FORM 6-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2002
ENERGY POWER SYSTEMS LIMITED
(FORMERLY: ENGINEERING POWER SYSTEMS LIMITED)
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(Address of Principal executive offices)
Suite 301, 2 Adelaide Street West, Toronto, Ontario, M5H 1L6
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(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover form 20-F or Form 40-F:
Form 20-F X Form 40-F
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2b under the Securities Exchange Act of 1934:
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3- 2(b): 82
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENERGY POWER SYSTEMS LIMITED
(formerly: Engineering Power Systems Limited)
Date: November 27, 2002 By:____"Sandra J. Hall"____ ______
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Sandra J. Hall, President, Secretary & Director
[GRAPHIC OMITED]
[GRAPHIC OMITED]
Energy Power Systems Limited
Management's Discussion And Analysis of Financial Condition
and Operating Results
For the Period Ending June 30, 2002
Suite 301, 2 Adelaide Street West, Toronto, Ontario, M5H 1L6 Telephone: 416
861-1484 Facsimile: 416 861-9623 www.epsx.com
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS
The following discussion and analysis of Energy Power Systems Limited
("Energy Power" or the "Company") should be read in conjunction with the
Company's Audited Consolidated Financial Statements for the fiscal years ended
June 30, 2002, 2001 and 2000 and notes thereto. Unless otherwise indicated, the
following discussion is based on Canadian dollars and presented in accordance
with Canadian Generally Accepted Accounting Principles ("GAAP"). For reference
to differences between Canadian and US Generally Accepted Accounting Principles
see note 17 of the Audited Consolidated Financial Statements.
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), which reflect the Company's current expectations regarding the
future results of operations, performance and achievements of the Company. The
Company has tried, wherever possible, to identify these forward-looking
statements by, among other things, using words such as "anticipate," "believe,"
"estimate," "expect" and similar expressions. These statements reflect the
current beliefs of management of the Company, and are based on current available
information. Accordingly, these statements are subject to known and unknown
risks, uncertainties and other factors which could cause the actual results,
performance or achievements of the Company to differ materially from those
expressed in, or implied by, these statements. (See the Company's Annual
Information Form and Annual Form 20 F for Risk Factors.) The Company is not
obligated to update or revise these "forward-looking" statements to reflect new
events or circumstances.
OVERVIEW
The Company is a corporation amalgamated under the laws of the Province of
Ontario and Provincially registered in the Provinces of Alberta and Newfoundland
and is an energy source and service company that operates an Industrial &
Offshore Division, and an Oil & Gas Division. The audited consolidated financial
results for the fiscal periods ending June 30, 2002, 2001 and 2000 include the
accounts of the Company and its wholly owned subsidiary M&M Engineering Limited
("M&M"), a Newfoundland and Labrador company, and M&M's wholly-owned subsidiary
M&M Offshore Limited ("MMO"), a Newfoundland and Labrador company (reference to
M&M may include MMO). M&M and MMO together operate from their 47,500 square foot
fabrication facility and 15 acre property. M&M is an industrial, mechanical
contractor. MMO (i) produces steel components for structures and heavy industry;
(ii) manufactures pressurized vessels and tanks; and (iii) provides in-plant
fabrication, welding and assembly services for the offshore oil sector and heavy
industry.
During fiscal 2001 the Company commenced its oil and gas operations. The
activities of the Company's Oil & Gas Division include exploration, development
and production of oil and natural gas. The Company's oil and gas properties are
located in the Canadian Provinces of Alberta, Ontario and Prince Edward Island.
During fiscal 2001 the Company adopted a plan to discontinue the operations of
its Power Division. This division has been treated as discontinued operations
for accounting purposes (see Note 20). As such the operations of the Company's
Power Division have been excluded from the audited consolidated statement of
loss and deficit from continuing operations in prior periods. The Company
intends to monetize its investment in the Andhra Pradesh Project, India.
During fiscal 2000 the Company disposed of its interests in Merlin
Engineering A.S. ("Merlin") and divested ASI Holdings, Inc. ("ASIH"). These
operations have been treated as discontinued operations for accounting purposes
(see Note 20). As such, the operations of Merlin and ASIH have been excluded
from the audited consolidated statement of loss and deficit from continuing
operations in current and prior periods.
CRITICAL ACCOUNTING POLICIES: The Company's significant accounting policies
are described in the notes to the audited consolidated financial statements. It
is increasingly important to understand that the application of generally
accepted accounting principles involve certain assumptions, judgments and
estimates that affect reported amounts of assets, liabilities, revenues and
expenses. The application of principles can cause varying results from company
to company.
The most significant policies that impact the Company and its subsidiaries
relate to revenue recognition policies, oil and gas accounting and reserve
estimates, impairment of capital assets, accounting for joint ventures, the
future income tax assets and liabilities, contingent liabilities and assets and
valuation of the Company's investment in Konaseema EPS Oakwell Power Limited
("KEOPL"). During the 2002 fiscal year the Company adopted the new accounting
policies for Goodwill and Other intangibles.
Revenue recognition: Revenue for M&M & MMO is generated principally from
contracts or purchase orders awarded through a competitive bidding process.
Revenue from construction and fabrication contracts is recognized on the
percentage of completion basis, pursuant to which contract revenues are
recognized by assessing the value of the work performed in relation to the total
estimated cost of the contract based upon the contract value.
Oil and gas revenue is recognized on actual production volumes and delivery
of the product to the market, based on the operator's reports.
Oil and gas accounting and reserve estimates: The Company follows the full cost
method of accounting for oil and gas operations whereby all costs of exploring
for and developing oil and gas reserves are initially capitalized. Such costs
include land acquisition costs, geological and geophysical expenses, carrying
charges on non-producing properties, costs of drilling and overhead charges
directly related to acquisition and exploration activities.
Costs capitalized, together with the costs of production equipment, are depleted
on the unit-of-production method based on the estimated gross proved reserves.
Petroleum products and reserves are converted to equivalent units of oil by
converting natural gas at 6,000 cubic feet of gas to 1 barrel of oil.
Costs acquiring and evaluating unproved properties are initially excluded from
depletion calculations. These unevaluated properties are assessed periodically
to ascertain whether impairment has occurred. When proved reserves are assigned
or the property is considered to be impaired, the cost of the property or the
amount of the impairment is added to costs subject to depletion calculations.
Proceeds from a sale of petroleum and natural gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the rate of depletion.
In applying the full cost method, under Canadian GAAP, the Company performs a
ceiling test which restricts the capitalized costs less accumulated depletion
and amortization from exceeding an amount equal to the estimated undiscounted
value of future net revenues from proved oil and gas reserves, as determined by
independent engineers, based on sales prices achievable under existing contracts
and posted average reference prices in effect at the end of the Company's fiscal
year and current costs, and after deducting estimated future general and
administrative expenses, production related expenses, financing costs, future
site restoration costs and income taxes.
In applying the full cost method under US GAAP, the Company performs a ceiling
test based on the same calculations used for Canadian GAAP except the Company is
required to discount future net revenue at 10% and there is no deduction from
the US GAAP ceiling test for estimated future general and administrative
expenses and interest.
Impairment of Capital Assets: The Company has written down $0.3 million of the
carrying value of its Port aux Basques property to its estimated net realizable
amount of $0.1 million in 2002 ($1.5 million was charged 2001).
Joint Ventures: The Company's Industrial & Offshore Division carries out part
of its business in four joint ventures. The Company's audited consolidated
financial statements include the Company's proportionate share of these joint
ventures assets, liabilities, revenues and expenses.
Future Income Assets and Liabilities: The Company uses the asset and liability
method of accounting for income taxes. Under this method, future income tax
assets and liabilities are determined based on differences between the financial
statement carrying amounts and their respective income tax bases (temporary
differences). Management regularly reviews its tax assets for recoverability and
establishes a valuation allowance based on historical taxable income, projected
future taxable income and the expected timing of the reversals of existing
temporary differences. The Company has $10.2 million of non-capital losses. The
Company carries an income tax asset of $0.6 million related to those non-capital
losses. Additionally, the Company fully utilized all of its available net
operating carry-forwards attributable to continuing operations for financial
statement purposes. In 2002 the Company took a valuation allowance charge of
$0.5 million which reduced the future tax asset by $0.5 million.
Contingent liabilities and assets: On August 28, 2002 the Company was served a
Writ of Summons from Oakwell Engineering Limited ("Oakwell") of Singapore, a
former joint venturer in a power project in Andhra Pradesh, India. On November
8, 2002 the Company counter claimed against Oakwell for damages, costs and
interest as referred to in Note 21 of the audited consolidated financial
statements. No provision has been made in the audited consolidated financial
statements for this claim. The Company estimates the range of liability related
to pending litigation where the amount and range of loss can be estimated. Where
there is a range of loss, the Company records the minimum estimated liability
related to those claims. As additional information becomes available, we assess
the potential liability related to our pending litigation and revise our
estimates accordingly. Revisions of our estimates of the potential liability
could materially impact our results of future operations. If the final outcome
of such litigation and contingencies differs adversely from that currently
expected, it would result in a charge to earnings when determined.
There are deficiencies in the State Government providing lender guarantees for
the Karnataka, India power project. The Company is pursuing legal recourses
against the Government of Karnataka and the Karnataka Power Transmission
Corporation Limited. At the current time no assessment can be made of the actual
recoverable amount. Accordingly no amount has been recorded in these audited
consolidated financial statements.
Valuation of the Company's Investment in KEOPL: The Company owns 11,348,200
ordinary equity shares of Rs. 10 each, of KEOPL (the "KEOPL Shares"), a company
incorporated in India, which is developing a Power project in Andhra Pradesh,
India. Pursuant to the Revised VBC Agreement dated August 10, 2000 between the
Company, VBC Group ("VBC"), KEOPL's parent company, and KEOPL, VBC shall
purchase the Company's investment in KEOPL for INR 113,482,000 (approximately
Cdn. $3,500,000) on or before June 30, 2002 if the Company offers its KEOPL
Shares to VBC prior to June 30, 2002.
On May 3, 2002, the Company, pursuant to the Revised VBC Agreement, offered and
tendered the KEOPL Shares to VBC for purchase on or before June 30, 2002. On
July 1, 2002, VBC raised a dispute regarding the purchase and sale of the KEOPL
Shares. The Company is pursuing legal remedies against VBC and Oakwell.
The investment in KEOPL is recorded at expected net recoverable amount of $3.5
million. The actual recoverable amount is dependant upon future events and could
differ materially from the expected net recoverable amount.
Goodwill: The Company has adopted new accounting policies for Goodwill as
required under the recommendations of the new CICA Handbook Section 1581,
Business Combinations, and Section 3062, Goodwill and Other Intangibles. The
newly adopted accounting policy is also consistent with FASB No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). As a result of applying the new standards, management has determined
that the value of goodwill was impaired, accordingly a transitional impairment
loss of $2,056,832 has been charged to opening deficit.
RESULTS OF OPERATIONS
The following discussion of the results of operations of the Company is a
comparison of the Company's two fiscal periods ended June 30, 2002 and 2001.
Revenue: The Company's consolidated revenues of $22.0 million for the year
ending June 30, 2002 increased by 15% from $19.1 million reported during the
same period the previous year. Revenue growth was driven by both a 15% increase
in revenues to $21.6 million from $18.8 million during 2001 derived from the
Company's Industrial & Offshore Division as well as a 33% increase in revenues
to $0.4 million from $0.3 million during 2001 from the Company's Oil & Gas
Division, which commenced February 1, 2001.
Gross Profit: Consolidated gross profit for the fiscal period ending June 30,
2002 increased 20% to $3.0 million from $2.5 million in 2001. The increase was
primarily due to increased gross profits from the Company's Industrial &
Offshore Division. This increase in gross profit was primarily driven by
increased revenue during the year as the Company's consolidated gross margin as
a percent of sales has remained reasonably consistent at 13.5% versus 13.2% for
the previous year. During the year gross profits from the Industrial & Offshore
Division increased 33% to $3.2 million from $2.4 million during 2001. This
increase was due to increased revenues during 2002. Gross margins for the
Company's Oil & Gas Division decreased to ($0.2) million from $0.2 million
during 2001. This decrease was primarily due to increased depletion of the
Company's reserves.
Administrative expenses: Administrative expenses of $4.2 million for the twelve
month period ending June 30, 2002 was 62% higher than administrative expenses of
$2.6 million the previous year. For the fiscal year 2002 the Company incurred a
foreign exchange loss of $0.2 million and in the fiscal year 2001 the Company
had a foreign exchange gain of $0.2 million. For the fiscal year 2002
professional fees increased to $0.3 million. In addition during the 2002 fiscal
year the Company wrote down its marketable securities by $0.1 million. The
Company also had increases in its general and administrative expenditures.
Other income: Included in other income is a litigation settlement of $0.7
million related to a claim against a company with respect to an asset purchase
agreement. Also included is an overprovision for costs related to the Port aux
Basques property settled for $0.2 million less than accrued. The balance of
other income relates mainly to credits received for workers compensation
adjustments of prior years.
Loss from Continuing Operations before Income Taxes: Losses from Continuing
Operations before Income Taxes decreased 77% by $1.7 million to $0.5 million
during fiscal 2002 from $2.2 million the previous year. The majority of the
decrease in losses was due to a non-cash write down of inactive capital assets
of $1.5 million during the previous fiscal period. In the current period the
Company wrote down an additional $0.3 million.
Current and Future Income Taxes: During the fiscal period ending June 30, 2002 a
net future income tax charge of $0.6 million was incurred compared to a net
future income tax credit realization of $1.2 million during fiscal 2001. The tax
credit during fiscal 2001 was primarily due to a valuation allowance charge of
$1.1 million for expected future income from the Company's oil and gas
properties. During fiscal 2002 the effective tax rate for the Company was 39%
and fiscal 2001 43%.
Net losses from Continuing Operations: Consolidated loss from continuing
operations for the twelve month period ending June 30, 2002 was $1.1 million,
10% more than the $1.0 million loss from continuing operations reported for the
previous twelve month period.
Net losses from Continuing Operations Per Share: As a result of the foregoing,
net losses from continuing operations per share for the twelve month period
ending June 30, 2002 decreased 22% to $0.17 per share from $0.23 per share for
fiscal 2001.
Discontinued Operations: Losses incurred from discontinued operations result
from the Company's discontinued Power Division in fiscal 2001. During the
current year the Company did not incur any losses from discontinued operations.
Losses from discontinued operations were $2.7 million for the twelve month
period ending June 30, 2001.
Net losses and Net losses per share: As a result of the foregoing, net loss
decreased 69% to $1.1 million as compared to a net loss incurred of $3.6 million
during the previous fiscal period. Net loss per share decreased 80% to $0.17 per
share for the fiscal period ending June 30, 2002 from $0.85 per share for the
previous twelve month period.
Goodwill: During the year the Company adopted new accounting policies for
Goodwill as required under the recommendations of the new CICA Handbook Section
1581, Business Combinations, and Section 3062, Goodwill and Other Intangibles
(see Critical Accounting Policies above). The new accounting policy has not been
adapted retroactively. The adjusted net loss and basic loss per share for the
comparative fiscal year ending June 30, 2001 if no amortization was recorded in
those years is a loss of $3.4 million versus the recorded amount of $3.6 million
in 2001 and a net loss per share of $(0.79) versus a loss per share of $(0.85)
reported in the financial statements.
The following discussion of the results of operations of the Company is a
comparison of the Company's two fiscal periods ended June 30, 2001 and 2000.
Revenue: The Company's consolidated revenues of $19.1 million for the year
ending June 30, 2001 increased by 1% from $18.9 million reported during the same
period the previous year. New sources of revenue from the Company's Oil & Gas
Division, which commenced February 1, 2001, contributed to this revenue growth.
Gross Profit: Consolidated gross margins for the fiscal period ending June 30,
2001 decreased 34% to $2.5 million from $3.8 million in 2000. The difference was
primarily due to decreased profit margins from the Company's Industrial &
Offshore Division. During fiscal 2001 gross profit margins from the Industrial &
Offshore Division were 13% compared to 20% the previous year. The difference is
attributable to both a high volume low margin contract included in revenues in
2001 and a high volume high margin contract included in revenues in 2000.
Consolidated gross profit includes a 43% gross profit margin derived from the
Company's Oil & Gas Division.
Administrative expenses: Administrative expenses of $2.6 million for the twelve
month period ending June 30, 2001 was substantially lower than administrative
expenses of $4.3 million for the previous twelve month period. In 2001
administrative expenses was reduced by previous years overprovision of
administrative expenses of approximately $1.0 million.
Loss from Continuing Operations before Income Taxes: Losses from Continuing
Operations before Income taxes increased 100% to $2.2 million during fiscal 2001
from $1.1 million the previous year. The majority of the increase was due to a
non-cash write down of inactive capital assets of $1.5 million. Before this
write down, the losses from continuing operations before income taxes would have
been reduced by 35% to $0.7 million. This reduction is due primarily to the
corporate restructuring which commenced during fiscal 2000.
Current and Future Income Taxes: Effective July 1, 2000, the Company changed its
method of accounting for income taxes from the deferral method to the liability
method. The liability method requires that accumulated tax balances be adjusted
to reflect changes in the tax rates. This standard was applied retroactively;
however, as permitted under the new rules, comparative financial information has
not been restated, as the difference was insignificant. During the fiscal period
ending June 30, 2001 a net future income tax credit of $1.2 million was realized
compared to a net future income tax charge of $0.3 million during fiscal 2000.
The tax credit during fiscal 2001 was primarily due to a valuation allowance
charge of $1.1 million for expected future income from the Company's oil and gas
properties. During fiscal 2001 the effective tax rate for the Company was 43%
and fiscal 2000 45%.
Net losses from Continuing Operations: Consolidated loss from continuing
operations for the twelve month period ending June 30, 2001 was $1.0 million,
32% less than the loss from continuing operations reported for the previous
twelve month period.
Net losses from Continuing Operations Per Share: As a result of the foregoing,
net losses from continuing operations per share for the twelve month period
ending June 30, 2001 decreased 50% to $0.23 per share from $0.46 per share for
fiscal 2000.
Discontinued Operations: Losses incurred from discontinued operations result
from the Company's discontinued Power Division and the disposition of ASI
Holdings Limited and Merlin Engineering A.S. Losses from discontinued operations
increased 108% to $2.7 million for the twelve month period ending June 30, 2001
compared to $1.3 million in the previous fiscal period. The loss was primarily
due to the write down of the Karnataka Project and other charges taken against
the Company's Independent Power Projects.
Net losses and Net losses per share: As a result of the foregoing, net loss
increased 33% to $3.6 million as compared to a net loss incurred of $2.7 million
during the previous fiscal period. Net loss per share decreased 1% to $0.85 per
share for the fiscal period ending June 30, 2001 from $0.86 per share for the
previous twelve month period.
Goodwill: In fiscal 2002 the Company adopted new accounting policies for
Goodwill as required under the recommendations of the new CICA Handbook Section
1581, Business Combinations, and Section 3062, Goodwill and Other Intangibles
(see Critical Accounting Policies above). The new accounting policy has not been
adapted retroactively. The adjusted net loss, basic loss per share from
continuing operations and basic loss per share for comparative fiscal years
ending June 30, 2001 and 2000 if no amortization was recorded in those years are
in a loss of $3.4 million versus the recorded amount of $3.6 million in 2001 and
a net loss per share of $(0.79) versus a loss per share of $(0.85) reported in
the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2002 were $5.6 million, compared to
$1.2 million at the end of the previous year. During the 2002 fiscal year the
Company issued common shares for cash of $9.4 million (see note 10 of the
audited consolidated financial statements). The primary use of funds was applied
to the exploration and development of oil and gas properties. During the year
the Company expended $2.8 million on the exploration and development of new oil
and gas reserves. In addition the Company repaid $0.4 million of shareholder
loans for cash and utilized $0.6 million from its line of credit. Cash of $2.0
million was used to fund the Company's operating activities.
Cash resources at June 30, 2001 were $1.2 million, compared to $1.7 million at
the end of the previous year. During fiscal 2001 the Company recovered
approximately $3.4 million from its investment in KEOPL (the Andhra Pradesh
Project) and issued common and preference shares for a gross proceeds of $1.6
million. The available cash was used to acquire $1.7 million of oil and gas
properties and to repay $1.9 million in prior advances from shareholders. The
remainder of cash resources of approximately $1.3 million was applied to fund
operating activities.
The Company's primary sources of liquidity and capital resources historically
have been cash flows from the operations of the Industrial & Offshore Division,
issuance of share capital and advances from shareholders. During fiscal 2001 and
2000 the Company recovered part of its investment in KEOPL. During fiscal 2003,
it is expected that primary sources of liquidity and capital resources will be
derived from the operations of the Industrial & Offshore Division, revenues from
the Oil & Gas Division and further recovery of the Company's investment in
KEOPL.
The Company's Industrial & Offshore Division maintains their own bank line of
credit facility. The Company's M&M and MMO subsidiaries credit facility, through
Canadian Imperial Bank of Commerce ("CIBC") was initially entered into December
1994 and was amended on March 9, 2000. The CIBC credit facility currently
allows M&M to borrow up to the lesser of (i) $1.75 million, or (ii) 75% of
receivables from government or large institutions/corporations and 60% of other
receivables to finance working capital requirements on a revolving basis. The
CIBC credit facility is payable upon demand. As of June 30, 2002, the principal
balance outstanding under the credit facility was $1.5 million, compared to
$0.8 million as at June 30, 2001. As security for repayment of the credit
facility, M&M granted to CIBC a first priority lien on pledged receivables,
inventory and specific equipment; a second priority lien on land, buildings and
immovable equipment; and an assignment of insurance. MMO also guarantees the
CIBC credit facility. The credit agreement requires M&M to satisfy certain
financial tests, limits the amount of indebtedness M&M may incur and restricts
the payment of dividends.
M&M is indebted to RoyNat, Inc. ("RoyNat") in the amount of $0.5 million as of
June 30, 2002 (compared to $0.6 million in 2001). This indebtedness arose in
connection with a mortgage loan, which was renewed August 2000.
The original credit was offered on May 18, 1990 by RoyNat to M&M in connection
with the purchase of its fabrication facility in St. John's, Newfoundland. The
mortgage bears interest at RoyNat's cost of funds plus 3.25%, and is payable in
monthly principal payments of $7,000, plus interest. As security, M&M granted
a first priority lien on land and building, and a secondary lien on all other
assets of M&M, subject to a first priority lien in favor of CIBC. M&M Offshore
has also guaranteed this mortgage.
OUTLOOK AND PROSPECTIVE CAPITAL REQUIREMENTS: The Industrial & Offshore
Division is currently working on a backlog of contracts. Further development of
Atlantic Canada's offshore infrastructure could feed further growth for the
Industrial & Offshore Division. In addition the Oil & Gas Division is adding
positive cash flow to fund corporate operations and future development and
growth strategies. At present the Company intends to expand its oil and gas
interests.
As part of the Company's oil and gas exploration and development program the
Company expects to expend significant capital resources to expand its existing
portfolio of proved and probable oil and gas reserves. These expenditures can
be funded through existing cash held by the Company. Any excess expenditure may
be funded by additional share capital issued by the Company, debt or by other
means.
Subsequent to year-end, one of M&M's joint ventures required an increase in
its credit facility to the amount of $2,450,000. The facility is repayable on
demand on or before December 31, 2002 and bears interest at the bank's prime
lending rate plus 2.00% per annum. As security for this facility, M&M was
required to confirm that they would not claim repayment of $300,000 owed to them
by the joint venture until December 31, 2002. M&M was also required to provide a
guarantee of $500,000 until December 31, 2002. Along with the existing
postponement of $50,000 and permanent guarantee of $75,000 (see Note 7), M&M's
commitment is now at $350,000 postponement and $575,000 guarantee.
With respect to anticipated capital expenditures over the next twelve months,
M&M is expected to expend approximately $0.5 million for new and used
manufacturing and office-related equipment. Such equipment, which could be
utilized to generate additional construction revenues, could be financed through
capital leases with equipment manufacturers or credit arrangements with M&M's
existing lenders, cash from its parent company or other means.
The Company's future profitability over the longer term will depend upon its
ability to successfully implement its business plan. M&M has, in the past,
focused on manufacturing and fabricating process piping, production equipment,
steel tanks and other metal products requiring specialized welding and
fabrication abilities. Management believes that several opportunities are
developing in the Atlantic provinces of Canada which will enable M&M to maintain
and increase this business. These include proposed offshore oil and gas projects
for the White Rose Oilfield, the Sable Island Offshore Energy Project, and the
Hebron Oilfield, in addition to development of the Voisey's Bay nickel mine. It
is also our belief that M&M will be afforded opportunities with respect to the
upgrade and maintenance of existing area infrastructure including the Hibernia
and Terra Nova oil fields, mechanical fabrication and maintenance of production
equipment for refineries, pulp and paper mills (including environmental
equipment) and private sector power generation projects (primarily for mining
and natural resources).
RECENTLY ISSUED UNITED STATES ACCOUNTING STANDARDS: In August 2001, the FASB
issued SFAS No. 143 "Accounting for Asset Retirement Obligations". SFAS No. 143
requires the fair value of a liability for an asset retirement obligation to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated retirement costs are capitalized as part
of the carrying amount of the long-lived asset. SFAS No. 143 is effective for
the fiscal year ending June 30, 2003. Management believes the adoption of this
statement will have no material impact on the financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets". SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuous operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.
Currently, the Company is assessing, but has not yet determined how the adoption
of SFAS 144 will impact its financial position and results of operation.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 rescinds FASB No. 4 "Reporting Gains and Losses from Extinguishment
of Debt", and an amendment of that statement, FASB No. 64 "Extinguishments of
Debt made to Satisfy Sinking-Fund Requirements". This statement also rescinds
FASB No. 44, "Accounting for Intangible Assets of Motor Carriers". This
statement amends FASB No. 13, "Accounting for Leases", to eliminate an
inconsistency between required accounting for sale-leaseback transactions and
the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This statement amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions for debt extinguishments are applicable for fiscal
years beginning after May 15, 2002 and the provisions regarding lease accounting
are for transactions occurring after May 15, 2002. Management believes the
adoption of this statement will not have a material effect on the financial
position and results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at the date the
liability is incurred and is measured and recorded at fair value. This is
effective for exits or disposal activities initiated after December 31, 2002.
Management is of the opinion that the adoption of SFAS No. 146 will not impact
its financial position and results of operation.
TREND INFORMATION
SEASONALITY: The Company's Industrial & Offshore Division operates in a
cyclical and seasonal industry. Fabrication industry activity levels are
generally dependent on the level of capital spending in heavy industries such as
mining, forestry, oil and gas and petrochemicals. In addition the Company is
subject to seasonal levels of activity whereby business activities tends to be
lower during the winter months. The level of industry profits,
capacity-utilization in the industry and interest rates often affect capital
spending in these industries. Success in fabrication will be dependent on the
Industrial & Offshore Division's ability to secure and profitably perform
fabrication contracts. Fixed price fabrication contracts contain the risk of
bid error or significant cost escalation with regard to either labor or material
costs, combined with a limited ability to recover such costs from the applicable
client.
The Company's Oil & Gas Division is not a seasonal business, but increased
consumer demand or changes in supply in certain months of the year can influence
the price of produced hydrocarbons, depending on the circumstances. Production
from the Company's oil and gas properties is the primary determinant for the
volume of sales during the year.