United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] 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, 2003
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
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
(Exact name of Registrant as specified in its charter)
HALO RESOURCES LTD.
(formerly Trimark Energy 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, 2003
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 130
-1-
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.
BCPD Barrels of condensate per day.
BO Barrels of oil.
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.
isopach maps Maps showing variations in the thickness of a
particular sedimentary bed and the interval or spacing
between one sedimentary bed and another.
liquids Crude oil and natural gas liquids.
MBO One thousand barrels of oil.
MCF One thousand cubic feet.
MCFE One thousand cubic feet equivalent.
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
gas reserves quantities 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
producability 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.
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
The Company cautions readers regarding forward looking statements found in the
following discussion and elsewhere in this annual report 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.
-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, 2003,
2002 and 2001, was derived from the consolidated 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,
2000 and 1999 are derived from the Company's audited consolidated 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 US GAAP, and their effect
on the Company's financial statements.
($ in 000, except per share data)
-----------------------------------------------------------
Year Ended August 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
Revenues $69 $163 $635 $398 $143
Production expenses $17 $135 $185 $155 $132
Depreciation, depletion and impairment $1,252 $6,011 $5,168 $78 $1,703
General and administrative expenses $177 $242 $330 $462 $350
Net income (loss) $(1,473) $(6,567) $(5,048) $(297) $(2,042)
Income (loss) per share $(0.50) $(2.24) $(2.03) $(0.14) $(2.80)
Weighted average number of shares 2,927 2,927 2,480 2,110 723
Dividends per share - - - - -
Working capital (deficiency) $(2) $77 $6 $1,262 $1,338
Petroleum and natural gas interests $76 $1,111 $7,022 $7,795 $5,096
Other assets - $115 $619 $773 -
Shareholders' equity $(945) $528 $7,094 $9,830 $6,434
Capital stock $19,537 $19,537 $19,537 $17,225 $13,532
Total assets $93 $1,631 $8,168 $10,137 $6,698
-5-
ADJUSTMENT TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company are presented in accordance
with Canadian GAAP. Canadian GAAP differs in certain material respects from US
GAAP. The material differences between Canadian and US GAAP, in respect of these
consolidated financial statements, are summarized in the tables below.
Consolidated Statement of Loss
2003 2002 2001
$ $ $
Net loss under Canadian GAAP (1,472,642) (6,566,673) (5,048,280)
Adjustments for related party transactions (i) - 1,928,229 815,793
Stock-based compensation (iii) - (74,614) (316,069)
Other compensation expense (vi) - - (172,720)
Additional depreciation, depletion and amortization (ix) (500) - -
------------ ------------ ------------
Net loss under US GAAP (1,473,142) (4,713,058) (4,721,276)
============ ============ ============
Loss per share under US GAAP (0.50) (1.61) (1.90)
============ ============ ============
Consolidated Balance Sheet
2003 2002
$ $
Total assets under Canadian GAAP 93,085 1,631,221
Deferred tax asset (iv) 780,000 3,662,000
Less: Valuation allowance (iv) (780,000) (3,662,000)
Asset retirement cost (ix) 7,400 -
------------ ------------
Total assets under US GAAP 100,485 1,631,221
============ ============
Total liabilities under Canadian GAAP 1,038,058 1,103,552
Asset retirement obligations (ix) 7,900 -
Discount on advances (x) (60,028) -
------------ ------------
Total liabilities under US GAAP 985,930 1,103,552
============ ============
Total shareholders' equity under Canadian GAAP (944,973) 527,669
Additional depreciation, depletion and amortization (ix) (500) -
Discount on advances (x) 60,028 -
------------ ------------
Total shareholders' equity under US GAAP (885,445) 527,669
============ ============
(i) Capital Contributions with Respect to Related Party Transactions
During the 1999 fiscal year, the Company acquired and disposed of
certain petroleum interests with Hilton Petroleum Ltd. ("Hilton") a
publicly traded company with common directors and officers, 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.
-6-
The net loss under US GAAP for the 2002 and 2001 fiscal years have also
been adjusted for the subsequent amortization and impairment charges of
these petroleum interest acquisitions costs. There was no impact on the
2003 fiscal year.
(ii) 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, 2003 and it was determined that
no additional write-down of proved petroleum interests was necessary.
(iii) Stock-Based Compensation
The Company grants stock options which reserves common shares for
issuance to employees and directors. Before the 2003 fiscal year, the
issuance of stock options was not recognized for accounting purposes
under Canadian GAAP. Under US GAAP, the issuance of stock options
requires an assessment to determine stock based compensation.
Accordingly, the Company has applied the provisions of Statement of
Financial Accounting Standards ("SFAS") 123 Accounting for Stock-Based
Compensation to account for and 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 and 2001:
2002 2001
------------- -------------
Risk-free interest rate 4.54% 4.81% - 6.47%
Expected volatility 118% 124%
Expected lives 3 years 3 years
Expected dividend yield 0% 0%
No options were granted during the 2003 fiscal year.
(iv) 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, 2003, the Company has fully reserved the $780,000 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, $153,000 is
attributable to the 2003 fiscal year.
(v) 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 of the Company, pursuant to private placements conducted by the
Company, for cash proceeds of $2,312,560. No private placement
transactions were conducted by the Company during the 2003 and 2002
fiscal years.
-7-
(vi) 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 Exchange
("TSXV"), 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, 2003 would increase by $nil (2002 - $nil; 2001 - $172,720) and $nil
(2002 - $nil; 2001 - $140,700), respectively, and share capital, as at
August 31, 2003 would increase by $961,402 (2002 - $961,402; 2001 -
$961,402). There is no net change to shareholders' equity.
(vii) Functional Currency
The Company's functional currency is the Canadian dollar.
(viii) Classification of Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 142 "Goodwill and Other Intangible Assets" which prescribes
accounting for definite and indefinite life intangible assets and
goodwill. Intangible assets with a determinable useful life will
continue to be amortized over that period. As a consequence of the
introduction of SFAS 142, the oil and gas industry is currently
discussing the appropriate balance sheet classification of oil and gas
mineral rights held by lease or contract. The Company classifies these
assets as a component of petroleum and natural gas interests in
accordance with its interpretation of SFAS 19 and common industry
practice. There is also a view that these mineral rights are intangible
assets as defined in SFAS 141 "Business Combinations" and, therefore,
should be classified separately on the balance sheet as intangible
assets.
The Company did not change or reclassify contractual mineral rights
included in petroleum and natural gas interests on the balance sheet
upon adoption of SFAS 142. The Company believes its current accounting
of such mineral rights as part of oil and gas properties is appropriate
under the full cost method of accounting. However, if the accounting
for mineral rights held by lease or contract is ultimately changed so
that costs associated with mineral rights not held under fee title and
pursuant to the guidelines of SFAS 141 are required to be classified as
long term intangible assets, then the reclassification would have no
impact on the Company's August 31, 2003 balance sheet. Management does
not believe the ultimate outcome of this issue will have a significant
impact on the Company's cash flows, results of operations or financial
condition.
(ix) Asset Retirement Obligations
The Company adopted SFAS 143 "Asset Retirement Obligations" for US GAAP
reporting purposes on September 1, 2003. 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 requires companies to record the present value of
obligations associated with the retirement of tangible long-lived
assets in the period in which it is incurred. The liability is
capitalized as part of the related long-lived asset's carrying amount.
Over time, accretion of the liability is recognized as an operating
expense and the capitalized cost is depreciated over the expected
useful life of the related asset. The Company's asset retirement
obligations relate primarily to the plugging, dismantlement, removal,
site reclamation and similar activities of its petroleum and natural
gas interests. Prior to adoption of SFAS 143, such obligations were
accrued ratably over the
-8-
productive lives of the assets through its depreciation, depletion and
amortization of petroleum and natural gas interests without recognizing
a separate liability for such amounts.
At the time of adoption, total assets increased by $7,500, and total
liabilities increased by $7,500. The amounts recognized upon adoption
are based upon numerous estimates and assumptions, including future
retirement costs, future recoverable quantities of petroleum and
natural gas, future inflation rates and the credit-adjusted risk free
interest rate. Changes in asset retirement obligations during the year
were:
$
Asset retirement obligations at September 1, 2002 -
Liabilities incurred 7,500
Liabilities settled -
Accretion expense (included in depreciation) 400
----------
Asset retirement obligation at August 31, 2003 7,900
Less: current portion -
----------
Long-term portion 7,900
==========
The Company will adopt Section 3110 "Asset Retirement Obligations" of
the CICA Handbook, which is harmonious with SFAS 143, on September 1,
2004.
(x) Imputed Interest on Long-Term Debt
US GAAP requires that interest be imputed on debt that does not bear
interest. The Company has imputed interest at its estimated incremental
borrowing rate of 10%, with an offsetting charge to retained earnings
as the debt is held by related parties. The discount will be accreted
to earnings over the term to maturity.
The Company's consolidated statements of cash flow comply with US GAAP.
New Technical Pronouncements
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections." FASB 4
required all gains or losses from extinguishment of debt to be classified as
extraordinary items net of income taxes. SFAS 145 requires that gains and losses
from extinguishment of debt be evaluated under the provisions of Accounting
Principles Board Opinion 30, and be classified as ordinary items unless they are
unusual or infrequent or meet the specific criteria for treatment as an
extraordinary item. This statement is effective January 1, 2003. The Company
does not anticipate that the adoption of this statement will have a material
effect on its financial position or results of operations.
In July 2002, the 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
EITF Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." This Statement requires recognition of a liability for a
cost associated with an exit or disposal activity when the liability is
incurred, as opposed to when the entity commits to an exit plan under EITF 94-3.
SFAS 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not anticipate that the adoption of
this statement will have a material effect on its financial position or results
of operations.
In December 2002, the FASB approved SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement 123".
SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
-9-
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company will continue to
account for stock-based compensation using the methods detailed in the
stock-based compensation accounting policy, and has adopted the disclosure
requirement of SFAS 148.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends certain portions
of SFAS 133 and is effective for all contracts entered into or modified after
June 30, 2003 on a prospective basis. SFAS 149 is not expected to have a
material effect on the results of operations or financial position of the
Company since the Company currently has no derivatives or hedging contracts.
In June 2003, the FASB approved SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS 150 is not expected to have an effect
on the Company's financial position.
Exchange Rate History
The following table sets forth the average exchange rate for one Canadian dollar
expressed in terms of one US dollar for the fiscal years ended August 31, 2003,
2002, 2001, 2000 and 1999.
Period Average
----------------------------------- -------
September 1, 2002 - August 31, 2003 0.6767
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
The following table sets forth high and low exchange rates for one Canadian
dollar expressed in terms of one US dollar for the six-month period ended
February 29, 2004.
Month High Low
-------------- ------ ------
September 2003 0.7424 0.7207
October 2003 0.7667 0.7418
November 2003 0.7708 0.7484
December 2003 0.7738 0.7460
January 2004 0.7880 0.7496
February 2004 0.7629 0.7439
Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
The noon rate of exchange on March 2, 2004, reported by the United States
Federal Reserve Bank of New York for the conversion of Canadian dollars into
United States dollars was CDN$0.7442 (US$1.3437 = 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:
-10-
CESSATION OF FUNDING OF THE COMPANY'S CALIFORNIA PETROLEUM PROPERTIES
Since October 2000, the Company has devoted its activities towards the funding
of its interests in the exploration and development of oil and gas leases in
California. The recorded costs relating to these acquisitions, exploration and
development 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. In
September 2002, the side track well to the Suisun #25 well at the Basil Prospect
was plugged and abandoned. 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 and the unlikelihood of any further activities at East
Lost Hills, during fiscal 2003 the Company determined to write-off its remaining
net investment in Trimark Resources Inc., resulting in an impairment charge of
approximately $1.2 million. As a result the Company has written-off all of its
petroleum and natural gas interests other than its costs relating to the West
Ranch Field, located in Texas.
ACCUMULATED LOSSES AND FINANCING RISKS
During the year ended August 31, 2003, the Company incurred a loss of
approximately $1.5 million, and as at August 31, 2003, the Company had an
accumulated deficit of approximately $20.5 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. As at November 30,
2003, the Company had a working capital deficiency of $3,595 and outstanding
advances payable of $1,023,047.
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.
On January 15, 2004, the Company announced an equity financing to raise $510,000
and on February 19, 2004 the Company announced a further equity financing to
raise $780,000. See "Item 5. Management's Discussion and Analysis - Liquidity
and Capital Resources" and "Item 8. Financial Information - Significant
Changes." There are no assurances that the equity financings will be completed.
RISK TO DILUTION TO SHAREHOLDERS
The Company may in the future grant to some or all of its directors, officers,
insiders and key employees options to purchase the Company's common shares as
non-cash incentives to those employees. Such options may be granted at exercise
prices equal to market prices, or at prices as allowable under the policies of
the TSXV, when the public market is depressed. To the extent that significant
numbers of such options may be granted and exercised, the interests of then
existing shareholders of the Company will be subject to additional dilution.
-11-
The Company is currently without any significant source of revenue and will most
likely be required to issue additional shares to settle its debentures and
finance its operations. In addition, the Company may issue additional shares to
acquire additional properties. The issuance of additional shares will cause the
Company's existing shareholders to experience dilution of their ownership
interests.
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 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.
-12-
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
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
-13-
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.
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.
ADEQUATE LABOR
Corporate accounting, management and administration are provided, in part, by
Chase Management Ltd. ("Chase"), a company owned by Mr. Nick DeMare, the
President 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.
-14-
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 of 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 TSXV fluctuated from a low of $0.05 to a high of $0.40 during the 12-month
period ending January 30, 2004 and closed at $0.35 on January 30, 2004. 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 strengthening
against the United States dollar. Continued strengthening of the Canadian dollar
may have a material and positive 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
Company's shares are traded for less than US$5.00 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,
-15-
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. 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 October 15, 1990,
the Company's name was changed to Trimark Resources Ltd. 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 December 13, 1996, the Company's name was
changed to International Trimark Resources Ltd. On June 16, 1997, the Company
changed its name to Trimark Oil & Gas Ltd. On March 21, 2002, the Company
changed its name to Trimark Energy Ltd. On February 23, 2004, the Company
changed its name to its current name, Halo Resources Ltd.
The Company's common shares are listed for trading on the TSXV, which 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 TSXV's premier tier and is reserved for the
TSXV'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 TSXV are Tier II
companies. The Company trades on the TSXV under the symbol "HLO" 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 "HLOSF".
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 Company's interest in
the West Ranch Field.
The Company owns all of the interests in Safari Petroleum LLC ("Safari"), a
Colorado limited liability company, which was formed on June 14, 1995. Safari
has recently sold its minor oil and gas property interests and, as of the date
of this report, Safari is inactive.
-16-
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. The Company has written-off its investment in Trimark Inc. and no longer
accounts for it in its consolidated financial statements. See "Item 4.
Information on the Company - Principal Oil and Gas Properties".
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.
DISPOSITIONS
During fiscal 2003, the Company wrote-off its net investments in Trimark Inc.,
which held substantially all of the Company's petroleum and natural gas
interests at that time. Accordingly, it recorded a net charge of $1,240,794 for
depreciation, depletion and impairment to reflect the abandonment of Trimark
Inc.
EXPLORATION EXPENDITURES
During fiscal 2001, 2002 and 2003, the Company incurred $4.4 million, $100,000,
and $320,000 respectively, on the acquisition, exploration and development of
its petroleum interests. Expenditures in fiscal 2003 were incurred on the
drilling of a sidetrack well on the Basil Prospect and earning a 3% working
interest in the West Ranch Field. See "Item 4. Information on the Company -
Principal Oil and Gas 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. Over the
past years the Company's main focus were its interests in the East Lost Hills
Joint Venture and the San Joaquin Joint Venture. See "Item 4. Information on the
Company - Business Overview - Principal Oil and Gas Properties." These ventures
were unsuccessful and the Company ceased participation in these activities in
February 2002. During fiscal 2002, the Company also participated in the drilling
of an exploratory well in Regional California. A side-track well was
subsequently drilled and determined to be uneconomic. The well was plugged and
abandoned in September 2002. As of the date of this report, the Company holds a
3% interest in certain oil and gas leases in Texas, known as the West Ranch
Field Prospect. These interests are not significant. The Company is in a period
of reconstruction and will be required to restructure its debts and obtain new
financing in order to proceed with identifying new properties for acquisition,
exploration and development. See "Item 5. Operating and Financial Review and
Prospects - Liquidity and Capital Resources".
2003 EXPLORATION BUDGET
No exploration budgets have been determined by the Company for the 2004 fiscal
year. All further capital expenditures on the West Ranch Field will be funded
from cash flow from existing producing wells. The Company is reviewing a number
of properties in Canada and, subject to availability of financing, plans to
pursue acquisition of resource properties in Canada.
SALES AND REVENUE DISTRIBUTION
During fiscal 2003, 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
-17-
continuity of the Company's operations. The Company does not maintain
significant inventories of petroleum or natural gas liquids.
Total revenues reported for fiscal 2003, 2002 and 2001, were as follows:
($ in 000)
--------------------------------------
Years Ended August 31,
--------------------------------------
2003 2002 2001
$ $ $
Oil and Gas Sales
- United States 45 126 521
---------- ---------- ----------
Interest and Other
- United States 23 14 15
- Canada 1 23 99
---------- ---------- ----------
24 37 114
---------- ---------- ----------
Total Revenues 69 163 635
========== ========== ==========
COMPETITIVE BUSINESS CONDITIONS, COMPETITIVE POSITION IN THE INDUSTRY AND
METHODS OF COMPETITION
The Company's petroleum and natural gas exploration activities 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, 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.
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
-18-
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 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
EAST LOST HILLS JOINT VENTURE AND SAN JOAQUIN JOINT VENTURE, CALIFORNIA
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.
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 June 2002, concluded an agreement with Berkley
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.
-19-
PROPERTY DESCRIPTION
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 east side
of the Lost Hills Structure. The East Lost Hills Joint Venture lands were in the
footwall side of this thrust fault, directly east of and structurally below the
existing Lost Hills field.
The geological objectives of the East Lost Hills Joint Venture were stacked
sands (layers of sand stacked one over the other) within the Temblor Group which
are buried between 16,500 to 19,000 feet.
EXPLORATION
EAST LOST HILLS JOINT VENTURE WORK PROGRAM
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 MMCF/D. 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. The operator had considered either a re-drill or re-entry of this well
bore.
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
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, in early March of 2000, 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.
-20-
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.
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 MMCF/D 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. Agua sands remain a promising zone for
the ELH #4 well and remain untested. 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 2 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 MMCF/D with one peak of 2.37 MMCF/D. 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. 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.
On December 2, 2002, the Company received confirmation from the operator that it
had formally proposed plugging and abandonment of the ELH #4 and #9 wells. In
light of the results and uncertainties of any further activities at East Lost
Hills by the joint venture, the Company determined that it would no longer
provide further funding to Trimark Inc.
The ELH #1 well continues to produce at constrained levels of approximately 1.5
MMCFE gas per day. Trimark Inc.'s share of net revenues is being applied by the
operator against outstanding amounts owed by Trimark Inc. The Company is unaware
of any further activities being conducted on any other wells at East Lost Hills.
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, 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.
REGIONAL CALIFORNIA, CALIFORNIA
With the initial exposure to the San Joaquin Basin of California, through the
participation in the East Lost Hills and Greater San Joaquin Basin Joint
Ventures, management decided to participate in an exploration program, the focus
of which was to identify prospects in the San Joaquin and Sacramento Basins of
California. Unlike the East Lost Hills
-21-
and Greater San Joaquin Basin Joint Venture lands, these prospects have much
shallower target horizons. The prospect acquisition costs and the costs to drill
and complete these prospects are substantially lower. As a result of these lower
costs, the Company was able to acquire a more substantial working interest in
these prospects.
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 23% working interest in the prospects
tested.
During fiscal 2002, the Company participated in the drilling of an exploratory
well (the Suisun #25 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 must be drilled
directional under a body of water from a land based position. The targets are
believed to be at 4,500 feet but the well must 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. The Company had originally held a 33.4% working
interest in the Basil Prospect. It increased its working interest to 48% under
the proposed side-track.
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. During fiscal 2003, the Company recorded an
impairment charge of $1,240,794, primarily reflecting the costs relating to the
acquisitions, the initial drilling of the Suisun #25 well and the drilling of
the side-track well.
THE COMPANY HAS ABANDONED THE REGIONAL CALIFORNIA PROSPECTS.
WEST RANCH FIELD, TEXAS
On December 18, 2002, the Company entered into a purchase and sale agreement
with PNP Petroleum Inc. ("PNP"), a private company at arm's-length to the
Company, whereby the Company acquired a 3% net working interest (2.360825% net
revenue interest) in certain oil and gas leases known as the West Ranch Field.
To acquire its interest the Company funded approximately $70,000 of initial
development costs.
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.
-22-
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. PNP purchased the West Ranch Field and took over its operation
on January 1, 2002. 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. It is expected that any additional capital
expenditures can be funded from cash flow.
OIL AND GAS RESERVES
The following table sets forth information regrading the Company's share of
estimated proven oil and gas reserve quantities, reserve value and discounted
future net revenues. The reserve related information at August 31, 2003, was
determined internally. 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, as at August 31, 2003,
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%
(MMCF) (MBO) (MMCFE)(1) ($000) ($000)
Proved oil and gas reserv 768 218 2,076 3,833 2,392
=== === ===== ===== =====
(1) Condensates and natural gas liquids are converted to MCFE at the rate of
six gallons of liquids per MCF of natural gas. These conversions are based
upon the approximate energy content of natural gas condensates and liquids.
(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 prices 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.
ACREAGE
As of the date of this report, the Company has interests in the West Ranch
Field, Texas, as follows:
Gross Net
Acres Acres
Proved developed produci 814 19.21
Proved developed non-producing 320 7.55
----- -----
1,134 26.76
===== =====
PRODUCTIVE OIL AND GAS WELLS
As at the date of this report, the Company has twelve producing wells (0.2832
net wells), six proved non-producing wells (0.141648 net wells) and 18 shut-in
wells (0.425 net wells) at the West Ranch Field. The Company commenced receiving
revenues in March 2003. During the year ended August 31, 2003, the West Ranch
Field recorded 20,403 barrels (507 barrels net to the Company) of oil and 84,403
mcfs (2,131 mcfs net to the Company) of gas.
-23-
OTHER ASSETS
As at the date of this report, the Company does not hold any material assets
other than its interests in its petroleum interests.
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
--------------------------
| HALO RESOURCES LTD. |
| (Yukon) |
--------------------------
|
|
|---------------------------------------------|
| |
| |
---------------------- ----------------------
| SAFARI PETROLEUM LLC | | TMK OIL & GAS INC. |
| (Colorado) | | (California) |
| 100% | | 100% |
---------------------- ----------------------
SUBSIDIARIES
TMK Oil & Gas Inc.
The Company owns all of the outstanding common shares of 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.
Safari Petroleum LLC
The Company owns all of the interests in Safari, a Colorado limited liability
company, which was formed on June 14, 1995. Safari has recently sold its minor
oil and gas property interests and, as of the date of this report, Safari is
inactive.
Trimark Resources Inc.
The Company owns all of the outstanding common shares of Trimark Inc., a
Colorado corporation, which was incorporated on June 4, 1993. The Company has
written-off its investment in Trimark Inc. and no longer accounts for it in its
consolidated financial statements.
-24-
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, 2003, 2002, and 2001 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 US 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 March 2, 2004,
reported by the United States Federal Reserve Bank of New York, for the
conversion of Canadian dollars into United States dollars was CDN$0.7442
(US$1.3437 = 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 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.
OVERVIEW
The Company, through its subsidiaries, 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.
-25-
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 2003 COMPARED TO YEAR ENDED AUGUST 31, 2002
Effective November 30, 2002, the Company wrote-off its net investment in Trimark
Inc., a wholly-owned subsidiary which held all of the Company's petroleum and
natural gas interests at that time. Accordingly, the Company ceased to record
the activities of Trimark Inc. and recorded $1,240,794 depreciation, depletion
and impairment charge to reflect the abandonment of Trimark Inc.
In January 2003, the Company earned a 3% working interest in certain oil and gas
leases known as the West Ranch Field, by funding exploration and development
costs. As of August 31, 2003, the Company has incurred $87,255 on drilling
activities and has recorded $40,044 in oil and gas revenues, comprising of
$22,208 (507 barrels) of oil and $17,836 (2,131 mcf) of gas. All the production
in 2003 is associated with production from the West Ranch Field. Currently there
are 11 wells producing at the West Ranch Field. Production costs of $11,257 was
incurred and depletion of $11,088 was recorded for 2003. All production in the
2002 fiscal year was derived primarily from the ELH #1 well.
General and administrative costs decreased by $64,842, from $241,789 in the 2002
fiscal year to $176,947 in the 2003 fiscal year. The decrease in costs were as a
result of the Company's reduced operations and limited financial resources. All
costs have been reduced where possible.
During fiscal 2003, the Company disposed of its interest in the South Haskell
property for cash proceeds of $84,907.
YEAR ENDED AUGUST 31, 2002 COMPARED TO YEAR ENDED AUGUST 31, 2001
During the 2002 fiscal year, 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 occurred which affected the comparability
of the Company's performance to prior periods. Since February 2000, the
Company's focus was 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, was 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 received by the Company
during 2002 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
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.
-26-
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 US 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 a 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.
LIQUIDITY AND CAPITAL RESOURCES
As at November 30, 2003, the Company had a working capital deficit of $3,595 and
$1,023,047 of advances outstanding. Currently, the Company is 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 acquisition of, exploration for and development of its
petroleum interests, to fund on-going overhead or to discharge its ongoing
liabilities as they come due. There is no assurance that the Company will be
able to obtain sufficient financings.
On January 15, 2004, the Company announced that it has agreed to conduct a
non-brokered private placement of 3,400,000 units at $0.15 per unit, for
$510,000 gross cash proceeds. Each unit will comprise of one common share and
one share purchase warrant. Each warrant will entitle the holder to purchase an
additional common share for a period of two years from closing, at $0.20 per
share in year one, and at $0.25 per share in year two.
On February 19, 2004, the Company announced that it had agreed to conduct a
further non-brokered private placement of 3,250,000 units at $0.24 per unit for
$780,000 gross cash proceeds. Each unit will comprise of one common share and
one share purchase warrant. Each warrant will entitle the holder to purchase an
additional common share for a period of two years from closing, at $0.30 per
share.
Completion of the proposed private placements are subject to TSXV approval.
There are no assurances that the equity financings will be completed.
TREND INFORMATION
The Company is not aware of any trends which might affect its financial results
or business.
RESEARCH AND DEVELOPMENT
During fiscal 2001, 2002 and 2003, the Company incurred $4.4 million, $100,000
and $320,000 respectively, on the acquisition, exploration and development of
its petroleum interests. During the period from September 1, 2003 to January 31,
2004, the Company had incurred approximately $8,000 in development expenditures
on its petroleum interests.
-27-
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
- --------------------------------------------------------------------------------
DIRECTORS AND SENIOR MANAGEMENT
The names, positions held with the Company and terms of office 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)
- ------------------------ ------------------------- -------------------------------------
NICK DEMARE(1) Director January 1996 - present
Burnaby, President and CEO July 4, 2003 - present
British Columbia, Canada
ANDREW CARTER(1) Director February 12, 2004 - present
North Vancouver,
British Columbia, Canada
WILLIAM LEE(1) Director February 1997 - present
Tsawwassen,
British Columbia, Canada
HARVEY LIM Corporate Secretary December 1988 - present
Burnaby,
British Columbia, Canada
(1) Member of the Audit Committee.
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.
Nick DeMare (Age 49), President, Chief Executive Officer and 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."
-28-
Andrew Carter (Age 56), Director
Mr. Carter obtained a certificate in accounting from the Principal Midland
College of TAFE (Western Australia) in 1987. Since 1992, Mr. Carter has been a
member of the Australian Institute of Credit Management. Mr. Carter has an
extensive background, initially in the mining industry and then as a commercial
financial executive. During the 1970's, Mr. Carter was involved in the mining
industry, where he managed exploration crews in the Leonora and Kimberly regions
in Western Australia. He subsequently changed professions and, in 1988, was
appointed Chief Executive of RAC Finance Limited, the largest non-bank owned
commercial financier in Western Australia. During this time, he was appointed
Chairman and Director of Australian Finance Conference Limited and represented
the industry as a panel member of the Commercial Tribunal for Western Australia.
In 1999, Mr. Carter relocated to Vancouver where he has been providing
consulting services as an independent corporate consultant. Mr. Carter 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".
William Lee (Age 50), Director
Mr. Lee 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. He has been a financial officer or controller
of several public and private companies since 1986 and, prior, thereto, was a
Senior Audit Manager at Deloitte & Touche. Prior to March, 1995, Mr. Lee was
employed as the Chief Financial Officer of Sanctuary Woods Multimedia Corp. From
March 1995 to June 1996, Mr. Lee was employed as the Chief Financial Officer of
Wildwood Interactive Inc. Since June, 1996, Mr. Lee has been employed as the
Chief Financial Officer of IMA Exploration Inc., a public company engaged in the
exploration of mineral properties. Mr. Lee currently serves as an officer and
director of other public reporting companies.
Harvey Lim (Age 45), 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, 2003, the former and current directors
and officers of the Company, as a group, had received or charged the Company a
total of $153,064 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.
"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 $100,000 whether or not they are an
executive officer at the end of the fiscal year.
During the fiscal year ended August 31, 2003, the Company had two Named
Executive Officers, Donald W. Busby, the Company's former Chairman and CEO and
Nick DeMare, the Company's current interim President and CEO. The
-29-
following table sets forth the compensation awarded, paid to or earned by the
Named Executive Officers during the financial years ended August 31, 2001, 2002
and 2003:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------ --------------------------------------
AWARDS PAYOUTS
-------------------------- -------
SECURITIES RESTRICTED
OTHER UNDER SHARES OR ALL
ANNUAL OPTIONS/ RESTRICTED OTHER
NAME AND COMPEN- SARS SHARE LTIP COMPEN-
PRINCIPAL SALARY BONUS SATION GRANTED UNITS PAYOUTS SATION
POSITION Year(1) ($) ($) ($) (#)(2) ($) ($) ($)
- -------------------- ------ ------- ----- ------- ---------- ---------- ------- -------
Nick DeMare(3) 2003 Nil Nil Nil Nil/Nil N/A N/A 52,215(4)
interim President, 2002 Nil Nil Nil Nil/Nil N/A N/A 46,080(4)
CEO and Director 2001 Nil Nil Nil Nil/Nil N/A N/A 47,110(4)
Donald W. Busby(3) 2003 Nil Nil Nil Nil/Nil N/A N/A 100,849(5)
former Chairman, 2002 Nil Nil Nil Nil/Nil N/A N/A 132,082(5)
President, CEO and 2001 Nil Nil Nil 56,142/Nil N/A N/A 105,296(5)
Director
NOTES:
(1) Financial years ended August 31, 2001, 2002 and 2003.
(2) Figures represent options granted during a particular year; see "Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year- End Option Values"
table below for the aggregate number of options outstanding at year end.
(3) Mr. Busby resigned as a director and the Chairman, President and CEO of the
Company on July 4, 2003. Mr. DeMare was subsequently appointed as the
interim President and CEO of the Company.
(4) Paid to Chase, a private company owned by Mr. DeMare, for accounting,
administration and professional services rendered by Chase personnel. See
"Employment Agreements" below.
(5) 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 did
not grant any LTIP's during the financial year ended August 31, 2003.
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
Officers or directors during the financial year ended August 31, 2003.
OPTION GRANTS IN LAST FISCAL YEAR
No incentive stock options were granted to the Named Executive Officers during
the past fiscal year ended August 31, 2003.
-30-
REPRICING OF OPTIONS IN LAST FISCAL YEAR
No incentive stock options were repriced during the fiscal year ended August 31,
2003 in respect of the Named Executive Officers.
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, 2003 by the Named Executive Officers and the
fiscal year-end value of unexercised options on an aggregated basis:
Value of
Unexercised
Unexercised In-the-Money
Options at Options
Fiscal at Fiscal
Year-End Year-End
Securities Aggregate (#)(3) ($)(3)(4)
Acquired on Value
Exercise Realized Exercisable/ Exercisable/
Name (#)(1) ($)(2) Unexercisable Unexercisable
- --------------- ----------- --------- ------------- -------------
Nick DeMare Nil Nil 14,286/Nil Nil/Nil
Donald W. Busby Nil Nil 56,142/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
TSXV on the date of the exercise, less the exercise price per share.
(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 TSXV on August 31, 2003, of
$0.07 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 $100,000 per executive officer.
COMPENSATION OF DIRECTORS
No incentive stock options were granted or repriced during the fiscal year ended
August 31, 2003 to directors who are not Named Executive Officers of the
Company.
The following table sets forth details of all exercises of stock options/SARs
during the financial year ended August 31, 2003 by current and former directors
who are not Named Executive Officers of the Company and the financial year-end
value of unexercised options/SARs:
-31-
Value of
Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at Fiscal at Fiscal
Year-End Year-End
Securities Aggregate (#)(3) ($)(3)(4)
Acquired on Value
Exercise Realized Exercisable/ Exercisable/
Name (#)(1) ($)(2) Unexercisable Unexercisable
- --------------- ----------- --------- ------------- -------------
George Muscroft Nil Nil 8,571/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
TSXV 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 TSXV on August 30, 2003 of
$0.07 per share, less the exercise price of in-the-money stock options.
During the most recently completed financial year ended August 31, 2003, current
and former directors, who were not Named Executive Officers, did not receive any
compensation for services provided to the Company in their capacities as
directors and/or consultants and/or experts.
EMPLOYMENT AGREEMENTS
The Company has an arrangement with Chase, a company wholly-owned by Nick
DeMare, whereby the Company has retained Chase to provide ongoing
administrative, accounting and management services. In return for providing such
services, Chase is paid a monthly fee of $3,000 plus any out-of-pocket
disbursements made by Chase on the Company's behalf. The administrative contract
may be terminated by either party with two months' notice. In addition, the
Company may engage Chase to perform extra services in which case Chase will
charge the Company for its employees at competitive rates. 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 shareholders' meeting must appoint or re-appoint
an audit committee. As of the date of this report, the members of the audit
committee were Messrs. DeMare, Carter and Lee.
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.
REMUNERATION COMMITTEE
The Company does not have a separate Remuneration Committee.
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.
-32-
The Company and its subsidiaries do not have any contracts with the directors of
the Company (or any entities controlled by the directors of the Company)
providing for benefits upon termination of employment.
EMPLOYEES
During the years ended August 31, 2003, 2002 and 2001, 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. 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.
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, 2004.
SHARES AND RIGHTS BENEFICIALLY
TITLE OF CLASS NAME AND ADDRESS OF OWNER OWNED OR CONTROLLED (1) PERCENT OF CLASS (1)
- -------------- --------------------------------- ----------------------------- ----------------------
Common Stock Nick DeMare 58,555(2) 2.0%
Burnaby, British Columbia
Common Stock Andrew Carter Nil N/A
North Vancouver, British Columbia
Common Stock William Lee Nil N/A
Tsawwassen, British Columbia
Common Stock Harvey Lim 143 <1.0%
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, 2004.
(2) 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.
STOCK OPTION PLAN
The Company has a rolling stock option plan (the "Plan"), which makes a total of
10% of the issued and outstanding shares of the Company available for issuance
thereunder. The Company's Plan is approved annually by the shareholders. In
accordance with the policies of the TSXV, a rolling plan, which is the type of
plan the Company has adopted, requires the approval of the shareholders of the
Company on an annual basis.
The purpose of the Plan is 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 provides that it is solely within the discretion of the Board to
determine who should receive options and in what amounts. The Board of Directors
may issue a majority of the options to insiders of the Company. However, the
Plan provides that in no case will the Plan or any existing share compensation
arrangement of the Company result, at
-33-
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 intended to be a brief description of the 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. Any outstanding
options will form a part of the foregoing 10%. The exercise price of the
stock options, as determined by the Board of Directors in its sole
discretion, shall not be less than the closing price of the Company's
shares traded through the facilities of the TSXV on the date prior to the
date of grant, less allowable discounts, in accordance with the policies of
the TSXV or, if the shares are no longer listed for trading on the TSXV,
then such other exchange or quotation system on which the shares are listed
and quoted for trading.
2. The Board of Directors 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 five years from the date on
which the Board of Directors grant and announce the granting of the option.
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 of Directors 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.
As of the date of this report there are no incentive stock options outstanding
to purchase shares of the Company's common stock.
WARRANTS
As of the date of this report there are no warrants outstanding.
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. As of January
31, 2004, there are no shareholders holding greater than 5% of the Company's
outstanding shares.
CHANGES IN SHAREHOLDINGS
On January 31, 2003, Hilton and Donald W. Busby owned or controlled 504,285 and
402,718 shares and rights, respectively, in the Company as follows:
-34-
i) Hilton's holdings was comprised of 234,285 shares of common
stock and warrants to acquire an additional 270,000 common
shares. The warrants have since expired. As of the date of
this report, Hilton holds 154,285 common shares; and
ii) Mr. Busby's holdings was comprised of 144,005 shares of common
stock and warrants to acquire an additional 106,286 common
shares held by Boone Petroleum Inc., ("Boone"), 96,285 shares
held by the Donald W. Busby 1999 Irrevocable Trust ("Busby
Trust") and options held by Mr. Busby to acquire 56,142 common
shares. Mr. Busby is a former director, Chairman, President
and CEO of the Company. Boone is a private company
wholly-owned by Mr. Busby. The warrants and options have since
expired. As of the date of this report, 144,005 shares remain
held by Boone and 96,285 shares remain held by the Busby
Trust.
CHANGE OF CONTROL
As of the date of this report, there are no arrangements know to the Company
which may at a subsequent date result in a change of control of the Comapny.
UNITED STATES SHAREHOLDERS
As of March 2, 2004, there were approximately six registered holders of the
Company's common shares in the United States, with combined holdings of 493,661
shares, representing 16.9% 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, 2003 and the period
from September 1, 2003 to January 31, 2004, 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. DWB, a private company wholly-owned by Donald Busby, the former
Chairman, President, CEO and a director of the Company, was retained to
provide marketing, consulting and management services. The arrangement
was terminated on July 4, 2003 upon Mr. Busby's resignation as
Chairman, President, CEO and a director of the Company. Management
believes the arrangement with DWB was fair to the Company and similar
to terms which could be obtained from unrelated third parties. During
the year ended August 31, 2003,the Company paid $100,849 to DWB.
2. The Company has retained Chase, a company wholly-owned by Mr. Nick
DeMare, the President and CEO and 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, 2003 and the period
from September 1, 2003 to January 31, 2004, the Company paid or was
charged by Chase $52,215 and $97,000 respectively.
-35-
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. Donald W. Busby. The loan originally bore interest at
5% per annum, compounded monthly, and was to mature on March 27, 2002. During
the fiscal year ended August 31, 2002, the Company agreed to extend the term of
the loan to January 24, 2004. In addition, the loan was renegotiated to bear
interest at 10% per annum, payable quarterly. During the fiscal year ended
August 31, 2003. Mr. Busby repaid the remaining outstanding principal of
$114,843 and interest of $2,242.
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, 2003 and the
period from September 1, 2003 to January 31, 2004.
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 the United States, and for
which such director currently serves as an officer or director:
PRINCIPAL REPORTING COMPANY CAPACITY PERIOD
- ------------- ----------------------- ---------------------- ------------------------
Nick DeMare Aguila American Resources Ltd. Director January 2003 - present
Andean American Mining Corp. Director August 2002- present
Secretary December 1995 - present
California Exploration Ltd. Director October 2002 - present
Dial Thru International Inc. Director January 1991 - present
GGL Diamond Corp. Director May 1989 - present
Global Energy Inc. Director & President September 2002 - present
Golden Peaks Resources Ltd. Director January 1992 - present
Goldmarca Limited Director September 2000 - present
Gold Point Exploration Ltd. Director & President August 2003 - present
Hilton Petroleum Ltd. Director October 1989 - present
President & CEO July 2003 - present
Kookaburra Resources Ltd. Director June 1988 - present
Lariat Resources Ltd. Director & President August 2002 - present
North American Oil & Gas Inc. Director, Secretary & Treasurer June 2001 - present
Medina International Corp. Director, Secretary & Treasurer May 2002 - present
Halo Resources Ltd. Director January 1996 - present
President & CEO July 2003 - present
Tinka Resources Limited Director & Secretary October 2003 - present
Tumi Resources Limited Director January 2000 - present
Andrew Carter California Exploration Ltd. Director September 2003 - present
Hilton Petroleum Ltd. Director July 2003 - present
Tinka Resources Ltd. Director, President & CEO February 2003 - present
Halo Resources Ltd. Director, President & CEO February 2003 - present
-36-
PRINCIPAL REPORTING COMPANY CAPACITY PERIOD
- ------------- ----------------------- ---------------------- ------------------------
William Lee Gold Point Exploration Ltd. Director January 2001 - present
Hilton Petroleum Ltd. Director September 1995 - present
IMA Exploration Inc. Director June 1996 - present
Tinka Resources Limited Director October 2002 - present
Halo Resources Ltd. Director February 2004 - present
Harvey Lim Gold Point Exploration Ltd. Director & Secretary October 2003 - present
California Exploration Ltd. Director & Secretary September 2003 - present
Hilton Petroleum Ltd. Secretary June 1997 - -present
Medina International Corp. Director May 2002 - present
Halo Resources Ltd. Secretary December 1988 - 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.
ITEM 8. FINANCIAL INFORMATION.
- --------------------------------------------------------------------------------
DESCRIPTION PAGE
- ----------- ----
Audited Consolidated Financial Statements
for the Years Ended August 31, 2003, 2002 and 2001 F-1 to F-20
SIGNIFICANT CHANGES
On January 15, 2004, the Company announced that it has agreed to conduct a
non-brokered private placement of 3,400,000 units at $0.15 per unit, for
$510,000 gross cash proceeds. Each unit will be comprised of one common share
and one share purchase warrant. Each warrant will entitle the holder to purchase
an additional common share for a period of two years from closing, at $0.20 per
share in year one, and at $0.25 per share in year two.
On February 19, 2004, the Company announced that it had agreed to conduct a
further non-brokered private placement of 3,250,000 units at $0.24 per unit for
$780,000 gross cash proceeds. Each unit will be comprised of one common share
and one share purchase warrant. Each warrant will entitle the holder to purchase
an additional common share for a period of two years from closing, at $0.30 per
share.
Completion of the proposed private placements are subject to TSXV approval.
There are no assurances that the equity financings will be completed.
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.
-37-
LEGAL PROCEEDINGS
The Company knows of no material, active or pending legal proceedings against
it; nor is the Company involved as a plaintiff in any material proceeding or
pending litigation.
The Company knows of no active or pending proceedings against anyone that might
materially adversely affect an interest of the Company.
ITEM 9. THE OFFER AND LISTING.
- --------------------------------------------------------------------------------
PRICE HISTORY
The TSXV 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 TSXV's premier tier
and is reserved for the TSXV'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 TSXV
are Tier II companies. The Company trades on the TSXV under the symbol "HLO" and
is classified as a Tier II company.
There have been no trading suspensions imposed by the TSXV 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 TSXV, and predecessor
exchanges, for the periods indicated:
TSXV STOCK TRADING ACTIVITY
SALES PRICE
---------------------------
YEAR ENDED VOLUME HIGH LOW
August 31, 2003 735,039 $0.18 $0.06
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
SALES PRICE
---------------------------
QUARTER ENDED VOLUME HIGH LOW
February 29, 2004 301,186 $0.50 $0.19
November 30, 2003 291,445 $0.22 $0.05
August 31, 2003 52,048 $0.09 $0.06
May 31, 2003 259,747 $0.18 $0.09
February 28, 2003 267,372 $0.15 $0.07
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
-38-
SALES PRICE
---------------------------
MONTH ENDED VOLUME HIGH LOW
February 29, 2004 117,505 $0.50 $0.31
January 31, 2004 108,783 $0.40 $0.20
December 31, 2003 74,898 $0.25 $0.19
November 30, 2003 102,258 $0.22 $0.14
October 31, 2003 141,309 $0.20 $0.08
September 30, 2003 47,878 $0.14 $0.05
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 "HLOSF". The following tables set forth the market price ranges and
the aggregate volume of trading of the common shares of the Company on the OTC
system for the periods indicated:
OTC-BB TRADING ACTIVITY
SALES PRICE (US $)
---------------------------
YEAR ENDED VOLUME HIGH LOW
August 31, 2003 177,000 $0.09 $0.03
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
February 29, 2004 19,153 $0.34 $0.06
November 30, 2003 11,526 $0.07 $0.05
August 31, 2003 1,500 $0.05 $0.05
May 31, 2003 133,000 $0.08 $0.04
February 28, 2003 18,500 $0.08 $0.03
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
SALES PRICE (US $)
---------------------------
MONTH ENDED VOLUME HIGH LOW
February 29, 2004 428 $0.34 $0.20
January 31, 2004 10,285 $0.20 $0.08
December 31, 2003 8,440 $0.15 $0.06
November 30, 2003 5,726 $0.07 $0.05
October 31, 2003 3,000 $0.05 $0.05
September 30, 2003 2,800 $0.05 $0.05
These above quotations reflect inter-dealer prices without retail mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
The OTC-BB is smaller and less liquid than the major securities markets in the
United States. The trading volume of the Company's shares on the OTC-BB has been
volatile. Consequently, shareholders in the United States may not be able to
sell their shares at the time and at the price they desire.
-39-
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
Corporations under the access number 29383 (the "Yukon Registrar").
The Company's Articles of Continuance place no restrictions upon the Company's
objects and purposes.
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.
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;
-40-
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 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.
Of the Company's unlimited share capital, a total of 2,926,859 common shares
were issued and outstanding as of January 31, 2004. 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.
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.
Special meetings may be called by the board of directors, the Chairman of the
board of directors, the managing director or the president at any time.
-41-
The only persons entitled to be present at a meeting of shareholders shall be
those entitled to vote thereat, the board of directors, the auditor of the
Company and others who, although not entitled to vote, are entitled or required
under any provision of the Yukon Act, the Articles of Continuance or bylaws to
be present at the meeting. Any other person may be admitted only on the
invitation of the Chairman of the meeting or with the consent of the meeting.
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 CONTRACTS
The following are material contracts entered into by the Company during the two
years preceding the date of this report:
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 - East Lost Hills Joint Venture and
San Joaquin Joint Venture, California".
2. Agreement December 18, 2002, between TMK Oil & Gas, Inc. and PNP
Petroleum Inc. See "Item 4. Information on the Company - Business
Overview - Principal Oil and Gas Properties - West Ranch Field, Texas."
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
-42-
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.
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
-43-
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
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 US 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- US 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-US 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.
-44-
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 US 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.
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.
US HOLDERS
As used herein, a "US Holder" is defined as (i) citizens or residents of the US,
or any state thereof, (ii) a corporation or other entity created or organized
under the laws of the US, or any political subdivision thereof, (iii) an estate
the income of which is subject to US federal income tax regardless of source or
that is otherwise subject to US 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 US court and which has one or more US 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
US 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 US Holder's United States federal income tax liability
or, alternatively, may be deducted in computing the US 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 US 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 US Holder
which is an individual, estate or trust. There are currently no preferential tax
rates for long-term capital gains for a US 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 US 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 US 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 US Holder during that year. Subject
to certain limitations, Canadian taxes withheld will be eligible for credit
against the US Holder's United States federal income taxes. Under the Code, the
limitation on foreign taxes eligible for credit is
-45-
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 US Holder's circumstances. Foreign tax
credits allowable with respect to each class of income cannot exceed the US
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 US 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 US 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 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
-46-
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 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.
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
- --------------------------------------------------------------------------------
An evaluation was performed under the supervision and with the participation of
the Company's management, including Mr. DeMare, who is the Company's chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(the "Exchange Act") as of August 31, 2003. Based upon that evaluation, Mr.
DeMare, concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
ITEM 16. [RESERVED]
- --------------------------------------------------------------------------------
Not applicable.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
- --------------------------------------------------------------------------------
The Board of Directors has determined that the Company has at least one audit
committee financial expert, Mr. Nick DeMare, who serves on the Company's audit
committee.
-47-
ITEM 16B. CODE OF ETHICS.
- --------------------------------------------------------------------------------
On March 1, 2004, our board of directors adopted a code of ethics which applies
to the Company's principal executive officer, principal financial officer and
principal accounting officer and/or controller, or persons performing similar
functions. The code of ethics is filed with this report as an exhibit.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS.
- --------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
See pages 51 (F-1) through 70 (F-20).
ITEM 18. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 19. EXHIBITS.
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION PAGE
1.1 Roll Over Articles of Golden Chance Resources Inc. N/A
and amendments thereto.(1)
1.2 Certificate of Continuance and Articles of Continuance N/A
for Trimark Resources Ltd. and amendments thereto.(1)
1.3 Bylaws of Trimark Resources Ltd.(1) N/A
1.4 Certificate of Amendment and Articles of Amendment for 71
International Trimark Resources Ltd.
1.5 Certificate of Amendment and Articles of Amendment for 74
Trimark Oil & Gas Ltd.
1.6 Certificate of Amendment and Articles of Amendment for 77
Trimark Energy Ltd.
-48-
EXHIBIT
NUMBER DESCRIPTION PAGE
1.7 Certificate of Amendment and Articles of Amendment for 80
Halo Resources Ltd.
4.12 Form of Loan Agreement Between Donald W. Busby and N/A
Trimark Oil & GasLtd. dated November 19, 1999(2)
4.13 Oil and Gas Prospect Exploration and Development N/A
Agreement dated February 26, 2000(2)
4.14 Agreement between Berkley Petroleum, Inc., Hilton N/A
Petroleum Inc., Trimark Resources Inc., STB Energy Inc.,
and KOB Energy Inc., dated June 10, 2002(3)
4.15 Agreement between TMK Oil & Gas Inc. and PNP Petroleum Inc. 83
dated December 18, 2002.
4.16 Stock Option Plan 105
8.1 List of Subsidiaries 121
11.1 Code of Ethics 123
12.1 Certification of Nick DeMare Pursuant to Rule 13a-14(a) 127
13.1 Certification of Nick DeMare Pursuant to 18 U.S.C. 129
Section 1350
(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.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 20-F,
filed with the Commission on February 19 ,2003. File number 0-30196.
-49-
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.
HALO RESOURCES LTD.
Dated: March 8, 2004 /s/ Nick DeMare
- ----------------------- ---------------------------
Nick DeMare,
President,
Chief Executive Officer,
Chief Financial Officer and
Director
-50-
- --------------------------------------------------------------------------------
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
- --------------------------------------------------------------------------------
F-1
-51-
D & H
group
Chartered
Accountants
AUDITORS' REPORT
To the Shareholders of Halo Resources Ltd.
(formerly Trimark Energy Ltd.)
We have audited the consolidated balance sheets of Halo Resources as at August
31, 2003 and 2002 and the consolidated statements of loss and deficit and cash
flow for the years ended August 31, 2003, 2002 and 2001. 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, 2003
and 2002 and the results of its operations and its cash flow for the years ended
August 31, 2003, 2002 and 2001 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, 2003 and
2002 and results of operations for the years ended August 31, 2003, 2002 and
2001 to the extent summarized in Note 11 to the consolidated financial
statements.
On December 17, 2003, we reported separately to the shareholders of Halo
Resources Ltd. on consolidated financial statements as at, and for the year
ended August 31, 2003 and 2002 audited in accordance with Canadian generally
accepted auditing standards which did not include a reconciliation to United
States generally accepted accounting principles.
Vancouver, B.C. /s/ D&H Group
December 17, 2003
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
-52-
D & H
group
Chartered
Accountants
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
December 17, 2003 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.
December 17, 2003 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
-53-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31
(Expressed in Canadian Dollars)
2003 2002
$ $
A S S E T S
CURRENT ASSETS
Cash 9,805 336,182
Amounts receivable 7,113 22,849
Marketable securities - 46,121
------------ ------------
16,918 405,152
PETROLEUM AND NATURAL GAS INTERESTS (Note 4) 76,167 1,111,226
OTHER ASSETS (Note 8(b)) - 114,843
------------ ------------
93,085 1,631,221
============ ============
L I A B I L I T I E S
CURRENT LIABILITIES
Accounts payable and accrued liabilities 19,046 328,018
ADVANCES (Note 5) 1,019,012 775,534
------------ ------------
1,038,058 1,103,552
------------ ------------
S H A R E H O L D E R S ' E Q U I T Y ( D E F I C I E N C Y )
SHARE CAPITAL (Note 6) 19,537,102 19,537,102
DEFICIT (20,482,075) (19,009,433)
------------ ------------
(944,973) 527,669
------------ ------------
93,085 1,631,221
============ ============
NATURE OF OPERATIONS, NAME CHANGE AND GOING CONCERN (Note 1)
APPROVED BY THE BOARD
/s / Nick DeMare , Director
- -------------------------------
/s/ Andrew Carter , Director
- -------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
-54-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED AUGUST 31, 2003, 2002, and 2001
(Expressed in Canadian Dollars)
2003 2002 2001
$ $ $
REVENUES
Oil and gas sales 45,346 125,749 521,322
Interest and other 23,878 37,028 114,098
------------ ------------ ------------
69,224 162,777 635,420
------------ ------------ ------------
EXPENSES
Production 16,810 134,556 185,037
General and administrative 176,947 241,789 330,245
Depreciation, depletion and impairment 1,251,882 6,010,537 5,168,418
------------ ------------ ------------
1,445,639 6,386,882 5,683,700
------------ ------------ ------------
LOSS BEFORE THE FOLLOWING (1,376,415) (6,224,105) (5,048,280)
INTEREST EXPENSE (60,741) (70,630) -
WRITE-OFF OF AMOUNTS RECEIVABLE (19,959) - -
LOSS ON SALE OF MARKETABLE SECURITIES (15,527) (13,239) -
WRITE-DOWN OF OTHER ASSETS - (258,699) -
------------ ------------ ------------
NET LOSS FOR THE YEAR (1,472,642) (6,566,673) (5,048,280)
DEFICIT - BEGINNING OF YEAR (19,009,433) (12,442,760) (7,394,480)
------------ ------------ ------------
DEFICIT - END OF YEAR (20,482,075) (19,009,433) (12,442,760)
============ ============ ============
LOSS PER COMMON SHARE
- BASIC AND DILUTED $(0.50) $(2.24) $(2.04)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,926,859 2,926,859 2,480,189
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
-55-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 and 2001
(Expressed in Canadian Dollars)
2003 2002 2001
$ $ $
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Net loss for the year (1,472,642) (6,566,673) (5,048,280)
Items not involving cash
Depreciation, depletion and impairment 1,251,882 6,010,537 5,168,418
Interest expense 60,741 70,630 -
Write-off of amounts receivable 19,959 - -
Loss on sale of marketable securities 15,527 13,239 -
Write-down of other assets - 258,699 -
Effect of unrealized foreign exchange gain - (24,199) (39,638)
------------ ------------ ------------
(124,533) (237,767) 80,500
Decrease (increase) in amounts receivable (4,223) 26,093 212,692
Decrease (increase) in inventory - 70,050 (70,050)
Increase (decrease) in accounts payable
and accrued liabilities 9,197 (40,907) 214,064
------------ ------------ ------------
(119,559) (182,531) 437,206
------------ ------------ ------------
FINANCING ACTIVITIES
Issuance of common shares - - 2,312,560
Advances received (repayment) (117,405) - 553,200
------------ ------------ ------------
(117,405) - 2,865,760
------------ ------------ ------------
INVESTING ACTIVITIES
Other assets 114,843 80,019 -
Additions to petroleum interests (319,757) (99,517) (4,415,135)
Proceeds from sale of marketable securities 30,594 323,821 -
Proceeds from sale of petroleum interests 84,907 - 19,851
------------ ------------ ------------
(89,413) 304,323 (4,395,284)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (326,377) 121,792 (1,092,318)
CASH - BEGINNING OF YEAR 336,182 214,390 1,306,708
------------ ------------ ------------
CASH - END OF YEAR 9,805 336,182 214,390
============ ============ ============
See also Note 12 for supplementary cash flow information.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
-56-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
1. NATURE OF OPERATIONS, NAME CHANGE AND GOING CONCERN
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. As described in Note 4, the Company wrote
off the majority of its petroleum and natural gas interests in November
2002, due to the disappointing results at East Lost Hills and regional
California. In January 2003, the Company acquired an interest in oil and
gas leases in Texas.
On February 23, 2004, the Company changed it name from Trimark Energy Ltd.
to Halo Resources Ltd.
During the 2003 fiscal year, the Company incurred a net loss of $1,472,642
and, as at August 31, 2003, had accumulated a deficit of $20,482,075. The
Company is currently not generating sufficient cash flow from its
operations to meet ongoing corporate overhead and to 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.
2. CHANGE IN ACCOUNTING POLICY
During the 2003 fiscal year the Company adopted, on a prospective basis,
the provisions of the new Section 3870 "Stock-Based Compensation and Other
Stock Based Payments" of the Canadian Institute of Chartered Accountants'
Handbook ("Section 3870"). Section 3870 establishes standards for the
recognition, measurement and disclosure of stock-based compensation and
other stock-based payments. Section 3870 recommends that certain
stock-based transactions, such as the grant of stock options, be accounted
for at fair value. The section is only applicable to transactions that
occurred on or after January 1, 2002. During the 2003 fiscal year the
Company did not grant any stock options. The adoption of Section 3870 did
not have any impact on the Company's financial statements.
3. 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 applied under United States generally accepted accounting principles
("US GAAP") are disclosed in Note 11.
F - 7
-57-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
3. ACCOUNTING POLICIES (continued)
The consolidated financial statements for the 2002 fiscal year included the
accounts of the Company and its wholly-owned subsidiaries, Trimark
Resources Inc. ("Trimark Inc."), Safari Petroleum, LLC ("Safari") and TMK
Oil & Gas Inc. ("TMK"). As described in Note 4, during the 2003 fiscal year
the Company abandoned its net investment in Trimark Inc. Intercompany
balances and transactions are eliminated on consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian GAAP
requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenditures during the period. Actual results may
differ from those estimates.
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.
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.
F - 8
-58-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
3. ACCOUNTING POLICIES (continued)
CASH EQUIVALENTS
Cash includes cash and short-term deposits maturing within 90 days of the
original date of acquisition.
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 income
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.
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
-59-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
4. PETROLEUM AND NATURAL GAS INTERESTS
2003 2002
$ $
Evaluated Properties
Acquisitions and leasehold costs - 7,956,252
Exploration and development costs 87,255 6,863,704
Gathering facility - 189,604
------------ ------------
87,255 15,009,560
------------ ------------
Unevaluated Properties
Acquisitions and leasehold costs - 554,760
Exploration costs - 421,091
------------ ------------
- 975,851
------------ ------------
87,255 15,985,411
Less: accumulated depreciation,
depletion and impairment (11,088) (14,874,185)
------------ ------------
76,167 1,111,226
============ ============
(a) During the 2003 fiscal year, the Company incurred petroleum
expenditures totalling $232,502 on the unsuccessful drilling of a
side-track well on the Basil Project. In addition, the Company did not
participate in any further funding of 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. In light of the results and
uncertainties of any further activities at East Lost Hills by the
joint venture, the Board of Directors of the Company has determined
that the Company will no longer provide further funding to Trimark
Inc., which holds the Company's East Lost Hills and regional
California petroleum interests. Accordingly, the Company has recorded
an impairment charge of $1,240,794, representing the Company's
remaining net investment in Trimark Inc. Effective November 30, 2002,
the Company ceased to record the activities of Trimark Inc.
(b) During May 2002, the Company, the operator of the East Lost Hills
Project and certain other participants in the East Lost Hills joint
venture, concluded an agreement on the ongoing evaluation of the ELH
#4 and #9 wells, whereby the funding parties assumed all of the unpaid
amounts and future costs in completing the evaluation of these wells.
In return, they were 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 2002 fiscal year the Company reversed $169,385 of
"accounts payable and accrued liabilities" with an offsetting credit
to "petroleum and natural gas interests".
(c) In January 2003, the Company earned a 3% working interest in certain
oil and gas leases, known as the West Ranch Field, located in Jackson
County, Texas by funding a development program on the subject leases.
As of August 31, 2003, the West Ranch Field remains the Company's only
producing petroleum and natural gas interests.
F - 10
-60-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
4. PETROLEUM AND NATURAL GAS INTERESTS (continued)
(d) No write-down was required as a result of the ceiling test performed
effective August 31, 2003. During the 2002 fiscal year the Company
recorded an impairment of $5,834,318 (2001 - $4,790,379)from the
ceiling test performed effective August 31, 2002. The ceiling test is
a cost- recovery test and is not intended to result in an estimate of
fair market value.
5. ADVANCES
2003 2002
$ $
Advances, bearing interest at 10%
per annum, due September 1, 2005 (a) 718,870 775,534
Advances, non-interest bearing,
due September 1, 2005 (b) 300,142 -
------------ ------------
1,019,012 775,534
============ ============
(a) As at August 31, 2003, $582,595 principal and $136,275 accrued
interest remain outstanding. Included in this balance is $361,233
owing to Hilton Petroleum Ltd. ("Hilton"), a public company which
holds common shares of the Company, and of which certain of its
shareholders, officers and directors are also shareholders, officers
and directors of the Company. The advances are unsecured.
(b) Advances have been made to the Company by shareholders and directors
of the Company for working capital purposes.
6. SHARE CAPITAL
Authorized - unlimited common shares without par value
Issued and outstanding -
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Number $ Number $ Number $
Balance, beginning of year 2,926,859 19,537,102 2,926,859 19,537,102 2,286,492 17,141,542
Issued during the year
Private placements - - - - 640,367 2,395,560
------------ ------------ ------------ ------------ ------------ ------------
Balance, end of year 2,926,859 19,537,102 2,926,859 19,537,102 2,926,859 19,537,102
============ ============ ============ ============ ============ ============
(a) The Company has established a rolling stock option plan (the "Plan"),
in which the maximum number of common shares which can be reserved for
issuance under the Plan is 10% of the issued and outstanding shares of
the Company. The exercise price of the options is set at the Company's
closing share price on the day before the grant date, less allowable
discounts in accordance with the policies of the TSX Venture Exchange.
The options have a maximum term of ten years.
F - 11
-61-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
6. SHARE CAPITAL (continued)
A summary of the Company's options at August 31, 2003 and 2002, and
the changes for the fiscal years ending on those dates is presented
below:
2003 2002
---------------------------- ----------------------------
Weighted Weighted
Number Average Number Average
of Options Exercise Price of Options Exercise Price
$ $
Balance,
beginning of year 125,000 0.40 226,715 6.44
Granted - 7,143 0.40
Cancelled/expired (32,143) 0.40 (108,858) 1.97
------------ ------------
Balance, end of year 92,857 0.40 125,000 0.40
============ ============
The following table summarizes information about the stock options
outstanding and exercisable at August 31, 2003:
Weighted Average
Remaining Weighted Average
Number of Options Exercise Price Contractual Life Exercise Price
92,857 $0.40 0.40 years $0.40
====== ===== ========== =====
(b) Details of the number of warrants outstanding are as follows:
2003 2002
Balance, beginning of year 468,857 891,867
Expired (468,857 (423,010)
------------ ------------
Balance, end of year - 468,857
============ ============
7. INCOME TAXES
As at August 31, 2003, the Company has accumulated non-capital losses for
income tax purposes of approximately $1,977,000, expiring from 2004 to
2010, 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, 2003, the Company was charged
$153,064 (2002 - $185,020; 2001 - $157,239)) for management,
professional, accounting and administrative services provided by
companies controlled by current and former officers of the Company. As
at August 31, 2003, accounts payable and accrued liabilities include
$7,770 (2002 - $67,899) due to these related parties.
F - 12
-62-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
8. RELATED PARTY TRANSACTIONS (continued)
(b) During the 2003 fiscal year the former President of the Company repaid
the outstanding principal balance of $114,843 and interest income of
$2,242 (2002 - $8,831; 2001 - $9,968) to the Company.
(c) Other related party transactions are disclosed elsewhere in these
consolidated financial statements.
9. SEGMENTED INFORMATION
As at August 31, 2003, 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:
2003
--------------------------------------------
Identifiable Net
Assets Revenues Income (Loss)
$ $ $
United States 80,226 68,800 (967,993)
Canada 12,859 424 (504,649)
------------ ------------ ------------
93,085 69,224 (1,472,642)
============ ============ ============
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 (5,544,636)
Canada 818,251 98,556 485,356
------------ ------------ ------------
8,168,171 635,420 (5,048,280)
============ ============ ============
F - 13
-63-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
10. FINANCIAL INSTRUMENTS
(a) Fair Values
The fair values of financial instruments at August 31, 2003 and 2002,
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, 2003 and 2002 may differ significantly from that presented.
Fair value approximates the amounts reflected in the financial
statements for cash, amounts receivable, accounts payable and accrued
liabilities.
It is not practicable to estimate the fair value of the advances.
(b) Credit Risk Management
The amounts 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 are presented in
accordance with Canadian GAAP. Canadian GAAP differs in certain
material respects from US GAAP. The material differences between
Canadian and US GAAP, in respect of these consolidated financial
statements, are summarized in the tables below.
Consolidated Statement of Loss
2003 2002 2001
$ $ $
Net loss under Canadian GAAP (1,472,642) (6,566,673) (5,048,280)
Adjustments for related party
transactions (i) - 1,928,229 815,793
Stock-based compensation (iii) - (74,614) (316,069)
Other compensation expense (vi) - - (172,720)
Additional depreciation, depletion
and amortization (ix) (500) - -
------------ ------------ ------------
Net loss under US GAAP (1,473,142) (4,713,058) (4,721,276)
============ ============ ============
Loss per share under US GAAP (0.50) (1.61) (1.90)
============ ============ ============
F - 14
-64-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
Consolidated Balance Sheet
2003 2002
$ $
Total assets under Canadian GAAP 93,085 1,631,221
Deferred tax asset (iv) 780,000 3,662,000
Less: Valuation allowance (iv) (780,000) (3,662,000)
Asset retirement cost (ix) 7,400 -
------------ ------------
Total assets under US GAAP 100,485 1,631,221
============ ============
Total liabilities under Canadian GAAP 1,038,058 1,103,552
Asset retirement obligations (ix) 7,900 -
Discount on advances (x) (60,028) -
------------ ------------
Total liabilities under US GAAP 985,930 1,103,552
============ ============
Total shareholders' equity under Canadian GAAP (944,973) 527,669
Additional depreciation, depletion and amortization (ix) (500) -
Discount on advances (x) 60,028 -
------------ ------------
Total shareholders' equity under US GAAP (885,445) 527,669
============ ============
(i) Capital Contributions with Respect to Related Party
Transactions
During the 1999 fiscal year, the Company acquired and disposed
of certain petroleum interests with Hilton 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 for the 2002 and 2001 fiscal years
have also been adjusted for the subsequent amortization and
impairment charges of these petroleum interest acquisitions
costs. There was no impact on the 2003 fiscal year.
F - 15
-65-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(ii) 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, 2003 and it was determined that no
additional write-down of proved petroleum interests was
necessary.
(iii) Stock-Based Compensation
The Company grants stock options which reserves common shares
for issuance to employees and directors. Before the 2003
fiscal year, the issuance of stock options was not recognized
for accounting purposes under Canadian GAAP. Under US GAAP,
the issuance of stock options requires an assessment to
determine stock based compensation. Accordingly, the Company
has applied the provisions of Statement of Financial
Accounting Standards ("SFAS") 123 Accounting for Stock-Based
Compensation to account for and 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 and 2001:
2002 2001
------------ ------------
Risk-free interest rate 4.54% 4.81% - 6.47%
Expected volatility 118% 124%
Expected lives 3 years 3 years
Expected dividend yield 0% 0%
No options were granted during the 2003 fiscal year.
(iv) 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, 2003, the Company has fully reserved the
$780,000 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, $153,000 is attributable to the 2003 fiscal
year.
F - 16
-66-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(v) 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 of the Company, pursuant
to private placements conducted by the Company, for cash
proceeds of $2,312,560. No private placement transactions were
conducted by the Company during the 2003 and 2002 fiscal
years.
(vi) 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, 2003 would increase by $nil (2002 - $nil;
2001 - $172,720) and $nil (2002 - $nil; 2001 - $140,700),
respectively, and share capital, as at August 31, 2003 would
increase by $961,402 (2002 - $961,402; 2001 - $961,402). There
is no net change to shareholders' equity.
(vii) Functional Currency
The Company's functional currency is the Canadian dollar.
(viii) Classification of Intangible Assets
In July 2001, the Financial Accounting Standards Board
("FASB") issued SFAS 142 "Goodwill and Other Intangible
Assets" which prescribes accounting for definite and
indefinite life intangible assets and goodwill. Intangible
assets with a determinable useful life will continue to be
amortized over that period. As a consequence of the
introduction of SFAS 142, the oil and gas industry is
currently discussing the appropriate balance sheet
classification of oil and gas mineral rights held by lease or
contract. The Company classifies these assets as a component
of petroleum and natural gas interests in accordance with its
interpretation of SFAS 19 and common industry practice. There
is also a view that these mineral rights are intangible assets
as defined in SFAS 141 "Business Combinations" and, therefore,
should be classified separately on the balance sheet as
intangible assets.
F - 17
-67-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
The Company did not change or reclassify contractual mineral
rights included in petroleum and natural gas interests on the
balance sheet upon adoption of SFAS 142. The Company believes
its current accounting of such mineral rights as part of oil
and gas properties is appropriate under the full cost method
of accounting. However, if the accounting for mineral rights
held by lease or contract is ultimately changed so that costs
associated with mineral rights not held under fee title and
pursuant to the guidelines of SFAS 141 are required to be
classified as long term intangible assets, then the
reclassification would have no impact on the Company's August
31, 2003 balance sheet. Management does not believe the
ultimate outcome of this issue will have a significant impact
on the Company's cash flows, results of operations or
financial condition.
(ix) Asset Retirement Obligations
The Company adopted SFAS 143 "Asset Retirement Obligations"
for US GAAP reporting purposes on September 1, 2003. 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 requires
companies to record the present value of obligations
associated with the retirement of tangible long-lived assets
in the period in which it is incurred. The liability is
capitalized as part of the related long-lived asset's carrying
amount. Over time, accretion of the liability is recognized as
an operating expense and the capitalized cost is depreciated
over the expected useful life of the related asset. The
Company's asset retirement obligations relate primarily to the
plugging, dismantlement, removal, site reclamation and similar
activities of its petroleum and natural gas interests. Prior
to adoption of SFAS 143, such obligations were accrued ratably
over the productive lives of the assets through its
depreciation, depletion and amortization of petroleum and
natural gas interests without recognizing a separate liability
for such amounts.
At the time of adoption, total assets increased by $7,500, and
total liabilities increased by $7,500. The amounts recognized
upon adoption are based upon numerous estimates and
assumptions, including future retirement costs, future
recoverable quantities of petroleum and natural gas, future
inflation rates and the credit-adjusted risk free interest
rate. Changes in asset retirement obligations during the year
were:
$
Asset retirement obligations at September 1, 2002 -
Liabilities incurred 7,500
Liabilities settled -
Accretion expense (included in depreciation) 400
--------
Asset retirement obligation at August 31, 2003 7,900
Less: current portion -
--------
Long-term portion 7,900
========
F - 18
-68-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
The Company will adopt Section 3110 "Asset Retirement
Obligations" of the CICA Handbook, which is harmonious with
SFAS 143, on September 1, 2004.
(x) Imputed Interest on Long-Term Debt
US GAAP requires that interest be imputed on debt that does
not bear interest. The Company has imputed interest at its
estimated incremental borrowing rate of 10%, with an
offsetting charge to retained earnings as the debt is held by
related parties. The discount will be accreted to earnings
over the term to maturity.
(b) The Company's consolidated statements of cash flow comply with US
GAAP.
(c) New Technical Pronouncements
In April 2002, the FASB issued SFAS 145, "Rescission of FASB
Statements 4, 44, and 64, Amendment of FASB Statement 13, and
Technical Corrections." FASB 4 required all gains or losses from
extinguishment of debt to be classified as extraordinary items net of
income taxes. SFAS 145 requires that gains and losses from
extinguishment of debt be evaluated under the provisions of Accounting
Principles Board Opinion 30, and be classified as ordinary items
unless they are unusual or infrequent or meet the specific criteria
for treatment as an extraordinary item. This statement is effective
January 1, 2003. The Company does not anticipate that the adoption of
this statement will have a material effect on its financial position
or results of operations.
In July 2002, the 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 EITF Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires recognition of a liability
for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an
exit plan under EITF 94-3. SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The
Company does not anticipate that the adoption of this statement will
have a material effect on its financial position or results of
operations.
In December 2002, the FASB approved SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement 123". SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation" to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS 148 is effective
for financial statements for fiscal years ending after December 15,
2002. The Company will continue to account for stock-based
compensation using the methods detailed in the stock-based
compensation accounting policy, and has adopted the disclosure
requirement of SFAS 148.
F - 19
-69-
HALO RESOURCES LTD.
(formerly Trimark Energy Ltd.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian Dollars)
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 amends
certain portions of SFAS 133 and is effective for all contracts
entered into or modified after June 30, 2003 on a prospective basis.
SFAS 149 is not expected to have a material effect on the results of
operations or financial position of the Company since the Company
currently has no derivatives or hedging contracts.
In June 2003, the FASB approved SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS 150 is not expected to have an effect on the
Company's financial position.
12. SUPPLEMENTARY CASH FLOW INFORMATION
Non-cash investing and financing activities were conducted by the Company
as follows:
2003 2002 2001
$ $ $
Operating activities
Reversal of accounts payable and
accrued liabilities - (169,385) -
============ ============ ============
Investing activities
Reversal of petroleum and natural
gas interests expenditures - 169,385 -
============ ============ ============
2003 2002 2001
$ $ $
Interest paid in cash - - -
============ ============ ============
Income taxes paid in cash - - -
============ ============ ============
During fiscal 2003, the Company recorded $60,741 (2002 - $70,630; 2001 -
$nil) of interest expense on advances.
F - 20
-70-