07
September 30, 2002 - (1) - (1) - (1)
August 31, 2002 2,300 $0.09 $0.09
(1) No common shares traded during the period.
ITEM 10. ADDITIONAL INFORMATION.
- --------------------------------------------------------------------------------
Articles of Continuance and Bylaws
- ----------------------------------
The Company was incorporated under the laws of British Columbia, Canada on June
16, 1983 by registration of its Memorandum and Articles with the B.C. Registrar
of Companies (the "BC Registrar") under the incorporation number 372193. On
December 14, 1993, the Company was continued to the Yukon Territory, Canada by
the registration of its Articles of Continuance with the Yukon Registrar of
Companys under the access number 27053 (the "Yukon Registrar").
The following is a summary of all material provisions of the Company's Articles
of Continuance and Bylaws and certain provisions of the Yukon Business
Corporations Act (the "Yukon Act"), applicable to the Company:
A. Director's power to vote on a proposal, arrangement or contract in which
the director is materially interested.
A director or officer who is a party to, or who is a director or officer of
or has a material interest in any person who is a party to, a material
contract or proposed material contract must disclose the nature and extent
of his interest in accordance with the Yukon Act. A director who holds such
material interest may not vote on the transaction but will be counted in
the quorum present at the meeting at which such vote is taken. A director
that is a party to a material contract or proposed material contract cannot
vote on any resolution to approve the contract unless the contract is:
1. an arrangement by way of security for money lent to or obligations
undertaken by a director, or by a body corporate in which a director
has an interest, for the benefit of the corporation or an affiliate;
2. a contract relating primarily to a director's remuneration as a
director, officer, employee or agent of the corporation or an
affiliate;
3. a contract for purchasing and maintaining insurance to cover directors
against liability incurred by them as directors as specified under the
Yukon Act;
4. a contract for the indemnification of a director by the corporation as
specified under the Yukon Act; or
5. a contract with an affiliate.
B. Director's power, in the absence of an independent quorum, to vote
compensation to themselves or any members of their body.
The compensation of the directors is governed by the Company's By-laws
which allow for the determination of remuneration to be paid by the Board
of Directors.
-40-
C. Borrowing powers exercisable by the directors.
The directors may, on behalf of the Company:
1. borrow money on the credit of the corporation;
2. issue, reissue, sell or pledge debt obligations of the corporation;
3. give a guarantee on behalf of the corporation to secure performance of
an obligation of any person, subject to certain conditions detailed in
section 46 of the Yukon Act; or
4. mortgage, hypothecate, pledge or otherwise create a security interest
in all or any property of the corporation, owned or subsequently
acquired to secure any obligation of the corporation.
D. Retirement and non-retirement of directors under an age limit requirement.
There are no such provisions applicable to the Company under its Articles
of Continuance, By-laws or the Yukon Act.
E. Number of shares required for a director's qualification
A director of the Company is not be required to hold a share in the capital
of the Company as qualification of his office.
Description of Common Shares
- ----------------------------
The authorized capital of the Company consists of an unlimited number of common
shares without par value. A complete description is contained in the Company's
Articles of Continuance.
Of the Company's unlimited share capital, a total of 2,926,859 common shares
were issued and outstanding as of January 31, 2003. All of the common shares of
the Company rank equally as to voting rights, participation in a distribution of
the assets of the Company on a liquidation, dissolution or winding-up of the
Company and the entitlement of dividends. The holders of the common shares are
entitled to receive notice of all shareholder meetings and to attend and vote at
such meetings. Each common share carries with it the right to one vote. The
common shares do not have preemptive or conversion rights. In addition, there
are no sinking fund or redemption provisions applicable to the common shares.
The declaration of dividends on the common shares of the Company is within the
discretion of the Company's Board of Directors. The Company has not paid any
dividends on its common shares and has no policy with respect to the payment of
dividends.
The Company's issued and outstanding common shares are not subject to further
capital calls by the Company and there are no provisions in the Company's
Articles of Continuance or Bylaws or the Yukon Act discriminating against any
existing or prospective holder of the Company's common shares as a result of
such shareholder owning a substantial number of shares.
Neither the Articles of Continuance nor the Bylaws of the Company have any
limitations on non-resident or foreign ownership of the Company's common shares.
The Yukon Act provides that the rights and provisions attached to any class of
shares may not be amended unless consented to by a separate resolution passed by
a majority of not less than 2/3 of the votes cast, in person or by proxy, by
holders of shares of that class.
-41-
Shareholder Meetings
- --------------------
The Company's first annual general meeting must take place within eighteen
months of the date of its incorporation and thereafter an annual general meeting
will be held not later than fifteen months from its last meeting of
shareholders, at such time and place as may be determined by the directors.
A notice of record date advising of the Company's annual general meeting and the
date for which the determination of shareholders is to be fixed must be issued 7
days in advance of the record date. The notice of meeting, information circular,
financial statements and proxy are to be mailed to the shareholders not less
than 25 days prior to the meeting date. A quorum for the transaction of business
at a general meeting is two shareholders present in person or represented by
proxy representing a minimum of 5% of the issued voting shares in the Company.
Only members who are registered holders of the Company's shares at the close of
business on the record date (a date which is not more than 50 days, nor less
than 35 days prior to the date of the meeting) who either attend the meeting or
who have completed and delivered a form of proxy in the manner and subject to
the provisions described above shall be entitled to vote or to have their shares
voted at the meeting.
On a show of hands, every person who is present and entitled to vote shall have
one vote. Whenever a vote by show of hands shall have been taken upon a
question, unless a ballot thereon is so required or demanded, a declaration by
the Chairman of the meeting that the vote upon the question has been carried or
carried by a particular majority or not carried, an entry to that effect in the
minutes of the meeting shall be conclusive evidence of the fact without proof of
the number or proportion of the votes recorded in favour of or against any
resolution or other proceeding in respect of the said question, and the result
of the vote so taken shall be the decision of the members upon the said
question.
Material Contract
- -----------------
1. Agreement between Berkley Petroleum Inc., Hilton Petroleum Inc., Trimark
Resources Inc., STB Energy Inc. and KOB Energy Inc., dated June 10, 2002.
See "Item 4. Information on the Company - Business Overview - Principal Oil
and Gas Properties - Material Properties - East Lost Hills Joint Venture
and San Joaquin Joint Venture, California".
Exchange Controls
- -----------------
There are no governmental laws, decrees, or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance of
interest, dividends, or other payments to non-resident holders on the Company's
Common Stock. Any remittances of dividends to United States residents are,
however, subject to a 15% withholding tax (10% if the shareholder is a
corporation owning at least 10% of the outstanding Common Stock of the Company)
pursuant to Article X of the reciprocal tax treaty between Canada and the United
States. See "Item 10. Additional Information-Taxation."
Except as provided in the Investment Canada Act (the "Act"), there are no
limitations specific to the rights of non- Canadians to hold or vote the common
stock of the Company under the laws of Canada or in the charter documents of the
Company.
Management of the Company considers that the following general summary fairly
describes those material provisions of the Act pertinent to an investment by an
American investor in the Company.
The Act requires a non-Canadian making an investment which would result in the
acquisition of control of a Canadian business, the gross value of the assets of
which exceeds certain threshold levels or the business activity of which is
related to Canada's cultural heritage or national identity, to either notify, or
file an application for review with, Investment Canada, the federal agency
created by the Investment Canada Act.
The notification procedure involves a brief statement of information about the
investment of a prescribed form which is required to be filed with Investment
Canada by the investor at any time up to 30 days following implementation of the
investment. It is intended that investments requiring only notification will
proceed without government intervention unless the investment is in a specific
type of business activity related to Canada's cultural heritage and national
identity.
-42-
If an investment is reviewable under the Act, an application for review in the
form prescribed is normally required to be filed with Investment Canada prior to
the investment taking place and the investment may not be implemented until the
review has been completed and the Minister responsible for Investment Canada is
satisfied that the investment is likely to be of net benefit to Canada. If the
Minister is not satisfied that the investment is likely to be of net benefit to
Canada, the non-Canadian must not implement the investment or, if the investment
has been implemented, may be required to divest himself of control of the
business that is the subject of the investment.
The following investments by non-Canadians are subject to notification under the
Act:
(1) an investment to establish a new Canadian business; and
(2) an investment to acquire control of a Canadian business that is not
reviewable pursuant to the Act.
The following investments by a non-Canadian are subject to review under the Act:
(1) direct acquisitions of control of Canadian businesses with assets of $5
million or more unless the acquisition is being made by an American
investor;
(2) direct acquisitions of control of Canadian businesses with assets of
$152,000,000 or more by an American investor;
(3) indirect acquisitions of control of Canadian businesses with assets of $5
million or more if such assets represent more than 50% of the total value
of the assets of the entities, the control of which is being acquired,
unless the acquisition is being made by an American investor;
(4) indirect acquisitions of control of Canadian businesses with assets of
$152,000,000 or more by an American investor if such assets represent more
than 50% of the total value of the assets of the entities, the control of
which is being acquired;
(5) indirect acquisitions of control of Canadian businesses with assets of $50
million or more even if such assets represent less than 50% of the total
value of the assets of the entities, the control of which is being
acquired, unless the acquisition is being made by an American investor in
which case there is no review; and
(6) an investment subject to notification that would not otherwise be
reviewable if the Canadian business engages in the activity of publication,
distribution or sale of books, magazines, periodicals, newspapers, audio or
video music recordings, or music in print or machine-readable form.
Generally speaking, an acquisition is direct if it involves the acquisition of
control of the Canadian business or of its Canadian parent or grandparent and an
acquisition is indirect if it involves the acquisition of control of a
non-Canadian parent or grandparent of an entity carrying on the Canadian
business. Control may be acquired through the acquisition of actual or de jure
voting control of a Canadian corporation or through the acquisition of
substantially all of the assets of the Canadian business. No change of voting
control will be deemed to have occurred if less than one-third of the voting
control of a Canadian corporation is acquired by an investor.
An American, as defined in the Act includes an individual who is an American
national or a lawful, permanent resident of the United States, a government or
government agency of the United States, an American-controlled corporation,
limited partnership, trust or joint venture and a corporation, limited
partnership, trust or joint venture that is neither American-controlled or
Canadian-controlled of which two-thirds of its board of directors, general
partners or trustees, as the case may be, are any combination of Canadians and
Americans.
The higher thresholds for Americans do not apply if the Canadian business
engages in activities in certain sectors such as oil, natural gas, uranium,
financial services (except insurance), transportation services or media
activities.
The Act specifically exempts certain transactions from either notification or
review. Included among the category of transactions is the acquisition of voting
shares or other voting interests by any person in the ordinary course of that
person's business as a trader or dealer in securities. Given the nature of the
-43-
Company's business and the size of its operations, management does not believe
the Investment Canada Act would apply to an investment in the Company's shares
by a U.S. investor.
TAXATION
Material Canadian Federal Income Tax Consequences
- -------------------------------------------------
Management of the Company considers that the following discussion fairly
describes the material Canadian federal income tax consequences applicable to a
holder of Common Stock of the Company who is a resident of the United States and
who is not a resident of Canada and who does not use or hold, and is not deemed
to use or hold, his shares of Common Stock of the Company in connection with
carrying on a business in Canada (a "non-resident shareholder").
This summary is based upon the current provisions of the Income Tax Act (Canada)
(the "ITA"), the regulations thereunder (the "Regulations"), the current
publicly announced administrative and assessing policies of Revenue Canada,
Taxation and all specific proposals (the "Tax Proposals") to amend the ITA and
Regulations announced by the Minister of Finance (Canada) prior to the date
hereof. This description is not exhaustive of all possible Canadian federal
income tax consequences and, except for the Tax Proposals, does not take into
account or anticipate any changes in law, whether by legislative, governmental
or judicial action.
Dividends
- ---------
Dividends paid on the common stock of the Company to a non-resident will be
subject to withholding tax. The Canada- U.S. Income Tax Convention (1980)
provides that the normal 25% withholding tax rate is reduced to 15% on dividends
paid on shares of a corporation resident in Canada (such as the Company) to
residents of the United States, and also provides for a further reduction of
this rate to 5% where the beneficial owner of the dividends is a corporation
which is a resident of the United States which owns at least 10% of the voting
shares of the corporation paying the dividend.
Capital Gains
- -------------
In general, a non-resident of Canada is not subject to tax under the ITA with
respect to a capital gain realized upon the disposition of a share of a
corporation resident in Canada that is listed on a prescribed stock exchange.
For purposes of the ITA, the Company is listed on a prescribed stock exchange.
Non-residents of Canada who dispose of shares of the Company will be subject to
income tax in Canada with respect to capital gains if:
(a) the non-resident holder;
(b) persons with whom the non-resident holder did not deal at arm's
length; or
(c) the non-resident holder and persons with whom the non-resident holder
did not deal with at arm's length,
owned not less than 25% of the issued shares of any class or series of the
Company at any time during the five-year period preceding the disposition. In
the case of a non-resident holder to whom shares of the Company represent
taxable Canadian property and who is resident in the United States, no Canadian
taxes will be payable on a capital gain realized on such shares by reason of the
Canada-U.S. Income Tax Convention (1980) (the "Treaty") unless the value of such
shares is derived principally from real property situated in Canada. However, in
such a case, certain transitional relief under the Treaty may be available.
Material United States Federal Income Tax Considerations
- --------------------------------------------------------
The following discussion summarizes the material United States federal income
tax consequences, under current law, applicable to a U.S. Holder (as defined
below) of the Company's common stock. This discussion does not address
consequences peculiar to persons subject to special provisions of federal income
tax law, such as tax-exempt organizations, qualified retirement plans, financial
institutions, insurance companies, real estate investment trusts, regulated
investment companies, broker-dealers, nonresident alien individuals or foreign
corporations, and shareholders owning common stock representing 10% of the vote
and value of the Company. In addition, this discussion does not cover any state,
local or foreign tax consequences.
-44-
The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
In addition, this discussion does not consider the potential effects, both
adverse and beneficial of recently proposed legislation which, if enacted, could
be applied, possibly on a retroactive basis, at any time. Holders and
prospective holders of the Company's Common Stock should consult their own tax
advisors about the federal, state, local and foreign tax consequences of
purchasing, owning and disposing of shares of Common Stock of the Company.
U.S. Holders
- ------------
As used herein, a "U.S. Holder" is defined as (i) citizens or residents of the
U.S., or any state thereof, (ii) a corporation or other entity created or
organized under the laws of the U.S., or any political subdivision thereof,
(iii) an estate the income of which is subject to U.S. federal income tax
regardless of source or that is otherwise subject to U.S. federal income tax on
a net income basis in respect of the common stock, or (iv) a trust whose
administration is subject to the primary supervision of a U.S. court and which
has one or more U.S. fiduciaries who have the authority to control all
substantial decisions of the trust, whose ownership of common stock is not
effectively connected with the conduct of a trade or business in the United
States and shareholders who acquired their stock through the exercise of
employee stock options or otherwise as compensation.
Distributions on Shares of Common Stock
- ---------------------------------------
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to the Company's common stock are required to include in gross
income for United States federal income tax purposes the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's United States federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States federal taxable income by those who itemize deductions. (See more
detailed discussion at "Foreign Tax Credit" below.) To the extent that
distributions exceed current or accumulated earnings and profits of the Company,
they will be treated first as a return of capital up to the U.S. Holder's
adjusted basis in the common stock and thereafter as gain from the sale or
exchange of such shares. Preferential tax rates for long-term capital gains are
applicable to a U.S. Holder which is an individual, estate or trust. There are
currently no preferential tax rates for long-term capital gains for a U.S.
Holder which is a corporation. Dividends paid on the Company's common stock will
not generally be eligible for the dividends received deduction provided to
corporations receiving dividends from certain United States corporations.
Foreign Tax Credit
- ------------------
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of the Company's common stock may be entitled, at
the option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid by (or withheld from) the U.S. Holder during that year.
Subject to certain limitations, Canadian taxes withheld will be eligible for
credit against the U.S. Holder's United States federal income taxes. Under the
Code, the limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. Dividends paid by the
Company generally will be either "passive" income or "financial services"
income, depending on the particular U.S. Holder's circumstances. Foreign tax
credits allowable with respect to each class of income cannot exceed the U.S.
federal income tax otherwise payable with respect to such class of income. The
consequences of the separate limitations will depend on the nature and sources
of each U.S. Holder's income and the deductions appropriately allocated or
apportioned thereto. The availability of the foreign tax credit and the
application of the limitations on the credit are fact specific and holders and
prospective holders of common stock should consult their own tax advisors
regarding their individual circumstances.
Disposition of Shares of Common Stock
- -------------------------------------
A U.S. Holder will recognize gain or loss upon the sale of shares of common
stock equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received; and (ii) the shareholder's tax basis
-45-
in the common stock. This gain or loss will be capital gain or loss if the
shares are a capital asset in the hands of the U.S. Holder, and such gain or
loss will be long-term capital gain or loss if the U.S. Holder has held the
common stock for more than one year. Gains and losses are netted and combined
according to special rules in arriving at the overall capital gain or loss for a
particular tax year. Deductions for net capital losses are subject to
significant limitations. For U.S. Holders who are individuals, any unused
portion of such net capital loss may be carried over to be used in later tax
years until such net capital loss is thereby exhausted. For U.S. Holders which
are corporations (other than corporations subject to Subchapter S of the Code),
an unused net capital loss may be carried back three years from the loss year
and carried forward five years from the loss year to be offset against capital
gains until such net capital loss is thereby exhausted.
Other Considerations
- --------------------
The Company has not determined whether it meets the definition of a "passive
foreign investment company" (a "PFIC"). It is unlikely that the Company meets
the definition of a "foreign personal holding company" (a "FPHC") or a
"controlled foreign corporation" (a "CFC") under current U.S. law.
If more than 50% of the voting power or value of the Company were owned
(actually or constructively) by U.S. Holders who each owned (actually or
constructively) 10% or more of the voting power of the Company's common shares
("10% Shareholders"), then the Company would become a CFC and each 10%
Shareholder would be required to include in its taxable income as a constructive
dividend an amount equal to its share of certain undistributed income of the
Company. If (1) more than 50% of the voting power or value of the Company's
common shares were owned (actually or constructively) by five or fewer
individuals who are citizens or residents of the United States and (2) 60% or
more of the Company's income consisted of certain interest, dividend or other
enumerated types of income, then the Company would be a FPHC. If the Company
were a FPHC, then each U.S. Holder (regardless of the amount of the Company's
common shares owned by such U.S. Holder) would be required to include in its
taxable income as a constructive dividend its share of the Company's
undistributed income of specific types.
If 75% or more of the Company's annual gross income has ever consisted of, or
ever consists of, "passive" income or if 50% or more of the average value of the
Company's assets in any year has ever consisted of, or ever consists of, assets
that produce, or are held for the production of, such "passive" income, then the
Company would be or would become a PFIC. The Company has not provided assurances
that it has not been and does not expect to become a PFIC. Please note that the
application of the PFIC provisions of the Code to resource companies is somewhat
unclear.
If the Company were to be a PFIC, then a U.S. Holder would be required to pay an
interest charge together with tax calculated at maximum tax rates on certain
"excess distributions" (defined to include gain on the sale of stock) unless
such U.S. Holder made an election either to (1) include in his or her taxable
income certain undistributed amounts of the Company's income or (2) mark to
market his or her Company common shares at the end of each taxable year as set
forth in Section 1296 of the Code.
Information Reporting and Backup Withholding
- --------------------------------------------
U.S. information reporting requirements may apply with respect to the payment of
dividends to U.S. Holders of the Company's shares. Under Treasury regulations
currently in effect, non-corporate holders may be subject to backup withholding
at a 31% rate with respect to dividends when such holder (1) fails to furnish or
certify a correct taxpayer identification number to the payor in the required
manner, (2) is notified by the IRS that it has failed to report payments of
interest or dividends properly or (3) fails, under certain circumstances, to
certify that it has been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend payments.
Inspection of Documents
- -----------------------
Copies of the documents referred to in this annual report may be inspected at
the Company's corporate office at Suite 1305 - 1090 West Georgia Street,
Vancouver, British Columbia V6E 3V7, during normal business hours.
-46-
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
- --------------------------------------------------------------------------------
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
- --------------------------------------------------------------------------------
Not applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Within the 90 day period prior to the filing of this report there have been no
significant changes in the Company's internal controls or the occurrence of
events or other factors that could significantly affect these controls.
ITEM 16. [RESERVED]
- --------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
See pages 52 through 73.
ITEM 18. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Not applicable.
-47-
ITEM 19. EXHIBITS.
- --------------------------------------------------------------------------------
Exhibit
Number Description Page
- ------- -------------------------------------------------------- ------
1.1 Roll Over Articles of Golden Chance Resources Inc.
and amendments thereto.(1) N/A
1.2 Certificate of Continuance and Articles of Continuance
for Trimark Resources Ltd. and amendments thereto.(1) N/A
1.3 Bylaws of Trimark Resources Ltd.(1) N/A
4.12 Form of Loan Agreement Between Donald W. Busby
and Trimark Oil & Gas Ltd. dated November 19, 1999(2) N/A
4.13 Oil and Gas Prospect Exploration and Development
Agreement dated February 26, 2000(2) N/A
4.14 Agreement between Berkley Petroleum, Inc.,
Hilton Petroleum Inc., Trimark Resources Inc.,
STB Energy Inc., and KOB Energy Inc., dated June 10,2002 73
8.1 List of Subsidiaries 77
10.1 Certification of Donald W. Busby 79
10.2 Certification of Nick DeMare 81
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form 20-F, filed with the Commission on July 29, 1999. File number 0-30196.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 20-F,
filed with the Commission on February 28, 2001. File number 0-30196.
-48-
SIGNATURES
The registrant hereby certifies that it meets all of 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.
TRIMARK ENERGY LTD.
Dated: February 12, 2003 /s/ Donald Busby
----------------- ---------------------------
Donald W. Busby,
Chairman, President,
Chief Executive Officer and
Director
-49-
CERTIFICATION
I, Donald W. Busby, certify that:
1. I have reviewed this annual report on Form 20-F of Trimark Energy Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
Date: February 12, 2003
-----------------
Signed: /s/ Donald W. Busby
-------------------------------------
Donald W. Busby, Chairman, President,
Chief Executive Officer and Director
-50-
CERTIFICATION
I, Nick DeMare, certify that:
1. I have reviewed this annual report on Form 20-F of Trimark Energy Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
Date: February 12, 2003
-----------------
Signed: /s/ Nick DeMare
----------------------------------------------
Nick DeMare, Chief Financial Officer, Director
-51-
- --------------------------------------------------------------------------------
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
- --------------------------------------------------------------------------------
F-1
-52-
AUDITORS' REPORT
To the Shareholders of
Trimark Energy Ltd. (formerly Trimark Oil and Gas Ltd.)
We have audited the consolidated balance sheets of Trimark Energy Ltd. (formerly
Trimark Oil and Gas Ltd.) as at August 31, 2002 and 2001 and the consolidated
statements of loss and deficit and cash flow for the years ended August 31,
2002, 2001 and 2000. 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 Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at August 31, 2002
and 2001 and the results of its operations and its cash flow for the years ended
August 31, 2002, 2001 and 2000 in accordance with Canadian generally accepted
accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected assets and shareholders' equity as at August 31, 2002 and
2001 and results of operations for the years ended August 31, 2002, 2001 and
2000 to the extent summarized in Note 11 to the consolidated financial
statements.
Vancouver, B.C. /s/ D&H Group
November 20, 2002, except for Note 13
which is as of December 2, 2002 Chartered Accountants
D & H Group
A Partnership of Corporations
A Member of BHD Association with affiliated offices across
Canada and Internationally 10th Floor, 1333 West Broadway, Vancouver,
BC V6H 4C1 WWW.DHGROUP.CA F 604-731-9923 T 604-731-5881
F-2
-53-
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA - U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the shareholders dated
November 20, 2002 is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
/s/ D&H Group
Vancouver, B.C.
November 20, 2002 Chartered Accountants
D & H Group
A Partnership of Corporations
A Member of BHD Association with affiliated offices across
Canada and Internationally 10th Floor, 1333 West Broadway, Vancouver,
BC V6H 4C1 WWW.DHGROUP.CA F 604-731-9923 T 604-731-5881
F-3
-54-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31, 2002 AND 2001
(Expressed in Canadian Dollars)
2002 2001
$ $
A S S E T S
CURRENT ASSETS
Cash 336,182 214,390
Amounts receivable 22,849 48,942
Inventory - 70,050
Current portion of other assets (Note 4) - 193,463
Marketable securities (Note 4 (a)) 46,121 -
------------- -------------
405,152 526,845
PETROLEUM AND NATURAL GAS INTERESTS (Notes 3 and 13) 1,111,226 7,022,246
OTHER ASSETS (Note 4) 114,843 619,080
------------- -------------
1,631,221 8,168,171
============= =============
L I A B I L I T I E S
CURRENT LIABILITIES
Accounts payable and accrued liabilities 328,018 520,629
ADVANCES (Note 5) 775,534 553,200
------------- -------------
1,103,552 1,073,829
------------- -------------
S H A R E H O L D E R S ' E Q U I T Y
SHARE CAPITAL (Note 6) 19,537,102 19,537,102
DEFICIT (19,009,433) (12,442,760)
------------- -------------
527,669 7,094,342
------------- -------------
1,631,221 8,168,171
============= =============
GOING CONCERN (Notes 1 and 13)
APPROVED BY THE BOARD
/s/ Donald Busby, Director
- --------------------------
/s/ Nick DeMare, Director
- --------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
-55-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
2002 2001 2000
$ $ $
REVENUES
Oil and gas sales 125,749 521,322 202,714
Interest and other 37,028 114,098 195,735
------------- ------------- -------------
162,777 635,420 398,449
------------- ------------- -------------
EXPENSES
Production 134,556 185,037 154,529
General and administrative 241,789 330,245 462,429
Depreciation, depletion and impairment 6,010,537 5,168,418 78,340
------------- ------------- -------------
6,386,882 5,683,700 695,298
------------- ------------- -------------
LOSS BEFORE THE FOLLOWING (6,224,105) (5,048,280) (296,849)
INTEREST ON ADVANCES (70,630) - -
WRITE-DOWN OF OTHER ASSETS (Note 4) (258,699) - -
LOSS ON MARKETABLE SECURITIES (Note 4) (13,239) - -
------------- ------------- -------------
NET LOSS FOR THE YEAR (6,566,673) (5,048,280) (296,849)
DEFICIT - BEGINNING OF YEAR (12,442,760) (7,394,480) (7,097,631)
------------- ------------- -------------
DEFICIT - END OF YEAR (19,009,433) (12,442,760) (7,394,480)
============= ============= =============
LOSS PER COMMON SHARE $(2.24) $(2.04) $(0.14)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,926,859 2,480,189 2,110,135
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
-56-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
2002 2001 2000
$ $ $
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Net loss for the year (6,566,673) (5,048,280) (296,849)
Items not involving cash
Depreciation, depletion and impairment 6,010,537 5,168,418 78,340
Write-down of other assets 258,699 - -
Loss on marketable securities 13,239 - -
Interest on advances 70,630 - -
Effect of unrealized foreign exchange gain of other assets (24,199) (39,638) -
------------- ------------- -------------
(237,767) 80,500 (218,509)
Decrease (increase) in amounts receivable 26,093 212,692 (233,245)
Decrease (increase) in inventory 70,050 (70,050) -
Increase (decrease) in accounts payable and accrued liabilities (40,907) 214,064 42,450
------------- ------------- -------------
(182,531) 437,206 (409,304)
------------- ------------- -------------
FINANCING ACTIVITIES
Issuance of common shares - 2,312,560 3,933,801
Issuance costs - - (323,770)
Share subscriptions received - - 83,000
Advances - 553,200 -
------------- ------------- -------------
- 2,865,760 3,693,031
------------- ------------- -------------
INVESTING ACTIVITIES
Additions to petroleum interest (99,517) (4,415,135) (2,817,323)
Proceeds from sale of marketable securities 323,821 - -
Proceeds from sale of petroleum interests - 19,851 39,728
Other assets 80,019 - (772,905)
------------- ------------- -------------
304,323 (4,395,284) (3,550,500)
------------- ------------- -------------
INCREASE (DECREASE) IN CASH 121,792 (1,092,318) (266,773)
CASH - BEGINNING OF YEAR 214,390 1,306,708 1,573,481
------------- ------------- -------------
CASH - END OF YEAR 336,182 214,390 1,306,708
============= ============= =============
See also Note 12 for supplementary cash flow information.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
-57-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
1. NATURE OF OPERATIONS, NAME CHANGE AND GOING CONCERN
Trimark Energy Ltd. (the "Company") is an independent energy company
primarily engaged in the acquisition, exploration and development of crude
oil and natural gas properties in the United States. Effective March 21,
2002, the Company changed its name from Trimark Oil & Gas Ltd. to Trimark
Energy Ltd. in conjunction with its share consolidation described in Note
6(a).
During the year ended August 31, 2002, the Company incurred a loss of
$6,566,673 and, as at August 31, 2002, had a deficit of $19,009,433. The
Company is currently not generating sufficient cash flow from its
operations to meet ongoing corporate overhead and discharge its liabilities
as they come due. The future viability of the Company is dependent upon its
ability to generate additional financing to satisfy future working capital
requirements and debt repayment obligations and, in the longer term, the
generation of profit and positive cash flow from business operations.
These consolidated financial statements have been prepared on a going
concern basis which assumes that the Company will be able to realize assets
and discharge liabilities in the normal course of business for the
foreseeable future. Accordingly, the financial statements do not give
effect to adjustments, if any, that would be necessary should the Company
be unable to continue as a going concern and, therefore, be required to
realize its assets and liquidate its liabilities in other than the normal
course of business and at amounts which may differ from those shown in the
financial statements.
See also Note 13.
2. ACCOUNTING POLICIES
Basis of Presentation
---------------------
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP").
The significant differences between these principles and those that would
be accepted under United States generally accepted accounting principles
("US GAAP") are disclosed in Note 11.
The preparation of financial statements in conformity with Canadian GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Trimark Resources Inc. and Safari
Petroleum, LLC. Intercompany balances and transactions are eliminated on
consolidation.
F-7
-58-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
2. ACCOUNTING POLICIES (continued)
Petroleum and Natural Gas Interests
-----------------------------------
The Company follows the full cost method of accounting for petroleum and
natural gas operations. Under this method all costs related to the
exploration for and development of petroleum and natural gas reserves are
capitalized on a country-by-country basis. Costs include lease acquisition
costs, geological and geophysical expenses, overhead directly related to
exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from the sale of properties
are applied against capitalized costs, without any gain or loss being
recognized, unless such a sale would significantly alter the rate of
depletion and depreciation.
Depletion of exploration and development costs and depreciation of
production equipment is provided using the unit-of-production method based
upon estimated proven petroleum and natural gas reserves. The costs of
significant unevaluated properties are excluded from costs subject to
depletion. For depletion and depreciation purposes, relative volumes of
petroleum and natural gas production and reserves are converted into
equivalent units based upon relative energy content. Depreciation of the
gathering facility is charged to earnings over an estimated useful life of
10 years on a straight-line basis.
In applying the full cost method, the Company performs a ceiling test
whereby the carrying value of petroleum and natural gas properties and
production equipment, net of recorded future income taxes and the
accumulated provision for site restoration and abandonment costs, is
compared annually to an estimate of future net cash flow from the
production of proven reserves. Net cash flow is estimated using year end
prices, less estimated future general and administrative expenses,
financing costs and income taxes. Should this comparison indicate an excess
carrying value, the excess is charged against earnings.
Substantially all of the Company's oil and gas exploration, development and
production activities are conducted jointly with others and, accordingly,
these consolidated financial statements reflect the Company's proportionate
interest in such activities.
Revenue Recognition
-------------------
The Company recognizes petroleum and natural gas revenues from its
interests in producing wells as oil and gas is produced and sold from these
wells. The Company has no gas balancing arrangements in place. Oil and gas
sold is not significantly different from the Company's product entitlement.
Cash Equivalents
----------------
Cash includes cash and short-term deposits maturing within 90 days of the
original date of acquisition.
F-8
-59-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
2. ACCOUNTING POLICIES (continued)
Inventory
---------
Inventory consists of materials inventory. The materials inventory balance
include equipment held for future use and is accounted for based on the
lower of moving average cost method or market.
Marketable Securities
---------------------
Marketable securities are recorded at the lower of cost and market value.
Foreign Currency Translation
----------------------------
Monetary assets and liabilities are translated into Canadian dollars at the
balance sheet date rate of exchange and non-monetary assets and liabilities
at historical rates. Revenues and expenses are translated at appropriate
transaction date rates except for amortization, depreciation and depletion,
which are translated at historical rates. Gains and losses resulting from
the fluctuation of foreign exchange rates have been included in the
determination of income.
Income Taxes
------------
Income tax liabilities and assets are recognized for the estimated tax
consequences attributable to differences between the amounts reported in
the consolidated financial statements and their respective tax bases, using
enacted income tax rates. The effect of a change in income tax rates on
future income tax liabilities and assets is recognized in income in the
period that the change occurs. Future income tax assets are recognized to
the extent that they are considered more likely than not to be realized.
Share Option Plan
-----------------
The Company grants share options in accordance with the policies of the TSX
Venture Exchange (the "TSX Venture") as described in Note 6(b). No
compensation expense is recognized for this plan when shares or share
options are issued pursuant to the plan. Consideration paid for the shares
on exercise of the share options is credited to share capital.
Earnings (Loss) Per Share
-------------------------
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share assumes
the conversion, exercise or contingent issuance of securities only when
such conversion, exercise or issuance would have a dilutive effect on
earnings per share. The dilutive effect of convertible securities is
reflected in diluted earnings per share by application of the "if
converted" method. The dilutive effect of outstanding options and warrants
and their equivalents is reflected in diluted earnings per share by
application of the treasury stock method.
F-9
-60-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
3. PETROLEUM AND NATURAL GAS INTERESTS
2002 2001
$ $
Evaluated Properties
Acquisitions and leasehold costs 7,956,252 5,829,076
Exploration and development costs 6,863,704 4,185,331
Gathering facility 189,604 146,242
------------- -------------
15,009,560 10,160,649
------------- -------------
Unevaluated Properties
Acquisitions and leasehold costs 554,760 2,680,558
Exploration costs 421,091 3,044,687
------------- -------------
975,851 5,725,245
------------- -------------
15,985,411 15,885,894
Less: accumulated depreciation,
depletion and impairment (14,874,185) (8,863,648)
------------- -------------
1,111,226 7,022,246
============= =============
Property acquisition costs include costs incurred to purchase, lease, or
otherwise acquire a property. Exploration costs include the costs of
geological and geophysical activity, dry holes and drilling and equipping
exploratory wells. Development costs include costs incurred to gain access
to prepare development well locations for drilling and to drill and equip
development wells.
During May 2002, the operator of the East Lost Hills Project and certain
other participants in the ELH joint venture, concluded an agreement with
the Company on the ongoing evaluation of the ELH #4 and #9 wells, whereby
the funding parties have assumed all of the unpaid amounts and future costs
in completing the evaluation of these wells. In return, they will be
entitled to recover their costs plus 300% of their costs, from the future
production from these wells. Unpaid billings for the ELH #4 and #9 wells at
the time of the agreement totalled $613,288, of which $169,385 was billed
and had been recorded by the Company as accounts payable and accrued
liabilities at August 31, 2001. During the year ended August 31, 2002, the
Company reversed $169,385 of accounts payable and accrued liabilities with
an offsetting credit to petroleum and natural gas interests.
As a result of the ceiling test performed effective August 31, 2002, the
Company has recorded an impairment of $5,834,318 for the year ended August
31, 2002 (2001 - $4,790,379; 2000 - $nil). The ceiling test is a
cost-recovery test and is not intended to result in an estimate of fair
market value.
See also Note 13.
F-10
-61-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
4. OTHER ASSETS
2002 2001
$ $
Convertible note (a) - 619,080
Loan to officer (b) 114,843 193,463
------------- -------------
114,843 812,543
Less current portion - 193,463
------------- -------------
114,843 619,080
============= =============
(a) As at August 31, 2001, the Company held a US$400,000 unsecured
convertible note (the "ALPNET Note") issued by ALPNET, Inc.
("ALPNET"). The ALPNET Note had a variable interest rate of US prime
rate plus 2%, payable on a quarterly basis. The principal of the
ALPNET Note was repayable in three equal annual instalments commencing
June 2, 2003. During the year ended August 31, 2002, ALPNET was
acquired by SDL plc ("SDL"). In May 2002, the ALPNET Note was
converted into 275,862 common shares of SDL. The Company also recorded
a write-down of $258,699 on the ALPNET Note, reflecting the $383,181
quoted market value of the SDL shares received on the conversion.
The Company subsequently sold 240,862 shares of SDL for net proceeds
of $323,821, recognizing a loss of $10,743. A further provision of
$2,496 has been made to reflect the $46,121 quoted market value of the
remaining 35,000 shares of SDL held on August 31, 2002.
(b) The loan to officer originally bore interest at 5% per annum,
compounded monthly, and was to mature on March 27, 2002. During the
year ended August 31, 2002, the Company agreed to extend the term of
the loan to January 24, 2004. In addition, the loan now bears interest
at 10% per annum, payable quarterly. During the year ended August 31,
2002, interest income of $8,831 (2001 - $9,968; 2000 - $4,018) and
principal repayment of $78,620 was received.
5. ADVANCES
In August 2001, the Company received $553,200 pursuant to a proposed $1
million convertible debenture financing. In addition, during the year ended
August 31, 2002, a further $146,800 was converted from accounts payable and
accrued liabilities towards the financing. The proposed financing was not
completed and the amounts advanced to the Company have been recorded as
advances bearing interest at 10% per annum with no fixed term of repayment.
The note holders have confirmed that they will not demand repayment of the
advances in fiscal 2003. During the year ended August 31, 2002, the Company
recorded $70,630 (2001 - $4,904) of interest expense which remained unpaid
at August 31, 2002 and has been included in advances. Hilton Petroleum Ltd.
("Hilton"), a public company which is a shareholder of the Company and in
which certain of its officers and directors are also officers and directors
of the Company, advanced $300,000.
F-11
-62-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
6. SHARE CAPITAL
Authorized - unlimited common shares without par value
Issued and outstanding -
2002 2001 2000
-------------------------- -------------------------- --------------------------
Number $ Number $ Number $
Balance, beginning of year 2,926,859 19,537,102 2,286,492 17,141,542 1,660,766 12,414,941
------------ ------------ ------------ ------------ ------------ ------------
Issued during the year
Private placements - - 640,367 2,395,560 528,468 4,399,261
Exercise of options - - - - 28,571 228,000
Exercise of warrants - - - - 68,687 423,110
------------ ------------ ------------ ------------ ------------ ------------
640,367 2,395,560 625,726 5,050,371
Issuance costs - - - - - (323,770)
------------ ------------ ------------ ------------ ------------ ------------
- - 640,367 2,395,560 625,726 4,726,601
------------ ------------ ------------ ------------ ------------ ------------
Balance, end of year 2,926,859 19,537,102 2,926,859 19,537,102 2,286,492 17,141,542
============ ============ ============ ============ ============ ============
(a) On March 21, 2002, the Company completed a consolidation of its share
capital on a 1 new for 7 old basis. All comparative share balances
have been adjusted accordingly.
(b) The Company grants share options in accordance with the policies of
the TSX Venture. Under the general guidelines of the TSX Venture the
Company may reserve up to 10% of its issued and outstanding shares to
its employees, directors or consultants to purchase common shares of
the Company.
Stock options to directors and employees of the Company and
consultants to acquire shares were granted and outstanding as at
August 31, 2002. These options are exercisable on varying dates
expiring from fiscal 2003 to fiscal 2004 at $0.40 per share.
Details of options outstanding are as follows:
2002 2001
------------------------------- --------------------------------
2002 Weighted 2001 Weighted
Number Average Number Average
of Options Exercise Price of Options Exercise Price
$ $
Balance, beginning of year 226,715 6.44 119,572 8.96
Granted 7,143 0.40 121,429 4.27
Cancelled/expired (108,858) 1.97 (14,286) 9.31
------------- -------------
Balance, end of year 125,000 0.40 226,715 6.44
============= =============
During the year ended August 31, 2002, the Company re-priced existing
options to acquire 205,286 shares at prices ranging between $1.05 and
$13.30 per share, to $0.40 per share.
F-12
-63-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
6. SHARE CAPITAL (continued)
(c) As at August 31, 2002, the Company had outstanding warrants issued
pursuant to private placements which may be exercised to purchase
468,857 shares. The warrants expire at various times until fiscal 2003
and may be exercised at prices ranging from $3.64 per share to $4.34
per share.
Details of warrants outstanding are as follows:
2002 2001
Number Number
of Warrants of Warrants
Balance, beginning of year 891,867 348,927
Issued pursuant to private placements - 485,797
Issued pursuant to agent's fees - 57,143
Expired (423,010) -
------------ ------------
Balance, end of year 468,857 891,867
============ ============
7. INCOME TAXES
Future income tax assets and liabilities of the Company as at August 31,
2002 and 2001 are as follows:
2002 2001
$ $
Future income tax assets (liabilities)
Losses carried forward 3,662,000 2,490,000
Other 81,000 152,000
Petroleum and natural gas interests 3,104,000 1,960,000
------------ ------------
6,847,000 4,602,000
Valuation allowance (6,847,000) (4,602,000)
------------ ------------
Net future income tax asset - -
============ ============
F-13
-64-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
7. INCOME TAXES (continued)
2002 2001
$ $
Income tax rate reconciliation
Combined federal and provincial income tax rate 40% 45%
============= =============
Expected income tax recovery 2,627,000 2,271,000
Foreign income tax rate differences (434,000) (332,000)
Non-deductible depreciation and depletion (2,103,000) (1,809,000)
Deductible petroleum and natural gas interest expenditures 103,000 643,000
Non-taxable unrealized foreign exchange gains 60,000 284,000
Other 55,000 62,000
Unrecognized benefit of income tax losses (308,000) (1,119,000)
------------- -------------
Actual income tax recovery - -
============= =============
As at August 31, 2002, the Company has accumulated non-capital losses for
Canadian income tax purposes of approximately $1,428,000, expiring from
2003 to 2009, and for United States income tax purposes of approximately
US$5,666,000, expiring from 2008 to 2022, which are available for
application against future taxable income, the related benefits of which
have not been recognized in these financial statements.
8. RELATED PARTY TRANSACTIONS
(a) During the year ended August 31, 2002, the Company was charged
$185,020 (2001 - $157,239; 2000 - $120,264) for management,
professional, accounting and administrative fees and professional fees
provided by directors of the Company or companies controlled by
directors of the Company.
(b) As at August 31, 2002, accounts payable and accrued liabilities
include $22,833 (2001 - $101,158; 2000 - $98,268) due to Hilton.
(c) As at August 31, 2002, accounts payable and accrued liabilities
include $67,899 (2001 - $47,949; 2000 - $nil) due to private
corporations owned by directors of the Company.
(d) Other related party transactions are disclosed elsewhere in these
financial statements.
F-14
-65-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
9. SEGMENTED INFORMATION
As at August 31, 2002, the Company and its subsidiaries operated in one
industry segment, the exploration for, and the development and production
of crude oil and natural gas. The Company's current petroleum interests are
located in the United States and its corporate assets are located in
Canada. Identifiable assets, revenues and net loss in each of these
geographic areas are as follows:
2002
---------------------------------------------------
Identifiable Net
Assets Revenues Income (Loss)
$ $ $
United States 1,251,540 139,280 (6,253,150)
Canada 379,681 23,497 (313,523)
------------- ------------- -------------
1,631,221 162,777 (6,566,673)
============= ============= =============
2001
---------------------------------------------------
Identifiable Net
Assets Revenues Income (Loss)
$ $ $
United States 7,349,920 536,864 (5,533,636)
Canada 818,251 98,556 485,356
------------- ------------- -------------
8,168,171 635,420 (5,048,280)
============= ============= =============
2000
---------------------------------------------------
Identifiable Net
Assets Revenues Income (Loss)
$ $ $
United States 8,223,111 260,952 (54,324)
Canada 1,913,516 137,497 (242,525)
------------- ------------- -------------
10,136,627 398,449 (296,849)
============= ============= =============
F-15
-66-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
10. FINANCIAL INSTRUMENTS
(a) Fair Values
The fair values of financial instruments at August 31, 2002 and 2001,
were estimated based on relevant market information and the nature and
terms of financial instruments. Management is not aware of any factors
which would significantly affect the estimated fair market amounts,
however, such amounts have not been comprehensively revalued for
purposes of these financial statements. Disclosure subsequent to the
balance sheet dates and estimates of fair value at dates subsequent to
August 31, 2002 and 2001 may differ significantly from that presented.
Fair value approximates the amounts reflected in the financial
statements for cash, accounts receivable, marketable securities, other
assets, accounts payable and accrued liabilities and advances.
(b) Credit Risk Management
The accounts receivable are from various companies operating in the
oil and gas industry in the United States and are subject to normal
industry credit risks.
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(a) The consolidated financial statements of the Company have been
prepared in accordance with Canadian GAAP which differ in certain
material respects from US GAAP. Material differences between Canadian
and US GAAP and their effect on the Company's consolidated financial
statements are summarized in the tables below.
Consolidated Statement of Loss
2002 2001 2000
$ $ $
Net loss as reported under Canadian GAAP (6,566,673) (5,048,280) (296,849)
Adjustments for related party
transactions (ii) 1,928,229 815,793 -
Stock-based compensation (iv) (74,614) (316,069) (98,126)
Other compensation expense (vii) - (172,720) (134,742)
------------- ------------- -------------
Net loss under US GAAP (4,713,058) (4,721,276) (529,717)
============= ============= =============
Weighted average number of
common shares outstanding (i) 2,926,859 2,480,189 2,144,602
============= ============= =============
Loss per share under US GAAP (1.61) (1.90) (0.25)
============= ============= =============
F-16
-67-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
Consolidated Balance Sheet
2002 2001
$ $
Total assets under Canadian GAAP 1,631,221 8,168,171
Adjustments for related party transactions (ii) - (1,928,229)
Deferred tax asset (v) 3,662,000 2,490,000
Less: Valuation allowance (v) (3,662,000) (2,490,000)
------------- -------------
Total assets under US GAAP 1,631,221 6,239,942
============= =============
Total liabilities under Canadian GAAP 1,103,552 1,073,829
------------- -------------
Total liabilities under US GAAP 1,103,552 1,073,829
============= =============
Total shareholders' equity under Canadian GAAP 527,669 7,094,342
Adjustments for related party transactions (ii) - (1,928,229)
------------- -------------
Total shareholders' equity under US GAAP 527,669 5,166,113
============= =============
(i) Earnings per Share
Under US GAAP outstanding special warrants are included in the
calculation of loss per share.
(ii) Capital Contributions with Respect to Related Party Transactions
During the year ended August 31, 1999, the Company acquired and
disposed of certain petroleum interests with Hilton Petroleum,
Inc. for a combination of monetary and non-monetary
consideration.
US GAAP requires that certain transfers of non-monetary assets to
a company by its promoters or shareholders, in exchange for
stock, should generally be recorded at the transferor's
historical cost basis, whereas under Canadian GAAP, transfers of
non- monetary assets may be recorded based on the fair value of
either the stock issued or the assets acquired under certain
circumstances. Under Canadian GAAP these transactions were
recorded at their fair values. The transactions have been
adjusted to reflect the transactions based on the historical cost
basis.
The net loss under US GAAP has also been adjusted for the
subsequent amortization and impairment charges of these petroleum
interest acquisitions costs.
F-17
-68-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(iii)Ceiling test on petroleum interests
US GAAP requires that the net book value of proved petroleum
interests not exceed the sum of the present value of estimated
future net revenues (determined using current prices of petroleum
production less estimated future expenditures to be incurred in
developing and producing the proved reserves, discounted at ten
percent). This ceiling test was performed effective August 31,
2002 and it was determined that no additional write-down of
proved petroleum interests was necessary.
(iv) The Company grants stock options which reserves common shares for
issuance to employees and directors. Under Canadian GAAP, the
issuance of stock options is not recognized for accounting
purposes. Under US GAAP, the issuance of stock options requires
an assessment to determine stock based compensation. Accordingly,
the Company has applied the provisions of Financial Accounting
Standards ("SFAS") 123 Accounting for Stock-Based Compensation to
calculate stock-based compensation under US GAAP using the fair
value method.
The fair value of each option grant is estimated on the date of
grant using the Black- Scholes option pricing model with the
following assumptions used for grants in 2002, 2001 and 2000:
2002 2001 2000
------------- ------------- -------------
Risk-free interest rate 4.54% 4.81% - 6.47% 5.63% - 5.79%
Expected volatility 118% 124% 87%
Expected lives 3 years 3 years 2 - 3 years
(v) Income Tax
Under Canadian GAAP, deferred tax assets relating to the
potential benefit of income tax loss carryforwards are not
recognized unless there is virtual certainty of realization of
the benefit. US GAAP provides similar treatment, but requires the
benefit be recognized and a valuation allowance be recognized to
fully offset the deferred tax asset.
As at August 31, 2002, the Company has fully reserved the
$3,662,000 tax benefit of operating loss carryforwards, by a
valuation allowance of the same amount, because the likelihood of
realization of the tax benefit cannot be determined. Of the total
tax benefit, $1,172,000 is attributable to the year ended August
31, 2002.
F-18
-69-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(vi) Private Placements of Common Stock and Special Warrants with
Related Parties
US GAAP requires disclosure of private placements conducted by
the Company where directors and officers of the Company are
participants. During the year ended August 31, 2001, directors,
officers and companies controlled by the directors or officers
acquired 623,429 shares (2000 - 198,256) of the Company, pursuant
to private placements conducted by the Company, for cash proceeds
of $2,312,560 (2000 - $1,116,952). No private placement
transactions were conducted by the Company during the year ended
August 31, 2002.
(vii)Private Placements of Common Stock
The Company conducts the majority of its equity financings
pursuant to private placements. Under the policies of the TSX
Venture, the Company may provide a discount off the market price
of the Company's common stock. US GAAP does not permit a discount
from the market price. US GAAP requires the recognition of the
market value of the Company's common stock as a credit to share
capital, with a charge to operations for the portion of the
discount relating to equity financings conducted with officers
and directors of the Company and a charge to shareholders'
equity, as a capital distribution, for the discount relating to
the remaining portion of the equity financings.
Under US GAAP, loss and capital distributions for the year ended
August 31, 2002 would increase by $nil (2001 - $172,720; 2000 -
$134,742) and $nil (2001 - $140,700; 2000 - $184,919),
respectively, and share capital, as at August 31, 2002 would
increase by $961,402 (2001 - $961,402; 2000 - $647,982). There is
no net change to shareholders' equity.
(b) The Company's consolidated statements of cash flow comply with US
GAAP.
(c) New Technical Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB"),
issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS
143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 generally requires
obligations associated with asset retirements to be recognized earlier
and displayed as liabilities rather than as contra-assets. The
pronouncement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS 143 will have any impact on its financial
position or results of operations.
F-19
-70-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
In August 2001, FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long- Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 establishes a single accounting model for long-lived
assets to be disposed of by sale. The pronouncement is effective for
financial statements issued for fiscal years beginning after December
15, 2001. Management does not believe that the adoption of SFAS 144
will have any impact on its financial position or results of
operations.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity." SFAS 146 generally requires a
liability for a cost associated with an exit or disposal activity to
be recognized and measured initially at its fair value in the period
in which the liability is incurred. The pronouncement is effective for
exit or disposal activities initiated after December 31, 2002.
Management does not believe that the adoption of SFAS 146 will have
any impact on its financial position or results of operations.
12. SUPPLEMENTARY CASH FLOW INFORMATION
Non-cash investing and financing activities were conducted by the Company
as follows:
2002 2001 2000
$ $ $
Interest paid in cash - - 12,649
========== ========== ==========
Income taxes paid in cash - - -
========== ========== ==========
During the year ended August 31, 2002, the Company:
i) received marketable securities, with a fair value of $383,181, on the
exercise of a convertible note, as described in Note 4(a);
ii) converted $146,800 of accounts payable and accrued liabilities to
advances, as described in Note 5; and
iii) recorded $70,630 of interest expense on advances.
F-20
-71-
TRIMARK ENERGY LTD.
(formerly Trimark Oil & Gas Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(Expressed in Canadian Dollars)
13. SUBSEQUENT EVENT
Subsequent to August 31, 2002, the operator of the East Lost Hills Project
formally proposed the plugging and abandonment of the ELH #4 and #9 wells.
The remaining funding parties have not yet consented to the operator's
proposal. However, in light of the ongoing difficulties encountered and
uncertainties at East Lost Hills, the Company determined that it will
record a non-cash impairment charge, estimated at approximately $1.0
million, during fiscal 2003.
F-21
-72-