FORM 6-K
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 29, 2002 By:____"Sandra J. Hall"____ ______
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Sandra J. Hall, President, Secretary & Director
Message to Shareholders:
It has been a challenging year. We live in a time of growing global uncertainty
and have seen a significant decline in equity markets. It is in times such as
these that good companies take a long hard look at what made them successful and
focus themselves accordingly. Energy Power Systems has been doing just that. At
Energy Power, we are concentrating on our core competencies; Oil and Gas
exploration as well as, Industrial and Offshore contracting.
Energy Power - an Energy Source and Service Company.
Our Industrial & Offshore Division is headquartered in St. John's, Newfoundland
and consists of the business of M&M Engineering Limited and M&M Offshore Limited
(together "M&M"). Newfoundland and Labrador is the fastest growing province in
Canada, the country that leads the G-7 in economic growth. During the past year,
our Industrial & Offshore Division played key roles in a number of Atlantic
Canada's infrastructure projects. From pipeline installations for the offshore
oil facilities at the Newfoundland Transshipment Terminal to the rebuild of
major processing units at the 105,000 barrels per day refinery at
Come-By-Chance, Newfoundland to fabrication and installation of penstocks for
the Granite Canal Hydro Electric Project, M&M's expertise and experience has
been counted on. Over the course of 35 years, M&M Engineering has built a world
class reputation in industrial contracting.
We believe that there are several exciting opportunities developing in the
Atlantic provinces of Canada that will enable our Industrial & Offshore Division
to expand its 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 our Industrial & Offshore Division 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).
In the coming years, expenditures for the development of natural resources of
Newfoundland and Labrador alone are expected to be in the tens of billions of
dollars. With our Industrial & Offshore Division's track record for delivering
excellence on large-scale projects, its proven management team, as well as its
strategic location and owned facilities we have every reason to be excited about
the future.
It has been just over a year since we commenced oil and gas operations as part
of an initiative to increase cash flow. We have now acquired oil and gas
properties in the proven productive region of the Western Sedimentary Basin in
Alberta, Canada, and prospective property in the Central Maritimes Basin of
Atlantic Canada. During fiscal 2002, our Oil & Gas Division invested C$2,750,000
in a comprehensive drilling and exploration program. From our participation in
eleven wells, two wells are producing oil, one well is producing natural gas and
liquids, four wells are shut in pending evaluation, tie in and pipeline
facilities, one well is suspended, and the three remaining have been abandoned
as uneconomic. We also participated in a 3D seismic exploration program on our
Prince Edward Island Property in Atlantic Canada to delineate drilling targets
for a proposed winter drilling program.
Our Oil & Gas Division is already adding positive cash flow to Energy Power.
With the maturing value of oil and gas commodities, and a growing goal to make
North America less reliant on overseas supply, it is management's intention to
continue to strategically invest capital resources to expand our portfolio of
oil and gas reserves.
In corporate developments, the Company's common shares began trading on the
American Stock Exchange ("AMEX") under the symbol "EGY" in May 2002. We are
pleased to provide our shareholders with a listing on a 'national market' and an
internationally recognised stock exchange with the prestige of AMEX.
We are dedicated to growing the Company and enhancing shareholder value. On
behalf of the management and board of Energy Power Systems Limited, I would like
to thank you, our shareholders, for your continued support. We look forward to a
rewarding 2003.
On Behalf of the Board of Directors,
Sandra J. Hall
President and Secretary
November 21, 2002
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.
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
CONTENTS
--------------------------------------------------------
AUDITORS' REPORT 2
COMMENTS BY AUDITOR FOR U.S. READERS ON
CANADA-U.S. REPORTING DIFFERENCE 3
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 4
Statements of Loss and Deficit 5
Statements of Cash Flows 6
Summary of Significant Accounting Policies 7-10
Notes to Consolidated Financial Statements 11-33
================================================================================
AUDITORS' REPORT
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS OF
ENERGY POWER SYSTEMS LIMITED
We have audited the consolidated balance sheets of Energy Power Systems Limited
as at June 30, 2002 and 2001 and the consolidated statements of loss and deficit
and consolidated statements of cash flows for the years ended June 30, 2002,
2001 and 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with Canadian and U.S. generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 2002 and
2001 and the results of its operations and its cash flows for the years ended
June 30, 2002, 2001 and 2000 in accordance with Canadian generally accepted
accounting principles.
(signed) BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
August 29, 2002
================================================================================
COMMENTS BY AUDITOR FOR U.S. READERS
ON CANADA-U.S. REPORTING DIFFERENCE
--------------------------------------------------------------------------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when 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 5 to
the financial statements. Our report to the shareholders dated August 29, 2002
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) BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
August 29, 2002
============================================================================================
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30 2002 2001
--------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 5,610,621 $ 1,242,621
Marketable securities (market value $283,800; $255,290 - 2001) 283,800 221,213
Accounts receivable (Note 1) 5,218,201 4,331,086
Inventories and work in progress 2,652,816 1,039,853
Due from co-venturer (Note 6) 159,110 208,652
Prepaid expenses 59,618 67,329
Investment (Note 2) - 3,500,000
Future income tax asset (Note 11) 61,473 235,000
---------------------------
14,045,639 10,845,754
INVESTMENT (Note 2) 3,500,000 -
OIL AND GAS PROPERTIES (Note 3) 4,400,078 2,017,493
CAPITAL ASSETS (Note 4) 2,834,859 3,268,096
FUTURE INCOME TAX ASSET (Note 11) 533,527 862,000
GOODWILL (Note 5) - 2,056,832
--------------------------
$ 25,314,103 $ 19,050,175
===========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness (Note 7) $ 1,462,766 $ 829,001
Accounts payable and accrued liabilities 4,022,114 4,200,868
Due to shareholders (Note 8) 628,346 1,162,403
Current portion of long term debt (Note 9) 185,925 182,151
Future income tax liability (Note 11) 432,490 266,000
--------------------------
6,731,641 6,640,423
DUE TO SHAREHOLDERS (Note 8) - 350,000
LONG-TERM DEBT (Note 9) 501,670 646,311
FUTURE INCOME TAX LIABILITY (Note 11) 22,110 56,000
--------------------------
7,255,421 7,692,734
--------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 10) 42,096,732 32,207,289
Deficit (24,038,050) (20,849,848)
--------------------------
18,058,682 11,357,441
--------------------------
$ 25,314,103 $ 19,050,175
===========================================================================================
On behalf of the Board:
(signed) Sandra J. Hall
---------------------------
Director
(signed) James C. Cassina
----------------------------
Director
===========================================================================================
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE YEARS ENDED JUNE 30 2002 2001 2000
-------------------------------------------------------------------------------------------
REVENUE $ 22,010,321 $ 19,083,808 $ 18,924,369
COST OF SALES AND OIL AND GAS OPERATING COSTS
(including amortization of capital assets and
depletion $574,208; 2001 - $258,629; 2000 - $ 211,703)
19,037,135 16,571,162 15,127,539
-------------------------------------------
GROSS PROFIT 2,973,186 2,512,646 3,796,830
-------------------------------------------
EXPENSES
Administrative expenses 4,191,316 2,626,513 4,344,657
Amortization of goodwill - 261,258 261,258
Amortization of capital assets 124,405 157,111 154,416
Interest 78,334 165,965 100,588
Interest on long term debt 57,675 90,523 113,959
-------------------------------------------
4,451,730 3,301,370 4,974,878
-------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE
THE FOLLOWING UNDERNOTED ITEMS (1,478,544) (788,724) (1,178,048)
OTHER INCOME (Note 12) 1,258,677 66,218 72,486
WRITE DOWN OF INACTIVE CAPITAL ASSETS (316,668) (1,500,000) -
-------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (536,535) (2,222,506) (1,105,562)
-------------------------------------------
INCOME TAXES (Note 11)
Current (39,765) - 36,045
Future 634,600 (1,248,100) 330,300
Utilization of loss carryforwards - - (35,000)
-------------------------------------------
594,835 (1,248,100) 331,345
-------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (1,131,370) (974,406) (1,436,907)
LOSS FROM DISCONTINUED OPERATIONS (Note 20) - (2,660,510) (1,250,992)
-------------------------------------------
NET LOSS FOR THE YEAR (1,131,370) (3,634,916) (2,687,899)
==========================================================================================
DEFICIT, beginning of year (20,849,848) (17,214,932) (14,527,033)
TRANSITIONAL IMPAIRMENT LOSS (Note 5) (2,056,832) - -
-------------------------------------------
DEFICIT, beginning of year, as restated (22,906,680) (17,214,932) (14,527,033)
-------------------------------------------
DEFICIT, end of year $(24,038,050) $(20,849,848) $(17,214,932)
==========================================================================================
NET LOSS FROM CONTINUING OPERATIONS
PER SHARE (Note 16) $ (0.17) $ (0.23) $ (0.46)
==========================================================================================
NET LOSS FOR THE YEAR PER SHARE (Note 16) $ (0.17) $ (0.85) $ (0.86)
==========================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
==========================================================================================
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE YEARS ENDED JUNE 30 2002 2001 2000
-------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss from continuing operations for the year $(1,131,370) $ (974,406) $(1,436,907)
Adjustments to reconcile net loss to net cash
provided by operating activities
Amortization of goodwill - 261,258 261,258
Amortization of capital assets and depletion 698,613 415,740 366,119
Income taxes 634,600 (1,248,100) 330,300
Loss on sale of capital assets (7,895) 7,796 1,825
Gain on sale of marketable securities (22,311) - -
Valuation provision on marketable securities 108,376 - -
Unrealized foreign exchange loss - - 50,000
Write down of inactive capital assets 316,668 1,500,000 -
Professional fees settled by issuance of
shares - - 225,000
Net change in non-cash working capital
balances (Note 13) (2,617,222) (1,223,064) 160,235
-------------------------------------------
Cash used by operating activities
from continuing operations (2,020,541) (1,260,776) (42,170)
Cash used by discontinued operations - (52,278) (2,487,076)
-------------------------------------------
(2,020,541) (1,313,054) (2,529,246)
-------------------------------------------
INVESTING ACTIVITIES
Purchase of marketable securities, net (148,652) (221,213) -
Due from co-venturers 49,542 (91,968) -
Purchase of oil and gas assets (2,759,206) (1,727,857) -
Purchase of capital assets (163,087) (213,991) (181,447)
Proceeds from sale of capital assets 22,900 27,000 55,500
Other assets - 3,355,025 598,318
Restricted cash - - 2,095,984
Investing activities of discontinued operations - 22,900 4,028,962
-------------------------------------------
(2,998,503) 1,149,896 6,597,317
-------------------------------------------
FINANCING ACTIVITIES
Bank indebtedness 633,765 321,779 (135,854)
Long term debt, net (198,207) (277,187) (469,954)
Due to related parties - - 490,098
Advances from(repayments to) shareholders (404,057) (1,930,057) 282,137
Issuance of common shares 9,355,543 1,350,000 -
Issuance of preference shares - 250,000 -
Financing activities of discontinued operations - (79,803) (2,700,596)
-------------------------------------------
9,387,044 (365,268) (2,534,169)
-------------------------------------------
NET INCREASE (DECREASE) IN CASH DURING THE YEAR 4,368,000 (528,426) 1,533,902
CASH AND CASH EQUIVALENTS, beginning of year 1,242,621 1,771,047 237,145
-------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 5,610,621 $ 1,242,621 $ 1,771,047
================================================================================
SEE SUPPLEMENTARY CASH FLOW INFORMATION (Note 13 (a))
================================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
NATURE OF BUSINESS
AND PRINCIPLES OF
CONSOLIDATION
Energy Power Systems Limited ("EPS" or the "Company") is a
corporation amalgamated under the laws of the Province of Ontario. The
Company's business focus is to explore and develop oil and gas reserves. These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries M&M Engineering Limited ("M&M") and its wholly-owned
subsidiary M&M Offshore Limited ("MMO") whose business focus is engineering
mechanical contracting and steel fabrication in Newfoundland.
Pursuant to Articles of Amendment dated February 2, 2001 the Company
changed its name from Engineering Power Systems Limited to Energy Power Systems
Limited.
During fiscal 2001 the Company decided to discontinue efforts to act as a
developer of independent power projects. The Company is seeking a developer who
will purchase its interest in the Karnataka Project. In addition, the Company
intends to monetize its investment in the Andhra Pradesh Project. This segment
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 consolidated statement of loss and deficit from continuing operations
in current and prior periods.
During fiscal 2000, EPS 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
consolidated statement of loss and deficit from continuing operations in current
and prior periods.
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in Canada.
OIL AND GAS
PROPERTIES
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
natural gas at approximately 6,000 cubic feet to 1 barrel of oil.
================================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
OIL AND GAS
PROPERTIES -
(CONTINUED)
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. Alberta Royalty Tax Credits
are included in oil and gas sales.
In applying the full cost method, 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 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.
ROYALTIES
As is normal to the industry, the Company's production is subject
to crown, freehold and overriding royalties, and mineral or production taxes.
These amounts are reported net of related tax credits and other incentives
available.
ENVIRONMENTAL AND
SITE RESTORATION
COSTS
A provision for environmental and site restoration costs is made when
restoration requirements are established and costs can be reasonably estimated.
The balance of future salvage value of assets is netted against the future site
restoration accrual. The accrual is based on management's best estimate of
these future costs on the ratio of actual production to proved producing
reserves.
ACCOUNTING
ESTIMATES
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and reported amounts of revenues and
expenses during the reporting period. By their nature, these estimates are
subject to measurement uncertainty and the effect on the consolidated financial
statements of changes in such estimates in future periods could be material.
===============================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
REVENUE
RECOGNITION
Industrial and Offshore Division
Revenue from engineering construction and fabrication contracts is
recognized on the percentage of completion method. The percentage of completion
method recognizes revenue by assessing the value of the work performed in
relation to the total estimated cost of the contract based on the contract
value. Contract costs include all direct material and labour costs and those
indirect costs related to contract performance such as supplies, tools and
repairs. Administrative and general overheads are charged to expense as
incurred. Contract losses are provided for in full in the year in which they
become apparent.
Oil and Gas Division
Oil and gas revenue is recognized on actual production, and upon delivery
of the product to the customer based on the operators' reports.
MARKETABLE
SECURITIES
Marketable securities are valued at the lower of cost or market
on a portfolio basis.
INVESTMENT
The investment in Konaseema EPS Oakwell Power Limited ("KEOPL")
is recorded at expected net recoverable amount. The actual recoverable amount is
dependent on future events and could differ materially from the actual amount
recovered.
INVENTORIES
Inventories of finished goods are valued at the lower of cost
and net realizable value. Raw materials are valued at the lower of cost and
replacement cost.
JOINT VENTURES
The Company uses the proportionate consolidation method to
account for its non oil and gas joint ventures.
The majority of the Company's petroleum and natural gas exploration
activities are conducted jointly with others. These financial statements
reflect only the Company's proportionate interest in such activities.
CAPITAL ASSETS
Capital assets consist primarily of fabrication buildings,
office equipment, and manufacturing equipment. These assets are recorded at
cost less accumulated amortization and write down for impairment.
Capital assets are amortized on the declining balance basis over their
estimated useful lives at the following rates:
Buildings 3%
Manufacturing equipment 20%
Tools and equipment 20%
Office equipment 20%
Vehicles 30%
Paving 7%
Equipment under capital leases 20%
================================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
GOODWILL
Goodwill represents the excess purchase price paid for business
combinations over the value assigned to identifiable net assets acquired.
Goodwill is tested for impairment at least annually and an impairment loss is
recognized when the carrying amount of the goodwill of a reporting unit exceeds
the fair value of the goodwill. The fair value of the reporting unit is
obtained using the present value of expected cash flows.
MARKETING AND
PROMOTION COST
Marketing and promotion costs for new business opportunities
are charged to administrative expenses as incurred.
FOREIGN CURRENCY
TRANSLATION
Foreign currency accounts are translated to Canadian dollars as
follows:
At the transaction date, each asset, liability, revenue or expense is
translated into Canadian dollars by the use of the exchange rate in effect at
that date. At the year end date, monetary assets and liabilities are translated
into Canadian dollars by using the exchange rate in effect at that date and the
resulting foreign exchange gains and losses are included in income in the
current period.
INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Under this method, future income tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between financial reporting and tax bases of assets and liabilities and
available loss carryforwards. A valuation allowance is established to reduce
tax assets if it is more likely than not that all or some portions of such tax
assets will not be realized.
STOCK BASED
COMPENSATION
The Company has established a stock option plan (the "Plan")
for directors, officers and key employees. No compensation expense is
recognized for these plans when stock or stock options are issued to employees.
Any consideration paid by employees on exercise of stock options or purchase of
stock is credited to share capital.
CASH AND CASH
EQUIVALENTS
Cash and cash equivalents consist of cash on hand, bank balances
and investments in money market instruments with maturities of three months or
less.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
1. ACCOUNTS RECEIVABLE
Receivables consist of the following:
2002 2001
----------------------
Trade $4,930,847 $4,161,427
Holdbacks 287,354 169,659
----------------------
$5,218,201 $4,331,086
======================
2. INVESTMENT
Investment consists of the following:
2002 2001
----------------------
Investment in Konaseema EPS Oakwell Power Limited $3,500,000 $3,500,000
----------------------
Less: current portion - 3,500,000
----------------------
Long term portion $3,500,000 $ -
======================
The Company owns 11,348,200 ordinary equity shares of Rs. 10 each, of Konaseema
EPS Oakwell Power Limited ("KEOPL") (the "KEOPL Shares"), a company incorporated
in India, which is developing the Andhra Pradesh Project. 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 to effect the purchase and
sale of the KEOPL shares to VBC. The Company estimates that the carrying
amounts of the investment in KEOPL will be fully recovered. The actual
recoverable amount is dependent upon future events and could differ materially
from the amount estimated by management.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
3. OIL AND GAS PROPERTIES
During the year, the Company commenced an exploration and drilling program
resulting in expenditures of $2,759,206. During the previous year the Company
acquired various working interests in producing and non-producing oil and gas
properties in Alberta, Ontario and Prince Edward Island. As consideration, the
Company paid $1,727,857 cash and issued 90,000 common shares for $335,000.
These properties are carried at cost set out below:
Petroleum and natural gas properties and equipment
ACCUMULATED
DEPLETION AND NET BOOK
COST AMORTIZATION VALUE
-----------------------------------------
June 30, 2002 $4,822,063 $ 421,985 $4,400,078
=========================================
June 30, 2001 $2,062,857 $ 45,364 $2,017,493
=========================================
As at June 30, 2002, costs of acquiring unproved properties in the amount of
$1,186,516 (2001 - $376,842) were excluded from depletion calculations.
The Company is required to fund its share of costs and expenses. Failure to
fund expenditures will in some cases result in a dilution of its interests.
--------------------------------------------------------------------------------
4. CAPITAL ASSETS
Capital assets consists of the following:
2002 2001
ACCUMULATED Accumulated
COST AMORTIZATION Cost Amortization
Land $ 342,884 $ - $ 544,009 $ -
Building 2,139,887 623,270 2,643,700 935,005
Manufacturing equipment 764,482 671,672 755,032 645,057
Tools and equipment 1,164,421 869,526 1,087,315 805,440
Office equipment 311,029 217,999 281,107 200,264
Vehicles 199,805 150,625 204,707 137,452
Paving 37,460 15,999 36,152 14,433
Equipment under capital leases 879,687 455,705 811,907 358,182
---------------------------------------------
5,839,655 3,004,796 6,363,929 3,095,833
---------------------------------------------
Net book value $2,834,859 $ 3,268,096
=====================================
The Company's ownership in the building located in Port aux Basques,
Newfoundland, which is an inactive asset with a carrying amount of $100,000
(2001 - $407,705) may be subject to a third party debenture of $500,000 on the
leasehold interest that expires on December 22, 2008. The Company's position
with respect thereto is that it does not believe the debenture holder's security
interest is valid.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
5. GOODWILL
During the year, the Company adopted the recommendations of the new CICA
Handbook Section 1581, Business Combinations, and Section 3062, Goodwill and
Other Intangibles. As a result of applying the new standards, management
determined that the value of goodwill was impaired and accordingly a
transitional impairment loss $2,056,832 has been charged to opening deficit.
Goodwill had previously been amortized over 10 years.
Goodwill is recorded net of the transitional impairment loss of $2,056,832
and accumulated amortization prior to adoption of $615,417 (2001 - $615,417).
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 as follows:
2002 2001 2000
---------------------------
Reported net loss $ (1,131,370) $(3,634,916) $(2,687,899)
Add back: Goodwill amortization - 261,258 261,258
------------------------
Adjusted net loss $ (1,131,370) $(3,373,658) $(2,426,641)
=======================================
Basic loss per share:
Reported net loss for the year $ (0.17) $ (0.85) $ (0.86)
Goodwill amortization - 0.06 0.08
--------------------------------
Adjusted net loss for the year $ (0.17) $ (0.79) $ (0.78)
======================================
-------------------------------------------------------------------------------
6. JOINT VENTURES
The Company's subsidiary, M&M, carries on part of its business in four joint
ventures, Newfoundland Service Alliance Inc. ("NSA"), a 20% owned joint venture
Magna Services Inc. ("Magna"), a 50% owned joint venture, Liannu, a limited
partnership, which the Company owns 49% and acts as the general partner and
North Eastern Contractors Limited, a 50% joint venture.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
6. JOINT VENTURES - (CONTINUED)
During the 2002 fiscal year the Company recorded $1,584,865 (2001 - $1,354,170)
of revenue from NSA and eliminated on proportionate consolidation $330,180 (2001
- $225,695). The Company also recorded revenue from Magna of $ Nil (2001 -
$166,836) and eliminated $ Nil (2001 - $83,418).
The following is a summary of the combined financial information relating to the
Company's proportionate interest in these joint ventures, unadjusted for
transactions between the joint venture and the Company:
PROPORTIONATE SHARE OF JOINT
VENTURES' FINANCIAL INFORMATION
2002 2001
-----------------------------
Balance sheet
Current assets $ 1,215,722 $ 562,138
Non current assets 3,636 4,375
Current liabilities (1,206,601) (555,763)
Operations
Revenue 2,932,433 2,860,599
Operating expenses and amortization 2,932,564 2,860,429
Net income (131) 170
Cash flows
Operating activities (117,249) (179,002)
Investing activities 19,000 75,966
Financing activities 50,000 (51)
-----------------------------------------------------------------------------
7. BANK INDEBTEDNESS
Bank indebtedness of M&M represents a revolving credit facility payable on
demand and bears interest at prime plus 2.25% from November 15, 2001 and prime
plus 2.0% for previous periods (average 2002 - 6.26%; 2001 - 8.66%).
The bank indebtedness is collateralized by a general assignment of accounts
receivable and inventory, a demand debenture providing a second fixed charge
over property and immovable equipment, a first fixed charge over certain
equipment and a floating charge over all assets.
The credit agreement which M&M has with the bank contains certain restrictive
covenants with respect to maintenance of certain financial ratios, declaration
and payment of dividends, advancement of funds to and from related parties and
acquisition of unfunded capital assets in excess of $400,000 (2001 - $400,000).
As at June 30, 2002 M&M was in compliance with these covenants.
During 2002, one of M&M's joint ventures obtained a credit facility in the
amount of $150,000, which is repayable on demand and bears interest at the
bank's prime lending rate plus 2.00% per annum. As security for this facility,
M&M postponed its claim for $50,000 owed to them by the joint venture until
repayment of the credit facility to the bank and provided a guarantee of $75,000
(see also Note 18).
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
------------------------------------------------------------------------------
8. DUE TO SHAREHOLDERS
The amount due to shareholders is comprised of a non-interest bearing promissory
note of $313,300 (2001 - $989,172) and a non-interest bearing amount due to a
shareholder of $315,046 (2001 - $523,231).
The promissory notes were fully repaid subsequent to June 30, 2002.
------------------------------------------------------------------------------
9. LONG-TERM DEBT
2002 2001
--------------------------
Roynat Inc. mortgage maturing in 2008 with interest at Roynat
cost of funds plus 3.25% ( 2002 - 6.26%; 2001 - 9.24%)
repayable in monthly principal payments of $7,000, plus
interest. The mortgage is collateralized by a first charge
on land and building of M&M, and a floating charge on
all other assets subject to a prior floating charge in
favour of the Canadian Imperial Bank of Commerce (see
Note 7) $ 521,400 $605,400
Capital leases on equipment, with interest at 5.4% to
16.3% (2001 - 7.2% to 16.7%) compounded semi-
annually, repayable in blended monthly payments of
10,200 (2001 - $10,000) 166,195 223,062
-------------------------
687,595 828,462
Less: Current portion 185,925 182,151
-------------------------
$ 501,670 $646,311
===========================
Principal repayments on long-term debt in each of the next five years are
estimated as follows:
2003 $185,925
2004 120,808
2005 106,978
2006 88,484
2007 and thereafter 185,400
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-----------------------------------------------------------------------------
10. SHARE CAPITAL
(a) Authorized
Unlimited Common shares, without par value
Unlimited Class A Preference shares, Series 1
Unlimited Class A Preference shares, Series 2
(b) Issued
NUMBER OF
SHARES CONSIDERATION
--------------------
Common shares
Balance, as at June 30, 2000 12,670,678 $29,322,289
Returned to treasury (25,000) -
Issued pursuant to a private placement (i) 8,000,000 800,000
Share consolidation (ii) (15,482,259) -
Warrants exercised 1,000,000 520,000
Options exercised (iii) 20,000 30,000
Issued for acquisition of oil and gas property (iv) 90,000 335,000
-----------------------
Balance, as at June 30,2001 6,273,419 31,007,289
Issued pursuant to a private placement (v), net of
issue costs of $273,525 1,100,000 6,668,993
Warrants exercised 1,960,000 2,240,000
Options exercised (vi) 277,500 926,550
Settlement of professional fees (vii) 7,726 53,900
Conversion of Preference shares (viii) 960,000 1,200,000
-----------------------
Balance, as at June 30, 2002 10,578,645 $42,096,732
=========================
Class A Preference shares, Series 2
Issued for cash and settlement of debt (viii)
during 2001 and balance, as at June 30, 2001 960,000 $ 1,200,000
Conversion to common shares (960,000) (1,200,000)
----------------------
Balance, as at June 30, 2002 - $ $-
=========================
Total issued share capital as at June 30, 2001 $ 32,207,289
==========
Total issued share capital as at June 30, 2002 $ 42,096,732
===
==============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
10. SHARE CAPITAL - (CONTINUED)
(i) On December 28, 2000 the Company issued 8,000,000 pre-consolidated units
from treasury to arms length parties. Each unit was ascribed a value of $0.10
and was comprised of one common share, a 1/2 Series A common share purchase
warrant and a 1/2 Series B common share purchase warrant. Each whole post
consolidated Series A common share purchase warrant and each whole post
consolidated Series B common share purchase warrant entitles the holder thereof
to purchase one common share at a price of $0.52 per share and $0.80 per share
respectively on or before December 28, 2002 and January 16, 2003 respectively.
(ii) On September 12, 2000, at a Special Meeting of Shareholders of the
Company, the shareholders approved the consolidation of the Company's issued
common shares on the basis that every four (4) pre-consolidation common shares
will be converted into one (1) post-consolidation common share. On February 2,
2001 the Company filed Articles of Amendment consolidating the issued common
shares on a one for four basis.
(iii) On February 6, 2001 the Company issued 20,000 options to a consultant
for professional services. On June 6, 2001 the consultant exercised the 20,000
options for consideration of $30,000.
(iv) On June 30, 2001 the Company issued 90,000 common shares from treasury
to an arms length party for consideration of $335,000 for the acquisition of
producing and non-producing oil and gas properties.
(v) During the year the Company entered into three private placements with
arms length parties as follows:
(a) The Company issued two allotments of 350,000 units at a price of US
$4.00 per unit on November 9, 2001 and November 16, 2001 respectively for gross
proceeds of US $2.8 million. Each unit was comprised of 350,000 common shares
and one-tenth of one common share purchase warrant. Each whole warrant entitles
the holder to purchase one common share at a purchase price of US $4.45 per
common share exercisable for a period of six months after closing. On May 9,
2002, 35,000 warrants expired under their own terms and on May 16, 2002, 35,000
warrants expired under their own terms.
(b) On March 13, 2002 the Company issued 400,000 units at a price of U.S.
$4.00 per unit for gross proceeds of US $1.6 million. Each unit was comprised
of one common share and one-tenth of one common share purchase warrant. Each
whole warrant entitles the holder to purchase one common share at a purchase
price of US $4.45 per common share exercisable for a period of one year after
closing.
(vi) On October 4, 2001 the Company issued 20,000 options to a consultant
for professional services. On November 12, 2001 the consultant exercised the
20,000 options for consideration of $85,000. On November 8th, and 12th
consultants exercised 4,000 and 20,000 options respectively for total proceeds
of $96,000. During the year employees of the Company exercised a total of
233,500 options for total consideration of $745,550.
(vii) On October 19, 2001 the Company issued 7,726 common shares for total
consideration of $53,900 to a former professional engaged by the Company for
settlement of professional fees.
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
10. SHARE CAPITAL - (CONTINUED)
(viii) On February 2, 2001 the Company issued 960,000 Class A Preference
shares, Series 2 from treasury to arms length parties. Each Series 2 share
carries a 5% cumulative preferred annual dividend. Each Series 2 share is
convertible during the first 30 months from the date of issuance into one unit
of the Company at the rate of $1.25 per unit. Each unit is comprised of one
common share and one common share purchase warrant. Each common share purchase
warrant is exercisable at $1.50 for one common share for a period of two years
after conversion. After 30 months each Series 2 share is convertible into one
unit at the weighted average price of the market value of the Company's common
shares during the period 10 days prior to conversion (the "Conversion Price").
Each unit is comprised of one common share and one common share purchase warrant
exercisable at 10% above the Conversion Price for one common share for a period
of two years after conversion. As consideration, $950,000 of promissory notes
payable to the shareholders were applied to shareholder loans and $250,000 of
cash was received.
During the year holders of 960,000 Series 2 Preference shares in the
capital of the Company exercised their conversion rights and acquired 960,000
common shares at $1.25 per share for total consideration of $1,200,000 and
960,000 common share purchase warrants with an exercise price of $1.50 per
warrant. The holders subsequently exercised the 960,000 common share purchase
warrants at $1.50 each for proceeds to the Company of $1,440,000.
(c) Warrants
The following common share purchase warrants are outstanding as at June 30,
2002:
NUMBER OF
WARRANTS EXPIRY DATE PRICE
96,000 October 4, 2002 $ 9.60
40,000 March 13, 2003 US $4.45
The continuity of the common share purchase warrants is as follows:
NUMBER OF
WARRANTS
Balance, as at June 30, 2000 4,523,885
Share consolidation (Note 10 (b)(ii)) (3,392,914)
Cancelled (812,054)
Issued to non-controlling shareholders 2,000,000
Exercised (1,000,000)
------------
Balance, as at June 30, 2001 1,318,917
Issued to non-controlling shareholders 110,000
Issued upon conversion of Series 2 Preference shares 960,000
Exercised (1,960,000)
Expired (292,917)
-----------
Balance, as at June 30, 2002 136,000
===========
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
10. SHARE CAPITAL - (CONTINUED)
(d) Stock Option Plan
The Company has a Stock Option Plan (the "Plan") to provide incentive for the
directors, officers, employees, consultants and service providers of the Company
and its subsidiaries. The maximum number of shares which may be set aside for
issuance under the Plan is 800,000 common shares (2001 - 281,250 common shares).
Under the Plan, the Company has granted the following stock options as at June
30, 2002:
NUMBER OF EXERCISE EXPIRY
HOLDER OPTIONS PRICE DATE
Directors and employees 274,000 $ 6.30 January 8, 2006
Consultant 21,000 4.00 June 14, 2005
The continuity of stock options is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
Balance, June 30, 2000 422,500 $ 4.02
Share consolidation (Note 10 (b)(ii)) (316,875) 16.07
Cancelled (105,625) 16.07
Issued 275,000 2.73
Exercised (20,000) 1.50
-----------------------
Balance, June 30, 2001 255,000 2.82
----------------------
Issued 342,500 6.18
Expired (25,000) 4.00
Exercised (277,500) 3.34
-----------------------
Balance, June 30, 2002 295,000 $ 6.14
=======================
All options are vested and exercisable.
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
11. 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, the difference was
insignificant.
Significant components of the Company's future tax assets and liabilities are as
follows:
2002 2001
--------------------------
FUTURE INCOME TAX ASSETS:
Non-capital loss carryforwards $ 4,016,968 $ 3,698,000
Capital losses 2,340,635 2,465,000
Oil and gas properties 578,230 20,000
--------------------------
6,935,833 6,183,000
Non-capital losses applied (773,833) (21,000)
Valuation allowance (5,567,000) (5,065,000)
--------------------------
$ 595,000 $ 1,097,000
==========================
Current portion $ 61,473 $ 235,000
==========================
Long term portion $ 533,527 $ 862,000
==========================
FUTURE INCOME TAX LIABILITIES
Capital assets $ (119,375) $ (56,000)
Work in progress (985,495) (196,000)
Holdbacks (123,563) (91,000)
--------------------------
(1,228,433) (343,000)
Non capital losses applied 773,833 21,000
--------------------------
$ (454,600) $ (322,000)
==========================
Current portion $ (432,490) $ (266,000)
==========================
Long term portion $ (22,110) $ (56,000)
==========================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
11. INCOME TAXES - (CONTINUED)
The Company's provision for income taxes is comprised as follows:
2002 2001 2000
--------------------------------------
Net loss from continuing operations $(536,535) $(2,222,506) $(1,105,562)
======================================
Combined federal and provincial income tax
rate 39% 43% 45%
======================================
Recovery of income tax calculated at
statutory rates $(209,249) $ (955,678) $ (497,502)
Increase (decrease) in taxes resulting from:
Non-deductible expenses 21,263 672,578 461,000
Amortization of goodwill - 112,000 118,000
Depletion of oil and gas properties 146,883 20,000 -
Other 133,938 - (352,498)
Benefits of previously unrecorded losses - (1,097,000) -
Losses not recognized for income
tax purposes - - 602,345
Valuation allowance adjustment 502,000 - -
-------------------------------
Provision for income taxes $ 594,835 $(1,248,100) $ 331,345
======================================
The Company and its subsidiaries have non-capital losses of approximately
$10,200,000 which are available to reduce future taxable income. These
non-capital losses expire as follows:
2003 $26,000
2004 887,000
2005 2,900,000
2006 1,938,000
2007 1,427,000
2008 1,580,000
2009 1,442,000
-------------------------------------------------------------------------------
12. OTHER INCOME
Included in other income is a litigation settlement of $650,000 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 $214,500 less than accrued. The balance of other income relates
mainly to credits received for workers compensation adjustments of prior years.
--------------------------------------------------------------------------------
13. CHANGES IN WORKING CAPITAL AND NON-CASH TRANSACTIONS
Non-cash working capital transactions relating to funds from operations are as
follows:
2002 2001 2000
--------------------------------------
Accounts receivables $ (887,115) $ (997,513) $(580,536)
Inventories and work in progress (1,612,963) 485,491 (168,205)
Prepaid expenses 7,711 13,758 (6,195)
Accounts payable and accrued liabilities (124,855) (724,800) 915,171
--------------------------------------
$(2,617,222) $(1,223,064) $ 160,235
======================================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
13. CHANGES IN WORKING CAPITAL AND NON-CASH TRANSACTIONS (CONTINUED)
(a) Supplemental Cash Flow Information
2002 2001 2000
----------------------------
Cash paid for interest $136,009 $256,488 $241,247
Cash paid for taxes - - 19,501
(b) Non-Cash Transactions
The Company entered into the following non-cash transactions:
2002 2001 2000
----------------------------
Shares issued pursuant to settlement
of professional fees $53,900 $- $225,000
Shares issued pursuant to private
placement in settlement of
promissory notes - 950,000 768,000
Shares issued pursuant to exercise
of warrant in settlement of
promissory notes 480,000 - -
Shares issued to former subsidiary,
Merlin - - 400,000
Shares issued for acquisition of Oil
and Gas Properties - 335,000 -
Capital assets purchased through
capital leases 57,340 95,694 172,755
----------------------------------------------------------------------------
14. COMMITMENTS
Operating Leases
The Company has entered into agreements to lease vehicles and office equipment
for various periods until the year 2007. The minimum rental commitments under
operating leases are estimated as follows:
2003 $90,489
2004 55,460
2005 22,000
2006 7,276
2007 3,032
----------
178,257
==========
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-----------------------------------------------------------------------------
15. FINANCIAL INSTRUMENTS
The carrying values of the primary financial instruments of the Company, with
the exception of long-term debt, approximate fair values due to the short-term
maturities and normal trade credit terms of those instruments. Included in cash
is $2,613,213 held at one financial institution and $2,693,179 held at a
financial intermediary.
The fair value of long-term debt and amounts due to shareholders approximates
carrying value in 2002 and 2001 as the terms were renegotiated.
The Company provides services and sells its products to many customers. Four
customers represent 53% (2001 - three customers represents 53%) of the trade
accounts receivable at year-end. One customer represents 31% (2001 - one
customer represents 40%; 2000 - one customer represents 39%) of the revenue for
the year. Two suppliers represent 28% (2001 - three suppliers represent 33%) of
the trade accounts payable at year-end.
-------------------------------------------------------------------------------
16. PER SHARE INFORMATION
In 2001 the Company adopted the treasury method for computing earnings per share
and fully diluted earnings per share. The treasury method has been applied
retroactively. Net loss per share has been determined using the weighted
average number of common shares outstanding as at June 30, 2002 - 6,638,384
(2001 - 4,256,502; 2000 - 3,135,857).
In each of the fiscal years the exercise of warrants and stock options would be
anti-dilutive. The weighted average number of common shares and net loss per
share figures for prior year have been retroactively restated for the reverse
stock split.
-------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES
The Company's accounting policies do not differ materially from accounting
principles generally accepted in the United States ("US GAAP") except for the
following:
(a) Stock Options
Under US GAAP (FAS 123), stock options granted to consultants are
recognized as an expense based on their fair value at the date of grant. Under
Canadian GAAP the options are disclosed and no compensation expense is recorded.
The calculation for the compensation of $8,621 (2001 - $112,040) is based on the
Black-Scholes option pricing model with the assumption that no dividends are to
be paid on common shares, a weighted average volatility factor for the Company's
share price of 0.31 for 20,000 options issued during fiscal 2002 and a
volatility factor for the Company's share price of 0.64 for 70,000 options and
0.43 for 20,000 options issued during fiscal 2001, a weighted average risk free
interest rate of 5% over a four year period and a fair value of options of $2.70
( 2001 - $3.10 and $1.50 respectively).
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(a) Stock Options - (Continued)
The Company follows APB 25 for options granted to employees. For
employees, compensation expense is recognized under the intrinsic value method.
Under this method, compensation cost is the excess, if any, of the quoted market
price at grant date over the exercise price. Such expense is reflected over the
service period; if for prior services, expensed at date of grant; if for future
services, expensed over vesting period. The exercise price of the stock options
outstanding to employees is equal or exceeds the market value of the shares at
the date granted, therefore, no compensation expense is recognized at grant date
for US GAAP purposes.
(b) Interest Free Loans
Under US GAAP, the benefit of interest free loans is reflected as a
discount to the debt and a credit to paid in capital. This discount is computed
using the current borrowing rate available to the Company and amortized over the
life of the debt.
(c) Joint Venture
Under US GAAP, the Company would use the equity method of accounting for
joint ventures rather than the proportionate consolidation method of accounting.
For further information see Note 6.
(d) Comprehensive Income
Under US GAAP, comprehensive income must be reported which is defined as
all changes in equity other than those resulting from investments by owners and
distributions to owners.
(e) Marketable Securities
Under accounting principles generally accepted in Canada, gains (losses) in
shares of public companies are not recognized until investments are sold unless
there is deemed to be an impairment in value which is other than temporary.
Under US GAAP, such investments are recorded at market value and the unrealized
gains and losses are recognized as a separate item in the shareholder's equity
section of the balance sheet unless impairments are considered other than
temporary.
(f) Preference Shares
In 2001 under US GAAP, the Company has recorded a deemed dividend of
approximately $420,000 for the beneficial conversion under the terms of the
preferred shares.
(g) Oil and Gas Properties
Under US GAAP, the Company is required to discount future net revenues at
10% for purposes of calculating any required ceiling test write-down. Under
Canadian GAAP, future net revenues are not discounted, however, they are reduced
for estimated future general and administrative expenses and interest. As a
result the carrying value of the oil and gas properties under US GAAP would be
written down to discounted future net revenues.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(h) Recently Adopted Accounting Standards
In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 dealing with revenue recognition which is effective in the
fourth quarter of the Company's 2000 fiscal year. The adoption of this Staff
Accounting Bulletin did not have a material effect on the Company's financial
statements.
In March 2000, the Financial Accounting Standards Board Issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation", an interpretation of APB Opinion No. 25. The Company adopted the
interpretation on July 1, 2000. Among other things, the Interpretation requires
that stock options that have been modified to reduce the exercise price be
accounted for as variable. As of July 1, 2000, under the provisions of
Interpretation No. 44, any options that are considered repriced are accounted
for as variable options from that date forward. Therefore, the option value
will be re-measured on a quarterly basis using the greater of the exercise price
or the July 1, 2000 fair market value as the basis for determining increases in
the intrinsic value of the options. During 2001, the Company repriced 57,500
options with an intrinsic value of $92,000 which has been included in the
compensation expense adjustment. During 2002, these repriced options were
exercised and an additional intrinsic value of $102,550 was recorded to the
compensation expense adjustment on their respective measurement dates.
In June 2001, the FASB issued FASB Statement No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that the Company reclassifies the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141. Management
believes the adoption of this statement will have no material impact on the
financial statements.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill impairment at least annually. In addition,
SFAS 142 requires that the Company identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires that the Company complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. During 2002, the Company
early adopted SFAS 142, management has determined that the value of goodwill was
impaired, accordingly a transitional impairment loss $2,056,832 has been
reported as a cumulative effect of a change in accounting principle. Goodwill
had previously been amortized over 10 years. This change in accounting policy
has been applied by recording a cumulative adjustment in 2002.
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(h) Recently Adopted United States Accounting Standards (continued)
Goodwill is recorded net of the transitional impairment loss of $2,056,832
and accumulated amortization prior to adoption of $615,417 (2001 - $615,417).
The adjusted net loss from continuing operations per US GAAP, basic and
diluted net loss per share from continuing operations and basic and diluted net
loss per share for comparative fiscal years ending June 30, 2001 and 2000 if no
amortization was recorded in those years are as follows:
2002 2001 2000
-------------------------------------
Reported net loss from continuing
operations per US GAAP $ (2,441,721) $(1,357,753) $(1,785,582)
Add back: Goodwill amortization - 261,258 261,258
------------------------------------
Adjusted net loss from continuing
operations per US GAAP $ (2,441,721) $(1,096,495) $(1,524,324)
=========================================
Basic and diluted net loss per share from
continuing operations per US GAAP
Reported net loss from continuing
operations per US GAAP $ (0.37) $ (0.42) $ (0.57)
Goodwill amortization - 0.06 0.08
-------------------------------------
Adjusted net loss from continuing
operations $ (0.37) $ (0.36) $ (0.49)
===========================================
Basic and diluted net loss per share
per US GAAP:
Reported net loss per US GAAP $ (0.68) $ (1.04) $ (0.97)
Goodwill amortization - 0.06 0.08
-------------------------------------
Adjusted net loss for the year
per US GAAP $ (0.68) $ (0.98) $ (0.89)
============================================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(h) Recently Issued United States Accounting Standards (continued)
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.
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
If US GAAP were followed, the effect on the consolidated balance sheet would be
as follows:
2002 2001
--------------------------
Total assets per Canadian GAAP $25,314,103 $19,050,175
Unrealized gain on marketable securities (e) - 34,077
Writedown oil and gas properties (g) (1,044,000) -
--------------------------
Total assets per US GAAP $24,270,103 $19,084,252
==========================
Total liabilities per Canadian GAAP $ 7,255,421 $ 7,692,734
Unamortized debt discount (b) - (155,180)
--------------------------
Total liabilities per US GAAP $ 7,255,421 $ 7,537,554
==========================
Total shareholders' equity per Canadian GAAP $18,058,682 $11,357,441
Other paid in capital adjustment per US GAAP
Compensation expense (a) 413,102 301,931
Debt discount (b) 683,162 683,162
Unrealized gain on marketable securities (e) - 34,077
Deficit adjustments per US GAAP
Amortization of debt discount (683,162) (527,982)
Compensation expense (413,102) (301,931)
Writedown oil and gas properties (1,044,000) -
--------------------------
Total shareholders' equity per US GAAP $17,014,682 $11,546,698
==========================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
If US GAAP were followed, the effect on the consolidated statements of loss would be as
follows:
2002 2001 2000
------------------------------
Net loss from continuing operations
according to Canadian GAAP $(1,131,370) $ (974,406) $(1,436,907)
Compensation expense adjustment (a) (111,171) (204,040) -
Amortization of debt discount (b) (155,180) (179,307) (348,675)
Writedown oil and gas properties (g) (1,044,000) - -
------------------------------
Net loss from continuing operations
according to US GAAP (2,441,721) (1,357,753) (1,785,582)
Loss from discontinued operations - (2,660,510) (1,250,992)
-----------------------------
Net loss according to US GAAP before
cumulative effect of a change in accounting
principle (2,441,721) (4,018,263) (3,036,574)
Cumulative effect of a change in accounting
principle (2,056,832) - -
-------------------------------
Net loss according to US GAAP (4,498,553) (4,018,263) (3,036,574)
Unrealized (loss) gain on
marketable securities (e) (34,077) 34,077 -
-----------------------------
Comprehensive net loss according to
US GAAP $(4,498,553) $(4,018,263) $(3,036,574)
========================================
Net loss according to US GAAP $(4,498,553) $(4,018,263) $(3,036,574)
Deemed dividend on preferred shares (f) - (420,000) -
-------------------------------
Net loss available for common shareholders $(4,498,553) $(4,438,263) $(3,036,574)
========================================
Basic and diluted net loss per common
share from continuing operations
according to US GAAP $ (0.37) $ (0.42) $ (0.57)
========================================
Loss per common share for the cumulative
effect of a change in accounting
principle for GAAP $ (0.31) $ - $ -
========================================
Basic and diluted net loss per common
share according to US GAAP $ (0.68) $ (1.04) $ (0.97)
========================================
Shares used in the computation of basic
and diluted earnings per share 6,638,384 4,256,502 3,135,857
========================================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
18. SUBSEQUENT EVENT
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.
--------------------------------------------------------------------------------
19. SEGMENTED INFORMATION
The Company's operations are separated into two distinct segments; the
Industrial & Offshore Division, consisting of the operations of M&M and its
wholly-owned subsidiary MMO, and the Oil & Gas Division performing oil and gas
exploration and production. M&M and MMO are engineering and construction
companies, performing installation, erection, welding, maintenance and ancillary
fabrication services.
The following is the Company's segmented information for continuing operations:
For the year ended June 30, 2002
INDUSTRIAL &
OFFSHORE OIL & GAS 2002
DIVISION DIVISION CORPORATE TOTAL
------------------------------------------------------
Revenue $21,561,858 $ 448,463 $ - $22,010,321
Interest expense 131,084 - 4,925 136,009
Amortization 321,991 376,622 - 698,613
Net earnings (loss) from
continuing operations $ 187,642 $ (690,758) $ (628,254) $(1,131,370)
Capital assets and Oil and
Gas Interests $ 2,834,859 $4,400,078 $ - $ 7,234,937
===============================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
------------------------------------------------------------------------------
19. SEGMENTED INFORMATION (CONTINUED)
For the year ended June 30, 2001
INDUSTRIAL &
OFFSHORE OIL & GAS 2001
DIVISION DIVISION CORPORATE TOTAL
-----------------------------------------------------
Revenue $18,770,318 $ 313,490 $ - $19,083,808
Interest expense 251,592 - 4,896 256,488
Amortization 631,634 45,364 - 676,998
Net earnings (loss) from
continuing operations $(2,100,005) $1,239,633 $ (114,034) $ (974,406)
Capital assets and Oil and
Gas Interests $ 3,268,096 $2,017,493 $ - $ 5,285,589
For the year ended June 30, 2000
INDUSTRIAL &
OFFSHORE OIL & GAS 2000
DIVISION DIVISION CORPORATE TOTAL
-----------------------------------------------------
Revenue $18,924,369 $ - $ - $18,924,369
Interest expense 214,548 26,700 - 241,248
Amortization 627,377 - - 627,377
Net earnings (loss) from
continuing operations $ 520,852 $ - $(1,957,759) $(1,436,907)
------------------------------------------------------------------------------
20. DISCONTINUED OPERATIONS
Effective June 30, 2001 the Company adopted a formal plan to dispose of its
power segment of business (the "Power Division"). The Company intends to
exercise its option under the terms of the Revised VBC Agreement to cause VBC to
purchase the Company's equity shares in the KEOPL (see Note 2) and has adopted a
formal plan of disposition of its interest in the Karnataka Project.
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
20. DISCONTINUED OPERATIONS - (CONTINUED)
Effective May 30, 2000, the Company divested its 51% ownership interest in its
Norwegian engineering design subsidiary, Merlin, for $10 cash. Effective June
30, 2000 the Company adopted a formal plan of disposition for its barge mounted
power plant construction subsidiary ASIH.
The results of each of Power Division, Merlin and ASIH have been accounted for
as discontinued operations. Estimated disposal costs have been included in the
loss from discontinued operations.
The accounting for these discontinued operations is summarized as follows:
2002 2001 2000
-----------------------------------
Revenues
Merlin $ - $ - $ 5,575,145
ASIH - - -
Power division - - -
-----------------------------------
$ - $ - $ 5,575,145
===================================
Earnings (loss) from operations
Merlin $ - $ - $ (41,428)
ASIH - - (688,221)
Power division - (48,414) (667,658)
----------------------------------
- (48,414) (1,397,307)
----------------------------------
Gain (loss) from disposal of operations
Merlin - - 666,610
ASIH - - (520,295)
Power division - (2,612,096) -
---------------------------------
- (2,612,096) 146,315
---------------------------------
Loss from discontinued operations $ - $(2,660,510) $(1,250,992)
=================================
The Company's consolidated balance sheets include the following amounts related
to the discontinued operations:
2002 2001
----------------------
Investment $3,500,000 $3,500,000
======================
Total net assets $3,500,000 $3,500,000
======================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
21. CONTINGENT LIABILITY
Writ of Summons
On August 28, 2002, Oakwell Engineering Limited ( "Oakwell"), a company
incorporated in the Republic of Singapore, which was the former joint venturer
with the Company in the Project referred to in Note 2, pursuant to a Settlement
Agreement (the "Agreement") dated December 29, 1998 entered into between Oakwell
and the Company, filed a Writ of Summons against the Company. Oakwell's claim
against the Company is the sum of US $2,790,000, an amount equivalent to 6.25%
of the actual cash available for foreign repatriation from the Project in each
of the first five years after the commercial operation date of the Project or in
the alternative, damages; interest at 8% per annum and indemnity costs. The
Company intends to counter claim against Oakwell for damages, costs and
interest. Oakwell has claimed repudiation of the Agreement. Oakwell has
renounced further performance of the Agreement which has been accepted by the
Company.
Subsequent to the Agreement, a change of circumstances materially affected
the Project which may affect the terms of the Agreement. Management will seek
all legal remedies to defend against this claim. No provision has been made to
these financial statements for the claim.