SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO
SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) JULY 28, 2003
ASSURE ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 333-61714 13-4125563
-------- --------- ------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation or organization) Identification No.)
2750-140 4TH AVENUE, S.W., CALGARY, ALBERTA T2P 3N3
------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(403) 266-2787
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
---------------------------------------------------
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report.)
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
(b) Pro Forma Financial Information. (1)
(c) Exhibits:
2.1 Share Purchase Agreement dated March 6, 2003 by and among Assure
Energy, Inc., and Al J. Kroontje, Trevor G. Penford, Karen
Brawley-Hogg, Donald J. Brown, Troon Investments, Ltd., and Quarry
Oil & Gas, Ltd. (2)
2.2 Amending Agreement dated March 26, 2003 to March 6, 2003 Share
Purchase Agreement. (2)
2.3 Amending Agreement No. 2 dated April 11, 2003 to March 6, 2003 Share
Purchase Agreement. (2)
(1) Previously filed with Registrant's Form 8K/A dated July 28, 2003 as
filed with the Securities and Exchange Commission on October 10,
2003.
(2) Previously filed with Registrant's Form 8K dated July 28, 2003 as
filed with the Securities and Exchange Commission on August 11,
2003.
2
SIGNATURE
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 hereunto duly authorized.
ASSURE ENERGY, INC.
Dated: August 19 , 2004 By: /s/ Harvey Lalach
--------------------------
Harvey Lalach, President
3
ITEM 7(A). FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
INDEX TO FINANCIAL STATEMENTS
QUARRY OIL & GAS LTD
PAGE
Auditors' Report - BDO Dunwoody LLP.......................................... 5
Balance Sheets (audited) as at September 30, 2002 and 2001................... 6
Statements of Income and Retained Earnings (audited) for the years
ended September 30, 2002 and 2001............................................ 7
Statements of Cash Flows (audited) for the years ended
September 30, 2002 and 2001.................................................. 8
Notes to Financial Statements (audited) for the years ended
September 30, 2002 and 2001.................................................. 9
Preliminary Note to (unaudited) Financial Statements for the nine
months ended June 30, 2003................................................... 23
Balance Sheets as at June 30, 2003 (unaudited) and
September 30, 2002 (audited)................................................. 24
Statements of Operations and Retained Earnings (unaudited)
for the nine months ended June 30, 2003 and 2002............................. 25
Statements of Cash Flows (unaudited) for the nine months
ended June 30, 2003 and 2002................................................. 26
Notes to Financial Statements (unaudited) for the
nine months ended June 30, 2003.............................................. 27
4
AUDITORS' REPORT
TO THE DIRECTORS OF QUARRY OIL & GAS LTD.
We have audited the balance sheets of Quarry Oil & Gas Ltd. as at September 30,
2002 and 2001 and the statements of operations and retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Corporation as at September 30, 2002 and
2001 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
May 31, 2004 /s/ BDO Dunwoody LLP
CALGARY, ALBERTA CHARTERED ACCOUNTANTS
5
QUARRY OIL & GAS LTD.
BALANCE SHEETS
CANADIAN DOLLARS
AS AT SEPTEMBER 30 2002 2001
----------- -----------
ASSETS
Current Assets
Receivables $ 1,100,687 $ 1,403,886
Income taxes recoverable 750,476 233,088
Deposits and prepaid expenses 76,575 40,383
----------- -----------
1,927,738 1,677,357
Debenture receivable (note 3) 1,700,000 1,700,000
Property and equipment (note 4) 17,149,051 9,323,891
----------- -----------
Total Assets $20,776,789 $12,701,248
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank overdraft (note 5) $ 342,346 $ 155,883
Payables and accrued liabilities 5,103,602 1,669,441
Current portion of commodity contracts (note 8) 977,314 262,072
Bank loan (note 5) 6,765,150 5,346,200
----------- -----------
13,188,412 7,433,596
Commodity contracts (note 8) 329,360 88,317
Site restoration and abandonment 97,248 45,511
Future income taxes (note 7) 2,394,484 1,323,372
----------- -----------
16,009,504 8,890,796
----------- -----------
Shareholders' Equity
Share capital (note 6) 2,169,216 1,951,314
Retained earnings 2,598,069 1,859,138
----------- -----------
4,767,285 3,810,452
----------- -----------
Total Liabilities and Shareholders' Equity $20,776,789 $12,701,248
----------- -----------
Contingencies and commitments (notes 1, 5, 8 and 9)
See accompanying notes to the financial statements
6
QUARRY OIL & GAS LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
CANADIAN DOLLARS
FOR THE YEARS ENDED SEPTEMBER 30 2002 2001
----------- -----------
REVENUE
Petroleum and natural gas sales $ 5,889,800 $ 9,106,969
Less: Royalties, net of tax credits 971,343 1,766,738
----------- -----------
Net petroleum and natural gas revenue 4,918,457 7,340,231
Interest and other income 289,734 108,707
----------- -----------
5,208,191 7,448,938
----------- -----------
EXPENSES
Production and operating costs 2,304,780 2,034,567
General and administrative 502,537 601,178
Interest on bank loan 286,955 309,631
Depletion and depreciation 957,543 1,203,024
Site restoration and abandonment 51,736 78,927
Loss on investment -- 127,000
----------- -----------
4,103,551 4,354,327
----------- -----------
Income before income taxes 1,104,640 3,094,611
Income tax expense (recovery) - Current (705,404) 198,837
- Future 1,071,113 796,425
----------- -----------
365,709 995,262
----------- -----------
Income before non-controlling interest 738,931 2,099,349
Non-controlling interests' share of income -- 19,551
----------- -----------
Net income for the year 738,931 2,079,798
Retained earnings, beginning of year 1,859,138 2,004,478
Dividend -- (2,225,138)
----------- -----------
Retained earnings, end of year $ 2,598,069 $ 1,859,138
----------- -----------
Earnings per share - Basic $ 0.05 $ 0.16
- Diluted $ 0.05 $ 0.15
Weighted average common shares outstanding
- Basic 14,276,340 13,082,696
- Diluted 14,766,415 13,847,936
See accompanying notes to the financial statements
7
QUARRY OIL & GAS LTD.
STATEMENTS OF CASH FLOWS
CANADIAN DOLLARS
FOR THE YEARS ENDED SEPTEMBER 30 2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income for the year $ 738,931 $ 2,079,798
Proceeds from sale of commodity contracts 700,799 350,389
Add (deduct) items not affecting cash:
Depreciation, depletion and site restoration 1,009,279 1,281,951
Loss on investment -- 127,000
Future income taxes 1,071,113 796,425
Amortized proceeds from sale of commodity
contracts (262,072) --
Unrealized loss on commodity contracts, net 517,557 --
Interest income on debenture receivable and share
purchase loans (note 11) (197,032) (34,334)
----------- -----------
Cash flow from operations 3,578,575 4,601,229
Decrease in non-cash operating working capital (note 11) (24,369) (1,329,438)
----------- -----------
3,554,206 3,271,791
----------- -----------
FINANCING ACTIVITIES
Bank loan advances 1,418,950 2,666,200
Share purchase loans repaid 217,902 194,249
----------- -----------
1,636,852 2,860,449
----------- -----------
INVESTING ACTIVITIES
Acquisitions of property and equipment (5,377,521) (6,185,122)
Investment in resource company -- (127,000)
Expenditures on site restoration and abandonment -- (63,476)
----------- -----------
(5,377,521) (6,375,598)
----------- -----------
Net cash flow for the year (186,463) (243,358)
Bank overdraft, beginning of year (155,883) 87,475
----------- -----------
Bank overdraft, end of year $ (342,346) $ (155,883)
=========== ===========
Income taxes paid in cash $ -- $ 643,202
Interest paid in cash $ 286,955 $ 309,631
See accompanying notes to the financial statements
8
QUARRY OIL & GAS LTD.
NOTES TO THE FINANCIAL STATEMENTS
CANADIAN DOLLARS, UNLESS OTHERWISE STATED
For the years ended September 30, 2002 and 2001
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
The Corporation is engaged in the exploration, development, acquisition
and production of petroleum and natural gas in Western Canada.
The financial statements for 2001 include the accounts of the
Corporation's former subsidiaries, Tesoro Energy Ltd. ("Tesoro") and
Tesoro Energy Corp. ("New Tesoro"). During 2001, the Corporation disposed
of its interest in Tesoro Energy Ltd. in return for Tesoro common shares
that were subsequently distributed to its shareholders in the form of a
dividend (note 3).
Effective July 28, 2003, Assure Energy Inc. ("Assure") acquired a total of
6,919,900 shares of the Corporation. Assure acquired 6,750,000 shares of
the Corporation pursuant to a Purchase Agreement (the "Agreement") dated
March 6, 2003 and acquired an additional 169,900 shares through market
transactions. The aggregate purchase price for the acquisition of the
6,919,900 the Corporation's shares, which represents approximately 48.5%
of the Corporation's outstanding common stock, was $6,947,988 which was
paid in cash (the "Acquisition"). Prior to the Acquisition, certain
non-oil and gas assets had been transferred to a new entity, Keantha
Holdings Inc. ("Keantha"), which is a Canadian subsidiary of the
Corporation. The Corporation retained a 49% interest in this new entity.
At September 30, 2002 the Corporation had incurred capital expenditures
which it anticipated funding from future cash flows. Consequently, the
Corporation has extended its payment of trade creditors beyond normal
credit terms and the Corporation was in violation of certain banking
covenants as disclosed in note 5. At December 31, 2003, the Corporation
had incurred additional capital expenditures that it anticipated funding
from future cash flows. Management is in the process of evaluating
alternative financing arrangements and expects to resolve these credit
issues in fiscal 2004 by applying cash flow from operations to trade
creditors' balances and by evaluating alternative financing arrangements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT
i) Capitalized Costs
The Corporation follows the full cost method of accounting for its
petroleum and natural gas operations. Under this method, all costs
related to the exploration for and development of petroleum and
natural gas reserves are capitalized. Costs include lease
acquisition costs, geological and geophysical expenses, overhead
directly related to exploration and development activities and
drilling both productive and non-productive wells, but do not
include the interest incurred on loans to finance these activities.
Proceeds from the disposition of properties are applied against
capitalized costs except where this application would change the
rate for depletion and depreciation of such costs by more than 20%,
in which case, the gain or loss arising on the disposition is
included in earnings.
9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a) PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT (CONTINUED)
ii) Depletion and Depreciation
Depletion of exploration and development costs and depreciation of
production equipment is provided using the unit-of-production method
based upon estimated net proven petroleum and natural gas reserves,
before the deduction of royalties. The costs of significant
unevaluated properties are excluded from costs subject to depletion.
For depletion and depreciation purposes, relative volumes of
petroleum and natural gas production and reserves are converted to
common units at the rate of six units of natural gas to one unit of
oil.
Furniture and equipment is depreciated on the straight-line basis at
rates expected to write off the carrying values, net of expected
future recoveries, over the estimated useful lives of the assets.
iii) Ceiling Test
In applying the full cost method of accounting for petroleum and
natural gas operations, the Corporation calculates a ceiling test
whereby the carrying value of petroleum and natural gas properties
and equipment, net of recorded future income taxes and the
accumulated provision for site restoration and abandonment costs, is
compared to an estimate of future net cash flow from the production
of proven reserves. Net cash flow is estimated using period-end
commodity prices less estimated future costs for production, general
and administrative expenses, financing, site restoration and
abandonment and income taxes. Should this comparison indicate an
excess carrying value, the excess is charged against earnings.
b) SITE RESTORATION
Estimated future costs relating to site restoration and abandonment
are provided for over the life of proven reserves on a
unit-of-production basis. Costs are estimated, net of expected
recoveries, based upon current legislation, costs, technology and
industry standards. The provision is recorded as an expense and the
accumulated provision is reflected as a liability. Actual
expenditures are charged against the liability when incurred.
c) JOINT VENTURES
From time to time, certain petroleum and natural gas activities are
conducted jointly with others. These financial statements reflect
only the Corporation's proportionate interest in such activities.
d) REVENUE RECOGNITION
Petroleum and natural gas sales are recognized when the product is
shipped and ownership transfers.
e) EARNINGS PER SHARE
Earnings per share is determined based upon the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is determined by applying the treasury stock
method to the exercise of outstanding stock options and share
purchase warrants and assumes payment of share purchase loans,
except to the extent that the inclusion of these items would be
anti-dilutive to the resulting earnings per share calculation.
f) STOCK BASED COMPENSATION
The Corporation records a compensation expense in the financial
statements for stock options granted to consultants and does not
record compensation expense in the financial statements for stock
options granted to employees and directors.
g) FUTURE INCOME TAXES
The Corporation records future income taxes on the liability method
of tax accounting. Under this method, future tax assets and
liabilities are determined based on the difference between the tax
value of each asset or liability and its carrying value on the
balance sheet and are measured using substantially enacted tax rates
and laws that are expected to be in effect when the differences
reverse.
10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h) COMMODITY CONTRACTS
The Corporation trades petroleum products and derivative instruments. In
addition, the Corporation enters into commodity contracts in the normal
course of its business to establish future sales prices and manage the
future cash flow risk associated with price volatility of its production.
Commodity contracts may be designated as hedges of financial risk exposure
of anticipated transactions if, both at the inception of the hedge and
throughout the hedge period, the changes in fair value of the contract
substantially offset the effect of the commodity price changes on the
anticipated transactions and if it is probable that the transactions will
occur.
The Corporation also enters into foreign currency contracts used to hedge
exposure to changes in foreign exchange rates from anticipated commitments
or commodity contracts denominated in foreign currencies. If hedge
criteria are met, changes in the values of these contracts are not
recognized on the Balance Sheet.
For contracts that qualify as hedges for accounting purposes, amounts paid
or received are recognized as assets or liabilities until the related oil
production is sold, when they are amortized to revenue and gains and
losses are recognized on the delivery of the petroleum product or
settlement of the financial contract. In the event of early settlement or
re-designation of hedging transactions, gains or losses are deferred and
brought into income at the delivery dates originally designated. Where
anticipated transactions are no longer expected to occur, with the effect
that the risk that was hedged no longer exists, unrealized gains and
losses are recognized in income at the time such determination is made.
Commodity contracts, including all written options, or foreign currency
contracts that are not effective hedges are adjusted to market values at
the Balance Sheet date with differences in value being recognized in
income.
Cash flows arising in respect of these contracts are recognized under cash
flow from operating activities.
i) FINANCIAL INSTRUMENTS
Financial instruments of the Corporation consist of accounts receivable,
income taxes recoverable, accounts payable and accrued liabilities, share
purchase loans, the debenture receivable and the bank loan. The debenture
receivable earns interest at market rates and, as such, the book value
approximates market value.
The fair values of the remainder of the financial instruments are
equivalent to their carrying values because of the short term to maturity
of those instruments.
j) MEASUREMENT UNCERTAINTY
The amounts recorded for depletion and depreciation of petroleum and
natural gas properties and equipment and site restoration and abandonment
are based on estimates of reserves and future costs. By their nature,
these estimates, and those related to the future cash flows used to assess
impairment, could differ from actual results and impact the financial
statements of future periods.
11
3. BUSINESS COMBINATION AND DEBENTURE RECEIVABLE
During 2001, the Corporation entered into an agreement with Pentland Firth
Ventures Ltd. ("Pentland") pursuant to the terms of which Pentland was to
acquire all of the shares of the Corporation's subsidiary, Tesoro Energy
Ltd. ("Tesoro"). Tesoro was formed in March 2001 as a wholly owned
subsidiary of the Corporation. The Corporation transferred certain oil and
gas assets to Tesoro at fair market values in anticipation of the
transaction with Pentland.
Pentland acquired all of the shares of Tesoro in exchange for 31,500,000
common shares of Pentland valued at $0.07 per share and the assumption of
a secured $1,700,000 10% debenture owed by Tesoro to the Corporation. The
transaction received regulatory approval in June 2001, subject to
shareholder approval by the shareholders of Pentland. This shareholder
approval was received in July 2001. The shareholders of Pentland also
approved a name change of Pentland to Tesoro Energy Corp. ("New Tesoro")
at the July 4, 2001 meeting.
The transaction with Pentland was recorded at fair market values based on
trading prices of Pentland shares with oil and gas assets being reduced by
gross proceeds.
On September 7, 2001, the Corporation declared a dividend in kind and
distributed the shares of New Tesoro held by it to its shareholders. This
transaction was recorded at the carrying value of New Tesoro's shares held
by the Corporation.
The debenture outstanding is receivable from New Tesoro, bears interest at
the rate of 10% per annum payable monthly, matures on July 26, 2006 and is
secured by oil and gas assets of New Tesoro. The Corporation has
subordinated its security interest in favor of New Tesoro's bankers.
Subsequent to September 30, 2002, New Tesoro repaid $700,000 of the
debenture.
4. PROPERTY AND EQUIPMENT
ACCUMULATED
DEPLETION AND NET BOOK
2002 COST DEPRECIATION VALUE
----------------------------------------------------------------------------------------------------------
Petroleum and natural gas properties and equipment $21,094,970 $3,981,428 $17,113,542
Furniture and equipment 74,496 38,987 35,509
----------------------------------------------------------------------------------------------------------
$21,169,466 $4,020,415 $17,149,051
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ACCUMULATED
DEPLETION AND NET BOOK
2001 COST DEPRECIATION VALUE
----------------------------------------------------------------------------------------------------------
Petroleum and natural gas properties and equipment $12,314,589 $3,042,355 $9,272,234
Furniture and equipment 72,174 20,517 51,657
----------------------------------------------------------------------------------------------------------
$12,386,763 $3,062,872 $9,323,891
----------------------------------------------------------------------------------------------------------
In 2002, costs totaling $2,922,368 (2001 - $1,928,576) that were incurred
on unproven properties have been excluded from costs subject to depletion.
During 2002, the Corporation capitalized general and administrative
expenses of $243,679 (2001-$252,007) that related to exploration and
development activities, to the cost of petroleum and natural gas
properties.
In 2001, the Corporation disposed of oil and natural gas properties for
consideration of $4,215,774 and applied the proceeds against capitalized
costs as this disposition did not alter the depletion and depreciation
rate by more than 20%.
12
5. BANK
The Corporation has credit facilities that provide for a revolving demand
line of credit of $10,000,000. The credit facility is with a Canadian
chartered bank and is secured by a $15 million floating charge debenture
over all the Corporation's assets and a general security agreement. The
facility bears interest at the rate of 0.75% (2001 - 0.50%) above the
bank's prime lending rate but the Corporation has the right to fix up to
$5,000,000 of the facility for periods up to six months at a rate of 1.75%
above the bank's Guaranteed Note Base Rate (total of 4.58% at September
30, 2002).
As at September 30, 2002 the Corporation had drawn $6,765,150 (2001 -
$5,346,200) on the line of credit, issued letters of credit totaling
$2,000,000 (2001 - $583,544) and issued cheques which had not yet been
presented for payment in the amount of $342,346 (2001 - $155,883). The
loan is classified as a current liability reflecting the demand nature of
the loan.
Under the credit facility agreement with the bank, the Corporation is
subject to certain covenants. The Corporation was not in compliance with
its covenants regarding the balance sheet liquidity ratios at September
30, 2002, specifically the working capital ratio and the debt to equity
ratio. The Corporation continues to be in violation of certain covenants.
The bank is aware of this violation of the covenants and is currently
conducting a review of the terms of the Corporation's credit facility.
6. SHARE CAPITAL
a) AUTHORIZED
Preferred Shares - unlimited number of shares without par value.
Common Shares - unlimited number shares without par value.
b) COMMON SHARES ISSUED
2002 2001
# OF SHARES AMOUNTS # OF SHARES AMOUNTS
------------------------------------------------------------------------------------------------
Balance - beginning of year 14,276,340 $2,579,814 12,521,340 $1,962,065
Private placement - - 200,000 100,000
Exercise of stock options - - 1,555,000 517,749
------------------------------------------------------------------------------------------------
14,276,340 $2,579,814 14,276,340 $2,579,814
Share purchase loans (410,598) (628,500)
------------------------------------------------------------------------------------------------
Balance - end of year 14,276,340 $2,169,216 14,276,340 $1,951,314
------------------------------------------------------------------------------------------------
c) SHARE PURCHASE LOANS
The balance includes advances made to officers and employees as
follows:
i) Non-interest bearing loans to acquire common shares of the
Corporation pursuant to private placements totaling $142,500
(2001 - $180,000) with no fixed terms of repayment.
ii) Share purchase loans totaling $268,098 (2001 - $448,500) that
bear interest at the rate of 6.5% per annum and are repayable
by August 16, 2003.
The share purchase loans are secured by 1,309,122 common shares of
the Corporation that were issued at an average price of $0.31 per
share and have a market price of $1.10 per share at September 30,
2002 and by 2,880,068 common shares of New Tesoro that were issued
as a dividend to the holders of the Corporation's common shares and
have a market price of $0.06 per share at September 30, 2002. The
Corporation earned interest of $27,033 on these loans in 2002 (2001
- $3,594).
At September 30, 2002 an officer's share purchase loan was in
arrears in the amount of $67,094, and he has therefore defaulted on
the loan agreement. Subsequent to September 30, 2002, the
Corporation has recovered $41,094 of the total of $231,250 that is
owing by this former officer.
13
6. SHARE CAPITAL (CONTINUED)
d) STOCK OPTIONS
The Corporation has a Stock Option Plan for the issuance of common
shares to employees, officers, directors and other key personnel
based on approval of the Board of Directors and regulatory
authorities. The maximum term of the options is five years and the
options vest in accordance with the resolution of the Board of
Directors pertaining to each grant, but normally over a period of
two years from the date granted.
2002 2001
WEIGHTED WEIGHTED
AVERAGE AVERAGE
# OF SHARES EXERCISE PRICE # OF SHARES EXERCISE PRICE
------------------------------------------------------------------------------------------------
Outstanding - beginning of year - - 1,220,000 $0.26
Awarded (1) 40,000 $1.00 335,000 $0.60
Exercised - - (1,555,000) $0.36
------------------------------------------------------------------------------------------------
Outstanding - end of year 40,000 $1.00 Nil $ -
------------------------------------------------------------------------------------------------
Exercisable - end of year 20,000 $1.00 Nil $ -
------------------------------------------------------------------------------------------------
The 2002 stock options expire in March 2006.
(1) The 2002 options were awarded to a consultant. No value was
attributed to these options as such value would not be
material.
7. INCOME TAXES
The income tax expense differs from the amount that would be obtained by
applying the statutory income tax rate to income before income taxes. The
principal reasons for the difference between such "expected" income tax
expense and the amount recorded are as follows:
RATE 2002 RATE 2001
-----------------------------------------------------------------------------------------------------
"Expected" income tax expense 42.4% $ 468,036 43.6% $ 1,349,869
Non-deductible crown charges 0.1% 1,248 5.0% 154,229
Resource allowance (8.0%) (88,464) (14.7%) (454,469)
Rate change in recovery of prior year taxes (3.1%) (34,330) - -
Other 1.7% 19,219 (1.7%) (54,367)
-----------------------------------------------------------------------------------------------------
Income tax expense 33.1% $ 365,709 32.2% $ 995,262
-----------------------------------------------------------------------------------------------------
The future income tax liability of $2,394,484 (2001 - $1,323,372) derives
from property and equipment having a carrying value in the accounts of the
Corporation that is $6,270,762 (2001 - $9,323,891) higher than its value
for income tax purposes, offset by an unrealized loss on commodity
contracts of $517,557 (2002 - $Nil) and the provision for site restoration
and abandonment of $97,248 (2002 - $45,511) that are recorded in the
accounts with no equivalent reduction in taxable income.
14
7. INCOME TAXES (CONTINUED)
The Corporation has available the following tax pool balances which may be
deducted in determining taxable income of future years. The amounts are
deductible annually at the rates indicated:
RATE 2002 2001
-----------------------------------------------------------------------------------------------------
Canadian Oil & Gas Property Expense 10% $ 2,545,000 $ 2,696,991
Undepreciated Capital Cost 25% 4,909,495 2,386,262
Canadian Development Expense 30% 2,580,059 968,583
Canadian Exploration Expense 100% 746,487 -
-----------------------------------------------------------------------------------------------------
Total Tax Pools $ 10,781,041 $ 6,051,836
-----------------------------------------------------------------------------------------------------
8. COMMODITY PRICE AND CREDIT RISK
a) COMMODITY PRICES
The Corporation has sold option contracts related to oil production.
The proceeds from these sales are recorded as liabilities until the
related oil production is sold, when they are amortized to revenue.
The market value of the outstanding commodity option contracts are
determined at the reporting date and any differences from the
unamortized proceeds are recorded as a gain or loss and netted
against net petroleum and natural gas revenue, and adjusted to the
liability. At September 30, the recorded commodity option contracts
liability consists of the following:
2002 2001
------------------------------------------------------------------------------------------------
Sale of WTI oil put options at a strike price of US $20.00
(400 bopd for January 1 to December 31, 2002)
Unamortized proceeds $ 88,317 $ 350,389
Adjustment to market pricing (88,317) -
Sale of Cdn $ WTI oil call options at a strike price of $34.00
(400 bopd for January 1 to December 31, 2003)
Unamortized proceeds 700,800 -
Adjustment to market pricing 605,874 -
------------------------------------------------------------------------------------------------
Total commodity option contracts 1,306,674 350,389
Current portion (977,314) (262,072)
------------------------------------------------------------------------------------------------
Long-term commodity option contracts $ 329,360 $ 88,317
------------------------------------------------------------------------------------------------
The Corporation also has swap contracts to sell future oil
production outstanding that have not been recorded in the accounts
and will affect the selling prices of its oil when the related
production is sold. Swap contracts are similar to forward contracts
other than that there is no official market for swaps. Swaps are
traded over the counter and are derivative financial instruments. At
September 30, the unrealized gain (loss) on these positions was as
follows:
15
8. COMMODITY PRICE AND CREDIT RISK (CONTINUED)
UNREALIZED GAIN (LOSS)
----------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------------
WTI oil swap of 450 bopd at a price of Cdn $38.78
Oct 1 to Dec 31, 2001 - 92 days $59,000
WTI oil swap of 400 bopd at a price of Cdn $38.30
Jan 1 to Sept 30, 2002 - 273 days 146,000
Oct 1 to Dec 31, 2002 - 92 days ($298,377) 49,000
Swap of US $240,000 Currency per month at US $1 = Cdn $1.59
Jan 1 to Sept 30, 2002 - 9 months 29,250
Oct 1 to Dec 31, 2002 - 3 months (36,924) 9,750
----------------------------------------------------------------------------------------------------
Unrecorded gain (loss) at September 30 ($335,301) $293,000
----------------------------------------------------------------------------------------------------
For the year ended September 30, 2002, the realized gain from the hedging
of oil production totaling $353,117 (2001 - a loss of $647,946) is
recorded as an adjustment to revenue as is the unrealized loss on the sale
of commodity option contracts of $517,557 (2001 - $Nil).
b) CREDIT RISK
The Corporation markets approximately 99% of its oil and natural gas
production through a major Canadian oil and gas producer who is also the
counter party for all the Corporation's hedging contracts. Other accounts
receivable are mainly with joint venture partners in the oil and gas
industry. All accounts receivable are subject to internal credit review
designed to mitigate the risk of non-payment.
9. COMMITMENTS AND CONTINGENCIES
At September 30, 2002, the Corporation is committed to a lease for the
rental of office space amounting to $108,417 (2001 - $38,071) annually and
expired in December 31, 2003. Subsequent to year end, the Corporation
extended the lease agreement to December 2005.
While the Corporation has outstanding commodity contracts, it is committed
to market its oil and gas production through the party that acts as the
counter party for the commodity contracts.
The Corporation owns an interest in one oil and gas property that is
operated by another company. As such, the Corporation is liable for its
proportionate share of costs incurred by that operator. There are no known
commitments by this operator for which the Corporation has not recorded
its proportionate share of the costs.
Subsequent to year end, the Corporation is currently involved in
litigation with a former officer of the Corporation who is claiming
$240,000 in respect of termination and severance pay. The Corporation is
contesting this claim.
10. RELATED PARTY TRANSACTIONS
a) TESORO ENERGY CORP. ("NEW TESORO")
The Corporation and New Tesoro entered into an Administrative
Services Agreement on July 26, 2001 pursuant to which the
Corporation provides management and administrative services to New
Tesoro for a period of three years that commenced on July 26, 2001.
In exchange, the Corporation receives a fee equal to 10% of New
Tesoro's cash flow from field operations, plus the re-imbursement of
third party expenditures. For the year ended September 30, 2002 the
administrative services fee amounted to $121,653 (2001 - $16,640)
and is recorded as a reduction of General and Administrative Expense
in the Statement of Operations. Pursuant to this agreement, the
Corporation acts as an agent in the marketing of all of New Tesoro's
oil and natural gas production. The total value of production
marketed on behalf of New Tesoro during the year was approximately
$2,073,000.
In 2002, the Corporation earned interest of $170,000 on the
Debenture Receivable from New Tesoro (2001 - $30,740) that is
included in Interest and Other Income in the Statement of Income
(note 3).
16
10. RELATED PARTY TRANSACTIONS (CONTINUED)
a) TESORO ENERGY CORP. ("NEW TESORO") - CONTINUED
At September 30, 2002 Accounts Payable and Accrued Liabilities on
the Balance Sheet includes a net amount of $122,450 that is payable
to New Tesoro in respect of marketing revenue from the sale of New
Tesoro's oil and natural gas production (2001 - net Accounts
Receivable on the Balance Sheet of $205,636). The companies are
related by virtue of common directorship and management.
Subsequent to September 30, 2002, the Corporation acquired 5,580,000
flow-through common shares of Tesoro for $334,800, to hold 6.99% of
the issued and outstanding shares of New Tesoro.
Transactions between the Corporation and New Tesoro in the normal
course of operations were conducted at the agreed to exchange
amounts which is fair market rates. C) TELFORD SERVICES GROUP, INC.
b) TELFORD SERVICES GROUP INC.
The Corporation leases equipment to Telford Services Group, Inc.
("Telford") at fair market rates under a month-to-month lease
agreement. For the year ended September 30, 2002, lease income of
$90,185 (2001 - $69,567) was earned and is included in Interest and
Other Income in the Statement of Income.
Telford manages the construction of production facilities and well
tie-in activities at certain of the Corporation's oil and natural
gas properties. The Corporation re-imburses costs incurred by
Telford and compensates Telford for work done at market rates.
During the year, these services totaled $431,273 (2001 - nil) and
are recorded as Property and Equipment on the Balance Sheet.
At September 30, 2002, Accounts Payable and Accrued Liabilities on
the Balance Sheet includes an amount of $67,906 payable to Telford
(2001 - Accounts Receivable of $25,683). The companies are related
by virtue of common directorship and management.
The Corporation was related to Telford until July 28, 2003, by
virtue of having common directors and management.
Transactions between the Corporation and Telford in the normal
course of operations were conducted at the agreed to exchange
amounts which is fair market rates.
11. STATEMENT OF CASH FLOWS
a) Changes in non-cash operating working capital consist of the
following:
2002 2001
---------- ----------
Receivables 500,232 (435,353)
Income taxes recoverable (517,388) (745,801)
Deposits and prepaid expenses (36,192) (21,884)
Payables and accrued liabilities 28,979 (126,400)
---------- ----------
(24,369) (1,329,438)
b) During the years ended September 30, 2002 and 2001, the Corporation
had the following non-cash transactions:
(i) During 2001, certain oil and gas assets were transferred to
Pentland in exchange for 31,500,000 shares at $0.07 per share
of Pentland and a debenture receivable of $1,700,000 (note 3).
(ii) During 2001, dividends of $2,225,138 were declared as payment
in kind for the disposition of the Corporation's interest in
Tesoro (note 3).
(iii) Interest income on the debenture receivable and the share
purchase loans was accrued and included in receivables for
$170,000 (2001 - $30,740) and $27,033 (2001 - $3,594),
respectively and recognized as Interest and other income in
the Statement of Income.
(iv) During 2002, the Corporation advanced $Nil (2001 - $423,500)
to certain officers and employees as share purchase loans
(note 6).
17
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"), which in most
respects conform to accounting principles generally accepted in the United
States ("U.S. GAAP"). Significant differences between Canadian and U.S. GAAP
which relate to the Corporation's financial statements are as follows:
NET INCOME IN ACCORDANCE WITH U.S. GAAP
Years ended September 30
Canadian dollars NOTES 2002 2001
----------- -----------
Net income - Canadian GAAP $ 738,931 $ 2,079,798
Change in fair value of financial instruments a (921,301) 1,011,000
Deferred tax effect of change in fair value of financial instruments a 359,307 (394,290)
Asset retirement obligation f (29,393) 17,445
Deferred tax effect on asset retirement obligation f 19,982 --
Compensation expense, intrinsic value of share purchase loans e -- (1,002,500)
Compensation expense, stock dividend e -- (269,713)
Compensation (expense) recovery, share purchase loans e (95,190) 245,000
----------- -----------
Income before cumulative effect of accounting changes 72,336 1,686,740
Cumulative effect of accounting change for accounting for derivatives a (718,000)
Deferred tax effect of cumulative effect of change in method of
accounting for derivatives a 280,020
Cumulative effect of accounting change for asset retirement obligation f (313,044)
Deferred tax effect of cumulative effect of accounting change for
asset retirement obligation f -- 115,280
----------- -----------
Net income - U.S. GAAP $ 72,336 $ 1,050,996
----------- -----------
EARNINGS PER COMMON SHARE, BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX b
Basic $ 0.01 $ 0.13
Diluted $ 0.01 $ 0.12
EARNINGS PER COMMON SHARE AFTER CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX b
Basic $ 0.01 $ 0.08
Diluted $ 0.01 $ 0.08
18
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
BALANCE SHEET IN ACCORDANCE WITH U.S. GAAP
As at September 30
Canadian dollars NOTES 2002 2001
U.S. U.S.
CANADIAN GAAP GAAP CANADIAN GAAP GAAP
------------ ----------- ------------ ------------
Current assets $1,927,738 $ 1,927,738 $1,677,357 $1,677,357
Debenture receivable 1,700,000 1,700,000 1,700,000 1,700,000
Commodity contracts - - - 204,683
Property and equipment 17,149,051 17,505,227 9,323,891 9,570,705
------------ ----------- ------------ ------------
Total assets $ 20,776,789 $21,132,965 $ 12,701,248 $ 13,152,745
------------ ----------- ------------ ------------
Current liabilities $ 13,188,412 $13,188,412 $ 7,433,596 $ 7,433,596
Commodity contracts a 329,360 957,662 88,317 -
Asset retirement obligation f - 778,416 - 587,924
Site restoration and abandonment 97,248 - 45,511 -
Deferred income taxes a 2,394,484 2,014,184 1,323,372 1,322,362
------------ ----------- ------------ ------------
16,009,504 16,938,674 8,890,796 9,343,882
Shareholders' equity
Share capital e 2,169,216 3,021,906 1,951,314 2,708,814
Retained earnings 2,598,069 1,172,385 1,859,138 1,100,049
------------ ----------- ------------ ------------
Total liabilities and shareholders' equity $ 20,776,789 $21,132,965 $ 12,701,248 $ 13,152,745
------------ ----------- ------------ ------------
a) DERIVATIVE INSTRUMENTS AND HEDGING
In accordance with Canadian GAAP, the fair value and unrealized gains and
losses of financial instruments qualifying as cash flow hedges are not
recorded on the balance sheet. The costs and gains on hedge contracts are
recognized in income in the same period as the hedged transactions are
settled. In the United States, Statement of Financial Accounting Standards
("SFAS No. 133"), Accounting for Derivative Instruments and Hedging
Activities, amended by SFAS 137 (June 1999) and SFAS 138 (June 2000), was
issued effective January 1, 2001. SFAS 133 requires that the fair value of
financial instruments designated as cash flow hedges are reflected as an
asset or liability on the balance sheet. Changes in the derivative's fair
value are recognized in current period earnings unless specific hedge
accounting criteria are met.
As at September 30, 2002 and 2001, the Corporation had contracts in place
consisting of commodity option contracts and swap contracts. For Canadian
GAAP purposes, the Corporation has recognized the fair value of the
commodity option contracts on the balance sheet and has recorded
unrealized gains on these contracts in earnings as these did not meet
specific hedge accounting criteria. The accounting for the commodity
option contracts is the same for U.S. GAAP purposes. The swap contracts
qualify as cash flow hedges for Canadian GAAP purposes. Accordingly, the
Corporation has not recognized the fair value of the swap contracts on its
Balance Sheet. For U.S. GAAP purposes, the swap contracts do not meet the
criteria for hedge accounting under SFAS 133. Therefore, the adoption of
SFAS 133 resulted in recognition of derivative liabilities with a fair
value of $718,000, tax effect of $280,020, at October 1, 2000, which is
reflected as the cumulative effect of the change in the method of
accounting for derivatives in the reconciliation of net income for the
year ended September 30, 2001. This also resulted in the recognition for
U.S. GAAP purposes of liabilities of $628,302 (2001 - net assets of
$293,000), and a loss of $921,301, tax effect of $359,307, (2001 - gain of
$1,011,000, tax effect of $394,290) under U.S. GAAP.
19
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
b) EARNINGS PER SHARE
Prior to January 1, 2001, diluted earnings per share under Canadian GAAP
were calculated utilizing the imputed earnings method whereby net income
is increased for the imputed earnings, after income taxes, on the cash
that would have been received on the exercise of outstanding stock options
and other potentially dilutive securities at an appropriate rate of
return. Under U.S. GAAP, the treasury stock method is used to calculate
diluted earnings per share whereby the assumed proceeds that arise from
the exercise of outstanding in the money options are used to purchase
common shares of the Corporation at their average market price for the
period. Effective January 1, 2001, Canadian GAAP requires the use of the
treasury stock method. Earnings per share presented under Canadian GAAP
and U.S. GAAP for 2002 and 2001 have been calculated using the treasury
stock method.
c) DEBENTURE RECEIVABLE
In Canada, long term receivables are carried at cost and written down to
reflect any loss in value that is other than temporary. Under U.S. GAAP,
long term receivables are carried at fair value if it is determined that
these long term receivables will not be held to maturity.
The Corporation has determined that it will realize on this receivable
prior to its maturity of July 26, 2006. As the carrying value of the
$1,700,000 debenture receivable represents fair value, no adjustment is
required for U.S. GAAP purposes.
d) FULL COST ACCOUNTING
Under the full cost method of accounting in Canada, the Corporation
performs a ceiling test to ensure that the carrying value of petroleum and
natural gas properties and equipment, net of future taxes and the
accumulated provision for site restoration and abandonment costs, does not
exceed the estimated future net revenues from production of proved
reserves. Net cash flow is undiscounted and is estimated using period end
commodity prices less estimated future costs for production, general and
administrative expenses, financing, and an estimate for site restoration
and abandonment and income taxes. For purposes of the U.S. GAAP ceiling
test, as specified by the Securities and Exchange Commission, the net cash
flow is discounted at 10 percent and future general and administrative
expenses and financing costs are not deducted.
There was no excess carrying value of the Corporation's petroleum and
natural gas properties and equipment under Canadian or U.S. GAAP.
e) STOCK-BASED COMPENSATION
In Canada, no recognition is normally given to any part of a stock option
as representing compensation expenses. In accordance with U.S. GAAP,
compensation cost for stock options granted to employees is measured using
the fair value method or the intrinsic value method. Under the fair value
method, compensation cost is generally measured at the grant date based on
the value of the award and is recognized over the vesting period. Under
the intrinsic method, compensation cost is the excess, if any, of the
quoted market price of the shares at the grant date, or other measurement
date, over the amount an employee must pay to acquire the shares.
The Corporation has not recognized compensation costs in the financial
statements for share options granted to employees and directors under
Canadian GAAP for all options. Under U.S. GAAP, the Company uses the
intrinsic value method, and certain adjustments were required as detailed
below.
In 2001, the Company loaned certain employees $142,500 in order to
facilitate the purchase of shares issued in a private placement. The loans
are non-interest bearing and have no fixed terms of repayment (note 6 (c)
(i)). These loans are accounted for using fixed plan accounting for U.S.
GAAP purposes. The dividend of the Tesoro shares acquired as detailed
below was charged to compensation expense for U.S. GAAP purposes and
amounted to $Nil (2001 - $81,123).
20
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
e) STOCK-BASED COMPENSATION (CONTINUED)
In 2001, the Company loaned certain employees $448,500 in order to
facilitate the exercise of certain options outstanding. The loans bear
interest at the rate of 6.5% and are repayable by August 16, 2003 (note 6
(c) (ii)). On August 9, 2001, the Corporation declared a special dividend
of 2.2 common shares of Tesoro for each issued and outstanding common
share of the Corporation distributable to shareholders of record on August
21, 2001. Therefore, the exercise of the options enabled management to
participate in the distribution of Tesoro common shares (note 3).
For U.S. GAAP purposes, the payment of the stock dividend is treated as
compensation expense and the advancing of the loans are treated as a new
option grant for accounting purposes. As a result, the Company recorded
$Nil (2001 - $188,590) in compensation expense related to the stock
dividend and compensation expense on the intrinsic value of the share
purchase loans of $Nil (2001 - $1,002,500). The share purchase loans are
accounted for using variable plan accounting for U.S. GAAP purposes. Under
the variable plan accounting, the compensation recognized for vested
awards is adjusted to the intrinsic value of the awards at each balance
sheet date. Compensation expense was adjusted by $95,190 (2001 - a
recovery of $245,000).
f) ASSET RETIREMENT OBLIGATION
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143"). SFAS 143 requires liability recognition for retirement obligations
associated with tangible long-lived assets. The obligations included
within the scope of SFAS 143 are those for which a company faces a legal
obligation for settlement. The initial measurement of the asset retirement
obligation is to be at fair value. The asset retirement cost equal to the
fair value of the retirement obligation is to be capitalized as part of
the cost of the related long-lived asset and amortized to expense over the
useful life of the asset. SFAS 143 is effective for all fiscal years
beginning after June 15, 2002. For U.S. GAAP purposes, the Corporation
early adopted SFAS 143 effective October 1, 2000.
Effective January 1, 2004, the Canadian Institute of Chartered Accountants
("CICA") implemented accounting standard for asset retirement obligations.
For Canadian GAAP purposes, this accounting standard was effective January
1, 2004 with early adoption encouraged. If early adopted, retroactive
restatement is required in accordance with CICA recommendations on
Accounting Changes.
The adoption of SFAS 133 resulted in recognition of asset retirement
liabilities with a carrying value of $313,044, tax effect of $115,280, at
October 1, 2000, which is reflected as the cumulative effect of the change
in the method of accounting for asset retirement obligation in the
reconciliation of net income for the year ended September 30, 2001. This
also resulted in the recognition for U.S. GAAP purposes an asset
retirement obligation liability of $778,416 (2001 - $587,924), a reduction
to site restoration and abandonment of $97,248 (2001 - $45,511), a net
increase to property and equipment of $356,176 (2001 - $246,814) and an
expense of $29,393, less related tax effect of $19,982, for a net expense
of $9,411 (2001 - recovery of $17,445) in the statement of income under
U.S. GAAP.
g) RECENT ACCOUNTING PRONOUNCEMENTS
The CICA issued Accounting Guideline 13 "Hedging Relationships" which
deals with the identification, designation, documentation and
effectiveness of hedging relationships for the purpose of applying hedge
accounting. The guideline is effective for fiscal years beginning on or
after July 1, 2003. Management has made the determination that the
standard will not have any affect on the Corporation.
FASB issued FASB Interpretation 46 "Consolidation of Variable Interest
Entities" effective for the first interim or annual reporting period
beginning after June 14, 2003. The standard mandates that certain variable
interest entities be consolidated by their primary beneficiary. Management
has made the determination that the standard will not have any affect on
the Corporation.
21
12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
g) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2002, the CICA issued an exposure draft for "Stock-Based
Compensation and Other Stock-Based Payments". The new standard proposes to
eliminate the option for an enterprise to disclose pro forma earnings and
pro forma earnings per share as if the fair value based method of
accounting had been applied. This would require the recognition of
stock-based compensation expense for all stock-based compensation
transactions.
In June 2002, FASB issued SFAS 146 "Accounting for Costs Associated with
Exit or Disposal Activities". The standard requires that liabilities for
exit or disposal activity costs be recognized and measured at fair value
when the liability is incurred. This standard is effective disposal
activities initiated after December 31, 2002.
22
QUARRY OIL & GAS LTD.
UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2003
The following unaudited balance sheet of Quarry Oil & Gas Ltd. ("the
Corporation") as at June 30, 2003 and the statements of operations and retained
earnings and cash flows for the nine month period ended June 30, 2003 are the
responsibility of the Corporation's management. These financial statements have
not been reviewed by the independent external auditors of the Corporation.
These financial statements have been prepared by the Corporation's management in
Canadian dollars and include the selection of appropriate accounting principles,
judgments and estimates necessary to prepare these financial statements in
accordance with Canadian generally accepted accounting principles.
23
QUARRY OIL & GAS LTD.
BALANCE SHEETS
CANADIAN DOLLARS
JUNE 30 September 30
2003 2002
ASSETS UNAUDITED Audited
----------- -----------
CURRENT ASSETS
Accounts receivable $ 1,246,120 $ 1,100,687
Income taxes receivable -- 750,476
Deposits and prepaid expenses 22,280 76,575
----------- -----------
1,268,400 1,927,738
Investments (note 5) 341,298 --
Debenture receivable (note 5) 1,000,000 1,700,000
Property and equipment 18,848,907 17,149,051
----------- -----------
TOTAL ASSETS $21,458,605 $20,776,789
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Bank overdraft $ 286,715 $ 342,346
Accounts payable and accrued liabilities 1,643,430 5,103,602
Income taxes payable 208,467 --
Current portion of commodity option contracts (note 4) 726,413 977,314
Bank loan (note 2) 8,167,155 6,765,150
----------- -----------
11,032,180 13,188,412
Commodity hedging (note 4) -- 329,360
Provision for site restoration and abandonment 179,940 97,248
Future income taxes 3,159,291 2,394,484
----------- -----------
14,371,411 16,009,504
SHAREHOLDERS' EQUITY
Share capital (note 3) 2,381,939 2,169,216
Retained earnings 4,705,255 2,598,069
----------- -----------
Shareholders' equity 7,087,194 4,767,285
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $21,458,605 $20,776,789
=========== ===========
See accompanying notes to the financial statements
24
QUARRY OIL & GAS LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
CANADIAN DOLLARS
UNAUDITED NINE MONTHS ENDED JUNE 30
REVENUE 2003 2002
----------- -----------
Petroleum and natural gas sales $10,404,223 $ 4,588,837
Royalties, net of ARTC 1,949,856 615,331
----------- -----------
Petroleum and natural gas revenue, net 8,454,367 3,973,506
Interest and other income 165,990 216,761
----------- -----------
8,620,357 4,190,267
----------- -----------
EXPENSES
Production and operating 2,589,910 1,642,816
General and administrative 489,567 394,280
Interest on bank loan 345,232 196,952
Depreciation and depletion 1,994,691 614,042
Provision for site restoration 82,692 37,361
----------- -----------
5,502,092 2,885,451
----------- -----------
Income before income taxes 3,118,265 1,304,816
INCOME TAXES
Current 246,272 (504,298)
Future 764,807 935,172
----------- -----------
Total income tax expense 1,011,079 430,874
----------- -----------
NET EARNINGS 2,107,186 873,942
Retained earnings, beginning of period 2,598,069 1,859,138
----------- -----------
Retained earnings, end of period $ 4,705,255 $ 2,733,080
=========== ===========
EARNINGS PER SHARE - BASIC $ 0.15 $ 0.06
- DILUTED $ 0.15 $ 0.06
Basic weighted average shares outstanding 14,276,340 14,276,340
Diluted weighted average shares outstanding 14,278,790 14,276,524
See accompanying notes to financial statements
25
QUARRY OIL & GAS LTD.
STATEMENTS OF CASH FLOWS
CANADIAN DOLLARS
NINE MONTHS ENDED JUNE 30
UNAUDITED 2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income $ 2,107,186 $ 873,942
Proceeds from sale of commodity option contracts 326,200 700,800
Items not affecting cash:
Depreciation, depletion & site restoration 2,077,383 651,403
Commodity hedging proceeds amortized (481,566) --
Unrealized (gain) loss on commodity option contracts (424,895) 92,986
Future income tax 764,807 935,172
----------- -----------
Cash flow from operations
4,369,115 3,254,303
Changes in non-cash operating working capital 1,038,346 (432,320)
----------- -----------
Cash provided by operating activities
5,407,461 2,821,983
----------- -----------
FINANCING ACTIVITIES
Bank debt 1,402,005 630,400
Loans to officers and employees repaid, net 212,723 94,784
----------- -----------
Cash generated by financing activities
1,614,728 725,184
----------- -----------
INVESTING ACTIVITIES
Expenditures on plant and equipment (7,325,260) (3,881,771)
Purchase of oil and gas properties -- (50,000)
Debenture repaid 700,000 --
Purchase of investments (341,298) --
----------- -----------
Cash used in investing activities (6,966,558) (3,931,771)
----------- -----------
Decrease (increase) in bank overdraft 55,631 (384,604)
Bank overdraft, beginning of period (342,346) (155,883)
----------- -----------
Bank overdraft, end of period $ (286,715) $ (540,487)
=========== ===========
See accompanying notes to financial statements
26
QUARRY OIL & GAS LTD.
NOTES TO THE FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003
CANADIAN DOLLARS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS
Quarry Oil & Gas Ltd. ("Quarry" or "the Corporation") is engaged in the
acquisition, exploration, development and production of petroleum and
natural gas in Western Canada.
The balance sheet of Quarry as at June 30, 2003 and the statements of
operations and retained earnings and cash flows for the nine months ended
June 30, 2003 and the notes thereto are the responsibility of the
Corporation's management. These interim financial statements have not been
reviewed by the independent external auditors of the Corporation.
The Corporation's interim financial statements have been prepared by
management in accordance with accounting principles generally accepted in
Canada, following the same accounting policies and methods of computation
used in the annual financial statements for the fiscal year ended
September 30, 2002. The disclosure that follows is incremental to, and
should be read in conjunction with, the disclosure in the financial
statements and notes thereto for the year ended September 30, 2002.
Subsequent to June 30, 2003, the Corporation incurred capital expenditures
that it anticipated funding from future cash flows. Consequently, the
Corporation extended its payment of trade creditors beyond normal credit
terms resulting in violation of certain banking covenants. Management is
in the process of evaluating alternative financing arrangements and
expects to resolve these credit issues in fiscal 2004 by applying cash
flow from operations to trade creditors' balances and by evaluating
alternative financing arrangements.
2. PROPERTY AND EQUIPMENT
ACCUMULATED
DEPLETION AND NET BOOK
JUNE 30, 2003 COST DEPRECIATION VALUE
----------- ----------- -----------
Petroleum and natural gas
properties and equipment $24,789,517 $5,962,150 $18,827,367
Furniture and equipment 74,496 52,956 21,540
----------- ----------- -----------
$24,864,013 $ 6,015,106 $18,848,907
=========== =========== ===========
ACCUMULATED
DEPLETION AND NET BOOK
September 30, 2002 COST DEPRECIATION VALUE
----------- ----------- -----------
Petroleum and natural
gas properties and equipment 21,094,970 3,981,428 17,113,542
Furniture and equipment 74,496 38,987 35,509
----------- ----------- -----------
$21,169,466 $ 4,020,415 $17,149,051
=========== =========== ===========
27
3. BANK LOAN
The Corporation has been in default of certain banking covenants and on
April 29, 2003 it entered into a forbearance agreement with its banker,
which was designed to provide the Corporation with time to obtain
alternative financing. At June 30, 2003, the Corporation was in
substantial compliance with the covenants contained in its existing bank
credit agreement. Subsequent to June 30, 2003, the Corporation was in
default of certain other banking covenants, specifically the working
capital ratio and the debt to equity ratio. The Corporation continues to
be in violation of certain covenants. The bank is aware of this violation
of the covenants and is currently conducting a review of the terms of the
Corporation's credit facility.
4 SHARE CAPITAL
No common shares or stock options were issued during the period and no
stock options were exercised. At June 30, 2003 and September 30, 2002,
there were 40,000 stock options issued and outstanding. In previous years,
the Corporation granted loans to certain officers and employees to assist
them with their purchase of the Corporation's common shares. The amounts
outstanding under these loans are disclosed as a reduction of share
capital.
JUNE 30 September 30
2003 2002
---------- ----------
Share capital $2,579,814 $2,579,814
Share purchase loans 197,875 410,598
---------- ----------
Net share capital $2,381,939 $2,169,216
========== ==========
5. RISK MANAGEMENT
The Corporation has sold option contracts related to oil production.
During the nine months ended June 30, 2003, the Corporation sold its
forward sale contract for US $240,000 per month for the period June to
December 2003 and received proceeds of $326,200. These proceeds were
recorded on the balance sheet and will be reflected as income concurrent
with the sale of the related oil production and netted against net
petroleum and natural gas revenue. In accordance with Canadian Generally
Accepted Accounting Principles related to derivative activities, at June
30, 2003 the Corporation had recorded the following net amounts as
liabilities on its balance sheet:
JUNE 30 September 30
2003 2002
--------- ---------
Proceeds from sale of option contracts, less amounts amortized:
Cdn. $34 WTI call option contracts for 400 bopd of oil production $ 353,280 $ 700,800
US $20 Put sold for 400 bopd of oil production -- 88,317
Adjustment of outstanding options contracts to market value 92,662 517,557
Settlement of forward sale contracts for US $240,000 per month 280,471 --
--------- ---------
726,413 1,306,674
Less current portion of commodity contracts 726,413 977,314
--------- ---------
Commodity contracts $ -- $ 329,360
========= =========
The Corporation realized a loss of $442,110 for the nine months to June
30, 2003 (2002 - a gain of $481,024). This realized loss has been
reflected as a reduction of petroleum and natural gas sales in the
Statement of Income.
28
6. RELATED PARTY TRANSACTIONS
a. Tesoro Energy Corp.
The companies are related by virtue of having common directors and, until
July 28, 2003, were related by common management. The Corporation holds an
indirect 49% interest in a $1,000,000 debenture from Tesoro Energy Corp.
("Tesoro") that earns interest at the rate of 10% per annum (until July
28, 2003, the Corporation held 100% of this interest). For the nine months
ending June 30, 2003, the Corporation earned interest of $96,627 (2002 -
$127,616). The Corporation also holds an indirect 49% interest in 5.6
million common shares of Tesoro. The 5.6 million shares were originally
acquired by the Corporation in December 2002 as "flow through shares" at a
price of $0.06 per share. Until March 31, 2003, the Corporation provided
management and administrative services to Tesoro under a contract for
which it charged a management fee. The fee for these services during the 9
months ended June 30, 2003 was $114,280 (2002 - $95,635). The Corporation
acted as an agent in the marketing of a portion of Tesoro's oil and gas
production during the 9 months ended June 30, 2003, amounting to
$1,281,434. The net amount payable by the Corporation to Tesoro at June
30, 2003 was $281,122 (September 30, 2002 - $122,450). Transactions
between the Corporation and Tesoro were conducted at fair market rates.
b. Telford Services Group, Inc.
The Corporation was related to Telford Services Group, Inc. ("Telford")
until July 28, 2003 by virtue of having common directors and management.
For the period from October 1, 2002 to June 30, 2003 the net value of
transactions between the parties, all of which were conducted at fair
market rates, was approximately $951,883. During the period, Telford
undertook work for the Corporation related to oil and gas lease and
facilities construction. In addition, the Corporation leased an airplane
to Telford to the date that it transferred the airplane to Keantha
Holdings Inc. (note 7 c). Transactions between the Corporation and Telford
were conducted at fair market rates.
c. Keantha Holdings Inc. ("Keantha")
As at June 30, 2003 the Corporation had a debenture receivable of
$1,000,000 from Tesoro Energy Corp. ("Tesoro"), a Corporation related by
virtue of having common directors. The debenture had an interest rate of
10% per annum payable monthly, matured on July 26, 2006 and was secured by
the oil and gas assets of Tesoro. During the nine months ended June 30,
2003, the Corporation incorporated a company, Keantha Holdings Inc.
("Keantha"), and transferred to it 5.6 million Tesoro common shares, which
were originally acquired by the Company in December 2002 as "flow through
shares" at a price of $0.06 per share, and an airplane, which was leased
to Telford Services Group, Inc. (note 7 b). The carrying value of the
investment in Keantha was $341,298 at June 30, 2003. Subsequent to June
30, 2003, the Corporation transferred to Keantha the $1,000,000 Tesoro
debenture. On July 28, 2003, the Company sold a 51% interest in Keantha to
an investor group that included the former Chairman and Chief Executive
Officer and one of the Company's other directors, for proceeds of
$867,662, which was received in cash.
7. SUBSEQUENT EVENTS
a. On July 28, 2003, the Corporation's Chairman and interim Chief
Executive Officer resigned all his positions with the Corporation
and was paid a termination payment of $592,500.
b. Effective July 28, 2003, Assure Energy, Inc. ("Assure"), a
Corporation now incorporated in Alberta, acquired a total of
6,919,900 shares of Quarry representing approximately 48.5% of
Quarry's outstanding common stock. Assure is now the majority
shareholder of Quarry and has effective control of Quarry's
operations. Assure, through its wholly-owned subsidiary, Assure Oil
& Gas Corp., provides management services to the Corporation whereby
it supplies the Corporation with the services of certain of its
employees that have management or operational expertise.
29
7. SUBSEQUENT EVENTS (CONTINUED)
c. As at December 31, 2003, the Corporation's independent reserve
engineers revised downwards the estimated quantities of the
Corporation's oil and gas reserves due to technical and operating
issues. The engineers also reflected in their report new reserves
reporting requirements for Canadian oil and gas companies,
introduced by Canadian securities regulators effective September 30,
2003, which negatively impacted the measurement of proved reserves.
As a result of these factors, the Corporation's proved reserves were
subject to downward revisions of approximately 592,000 barrels of
crude oil and 673 million cubic feet of natural gas from previously
estimated quantities of reserves. An impairment test was performed
at December 31, 2003 and at March 31, 2004 under the guidelines
prescribed by Canadian Generally Accepted Accounting Principles and
no write-down of capitalized costs was required.
d. The Corporation is currently involved in litigation with a former
officer of the Corporation who is claiming $240,000 in respect of
termination and severance pay. The Corporation is contesting this
claim.
e. Effective June 30, 2004, the Corporation and Assure completed a
non-brokered private placement whereby the Corporation issued to
Assure 1,000,000 units (the "Units") at a price of $0.75 per Unit
for cash proceeds to the Corporation of $750,000. Each Unit consists
of one common share and one warrant (a "Warrant"). Each Warrant
entitles the holder to purchase one common share of the Corporation
at a price of $0.80 for a period of two years. Such proceeds will be
used by Quarry for certain required capital expenditures and for
other working capital requirements. Taking into account the issuance
of the said 1,000,000 common shares comprising part of the Units
(the "Purchased Shares"); the Corporation now has 15,276,340 common
shares issued and outstanding. Assure now owns and controls a total
of 7,919,900 common shares representing 51.84% of the issued and
outstanding common shares of the Corporation.
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"), which in most
respects conform to accounting principles generally accepted in the United
States ("U.S. GAAP"). Significant differences between Canadian and U.S.
GAAP which relate to the Corporation's financial statements are as
follows:
NET INCOME IN ACCORDANCE WITH U.S. GAAP
Nine months ended June 30
Canadian dollars NOTES 2003 2002
--------- ----------- -----------
Net income - Canadian GAAP $ 2,107,186 $ 873,942
Asset retirement obligation b 15,735 (23,486)
Deferred tax effect of asset retirement obligation b 1,693 -
Change in fair value of financial instruments a 182,360 (322,921)
Deferred tax effect of change in fair value of financial instruments a (71,120) 125,939
Compensation (expense) recovery, share purchase loans e - (35,192)
------------ ------------
Net income - U.S. GAAP $ 2,235,854 $ 618,282
============ ============
Basic $ 0.16 $ 0.04
Diluted $ 0.16 $ 0.04
============ ============
30
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
BALANCE SHEET IN ACCORDANCE WITH U.S. GAAP
Canadian dollars NOTES JUNE 30, 2003 SEPTEMBER 30, 2002
U.S. U.S.
CANADIAN GAAP GAAP CANADIAN GAAP GAAP
------------ ----------- ----------- -----------
Current assets $1,268,400 $ 1,268,400 $1,927,738 $ 1,927,738
Investments 341,298 341,298 - -
Debenture receivable c 1,000,000 1,000,000 1,700,000 1,700,000
Property and equipment 18,848,907 19,181,355 17,149,051 17,505,227
------------ ----------- ----------- -----------
Total assets $ 21,458,605 $21,791,053 $ 20,776,789 $ 21,132,965
------------ ----------- ----------- -----------
Current liabilities a 11,032,180 11,478,122 $13,188,412 $13,188,412
Commodity contracts a - - 329,360 957,662
Asset retirement obligation b - 821,645 - 778,416
Site retirement and abandonment b 179,940 - 97,248 -
Future income taxes a 3,159,291 2,848,418 2,394,484 2,014,184
------------ ----------- ----------- -----------
14,371,411 15,148,185 16,009,504 16,938,674
Shareholders' equity
Share capital e 2,381,939 3,234,629 2,169,216 3,021,906
Retained earnings 4,705,255 3,408,239 2,598,069 1,172,385
------------ ----------- ----------- -----------
Total liabilities and shareholders' equity $ 21,458,605 $21,791,053 $ 20,776,789 $ 21,132,965
------------ ----------- ----------- -----------
a) DERIVATIVE INSTRUMENTS AND HEDGING
In accordance with Canadian GAAP, the fair value and unrealized gains and
losses of financial instruments qualifying as cash flow hedges are not
recorded on the balance sheet. The costs and gains on hedge contracts are
recognized in income in the same period as the hedged transactions are
settled. In the United States, Statement of Financial Accounting Standards
("SFAS No. 133"), Accounting for Derivative Instruments and Hedging
Activities, amended by SFAS 137 (June 1999) and SFAS 138 (June 2000), was
issued effective January 1, 2001. SFAS 133 requires that the fair value of
financial instruments designated as cash flow hedges are reflected as an
asset or liability on the balance sheet. Changes in the derivative's fair
value are recognized in current period earnings unless specific hedge
accounting criteria are met.
As at June 30, 2003 and September 30, 2002, the Corporation had contracts
in place consisting of commodity option contracts and swap contracts. For
Canadian GAAP purposes, the Corporation has recognized the fair value of
the commodity option contracts on the balance sheet and has recorded
unrealized gains on these contracts in earnings as these did not meet
specific hedge accounting criteria. The Corporation has not recognized the
fair value of the swap contracts on its Balance Sheet. For U.S. GAAP
purposes, the adoption of SFAS 133 resulted in recognition of a gain of
$182,360, tax effect of $71,120, (2002 - loss of $322,921, tax effect of
$125,939).
31
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
b) ASSET RETIREMENT OBLIGATION
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143"). SFAS 143 requires liability recognition for retirement obligations
associated with tangible long-lived assets. The obligations included
within the scope of SFAS 143 are those for which a Corporation faces a
legal obligation for settlement. The initial measurement of the asset
retirement obligation is to be at fair value. The asset retirement cost
equal to the fair value of the retirement obligation is to be capitalized
as part of the cost of the related long-lived asset and amortized to
expense over the useful life of the asset. SFAS 143 is effective for all
fiscal years beginning after June 15, 2002. For U.S. GAAP purposes, the
Corporation early adopted SFAS 143 effective October 1, 2000. Effective
January 1, 2004, the Canadian Institute of Chartered Accountants ("CICA")
implemented accounting standard for asset retirement obligations. For
Canadian GAAP purposes, this accounting standard was effective January 1,
2004 with early adoption encouraged. If early adopted, retroactive
restatement is required in accordance with CICA recommendations on
Accounting Changes. The adoption of SFAS 133 resulted in recognition for
U.S. GAAP purposes an asset retirement obligation liability of $821,645
(2002 - $778,416), a reduction to site restoration and abandonment of
$179,940 (2002 - $97,248), a net increase to property and equipment of
$332,448 (2002 - $356,176) and a recovery of $17,428, inclusive of a
deferred tax recovery of $ 1,693 (2002 - expense of $23,486) in the
statement of income under U.S. GAAP.
c) DEBENTURE RECEIVABLE
In Canada, long term receivables are carried at cost and written down to
reflect any loss in value that is other than temporary. Under U.S. GAAP,
long term receivables are carried at fair value if it is determined that
these long term receivables will not be held to maturity.
The Corporation has determined that it will realize on this receivable
prior to its maturity of July 26, 2006. As the carrying value of the
$1,000,000 debenture receivable at June 30, 2003 (September 30, 2002 -
$1,700,000) represents fair value, no adjustment is required for U.S. GAAP
purposes.
d) FULL COST ACCOUNTING
Under the full cost method of accounting in Canada, the Corporation
performs a ceiling test to ensure that the carrying value of petroleum and
natural gas properties and equipment, net of future taxes and the
accumulated provision for site restoration and abandonment costs, does not
exceed the estimated future net revenues from production of proved
reserves. Net cash flow is undiscounted and is estimated using period end
commodity prices less estimated future costs for production, general and
administrative expenses, financing, and an estimate for site restoration
and abandonment and income taxes. For purposes of the U.S. GAAP ceiling
test, as specified by the Securities and Exchange Commission, the net cash
flow is discounted at 10 percent and future general and administrative
expenses and financing costs are not deducted.
There was no excess carrying value of the Corporation's petroleum and
natural gas properties and equipment under Canadian or U.S. GAAP based on
estimated proved reserves as at June 30, 2003 or September 30, 2002.
32
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
e) STOCK-BASED COMPENSATION
In 2001, the Company loaned certain employees $448,500 in order to
facilitate the exercise of certain options outstanding. The loans bear
interest at the rate of 6.5% and are repayable by August 16, 2003. On
August 9, 2001, the Corporation declared a special dividend of 2.2 common
shares of Tesoro for each issued and outstanding common share of the
Corporation distributable to shareholders of record on August 21, 2001.
Therefore, the exercise of the options enabled management to participate
in the distribution of Tesoro common shares.
For U.S. GAAP purposes, the payment of the stock dividend is treated as
compensation expense and the advancing of the loans are treated as a new
option grant for accounting purposes. As a result, the Company recorded
$Nil (2002 - $35,192) in compensation expense related to the stock
dividend. The share purchase loans are accounted for using variable plan
accounting for U.S. GAAP purposes.
f) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, FASB issued SFAS 146 "Accounting for Costs Associated with
Exit or Disposal Activities". The standard requires that liabilities for
exit or disposal activity costs be recognized and measured at fair value
when the liability is incurred. This standard is effective for disposal
activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34" ("FIN
45"). FIN 45 requires the recognition of an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for
the initial recognition and measurement of the liability will be applied
on a prospective basis to guarantees issued or modified after December 31,
2002. Management has determined that the adoption of FIN45 will not have
an impact on the Corporation.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, and provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent and more
frequent disclosures in financial statements of the effects of stock-based
compensation. The interim disclosure requirements of SFAS No. 148 are
effective for interim periods beginning after December 15, 2002.
In January 2003, FASB issued Financial Interpretation 46 "Consolidation of
Variable Interest Entities" effective for the first interim or annual
reporting period beginning after June 14, 2003. The standard mandates that
certain variable interest entities be consolidated by their primary
beneficiary. Management has made the determination that the standard will
not have any affect on the Corporation. In April 2003, the FASB issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts and hedging activities under SFAS 133. The amendments
set forth in SFAS 149 require that contracts with comparable
characteristics be accounted for similarly. SFAS 149 is generally
effective for contracts entered into or modified after June 30, 2003 (with
a few exceptions) and for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively only.
33
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
f) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer measures
certain financial instruments with characteristics of both liabilities and
equity and requires that an issuer classify a financial instrument within
its scope as a liability (or asset in some circumstances). SFAS No. 150
was effective for financial instruments entered into or modified after May
31, 2003.
The Canadian Institute of Chartered Accountants ("CICA") issued Accounting
Guideline 13 "Hedging Relationships" which deals with the identification,
designation, documentation and effectiveness of hedging relationships for
the purpose of applying hedge accounting. The guideline is effective for
fiscal years beginning on or after July 1, 2003. Management has made the
determination that the standard will not have any affect on the
Corporation.
In 2003, the CICA issued a new accounting standard for "Stock-Based
Compensation and Other Stock-Based Payments". The new standard eliminates
the option for an enterprise to disclose pro forma earnings and pro forma
earnings per share as if the fair value based method of accounting had
been applied, and requires the recognition of stock-based compensation
expense for all stock-based compensation transactions. The standard
applies to stock option awards granted to employees for fiscal years
commencing on or after January 1, 2004 and to stock option awards granted
to non-employees for fiscal years commencing on or after January 1, 2002.
34