UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year ended December 31, 2004
|_| 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 0-17729
FEC RESOURCES INC (formerly "FORUM ENERGY CORPORATION")
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's Name into English)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
Suite 1400 700-2nd Street SW Calgary, AB. T2P 4V5
(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, without par value
(Title of Class)
Common Stock Purchase Warrants
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
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: 174,583,646 Common Stock and 8,239,000 Common Stock Purchase Warrants
and 7,667,500 Common Stock Purchase Options.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 or 15 (d) of the Securities and 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:
Yes |x| No |_|
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Not Applicable
FEC RESOURCES, INC (formerly "FORUM ENERGY CORPORATION")
FORM 20-F ANNUAL REPORT FISCAL 2004, ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
Page
PART I
Item 1. Identity of Directors, Senior Management and Advisers 4
Item 2. Offer Statistics and Expected Timetable 4
Item 3. Key Information 4
Item 4. Information on the Company 12
Item 5. Operating and Financial Review and Prospects 16
Item 6. Directors, Senior Management and Employees 21
Item 7. Major Shareholders and Related Party Transactions 28
Item 8. Financial Information 29
Item 9. The Listing 32
Item 10. Additional Information 33
Item 11. Quantitative and Qualitative Disclosure About Market Risk 35
Item 12. Description of Securities other than Equity Securities 35
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies 35
Item 14. Material Modifications to the rights of Security Holders
and Use of Proceeds 36
Item 15. Controls And Procedures 36
Item 16A. Audit Committee Financial Expert 36
Item 16B. Code Of Ethics 36
Item 16C. Principal Accountant Fees And Services 37
PART III
Item 17. Financial Statement 38
Item 18. Financial Statements 62
Item 19. Exhibits 62
Signatures 63
Exhibit Index 64
Certifications 65
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements. Forward-looking statements represent our current expectations or
forecasts of future events and are based on our management's beliefs, as well as
assumptions made by and information currently available to them. You can
identify these statements by the fact that they do not relate strictly to
historical or current facts. These statements may include the words
"anticipate," "believe," "budget," "estimate," "expect," "intend," "objective,"
"plan," "probable" "possible," "potential," "project" and other words and terms
of similar meaning in connection with any discussion of future operating or
financial performances.
Any or all of our forward-looking statements in this Form 20-F may turn
out to be wrong. They can be affected by inaccurate assumptions or by known or
unknown risks and uncertainties. Many of these factors, including the risks
outlined under "Risk Factors," will be important in determining our actual
future results, which may differ materially from those contemplated in any
forward-looking statements. These factors include, among others, the following:
- oil and natural gas price volatility;
- uncertainties in the estimates of proved reserves and in the
projection of future rates of production and timing of development
expenditures;
- our ability to find and acquire additional reserves;
- risks associated with acquisitions, exploration, development and
production;
- operating hazards attendant to the oil and natural gas business;
- potential constraints on our ability to market reserves due to
limited transportation space;
- climatic conditions;
- availability and cost of labor, material, equipment and capital;
- ability to employ and retain key managerial and technical personnel;
- international, national, regional or local political and economic
uncertainties, including changes in energy policies, foreign
exchange restrictions and currency fluctuations;
- adverse regulatory or legal decisions, including those under
environmental laws and regulations;
- the strength and financial resources of our competitors;
- general economic conditions; and
- our ability to continue as a going concern.
When you consider these forward-looking statements, you should keep in
mind these risk factors and other cautionary statements in this prospectus. Our
forward-looking statements speak only as of the date made.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as otherwise required by United
States securities laws, we are under no duty to update any of the forward
looking statements after the date of this Form 20-F to conform them to actual
results or to changes in our expectations. All forward-looking statements
attributable to us are expressly qualified in their entirety by the foregoing
cautionary statement.
3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable to Form 20-F filings as annual report.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable to Form 20-F filings as annual report.
ITEM 3. KEY INFORMATION.
The following is a summary of key information about our financial
condition, capitalization and the risk factors pertaining to our business.
Currency Exchange Rates
Table No. 3(A)(1) sets forth the rate of exchange for the Canadian Dollar
at the end of each of the five most recent fiscal years ended December 31, the
average rates for each year, and the range of high and low rates for each year.
Table 3(A)(2) sets forth the high and low exchange rates for each month during
the previous six months. For purposes of these tables, the rate of exchange
means 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 table sets forth the number of Canadian Dollars required under that
formula to buy one US Dollar. The average rate means the average of the exchange
rates on the last day of each month during the year.
Table No. 3(A)(1)
U.S. Dollar/Canadian Dollar
Currency Exchange Table No. 1
U.S. Dollar/Canadian Dollar
- --------------------------------------------------------------------------------
Average High Low Close
- --------------------------------------------------------------------------------
Fiscal Year Ended 12/31/04 1.30 1.40 1.18 1.20
- --------------------------------------------------------------------------------
Fiscal Year Ended 12/31/03 1.40 1.54 1.31 1.30
- --------------------------------------------------------------------------------
Fiscal Year Ended 12/31/02 1.57 1.62 1.51 1.58
- --------------------------------------------------------------------------------
Fiscal Year Ended 12/31/01 1.55 1.60 1.49 1.59
- --------------------------------------------------------------------------------
Fiscal Year Ended 12/31/00 1.49 1.56 1.44 1.50
- --------------------------------------------------------------------------------
The current rate of exchange was 1.2283 on June 30,2005.
Table No. 3(A)(2)
U.S. Dollar/Canadian Dollar
- --------------------------------------------------------------------------------
01/05 02/05 03/05 04/05 05/05 06/05
- --------------------------------------------------------------------------------
High 1.2381 1.2562 1.2463 1.2482 1.2703 1.2263
- --------------------------------------------------------------------------------
Low 1.1982 1.2301 1.2017 1.2094 1.2372 1.2578
- --------------------------------------------------------------------------------
4
A. Selected Financial Data
The tables below present selected financial information. Our financial
statements are stated in Canadian Dollars and are prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). Table 3(A)(3)
presents selected financial information under Canadian GAAP and Table 3(A)(4)
presents the same information assuming we had reported under US GAAP (see
below). These tables should be read in conjunction with the financial statements
and notes thereto and Management Discussion and Analysis included elsewhere in
this annual report. All dollar amounts in this report are expressed in Canadian
dollars unless otherwise stated.
Table No. 3(A)(3)
Selected Financial Data CDN GAAP
(CDN $ in '000, except EPS, Weighted Avg. Shares and Capital Stock Shares)
------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
- ------------------------------------------------------------------------------------------------------
Revenue $ -- $ -- $ -- $ 1 $ 1
Loss before non-controlling interest $ (7,228) $ (1,397) $ (1,058) $ (1,195) $ (1,665)
Net loss $ (7,219) $ (1,356) $ (1,058) $ (1,514) $ (2,028)
Net loss per share $ (0.05) $ (0.01) $ (0.10) $ (0.17) $ (0.28)
Diluted Net loss per share $ (0.05) $ (0.01) $ (0.10) $ (0.17) $ (0.28)
Dividends per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Avg. Shares O/S ('000) 149,900 113,700 10,404 8,734 7,338
- ------------------------------------------------------------------------------------------------------
Working Capital $ (998) $ (283) $ (587) $ (574) $ (281)
Resource Properties (1) $ 6,217 $ 8,951 $ -- $ -- $ 149
Long-Term Debt $ 7,921 $ 6,882 $ -- $ -- $ Nil
Shareholders' Equity/ (deficiency) $ (2,153) $ 1,809 $ (576) $ 242 $ 838
Capital Stock Shares (`000) 174,584 135,821 10,511 9,529 7,845
Total Assets $ 7,271 $ 9,109 $ 71 $ 852 $ 1,164
- ------------------------------------------------------------------------------------------------------
(1) Resource properties comprise all costs of acquisition of, exploration for,
and development of petroleum and natural gas reserves (net of government
incentives) less depletion and write downs.
Table No. 3(A)(4)
Selected Financial Data US GAAP
(CDN $ in '000, except EPS, Wgt Avg. shares and Capital Stock Shares)
------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
- ------------------------------------------------------------------------------------------------------
Revenue $ -- $ -- $ -- $ 1 $ 1
Loss before non-controlling interest $ (7,227) $ (2,832) $ (1,064) $ (1,195) $ (1,665)
Net loss $ (7,218) $ (2,791) $ (1,064) $ (1,785) $ (2,028)
Net loss per share $ (0.05) $ (0.02) $ (0.10) $ (0.20) $ (0.28)
Fully Diluted Net loss per share $ (0.05) $ (0.02) $ (0.10) $ (0.20) $ (0.28)
Dividends per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Wgt. Avg. Shares O/S ('000) 149,900 113,700 10,404 8,734 7,338
- ------------------------------------------------------------------------------------------------------
Working Capital $ (998) $ (283) $ (598) $ (221) $ (281)
Resource Properties $ 6,217 $ 8,951 $ -- $ -- $ 149
Long-Term Debt $ 8,105 $ 6,882 $ -- $ -- $ Nil
Shareholders' Equity/(deficiency) $ (2,205) $ 1,809 $ (876) $ (51) $ 838
Capital Stock Shares (`000) 174,584 135,821 10,511 9,529 7,845
Total Assets $ 7,405 $ 9,109 $ 71 $ 852 $ 1,164
- ------------------------------------------------------------------------------------------------------
5
B. Risk Factors
GENERAL BUSINESS RISKS
o We have a history of net losses.
We sustained net losses for each of the fiscal years ended December 31,
2004, 2003 and 2002 of, respectively $7,218,000, $2,791,000 and $1,064,000,
respectively. We also anticipate sustaining a loss from operations for the
fiscal year ended December 31, 2005.
o There is doubt as to our ability to continue operations as a going
concern.
Our success is dependent upon our ability to discover economically
recoverable reserves and to bring such reserves into profitable production, and
is subject to a number of risks, including environmental risks, contractual
risks, legal and political risks, fluctuations in the price of oil and gas and
other factors beyond our control.
The consolidated financial statements included herein have been prepared
by management on the basis of accounting principles applicable to a going
concern. Management believes the going concern basis, which presumes the
realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future, is appropriate. We have experienced
significant operating losses and cash outflows from operations in the years
ended December 31, 2004 and 2003, and had a $998,315 working capital deficiency
at December 31, 2004 and have no producing properties. Our ability to continue
as a going concern is dependent on achieving profitable operations and upon
obtaining additional financing. The outcome of these matters cannot be predicted
at this time.
In the United States, reporting standards for auditors require the addition of
an explanatory 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 (see comments by auditors for US readers on
Canada-US reporting differences).
o We will need additional funds in order to implement our intended projects
and there is no assurance that such funds will be available as, if and
when, need.
Funds used in operations for the fiscal years ended December 31, 2004,
2003, and 2002 were $(2,041,941), $(581,205) and $(715,887), respectively. We
have been dependent upon the proceeds of equity financing to fund operations. No
assurances can be given that our actual cash requirements will not exceed our
budget, that anticipated revenues will be realized, that, when needed, lines of
credit will be available if necessary or that additional capital will be
available to us. There is no assurance that we will be able to obtain such
additional funds on terms and conditions we may deem acceptable. Failure to
obtain such additional funds may materially and adversely affect our ability to
acquire interests in oil and gas properties.
o We do not intend to pay dividends in the foreseeable future.
We have paid no dividends on our common shares since inception and do not
plan to pay dividends in the foreseeable future. See "Description of Common
Shares."
6
o The market price of our common shares has been and will in all likelihood,
continue to be volatile.
The market price of our common shares has fluctuated over a wide range and
it is likely that the price of our common shares will fluctuate in the future.
Announcements regarding acquisitions, the status of corporate collaborations,
regulatory approvals or other developments by us or our competitors could have a
significant impact on the market price of the common shares.
o The value and transferability of our shares may be adversely impacted by
the limited trading market for our shares and the penny stock rules.
There is only a limited trading market for our shares on the Over the
Counter Bulletin Board Exchange ("OTCBB"). There can be no assurance that this
market will be sustained or that we will be able to satisfy any future trading
criteria that may be imposed by the National Association of Securities Dealers
("NASD").
In addition, holders of our common shares may experience substantial
difficulty in selling their securities as a result of the "penny stock rules."
Our common shares are covered by the penny stock rules, a Securities and
Exchange Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors, generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse. For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell our
securities and also may affect the ability of purchasers of our stock to sell
their shares in the secondary market. It may also cause fewer broker dealers to
make a market in our common shares.
o The large number of shares eligible for future sale by existing
shareholders may adversely affect the market price for our common shares.
Future sales of substantial amounts of common shares in the public market, or
the perception that such sales could occur, could adversely affect the market
price of the common shares. At June 30, 2005, we had 174,650,053 common shares
outstanding. On that date we also had reserved 18,989,790 common shares for
issuance under our stock plan at per share exercise prices ranging from $0.08 to
$0.43 and had reserved 8,239,000 common shares for issuance under the Warrants
pursuant to various private placements and the acquisition of Forum Exploration
Inc. We intend to include these common shares in a Registration Statement to be
filed with the United States Securities and Exchange Commission pursuant to the
Securities Act 1933 registering the common shares for resale.
7
See "Item 6. Directors, Senior Management and Employees--Options to Purchase
Securities from the Company or Subsidiaries."
No prediction can be made as to the effect, if any, that sales of shares
of common shares or the availability of such shares for sale will have on the
market prices of our common shares prevailing from time to time. The possibility
that substantial amounts of our common shares may be sold under Rule 144 into
the public market may adversely affect prevailing market prices for the common
shares and could impair our ability to raise capital in the future through the
sale of equity securities.
o Foreign laws, rules and environmental regulations to which we are subject
may adversely affect our business operations as well as the market price
for our stock.
The production of oil and gas is generally subject to extensive laws,
rules, orders and regulations governing a wide variety of matters, including the
drilling and spacing of wells, allowable rates of production, prevention of
waste and pollution and protection of the environment. In addition to the direct
costs borne in complying with such regulations, operations and revenues may be
impacted to the extent that certain regulations limit oil and gas production to
below economic levels. Although the particular regulations applicable in each
jurisdiction in which operations are conducted vary, such regulations are
generally designed to ensure that oil and gas operations are carried out in a
safe and efficient manner and to ensure that similarly-situated operators are
provided with reasonable opportunities to produce their respective fair share of
available crude oil and natural gas reserves. However, since these regulations
generally apply to all oil and gas producers, we believe that these regulations
should not put us a material disadvantage to other oil and gas producers.
OPERATING RISKS - OIL AND GAS EXPLORATION ACTIVITIES
o We do not currently own properties with oil or gas reserves.
We do not own any properties with oil or gas reserves. Our future oil and
natural gas reserves, production, and, therefore, cash flow and income, as well
as our success are highly dependent on success in finding or acquiring
recoverable reserves. We cannot assure shareholders that we will be able to
develop, exploit, find or acquire reserves to replace future production, if any.
o Exploring for and producing oil and natural gas are high-risk activities
with many uncertainties that could adversely affect our business,
financial condition or results of operations.
Exploration and development of oil and gas resources involve a high degree
of risk and few properties which are explored are ultimately developed into
producing properties. There is no assurance that our exploration and development
activities will result in any discoveries of commercial bodies of oil or gas.
The long-term profitability of our operations will be in part directly related
to the cost and success of our exploration programs which may be affected by a
number of factors. Substantial expenditures are required to establish reserves
through drilling, to develop processes to extract the resources, and, in the
case of new properties, to develop the extraction and processing facilities and
infrastructure at any site chosen for extraction. Although substantial benefits
may be derived from the discovery of a major deposit, no assurance can be given
that resources will be discovered in sufficient quantities to justify commercial
operations or that the funds required for development can be obtained on a
timely basis.
8
o If we are unable to continue to identify, explore and develop new
properties, our business operations may be adversely affected.
We expect that in order to be successful in our oil and gas exploration
activities we must continually acquire or explore for and develop new oil and
gas reserves to replace those, if any, being depleted by production. Without
successful drilling or acquisition ventures our oil and gas assets, properties
and the revenues derived there from, if any, will decline over time. To the
extent we engage in drilling activities, such activities carry the risk that no
commercially viable oil or gas production will be obtained. The cost of
drilling, completing and operating wells is often uncertain. Moreover, drilling
may be curtailed, delayed or cancelled as a result of many factors, including
shortage of available working capital, title problems, weather conditions,
environmental concerns, shortages of or delays in delivery of equipment, as well
as the financial instability of well operators, major working interest owners
and drilling and well servicing companies. The availability of a ready market
for our oil and gas will depend on numerous factors beyond its control,
including the demand for and supply of oil and gas, the proximity of our natural
gas reserves to pipelines, the capacity of such pipelines, fluctuations in
seasonal demand, the effects of inclement weather, and government regulation.
New gas wells may be shut-in for lack of a market until a gas pipeline or
gathering system with available capacity is extended into the area.
o The exploration and development of oil and gas properties are subject to
operating hazards and risks for which we will be uninsured.
Exploration for natural resources involves many risks, which even a
combination of experience, knowledge and careful evaluation may not be able to
overcome. Operations in which we expect to acquire an interest will be subject
to all the hazards and risks normally incidental to exploration, development and
production of resources, any of which could result in work stoppages, damage to
persons or property and possible environmental damage. These include the
possibility of fires, earthquake activity, coastal erosion, explosions,
blowouts, oil spills or seepage, gas leaks, discharge of toxic gas,
over-pressurized formations, unusual or unexpected geological conditions and the
absence of economically viable reserves. These hazards may result in cost
overruns, substantial losses and/or exposure to substantial environmental and
other liabilities.
o Fluctuating oil prices may adversely impact our operations and activities.
The price of oil and gas has fluctuated widely, particularly in recent
years, and is affected by numerous factors beyond our control including
international, economic and political trends, expectations of inflation,
currency exchange fluctuations, interest rates, global or regional consumptive
patterns, speculative activities and increased production due to new extraction
developments and improved extraction and production methods. The effect of these
factors on the price of oil and gas, and therefore the economic viability of any
of our exploration projects, cannot accurately be predicted.
9
o If we fail to fulfill our obligations under our purchase option and joint
venture agreements not only will our operations be adversely affected, but
we may lose our interest in the property in question .
We may, in the future, be unable to meet our share of costs incurred under
the joint venture agreements or other option or joint venture agreements to
which we are, or may become a party, and we may have our interest in properties,
in which we may acquire interests subject to such agreements, reduced as a
result. Furthermore, if other parties to such agreements do not meet their share
of such costs, we may be unable to finance the cost required to complete
recommended programs.
o It is possible that our title for the claims in which we have an interest
will be challenged by third parties.
Although we will attempt to ascertain the status of the title for any
projects in which we have or will acquire a material interest, there is no
guarantee that title to such concessions will not be challenged or impugned. In
some countries, the system for recording title to the rights to explore, develop
and mine natural resources is such that a title opinion provides only minimal
comfort that the holder has title. Also, in many countries, claims have been
made and new claims are being made by aboriginal peoples that call into question
the rights granted by the governments of those countries.
o Reserve estimates for oil and gas reserves reported by us are dependent on
many assumptions that may ultimately turn out to be inaccurate.
Reserve estimates are imprecise and may be expected to change as
additional information becomes available. Furthermore, estimates of crude oil
and natural gas reserves, of necessity, are projections based on engineering
data and there are uncertainties inherent in the interpretation of such data as
well as the projection of future rates of production and the timing of
development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured in
an exact way and the accuracy of any reserve estimate is a function of the
quality of available data of engineering and geological interpretation and
judgment. Accordingly, there can be no assurance that the information regarding
reserves, if any, set forth herein will ultimately be produced.
o Our oil and gas production and marketing may be adversely affected by
factors beyond our control.
The production and marketing of oil and gas are affected by a number of
competitive factors which are beyond our control and the effect of which cannot
be accurately predicted. These factors include crude oil imports, actions by
foreign oil-producing nations, the availability of adequate pipeline and other
transportation facilities, the availability of equipment and personnel, the
marketing of competitive fuels, the effect of governmental regulations and other
matters affecting the availability of a ready market such as fluctuating supply
and demand.
10
o Our operations will be subject to numerous environmental risks.
Our natural gas and oil operations will be subject to compliance with
federal, state, and local laws and regulations controlling the discharge of
materials into the environment or otherwise relating to the protection of the
environment. We believe that there is a trend toward stricter standards of
environmental regulation which will in all probability continue. Compliance with
such laws may cause substantial delays and require capital outlays in excess of
those anticipated, adversely affecting our earnings and competitive position in
the future.
o Since we have acquired properties in less developed countries, our
operations may be adversely affected by risks associated with the
political, economic and social climate of the countries in which we will
operate.
Since our exploration and development activities will occur primarily in
countries other than Canada or the United States, we may be affected by possible
political or economic instability in those countries. The risks include, but are
not limited to, terrorism, military repression, extreme fluctuations in currency
exchange rates and high rates of inflation. Changes in resource development or
investment policies or shifts in political attitude in these countries may
adversely affect our business. Operations may be effected in varying degrees by
government regulations with respect to restrictions on production, price
controls, export controls, income taxes, expropriation of property, maintenance
of claims, environmental legislation, land use, land claims of local people,
water use and mine safety. The effect of these factors cannot be accurately
predicted. Exploration and production activities in areas outside the United
States and Canada are also subject to the risks inherent in foreign operations,
including loss of revenue, property and equipment as a result of hazards such as
expropriation, nationalization, war, insurrection and other political risks.
o We face competition from larger and better financed companies seeking to
acquire properties in our sphere of operation.
The oil and gas industry is highly competitive and our business could be
harmed by competition with other companies. Because oil and gas are fungible
commodities, the principal form of competition is price competition. We will
strive to maintain the lowest finding and production costs possible to maximize
profits. In addition, as an independent oil and gas company, we frequently
compete for reserve acquisitions, exploration leases, licenses, concessions and
marketing agreements against companies with financial and other resources
substantially larger than we possess. Many of our competitors have established
strategic long term positions and maintain strong governmental relationships in
countries in which we may seek entry.
o We currently do not maintain insurance against potential losses and
unexpected liabilities.
As previously stated, exploration for and production of oil and natural
gas can be hazardous, involving natural disasters and other unforeseen
occurrences such as blowouts, cratering, fires and loss of well control, which
can damage or destroy wells or production facilities, injure or kill people, and
damage property and the environment. Although we intend to maintain insurance
against many potential losses or liabilities arising from our operations in
accordance with customary industry practices and in amounts that we believe to
be prudent, we do not presently have such insurance coverage; and, even if we
were to obtain such insurance coverage, there is no assurance that it will be
adequate to protect against all operational risks.
11
o We are dependent on retaining our senior management and key personnel.
To a large extent, we depend on the services of our senior management
personnel. These individuals have critical and unique knowledge of the areas of
operations that facilitate the evaluation and acquisition of potential
properties in our intended sphere of operations. The loss of these experienced
personnel could have a material adverse impact on our ability to compete in this
region of the world. We do not maintain any insurance against the loss of any of
these individuals.
o Our directors may face conflicts of interest in connection with our
participation in certain ventures because they are directors of other
resource companies.
, Some of our directors participate in other resource Companies and to the
extent that such other companies may participate in ventures in which we may
participate, our directors may have a conflict of interest in negotiating and
concluding terms respecting the extent of such participation. It is possible
that due to our directors' conflicting interests we may be precluded from
participating in certain projects that we might otherwise have participated in
or we may obtain less favorable terms on certain projects than we might have
obtained if our directors were not also the directors of other participating
mineral resource companies. In their effort to balance their conflicting
interests, our directors may approve terms that are equally favorable to all of
their companies as opposed to negotiating terms that may be more favorable to us
but adverse to their other companies. Additionally, it is possible that we may
not be afforded certain opportunities to participate in particular projects
because such projects are assigned to our directors' other companies for which
the directors may deem the projects to have a greater benefit.
ITEM 4. INFORMATION ON THE COMPANY
A. Corporate History and Development of the Company.
We were incorporated on February 8, 1982 in British Columbia, Canada under
the name Tylox Corporation. Our continuance under the Canada Business
Corporation Act resulted in, among other things, our name change, first in
December 1991, to Tracer Petroleum Corporation followed in July 2003, to Forum
Energy Corporation. On May 18th 2005 we had a name change to FEC Resources, Inc.
Our wholly owned subsidiaries are TEPCO Ltd. ("TEPCO"), Tracer Petroleum
International Ltd.("TPI"), a company incorporated in Bermuda to pursue oil and
gas ventures in the Middle East, and Pacific Geothermal Energy Inc. ("Pac Geo").
In addition we own 66 2/3% of Forum Exploration, Inc. ("FEI") a Philippine based
oil and gas company with rights to develop certain concession areas as more
fully described later.
We are engaged in the acquisition, exploration and, when warranted,
development of natural resource properties. In the years ending December 31,
1999, 2000 and 2001, our focus was on the disposition of certain of our property
interests. We successfully completed our disposition program in 2002 retaining
in some instances small working interests in some of our prior projects. We are
currently focused on the exploration and development of two petroleum license
areas in the Philippines held by FEI.
Our head office is located at Suite 1400 700 - 2nd Street SW, Calgary,
Alberta T2P 4V5. Our phone number is (403) 290-1676. We also have an office for
FEI located at 14 F Pearlbank Centre,
12
146 Valero Street, Salcedo Village, 1227 Makati City, Philippines with phone
number (632) 893-7019 /21.
13
B. Business Overview
At this time, we do not have any revenue generating assets, and as a
result rely on equity and/or debt financing to fund ongoing operations. We have
experienced large operating losses and cash outflows and, as such, our ability
to continue as a going concern is dependant upon achieving profitable operations
and upon obtaining additional financing. The outcome of these matters cannot be
predicted at this time.
We are currently pursuing exploration and development opportunities for
oil and natural gas in the Philippines.
Recent Developments
A Heads of Agreement was signed on January 27, 2005 between the Corporation and
Sterling Energy Plc ("SEY") (a UK based Oil and Gas Company) to transfer to the
Corporation the license in the Philippine GSEC 101 properties (including Reed
Bank) in Exchange for new shares issued by the Corporation. Subsequently,
pursuant to a Transaction Agreement it was agreed by both companies to transfer
their respective Philippine Assets to a newly formed UK Company - Forum Energy
Plc ("FEP"). An extra-ordinary meeting of the shareholders approved the transfer
of assets on May 18th 2005. In May 2005 Forum Energy Plc raised (pound)3,400,000
(gross proceeds) of a pre-IPO issue and the Corporation's share of FEP was
reduced to 57.4%. In July, 2005 an IPO will raise between (pound)6 million and
(pound)15 million through the issue of additional FEP shares. At this time the
Corporation holding of FEP shares will be further diluted up to approximately
32% of FEP depending on the price of the offering. The pre-IPO interim offering
was to provide the Corporation with funding ahead of the IPO so that it could
proceed with its activities. Subsequent to this IPO FEP will be listed on the
AIM market of the London Stock Exchange. Also, effective May 18th 2005, the
Corporation changed its name to FEC Resources, Inc.
Subject to shareholder approval, once this transaction has been completed, and
funds have been raised by Forum Energy Plc under the Pre-IPO and the IPO the
subsequent dilution will result in the Corporation recognizing the disposition
of the asset and the receipt of the shares in Forum Energy Plc as a Long-Term
Investment.
The Corporation and Sterling have retained UK based Noble & Company as the
Nominated Advisers, who have agreed to take Forum Energy Plc to the AIM market
of the London Stock Exchange in July, 2005. Noble & Company have also assisted
in raising (pound)3.4 million in a pre-IPO phase in May 2005 and are planning to
raise an additional (pound)6 million to (pound)15 million by the end of July,
2005.
The shares received by the Corporation in exchange for the assets will be
subject to a one year "lock-up" and then for 6 months thereafter the Corporation
can only trade the shares of Forum Energy Plc through Noble & Company to protect
an orderly market.
The Philippines
We are currently pursuing exploration and development opportunities for
oil, natural gas and coal in the Philippines through FEI, a Philippines based
energy company with sole participation in Service Contract 40, a petroleum
license based onshore and offshore Cebu Island, Philippines. FEI also has sole
application for a petroleum license known as Manila Bay / West Central Luzon.
14
In May 2005, we entered into an agreement with Energy Services Group (ESG)
Dubai (www.esgdubai.com), for the ongoing management and oversight of the
Company's exploration and development efforts.
In July 2005, FEI applied for a Coal Operating Contract with proven coal
reserves, on the island of Cebu, Philippines.
C. Current Exploration/Development
Forum Exploration Inc.
FEI is focusing on oil and gas exploration in the Philippines and more
recently Coal Production. Currently, FEI has applied for and/or currently holds
a 100% interest in two petroleum contract areas in the Philippines (the "Forum
Properties") and has applied for sole rights to operate a Coal Operating
Contract ("COC") on the Island of Cebu
o The application for Manila Bay / West Central Luzon known as a GSEC
(Geophysical Survey and Exploration Contract), which covers Manila Bay and
a portion of the contiguous landward area of Luzon Island. This GSEC,
known as GSEC92, expired May 12th 2000. FEI recently applied for another
GSEC area which includes the Manila Bay area, previously covered by GSEC
92, plus an additional area on land in a strip extending northwards from
the bay and beyond Lincayen Gulf.
o The contract area known as service contract 40 (SC40), which covers the
northern half of Cebu Island plus part of the Visayan Sea offshore to the
west of the island. Several exploration prospects and leads have been
identified by FEI within the service contract area, both on Cebu and
offshore in the Visayan Sea. A small gas field has been discovered and
appraised on Cebu, but its small size has meant that so far it has not
been developed. Another small field was discovered during FEI's 2003
onshore drilling program. FEI plans (subject to the receipt of necessary
working capital which it may or may not receive) to conduct an evaluation
of both these fields - to be carried out by PGS Reservoir Consultants (UK)
Limited ("PGS"), an independent consulting firm, specializing in petroleum
reservoir evaluation.
o The COC being applied for by FEI is made up of four Coal Blocks on the
island of Cebu with a total aerial closure of over 2,500 hectares.
Manila Bay
The Manila Bay prospect was identified in the early 1990s as a potential
Miocene/Pliocene gas target and the first well was drilled on the structure by
Cophil Exploration and its partners during 1995. Unfortunately technical and
operational problems forced the abandonment of the initial hole and a sidetrack
well also had to be abandoned after it encountered an overpressured late Miocene
limestone horizon at around 7,430 feet. Gas was detected in the drilling mud
during the penetration of the limestone section, but the lack of wireline logs
or drill stem tests meant that no further evaluation of the limestone zone was
possible at that stage.
15
In 1996 a further well was drilled on the structure very close to the
original well location. This well successfully drilled down to a Total Depth
("TD") of 11,684 feet. Gas shows from the drilling mud were identified in
several zones and this information, together with wireline log data, was used to
select three zones for drill stem testing. Unfortunately, all of the three
tested zones flowed water, with only minor amounts of gas. There was the
suspicion that the final test of the shallow Malo Pungatan limestone horizon,
which had been responsible for the over-pressure problems encountered in the
original well, was compromised by a probable casing leak, adding further
uncertainty to the interpretation of the well results.
The available seismic and well data from Manila Bay were the subject of a
detailed review and evaluation by PGS during 1997. The conclusions from this
work were that some additional prospects may be present near the original Manila
Bay wells and that new seismic work, involving re-processing and attribute
analysis, may identify potential new drilling targets.
During the year we decided not to pursue renewing this license with the
resulting recognition of $2,617,821 loss.
SC 40 - Cebu
Exploration in the Visayan basin began over 100 years ago and since then
approximately 130 wells have been drilled. The majority of the wells were very
shallow tests and drilled outside of structural closure. Oil and gas shows have
been encountered in a number of wells with oil and gas discoveries made on Cebu
Island. Since 1994 twelve wells have been drilled in the offshore Visayan basin,
ten of which lie within the SC 40 Licence. Of these ten wells, nine-targeted
wells of Miocene reef pays have been defined on 2D seismic data and good
reservoir quality was established on 7 of those wells. Hydrocarbon seeps are
also common in the area indicating an active and mature petroleum system.
Recent Drilling Activity
FEI met the 2003 Department of Energy (DOE) work commitments for SC40
through the drilling of four wells. The work program commenced with the drilling
of Forum 1X on March 31st 2003, followed by 1X/A, 2X and 3X which were drilled
to target depth in December 2003. Oil and gas shows were encountered during
drilling and Forum 2X flowed up to 217,000 standard cubic feet of gas per day
through a half-inch choke with an initial pre-flow pressure of about 700 pounds
per square inch (psi) and a flowing pressure of 350 psi during testing in
October 2003. It is not yet known whether commercially viable quantities of oil
and gas can be produced from any of these wells.
The wells are located in Barangay Maya, Daanbantayan, Cebu and were
drilled to depths of between 1,000 and 2,000 feet using FEI's wholly-owned
Hycalog HH3500 drilling rig.
Forum 1-X is located close to the old MST-11 well, which flowed 540 boe
per day during a test conducted by American Asiatic Oil Company (AAOC) in 1961.
Other subsequent wells drilled in the 1960s and early 1970s by AAOC and by China
National Petroleum Company of Taiwan also reported to have flowed oil on test,
but sustained production at commercial rates was never established.
All exploration and development work is being carried out by FEI, our 66.67%
owned subsidiary with our funding assistance.
16
ITEM 5. OPERATING AND FINANCIAL OVERVIEW AND PROSPECTS.
We have experienced significant operating losses and fund outflows from
operations over the last few years and as a result our ability to continue as a
going concern is dependent on achieving profitable operations and/or upon
obtaining additional financing.
Our audited financial statements were prepared in accordance with
accounting principles and practices generally accepted in Canada ("Canadian
GAAP"), which are not materially different from those in the United States
(refer to the Auditors' Report dated May 18, 2005 except as to Note 14 which is
as of July 14, 2005)
The following discussion and analysis of financial results should be read in
conjunction with the audited financial statements of the Company for the year
ended December 31, 2004, together with the notes related thereto. The discussion
contains forward-looking statements that involve risks and uncertainties. Such
information, although considered reasonable by Corporate management at the time
of preparation, may prove to be inaccurate and actual results may differ
materially from those anticipated in the statements made.
Fiscal Year Ended December 31, 2004 versus Fiscal Year Ended December 31,2003
During the year ended December 31, 2004, we continued to focus our efforts
on creating shareholder value through the acquisition of, or participation in,
the development of international petroleum projects. Our primary focus at this
time is on opportunities in the Philippines.
The consolidated results for the year ended December 31, 2004 was a loss of
$7,219,068 or $0.05 per share versus a loss of $1,356,130 for 2003 or $0.01 per
share. The results for the year ended December 31, 2004 incorporate the
activities of FEI. The reason for the increased loss was attributable to
recognizing an impairment of the investment in Manila Bay Properties as we
decided not to continue pursuing the license. In addition we recognized
Philippine Operating costs in our expenses and did not capitalize these costs as
the development activity during the year was negligible.
We have experienced significant operating losses and fund outflows from
operations in the years ended December 31, 2004 and 2003, had a $998,315 working
capital deficiency at December 31, 2004 and have no producing properties. Our
ability to continue as a going concern is dependent on achieving profitable
operations and upon obtaining additional financing. The outcome of these matters
cannot be predicted at this time.
In the United States, reporting standards for auditors require the addition of
an explanatory 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 (see comments by auditors for US readers on
Canada-US reporting differences)
Fiscal Year Ended December 31, 2003 versus Fiscal Year Ended December 31,2002
During the year ended December 31, 2003, we continued to focus our efforts
on creating shareholder value through the acquisition of, or participation in,
the development of international petroleum projects. Our primary focus at this
time is on opportunities in the Philippines.
17
In July, 2003 we finalized our acquisition of two-thirds of FEI. The
consideration was 100,000,000 of our common shares, plus a commitment to fund
the overhead of FEI and to fund the minimum work commitment on the two
properties it has 100% working interests in. During the course of the year, we
drilled three wells that are currently being tested. To date, we have met our
obligations under the License areas and are in the process of raising additional
working capital to further develop our interests as well as to pursue other
opportunities in the energy sector both in the Philippines and South East Asia.
The consolidated results for the year ended December 31, 2003 was a loss
of $1,356,130 or $0.01 per share versus a loss of $1,058,276 for 2002 or $0.10
per share. The results for the year ended December 31, 2003 incorporate the
activities of FEI.
We have experienced significant operating losses and fund outflows from
operations in the years ended December 31, 2003 and 2002, had a $283,314 working
capital deficiency at December 31, 2003 and have no producing properties. Our
ability to continue as a going concern is dependent on achieving profitable
operations and upon obtaining additional financing. The outcome of these matters
cannot be predicted at this time.
In the United States, reporting standards for auditors require the addition of
an explanatory 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 (see comments by auditors for US readers on
Canada-US reporting differences)
Fiscal Year Ended December 31, 2002 versus Fiscal Year Ended December 31, 2001
During the year ended December 31, 2002, we continued to focus our efforts
on the acquisition of or participation in the development of proven petroleum
reserves internationally.
The loss for the year was $1,058,276, or $0.10 per share (2001 - loss of
$1,513,911 or $0.17 per share). This was primarily attributed to administrative
expenditures of $782,835 (2001 - $1,196,014), which are mainly associated with
the ongoing pursuit of international petroleum development opportunities.
We had a working capital deficiency at December 31, 2002 of $587,102
(December 31, 2001 - deficiency of $573,871) and shareholders' deficiency of
$576,489 (December 31, 2001 - equity of $241,537). During the year, we raised
$180,370 of new equity capital through the exercise of stock options. In
addition we sold assets and received proceeds of $643,326, and raised a further
$104,631 through the issue of short-term loans and convertible debt. We expect
that we will have to raise additional funds through equity and/or debt in order
to finance acquisitions and operations.
18
Liquidity and Capital Resources
The working capital deficit at December 31, 2004 was $998,315 (2003 - deficit
$283,314) and shareholders' deficit was $2,152,807 (2003- surplus of
$1,808,953). During the year, we sold convertible debt totaling $657,008,
obtained short-term loans from directors and major shareholders of $317,922 and
long-term debt of $246,552. We will need to raise additional capital through
debt, equity or other offerings to fund our ongoing operations and further
development of our properties if warranted.
In October 2004 Pacific Geothermal Energy Inc ("Pacgeo"), a Delaware Corporation
signed a debenture purchase agreement with HEM Mutual Assurance LLC ("HEM") and
Highgate House LLC to permit Pacgeo to purchase 5-year 1.5% convertible notes
totalling US$1,000,000. This convertible debt was sold in six different notes of
which $441,000 was issued under First Debenture A by HEM, First Debenture B for
$49,000 by Highgate House, Second debenture for $9,000 and $1,000 by HEM and
Highgate respectively. First debenture A and B are convertible at the lesser of
$0.10 and 125% of the average of the closing bid price per share of Pacgeo stock
during 5 trading days immediately preceding the conversion, or 100% of the
average of the three lowest closing bid prices during the 40 trading day
immediately prior to conversion date (in whole or part). The second debenture
has a fixed conversion price of $0.01 per share. First debenture C for $450,000
and First debenture D for $50,000 in favour of Highgate (which has not been
drawn down as the trading price for the shares needed to be above 10 cents for a
continuous 30 trading days). In order to facilitate the conversion process
Pacgeo lodged 10,000,000 shares with the Escrow agent for HEM from treasury
against future conversion.
The Corporation incorporated a Delaware, USA subsidiary company in September
2004 called Forum Acquisition Corp. Under an Agreement and plan of Merger Pacgeo
and Forum Acquisition Corp, merged and the surviving entity was Pacgeo which now
became a subsidiary of the Corporation. In turn the Corporation assumed the
Convertible debentures noted above against the assets of Pacgeo, being the
balance of the bank account and in turn issued 10,000,000 shares of the Company
in favour of HEM and Highgate House LLC to replace the shares issued by Pacgeo.
The 10,000,000 shares issued by Pacgeo were then returned for cancellation.
On October 22nd 2004 GEM partially converted the Second debenture and received
900,000 shares for their $9,000 conversion. The conversion price on the second
debenture was set at $0.01 per share. The remaining debentures are convertible
at the formula stated above. The Corporation has not purchased the First
debenture B at this time.
The Corporation may repurchase any unconverted debentures at any time giving 30
days notice under the agreement and paying an early retirement penalty amount to
the face amount of the Convertible note plus 35% of the face amount as a
penalty. Should the Corporation enter into a financing of over US$5,000,000 the
notes will become due and payable at a penalty of the face amount of the notes
plus 50% of the face amount.
A Heads of Agreement was signed on January 27, 2005 between the Corporation and
Sterling Energy Plc ("SEY") (a UK based Oil and Gas Company) to transfer to the
Corporation the license in the Philippine GSEC 101 properties (including Reed
Bank) in Exchange for new shares issued by the Corporation. Subsequently,
pursuant to a Transaction Agreement it was agreed by both companies to transfer
their respective Philippine Assets to a newly formed UK Company - Forum Energy
Plc. An extra-ordinary meeting of the shareholders approved the transfer of
assets on May 18th 2005. In May 2005 Forum
19
Energy Plc raised (pound)3,400,000 (gross proceeds) of a pre-IPO issue and the
corporation share of FEP was reduced to 57.4%. In July, 2005 an IPO will raise
between (pound)6 million and (pound)15 million through the issue of additional
FEP shares. At this time the Corporation holding of FEP shares will be further
diluted up to approximately 32% of FEP depending on the price of the offering.
The pre-IPO interim offering was to provide the Corporation with funding ahead
of the IPO so that it could proceed with its activities. Subsequent to this IPO
FEP will be listed on the AIM market of the London Stock Exchange. Also,
effective May 18th 2005, the Corporation changed its name to FEC Resources, Inc.
Subject to shareholder approval, once this transaction has been completed, and
funds have been raised by Forum Energy Plc under the Pre-IPO and the IPO the
subsequent dilution will result in the Corporation recognizing the disposition
of the asset and the receipt of the shares in Forum Energy Plc as a Long-Term
Investment.
The Corporation and Sterling have retained UK based Noble & Company as the
Nominated Advisers, who have agreed to take Forum Energy Plc to the AIM market
of the London Stock Exchange in July, 2005. Noble & Company have also assisted
in raising (pound)3.4 million in a pre-IPO phase in May 2005 and are planning to
raise an additional (pound)6 million to (pound)15 million by the end of July,
2005.
The shares received by the Corporation in exchange for the assets will be
subject to a one year "lock-up" and then for 6 months thereafter the Corporation
can only trade the shares of Forum Energy Plc through Noble & Company to protect
an orderly market.
In April and May, 2005 the Corporation has raised additional working capital in
the amount of US$896,000 through the issue of Convertible debt. The debt may be
converted into shares of the Corporation at a conversion price of $0.05 per
share, or alternatively the Debenture holder at their option may convert into
shares of Forum Energy Plc at the pre-IPO price. Such shares of Forum Energy Plc
will be exempt from the lockup arrangements described above.
Contractual Obligations
Under an agreement with FPI dated March 2003 as amended in April 2003, the
Corporation is responsible for fulfilling the cost of the work programme for FEI
for calendar years 2003 and 2004. The Corporation has fulfilled those
obligations through December 31, 2004 and received confirmation from FPI. The
Corporation has received confirmation from the Department of Energy of the
Philippine Government that the commitment to drill additional wells in the
Libertad field can be deferred to 2006. The Corporation has entered into a
transaction agreement with Sterling Energy Plc to transfer its Philippine Assets
to a new company which in turn will raise money to meet ongoing commitments.
We may still need to raise additional funds if the results of our
exploration programs demonstrate that either further exploration or development
of our properties is warranted. No assurance can be given such financing will be
available to us when required or on commercially viable terms. See "RISK
FACTORS."
20
Critical Accounting Policies
The financial statements have been prepared in accordance with Canadian
GAAP. A summary of significant accounting policies is presented in Note 2 to the
Financial Statements. Most accounting policies are mandated under Canadian GAAP
and therefore do not have the ability to select alternatives. However, in
accounting for oil and gas activities, companies have a choice between two
acceptable accounting policies: the full-cost and the successful efforts method
of accounting.
We follow the full-cost method of accounting for oil and natural gas
activities. Using the full-cost method of accounting, all costs of acquiring,
exploring and developing oil and natural gas properties are capitalized,
including unsuccessful drilling costs and administrative costs associated with
acquisition and development.
Under the full-cost method of accounting, an impairment test is applied to
the overall carrying value of property, plant and equipment for each cost centre
on a country by country basis with the proved reserves using commodity prices at
period end.
Under APB Opinion 25 the repricing of outstanding stock options under a
fixed price stock option plan results in these options being recognized as
variable price options from the date of the modification until they are
exercised, forfeited or expire. Accordingly, changes in the intrinsic value of
the stock options from the modification date to the period end date would be
recognized in the consolidated statements of loss as adjustments to general and
administrative expense.
As described in note 7 to the Financial Statements, the Corporation has
granted stock options to selected employees, directors and officers. For US GAAP
purposes, Financial Accounting Standard ("FAS") 123, "Accounting for Stock-Based
Compensation," requires that an enterprise recognize, or at its option, disclose
the impact of the fair value of stock options and other forms of stock-based
compensation cost by the intrinsic value method set out in Accounting Principles
Board (APB) Opinion 25. Under APB 25, as options are granted at exercise prices
based on the market value of the Corporation's shares at the date of grant,
there is no compensation expense relating to ABP Opinion 25 recorded. In
December 2004 FAS 123 was amended to require that all employee stock options be
recorded using the fair value method for all periods beginning after December
15, 2005. Early adoption of this method was encouraged and the Corporation
adopted amended FAS 123 in fiscal 2004 utilizing the Modified Prospective
Method.
Critical Accounting Estimates
The preparation of financial statements in accordance with Canadian GAAP
requires management to make certain judgments and estimates. Changes in these
judgments and estimates could have a material impact on our financial result and
financial condition. The process of estimating reserves is critical to several
accounting estimates. It requires significant judgments based on available
geological, geophysical, engineering and economic data. These estimates may
change substantially as data from ongoing development and production activities
becomes available and as economic conditions impacting oil and natural gas
prices, operating costs, and royalty burdens change. Reserve estimates impact
net income through depletion and the application of an impairment test.
Revisions or changes in the reserve estimates can have either a positive or
negative impact on net income.
21
Recent Canadian Accounting Related Pronouncements
Full-Cost Accounting Guideline
The Canadian Institute of Chartered Accountants ("CICA") issued Accounting
Guideline 16, "Full Cost Accounting" for years beginning on or after January 1,
2004. the new guideline updates reserve definitions to include the standards of
NI 51-101, sets criteria for accounting for disposals of properties and defines
the method to be used to deplete and depreciate capitalized costs. The
guidelines also sets standards for presentation and disclosure under full-cost
accounting. Adoption of the guideline is not expected to have a material impact
on the Financial Statements of our Company.
Stock Based Compensation
In September 2003, the CICA amended Handbook section 3870, "Stock Based
compensation and Other Stock Based Payments". The amendment requires that
companies recognize an expense in the financial statements for the stock based
payments based on the fair value method beginning January 1, 2004. In December
2004 FASB issued amended FAS 123 requiring that companies recognize an expense
in the financial statements for stock based payments based on the fair value
method of accounting beginning June 15, 2005 with early adoption being
encouraged. The Company adopted amended FAS 123 for fiscal 2004 and used the
Modified Prospective Method for recording the transition.
Asset Retirement Obligations
In December 2002, the CICA issued Handbook Section 3110,"Asset Retirement
Obligations". This standard requires recognition of a liability representing the
fair value of the future requirement obligations associated with property, plant
and equipment. This fair value is capitalized as part of the cost of the related
asset and amortized to expense over its useful life. The standard is effective
for all fiscal years beginning on or after January 1, 2004 and did not have an
impact on the Financial Statements of our Company.
Business Conditions and Risks
The business of exploration, development and acquisition of oil and gas
reserves involves a number of uncertainties and, as a result, we are exposed to
a number of risks inherent in the oil and gas industry. Operationally, we face
risks that are associated with finding, developing and producing oil and gas
reserves. These include risks associated with drilling economic risk,
environmental and safety concerns, and access to processing facilities. The
financial risks that are not within our control include the fluctuation in
commodity prices and interest rates.
We mitigate risk through the competence of our management team, and safety and
environmental programs that meet or exceed regulations.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. Directors and Senior Management
The following table lists as of the date of this report the names, ages,
functions and areas of experience in our operations of all the Directors and
Senior Management. Each Director will serve until the next annual general
meeting or until his/her successor is duly elected, unless his/her office is
vacated in accordance with our charter documents. The Executive Officers serve
at the pleasure of the Board of Directors.
22
- --------------------------------------------------------------------------------------------
Name Age Position/Area of Experience/Function
- --------------------------------------------------------------------------------------------
Larry W. Youell (1) 62 Director since June 1998, Chairman April 2003,
CEO effective May 2005
Barry Stansfield (1)(2)(3) 54 Director since April 2003, Chairman effective May 2005
Riaz Sumar (3) 35 Director, CFO since May, 2005
Robert K. Lynch (1)(2)(3) 72 Director since May 2005
Dr. Walter Brown (2)(3) 65 Director since May 2005
- --------------------------------------------------------------------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee
(3) Member of the Corporate Governance Committee
The following persons were members of our Board of Directors as of
December 31, 2002 and resigned as of the dates indicated:
Mr. Stephen Jacobs resigned effective March 25, 2003.
Mr. David Robinson resigned effective April 30, 2003 but was re-appointed
a director and President and Chief Executive Officer on December 8th, 2003. He
subsequently resigned on May 18th 2005 to join Forum Energy Plc as CEO.
In addition, Mr. David Harrison resigned as our Corporate Secretary
effective May 13, 2003 and Mr. Riaz Sumar was appointed as his replacement. Mr.
Riaz Sumar resigned as Corporate Secretary and was replaced by Mr. David
Thompson in August 2003.
Following the Extra-ordinary shareholders meeting of May 18th 2005, Messrs
Robinson and Thompson resigned to join the Board and Executive of Forum Energy
Plc and Mr. Larry Youell was appointed Chief Executive Officer and Mr. Riaz
Sumar Chief Financial Officer. Two new board members joined to fill the
vacancies being Mr Robert Lynch, aged 72 and Dr. Walter Brown, aged 65.
Information About our Directors and Officers
Mr. Larry Youell, President, Chief Executive Officer and Director
Mr. Youell spent 21 years with Consumers Gas Company Limited and its
subsidiaries ("Consumers"), in a variety of roles with increasing responsibility
including Senior Vice President Operations, and Senior Vice President Business
Support. He was also President of Rose Technology, and General Manager of
Consumers' largest division. Prior to joining Consumers, Mr. Youell was a
Management Consultant with an international base of clients. Mr. Youell was born
and raised in Calgary, Alberta. He received his Honours degree in Business from
the University of Western Ontario in 1963 and a Masters in Business
Administration from that university in 1968. Mr. Youell has been active in
charitable causes, including serving as Chair of the Arthritis Society in
Ontario and lead roles in fund raising for United Way and Skylight Theatre. He
is also Past Chair of the Ontario Natural Gas Association and International
Approvals Services Inc. Mr. Youell is Mr. Robinson's uncle.
23
Mr. Barry Stansfield, Director & Chairman
Barry Stansfield is an independent director with a broad business
experience spanning over 30 years. He was co-owner and managing director of
Stansfield Lake, a London based marketing company until the Company was acquired
by Communicator Plc. He is also a partner in a private property investment
company based in southern England.
Mr, Riaz Sumar, Director and Chief Financial Officer
A resident of Calgary, Mr. Sumar has extensive financial experience with
public companies. Mr. Sumar was previously Financial Controller of Forum Energy
Corporation 1996 - 2003. Currently also CFO of TransAKT corp. and previously CFO
of TSX listed North American Gem Inc. He received received the designation of
Certified General Accountant in 1997.
Dr. Walter Brown, Director
A resident of Manila, Philippines, Dr. Walter Brown has extensive
experience with resource and public companies and is also currently Chairman and
CEO of TSX listed Philex Gold Corporation.
Mr. Robert Lynch, Director
A resident of New York, USA, Robert Lynch has over 40 years business
experience. In addition to being a Director of the Corporation, Mr. Lynch also
currently serves as President of American & Foreign Enterprises Inc. and
President and Director of Lynch Farms Inc. Mr. Lynch has extensive experience
with public companies and was previously Director of NASDAQ listed Hadron Inc.
NYSE listed Dames & Moore and NASDAQ listed Data Broadcasting Corporation.
None of our directors and/or executive officers or those persons to be
appointed have been the subject of any order, judgment, or decree of any
governmental agency or administrator or of any court of competent jurisdiction,
revoking or suspending for cause any license, permit or other authority of such
person or of any corporation of which he is a director and/or executive officer,
to engage in the securities business or in the sale of a particular security or
temporarily or permanently restraining or enjoining any such person or any
corporation of which he is an officer or director from engaging in or continuing
any conduct, practice, or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a
security or any aspect of the securities business or of theft or of any felony.
There are no other arrangements or understandings between any two or more
directors or executive officers, pursuant to which he was selected as a director
or executive officer. Except as disclosed above, there are no family
relationships between any two or more directors or executive officers.
24
B. Compensation.
We have committed to pay our directors the following consulting fees and
directors fees on a monthly basis:
Larry Youell US$5,000
Barry Stansfield US$3,000
Riaz Sumar US$5,000
Robert K. Lynch US$1,000
Dr. Walter Brown US$1,000
In addition, the Board of Directors may award special remuneration to any
Director undertaking any special services on our behalf other than services
ordinarily required of a Director. Other than as indicated below, no Director
received any compensation for his services as a Director, including committee
participation and/or special assignments.
We grant stock options to Directors, Executive Officers and employees; as
described below under, "Options to Purchase Securities from Company or
Subsidiaries".
None of our executive officers/directors received other compensation in
excess of the lesser of US $25,000 or 10% of such officer's cash compensation as
reported in the compensation table above and all executive officers/directors as
a group did not receive other compensation which exceeded US $25,000 times the
number of persons in the group or 10% of the compensation reported in the
compensation table above.
No funds were set aside or accrued by us during the year ending December
31, 2003 to provide pension, retirement or similar benefits for directors or
executive officers. Except for the stock option program discussed below, we have
no bonus or profit sharing plans pursuant to which cash or non-cash compensation
is or may be paid to the our directors or executive officers.
The following tables detail the compensation paid during fiscal year ended
December 31, 2004 and 2003 to our Directors and members of our administrative,
supervisory or management bodies:
Director/Executive Officer Compensation
Fiscal Year ended December 31,2004
- --------------------------------------------------------------------------------
Option Exercise Total
Directors/Officers Salary Net Market Compensation
Value(1)
- --------------------------------------------------------------------------------
David R. Robinson US$72,000 US$56,818 US$128,818
Larry W. Youell US$24,000 US$22,495 US$46,495
David G. Wilson US$12,000 US$8,820 US$20,820
David M.Thompson US$72,000 US$17,045 US$89,045
Barry Stansfield US$12,000 US$27,273 US$39,273
- --------------------------------------------------------------------------------
Total US$ US$192,000 US$132,451 US$324,451
- --------------------------------------------------------------------------------
(1). "Option Exercise Net Market Value" is defined as the aggregate difference
between the exercise price and the market value of the common stock on the
date of exercise.
25
Fiscal Year ended December 31,2003
- --------------------------------------------------------------------------------
Option Exercise Net Total
Directors/Officers Salary/Fees Market Value(1) Compensation
- --------------------------------------------------------------------------------
David R. Robinson US$6,000 US$47,048 US$53,048
David M. Thompson US$51,000 Nil US$51,000
Larry W. Youell C$93,803 US$28,372 C$93,803 and US$28,372
David G. Wilson US$8,000 US$7,150 US$15,150
Barry Stansfield US$20,000 Nil US$20,000
David Harrison US$24,000 US$5,893 US$29,893
- --------------------------------------------------------------------------------
Total US$ US$109,000 US$197,463
Total CDN$ CDN$93,803 US$88,463 CDN$93,803
- --------------------------------------------------------------------------------
(1). "Option Exercise Net Market Value" is defined as the aggregate difference
between the exercise price and the market value of the common stock on the
date of exercise.
The Board of Directors may award special remuneration to any Director
undertaking any special services on our behalf other than services ordinarily
required of a Director. Other than indicated below no Director received any
compensation for his services as a Director, including committee participation
and/or special assignments.
Except for the stock option program discussed below, we have no bonus or
profit sharing plans pursuant to which cash or non-cash compensation is or may
be paid to the our directors or executive officers.
Options to Purchase Securities From Company or Subsidiaries.
Options to purchase securities from us are granted to directors/officers
and employees on terms and conditions acceptable to the relevant regulatory
authorities. We adopted a formal stock option plan on June 19, 2000. All of the
options granted to report date, except for those granted to Eastmark Ltd. and
Westmark Ltd., were granted in accordance with the stock option plan as amended.
26
Stock Options Granted and Outstanding
Stock Options Granted and Outstanding
- -------------------------------------------------------------------------------------------------------
Name Number of Exercise Expiration Date Issue/ Balance
Common Price (Exercise)
Shares (Expired)
(subsequent
to Y/E)
- -------------------------------------------------------------------------------------------------------
David Robinson 500,000 $ 0.08 April 26, 2008 (85,227) 414,773
1,000,000 $ 0.43 April 26, 2004 Nil 1,000,000
$ 0.31 April 26, 2008 68,182 68,182
- -------------------------------------------------------------------------------------------------------
Larry W. Youell 1,250,000 $ 0.08 April 26, 2008 (213,068) 1,036,932
$ 0.31 April 26, 2008 170,455 170,455
220,000 $0.0723 January 31, 2010 Nil 220,000
- -------------------------------------------------------------------------------------------------------
Barry Stansfield 2,000,000 $ 0.08 April 26, 2008 (340,910) 1,659,090
$ 0.31 April 26, 2008 272,726 272,726
80,000 $0.0723 January 31, 2010 Nil 80,000
- -------------------------------------------------------------------------------------------------------
David G. Wilson 500,000 $ 0.08 April 26, 2008 (85,227) 414,773
$ 0.31 April 26, 2008 68,182 68,182
80,000 $0.0723 January 31, 2010 Nil 80,000
- -------------------------------------------------------------------------------------------------------
David Thompson 1,250,000 $ 0.08 April 26, 2008 (213,068) 1,036,932
$ 0.31 April 26, 2008 170,455 170,455
- -------------------------------------------------------------------------------------------------------
Riaz Sumar 200,000 $ 0.08 April 26, 2008 Nil 200,000
- -------------------------------------------------------------------------------------------------------
Total Officers,
Directors, Consultants 7,639,790 6,892,500
- -------------------------------------------------------------------------------------------------------
C. Board Practices
We have an audit committee, a compensation committee, and a corporate
governance committee.
Audit Committee. The audit committee oversees the retention, performance
and compensation of our independent auditors, and the establishment and
oversight of our systems of internal accounting and auditing control. Members of
the audit committee are Larry Youell, Barry Stansfield, and David Wilson.
Following the AGM on June 22, 2005 Mr. Robert Lynch was appointed to the audit
committee to fill the vacancy left by Mr. David Wilson and other members were
automatically re-elected.
Compensation Committee. The compensation committee reviews and makes
recommendations to our board concerning the terms of the compensation packages
provided to our senior executive officers, including salary, bonus and awards
under our stock option plan and any other compensation plans that we may adopt
in the future. Members of the compensation committee are Larry Youell, Barry
Stansfield, and David Wilson. Following the AGM on June 22, 2005 Mr. Robert
Lynch was appointed to the audit committee to fill the vacancy left by Mr. David
Wilson and other members were automatically re-elected. Mr Youell stepped down
from the Compensation Committee as he is now CEO, and Dr. Walter Brown was
appointe ot fill the vacancy.
27
Corporate Governance Committee The corporate governance committee meets
with and discusses current disclosure issuances with our management personnel,
directors, and with both our Canadian and United States counsel, in order to not
only report to the Board of Directors any matters which should be the subject of
either public disclosure or remedial action but also to assist the Board of
Directors in establishing reporting and disclosure procedures to ensure that we
are in compliance with our disclosure and compliance obligations under
applicable laws, rules and obligations. Members of the corporate governance
committee are Larry Youell, Riaz Sumar, and Barry Stansfield.
D. Employees
As of December 31, we had no employees located outside of the
Philippines..
E. Share Ownership
The following table lists as of June 30, 2005, the share ownership of our
directors and executive officers.
The following table sets forth certain information as of June 30, 2005 regarding
the ownership of our common stock by (i) each beneficial owner more than 5% of
our outstanding common stock, (ii) each of our directors, (iii) each of our
named executive officers and (iv) all of our directors and executive officers as
a group. Except as otherwise indicated, the address of each person identified
below is c/o Forum Energy Corporation, Suite 1400, 700 - 2nd Street S.W.
Calgary, Alberta T2P 4V5. We believe that ownership of the shares by the persons
identified below is both of record and beneficial and that such persons have
sole voting and investment power with respect to the shares indicated.
Percentage of class in the following table is calculated individually based on
the following formula: (Shares directly or indirectly controlled + shares
issuable on the exercise or conversion of various securities) / (total shares
outstanding + shares issuable on the exercise or conversion of various warrant,
debentures and options by the director or officer). The total shares outstanding
on June 30, 2005 was 174,650,053.
- -----------------------------------------------------------------------------------------
(i) Name of Registered Shareholder owning 5% or Number of Percent
more of the outstanding shares: Shares of Class
- -----------------------------------------------------------------------------------------
Westmark Limited 32,303,850 17.59%
- ----------------------------------------------------------------------------------------
Langley Park Investment Trust Plc 27,000,000 15.46%
- ----------------------------------------------------------------------------------------
William T. Mullins 12,000,000 6.87%
- ----------------------------------------------------------------------------------------
Autogas Inc 11,500,000 6.59%
- ----------------------------------------------------------------------------------------
GCTS Inc 10,400,000 5.96%
- ----------------------------------------------------------------------------------------
(ii) Name of Director and/or Officer and number of
shares held:
- ----------------------------------------------------------------------------------------
David R. Robinson/DRR Capital 20,000/305,000 --/--
- ----------------------------------------------------------------------------------------
Larry W. Youell/Cindy Youell 50,060/85,273 --/--
- ----------------------------------------------------------------------------------------
David Thompson/AMS Limited 10,000/352,614 --/--
- ----------------------------------------------------------------------------------------
Barry Stansfield 68,182 --
- ----------------------------------------------------------------------------------------
David Wilson/Merckwood 35,245 --
- ----------------------------------------------------------------------------------------
(iii) Number of shares held by all Directors and Officers
as a group: 926,374 --
- ----------------------------------------------------------------------------------------
28
The particulars of the stock options granted to officers and directors are
set forth in the preceding section entitled "DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES." The particulars regarding convertible debentures and warrants
acquired by certain officers and directors are as follows:
The following table lists the current directors, executive officers and
employees to whom warrants to purchase our shares were sold and the number of
share purchase warrants so sold as of the date of this report, as well as the
number of share purchase warrants sold to Directors and all employees as a
group.
Warrants Held by Directors and Officers
- ------------------------------------------------------------------------------------------
Name Number of share Exercise Price Expiration
Purchase Warrants Date
- ------------------------------------------------------------------------------------------
Larry Youell 100,000 US$0.25 09/02/05
- ------------------------------------------------------------------------------------------
David G. Wilson 74,000 US$0.25 09/02/05
- ------------------------------------------------------------------------------------------
David R. Robinson (1) 340,000 US$0.25 09/02/05
- ------------------------------------------------------------------------------------------
Total Officers/Directors/Employees 514,000 US$0.25 09/02/05
- ------------------------------------------------------------------------------------------
(1) 280,000 share purchase warrants held in the name of DRR Capital
We are a publicly-owned corporation, the shares of which are owned by
Canadian residents, US residents, and residents of other countries. Currently,
we are not controlled directly or indirectly by another corporation or any
foreign government.
There are no arrangements, known to the Company, the operation of which
may at a subsequent date result in a change of control in the Company other than
as noted above.
The above listed organizations and individuals have no special or separate
voting rights than those rights held by our shareholders.
On June 28, 2005, the shareholders' list showed 926 registered
shareholders and 174,650,053 shares outstanding. The number of shares held by
U.S. residents was 21,343,358 , representing 12% of the total issued and
outstanding shares
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
We are a publicly-owned corporation, the shares of which are owned by
Canadian residents, US residents, and residents of other countries. We are not
controlled directly or indirectly by another corporation or any foreign
government. The following table provides the names and share ownership of those
parties that have ownership of 5% or more of each class of the Company's voting
securities as of June 28, 2005:
- --------------------------------------------------------------------------------
Name Number of Shares Owned Percentage of Class
- --------------------------------------------------------------------------------
Westmark Limited 32,303,850 17.59%
- --------------------------------------------------------------------------------
Langley Park Investment Trust Plc 27,000,000 15.46%
- --------------------------------------------------------------------------------
William T. Mullins 12,000,000 6.87%
- --------------------------------------------------------------------------------
Autogas Inc 11,500,000 6.59%
- --------------------------------------------------------------------------------
GCTS Inc 10,400,000 5.96%
- --------------------------------------------------------------------------------
29
There are no arrangements, known to the Company, the effect of which may
at a subsequent date result in a change of control in the Company other than as
noted in item 5 Operating and Financial. Overview and Prospects.
As at June 28, 2005 management is not aware of any person holding a
greater than 5% registered interest in any class of the Registrant's voting
securities other than as set forth above. The above listed organizations and
individuals have no special or separate voting rights than those rights held by
our shareholders.
On June 28, 2005, the shareholders' list showed 926 registered
shareholders and 174,650,053 shares outstanding. The number of shares held by
U.S. residents was 21,343,358 , representing 12% of the total issued and
outstanding shares.
B. Related Party Transactions
During the year ended December 31, 2004 general and administrative
expenses included fees charged by directors, officers and/or companies
controlled by them at what management believes are market rates under commercial
terms totaled $329,661 (2003 - $261,117; 2002 - $190,578). Included in accounts
payable and accrued liabilities at December 31, 2004 is $ 471,609 (December 31,
2003 - $69,673) owed to directors, officers and/or companies controlled by them.
At December 31, 2004 we owed short-term loans totaling $317,922 to
companies controlled by our directors and officers. These short loans were
non-interest bearing, unsecured and with no specific repayment terms.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Financial Statements and Other Financial Information
See "Item 17. Financial Statements."
We know of no pending legal or arbitration proceedings including those
relating to bankruptcy, governmental receivership or similar proceeding and
those involving any third party against it, nor are we involved as a plaintiff
in any material pending litigation.
We know of no pending proceedings to which any director, member of senior
management, or affiliate is either a party adverse to us or our subsidiaries or
has a material interest adverse to us or our subsidiaries. We have not declared
any dividends for the last five years, nor do we intend to declare any dividends
for the foreseeable future.
B. Significant Changes/Developments
(i) During April 2004 two shareholders arranged to advance up to
US$200,000 to FEI to assist with its working capital requirements. The advance
is an interest-free on-demand note to be issued and guaranteed by us under our
commitment to fund the working capital needs of FEI. The loans are short-term
and expect to be repaid out of proceeds from the new funding as well as awarding
the shareholders bonus shares equivalent to 20% of the amounts advanced.
30
(ii) On May 6, 2004 we announced that we had entered into an agreement
with Energy Services Group (ESG) Dubai, for the ongoing management and oversight
of the Corporation's exploration and development efforts. ESG has prepared the
2004 Work Programme and Budget for the Corporation's operating subsidiary, FEI.
The budget is for a total of US$4.36 million and includes the further
exploration and development of the Corporation's Cebu Island contract (SC40) as
well as Manila Bay (SC43) and specifically includes the development of the newly
discovered Maya Field and the Libertad Gas Field. The majority of the 2004 Work
Programme and Budget will be covered through the US$20 million financing that is
being arranged through AIAK Swiss in Kuala Lumpur. If such financing is not
completed, the Work Programme will be delayed until comparable financing can be
obtained.
(iii) On July 21, 2004 the Corporation entered into a Stock Purchase Agreement
with Langley Park Investments LLC ("Langley") in which the Company could issue
and sell 27,000,000 shares of Common Stock of the Company in exchange for the
purchase of Langley stock based on the total purchase price divided by the
conversion rate of the British Pound Sterling determined on July 31, 2004 (the
"Langley transaction"). These shares are restricted shares with a 2 year hold
from trading. Under the agreement the exchange rate on that day was $1.8060 to
(pound)1 resulting in the issue of 3,018,172 shares of Langley. The shares are
subject to a price protection in favour of Langley. Following the listing of
Langley on the London stock Exchange, 50% of these shares were released to the
Company for immediate use and the balance held for the two year period. The
shares are held at a UK brokerage Company in Escrow and have been valued at the
lower of market or cost.
In connection with the Langley transaction the company paid a third party
commission in Langley shares equivalent to 10% of the shares issued. 50% of the
commission has been paid and the balance will be payable when the second 50% of
Langley shares become available for trading.
During 2004 the Corporation sold 201,000 of the shares for proceeds of $95,670
resulting in a loss on sale of $45,565.
At December 31, 2004 an impairment loss was recognized to reflect the decrease
in value of the shares during the period in the amount of $950,568.
(iv) In October 2004 Pacific Geothermal Energy Inc ("Pacgeo"), a Delaware
Corporation signed a debenture purchase agreement with HEM Mutual Assurance LLC
("HEM") and Highgate House LLC to permit Pacgeo to purchase 5-year 1.5%
convertible notes totalling US$1,000,000. This convertible debt was sold in six
different notes of which $441,000 was issued under First Debenture A by HEM,
First Debenture B for $49,000 by Highgate House, Second debenture for $9,000 and
$1,000 by HEM and Highgate respectively. First debenture A and B are convertible
at the lesser of $0.20 and 125% of the average of the closing bid price per
share of Pacgeo stock during 5 trading days immediately preceding the
conversion, or 100% of the average of the three lowest closing bid prices during
the 40 trading day immediately prior to conversion date (in whole or part). The
second debenture has a fixed conversion price of $0.01 per share. First
debenture C for $450,000 and First debenture D for $50,000 in favour of Highgate
(which has not been drawn down as the trading price for the shares needed to be
above 10 cents for a continuous 30 trading days). In order to facilitate the
conversion process Pacgeo lodged 10,000,000 shares with the Escrow agent for HEM
from treasury against future conversion.
31
The Corporation incorporated a Delaware, USA subsidiary company in September
2004 called Forum Acquisition Corp. Under an Agreement and plan of Merger Pacgeo
and Forum Acquisition Corp, merged and the surviving entity was Pacgeo which now
became a subsidiary of the Corporation. In turn the Corporation assumed the
Convertible debentures noted above against the assets of Pacgeo, being the
balance of the bank account and in turn issued 10,000,000 shares of the Company
in favour of HEM and Highgate House LLC to replace the shares issued by Pacgeo.
The 10,000,000 shares issued by Pacgeo were then returned for cancellation.
On October 22nd 2004 GEM partially converted the Second debenture and received
900,000 shares for their $9,000 conversion. The conversion price on the second
debenture was set at $0.01 per share. The remaining debentures are convertible
at the formula stated above. The Corporation has not purchased the First
debenture B at this time. The Corporation may repurchase any unconverted
debentures at any time giving 30 days notice under the agreement and paying an
early retirement penalty amount to the face amount of the Convertible note plus
35% of the face amount as a penalty. Should the Corporation enter into a
financing of over US$5,000,000 the notes will become due and payable at a
penalty of the face amount of the notes plus 50% of the face amount.
(v) In January 2005, the Company entered into discussions with SEY regarding a
possible Joint Venture whereby Sterling would sell the Reed Bank Asset (GSEC101)
to Forum Energy Plc ("FEP", a new company registered in the UK) and FEC would
sell its Philippine asset to FEP. In addition it was proposed that FEP should be
admitted to AIM in the United Kingdom which has shown support for other junior
international energy companies who have successfully raised funds there. FEP has
engaged a Nominated Adviser and Broker, Noble & Company, to take the Company to
AIM and is currently engaged in preparing the necessary documentation for this
listing.
In March, 2005 FEC appointed PGS to evaluate the Oil and Gas reserves of the
Forum Exploration Assets as well as GSEC 101. In addition FEC appointed CSA
Group Limited to valuate the coal reserves of the coal properties which were
awarded to FEI in February 2005. The result of these reports will not only give
FEC a base valuation of its properties but also will form part of the Initial
Public Offering document for Newco when it seeks admission to AIM in the UK.
The Transactions resulted in FEC receiving 71.4% of the shares initially issued
in FEP in exchange for its 66.67% investment in Forum Exploration Inc (FEC's
equity position will be diluted , as will the 28.6% equity position of SEY, upon
completion of the FEP Pre-IPO and IPO placings). The executive management of FEC
will move to the executive management of FEP and FEP will assume the name of
Forum Energy Plc. FEC will continue its evaluation of the redomicile of FEC from
Canada to another jurisdiction. Finally FEC will be renamed FEC Resources PLC
and continue to source and develop natural resources investments.
The EGM was held on May 18th 2005 and all these motions were passed by a
majority of shareholders
32
ITEM 9. THE LISTING
A. Listing Details and Markets
Our common shares originally traded on the Vancouver Stock Exchange
("VSE") in British Columbia, Canada under the symbol "TPC". Trading on the VSE
commenced on May 25, 1983. We voluntarily de-listed from the VSE on August 6,
1999. Our common shares are traded on the NASDAQ SMALL CAP BOARD under the
symbol "TCXXF". Trading commenced on NASDAQ on October 30, 1989. Our shares were
de-listed from the NASDAQ SMALL CAP Board on September 22, 1999. Our shares now
trade on the OTC - Bulletin Board under the symbol "FRUEF".
The table below lists the high/low bid/ask prices on NASD/OTC-Bulletin
Board for our shares for each year within the five most recent fiscal years.
NASDAQ Small Cap/OTC Bulletin Board Stock Annual Price History - Common Shares
(US Dollars)
---------------------------------------
Year Ended High Low
---------------------------------------
12/31/04 $ 0.62 $ 0.07
12/31/03 $ 0.66 $ 0.08
12/31/02 $ 0.61 $ 0.08
12/31/01 $2.063 $ 0.09
12/31/00 $ 3.00 $ 0.38
---------------------------------------
The table below lists the volume of trading and high/low bid/ask prices on
NASD/OTC-Bulletin Board for our shares for each full quarterly period within the
two most recent fiscal years.
OTC Bulletin Board Stock Trading Activity - Common Shares
(US Dollars)
------------------------------------------------------
Quarter Ended Volume High Low
------------------------------------------------------
12/31/04 3,483,400 0.26 0.07
9/30/04 1,417,800 0.34 0.14
6/30/04 3,504,820 0.45 0.21
3/31/04 1,496,148 0.62 0.37
------------------------------------------------------
12/31/03 2,672,310 $0.62 $ 0.18
09/30/03 1,548,700 $0.30 $ 0.15
06/30/03 2,082,200 $0.66 $ 0.08
03/31/03 1,171,400 $0.21 $0.085
------------------------------------------------------
The table below highlights for the most recent six months the high and low
market prices for each month of our common shares on the OTC Bulletin Board.
OTC Bulletin Board Stock Monthly Price History - Common Shares
(US Dollars)
------------------------------------------------------
Month Ended High Low Volume
------------------------------------------------------
06/30/05 0.09 0.05 1,676,900
05/31/05 0.095 0.065 798,200
04/30/05 0.10 0.05 4,749,600
03/31/05 0.15 0.048 5,247,500
02/28/05 0.17 0.10 1,459,500
01/31/05 0.11 0.055 3,005,100
------------------------------------------------------
33
Our shares are issued in registered form and the following information is
taken from the records of Computershare Investor Services (located in Vancouver,
British Columbia), the lead registrar and transfer agent for the common shares.
On June 28th 2005, the shareholders' list showed 926 registered
shareholders and 174,650,053 shares outstanding. The number of shares held by
U.S. residents was 21,343,358 representing 12% of the issued and outstanding
shares. Our shares are not registered to trade in the US in the form of American
Depository Receipts (ADR's) or similar certificates.
ITEM 10. ADDITIONAL INFORMATION.
A. Memorandum and Articles of Association
Reference is hereby made to our Certificate of Continuance, and to our
Bylaws, each of which is incorporated herein by reference to, respectively,
exhibit 3.1 and 3.2 to our Registration Statement on Form F-1, file number
33-81290.
B. Material Contracts.
See "Item 4. Information About the Company."
C. Exchange Controls
Investment Canada Act
The Investment Canada Act (the "ICA") prohibits the acquisition of control
of a Canadian business enterprise in Canada by non-Canadians without the prior
consent of Investment Canada, the agency that administers the ICA, unless such
acquisition is exempt under the provisions of the ICA. Investment Canada must be
notified of such exempt acquisitions. The ICA covers acquisitions of control of
corporate enterprises, whether by purchase of assets, shares or "voting
interests" of an entity that controls, directly or indirectly, another entity
carrying on a Canadian business.
Apart from the ICA, there are no other limitations on the right of
non-resident or foreign owners to hold or vote securities imposed by Canadian
law or our Certificate of Continuance. There are no other decrees or regulations
in Canada which restrict the export or import of capital, including foreign
exchange controls, or that affect the remittance of dividends, interest or other
payments to non-resident holders of our securities except as discussed in
"Taxation", below.
D. Taxation
The following is a summary of the principal Canadian federal income tax
considerations generally applicable in respect of our common stock. The tax
consequences to any particular holder of common stock will vary according to the
status of that holder as an individual, trust, corporation or member of a
partnership, the jurisdiction in which that holder is subject to taxation, the
place where that holder is resident and, generally, according to that holder's
particular circumstances. This summary is applicable only to holders who are
resident in the United States, have never been resident in Canada, deal at arm's
length with us, hold their common stock as capital property and who will not use
or hold the common stock in carrying on a business in Canada.
34
This summary does not take into account provincial income tax
consequences. The summary assumes that the publicly announced proposals will be
enacted as proposed with the effective dates set out therein; otherwise, the
summary assumes that there will be no other changes in law whether by judicial
or legislative action.
If a non-resident were to dispose of common stock to another Canadian
corporation which deals or is deemed to deal on a non-arm's length basis with
the non-resident and which, immediately after the disposition, is connected with
the Company (i.e. which holds shares representing more than 10% of the voting
power and more than 10% of the market value of all of our issued and outstanding
shares), the excess of the proceeds over the paid-up capital of the common stock
sold will be deemed to be taxable as a dividend either immediately or eventually
by means of a deduction in computing the paid-up capital of the purchasing
corporation.
Under the Canadian Tax Act, a gain from the sale of common stock by a
non-resident will not be subject to Canadian tax, provided the stockholder
(and/or persons who do not deal at arm's length with the stockholder) has not
held a "substantial interest" in our shares (25% or more of the shares of any
class of our equity securities) at any time in the five years preceding the
disposition. Generally, the Canadian-United States Tax Convention (the "Tax
Convention") will exempt from Canadian taxation any capital gain realized by a
resident of the United States, provided that the value of the common stock is
not derived principally from real property situated in Canada.
In the case of any dividends paid to non-residents, the Canadian tax is
withheld by us, which remits only the net amount to the stockholder. By virtue
of Article X of the Tax Convention, the rate of tax on dividends paid to
residents of the United States is generally limited to 15% of the gross dividend
(or 10% in the case of certain corporate stockholders owning at least 10% of the
Company's voting shares). In the absence of the treaty provisions, the rate of
Canadian withholding tax imposed on non-residents is 25% of the gross dividend.
Stock dividends received by non-residents from us are taxable by Canada as
ordinary dividends.
This summary is of a general nature only and is not exhaustive of all
possible income tax consequences. It is not intended as legal or tax advice to
any particular holder of common stock and should not be so construed. Each
holder should consult his/her own tax advisor with respect to the income tax
consequences applicable to him/her in his/her own particular circumstances.
E. Documents on Display
The documents concerning us which are referred to in this Report are
either annexed hereto at exhibits (see Item 19) or may be inspected at our
principal executive offices in Calgary.
35
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Currency Exchange Rate Sensitivity
The results of our operations are subject to currency translational risk
and currency transaction risk. Regarding currency translational risk, the
operating results and financial position of our subsidiaries are reported in
local currencies and then translated into Canadian dollars at the applicable
exchange rate for preparation of our consolidated financial statements. The
fluctuation of the US dollar and Peso in relation to Canadian dollar will
therefore have an impact upon profitability of our operations and may also
affect the value of our assets and the amount of shareholders' equity.
In regards to transaction risk, our functional currency is the Canadian
dollar and our activities are predominantly executed using both the US and
Canadian dollar. We have done a limited number of financings and we are not
subject to significant operational exposures due to fluctuations in these
currencies. Our common shares are listed on the OTC-BB and are bought and sold
in US dollars. We have not entered into any agreements or purchased any
instruments to hedge any possible currency risks at this time.
Interest Rate Sensitivity
We currently have no significant short-term or long-term debt requiring
interest payments. This does not require us to consider entering into any
agreements or purchasing any instruments to hedge against possible interest rate
risks at this time. Our interest earning investments are short-term. Thus any
reductions in future income or carrying values due to future interest rate
declines are believed to be immaterial.
Commodity Price Sensitivity
Our future revenue and profitability will be dependant, to a significant
extent, upon prevailing spot market prices for oil and gas. In the past oil and
gas prices have been volatile. Prices are subject to wide fluctuations in
response to changes in supply of and demand for oil and gas, market uncertainty
and a variety of additional factors that are beyond the control of the Company.
We currently have no significant operating revenue.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
36
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15: CONTROLS AND PROCEDURES.
The Board of Directors has overall responsibility for reviewing the our
disclosure to ensure we provide full and plain disclosure to shareholders and
other stakeholders. The Board discharges its responsibilities through its
committees, specifically, with respect to financial disclosure. The Audit
Committee is responsible for reviewing our financial reporting procedures and
internal controls to ensure full and accurate disclosure of our financial
position.
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of the company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before
filing date of this report, have concluded that as of the Evaluation Date, our
disclosure controls and procedures were adequate and designed to ensure that
material information relating to us and our consolidated subsidiaries would be
made known to them by others within those entities.
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Audit Committee is responsible for reviewing our financial reporting
procedures, internal controls, the performance of our auditors and reviewing the
reserve evaluations prepared by our independent reserves evaluation engineering
consultants. The Audit Committee is also responsible for reviewing all
disclosure with respect to financial matters prior to filing or release and
quarterly and annual financial statements prior to their approval by the full
Board. Members of the Audit Committee are Larry Youell, , Barry Stansfield, and
David Wilson.
Our Board of Directors has determined that it has at least one financial
expert serving on its Audit Committee. This individual is Mr. Larry Youell who
has served as one of our Directors since March 1, 2003.
ITEM 16 B: CODE OF ETHICS.
We have adopted a formal "code of ethics" applicable to our principal
executive officer, financial officer, accounting officer or controller or
persons performing similar functions. We believe that the code of ethics is
reasonably designed to deter wrongdoing and to promote:
1. Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
2. Full, fair, accurate, timely, and understandable disclosure in reports and
documents that a registrant files with, or submits to, regulatory agencies
and in other public communications made by the registrant;
37
3. Compliance with applicable governmental laws, rules and regulations;
4. The prompt internal reporting of violations of the standards to an
appropriate person or persons identified in the standards; and
5. Accountability for adherence to the standards.
In addition we practice corporate governance in accordance with rules and
regulations in Canada.
Corporate Governance relates to the activities of the Board of Directors
who are elected by and accountable to the shareholders and takes into account
the role of management who are appointed by the Board of Directors and who are
charged with our on-going management. Our Board of Directors encourages sound
corporate governance practices designed to promote our well being and on-going
development, having always as its ultimate objective our best long-term
interests and the enhancement of value for all shareholders. The Board also
believes that sound corporate governance benefits our employees and the
communities in which we operate. The Board is of the view that our corporate
governance policies and practices, outlined below, are appropriate and
substantially consistent with the guidelines for improved corporate governance
in Canada as adopted by the Toronto Stock Exchange.
To better fulfill and implement the Board's corporate governance policies,
a Corporate Governance Committee has been established. The Corporate Governance
Committee meets with and discusses current disclosure issuances with our
management personnel, directors, and with both our Canadian and United States
counsel, in order to not only report to the Board of Directors any matters which
should be the subject of either public disclosure or remedial action but also to
assist the Board of Directors in establishing reporting and disclosure
procedures to ensure that we are in compliance with our disclosure and
compliance obligations under applicable laws, rules and obligations. Members of
the Corporate Governance Committee are Larry Youell, Barry Stansfield, and David
Wilson.
ITEM 16 C. ACCOUNTANTS FEES AND SERVICES
The company's external auditors, KPMG LLP, charged total fees of
Can$90,635 all of which related to the audit of the annual financial statements
for the year ended December 31, 2004 Our Auditors have informed us that they do
not wish to stand for re-election following the AGM. This is primarily due to
the change in business of the Company and Management following the EGM on May
18th 2005. The Shareholders have approved the Board to seek other auditing firms
to assume this role.
ITEM 16 D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITEE
Not Applicable.
ITEM 16 E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASER
Not Applicable.
38
PART III
ITEM 17. FINANCIAL STATEMENTS.
The auditors' report, financial statements and notes thereto, schedules
thereto, as required under Item 17 are found immediately below.
Financial Statements:
Report of Auditors, dated May 18, 2005
Consolidated Balance Sheets at December 31, 2004 and December 31, 2003
Consolidated Statements of Loss and Deficit for the Years ended
December 31, 2004, December 31, 2003, and December 31, 2002
Consolidated Statements of Cash Flows for the Years ended December 31,
2004, December 31, 2003, and December 31, 2002
Notes to the Consolidated Financial Statements
39
Consolidated Financial Statements of
FEC RESOURCES INC (FORMERLY FORUM ENERGY CORPORATION)
As at and for the years ended December 31, 2004, 2003 and 2002
40
Report of Independent Registered Public Accounting Firm
To the Directors of FEC Resources Inc. (formerly Forum Energy Corporation)
We have audited the accompanying consolidated balance sheets of FEC Resources
Inc. (formerly Forum Energy Corporation) as of December 31, 2004 and 2003 and
the consolidated statements of loss and deficit and cash flows for each of the
years in the two-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. We believe that our audits provide a
reasonable basis for our audit opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FEC Resources Inc.
as of December 31, 2004 and 2003 and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2004 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 of
America. Information relating to the nature and effect of such differences is
presented in note 15 to the consolidated financial statements.
The consolidated financial statements for the year ended December 31, 2002 were
audited by other auditors who expressed an opinion without reservation on those
statements in their report dated May 27, 2003.
(Signed) "KPMG LLP"
Chartered Accountants
Calgary, Canada
May 18, 2005, except as to note 14 which is as of July 14, 2005
41
COMMENTS BY AUDITORS FOR U.S READERS ON CANADA - U.S REPORTING DIFFERENCES
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 May 18,
2005, except as to note 14 which is as of July 14, 2005 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.
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Company's financial statements, such as the change described in note 3 to
the consolidated financial statements as at December 31, 2004 and for the year
then ended. Our report to the shareholders dated May 18, 2005 except as to note
14 which is as of July 14, 2005 is expressed in accordance with Canadian
reporting standards, which do not require a reference to such a change in
accounting principles in the auditors' report when the change is properly
accounted for and adequately disclosed in the financial statements.
(Signed) "KPMG LLP
Chartered Accountants
Calgary, Canada
May 18, 2005, except as to note 14 which is as of July 14, 2005
42
FEC RESOURCES INC (formerly Forum Energy Corporation)
CONSOLIDATED BALANCE SHEETS
Canadian Funds
As at December 31
- ----------------------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 25,076 $ 27,077
Accounts receivable 76,697 76,220
Prepaid expenses 4,986 22,927
Investments [note 9] 397,471 --
-----------------------------
504,230 126,224
-----------------------------
Property, plant and equipment [note 5] 6,248,346 8,982,789
Investments [note 9] 518,346 --
-----------------------------
$ 7,270,922 $ 9,109,013
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities [note 8a] $ 1,184,623 $ 409,538
Short-term loans [note 8b] 317,922 --
-----------------------------
1,502,545 409,538
-----------------------------
Long-term debt [note 6] 7,456,570 6,881,989
Convertible debentures payable, net [note 10] 464,614
Non-controlling interest -- 8,533
-----------------------------
9,423,729 7,300,060
-----------------------------
Shareholders' Equity (Deficiency)
Share capital [note 7 b and c] 10,693,033 7,239,109
Contributed surplus (note 7f) 1,246,885 526,167
Equity portion of convertible debentures payable [note 7b] 188,751 --
Deficit (14,281,476) (5,956,323)
-----------------------------
(2,152,807) 1,808,953
-----------------------------
$ 7,270,922 $ 9,109,013
=============================
Future operations [note 1]
Commitments and contingencies [note 11]
Subsequent events [note 14]
See Accompanying Notes to the Consolidated Financial Statements
ON BEHALF OF THE BOARD:
"David Robinson" "David Thompson"
- ---------------------------- ----------------------------
Director Director
43
FEC RESOURCES INC (formerly Forum Energy Corporation)
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
Canadian Funds
Years ended December 31
- ------------------------------------------------------------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------
EXPENSES
General and administration [note 8(a)] $ 3,069,950 $ 1,098,703 $ 784,949
Depreciation 268,185 173,658 22,065
Accretion on long-term debt [note 6] 328,029 153,679 --
Foreign exchange gain (65,632) (39,620) (2,114)
Interest expense 13,115 11,177 (13,953)
-------------------------------------------
3,613,647 1,397,597 790,947
OTHER EXPENSES
Loss on sale of investment (note 9) 45,565 -- 42,000
Loss on write down of investment (note 9) 950,568 -- 215,362
Impairment of property, plant and equipment (note 5) 2,617,821 -- 9,967
LOSS BEFORE NON-CONTROLLING INTEREST 7,227,601 1,397,597 1,058,276
Non-controlling interest (8,533) (41,467) --
-------------------------------------------
NET LOSS FOR THE YEAR 7,219,068 1,356,130 1,058,276
Deficit, beginning of the year, as previously reported 5,956,323 4,600,193 3,541,917
Change in accounting policy (note 3) 1,106,085 -- --
-------------------------------------------
Deficit, beginning of years, restated 7,062,408 4,600,193 3,541,917
===========================================
Deficit, end of the year $14,281,476 $ 5,956,323 $ 4,600,193
===========================================
Net loss per common share
- Basic and diluted [note 7] $ 0.05 $ 0.01 $ 0.10
===========================================
See Accompanying Notes to the Consolidated Financial Statements
44
FEC RESOURCES INC (formerly Forum Energy Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Canadian Funds
Years ended December 31
- ---------------------------------------------------------------------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
Cash provided by (used in)
OPERATING ACTIVITIES
Net loss for the year $(7,219,068) $(1,356,130) $(1,058,276)
Non-cash items included in loss
Depreciation 268,185 173,658 189,055
Non-controlling interest (8,533) (41,467) --
Accretion on long-term debt 328,029 153,679 --
Stock-based compensation 458,221 526,167 52,995
Unrealized foreign exchange gain (21,810) (37,112) --
Extension of warrants 428,807 -- --
Shares issued for services 102,258 -- --
Loss on sale of investments 45,565 -- 51,967
Impairment of property, plant and equipment 2,617,821 -- --
Allocation of equity portion of debt to interest 8,016 -- --
Loss on write-down of investment 950,568 -- 48,372
-------------------------------------------
(2,041,941) (581,205) (715,887)
Changes in working capital related to operating activities
Accounts receivable (477) 11,552 20,150
Prepaid expenses 17,941 (19,935) (519)
Accounts payable and accrued liabilities 775,085 107,183 (61,364)
-------------------------------------------
(1,249,392) (482,405) (757,620)
-------------------------------------------
INVESTING ACTIVITIES
Additions to properties, plant and equipment, net (151,563) (2,103,347) (1,638)
Net cash paid on business combination [note 4] -- (94,559)
Investments -- -- (154,064)
Proceeds on sale of investments [note 9] 95,670 27,776 643,326
-------------------------------------------
(55,893) (2,170,130) 487,624
-------------------------------------------
FINANCING ACTIVITIES
Short-term loans 317,922 (83,652) 83,652
Debentures payable 657,008 -- 20,979
Issuance of share capital, net of costs [note 7] 81,802 2,738,888 180,370
Long term debt 246,552 -- --
-------------------------------------------
1,303,284 2,655,236 285,001
-------------------------------------------
Net increase (decrease) in cash (2,001) 2,701 15,005
Cash - beginning of the year 27,077 24,376 9,371
-------------------------------------------
Cash - end of the year $ 25,076 $ 27,077 $ 24,376
===========================================
Interest paid $ -- $ 899 $ --
===========================================
Taxes paid $ -- $ -- $ --
===========================================
See Accompanying Notes to the Consolidated Financial Statements
45
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
1. FUTURE OPERATIONS
Forum Energy Corporation (the "Corporation") is incorporated under the
laws of Alberta and is engaged primarily in the business of exploration
and development of oil and gas reserves and the pursuit of other energy
related opportunities. The exploration and development of oil and gas
reserves involves significant financial risks. The success of the
Corporation is dependent upon its ability to discover economically
recoverable reserves and to bring such reserves into profitable
production, and is subject to a number of risks, including environmental
risks, contractual risks, legal and political risks, fluctuations in the
price of oil and gas and other factors beyond the Corporation's control.
These consolidated financial statements have been prepared by management
on the basis of accounting principles applicable to a going concern.
Management believes the going concern basis, which presumes the
realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future, is appropriate. The Corporation has
experienced significant operating losses and cash outflows from operations
in the years ended December 31, 2004 and 2003, has a $998,315 working
capital deficiency at December 31, 2004 and has no producing properties.
The Corporation's ability to continue as a going concern is dependent on
achieving profitable operations and upon obtaining additional financing.
The outcome of these matters cannot be predicted at this time.
If the going concern assumption were not appropriate for these
consolidated financial statements adjustments might be necessary to the
carrying values of assets and liabilities and the balance sheet
classifications used.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management
in accordance with Canadian generally accepted accounting principles
("Canadian GAAP"). The preparation of financial statements in conformity
with Canadian GAAP requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant of these estimates
relate to determining the recoverability of the Corporation's property,
plant and equipment. While it is the opinion of management that these
consolidated financial statements have been properly prepared within
reasonable limits of materiality and within the framework of the
significant accounting policies summarized below, actual results could
differ from the estimates made.
(a) Basis of preparation
These financial statements include the accounts of the Corporation and its
subsidiaries, Tracer Petroleum International ("TPI"); TEPCO Ltd.
("TEPCO"), Pacific Geothermal Energy, Inc. ("PAC GEO") and Forum
Exploration Inc. ("FEI") all of which are wholly owned with the exception
of FEI of which 66?% is owned.
46
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Property, plant and equipment
The Corporation follows the full cost method of accounting for oil and
natural gas operations, whereby all costs of exploring for and development
of oil and natural gas reserves are capitalized and accumulated in
country-by-country cost centres. Such costs include land acquisition
costs, geological and geophysical costs, costs of drilling both productive
and non-productive wells, interest costs on major development projects and
overhead charges directly related to acquisition, exploration and
development activities.
The costs (including exploratory dry holes) in cost centres from which
there has been no commercial production are not subject to depletion until
commercial production commences. The capitalized costs are periodically
assessed to determine whether it is likely such costs will be recovered in
the future. To the extent there are costs, which are not likely to be
recovered in the future, they are written-off.
The costs in cost centres from which there will be production will be
depleted and depreciated on the unit of production method based on the
estimated proved reserves. Oil and natural gas reserves and production
will be converted into equivalent units based upon their estimated
relative energy content. Costs of acquiring and evaluating significant
unproved properties are excluded from the depletion calculations. These
unproved properties are assessed periodically to ascertain whether
impairment in value has occurred.
Petroleum and natural gas assets are evaluated at least annually to
determine that the costs are recoverable and do not exceed the fair value
of the properties. The costs are assessed to be recoverable if the sum of
the undiscounted cash flows expected from the production of proved
reserves and the lower of cost and market of unproved properties exceed
the carrying value of the lower of cost and market of unproved properties
exceed the carrying value of the petroleum and natural gas assets. If the
carrying value of the petroleum and natural gas assets is not assessed to
be recoverable, an impairment loss is recognized to the extent that the
carrying value exceeds the sum of the discounted cash flows expected from
the production of proved and probable reserves and the lower of cost and
market of unproved properties. The cash flows are estimated using the
future product prices and costs and are discounted using the risk-free
rate.
Proceeds from the sale of oil and natural gas properties are applied
against capitalized costs, with no gain or loss recognized unless such a
sale would alter the depletion rate by more than 20%.
Substantially all of the Corporation's exploration, development and
production activities are conducted jointly with others and accordingly
these financial statements reflect only the Corporation's proportionate
interest in such activities.
The Corporation's drilling equipment and well logging equipment are
recorded at cost upon acquisition and depreciated on a straight-line basis
over five years.
The Corporation depreciates its office furniture and fixtures, and
transportation equipment at the rate of 30% per annum utilizing the
declining balance method. It provides for a full year's amortization of
these assets in the year of acquisition.
47
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Asset retirement obligation
Effective January 1, 2004 the Corporation retroactively adopted the
Canadian Institute of Chartered Accountants ("CICA") new standard for
accounting for asset retirement obligations (ARO). This standard requires
that the fair value of the statutory, contractual or legal obligations
associated with the retirement and reclamation of tangible long-lived
assets be recorded when the related assets are put into use, with a
corresponding increase to the carrying amount of the related assets. This
corresponding increase to capitalized costs is amortized to earnings on a
basis consistent with depreciation, depletion, and amortization of the
underlying assets. Subsequent changes in the estimated fair value of the
ARO are capitalized and amortized over the remaining useful life of the
underlying asset. The ARO liabilities are carried on the consolidated
balance sheet at their discounted present value and are accreted over time
for the change in their present value, with this accretion charge included
in depreciation, depletion and amortization.
As at December 31, 2004, 2003, and 2002 the Corporation had no asset
retirement obligations.
(d) Foreign currency translation
The accounts of the Corporation's integrated subsidiary have been
translated into Canadian dollars on the following basis:
Monetary assets and liabilities at the exchange rate at year-end.
Non-monetary assets and liabilities at historical exchange rates. Exchange
gains and losses are credited or charged to income in the year incurred.
(e) Stock option plan
The Corporation has a stock-based compensation plan as described in note
7. Effective January 1, 2004, the Corporation has adopted the new
accounting standard for stock based compensation, which requires the use
of the fair value method for valuing stock option grants subsequent to
January 1, 2002. Under this method, compensation cost attributable to all
share options granted is measured at fair value at the grant date and
expensed over the vesting period with a corresponding increase to
contributed surplus. Upon the exercise of the stock options, consideration
received together with the amount previously recognized in contributed
surplus is recorded as an increase to share capital.
(f) Income taxes
The Corporation follows the liability method to account for income taxes.
Under this method, future tax assets and liabilities are determined based
on the differences between the carrying value and the tax bases of assets
and liabilities, and measured using the enacted substantively tax rates
and laws expected to be in effect when these differences are expected to
reverse.
Future income tax assets are recognized to the extent that realization of
such assets is more likely than not.
48
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Investments
Investments consist of equity securities held for sale and are accounted
for using the cost method of accounting. The securities are recorded at
cost unless there has been a loss in value that is other than a temporary
decline, at which time the investment is written down to market value.
(h) Loss per share
Basic loss per share is computed using the weighted average number of
shares outstanding during the year. Diluted loss per share is computed in
accordance with the treasury stock method. Diluted loss per share reflects
the dilution that would occur if outstanding stock options and warrants
were exercised or converted into common shares using the treasury stock
method. For years ended December 31, 2004, 2003, and 2002 the inclusion of
the Corporation's stock options and warrants in the computation of diluted
loss per share would have an anti-dilutive effect on loss per share and
therefore they are excluded from the computation.
3. CHANGES IN ACCOUNTING POLICIES:
(a) Stock based compensation
Prior to January 1, 2004, the Corporation applied the fair value based
method of accounting prescribed by CICA Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments, only to stock options granted
to non-employees, and applied the intrinsic value of accounting to
employees stock options for stock options granted subsequent to January 1,
2002.
The CICA Accounting Standards Board has amended CICA Handbook Section
3870, Stock-based Compensation and Other Stock-based Payments to require
entities to account for employee stock options using the fair value based
method, beginning January 1, 2004. Under the fair value based method,
compensation cost is measured at fair value at the date of the grant and
is expensed over the awards vesting period. In accordance with one of the
transitional provisions permitted, the Corporation has retroactively
applied the fair value based method to all employee stock options granted
on or after January 1, 2002 and prior to January 1, 2004. The Corporation
has not restated prior year's reported amounts and accordingly, has
adjusted 2004 opening retained earnings at January 1, 2004 by $1,106,085
and contributed surplus by the same amount.
4. BUSINESS COMBINATION
On March 11, 2003, the Corporation entered into an agreement to acquire a
right to purchase 66?% of the issued and outstanding shares of FEI, a
Philippine Corporation that has rights to develop two properties located
in the Philippines. The Corporation completed this transaction on July 18,
2003 and co-terminously the Corporation exercised its right to acquire
66?% of FEI. The consideration rendered was the issuance of 100,000,000
common shares of the Corporation at an adjusted price of $0.001 per share.
The adjusted price per share was determined by management based upon the
vendors' cost of the right to purchase, which approximated $100,000, as
management believes there was not a sufficiently active and liquid market
for the Corporation's shares to support their use. In addition, the
Corporation undertook to procure funding in the form of an on-demand
bridge loan to fund the working capital needs of FEI from November 1, 2002
until the completion of the acquisition, which amounted to approximately
US$500,000. The Corporation also agreed to fund FEI's required property
work commitments and overhead for 2003 and 2004 [see Note 11].
49
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
4. BUSINESS COMBINATION - continued
The acquisition has been accounted for using the purchase method whereby
the assets and liabilities were recorded at their fair market values as at
the effective date and the operating results have been included in these
consolidated financial statements from the date of acquisition as tabled
below:
Net Assets Acquired:
Current assets (including cash $20,203) $ 102,938
Property, plant and equipment 7,042,487
Current liabilities (107,708)
Long-term debt (6,772,955)
Non-controlling interest (50,000)
------------
$ 214,762
============
Consideration Rendered:
Issuance of 100,000,000 common shares $ 100,000
Transaction costs 114,762
------------
$ 214,762
============
5. PROPERTY, PLANT AND EQUIPMENT
Accumulated
Depreciation Net book
December 31, 2004 Cost and impairment value
--------------------------------------
Philippine Based Assets:
Oil and gas exploration and other costs:
Drilling equipment $ 930,756 $ 353,702 $ 930,756
Well logging equipment and other costs 120,908 42,951 77,957
Deferred exploration costs 8,179,961 2,617,821 5,562,140
--------------------------------------
9,231,625 3,014,474 6,217,151
Office furniture and fixtures 121,378 93,294 28,084
Transportation equipment 5,532 2,421 3,111
--------------------------------------
$9,358,535 $3,110,189 $6,248,346
======================================
December 31, 2003
Philippine Based Assets:
Oil and gas exploration and other costs:
Drilling equipment $ 919,309 $ 119,684 $ 799,625
Well logging equipment and other costs 122,908 36,873 86,035
Deferred exploration costs 8,065,449 -- 8,065,449
--------------------------------------
9,107,666 156,557 8,951,109
Office furniture and fixtures 108,435 81,508 26,927
Transportation equipment 5,532 779 4,753
--------------------------------------
$9,221,633 $ 238,844 $8,982,789
======================================
December 31, 2002
--------------------------------------
Office furniture and fixtures $ 75,799 $ 65,186 $ 10,613
======================================
50
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
5. PROPERTY, PLANT AND EQUIPMENT - continued
Deferred exploration costs include acquisition costs, direct exploration
and development costs and an appropriate portion of related overhead
expenditures, and exclude general overhead or administrative expenditures
not specifically identified with a particular area of interest.
During the year ended December 31, 2004, the Corporation recognized the
expiration of the GSEC101 license and the resulting impairment of
$2,617,821 of capitalized costs attributed to that license.
No overhead costs were capitalized during the year ended December 31, 2004
(2003-$436,000).
6. LONG-TERM DEBT
Long-term debt is non-interest bearing, non-recourse, unsecured and
relates to previous funding of the deferred exploration costs by its
former parent company (Forum Pacific Inc.). The recovery of these advances
is deferred until the Corporation commences to earn revenue out of
production from its exploration of the SC40 Cebu and Manila Bay
properties, and then repayment shall be at a rate of 50% of the income
generated by FEI until fully repaid. The debt has been discounted to a
fair market value using a discount rate of 10% and the face amount of the
debt is P370,830,182 (CAN$9,148,206). The debt is subject to accretion and
an amount of $328,000 has been recognized for the year ended December 31,
2004 (2003 - $153,679).
7. SHARE CAPITAL
(a) Authorized
Unlimited number of Common shares without par value; and
Unlimited number of Class A and Class B preferred convertible redeemable
voting shares without par value
(b) Issued Common Shares
Number Amount
----------------------------
Balance December 31, 2001 9,529,749 $ 3,714,691
Issued pursuant to exercise of stock options 981,590 180,370
Options issued for services -- 52,995
----------------------------
Balance December 31, 2002 10,511,339 3,948,056
Acquisition of rights to acquire 66 ?% interest of FEI [note 4] 100,000,000 100,000
Issued for cash pursuant to private placement [note (i)] 21,538,295 2,792,758
Issued pursuant to exercise of stock options 697,831 103,201
Conversion of ROC Oil Loan [note ii] 3,073,572 398,511
Cost of offering and other financing -- (571,319)
----------------------------
Balance December 31, 2003 135,821,037 $ 6,771,207
Issued pursuant to exercise of stock options 1,491,040 1,482,615
Issued for services 371,569 102,258
Issued for exchange of shares [note iii ] 27,000,000 2,112,720
Issued for conversion of debenture 900,000 11,229
Issued to escrow for debenture financing [note iv] 9,100,000 --
Return to treasury (100,000) (13,218)
Cost of offering and other financing -- (245,323)
Allocation of equity portion of debenture for conversion (v) -- 3,643
----------------------------
Balance December 31, 2004 174,583,646 $10,225,131
============================
51
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
7. SHARE CAPITAL - continued
(i) On April 2, 2003 the Corporation entered into a non-brokered Private
Placement to sell 20,000,000 shares at US$0.10 each to raise US$2,000,000.
On June 6, 2003 the offering was increased to 24,000,000 shares. On July
31, 2003 the Corporation initially closed the offering at 19,438,295
shares subscribed and on August 25, 2003 a further 2,100,000 shares were
subscribed for a total of 21,538,295 on September 24, 2003 respectively.
(ii) On December 15, 2003 ROC Oil agreed to convert debt in the
Corporation amounting to US$255,944 plus interest accrued to date of
conversion of US$51,431. In consideration the Corporation issued a total
of 3,073,572 shares at the conversion price of US$0.10 per share,
$398,511.
(iii) On July 21, 2004 the Corporation entered into a stock purchase
agreement with Langley Park Investments Plc (see Note 9)
(iv) Shares issued in Escrow to be held against possible conversion into
equity on a Convertible Debenture issued in favour of HEM Mutual Assurance
LLC and Highgate House LLC (see note 10).
(v) The amount allocated to the convertible debenture (see note 10) of
$644,419 has been segregated into debt and equity components based on
their respective fair values. The equity component represents the holder
conversion right. It will continue to be disclosed separately in
shareholders' equity until the loan is either converted or repaid at which
time it will be transferred to share capital. The amount allocated to
equity on issuance was $192,394 and on December 31, 2004 the amount was
reduced to $188,751 as a result of a credit to share capital in the amount
of $3,643 reflecting a conversion of a portion of the debenture.
The difference between the recorded value of the debt component and the
face value of the debenture is amortized to income over the term of the
debenture. During the year ended December 31, 2004 $3,207 was amortized.
(c) Warrants
Number Amount
------------------------
Balance, December 31, 2001 3,299,994 $ 47,900
Issued 18,978 5,754
------------------------
Balance, December 31, 2002 [note (i)] 3,318,972 53,654
Expired (779,972) --
Issued [note c (i) and (ii)] 5,700,000 414,248
------------------------
Balance, December 31, 2003 and 2004 8,239,000 467,902
========================
(i) Warrants previously issued totaling 2,539,000 at an exercise price
between $0.25 and $0.90 due to expire on March 2, 2004 were further
extended to expire on September 2, 2004.
(ii) In connection with the offering mentioned in note 7 (a)(i) above, the
Corporation issued 5,700,000 purchase warrants which were recognized as an
expense of the offering totaling $414,248. The warrants have an exercise
price of US$0.08 per share and expire April 26, 2008.
(iii) Warrants previously issued totaling 2,539,000 at an exercise price
between $0.25 and $0.90 due to expire on September 2, 2004 were further
extended to expire on September 2, 2005. The fair value of the extension
of the warrants was calculated using the Black-Scholes option pricing
model with the following assumptions
52
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
7. SHARE CAPITAL - continued
Dividend yield (%) 0.0
Expected stock price volatility (%) 208
Risk free interest rate (%) 2.5
Expected life of options (years) 2
(d) Options
The Corporation has established a stock option plan whereby options may be
granted to its directors, officers, consultants, and employees. The
exercise price of each option equals the market price of the Corporation's
stock on the date of the grant and an option's maximum term is five years.
The options vest immediately. At December 31, 2004 there were 7,667,500
stock options outstanding to purchase common shares at US$0.08 - US$0.43
per share. These options expire on various dates to December 9, 2009.
Number of Options Weighted Average
Exercisable Exercise Price/Share
----------------------------------------
Outstanding and exercisable December 31, 2001 1,732,121 $0.16
Granted 1,482,290 $0.26
Exercised (981,590) $0.18
Cancelled/Expired (325,700) $1.28
------------------------------
Outstanding and exercisable December 31, 2002 1,907,121 $0.22
Granted 6,900,000 $0.18
Exercised (697,831) $0.11
Cancelled/Expired (469,500) $0.18
------------------------------
Outstanding and exercisable December 31, 2003 7,639,790 $0.18
Granted 1,750,000 $0.19
Exercised (1,491,040) $0.11
Cancelled/Expired (231,250) $0.24
------------------------------
Outstanding and exercisable December 31, 2004 7,667,500 $0.18
==============================
The following table summarizes stock options outstanding and exercisable
at December 31, 2004:
Weighted Average Remaining
Exercise Price Number of Options Life (in years)
--------------------------------------------------------------------------
$0.08 4,862,500 3
$0.10 1,000,000 5
$0.11 5,000 0
$0.15 50,000 0
$0.31 750,000 3
$0.43 1,000,000 3
-------------------------------------
7,667,500 3
=====================================
53
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
7. SHARE CAPITAL (Continued)
(d) Options (continued)
All incentive stock options granted in 2004 were recognized as
compensation expense based on the estimated fair values of the options on
the grant date.
The fair value of all options and warrants were estimated using a Black
Scholes option-pricing model and based on the following assumptions:
2004 2003 2002
-------------------------
Dividend yield (%) 0.0 0.0 0.0
Expected stock price volatility (%) 208 185 186
Risk free interest rate (%) 2.5 4.9 4.9
Expected life of options (years) 2 1 2
-------------------------
At December 31, 2004, 15,906,500 shares of common stock were reserved
including 7,667,500 shares reserved for issuance under stock option
agreements and 8,239,000 reserved for issuance in conjunction with
outstanding warrants.
Subsequent to December 31, 2004, no options were exercised and no
additional options were issued. A further 50,000 options expired
unexercised.
(e) Per share amounts
The loss per common share computations is based on the weighted average
number of shares outstanding, which was 149.9 million (2003 - 113.7
million; 2002 - 10.4 million). Diluted earnings per share amounts are not
recorded, as these amounts would be anti- dilutive.
(f) Contributed surplus
December 31, 2003 $ 526,127
Prior period adjustment related to stock based compensation (Note 3a) 1,106,085
Stock based compensation 458,221
Extension of warrants (note 7(c)(iii)) 428,807
Transferred to share capital on exercise of options (1,272,355)
------------
$ 1,246,885
============
8. RELATED PARTY TRANSACTIONS AND BALANCES
(a) Management and consulting fees:
During the year ended December 31, 2004 general and administrative
expenses included fees charged by directors, officers and/or companies
controlled by them at what management believes are market rates under
commercial terms totaling $329,661 (2003 - $261,117; 2002 - $190,578).
Included in accounts payable and accrued liabilities at December 31, 2004
is $471,609 (2003 - $69,673; 2002 - $46,373) owed to directors, officers
and/or companies controlled by them.
(b) At December 31, 2004 the Corporation owed short-term loans totaling
$317,922 to companies controlled by directors and officers of the
Corporation. These short loans are non-interest bearing, unsecured and
with no specific repayment terms. On repayment the lenders are entitled to
receive up to 20% of the value of the loan in additional fully paid
shares.
54
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
9. INVESTMENTS
On July 21, 2004 the Corporation entered into a Stock Purchase Agreement
with Langley Park Investments LLC ("Langley") in which the Company could
issue and sell 27,000,000 shares of Common Stock of the Company in
exchange for the purchase of Langley stock based on the total purchase
price divided by the conversion rate of the British Pound Sterling
determined on July 31, 2004 (the "Langley transaction"). These shares are
restricted shares with a 2 year hold from trading. Under the agreement the
exchange rate on that day was $1.8060 to (pound)1 resulting in the issue
of 3,018,172 shares of Langley. The shares are subject to a price
protection in favour of Langley. Following the listing of Langley on the
London stock Exchange, 50% of these shares were released to the Company
for immediate use and the balance held for the two year period. The shares
are held at a UK brokerage Company in Escrow and have been valued at the
lower of market or cost.
In connection with the Langley transaction the company paid a third party
commission in Langley shares equivalent to 10% of the shares issued. 50%
of the commission has been paid and the balance will be payable when the
second 50% of Langley shares become available for trading.
During 2004 the Corporation sold 201,000 of the shares for proceeds of
$95,670 resulting in a loss on sale of $45,565.
At December 31, 2004 an impairment loss was recognized to reflect the
decrease in value of the shares during the period in the amount of
$950,568.
In the year ended December 31, 2002 the Corporation entered in to a joint
venture agreement to participate in a project in southwestern Turkmenistan
and had advanced to the joint venture $154,064. As a result of political
unrest the Corporation decided not to pursue the project and a write-down
totaling $154,064 was recorded during the year ended December 31, 2002.
During the year ended December 31, 2002 the Corporation recorded a write
down totaling $48,372 with respect to its investment in 1,500,000 common
shares of Transmeridian Exploration Inc. as management had determined that
the carrying value of this investment has become permanently impaired.
During the year ended December 31, 2002 the Corporation had sold 1,350,000
common shares of Transmeridian Exploration Inc. for net proceeds totaling
$643,326 and recorded a loss on disposal totaling $42,000. During the year
ended December 31, 2003 the Corporation sold its remaining interest in
Transmeridian Exploration Inc. consisting of 150,000 common shares for net
proceeds totaling $27,776 resulting in no gain and no loss.
10. CONVERTIBLE DEBENTURE
In October 2004 Pacific Geothermal Energy Inc ("Pacgeo"), a Delaware
Corporation, signed a debenture purchase agreement with HEM Mutual
Assurance LLC ("HEM") and Highgate House LLC to permit Pacgeo to purchase
5-year 1.5% convertible notes totalling US$1,000,000. This convertible
debt was sold in six different notes of which $441,000 was issued under
First Debenture A with HEM, First Debenture B for $49,000 with Highgate
House, Second debenture for $9,000 and $1,000 with HEM and Highgate
respectively. First debenture A and B are convertible at the lesser of
$0.10 and 125% of the average of the closing bid price per share of Pacgeo
stock during 5 trading days immediately preceding the conversion, or 100%
of the average of the three lowest closing bid prices during the 40
trading day immediately prior to conversion date (in whole or part). The
second debenture has a fixed conversion price of $0.01 per share.
55
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
10. CONVERTIBLE DEBENTURE - continued
First debenture C for $450,000 and First debenture D for $50,000 in favour
of Highgate (which has not been drawn down as the trading price for the
shares needed to be above 10 cents for a continuous 30 trading days). In
order to facilitate the conversion process Pacgeo lodged 10,000,000 shares
with the Escrow agent for HEM from treasury against future conversion.
The Corporation incorporated a Delaware, USA subsidiary company in
September 2004 called Forum Acquisition Corp. Under an Agreement and plan
of Merger Pacgeo and Forum Acquisition Corp, merged and the surviving
entity was Pacgeo which now became a subsidiary of the Corporation. In
turn the Corporation assumed the Convertible debentures noted above
against the assets of Pacgeo, being the balance of the bank account and in
turn issued 10,000,000 shares of the Company in favour of HEM and Highgate
House LLC to replace the shares issued by Pacgeo. The 10,000,000 shares
issued by Pacgeo were then returned for cancellation.
On October 22nd 2004 GEM partially converted the Second debenture for
$10,000 and received 900,000 shares for their $9,000 conversion. The
conversion price on the second debenture was set at $0.01 per share. The
remaining debentures are convertible at the formula stated above. The
Corporation has not purchased the First debenture B at this time.
The Corporation may repurchase any unconverted debentures at any time
giving 30 days notice under the agreement and paying an early retirement
penalty amount equal to the face amount of the Convertible note plus 35%
of the face amount as a penalty. Should the Corporation enter into a
financing of over US$5,000,000 the notes will become due and payable at a
penalty of the face amount of the notes plus 50% of the face amount.
11. COMMITMENTS AND CONTINGENCIES
Under the agreement with Forum Pacific Inc. ("FPI") dated March 2003 as
amended in April 2003, the Corporation is responsible for fulfilling the
cost of the work programme for FEI for calendar years 2003 and 2004. The
Corporation has fulfilled those obligations through December 31, 2004 and
received confirmation from FPI. The Corporation has received confirmation
from the Department of Energy of the Philipine Government that the
commitment to drill additional wells in the Libertad field can be deferred
to 2006. The Corporation has entered into a Transaction Agreement with
Sterling Energy Plc to transfer its Philippine Assets to a new company
which in turn will raise money to meet ongoing commitments (see subsequent
event notes).
12. INCOME TAX LOSSES CARRIED FORWARD
The Corporation has incurred losses for Canadian income tax purposes in
the amount of approximately $6,670,000, which, together with accumulated
resource and equipment cost pools of approximately $1,174,348, may be
carried forward to offset future taxable income. The benefit, if any, of
these income tax losses and resource pool balances carried forward has not
been reflected in the consolidated financial statements. The income tax
losses carried forward expire as follows: 2006 - $1,960,000; 2007-
$1,100,000; 2008 -$850,000; 2009 - $850,000; 2010 - $630,000 and 2011 -
$1,101,000.
56
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
12. INCOME TAX LOSSES CARRIED FORWARD - continued
The Corporation has incurred expenditures in various jurisdictions, which
are subject to tax authority approval. Any future tax asset would be
offset by a valuation allowance due to the uncertainty surrounding the
future utilization of the tax pools by the Corporation.
13. FINANCIAL INSTRUMENTS
(a) Foreign currency exchange risk:
The Corporation is exposed to foreign currency fluctuations as many of the
Corporations expenditures are in U.S. dollars and Philippine pesos.
(b) Credit risk:
The Corporation's accounts receivable are primarily customers in the oil
and gas industry and government agencies and are subject to normal
industry credit risks.
(c) Fair value of financial instruments:
Financial instruments of the Corporation consist mainly of cash, accounts
receivable, accounts payable and accrued liabilities, short-term loans,
long-term debt and convertible loans. As at December 31, 2004, there were
no significant differences between the carrying amounts of these financial
instruments reported on the balance sheet and their estimated fair values.
14. SUBSEQUENT EVENTS
A Heads of Agreement was signed on January 27, 2005 between the
Corporation and Sterling Energy Plc ("SEY") (a UK based Oil and Gas
Company) to transfer to the Corporation the license in the Philippine GSEC
101 properties (including Reed Bank) in Exchange for new shares issued by
the Corporation. Subsequently, pursuant to a Transaction Agreement it was
agreed by both companies to transfer their respective Philippine Assets to
a newly formed UK Company - Forum Energy Plc. An extra-ordinary meeting of
the shareholders on May 18th 2005 approved the transfer of assets. In May
2005 Forum Energy Plc raised (pound)3,400,000 (gross proceeds) of a
pre-IPO issue and the corporation share of FEP was reduced to 57.4%. In
July, 2005 an IPO will raise between (pound)6 million and (pound)15
million through the issue of additional FEP shares. At this time the
Corporation holding of FEP shares will be further diluted up to
approximately 32% of FEP depending on the price of the offering. The
pre-IPO interim offering was to provide the Corporation with funding ahead
of the IPO so that it could proceed with its activities. Subsequent to
this IPO FEP will be listed on the AIM market of the London Stock
Exchange. Also, effective May 18th 2005, the Corporation changed its name
to FEC Resources, Inc.
Subject to shareholder approval, once this transaction has been completed,
and funds have been raised by Forum Energy Plc under the Pre-IPO and the
IPO the subsequent dilution will result in the Corporation recognizing the
disposition of the asset and the receipt of the shares in Forum Energy Plc
as a Long-Term Investment.
The Corporation and Sterling have retained UK based Noble & Company as the
Nominated Advisers, who have agreed to take Forum Energy Plc to the AIM
market of the London Stock Exchange in July, 2005. Noble & Company have
also assisted in raising (pound)3.4 million in a pre-IPO phase in May 2005
and are planning to raise an additional (pound)6 million to (pound)15
million by the end of July, 2005.
57
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
14. SUBSEQUENT EVENTS - continued
The shares received by the Corporation in exchange for the assets will be
subject to a one year "lock-up" and then for 6 months thereafter the
Corporation can only trade the shares of Forum Energy Plc through Noble &
Company to protect an orderly market.
In April and May, 2005 the Corporation has raised additional working
capital in the amount of US$896,000 through the issue of Convertible debt.
The debt may be converted into shares of the Corporation at a conversion
price of $0.05 per share, or alternatively the Debenture holder at their
option may convert into shares of Forum Energy Plc at the pre-IPO price.
Such shares of Forum Energy Plc will be exempt from the lockup
arrangements described above.
On February 27th, 2005 Forum Exploration, Inc announced that it had been
awarded two coal License in the island of Cebu, one located in central
Cebu and the other in southern Cebu. The Corporation has obtained an
independent Competent Person report on the coal assets which has valued
them conservatively at 4.9 million tonnes of coal. This coal can be
extracted commercially and the Corporation intend to pursue development of
the coal licenses. It will need to obtain an environmental compliance
certificate before commercial operations can be started.
On January 6th 2005, GEM filed notice to convert a further $36,000
convertible debenture at an average price of $0.06 per share and received
601,611 shares from Escrow (see note 10).
On January 25th 2005, GEM filed notice to convert a further $36,000
convertible at an average price of $0.06 per share and received 610,923
shares from Escrow (see note 10)
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP")
which, in most respects, conform to accounting principles generally
accepted in the United States ("US GAAP"). Significant differences between
Canadian and US GAAP are as follows:
Financial statement presentation
Statements of Loss 2004 2003 2002
$ $ $
- -------------------------------------------------------------------------------------------------------------------------
Loss for the year - Canadian basis (7,219,068) (1,356,130) (1,058,276)
Beneficial conversion feature (d) -- -- (13,441)
Interest charge on accretion of equity portion of convertible debt (b) 8,016 -- --
Stock option re-pricing (e) -- -- 7,502
Amortization of deferred financing costs (c) (6,984) -- --
Convertible loan inducement (d) -- (1,434,533) --
- -------------------------------------------------------------------------------------------------------------------------
Loss and comprehensive loss for the year - U.S. basis (7,218,036) (2,790,663) (1,064,215)
=========================================================================================================================
Loss per common share (basic and diluted) - Canadian basis (0.05) (0.01) (0.10)
Loss and comprehensive loss per common share (basic and diluted) - U.S. basis (0.05) (0.02) (0.10)
=========================================================================================================================
58
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - continued
Balance Sheet
As Reported
under Canadian Increase
As at December 31, 2004 Note GAAP (Decrease) US GAAP
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Deferred financing costs (c) -- $ 132,703 $ 132,703
Liabilities
Convertible debentures payable (b) $ 464,614 $ 184,378 $ 648,992
Shareholders' equity
Share capital (c)(b) $ 10,693,033 $ 136,044 $ 10,829,077
Contributed surplus (a)(d) $ 1,246,885 $ 605,930 $ 1,852,815
Equity portion of convertible debentures payable (b) $ 188,751 $ (188,751) --
Retained earnings (a)(b)(d) $(14,281,476) $ (604,898) $(14,886,374)
===========================================================================================================================
As Reported
under Canadian Increase
As at December 31, 2003 Note GAAP (Decrease) US GAAP
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Share Capital (d) $ 7,239,109 -- $ 7,239,109
Contributed surplus (d) $ 526,167 $ 1,712,015 $ 2,238,182
Retained earnings (d) $ (5,956,323) $ (1,712,015) $ (7,668,338)
===========================================================================================================================
a) Prior to 2004 the Company used the fair value method of accounting for
stock options granted to non-employees as prescribed by FAS 123 and the
intrinsic method of accounting for stock options issued to employees for
US GAAP purposes. Under Canadian GAAP, the Corporation applied the fair
value based method of accounting prescribed by CICA Handbook Section 3870,
Stock-based Compensation and Other Stock-based Payments, only to stock
options granted to non-employees, and applied the intrinsic value of
accounting to employees stock options for stock options granted subsequent
to January 1, 2002. On January 1, 2004 the Company changed its method of
accounting for stock options to the fair value method for US GAAP
purposes. While US GAAP continues to allow the use of either the intrinsic
method, as prescribed by APB 25, or the fair value method, as prescribed
by SFAS 123, the Company has elected to adopt the fair value method of
accounting for stock options for US GAAP purposes using the Modified
Prospective Method as prescribed under FAS 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement
No. 123." Under this transition provision the Corporation is only required
to record compensation for options issued in 2004 and consequently an
adjustment to retained earnings for 2002 and 2003 options is not required.
Under Canadian GAAP the adoption of the new accounting standard required
the use of the fair value method for all stock options granted subsequent
to January 1, 2002 and an adjustment to retained earnings of $1,106,085
was recorded for 2002 and 2003 options.
The following table provides pro forma measures of loss and loss per
common share had stock options granted to employees, officers and
directors in 2003 and 2002 been recognized as compensation expense based
on the estimated fair value of the options on the grant date.
59
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - continued
2003 2002
-----------------------------
Loss for the year as reported $1,356,130 $1,058,276
Compensation expense 765,897 250,188
-----------------------------
Pro-forma loss for the year $2,122,027 $1,308,464
=============================
Loss per common share as reported $ 0.01 $ 0.10
=============================
Pro-forma loss per common share $ 0.02 $ 0.13
=============================
b) Convertible debentures:
Under Canadian GAAP, the conversion option embedded in the convertible
debentures is presented separately as a component of shareholders' equity
and the amount allocated to the equity component is then accreted back to
debentures payable as a charge to interest over the life of the debenture.
Under U.S. GAAP, the embedded conversion option is not subject to
bifurcation and is thus presented as a liability along with the balance of
the convertible debentures. As a result under US GAAP, the net loss would
have decreased by the amount of the interest expense charged as a result
of the accretion of the equity component, which is $8,016, debentures
payable would decrease by that same amount, share capital would decrease
by $3,643 which is the amount allocated from the equity component as a
result of the exercise of a conversion during the year, and long-term debt
would increase by $184,378.
Under US GAAP on the commitment date of the debenture, the Company is
required to assess whether there is an intrinsic beneficial conversion
feature in place. The beneficial conversion feature is represented by the
excess of fair value of the shares issuable on conversion over the amount
of the loan proceeds to be allocated to the common shares upon conversion.
The Company has determined that there is no beneficial conversion feature
intrinsic in the convertible debenture.. Canadian GAAP does not require
the recognition of a beneficial conversion feature.
c) Under US GAAP the cost of financing would be deferred and amortized
over the life of the convertible instrument. The total financing costs for
the convertible was $139,687 and $6,984 has been amortized for 2004.
d) Under US GAAP, the terms of the convertible notes provide the lenders
with an `in-the-money' variable conversion rate. A beneficial conversion
feature on the convertible loan is calculated at issuance based on the
difference between the effective conversion price of the allocated
proceeds and the market price of the common stock. The amount of the
beneficial conversion feature at inception was $45,143, however, because
of the variability of the conversion ratio, it is remeasured each
reporting period until conversion, extinguishment or maturity. The
remeasurement of the beneficial conversion feature at December 31, 2002
resulted in an increase in the amount allocated to the beneficial
conversion feature of $13,441. Under US GAAP loan inducements result in a
gain or loss in the statements of Loss and Deficit. During the year ended
December 31, 2003 the convertible loan was converted to shares through an
inducement resulting in a loss totaling $1,434,533.
60
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - continued
e) Under APB Opinion 25 the repricing of outstanding stock options under a
fixed price stock option plan results in these options being recognized as
variable price options from the date of the modification until they are
exercised, forfeited or expire. Accordingly, changes in the intrinsic
value of the stock options from the modification date to the period end
date would be recognized in the consolidated statements of loss as
adjustments to general and administrative expense. For the year ended
December 31, 2002, income would increase by $7,502 as the market value of
the Corporation's common shares at December 31, 2002 was higher than the
revised exercise price.
Other Disclosures
Subtotal in Operating Cash Flows
The Company includes a subtotal in cash provided by operating activities
in the statements of cash flows. The SEC prohibits the inclusion of this
subtotal.
New pronouncements
In September 2004 the SEC issued SAB 106 regarding the application of FAS
143 by oil and gas entities that follow the full cost accounting method.
SAB 106 states that after the adoption of FAS 143 the future cash flows
associated with the settlement of asset retirement obligations accrued on
the balance sheet should be excluded from the computation of the present
value of estimated future net revenues for purposes of the full cost
ceiling test calculation. As the Company excludes these future cash
outflows from its present value of estimated future net cash flows and
does not reduce the capitalized oil and gas costs by the asset retirement
obligation reflected on the balance sheet, the adoption of SAB 106 in 2004
did not have any impact on the Company's financial statements, nor did it
have an effect on the results of the ceiling test calculation.
In 2004, the FASB issued a new revised Statement No. 123, Share-Based
Payment. FAS 123 establishes a standard for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or services. FAS 123 requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. The cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award - usually the vesting period. Revised
FAS 123 eliminates the alternative to use the intrinsic value method of
accounting that was provided in Statement 123 as originally issued.
Revised FAS 123 is effective for public companies as of the beginning of
the first interim reporting period after June 15, 2005. The Company
adopted Revised FAS 123 in 2004, the results of which have been reflected
above.
In 2003, the FASB issued interpretation No. 46 Consolidation of Variable
Interest Entities ("FIN 46"), which became effective January 1, 2004. The
Canadian Institute of Chartered Accountants ("CICA") issued a similar
accounting guideline ("AcG 15"). FIN 46 and AcG 15 provide guidance as to
when a company should consolidate another entity into its Consolidated
Financial Statements. A variable interest entity ("VIE") is a corporation,
partnership, trust, or any other legal structure used for business
purposes that either (i) does not have equity investors with voting rights
or (ii) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 and AcG 15
require a VIE to be consolidated by a company if that company is subject
to a majority of the risk of loss from the VIE's activities, is entitled
to receive a majority of the VIE's residual returns, or both. If a company
has previously consolidated
61
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
New pronouncements - continued
a VIE but is not subject to a majority of the risk of the loss of its
activities nor entitled to receive a majority of its residual returns,
such VIE is required to be deconsolidated. Management has determined that
this guideline does not impact on the Corporation's financial position,
operating results or cash flow. The adoption of this standard will not
have any impact on the Corporation's current financial position or results
of operations; however, the impact of this standard in future years could
be material.
In December 2004 the FASB issued FAS 153 which deals with the accounting
for the exchanges of non-monetary assets. FAS 153 is an amendment of APB
Opinion 29. APB Opinion 29 requires that exchanges of non-monetary assets
should be measured based on the fair value of the assets exchanged. FAS
153 amends APB Opinion 29 to eliminate the exception from using fair
market value for non-monetary exchanges of similar productive assets and
introduces a broader exception for exchanges of non-monetary assets that
do not have commercial substance. FAS 153 is effective for non-monetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
The Company does not believe that the application of FAS 153 will have an
impact on the financial statements.
These accounting standards do not have a material impact on the company at
this time. We will continue to monitor the relevance of all accounting
standards and will measure the impact when they are determined to apply.
62
FEC RESOURCES INC (formerly Forum Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
ITEM 18. FINANCIAL STATEMENTS.
The Company has elected to report under Item #17.
ITEM 19. EXHIBITS
1.1 Certificate of Continuance of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form F-1, File
No. 33-81290 (the "Registration"); *
1.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registration Statement); *
4.1 Consulting Agreement dated March 1st 2004 between the Company and David
Robinson *;
4.2 Consulting Agreement dated March 1st 2004 between the Company and Barry
Stansfield *;
4.3 Consulting Agreement dated November 23rd 2003 between the Company and
Larry Youell *;
4.4 Consulting Agreement dated March 1st 2004 between the Company and David
Wilson *
4.5 Consulting Agreement dated March 1st 2004 between the Company and David *;
4.6 Exchange and Release Agreement between Tracer Petroleum Corporation and
Transmeridian Exploration, Inc., dated March 16, 2001; *
4.7 Share Purchase Agreement dated March 11, 2003, as amended by agreements
dated March 21, and April 2, 2003; *
4.8 Amendment dated March 21, 2003 to Share Purchase Agreement dated March 11,
2003 as amended by an agreement dated April 2, 2003; *
4.9 Amendment dated April 2, 2003 to Share Purchase Agreement dated March 11,
2003 as amended by agreement dated March 21, 2003; *
8. List of Subsidiaries *;
11. Code of Ethics *;
12.1 Certification by the Chief Executive Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
12.2 Certification by the Chief Financial Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
13.1 Certification by the Chief Executive Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
13.2 Certification by the Chief Financial Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
* Previously filed
63
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.
Date: July 15, 2005 FORUM ENERGY CORPORATION
---------------------------------
(Registrant)
/s/ Larry W. Youell
-------------------------------------------
President and Chief Executive Officer
64
FORUM ENERGY CORPORATION
ANNUAL REPORT ON FORM 20F
FOR THE YEAR ENDED
DECEMBER 31, 2004
EXHIBIT INDEX
1.3 Certificate of Continuance of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form F-1, File
No. 33-81290 (the "Registration"); *
1.4 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registration Statement); *
4.1 Consulting Agreement dated March 1st 2004 between the Company and David
Robinson *;
4.2 Consulting Agreement dated March 1st 2004 between the Company and Barry
Stansfield *;
4.3 Consulting Agreement dated November 23rd 2003 between the Company and
Larry Youell *;
4.4 Consulting Agreement dated March 1st 2004 between the Company and David
Wilson *;
4.5 Consulting Agreement dated March 1st 2004 between the Company and David
Thompson *;
4.10 Exchange and Release Agreement between Tracer Petroleum Corporation and
Transmeridian Exploration, Inc., dated March 16, 2001; *
4.11 Share Purchase Agreement dated March 11, 2003, as amended by agreements
dated March 21, and April 2, 2003; *
4.12 Amendment dated March 21, 2003 to Share Purchase Agreement dated March 11,
2003 as amended by an agreement dated April 2, 2003; *
4.13 Amendment dated April 2, 2003 to Share Purchase Agreement dated March 11,
2003 as amended by agreement dated March 21, 2003; *
9. List of Subsidiaries *;
12. Code of Ethics *;
12.1 Certification by the Chief Executive Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
12.2 Certification by the Chief Financial Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
13.1 Certification by the Chief Executive Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
13.3 Certification by the Chief Financial Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith);
* Previously filed
65