-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HJzkRAu+R5MeL4XK03dTw9HFwVeWqdMOLq1YfuFSwjWPMdnn5TcHpolYsCW8PrPI oaux1rUP8m5AkWtySq0d/Q== 0000950131-00-002640.txt : 20000418 0000950131-00-002640.hdr.sgml : 20000418 ACCESSION NUMBER: 0000950131-00-002640 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE OIL INTERNATIONAL INC CENTRAL INDEX KEY: 0001009922 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 611126904 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24027 FILM NUMBER: 602763 BUSINESS ADDRESS: STREET 1: 840 SEVENTH AVENUE SW STREET 2: SUITE 750 T2P 3G2 CITY: CALGARY ALBE T2P 3G2 STATE: A2 MAIL ADDRESS: STREET 1: 840 SEVENTH AVE SW STREET 2: SUITE 750 T2P 3G2 CITY: CALGARY ALBERTA STATE: A2 10-K 1 FORM 10-K ================================================================================ Securities and Exchange Commission Washington, D.C. 20549 _________ FORM 10-K _________ [X] Annual For the fiscal year ended December 31, 1999 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ___________ Commission file number: 0--24027 PINNACLE OIL INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Nevada 61-1126904 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Suite 750 Phoenix Place, 840-7/th/ Avenue, S.W., Calgary, Alberta, Canada T2P 3G2 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (403) 264-7020 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 28, 2000 was approximately $337,396,000 based upon the closing price per share of the registrant's common stock of $38 on that date. The number of shares outstanding of the registrant's common stock as of March 28, 1999: 12,870,016 shares Documents Incorporated By Reference Information required by Part III (Items 10, 11, 12 and 13) is incorporated into this annual report by reference to the registrant's definitive proxy statement to be disseminated in advance of its annual meeting of stockholders to be held later in 2000. ================================================================================ Table Of Contents
Page ---- Item 1. Business............................................................................................ 1 - ------- -------- Overview............................................................................................ 1 -------- Our Corporate History............................................................................... 1 --------------------- Status Of Our Exploration Efforts................................................................... 2 --------------------------------- Corporate Objective................................................................................. 4 ------------------- Theoretical Basis Of SFD Technology................................................................. 5 ----------------------------------- Operational Practices In Conducting SFD Surveys..................................................... 6 ----------------------------------------------- Our Business And Geographic Segments................................................................ 11 ------------------------------------ Joint Venture Partners.............................................................................. 11 ---------------------- Competition......................................................................................... 15 ----------- Employees........................................................................................... 15 --------- Research and Development............................................................................ 16 ------------------------ Manufacturing Capacity and Suppliers................................................................ 16 ------------------------------------ Governmental And Environmental Regulation........................................................... 16 ----------------------------------------- Operating Hazards................................................................................... 16 ----------------- Our SFD Technology License.......................................................................... 17 -------------------------- We May Be Unable To Protect Our Proprietary Rights To Our SFD Data And The SFD ------------------------------------------------------------------------------ Technology.......................................................................................... 20 ---------- Item 2. Properties.......................................................................................... 20 - ------- ---------- Leased Premises..................................................................................... 20 --------------- Petroleum Properties................................................................................ 20 -------------------- Item 3. Legal Proceedings................................................................................... 22 - ------- ----------------- Item 4. Submission Of Matters To A Vote Of Securities Holders............................................... 22 - ------- ----------------------------------------------------- Item 5. Market Price Of And Dividends On Our Common Stock And Related Stockholder Matters................... 22 - ------- --------------------------------------------------------------------------------- Market Information.................................................................................. 22 ------------------ Dividend Policy..................................................................................... 23 --------------- Item 6. Selected Consolidated Financial Information......................................................... 23 - ------- ------------------------------------------- Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations............... 25 - ------- ------------------------------------------------------------------------------------- Overview............................................................................................ 25 -------- Capital Requirements................................................................................ 26 -------------------- Results Of Consolidated Operations.................................................................. 27 ---------------------------------- Liquidity And Capital Resources..................................................................... 30 ------------------------------- Other Matters....................................................................................... 31 ------------- Uncertainties And Risk Factors That May Affect Our Future Results And Financial ------------------------------------------------------------------------------- Condition........................................................................................... 32 --------- Item 7A. Quantitative and Qualitative Disclosure About Market Risk........................................... 42 - -------- --------------------------------------------------------- Oil And Gas Price Fluctuations...................................................................... 42 ------------------------------ Oil And Gas Price Fluctuations...................................................................... 43 ------------------------------ Currency Fluctuations............................................................................... 43 --------------------- Interest Rate Fluctuations.......................................................................... 43 -------------------------- Item 8. Financial Statements And Supplementary Data......................................................... 44 - ------- ------------------------------------------- Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure................ 44 - ------- ------------------------------------------------------------------------------------ Item 10. Our Directors And Executive Officers................................................................ 44 - -------- ------------------------------------ Item 11. Executive Compensation.............................................................................. 44 - -------- ---------------------- Item 12. Ownership Of Our Securities by Beneficial Owners And Management..................................... 44 - -------- --------------------------------------------------------------- Item 13. Certain Relationships And Related Transactions...................................................... 44 - -------- ---------------------------------------------- Item 14. Exhibits, Financial Statements, Schedules And Reports On Form 8--K.................................. 45 - -------- ------------------------------------------------------------------
-ii- The information set forth in Item 1 of this annual report, captioned "Business," is current as of April 14, 2000, unless an earlier or later date is indicated in such section. The information set forth in the sections of this annual report other than Item 1 is current as of December 31, 1999, unless an earlier or later date is indicated in those sections. All references to "dollars" in this prospectus refer to United States, or U.S., dollars unless specific reference is made to Canadian, or Cdn., dollars. For information relative to rates of exchange and currency conversion, see note 2(l) to our consolidated financial statements. Part I Item 1. Business Overview Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle") is a technology-based reconnaissance exploration company which utilizes our proprietary, quantum physics-based, stress field detection or "SFD" remote-sensing airborne survey technology, which we refer to as our "SFD Survey System," to quickly and inexpensively identify and high-grade oil and natural gas prospects. We are a publicly traded company whose common stock trades over-the-counter on the NASD Electronic Bulletin Board under the symbol "PSFD." Our principal executive offices are located at Suite 750, Phoenix Place, 840 7th Avenue S.W., Calgary, Alberta, Canada T2P 3G2, and our telephone number is (403) 264-7020. We use our SFD technology to survey or reconnoiter large exploration areas from our survey aircraft at speeds in excess of 150 mph to identify and "high-grade" leads for further evaluation and potential drilling. Our SFD technology is a recently developed technology which we adapted for airborne survey operations, and field tested for independent geologists and our joint venture partners, in 1996 and 1997. We commenced SFD survey activities on a full commercial basis for our joint venture partners in early 1998. Our SFD technology affords us the relatively inexpensive ability to obtain near real-time analysis and interpretation of potential hydrocarbon accumulations in a matter of days or weeks, as compared to months and in some cases years in the case of the seismic methods currently employed by the oil and gas exploration industry for wide area exploration or reconnaissance. These cost and time advantages will ultimately enable us to effectuate potentially significant reductions in oil and gas exploration "finding costs." Finding costs include the cumulative costs of acquiring seismic, purchasing mineral rights, and drilling and completing exploration wells. The ability to reduce finding costs is an extremely important financial factor in the oil and gas industry, insofar as low finding costs represent a measure of an oil and gas company's ability to effectively and efficiently find new reserves, as well as generate cash flow. Our Corporate History We were initially incorporated in Nevada on September 27, 1994 under the name "Auric Mining Corporation." In January 1996, we acquired all of the common stock of Pinnacle Oil Inc., a Nevada corporation, from its stockholders in exchange for our common stock. As a consequence of this transaction, Pinnacle Oil Inc., whom we refer to as "Pinnacle U.S.," became our wholly-owned subsidiary and its stockholders acquired a 92% controlling interest in our common stock. Prior to this transaction we were a corporate shell conducting no active business, and Pinnacle U.S. was a development stage research and development enterprise holding world-wide rights to use what is now our SFD technology for hydrocarbon exploration purposes. Immediately after this transaction we changed our name to "Pinnacle Oil International, Inc." -1- Status Of Our Exploration Efforts We conduct our reconnaissance exploration activities, as well as land acquisition, drilling, completion and production activities to exploit prospects identified using our SFD technology, through our two wholly-owned operating subsidiaries. Our first subsidiary, Pinnacle U.S., focuses on United States-based exploration. Our second subsidiary, Pinnacle Oil Canada, Inc., whom we refer to as "Pinnacle Canada," focuses on Canadian-based exploration. Pinnacle, in turn, concentrates on research and development efforts to improve the efficacy of our SFD Survey System. Our United States exploration efforts to date have been focused on the Greater Green River Basin in Wyoming and the Williston Basin in North Dakota. These exploration activities have been conducted under a joint exploration and development agreement with CamWest Exploration LLC, a Colorado-based exploration company. Under this agreement we conduct aerial surveys to identify prospects in exploration areas in the United States selected by CamWest. Our Canadian exploration efforts to date have been focused on southern Alberta, northeastern British Columbia, southwestern Saskatchewan and Newfoundland. The majority of these exploration activities have been conducted under an exploration joint venture agreement with Encal Energy Ltd., a Calgary-based exploration and production company. Under this agreement we conduct aerial surveys to identify prospects in exploration areas in Canada selected by Encal. We have also recently commenced conducting exploration activities in western Canada for our own account. We anticipate developing these prospects through a joint venture with either Encal or another Canadian exploration company. From the inception of our commercial airborne survey activities in mid-1997 through the date of this annual report, we have: . flown over: . 60,000 linear survey miles in 20 separate exploration areas in the United States and Canada for our joint venture partners, and . 2,500 linear survey miles in an separate exploration area in Canada for our own account; and . tendered 81 prospects which we believe to have commercial potential to our joint venture partners for further geological and geophysical evaluation as a result of our analysis and interpretation of SFD Data acquired during these flights. Of the 81 prospects we have tendered to our joint venture partners: . 25 prospects have been accepted by our joint venture partners for acquisition and drilling upon completion of their geological and geophysical evaluation. . seven prospects have been designated as "key tracts" by our joint venture partners for future drilling based upon long-term considerations such as land availability; . nine prospects have been rejected by our joint venture partners and have either reverted to Pinnacle for our own account or will be jointly exploited by Pinnacle and the joint venture partner pursuant to the terms of the joint venture agreement; and . the balance of the tendered prospects remain subject to acceptance pending completion of geological and geophysical evaluation, land acquisition or other considerations. Of the 25 prospects that have been accepted by our joint venture partners: -2- . One exploration well spudded in early 1999 by a third-party operator at Shoal Point, Newfoundland, was drilled directionally to an unknown bottom hole target, evaluated, and abandoned as being uneconomic. Pinnacle Canada elected a royalty interest through Encal with respect to this prospect. . One exploration well spudded in September 1999 by a third-party operator at our Leucite Hills South prospect in Wyoming, was drilled, cased and completed in September 1999 as a natural gas discovery. This well will not be placed into production by the operator, however, until a sufficient number of additional wells are drilled on the exploratory block and can be tied into a gathering system. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. . One exploration well spudded by CamWest in October 1999 at our Poblano prospect in Wyoming, was drilled, cased and completed in January 2000 as a natural gas discovery, and production will commence upon completion of a twelve-mile pipeline that will tie the well into a sales system. CamWest spudded a step-out exploratory well on this prospect in March 2000, which is still in the process of being drilled as of the date of this annual report. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. . One exploration well spudded by a third-party operator in October 1999 at our Poblano South prospect in Wyoming, was drilled, cased and completed in January 2000. This well has been shut-in by the operator pending further evaluation of its completion program. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. . One exploration well spudded in December 2000 by Encal at our Carbon prospect in southern Alberta, was drilled, cased and completed in January 2000 as a natural gas discovery. This well is currently suspended pending further completion activity by the operator. Pinnacle Canada elected an overriding royalty interest with respect to this prospect. . One exploration well spudded in March 2000 by Encal at our Monarch prospect in southern Alberta. This well is currently cased and awaiting completion. Pinnacle Canada elected a combination working interest and overriding royalty interest with respect to this prospect. . Drilling rights for the balance of the prospects have either been acquired and exploration wells are scheduled for drilling at a future date, or remain in the process of being acquired. We anticipate that two to four exploration wells will be spudded on these prospects by our joint venture partners or third-party operators by June 30, 2000. As of the date of this annual report, our joint venture partners have acquired drilling rights for fourteen of those prospects. The joint venture agreements we have entered into with our joint venture partners generally entitle us to elect to receive one of the two following payment streams for each SFD-identified prospect accepted and drilled under the applicable agreement: . A capital investment and generally risk-free overriding royalty of 5% to 8% of oil or natural gas revenues received by the joint venture partner with respect to the prospect. In any situation where we elect to receive this royalty, our joint venture partner will be responsible, at its own cost and risk, to acquire the necessary drilling rights for the prospect if it has not already done so, and to conduct all drilling, production and marketing activities necessary to exploit the prospect. . A working interest of up to 45% of the joint venture partner's net revenues with respect to the prospect. In any situation where we elect to participate on a working interest basis, we must bear our share of the acquisition of mineral and drilling rights (if necessary), drilling and production costs incurred with respect to the prospect based upon our working interest percentage. Although we will bear our share of these costs, our joint venture partner will nevertheless remain responsible for conducting and managing all drilling, production and marketing activities to exploit the prospect. -3- Our recent practice with our joint venture partners has been to participate in selected prospects on a combination working interest/overriding royalty interest basis, typically a 22 1/2% working interest and a 4% overriding royalty. Our U.S. joint venture partner is also required under the terms of its joint venture agreement to reimburse us for 100% of the expenses we incur in conducting aerial surveys for that partner, while our Canadian joint venture partner is required under the terms of its joint venture agreement to reimburse us for 50% of the expenses we incur in conducting aerial surveys for that partner. Our rights to use our SFD technology arises from an SFD technology license which we acquired from the owner and licensor of that technology, Momentum Resources Corporation, pursuant to which we received the exclusive world-wide right to use the SFD technology for hydrocarbon exploration purposes. We are obligated under the terms of that license to pay Momentum a fee equal to 1% of any "prospect profits" which we may receive on or before December 31, 2000, and 5% of any prospect profits which we may receive after December 31, 2000. Momentum is controlled and indirectly owned by two of our significant stockholders, both of whom currently serve as our directors and one of whom currently serves as one of our executive officers. Since we have not generated operating revenues to date, we should be considered a development stage enterprise. Although we have sufficient working capital as of December 31, 1999 to fund our current level of operations for several years assuming we make minimal investments in petroleum properties, our ability to continue as a going concern in the longer term will nevertheless be dependent upon our ability, either through our joint venture arrangements or for our own account, to successfully identify hydrocarbon bearing prospects, and to finance, develop, extract and market oil and natural gas from these prospects for a profit. We anticipate that we will continue to incur further operating losses until such time as we receive revenues from our joint venture partners with respect to prospects currently in the development stage, or through prospects we identify and exploit for our own account. Corporate Objective Our corporate objective is to become an industry leader in technology-driven oil and gas exploration. Utilizing our unique and exclusive SFD technology, we can provide to our joint venture partners competitive advantages not seen in the exploration business. We anticipate that we will attain our corporate objective through the following evolutionary steps: . In the short-term we will continue to work with our joint venture partners to explore the sedimentary basins they request we survey. Our primary interest at this stage of our development is to focus on drilling results to prove our SFD technology, while participating in a sufficient number of exploratory wells on a working interest basis to demonstrate our commitment to our technology. Budgetary considerations permitting, we will participate in drilling activities on either a pure working interest basis up to our permitted 45% where we are willing to accept higher risk in order to earn higher returns, or a combination working interest/overriding royalty basis where we desire to participate on a lower percentage basis. In other circumstances we will not participate, and will instead be paid an overriding royalty on production revenue. All of these projects will allow us to not only establish a statistical drilling track record for our SFD technology, but enable us to build cash flow to further fund our exploration drilling and research & development programs. . In the longer term once the value of our SFD technology has been demonstrated to the oil and gas industry, we will adopt a strategy to accomplish the following objectives: . promote the expeditious acquisition and drilling of SFD Prospects; . maximize the return on our investment while minimizing risk associated with direct investments in oil and gas drilling projects; and . enable us to have a greater degree of control and influence over strategic project decisions, while at the same time not becoming bogged down in drilling, production and marketing operational issues. While we anticipate that we will continue to participate in projects with third party exploration companies, we anticipate that the economics of investment or the underlying arrangements will change as follows: . we will either invest in the same way as we currently invest--i.e., on a straight working interest or royalty participation basis or a combination of the two depending upon capital investment requirements, potential reserve size, geographic location, risk levels, project completion times and parties involved--although we would expect that our working interest and royalty percentages would be increased; or . we will engage independent drilling, production and marketing companies on a contract basis. We anticipate that we will be able to finance our increased land acquisition costs and working interest participations through available cash flow or financings funded, in part, through our anticipated base of proven reserves. Most importantly, we will endeavor to acquire drilling and land rights in our name in order to procure maximum leverage in negotiating transactions with drilling and production partners or contractors on terms most beneficial to our company. While we will acquire a land department to acquire drilling rights and manage our properties, we do not intend to become a manpower- and cost-intensive drilling and production company, and will instead delegate these matters to our partners or independent contractors or service providers, although it is possible that we may establish a separate affiliated entity to manage production and marketing functions. We anticipate that we will increase our staffing levels--exclusive of any separate production and marketing entity we may establish--to approximately 50 employees in this business model, including additional administrative, research and development and SFD flight, survey and interpretive staff. Given our relatively modest projected staffing requirements, we anticipate that our annual operating expenses would be kept to relatively minimal levels. You should note that prospects that are confirmed through exploratory drilling as containing commercial quantities of oil and gas may become immediately marketable based on the size of their estimated reserves. It is therefore not necessary to actually place production wells on-line to recognize the value of these reserves, and we may consider selling the reserves and associated drilling rights to third parties based upon a discounted cash flow formula derived from estimated reserves and other production and/or market factors. We also anticipate that we will have the similar ability, once our SFD technology is proven, to sell SFD Prospects on the market, even if exploratory wells have not been drilled. We have, in fact, set up a mechanism under our joint venture agreements with our joint venture partner to dispose of smaller SFD Prospects which may have commercial value. -4- Theoretical Basis Of SFD Technology What Is Our SFD Technology Our SFD technology allows us to measure the variations in energies relating to `stressed' subsurface structures and hydrocarbon accumulations. By analyzing these field patterns, we are able to determine the probability of locating commercially viable deposits. The principal components of our SFD technology, the SFD sensors, are `stand-alone' devices that incorporate principals of contemporary quantum theory in their operation. What Is Quantum (Field) Theory And Its Applications `Quantum theory' incorporates two bodies of physics--`quantum mechanics,' which deals with wave-particle duality, superposition principle, uncertainty principle, wave function and probabilities; and `special relativity' which examines the effects of space-time geometry and the relativity of motion. Traditional physics, known as `classical theory,' cannot account for the structure and behavior of elementary particles, for example, the lattice- vibration effects that arise from electrons colliding with atoms. In contrast, quantum theory is successful in dealing with these phenomena. It describes matter and energy interactions in the universe in terms of single indivisible units called `quanta,' or in the singular `quantum.' According to the `standard model' of quantum theory, which summarizes current understanding of elementary particles and the fundamental forces of nature, `fields' are the basic make-up of the universe. Therefore, each elementary particle has an associated field with it. Little ripples in these fields carry information, energy and momentum from one area or particle to another. Quantum theory describes matter as both waves and as particles. A direct consequence of the wave-particle duality is the `uncertainty principle' advanced by Heisenberg. According to this principle, particles do not have definite locations, speeds, and paths as usually described by classical physics. Instead, quantum theory describes positions and other properties of particles in terms of the incidental events where the property will have a certain value. The way a quantum object behaves is defined by its 'wave function' developed by Schrodinger, allowing us to compute the `probability' that certain event will be observed. Everything in quantum theory is based on probability. This simply means that one cannot predict an event definitely but can estimate the probability for the event to occur. In spite of its success, there are situations where quantum theory is insufficient to give proper explanation. Under the umbrella of quantum theory, three fundamental forces--the `electromagnetic,' the `weak,' and the `strong' forces--are successfully unified. However, it cannot adequately incorporate the fourth, `gravitation.' None of the branches of quantum theory can account for the discrepancies in masses of elementary particles. To address this issue, Higgs proposed a mechanism--known as `massive gauge bosons'--by which particles acquire mass without breaking the symmetry laws of modern physics. Higgs bosons have no intrinsic spin or electric charge and can not be distinguished from empty space or vacuum. It is now proposed by physicists that the all-pervading Higgs scalar fields homogenize space and give rise to as many particles as there are many special scalar fields. In support, Peccei-Quinn symmetry and String theory predict the existence of `composite scalar fields' that are massless at high energies. Presently, physicists are working on proving the existence of these complex scalar fields. They forecast a number of individual and composite Higgs fields and torsion fields, the latter of which relates to the quantum spin of empty space or vacuum. These issues have ramification in our theoretical discussions with respect to the operation of our SFD technology and we interpret the role of Higgs fields as being direct and relevant. Quantum theory has already been applied in the development of commercially available instruments and devices. Superconducting Quantum Interference Device or SQUID is a typical example. It is the most sensitive detector of magnetic fields known so far. The application of SQUID technology ranges from medical diagnostics for detecting brain damage to performing special tests in relativity. Quantum lasers are another example of the successful commercial application of quantum theory. The major advantage of these lasers is that they can be tailored to emit light over a wide range of the spectrum--something that no other laser can do. In fact, anyone who owns a compact-disc player today uses this technology. By means of Molecular-Beam Epitaxy or MBE, initially developed at Bell Labs, layers of atoms can be deposited on a heated metal surface. This technology is essential in the fabrication of advanced semiconductor devices and integrated circuits including the quantum-well lasers. Nowadays, computer scientists are moving towards embracing quantum-wire and quantum computers as the future of computing. Theoretically, quantum computers will perform calculation orders of magnitude faster than the best computers of today. What Are Stress Fields And Their Relation To SFD Theory On a global scale, the earth's crust is under variable stress resulting from crustal plate (tectonic) movements that produce subsurface mechanical and hydraulic interactions. Stress is manifest in the macroscopic deformation of buried sediments and rock strata, the microscopic deformation of their constituent minerals. It is well known that electrical energy balance in a crystal lattice is maintained by the alternation of equal and opposite charges. However, when the crystal lattice of a material, for example quartz, is suddenly subjected to stress, electromagnetic radiation will be emitted. Under sustained localized stress conditions, we believe that `scalar energy fields' are also generated or modified at a quantum level. The word `scalar' in its basic form means that the field carries no direction only magnitude, unlike vector fields resulting from conventional electromagnetic fields that carry both magnitude and direction. The generated or modified scalar energy fields are non- electromagnetic in nature, and we believe are related to Higgs and torsion fields. Our SFD sensors are passive quantum transducers. The operation of these devices is based on quantum mechanical principles and involves the capture and interaction, translation and conversion of certain scalar energy fields into electrical signals. Our SFD sensors have demonstrated the ability to date to directly detect scalar energy effects generated or modified at depths in excess of 15,000 ft below the surface, and at altitudes in excess of 10,000 ft. Surface cultural phenomena, such as large body of water, do not affect the SFD sensors as long as the change in magnitude is moderate. By generating and maintaining their own quantum fields, the SFD sensors are able to interact with these energy fields via quantum particles. The resulting interactions are converted and "recorded" as electrical signals. Our SFD sensors are also non-linear `chaotic' devices. Chaos theory characterizes chaotic devices as behaving in a complex manner, despite the fact that they can be described quite simply. By definition, these systems exhibit unpredictable dynamics that are sensitive to their initial conditions. Chaotic systems are mathematically deterministic--that is, they follow precise laws, but their irregular behavior can appear random to the casual observer. The response of our device to a phenomenon may diverge exponentially and much faster than that of a slower linear system. Once a response to a phenomenon is initiated, it will proceed until saturation or occurrence of the next phenomenon. Even though, within the confinement of the inherent restrictions of quantum mechanics, the number of possibilities of reacting to the same stimulus is deterministic, the device still behaves irregularly. Nevertheless, by cycling about an optimum function point, the behavior of a quantum device can achieve some stability in a way that never quite repeats itself. Sustained geological stress will lead to the development of new conditions manifested in scalar energy fields of different origin that are related to Higgs and torsion fields. We postulate that the fields generated or modified are due to complex variations in quantum vibrations and vacuum interactions. These fields carry information, momentum and in some cases, substantial energy. Although these energy fields appear scalar in nature, they can in effect act as vector fields under certain conditions. When scalar energy fields interact with existing anomalies they can create large vortices with smaller internal vortices over a given subsurface phenomenon. The vortices may dynamically increase and decrease in magnitude, and when traversed they significantly affect the quantum interactions in our SFD sensor. Based on observations we have made from several hundred surveys of known oil and gas fields, it appears that these vortices are associated with `mechanical' and `hydraulic' stresses, as explained below, in particular, geologic structures and hydrocarbon accumulations. What Is The Practical Application Of Stress Fields to Geology and Hydrocarbon Exploration We believe that all regional substrata exhibit their own unique stress fields, reflecting the sedimentary and burial histories of those substrata and, more importantly for the purposes of the application of our technology, the mechanical and in some cases hydraulic stresses or pressures inherent in or placed upon those substrata. This is important because it is our ability to identify the changes in subsurface stresses and pressures with our SFD technology which allows us to either inferentially or directly identify oil and gas accumulations. Through our continued research and development, a high level of correlation has been shown between the science of geology and our quantum- based SFD technology. What Are Subsurface Mechanical Stresses Subsurface mechanical stresses are caused by directional tectonic forces that disrupt the stress and pressure equilibrium in the underlying strata. Sedimentary basins consisting of relatively undisturbed flat-lying or gently dipping sediments generally maintain a balanced pressure equilibrium and therefore exhibit low constant stress. Where tectonic forces have compressed, folded, faulted, or fractured the sedimentary package, a balanced mechanical equilibrium is not maintained, and these areas exhibit stresses in one or more directions depending upon the geology and the geometry of the deformation. In other areas where the regional strata is characterized by non-uniform geologic layering, particularly areas containing abrupt major sedimentation changes such as buried reefs, channels, and erosional edges, these appear to exhibit higher residual stress than the adjacent regional strata. -5- What Are Subsurface Hydraulic Stresses Hydraulic stresses are caused by the presence of fluids (liquids and gases), such as water, oil and natural gas, within the strata and, more particularly, the inherent and directional pressures resulting from the relative buoyancy of the fluids. A simple illustration of buoyancy is the effect of submerging a beach ball in a swimming pool. When a beach ball is submerged it attempts to rise to the top of the pool because the air in the beach ball is less dense than the surrounding water. This upward pressure, which displaces the water above the beach ball as it rises to the surface, is called buoyancy. Oil and gas exhibit the same properties when formed underground--they will percolate upwards through the strata by way of fractures or permeable strata until they either reach the surface or are stopped or "trapped" by a non-porous barrier, in which case they will continue to exert pressure against the trapping barrier. How Does Our SFD Technology Interact with Subsurface Stress Fields The principal components of our SFD technology are passive transducers, which we refer to as the "SFD Sensors," which create and maintain quantum fields. As we fly our SFD technology over an exploration area, the SFD Sensors interact with the varying stress fields that are generated by and within the subsurface strata. Our SFD technology interacts with these dynamic energy patterns and converts them into electrical digital signals which we record and later interpret using known geologic phenomena and oil and gas accumulations as analogies. Operational Practices In Conducting SFD Surveys How We Acquire SFD Data In operational practice, our SFD Survey System is flown over pre-selected exploration areas at varying altitudes and from different directions. As the SFD Sensors interact with the fields created by stresses, they register a multitude of responses that we record in the form of digital signals, which we refer to as "SFD Signals." Our proprietary data acquisition system acquires and records these signals and marks their geographic location with global positioning satellites using "GPS" coordinates. These integrated signals are now referred to as "SFD Data." Our technical crew aboard the aircraft can also monitor these signals in real time, which allows them to immediately identify areas of particular interest for further investigation. How We Interpret SFD Data Once SFD Datasets acquired from our airborne survey operations are returned to our home offices, our geological and geophysical interpretive staff process the data, plot the flight lines, and produce computer-generated maps. We then commence the following screening and interpretation process: . First, we screen the SFD Data for "anomalous" signals on the flight line, which we refer to as "SFD Anomalies." These SFD Anomalies include signals from both unknown or non-producing areas that we survey as well as signals obtained over known oil and gas pool crossings. . Once we have identified the SFD Anomalies on a given flight line, we then isolate and distinguish SFD Anomalies which have signal characteristics indicative of subsurface mechanical conditions, which we refer to as "structural signals," and subsurface hydraulic conditions, which we refer to as "hydrocarbon signals." At this point, we will contrast these new structural and hydrocarbon signals with those signals found over known oil and gas accumulations in the area. This comparative process, which we discuss in greater detail below, is very similar to that used in seismic interpretation. . Our geological team then puts each identified SFD Anomaly into subsurface context using our in-house geological database. The SFD Anomaly may then become a "SFD Lead," if the structural and hydrocarbon signals of the SFD Anomaly appear to coincide in proper geologic context. In other words we answer the question, does the anomaly make sense where it appears in the sedimentary basin? Where we have sufficiently qualified an SFD Lead with further SFD Data acquired from additional surveys, we reclassify the lead as a "Recommended SFD Prospect" and tender it to our joint venture partner for its further geological and geophysical evaluation. -6- In reaching its conclusion as to the coincidence of favorable geology and structural or hydrocarbon signals, our geological team will evaluate the following factors in the overall context of its understanding of the local geology: . "Templating" Signals With Those Of Known Oil And Gas Accumulations Our geological team compares or "templates" the anomalous structural and hydrocarbon signals with those of known oil and gas accumulations since oil and gas exploration is, by its inherent nature, a "comparative" process. Geologists and geophysicists constantly compare data for exploration areas to that from known producing regions that are either nearby or exhibit similar subsurface characteristics. Our process is similar in that we compare the structural or hydrocarbon signals from our anomalies to those signals from a nearby producing field or other known fields that exhibit similar patterns. -7- . Signals Characteristics The most common and reliable SFD signals are structural signals, which indicate the existence of potentially seismically-identifiable subsurface mechanical conditions such as structural traps, strata types and other geologic features and characteristics that commonly trap oil and gas accumulations ("seismically-identifiable structures"). Our experience is that our SFD technology recognizes seismically-identifiable structural traps and other geologic features with a high degree of accuracy. While the rate of corroboration is fairly high, the mere existence of seismically-identifiable structures does not mean that oil and gas is present. Rather, it merely infers that oil and gas may be present, since these geologic features and characteristics represent common trapping mechanisms. Industry experience has proven, for example, that the majority of seismically-identifiable structures do not trap commercial quantities of oil and gas. This is what makes "wildcat" exploration--where test wells are drilled in unproven areas distant from existing known pools usually based upon seismic interpretations or geological mapping--so risky. For example, the current oil industry rate of success in drilling productive wells in true wildcat exploration areas, based upon the ability of the well to produce sufficient hydrocarbons to repay its drilling costs and provide some return on equity, is only 10% to 20%, or one well out of five to ten wildcat wells drilled. The hydrocarbon signals are less common than structural signals. However, when hydrocarbon signals are present, they are complimentary to, and in some cases more probative than, our structural signals since: . Hydrocarbon signals directly indicate oil and gas accumulations, while the structural signals only infer oil and gas accumulations for the reasons indicated above; . The confluence of both structural and hydrocarbon signals, when present, enhances our comfort level in a commercial trap; and . The hydrocarbon signal alone lends itself to the potential identification of an abundant number of oil and gas accumulations that are "stratigraphically trapped" which are generally less susceptible to detection by seismic methods. The major drawback to date of our hydrocarbon signal is its relative inability on its own to indicate the depth of hydrocarbon accumulations or the number of oil and gas bearing zones, which we attempt to address through the templating process described above. While we believe based upon our experience that our SFD technology is fairly effective in identifying oil and gas pools, and particularly large fields, this belief will only be proven by drilling results from a representative group of stratigraphic pools that do not carry structural signals. 8 What Happens When We Tender Recommended SFD Prospects To Our Joint Venture Partners Once we tender a Recommended SFD Prospect to one of our joint venture partners, they conduct whatever conventional geological, geophysical and economic evaluations of the prospect they may deem prudent in making a decision to proceed with drilling. If the joint venture partner decides to drill a Recommended SFD Prospect, the prospect is characterized as an "Accepted SFD Prospect," in which case we can elect to either receive our 5% to 8% overriding royalty or to participate in the drilling and production of the prospect through our working interest election. How Fast Can We Acquire And Interpret SFD Data We are able to fly our SFD Survey System at 150 to 200 mph, and can survey 600 to 800 linear miles in a four-hour day of recording. For each day of recording, it takes our staff between one to five days of data processing and interpretation--including plotting flight routes, screening and analyzing anomalies, putting the anomalies in geologic context, and ranking the anomalies--to sufficiently identify and recommend the SFD Prospects from that flight line. The actual amount of time required is ultimately determined by the following factors: . The number and types of SFD Anomalies identified on the flight line; . The quality of the SFD Data; . The complexity of the subsurface geology under the flight line; . The amount of available geological information; and . The amount of SFD Data available from other SFD survey flights intercapting the potential prospect. As a consequence, we are able to record and interpret 800 linear miles of SFD Data acquired in one SFD survey flight over a period of only a few days at a cost of $5 to $10 per mile. By way of comparison, traditional land-based seismic crews record up to five linear miles of 2D seismic per day, depending on acquisition parameters, at costs of approximately $5,000 to $20,000 per mile. Two or more weeks are then required to process the data, followed by another several weeks for interpretation. As a result, it can take a minimum of six months to record and interpret 1,000 linear miles of new 2D seismic data, at a total cost of $5 million to $20 million. Greatly adding to these direct seismic expenses are the obvious opportunity costs of allowing aggressive competitors with comparable seismic capabilities an equal chance to record data during the same six month interpretation period. With our SFD technology, opportunity costs due to time lag are negligible. We identify approximately twenty SFD Leads on average for each four-hour day of surveying, and ultimately tender, on average, two or 10% of these leads to our joint venture partners as Recommended SFD Prospects for further evaluation. The SFD Prospects which we tender can be pool to field-sized targets that could require two to ten wells or more to exploit depending upon accumulation. At our current projected annual rate of six to eight survey days per month per ten months of airplane annual operational availability, we anticipate we can identify 120 to 160 Recommended SFD Prospects per year assuming no excessive downtime. We anticipate that we will increase our monthly flying rate at some future date as we increase our efficiencies, which would result in a corresponding increase in the number of Recommended SFD Prospects we identify. The actual number of these Recommended SFD Prospects that are accepted and ultimately drilled by our joint venture partners will, however, be dependent upon any number of competitive, geological and environmental variables. Longer-Term Issues That Effect The Timing Of SFD Surveys And Interpretation Before we tender a Recommended SFD Prospect to a joint venture partner, we will typically interpret two or more SFD Data sets for the prospect, which requires in turn a corresponding number of SFD survey -9- flights to acquire the data. If we are not able to acquire sufficient quality SFD Data for an SFD Lead from a single survey project, then we will be able in many instances to evaluate this information and tender the Recommended SFD Prospect to the joint venture partner in a matter of days following commencement of the interpretation process. However, in many cases we must perform additional survey flights over a target zone at a later date due to a number of factors, including delays attributable to weather, a need to acquire more definitive SFD Data, and requests by the joint venture partner to further define the Prospect or its surrounding area. Also, since we acquire SFD Data during our entire flight rather than limiting the data acquisition process to our targeted zones, we typically encounter new SFD Leads outside these zones which will require additional SFD Data for their further evaluation. It may take several weeks or even months to perform follow-up surveys on these SFD Leads due to impending survey and interpretation obligations to current joint venture partners, as well as weather conditions which may impede our ability to fly. We anticipate that a number of these timing issues will be addressed as we augment our current operational capacity with additional survey aircraft and interpretation staff. Longer-Term Issues That Effect The Timing Of Land Acquisition And Drilling We believe that our joint venture partners will not only be more successful in their drilling programs as a result of their reliance on our SFD technology, but also be capable of accessing superior opportunities more quickly than their competitors. However, the time it may take for a joint venture partner to get to the drilling stage of an SFD Prospect can still be lengthy depending upon any number of factors, including the following: . Regardless of the quality of SFD Data we have to support our recommendation in tendering a Recommended SFD Prospect, it currently remains necessary for our joint venture partners to conduct further geological and geophysical evaluations, including 2D or 3D seismic surveys where warranted, of each Recommended SFD Prospect. Because our SFD technology is a reconnaissance instrument, this must be done to determine the optimum drilling location and potential pay zone depth. . In some cases our joint venture partners may have the ability to conduct their geologic and geophysical evaluation relatively quickly, such as in circumstances where they have or can obtain sufficient quality commercial or proprietary local seismic data. However, in many cases, particularly those where we identify promising SFD Prospects outside target survey areas in which our joint venture partners already own drilling rights, local seismic data will not be existent or available. Seismic surveying, especially 3D seismic, requires governmental and environmental permits, satisfied surface land owners, and competent recording crews, among other things, and usually takes several months to acquire and process. . If our joint venture partners do not own mineral and drilling rights to a specific prospect, they must obtain these rights in order to drill. Negotiating deals with current mineral owners can be complicated, time consuming and frustrating, particularly when the prospective mineral rights lie in a highly competitive exploration area, or are already held by an oil & gas company. Some of the factors which influence our joint venture partners' ability to acquire the mineral and drilling rights at all, or the cost they must pay to acquire these rights, include: . whether the prospect lies in an active and competitive exploration area; . current oil & gas prices and their perceived direction; . the duration of the remaining term of a mineral lease; -10- . the size and configuration of the mineral holdings sought (contiguous land positions are more valuable and therefore more expensive to acquire than patchwork holdings); and . the proximity of oil and gas gathering and processing infrastructure. Also, our joint venture partners might be required, in the case of a farm-in, to first participate in the drilling of a location outside of our prospect in order to earn the right to later drill at the site of the prospect. This is done occasionally to earn valuable acreage "through the drill bit." . When mineral rights are held by the federal or state government, or held by the Crown (Canada), these lands may be acquired by posting for sale, but remain subject to the uncertainties of the bidding or auction process, and may require a considerable lead time before being offered for bid. Our Business And Geographic Segments We currently operate in only one business segment, oil and natural gas exploration, insofar as we intend to develop all oil and natural gas exploration prospects identified using our proprietary "SFD" remote-sensing airborne survey technology either directly for our account or indirectly for our account through working interest or overriding royalty interests through our joint venture partners. We do not currently sell or market our SFD Data as a separate product to third parties. For geographical segment information, see note 18 to our consolidated financial statements included in Item 14 of this annual report. Joint Venture Partners Canadian Exploration Joint Venture With Encal Energy Ltd. Our Canadian joint venture partner is Encal Energy Ltd., located in Calgary, Alberta, Canada. Encal is an intermediate Canadian exploration company listed on the Toronto and New York Stock Exchanges. As of December 31, 1999, Encal had total assets of Cdn. $775 million and 103,567 mboe of total proved reserves. For 1999, Encal averaged 13,862 barrels per day of oil and natural gas liquid production and 153 million cubic feet per day of natural gas production. Our current relationship with Encal is governed by the terms of an Exploration And Joint Venture Agreement entered into in September 1997, and which expires on September 15, 2000. This agreement replaced two prior joint venture agreements entered into with Encal during 1996 and 1997. We are currently in negotiations with Encal relative to extending the term of our current joint venture agreement, and modifying some of its terms to comport with our current business practices. The material terms of the joint venture agreement with Encal/1/ are summarized as follows: . We are required to conduct SFD surveys on selected "exploration areas" identified by Encal of up to 2,400 square miles, and Encal is required to reimburse us for 50% of all daily aircraft rental, pilot salary, food and accommodation costs we incur to conduct these surveys. We retain the right to reject any presented exploration area for any bona fide reason, including safety or technical concerns. . When we have completed our survey, screening and interpretation activities with respect to an exploration area, we are required to present Encal a written report listing our Recommended SFD Prospects and a summary of our interpretations for the flight lines within the exploration area, as _____________________ /1/ The terminology or defined terms we use in this section comports with our current nomenclature instead of that used in the Encal joint venture agreement in order to avoid confusion. -11- well as a map of flight lines and locations of all SFD Anomalies from the flight within the exploration area. We are also obligated to give Encal the opportunity to review the SFD Data in our offices. . Once we have tendered our report to Encal, it will have 90 days to conduct conventional geological and geophysical evaluation of each Recommended SFD Prospect tendered to it in order to determine whether it will accept the prospect for potential drilling. If Encal accepts the exploratory prospect, it will become an Accepted SFD Prospect. If Encal rejects the prospect, we will attempt to agree on a procedure for its joint exploitation. If we cannot reach agreement with Encal on a mechanism to exploit the prospect, it will become our exclusive property and we may deal with it in any manner we deem appropriate, subject to a two year confidentiality restriction if the prospect is located on specified Encal lands. . If Encal elects to drill a test well on an Accepted SFD Prospect, we will have the right, at that time, to elect to either participate in drilling the prospect on a working interest basis along the lines discussed below, or receive a sliding scale overriding royalty on Encal's share of production from the prospect on the lines discussed below. If we elect to participate on a working interest basis on any Accepted SFD Prospect, we will later be given a second election, to be exercised after Encal acquires drilling rights for the prospect but before Encal spuds its first test well on the prospect, to convert our working interest in the prospect into an overriding royalty interest. . Should we elect to participate on a working interest basis, we will be obligated to bear 45% of Encal's land acquisition, drilling and development costs for that well (unless it is a farm-in well which is fixed at 40%), and will be entitled to receive a commensurate percentage of all revenues received by Encal after the deduction of royalties, severances taxes and production and marketing costs. . Should we elect an overriding royalty, we will receive a minimum of 5% and a maximum 8% of Encal's net revenues for crude oil, depending on the productivity of the well, and a flat 8% of Encal's net revenues for all other petroleum substances, including natural gas. . We are obligated, whenever the number of active Recommended SFD Prospects is less than fifteen, to devote at least 50% of our worldwide survey capacity to identify prospects for Encal, until the amount or "inventory" of active Recommended SFD Prospects reaches eighteen. For purposes of the foregoing, the following exploration prospects are not included in the "inventory" of active Recommended SFD Prospects: . Any Recommended SFD Prospect for which Encal is unable to obtain drilling rights; . Any Recommended SFD Prospect on which Encal drills a test well; and . Any Recommended SFD Prospect rejected by Encal. . We have also agreed that: . we will have no more than two additional joint venture partners in Canada, although there are no restrictions on the number of joint venture partners we may utilize outside of Canada; . we will not grant larger or more numerous exploration areas to any other joint venture partners than those granted to Encal; . Encal will have the exclusive right for SFD surveys in the Province of British Columbia, and at least 50% of the aggregate area in selected regions of the Province of Alberta; and . Encal will be afforded a first opportunity to participate in any transaction utilizing our SFD technology to explore for petroleum substances outside of Canada, where, in our sole judgment, there is an opportunity for Encal to participate as operator or a participant provided -12- that role is available; and also provided that we believe it is appropriate for Encal to perform that role. . Encal will be the operator, and will make all decisions relating to and control for all prospects developed by the joint venture. In this regard, Encal will be responsible for . conventional oil and gas exploration, operation, development and management of the joint venture and any of its oil and gas properties; and . the production and marketing of any petroleum substances which are produced from the joint venture. . Should production be processed through Encal's production facilities, we will pay Encal a reasonable proportional fee for the use of these facilities. If production is processed through a third-party's production facilities, we will be charged our portion of the actual costs for services performed. It should be noted that as of the date of this annual report our company and Encal are not strictly following the prospect tendering and prospect evaluation time periods mandated in the Encal joint venture agreement insofar as we are currently working on the processes inherent in meeting these periods due to the evolving nature of the SFD identification and interpretation processes. We are also using a combination working interest/overriding royalty election in lieu of that specified in the Encal joint venture agreement. United States Exploration Joint Venture With CamWest Exploration LLC Our United States-based joint venture partner is CamWest Exploration LLC, a privately held oil and gas exploration company located in Denver, Colorado, and McKinney, Texas. CamWest is principally owned by Stephens Group, Inc., a private company headquartered in Little Rock, Arkansas, which invests primarily in energy, media, telecommunications and investment banking companies, and which has invested $8.5 million in our company through CamWest's affiliates. Our current relationship with CamWest is governed by the terms of a Joint Exploration And Development Agreement which we entered into in April 1998, and which expires in March, 2003. This agreement was originally entered into with an affiliate of CamWest, CamWest Limited Partnership. However, CamWest Limited Partnership assigned its rights and obligations under the joint venture agreement to CamWest on January 29, 1999, in order to establish an entity dedicated solely to SFD exploration and drilling activities. The material terms of the joint venture agreement with CamWest/2/ are as follows: . We are required to conduct SFD surveys on selected "exploration areas" in the United States or internationally outside of Canada identified by CamWest of up to 2,400 square miles, and CamWest is required to reimburse us for 100% of all daily aircraft rental, pilot salary, food and accommodation costs we incur to conduct these surveys. We retain the right to reject any presented exploration area for any bona fide reason, including safety or technical concerns. . When we have completed our survey screening and interpretation activities with respect to an exploration area, we are required to present CamWest a written report listing our Recommended SFD Prospects and a summary of our interpretations for the flight lines within the exploration area, _____________________ /2/ The terminology or defined terms we use in this section comports with our current nomenclature instead of that used in the Encal joint venture agreement in order to avoid confusion. -13- together with a map of flight lines and locations of all SFD Anomalies from the flight within the exploration area. . Once we have tendered our report to CamWest, it will have 90 days, at its sole cost, to conduct conventional geological and geophysical evaluation of each Recommended SFD Prospect tendered to it in order to determine whether it will drill a test well on the prospect. If CamWest decides to drill the exploratory prospect, it will become an Accepted SFD Prospect. If CamWest declines to drill, the prospect will be deemed rejected, in which case it will be tendered to a limited liability company which will be managed by CamWest, and owned 50% by us and 50% by CamWest, for joint exploitation. . Once CamWest elects to drill a test well on any Accepted SFD Prospect, we will be deemed to have a 45% working interest in that well along the lines discussed below; provided, however, we shall have the right, for a period of 15 days after CamWest notifies us it intends to drill, or 48 hours after notice that a drilling rig is located on the test well site if sooner, to reconsider our election. In this case we may either choose to either retain our 45% working interest, or reduce our working interest to a percentage less than 45%, or convert our entire interest to an overriding royalty along the lines discussed below. . Should we elect to participate on a working interest basis, we will be obligated to bear our elected percentage (i.e., 45% or less) of CamWest's land acquisition, drilling and development costs for that well, and will be entitled to receive a commensurate percentage of all revenues receives by CamWest after the deduction of royalties, severances taxes and production and marketing costs. . Should we elect an overriding royalty, we will receive a 5% royalty of CamWest net revenues if production is less than 1,000 barrels of oil or oil equivalents per month, and an 8% royalty when production equals or exceeds 1,000 barrels of oil or oil equivalents per month. . We are obligated, whenever the "inventory" of active Recommended SFD Prospects is less than 31, to commence and continue SFD surveying until there are again 36 Recommended SFD Prospects in active inventory. . We have also agreed that: . whenever the number of active Recommended SFD Prospects in active inventory for CamWest is below the minimum requirement, we will dedicate at least 50% of our worldwide SFD survey capacity toward CamWest's requirements, unless we have obligations under three or more other joint venture agreements, in which case we must dedicate at least 25% of our worldwide SFD survey capacity to CamWest; and . CamWest will have the exclusive rights for SFD surveys in 2,400 square mile "exclusive areas" selected by CamWest outside of Canada; provided, however, that these areas are limited to a total of 1,000,000 square miles within the United States and an additional 1,000,000 square miles outside of the United States and Canada. . CamWest will be the operator, and will make all decisions relating to management and control of, all Recommended SFD Prospects developed under the joint venture. In this regard, CamWest will be responsible for . conventional oil and gas exploration, operation, development and management of the joint venture and any of its oil and gas properties; and . the production and marketing of any petroleum substances which are produced from the joint venture -14- . Should production be processed through CamWest's production facilities, we will pay CamWest a reasonable proportional fee for the use of these facilities. If production is processed through a third-party's production facilities, we will be charged our portion of the actual costs for services performed. It should be noted that as of the date of this annual report our company and CamWest are not strictly following the prospect tendering and prospect evaluation time periods mandated in the CamWest joint venture agreement insofar as we are currently working on the processes inherent in meeting these periods due to the evolving nature of the SFD identification and interpretation processes. We are also using a combination working interest/overriding royalty election in lieu of that specified in the CamWest joint venture agreement. Renaissance Energy Survey Agreements We had previously entered into several short-term survey agreements with another Canadian exploration company, Renaissance Energy Ltd., whereby we survey designated exploration blocks and tendered Recommended SFD Prospects to Renaissance for drilling with specified timeframes. Although we tendered several Recommended SFD Prospects to Renaissance, they did not drill exploratory wells on these prospects principally for economic reasons given low oil and gas prices at that time, and the last of the agreements lapsed without renewal in December 1999. Competition Since we use our SFD technology for wide-area oil and gas reconnaissance exploration, our "competition" would generally be described as other technologies used for wide-area oil and gas reconnaissance exploration. The principal competitive technology in this regard would be seismic, which is well accepted in the industry and has, in fact, been used since 1919. While there are numerous industry competitors of all sizes which offer seismic services, the largest industry competitors to our knowledge are Baker Hughes Inc., Schlumberger Limited, Compagnie Generale de Geophysique, S.A, Seitel, Inc., Veritas DGC Inc. and Petroleum Geo-Services A.S.A. There are also a number of other technologies used in the industry for "passive" wide-area oil and gas reconnaissance exploration, including aeromagnetic, gravity, ground or surface radar, satellite surveys, telemetrics and spectrum analyzers, however, we do not believe that any of these technologies have been accepted in the industry as a highly predictive general exploration tool. To our knowledge there are no other companies in the oil and gas exploration industry who employ any quantum physics-based technology similar to our SFD technology. While the technologies noted above are competitive to ours in the sense that all are used for wide-area reconnaissance exploration, you should note that there is no direct competition in the sense that we do not offer the use of our SFD technology to the industry on a fee-for-service basis as is ordinarily the case with respect to the providers of these other technologies. Consequently, we do not have any customers for our SFD technology other than our two present joint venture partners. Employees As of December 31, 1999, we had fifteen full time employees. None of these employees are covered by collective bargaining agreements. Of these employees, five devote their full time and one devotes one-half of his time to SFD survey operations and SFD Data interpretation, and three devote their full time and one devotes one-half of his time to research and development. The balance provide administrative, information management and accounting support for all operations. We believe we have a favorable relationship with all of our employees. We have employment contracts with our four senior executives. -15- Research and Development Our research and development activities to date have focused on developing, improving and testing our SFD Survey System and related components. Our research and development expenses amounted to $272,489, $57,823 and $103,079 for our 1999, 1998 and 1997 fiscal years, respectively. Our research and development budget for fiscal 2000 is $400,000. Manufacturing Capacity and Suppliers All components of our SFD technology, other than readily available computer hardware and software, are fabricated at our facilities by either Momentum Resources Corporation or our company, using readily available materials, pursuant to Momentum's or our specifications. We are not dependent upon any third party contract manufacturers or suppliers to satisfy our manufacturing requirements. Governmental And Environmental Regulation SFD Survey Flight Operations The operation of our business, namely, conducting aerial SFD surveys and interpreting SFD Data, is not subject to material governmental or environmental regulation with the exception of flight rules promulgated by the Federal Aviation Administration and Transport Canada governing the use of private aircraft, including rules relating to low altitude flights. Oil And Gas Exploration And Development Projects The oil and natural gas industry in general is subject to extensive controls and regulations imposed by various levels of the federal and state governments in the United States and federal and provincial governments in Canada. In particular, oil and gas exploration and production is subject to laws and regulations governing environmental quality and pollution control, limits on allowable rates of production by well or proration unit, and other similar regulations. Laws and regulations generally are intended to prevent waste of oil and natural gas; protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production; and control contamination of the environment. Environmental regulations affect our operations on a daily basis. Public interest in the protection of the environment has increased dramatically in recent years. Drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. We believe that the trend of more expansive and stricter environmental legislation and regulations will continue. We do not expect that any of these government controls or regulations will affect projects in which we participate in a manner materially different than they would affect project of similar size or scope of operations. All current legislation is a matter of public record and we are not able to accurately predict what additional legislation or amendments may be enacted. Governmental regulations may be changed from time to time in response to economic or political conditions. Any laws enacted or other governmental action taken which prohibit or restrict onshore and offshore drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general would have a material adverse effect on our business, results of operations and financial position. Operating Hazards SFD Survey Flight Operations The operation of our SFD survey aircraft is subject to the usual hazards incident to general and low level flight operations. These hazards can cause personal injury and loss of life, as well as severe damage to and destruction of property. While we maintain insurance coverage against some, but not all, operating risks associated with the operation of our aircraft, we cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase, nor can we give any assurance that any claim would not exceed our policy limits. If we were unable to procure insurance for our flight operations at an acceptable cost, the occurrence of significant adverse aircraft accident not fully insured or indemnified against could have a material, adverse effect on our business, financial condition -16- and operating results. Similarly, a judgment or settlement in excess of our policy limits could also have a material, adverse effect on our business, financial condition and operating results. Oil And Gas Exploration And Development Projects The oil and gas exploration and development projects in which we participate through our joint venture partners will also be subject to the usual hazards incident to the drilling of oil and gas wells, including the risk of fire, explosions, blow-out, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. In addition to the foregoing, offshore operations are subject to the additional hazards of marine operations, such as capsizing, collision and adverse weather and sea conditions. These hazards can cause personal or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The project operator will, in accordance with prevailing industry practice, maintain insurance against some, but not all, of these risks. The insurance maintained by the project operator generally would not cover claims relating to failure of title to oil and gas leases, trespass during survey acquisition or surface damage attributable to seismic operations, or business interruption, nor would it protect against loss of revenues due to well failure. There can be no assurance that any insurance obtained by the project operating covering claims related to worker's compensation, comprehensive general liability for bodily injury and property damage, comprehensive automobile liability and pollution, cleanup, underground blowout and evacuation will be adequate to cover any losses or liabilities which may be incurred within projects in which we participate. We also cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase. Since we do not act as operator on any projects in which we may participate, we are dependent upon our partners to conduct operations in a manner so as to minimize these operating risks. In cases where we have direct liability as a result of our participation on a working interest basis, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have an direct material, adverse effect on our business, financial condition and operating condition. In these cases our exposure will be commensurate with our participation percentage. While we would have no direct liability in cases where our participation is limited to an overriding royalty interest, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have an indirect material, adverse effect on our business, financial condition and operating results to the extent it adversely affects our joint venture partner's ability to complete current projects or explore for and develop additional projects. Our SFD Technology License We do not own our SFD technology, but instead have an exclusive world-wide license to use the SFD Data acquired by the SFD Sensor for hydrocarbon identification and exploration purposes (the "SFD Technology License") which was granted to us by Momentum Resources Corporation, which is the owner of the SFD technology. We do, however, own our data acquisition systems used with the SFD Sensor. The terms of our license are governed by a Restated Technology Agreement which was entered into on August 1, 1996 by Pinnacle, Pinnacle U.S. and Momentum, and subsequently amended on April 3, 1998. Momentum is a Bahamas corporation which is indirectly owned and controlled by Messrs. George Liszicasz and R. Dirk Stinson, who were also parties to the SFD Technology License. Mr. Liszicasz, who is the inventor of the SFD technology, is also our largest stockholder and the Chief Executive Officer and a director of our company. Mr. Stinson is our second largest stockholder and one of our directors. The material terms of the SFD Technology License, as amended, are summarized as follows: -17- . Momentum is obligated to make the SFD Sensor available to our company for use on our SFD surveys in conjunction with our data acquisition and interpretation equipment, and must also provide all SFD Data acquired from each survey to our company for our exclusive use for hydrocarbon identification and exploration purposes. . Mr. Liszicasz is obligated to: . provide at least 500 man-hours per year to generate SFD Data, and . interpret and analyze all raw SFD Data. . We will have 180 days after the designation of a "Prospect" to use our best efforts to commercially and economically exploit the Prospect for its hydrocarbon potential, subject to specified exceptions. . We are obligated to pay Momentum certain amounts which will be contingent on the commercial exploitation of the Prospects by our company, specifically, 1% of any "prospect profits" we may actually receive on or before December 31, 2000, and 5% of any "prospect profits" we may actually receive after December 31, 2000. For purposes of the foregoing: . the term "prospect profits" means "prospect revenues" less "prospect expenses;", . the term "prospect revenues" means as the aggregate of all gross revenues we may receive with respect to the commercial exploitation of all Prospects under the SFD Technology License, whether through cash flows of a joint venture, sale of "leads" for Prospects, or revenues from our direct ownership and sale of hydrocarbons from Prospects; and . the term "prospect expenses" being defined as all project expenses actually paid by our company with respect to the commercial exploitation of all SFD Prospects. . In addition to the noted payments, commencing on January 1, 2001, we will become obligated to grant Momentum warrants to purchase 16,000 shares of our common stock for each month in which Prospect production exceeds 20,000 barrels of hydrocarbons. The exercise price for these warrants will be the "fair market value" of our common stock as determined by reference to the closing price on the last business day of the quarter of the calculation. . Momentum is prohibited during the term of the SFD Technology License from engaging in the identification or exploitation of hydrocarbons for its own account, and cannot grant any license or sublicense to any third party to use the SFD Sensor or the SFD Data for the identification or exploitation of hydrocarbons. . The initial term of the SFD Technology License expires on December 31, 2005, however, it will renew automatically for additional one year terms unless we give written notice to Momentum, no later than 60 days prior to the expiration of the pending term, of our election not to automatically renew the SFD Technology License. . Momentum, in turn, reserves the right to terminate the SFD Technology License upon the occurrence of any of the following events: . Our failure to make any payment required under the SFD Technology License. . Our abandonment or discontinuance of the conduct of the oil and gas exploration business; . Our dissolution or liquidation; -18- . Our assignment of our assets for the benefit of our creditors, or our filing bankruptcy, or the appointment of a receiver for our business or property; or . Our failure to perform any other material covenant, agreement or term of the SFD Technology License. . Momentum may also terminate the SFD Technology License upon the occurrence of a "Change in Control" with respect to our company. For the purposes of the foregoing, the term "Change in Control" is defined as any of the following events: . an acquisition whereby immediately after the acquisition, a person holds beneficial ownership of more than 50% of the total combined voting power of our then outstanding voting securities; or . if in any period of three consecutive years after the date of the SFD Technology License, our incumbent Board of Directors at the beginning of that period ceases to constitute a majority of the Board of Directors for reasons other than: [_] voluntary resignation, [_] refusal by one or more Board members to stand for election, or [_] removal of one or more Board members for good cause, provided that: . if the nomination or election of any new director was approved by a vote of at least a majority of the incumbent board, then such new director shall be deemed a member of the incumbent board, and . no individual shall be considered a member of the incumbent board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in Rule 14a-11 promulgated under the Securities Exchange Act of 1934); or . our Board of Directors or stockholders approve: [_] our merger, consolidation or reorganization; [_] our complete liquidation or dissolution; or [_] the agreement for the sale or other disposition of all or substantially all of our assets; . provided, however, a Change in Control shall not be deemed to occur in the event of any of the following: [_] our redemption of our stock; or [_] a "non-control transaction" in which our stockholders immediately before a transaction, directly or indirectly own immediately after the transaction at least a majority of the total combined voting power of the outstanding voting securities of the surviving corporation, in substantially the same proportion as those stockholders' ownership of our voting securities immediately before such transaction. -19- We May Be Unable To Protect Our Proprietary Rights To Our SFD Data And The SFD Technology As noted above, we have the exclusive right to utilize SFD Data for hydrocarbon exploration pursuant to the terms of our Restated Technology Agreement with Momentum Resources Corporation. While Momentum claims common law ownership of the SFD Technology, it has not obtained patent or copyright protection for the SFD Technology. Based in part on an opinion of patent counsel, Momentum and our company each believe that the disclosure risks inherent in patent or copyright registration far outweigh any legal protections which might be afforded by such registration. In the absence of significant patent or copyright protection, we may be vulnerable to competitors who attempt to imitate our SFD technology, or to develop functionally similar technologies. Although we believe that we have all rights necessary to market our services without infringing upon any patents or copyrights held by others, we cannot give you any assurance that conflicting patents or copyrights do not exist. We rely upon trade secret protection and confidentiality and non-disclosure agreements with our employees, consultants, joint venture partners and others to protect our proprietary rights. Furthermore, we do not believe, were Momentum to apply for and receive patent protection, that patent protection would necessarily protect Momentum or our company from competition. Momentum and our company therefore anticipate continued reliance upon contractual rights and on common law to protect our trade secrets. The steps taken by our company and Momentum to protect our respective rights may not be adequate to deter misappropriation, or to preclude an independent third party from developing functionally similar technology. We cannot give you any assurance that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to the Momentum's or our trade secrets, or otherwise disclose aspects of the SFD technology, or that we will be able to meaningfully protect our trade secrets. We also cannot give you any assurance that Momentum or our company will not be required to defend against litigation or to enforce or defend intellectual property rights relating to our SFD technology. Legal and accounting costs relating to prosecuting or defending intellectual property rights may be substantial. Item 2. Properties Leased Premises Our principal executive office space consists of 13,325 square feet located at Suite 750, Phoenix Place, 840 7th Avenue S.W., Calgary, Alberta, T2P 3G2, which we have leased for a five-year term extending through January 31, 2003. Our combined obligations for base lease payments and building operating cost and other pass-through items under this lease as of the date of this annual report is Cdn. $21,862 per month, which translates into U.S. $15,015 per month based upon the closing conversion rate as of December 31, 1999. We have the option under our lease, at the expiration of the five year term, to renew the lease if we have had no defaults under the lease. We believe that these facilities are adequate for our needs for the near future. We also maintain hangar facilities for our survey aircraft which we rent on a monthly basis, as well as executive office facilities in Las Vegas, Nevada, for United States operational requirements which we rent on a quarterly basis. Petroleum Properties We have no producing properties or oil and gas revenues or proven reserves for any of our most recent three fiscal years ended December 31, 1999. Summarized below is information relating to the exploratory wells in which we have or had either a working interest or an overriding royalty interest in the United States or Canada that have been spudded, drilled or completed as of December 31, 1999 and as of the date of this annual report: -20- . Exploratory Wells Drilled In The United States . Leucite Hills South Prospect In September 1999, we elected through Pinnacle U.S. to participate on a working interest basis with CamWest in drilling an exploration well on a ten square mile prospect in the Green River Basin in Sublette County, Wyoming. As a consequence of that election, we acquired a combination 11.25% overall working interest and a 1.6% overall net overriding royalty interest in the original earning section, which we refer to as our "Leucite Hills South" prospect. This exploratory well, which was spudded in September 1999, was drilled by a third-party operator, and cased and completed as a natural gas discovery in September 1999. This well will not, however, be placed into production by the operator until a sufficient number of additional wells are drilled on the exploratory block and can be tied into a gathering system. No additional step-out wells have been scheduled for drilling as of the date of this annual report. The potential estimated or proven reserves of the reservoir has not been ascertained. . Poblano Prospect In October 1999, we elected through Pinnacle U.S. to participate on a working interest basis with CamWest in drilling an exploration well on a ten square mile prospect in the Green River Basin in Sublette County, Wyoming. As a consequence of that election, we acquired a combination 16.875% overall working interest and a 2.49% overall net overriding royalty interest on the exploration block, which we refer to as our "Poblano" prospect. The exploratory well, which was spudded in October 1999, was drilled, cased and completed in January 2000 as a natural gas discovery. Production from this well will commence pending completion of a twelve mile pipeline which will tie the well into an existing sales system. The potential estimated or proven reserves of the reservoir has not been ascertained. Based upon the results of the first exploratory well, CamWest spudded a second step-out exploration well on the Poblano exploration block in March 2000, and drilling continues as of the date of this annual report. Our working interest and overriding royalty on this exploration well is identical to that which we hold with respect to the initial exploration well. . Poblano South Prospect In October 1999, we elected through Pinnacle U.S. to participate on a working interest basis with CamWest in drilling an exploration well on a ten square mile prospect in the Green River Basin in Sublette County, Wyoming. This exploratory block adjoins our Poblano exploratory block. As a consequence of that election, we acquired a combination 5.625% overall working interest and a 0.8% overall net overriding royalty interest on the exploration block, which we refer to as our "Poblano South" prospect. The exploratory well, which was spudded in October 1999, was drilled, cased and completed in January 2000. This well has been shut-in by the operator pending further evaluation of its completion program. The potential estimated or proven reserves of the reservoir has not been ascertained. . Exploratory Wells Drilled In Canada . Shoal Point Prospect One exploration well spudded in early 1999 by a third-party operator at Shoal Point, Newfoundland, was drilled, evaluated and determined to be a dry hole. Pinnacle Canada -21- elected a royalty interest through Encal with respect to this prospect. Due to the expiration of the underlying mineral lease, we do not believe that Encal has any current working interest in this prospect at this date. . Carbon Prospect In December 1999, we elected through Pinnacle Canada, to accept an overriding royalty interest from Encal with respect to an exploration well it would drill in southern Alberta. As a consequence of this election, we acquired a 2.5% overall overriding royalty interest on the exploration block, which we refer to as our "Carbon" prospect. The exploratory well, which was spudded in December 1999, was drilled, cased and completed in January 2000 as a natural gas discovery. This well is currently suspended pending further completion activity by the operator. The potential estimated or proven reserves of the reservoir has not been ascertained. . Monarch Prospect In November 1999, we elected through Pinnacle Canada, to participate on a working interest basis with Encal in drilling an exploration well on an SFD Prospect in southern Alberta. As a consequence of that election, we acquired a combination 22.5% overall working interest and a 3.1% overall net overriding royalty interest on lands Encal acquired in the exploration block, which we refer to as our "Monarch" prospect. The exploratory well was spudded in March 2000, and is currently cased and awaiting completion. Item 3. Legal Proceedings As of the date of this annual report, there are no material legal proceedings pending or, to the knowledge of our management, contemplated or threatened, to which to our company or properties are or may become a party. As of the date of this annual report, there are, to the knowledge of our management, no material proceedings to which any director, officer of affiliate of our company is a party adverse to our company or has a material interest adverse to our company. Item 4. Submission Of Matters To A Vote Of Securities Holders There were no matters submitted to a vote of our security holders during our fourth quarter ended December 31, 1999. Part II ------- Item 5. Market Price Of And Dividends On Our Common Stock And Related Stockholder Matters Market Information Our common stock trades over-the-counter on the NASD OTC Bulletin Board under the trading symbol "PSFD." The following table lists, by calendar quarter, the volume of trading and the high and low sales prices of our common stock on the NASD OTC Bulletin Board for our three most recent fiscal years ended December 31, 1999. -22-
Sales Price ------------------------ Period Volume High Low ------------------------ -------- ------- ------- 1999: Fourth Quarter.......... 715,500 $ 29.000 $13.063 Third Quarter........... 358,700 14.688 10.500 Second Quarter.......... 754,800 20.000 11.375 First Quarter........... 506,100 19.000 10.000 1998: Fourth Quarter.......... 2,361,600 $ 19.375 $ 3.500 Third Quarter........... 1,194,700 14.625 6.500 Second Quarter.......... 2,236,472 15.250 9.125 First Quarter........... 4,770,148 14.375 7.375 1997: Fourth Quarter.......... 4,667,954 $ 13.250 $ 6.500 Third Quarter........... 4,155,507 15.000 7.688 Second Quarter.......... 3,155,612 9.375 4.375 First Quarter........... 3,896,838 7.438 3.813
The closing price for our common stock as of March 28, 2000 was $38. On March 29, 2000, the shareholders' list provided by our transfer agent showed 60 registered shareholders and 12,870,016 shares of common stock outstanding. We estimate, based upon information provided by our stock transfer agents for our last annual meeting of stockholders held in September 1999, that there are approximately 1,300 beneficial holders of our common stock. As of March 29, 2000, there were also outstanding 800,000 shares of our series "A" convertible preferred stock, held by one stockholder, for which no trading market presently exists. These shares are each convertible into one share of common stock. There are also outstanding as of March 29, 2000, options and warrants entitling the holders to purchase 1,760,800 and 200,000 shares of our common stock, respectively. These warrants to purchase 200,000 shares of our common stock were fully exercised and paid on April 3, 2000. Dividend Policy We have never paid any cash dividends on shares of our capital stock, and we do not anticipate that we will pay any dividends in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our Board of Directors may deem relevant at that time. Item 6. Selected Consolidated Financial Information The following table presents selected historical consolidated financial data derived from our consolidated financial statements. The selected statement of loss data set forth below for our three fiscal periods ended December 31, 1999, December 31, 1998 and December 31, 1997, and the selected balance sheet data set forth below as of December 31, 1999 and December 31, 1998, have been audited by Deloitte & Touche LLP, independent auditors, as indicated in their report contained in the consolidated financial statements included in Item 14 of this annual report. The selected statement of loss data set forth below for the fiscal periods ended December 31, 1996 and December 31, 1995, and the selected -23- balance sheet data set forth below at December 31, 1997, December 31, 1996 and December 31, 1995, are derived from our audited consolidated financial statements not included in this annual report. The following selected financial data should be read in conjunction with: . our consolidated financial statements and the notes to our consolidated financial statements included in Item 14 of this annual report; and . Item 7 of this annual report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Oct. 20, 1995 (Inception) to Twelve Months Ended December 31, Dec. 31, ------------------------------------------------------ Consolidated Statement of Loss Data: 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- -------------- Operating Revenues............................ $ -- $ -- $ -- $ -- $ -- Operating expenses: Administrative............................. 1,132,390 979,119 742,438 355,391 53,024 Amortization and depreciation.............. 171,494 71,919 25,474 24,435 672 Research and development................... 272,489 57,823 103,079 -- -- Survey support............................. 287,632 193,759 120,588 101,010 -- Survey operations and data analysis, net of reimbursements by joint venture partners ................................ 30,354 30,026 114,686 -- -- Write-down of assets....................... 588 -- 17,074 -- -- ----------- ----------- ----------- ----------- -------------- Total operating expenses................ 1,894,947 1,332,646 1,008,653 480,836 53,696 Operating loss................................ (1,894,947) (1,332,646) (1,008,653) (480,836) (53,696) Other income (expenses): Interest income............................ 360,434 209,906 47,832 5,258 -- Interest expense on promissory notes....... -- (14,299) (110,000) -- -- Other income............................... -- 19,231 -- -- -- Settlement of damages...................... -- -- 157,500 -- -- ----------- ----------- ----------- ----------- -------------- Total other income (expenses)........... 360,434 214,638 95,332 5,258 -- Net loss for the period....................... $(1,534,513) $(1,117,808) $ (913,321) $ (475,578) $ (53,696) =========== =========== =========== =========== ============== Other comprehensive loss: Foreign currency translation adjustments.... (29,403) -- -- -- -- ------------ ----------- ----------- ----------- -------------- Comprehensive loss for the period............. $(1,563,916) $(1,117,808) $ (913,321) $ (475,578) $ (53,696) =========== =========== =========== =========== ============== Basic and diluted loss per share.............. $ (0.12) $ (0.35) $ (0.08) $ (0.04) $ (0.01) =========== =========== =========== =========== ============== Weighted average shares outstanding........... 12,684,289 12,392,011 11,979,385 11,472,992 10,090,675 =========== =========== =========== =========== ==============
As Of December 31, ------------------------------------------------------------------------ Consolidated Balance Sheet Data: 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- -------------- Working capital.............................. $ 8,656,695 $ 4,685,238 $ 680,820 $ 339,118 $ (87,208) Current assets............................... 9,259,016 4,862,588 969,957 534,156 49,517 Total assets................................. 10,729,926 5,566,205 1,179,862 639,508 88,029 Current liabilities.......................... 602,321 177,350 289,137 195,032 136,725 Total liabilities............................ 602,321 177,350 1,482,165 195,032 136,725 Shareholders' equity (deficit)............... 10,127,605 5,388,855 (296,054) 444,476 (48,696)
-24- Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following discussion of our consolidated financial condition and the results of our operations should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in Item 14 of this annual report. Overview We are a technology-based reconnaissance exploration company which utilizes our proprietary, quantum physics-based, stress field detection or "SFD" remote-sensing airborne survey technology, which we refer to as our "SFD Survey System," to quickly and inexpensively identify and high-grade oil and natural gas prospects. We conduct our reconnaissance exploration activities, as well as land acquisition, drilling, completion and production activities to exploit prospects identified using our SFD technology, through our two wholly-owned operating subsidiaries, Pinnacle U.S. which focuses on United States-based exploration, and Pinnacle Canada which focuses on Canadian-based exploration. Pinnacle, in turn, concentrates on research and development efforts to improve the efficacy of our SFD Survey System. Our United States exploration efforts to date have been conducted for CamWest Exploration LLC under a joint venture agreement pursuant to which we conduct aerial surveys to identify prospects in exploration areas in the United States selected by CamWest. Our Canadian exploration efforts to date have been conducted primarily for Encal Energy Ltd. under a joint venture agreement pursuant to which we conduct aerial surveys to identify prospects in exploration areas in Canada selected by Encal. We have also commenced conducting exploration activities in western Canada for our own account. The joint venture agreements we have entered into with our joint venture partners generally entitle us to elect to receive one of the two following payment streams for each SFD-identified prospect accepted and drilled under the applicable agreement: . a capital investment and generally risk-free overriding royalty of 5% to 8% of oil or natural gas revenues received by the joint venture partner with respect to the prospect. In any situation where we elect to receive this royalty, our joint venture partner will be responsible, at its own cost and risk, to acquire the necessary drilling rights for the prospect if it has not already done so, and to conduct all drilling, production and marketing activities necessary to exploit the prospect. . a working interest of up to 45% of the joint venture partner's revenues with respect to the prospect. In any situation where we elect to participate on a working interest basis, we must bear our share of the mineral rights and drilling acquisition (if necessary), drilling and production costs incurred with respect to the prospect based upon our working interest percentage. Although we will bear our share of these costs, our joint venture partner will nevertheless remain responsible for conducting and managing all drilling, production and marketing activities to exploit the prospect. Our U.S. joint venture partner is also required under the terms of its joint venture agreement to reimburse us for 100% of the expenses we incur in conducting aerial surveys for that partner, while our Canadian joint venture partner is required under the terms of its joint venture agreement to reimburse us for 50% of the expenses we incur in conducting aerial surveys for that partner. Our recent practice with our joint venture partners has been to participate in selected prospects on a combination working interest/overriding royalty interest basis, typically a 22 1/2% working interest and a 4% overriding royalty. Our rights to use our SFD technology arises from an SFD technology license which we acquired from the owner and licensor of that technology, Momentum Resources Corporation, pursuant to which we received the exclusive world-wide right to use the SFD technology for hydrocarbon exploration purposes. We are obligated under the terms of that license to pay Momentum Resources Corporation a fee equal to 1% of -25- any "prospect profits" (as that term is defined in the license) which we may receive on or before December 31, 2000, and 5% of any prospect profits which we may receive after December 31, 2000. As of December 31, 1999 and the date of this annual report: . One exploration well spudded in early 1999 by a third-party operator at Shoal Point, Newfoundland, was drilled, evaluated and determined to be a dry hole. Pinnacle Canada elected a royalty interest through Encal with respect to this prospect. . One exploration well in September 1999 by at third-party operator at our Leucite Hills South prospect in Wyoming, was drilled, cased and completed in September 1999 as a natural gas discovery. This well will not be placed into production by the operator, however, until a sufficient number of additional wells are drilled on the exploratory block and can be tied into a gathering system. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. . One exploration well spudded by CamWest in October 1999 at our Poblano prospect in Wyoming, was drilled, cased and completed in January 2000 as a natural gas discovery, and production will commence upon completion of a twelve-mile pipeline that will tie the well into a sales system. CamWest spudded a step-out exploratory well on this prospect in March 2000, which is still in the process of being drilled as of the date of this annual report. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. . One exploration well spudded by at third-party operator in October 1999 at our Poblano South prospect in Wyoming, was drilled, cased and completed in January 2000. This well has been shut-in by the operator pending further evaluation of its completion program. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. . One exploration well spudded in December 1999 in southern Alberta by Encal at our Carbon prospect in southern Alberta, was drilled, cased and completed in January 2000 as a natural gas discovery. This well is currently suspended pending further completion activity by the operator. Pinnacle Canada elected an overriding royalty interest with respect to this prospect. . One exploration well spudded in March 2000 by Encal at our Monarch prospect in southern Alberta. This well is currently cased and is awaiting completion. Pinnacle Canada elected a combination working interest and overriding royalty interest with respect to this prospect. We anticipate that two to four exploration wells will be spudded on other prospects by our joint venture partners or third-party operators by June 30, 2000. Since we have not generated operating revenues to date, we should be considered a development stage enterprise. Capital Requirements We have not generated operating revenues to date, although we have one completed well at our Poblano Prospect which we anticipate will commence production as soon as a twelve-mile pipeline is completed which will connect the prospect to a sales system. We anticipate the pipeline will be laid upon completion of our first step-out exploratory well on our Poblano Prospect. Assuming no unforseen delays or changes in production plans, production will commence by our third quarter in fiscal 2000. We are also drilling several additional exploratory wells in fiscal 1999, including the noted step-out exploratory well on the Poblano Prospect, which should add to any revenues we generate. Absent revenues, our sole source of cash to fund our operational and capital investment needs are monies we have raised through the private placement of our securities and exercise of employee options. -26- For further information regarding these transactions, see "--Liquidity And Capital Resources--Sources Of Cash" below. We have budgeted the following level of expenditures over the twelve-month period ended December 31, 2000: . Approximately $2,500,000 for continuing operations including SFD research and development activities; and . Up to $3,500,000 in capital expenditures to acquire and outfit an additional survey aircraft and invest in working interests with our joint venture partners or acquire drilling interests for our own account, although the overall amount of these capital expenditures may be significantly reduced or increased depending upon the success of our joint venture partners' drilling efforts over the next six to twelve months. After taking into consideration the $8,656,695 in working capital we had available as of December 31, 1999, and an additional $1,500,000 in working capital we raised subsequent to December 31, 1999 as a consequence of the exercise of warrants previously sold in August 1998, we have sufficient working capital on hand to fund our current level of operations, including research and development but excluding capital investments in working interests beyond that amount budgeted for the next twelve months as described above, through mid 2002. Our ability in the longer term to continue as a going concern will be dependent upon our ability to either: . raise additional capital through private or public placements of our securities, or . our receipt of meaningful amounts of revenues from our joint venture partners or through our own exploration efforts, which, in either case, will be dependent upon successful exploration and production activities. Results Of Consolidated Operations Operating Revenues We had no oil and gas working interest or royalty revenues for our twelve-month fiscal periods ended December 31, 1999, December 31, 1998 and December 31, 1997 ("fiscal 1999," fiscal 1998," and "fiscal 1997," respectively). Operating Loss We incurred an operating loss of $894,947 for fiscal 1999, as compared to $1,323,646 and $1,008,653 for fiscal 1998 and fiscal 1997, respectively. . Fiscal 1999 Compared to Fiscal 1998 The 42.2% increase in our operating loss for fiscal 1999 over fiscal 1998 was primarily attributable to the following changes in expense: . a $214,666, or 371.2%, increase in research and development expense from $57,823 to $272,489; . a $153,271 or 15.7%, increase in administrative expense from $979,119 to $1,132,390; . a $99,575, or 138.5%, increase in amortization and depreciation from $71,919 to $171,494; and -27- . a $93,873, or 48.4%, increase in survey support expense from $193,759 to $287,632. . Fiscal 1998 Compared to Fiscal 1997 The 32.1% increase in our operating loss for fiscal 1998 over fiscal 1997 was primarily attributable to the following changes in expense: . a $236,681, or 31.9%, increase in administrative expenses from $742,438 to $979,119; . a $73,171, or 60.7%, increase in survey support expense from $120,588 to $193,759; and . a $46,445, or 132.3%, increase in amortization and depreciation from $25,474 to $71,919; and . a $30,026 increase in net survey and data analysis expense from $0 to $30,026; and partially offset by: . a $45,256, or 43.9%, decrease in research and development expense from $103,079 to $57,823. . Relative Changes In Administrative Expense The $153,271 increase in administrative expense for fiscal 1999 was primarily attributable to across-the-board net increases in costs to support our increased level of business activities in fiscal 1999, the most significant of which were increases of $166,395 in wages and benefits; partially offset by a $111,739 decrease in legal expense. The $236,681 increase in administrative expense for fiscal 1998 was primarily attributable to across-the-board net increases in costs to support our increased level of business activities in fiscal 1998, the most significant of which were increases of $134,321 in wages and benefits, $57,823 in rent expense as the result of our moving into permanent premises necessary to support our increased level of operations, $54,218 in consulting fees and $44,064 in shareholder communication costs; partially offset by a decline of $213,742 in legal fees paid. . Relative Changes In Research and Development Expense Research and development expense generally relates to the cost--including allocable salaries--to develop, improve and test our SFD Survey System and related components. The $214,666 increase in research and development expense for fiscal 1999 was principally attributable to salaries associated with additional research and development staffing as we focused increased efforts to improve the operation and efficacy of our SFD Survey System. The $45,256 decrease in research and development expense for fiscal 1998 was principally attributable to our completion of significant research and development projects in 1997, including the adaptation of our SFD technology to an airborne platform incorporating a global positioning system. . Relative Changes In Amortization and Depreciation The $99,575 increase in amortization and depreciation for fiscal 1999 was primarily attributable to $57,139 in additional depreciation arising as the result of our purchase of our survey aircraft in late 1998 and $49,083 in additional depreciation and amortization arising in connection with our acquisition of additional computer equipment and software, partially offset by reduced depreciation occurring as the result of the disposition of a vehicle. The $46,445 increase in amortization and depreciation for fiscal 1998 was primarily attributable to $19,968 in additional depreciation and amortization arising in connection with our acquisition of additional computer equipment and software, $16,471 in additional depreciation arising as the result of our purchase of our survey aircraft in late 1998, $16,188 in additional depreciation arising as the result of our investment in -28- leasehold improvements in 1998, and $15,488 in additional depreciation arising as the result of our purchase of a vehicle in 1998. . Relative Changes In Survey Support Expense Survey support expense generally relates to the cost--including allocable salaries--to: . conduct field evaluations designed by our joint venture partners to evaluate our SFD technology (after netting any costs which our joint venture partners are required to reimburse us for); and . develop, organize, staff and train our survey and interpretation operational functions. The $93,873 increase in survey support expense for fiscal 1999 was primarily attributable to across-the-board net increases in costs to support our increased level of survey operations, the most significant of which were increases of $97,014 in salaries associated with additional support staffing and $42,947 in additional aircraft improvement expenses, partially offset in the elimination of airplane charter costs of $70,498 as a result of the purchase of our aircraft. The $73,171 increase in survey support expense for fiscal 1998 was primarily attributable to our commencement of full commercial SFD survey activities in early 1998. . Relative Changes In Survey And Data Analysis Expense Survey and data analysis expenditures consist primarily of any costs we incur conducting commercial SFD survey activities. These costs can be generally broken down into the following two components: . aircraft operating costs, travel expenses and allocable salaries of our personnel while on survey assignment (after netting any costs our joint venture partners are required to reimburse us for); and . allocable salaries incurred by our personnel interpreting SFD Data. Our total survey and data analysis expense, before taking any joint venture partner reimbursement into account, was $151,806 is fiscal 1999, as compared to $174,422 and $0 in fiscal 1998 and fiscal 1997, respectively. The decline in total survey and data analysis expense was primarily attributable to our reduction in charter costs as the result of our acquisition of our own aircraft in late 1998, as opposed to a reduction in the overall level of survey activities. Our net survey and data analysis expense--after taking into consideration joint venture partner reimbursements of $121,452, $144,396 and $0 in fiscal 1999, fiscal 1998 and fiscal 1997, respectively--was $30,534 in fiscal 1999 as compared to $30,026 and $0 in fiscal 1998 and fiscal 1997, respectively. The reduction in reimbursable amounts for fiscal 1999 as compared to fiscal 1998 was principally attributable to new methods of calculating reimbursable costs as a result of the acquisition of our aircraft. The increase in reimbursable amount for fiscal 1998 as compared to fiscal 1997 was principally attributable to our commencement of full commercial SFD survey activities in early 1998. . Expectations Relative To Future Expense Levels We effectively doubled our company staff during fiscal 1999 through the hiring of key professionals, including executive, geological, geophysical, scientific, information technology and aviation -29- personnel, and we anticipate that we will continue to hire similar personnel over the next year. We anticipate that our total operating expenses will continue to significantly increase on a quarterly basis through the end of fiscal 2000 as a result of the additional wages and employee benefits to be paid to any additional personnel we may hire as well as an increased level of operations which will be facilitated by recent and anticipated hirings. Other Income And Expense . Interest Income We earned $360,434 in interest income for fiscal 1999, as compared to $209,906 and $47,832 for fiscal 1998 and fiscal 1997, respectively. The increase in interest income for fiscal 1999 was attributable to higher cash balances in our accounts as a result of a $6,000,000 private placement of our common stock in May 1999, while the increase for fiscal 1998 was attributable to higher cash balances as a result of a $6,000,000 private placement of our series "A" preferred stock and warrants in April 1998. . Interest Expense We incurred $14,299 in interest expense in fiscal 1998, as compared to $110,000 in fiscal 1997. The noted expense primarily represents interest accrued on $1 million in loans made to our company in January of 1997 by Messrs. R. Dirk Stinson and George Liszicasz. These loans were converted into our common stock on February 1, 1998. Interest expense for fiscal 1998 was lower than the amount incurred for fiscal 1997 insofar as the loan balances were carried for only one month in fiscal 1998, as compared to eleven months in fiscal 1997. Liquidity And Capital Resources . Sources of Cash Our cash flow requirements from our inception as Pinnacle U.S. (October 20, 1995) through December 31, 1999 were funded principally from: . a private placement in May 1996 of 975,000 shares of our common stock for total gross proceeds of $975,000, . loans to our company by Messrs. Liszicasz and Stinson in the amount of $1,000,000 in January 1997, and the subsequent conversion of the outstanding balance of principal and accrued interest of these loans in the amount of $1,120,000 into 411,764 shares of our common stock in February 1998; . a private placement in April 1998 of 800,000 shares of our convertible series "A" preferred stock and 200,000 common stock purchase warrants for total gross proceeds of $6,000,000; and . a private placement in May 1999 of 400,000 shares of our common stock for total gross proceeds of $6,000,000. Subsequent to December 31, 1999, the holder of warrants to purchase 200,000 shares of our common stock at an exercise price of $7.10 per share exercised those warrants on April 3, 2000, resulting in gross proceeds to our company of $1,500,000. -30- . Cash Position and Sources And Uses Of Cash Our cash position as of December 31, 1999 was $9,068,723, as compared to $4,713,822 and $848,339 as of December 31, 1998 and 1997, respectively. The bulk of our cash is maintained in a United States government and government-backed securities money-market account. The $4,354,901 increase in our cash position for fiscal 1999 was attributable to $6,302,631 in cash raised through financing activities, partially offset by $885,973 in cash used in operating activities, $1,032,354 in cash used in investing activities, and a $29,403 comprehensive loss due to the effect of exchange rate changes. The $3,865,483 increase in our cash position for fiscal 1998 was attributable to $5,542,447 in cash raised through financing activities, partially offset by $1,050,059 in cash used in operating activities and $626,905 in cash used in investing activities. Our operating activities required cash in the amount of $885,973 for fiscal 1999, as compared to cash requirements of $1,050,059 for fiscal 1998. The $885,973 in cash used in operating activities for fiscal 1999 reflected our net loss of $1,534,513 for that period, as decreased for non-cash deductions and a net increase in non-cash working capital balances. The $1,050,059 in cash used in operating activities for fiscal 1998 reflected our net loss of $1,117,808 for that period, as decreased for non-cash deductions and a net increase in non-cash working capital balances. We raised $6,302,631 in cash from financing activities for fiscal 1999, as compared to $5,542,447 in cash raised from financing activities in fiscal 1998. The $6,302,631 in cash raised through financing activities in fiscal 1999 was principally comprised of $6,000,0000 in gross proceeds from the private placement of our common stock and $303,979 in gross proceeds from the exercise of employee stock options. The $5,542,447 in cash raised through financing activities in fiscal 1998 was comprised of $6,000,0000 in gross proceeds from the private placement of our series "A" convertible preferred stock and common stock purchase warrants. We used cash in the amount of $1,032,354 for investing activities in fiscal 1999, as compared to $626,905 in cash used for investing activities in fiscal 1998. The principal use of cash in fiscal 1999 was to acquire drilling rights in exploratory blocks pursuant to working interest elections ($775,159) and to acquire property, equipment and computer software ($258,058), while the principal use of cash in fiscal 1998 was to acquire property, equipment and computer software ($591,492). Other Matters Foreign Exchange We recorded a $29,403 foreign currency translation loss in fiscal 1999 as a comprehensive loss item on our statements of loss and stockholders' equity (deficit) in consolidating our books for financial reporting purposes as a result of the fluctuation in United States--Canadian currency exchange rates during that period. We anticipate that our exposure to significant foreign currency gains or losses on our books will increase as we invest a greater portion of our United States-dollar denominated cash reserves into our Canadian operations and properties through intercompany advancements. We cannot give you any assurance that our future operating results will not be similarly adversely affected by currency exchange rate fluctuations. See Item 7A of this annual report captioned "Quantitative and Qualitative Disclosure About Market Risk," for a description of other aspects of our company that may be potentially affected by foreign exchange fluctuations. Effect Of Inflation We do not believe that our operating results have been adversely affected at any time over the last three fiscal periods by inflation or changing prices. -31- Year 2000 Compliance During fiscal 1999 we reviewed our internal computer systems and software products for Year 2000 problems, and found them to be generally Year 2000 compliant, and have had no Year 2000 complications as of the date of this annual report. Uncertainties And Risk Factors That May Affect Our Future Results And Financial Condition We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this annual report, may affect our future results of operations or financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this annual report should be considered carefully in evaluating our company and our business and the value of our securities. Uncertainties and Risk Factors Generally Relating To Our Company And Our Business . We Are A Development Stage Enterprise Which Has Accumulated Losses Since Our Inception, And We Anticipate That We Will Continue To Incur Operating Losses For The Near Future We are a developmental stage enterprise since we have not received any oil or gas revenues to date, and have, as a consequence of our lack of revenues, incurred a net loss in the amount of $4,094,916 from our inception in October 1995 through December 31, 1999. Our ability to generate revenues and profits will depend primarily upon the successful implementation of our business plan, which is dependent at this point in time upon one or more of our joint venture partners successfully drilling and producing commercially viable quantities of oil or natural gas from SFD Prospects we identify. We do not anticipate that we will receive any oil or gas revenues until the third quarter of fiscal 2000, at the earliest, assuming our current contemplated drilling program is successful and there are no complications in drilling or completing the wells or tying them into a sales or gathering system. We anticipate that we will continue to incur significant losses on a month-to-month basis for at least twelve to eighteen months going forward from the date of this annual report, notwithstanding our receipt of oil and gas revenues based upon our internal projections, due to our significant monthly operating and research and development costs. . Our Limited Operating History Could Adversely Affect Our Business We are a recently organized development stage enterprise with an unproven technology and a limited operating history. Our activities through the date of this annual report have encompassed: . developing our business plan; . obtaining license rights to our SFD technologies; -32- . establishing administrative offices and laboratory facilities, and engaging executive, administrative, scientific, geological, geophysical, scientific, information technology and aviation personnel; . developing our SFD technology to a commercial stage; . acquiring joint venture partners; . conducting commercial SFD surveys on behalf of our joint venture partners; and . successfully drilling oil and gas wells identified through our SFD technology. We are subject to all the risks and issues inherent in the establishment and expansion of a new business enterprise including, among others, problems of using new and unproven technologies, hiring and training personnel, acquiring reliable facilities and equipment, and implementing operational controls. In general, startup businesses are subject to risks and or levels of risk that are often greater than those encountered by companies with established operations and relationships. Startups often require significant capital from sources other than operations. The management and employees of startup businesses shoulder the burdens of the business operations and a workload associated with company growth and capitalization that is disproportionately greater than that for an established business. Our limited operating history makes it difficult, if not impossible, to predict future operating results. We cannot give you any assurance that we will successfully address these risks. Our failure to successfully address these risks could have a material, adverse effect on our business, financial condition and operating results. . Our Future Success Is Dependent Upon Our Ability, Through Utilization Of Our SFD Technology, To Locate Commercially Viable Hydrocarbon Accumulations For Development By Our Joint Venture Partners. Our future success is dependent upon our ability, through utilization of our SFD technology, to locate commercially viable hydrocarbon accumulations for development by our joint venture partners. Based on our business plan, we will be dependent on: . the efficacy of our SFD technology in locating SFD Prospects; and . the cooperation of, and capital investment by, our joint venture partners in exploiting these prospects. Although the results of our SFD technology as a geologic structural identification tool have been satisfactorily tested by our joint venture partners, we cannot give you any assurances that our SFD technology will be able to consistently locate hydrocarbons or oil and gas prospects, or that these prospects will be commercially exploitable. We also cannot give you any assurances that we will be able to discover commercial quantities of oil and gas, or that our joint venture partners will successfully acquire and drill properties at low finding costs. . We Are Reliant Upon Our Joint Venture Partners For Opportunities To Participate In Exploration Prospects We will be reliant, at least in the near-term, upon our joint venture partners for opportunities to participate in exploration prospects, through overriding royalties or equity participation on a working interest basis from producing SFD Prospects. We exclusively focus on exploration and the review and identification of viable prospects through our SFD technology, and rely upon our joint venture partners to provide and complete all other project operations and responsibilities, including land acquisition, drilling, marketing and project administration. As a result, we have only a limited ability to exercise control over the selection of prospects for development, drilling or production operations, or the associated costs of such operations. The success of each project will be dependent upon a -33- number of factors which are outside our control, or controlled by our joint venture partners as the project operator, in accordance with the applicable agreements between our company and the joint venture partners. These factors include: . the selection and approval of prospects for lease/acquisition and exploratory drilling; . obtaining favorable leases and required permitting for projects; . the availability of capital resources of the joint venture partner for land acquisition and drilling expenditures; . the timing of drilling activity, and the economic conditions at such time, including then prevailing prices for oil and gas; and . the timing and amount of distributions from the production. Our reliance on our joint venture partners, and our limited ability to directly control project operations, costs and distributions could have a material adverse effect on the realization of return from our interest in projects, and on our overall financial condition. . Our Revenues And Cash Flow Will Be Principally Dependent Upon The Success Of Drilling And Production From Prospects In Which We Participate Through Agreements With Our Joint venture partners Pursuant to our business plan, our revenues and cash flow will, at least in the near-term, be principally dependent upon the success of drilling and production from prospects in which we participate through agreements with our joint venture partners in the form of an overriding royalty or a working interest or other participation right. The success of these prospects will be determined by the location, development and production of commercial quantities of hydrocarbons. Exploratory drilling is subject to numerous risks, including the risk that no commercially productive oil and gas reservoirs will be encountered. The cost to our joint venture partners to drill, complete and operate wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors including unexpected formation and drilling conditions, pressure or other irregularities in formations, equipment failures or accidents, as well as weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment. Our partners' inability to successfully locate and drill wells that produce commercial quantities of oil and gas would have a material adverse effect on our business, financial position and results of operations. . Our Future Operating Results May In The Future Fluctuate Significantly Our operating results may in the future fluctuate significantly depending upon a number of factors including industry conditions, prices of oil and gas, rate of drilling success, rates of production from completed wells and the timing of capital expenditures. This variability could have a material adverse effect on our business, financial condition and results of operations. In addition, any failure or delay in the realization of expected cash flows from initial operating activities could limit our future ability to continue exploration and to participate in economically attractive projects. . Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse Effect On Our Business It is impossible to predict future oil and natural gas price movements with any certainty, as they have historically been subject to wide fluctuations in response to a variety of market conditions, including: -34- . relatively minor changes in the supply and demand for oil and natural gas, . economic, political and regulatory developments, and . competition from other sources of energy. Any extended or substantial decline in oil and gas prices would have a material adverse effect on: . our ability to negotiate favorable joint ventures with viable industry participants; . the volume of oil and gas that could be economically produced by the joint ventures in which we participate; . our cash flow; and . our access to capital. We do not currently intend to engage in hedging activities, and may be more adversely affected by fluctuations in oil and gas prices than other industry participants that do engage in such activities. Our business, results of operations and financial condition would be materially and adversely affected by adverse changes in prevailing oil and gas prices. See Item 7A, captioned "Quantitative And Qualitative Disclosures About Market Risk," for additional discussion of market risks relating to oil and gas price fluctuations. . The Intense Competition That Is Prevalent In The Oil And Gas Industry Could Have A Material Adverse Effect On Our Business We compete directly with independent, technology-driven oil and gas exploration service companies, and indirectly (through our joint venture partnerships) with major and independent oil and gas companies in our exploration for and development of commercial oil and gas properties. We will experience competition from numerous oil and gas exploration competitors offering a wide variety of geological and geophysical services. Many of these competitors have substantially greater financial, technical, sales, marketing and other resources than we do, and may be able to devote greater resources to the development, promotion and sales of their services than our company. We cannot give you any assurance that our competitors will not develop exploration services that are superior to our SFD technology, or that these technologies will not achieve greater market acceptance than our SFD technology. Increased competition could impair our ability to attract viable industry participants, and to negotiate favorable participations and joint ventures with such parties, which could materially and adversely affect our business, operating results and financial condition. The oil and gas industry is highly competitive. Many companies and individuals are engaged in the business of acquiring interests in and developing oil and gas properties in the United States and Canada, and the industry is not dominated by any single competitor or a small number of competitors. Our joint venture partners will compete with numerous industry participants for the acquisition of land and rights to prospects, and for the equipment and labor required to operate and develop such prospects. Many of these competitors have financial, technical and other resources substantially in excess of those available to us or our joint venture partners. These competitive disadvantages could adversely affect our or our joint venture partners' ability to participate in projects with favorable rates of return. -35- . There Is Limited Market Acceptance For Our SFD Technology, And It Must Compete With Established Geological And Geophysical Technologies Which Have Already Achieved Market Acceptance. There is limited market acceptance for our SFD technology, and it must compete with established geological and geophysical technologies which have already achieved market acceptance. As is typical in the case of any new technology, demand and market acceptance for our SFD technology is subject to a high level of uncertainty and risk. Because the market for exploration services using our SFD technology is new and evolving, it is difficult to predict the future growth rate, and the size of the potential market. We cannot give you any assurance that a market for our exploration services will develop, or be sustainable. If the market fails to develop, or if our exploration services do not achieve or sustain market acceptance, our business, results of operations and financial condition would be materially and adversely affected. . Technological Advancements In The Oil And Gas Industry Could Have A Material Adverse Effect On Our Business The oil and gas industry is characterized by rapid technological advancements and the frequent introduction of new products, services and technologies. As new technologies develop, we may be placed at a competitive disadvantage, and competitive pressures may force us to improve or complement our SFD technology, or to implement additional technologies at substantial cost. In addition, other oil and gas exploration companies may implement new technologies before us, and these companies may be able to provide enhanced capabilities and superior quality. We cannot give you any assurance that we will be able to respond to these competitive pressures and implement or enhance our SFD technology on a timely basis, or at an acceptable cost. In such case, our business, financial condition and results of operations could be materially adversely affected. . Our Inability To Retain Our Key Managerial, Geological and Geophysical, and Research and Development Personnel Could Have A Material Adverse Effect On Our Business Our success depends to a significant extent on the continued efforts of our senior management team, which currently is composed of a small number of individuals, including Mr. George Liszicasz, the inventor of our SFD technology who is our Chief Executive Officer and who is responsible for the continuing development of our SFD technology and the interpretation of SFD Data, and Messrs. Daniel C. Topolinsky and James R. Ehrets, our President/Chief Operations Officer and our Executive Vice President of Operations, respectively. The loss of Mr. Liszicasz's services would be extremely difficult to replace since he is the inventor of, and has intimate knowledge of, the theoretical basis of the SFD technology, and has also developed the methodologies used to interpret SFD Data, and the loss of his services would likely have a material adverse effect on our business, results of operations and financial condition. While we are presently training personnel to operate our SFD technology and to interpret SFD Data, we cannot give you any assurance that these personnel could fully replace Mr. Liszicasz with respect to these functions, at least in the short-term. Moreover, we do not know if we would be able to successfully replicate the SFD technology in the event of the loss of Mr. Liszicasz. The loss of Messrs. Topolinsky's and Ehret's services would also be extremely difficult to replace due to their management skills and their core knowledge of our SFD technology and business as a result of their association with our company over the past several years, and their loss would also likely have a material adverse effect on our business, results of operations and financial condition. While we have entered into employment agreements with our senior management team, Mr. Liszicasz is not obligated--and as a result of his relationships with Momentum Resources Corporation may in the future be unable--to devote his entire undivided time and effort to or for our -36- benefit. While we currently carry a key person life insurance on Mr. Liszicasz, we do not carry any key person life insurance policies on any of our other executive officers. Our success also depends, to a lesser extent, on the continued efforts of our geological interpretive and research and development teams, which are composed of a small number of individuals. While there are professionals who could replace these individuals, none of these professionals have any theoretical or working knowledge of how to interpret SFD Data or how our SFD technology operates, and it would take a significant period of time to train any replacement personnel. Until such time as we have a fully trained complement of geological interpretive and research and development teams, the loss of any members of these teams could adversely affect the pace at which we interpret SFD Data or effect improvements to our SFD technology, which could adversely impact our business and results of operations and financial condition. . We May Be Unable To Attract The Qualified Managerial, Geological and Geophysical, and Research and Development Personnel Required To Implement Our Longer-Term Growth Strategies Our ability to implement our longer-term growth strategies depends upon our continuing ability to attract and retain highly qualified geological, technical, scientific, information management and administrative personnel. Competition for these types of personnel is intense and we cannot give you any assurance that we will be able to retain our key managerial, professional and/or technical employees, or that we will be able to attract and retain additional highly qualified managerial, professional and/or technical personnel in the future. Our inability to attract and retain the necessary personnel could impede our growth. . We May Be Unable To Effectively Manage Our Expected Growth Our success will depend upon the rapid expansion of our business. Expansion will place a significant strain on our financial, management and other resources, and will require us, among other things, to: . change, expand and improve our operating, managerial and financial systems and controls; and . improve coordination between our various corporate functions. We cannot give you any assurance that we will be able to manage the expansion of our business effectively. Our inability to effectively manage our growth, including the failure of any new personnel we hire to achieve anticipated performance levels, would have a material adverse effect on our business, results of operations and financial position. . Our Business May Be Adversely Affected By Currency Fluctuation, Regulatory, Political And Other Risks Associated with International Transactions We currently operate within the United States and Canada and anticipate we will also operate outside of these countries in the foreseeable future. These operations will subject us to several potential risks, including risks associated with: . fluctuating exchange rates, . the regulation by the governments of the United States and Canada as well as foreign governments of fund transfers and export and import duties and tariffs; and . political instability. -37- We cannot give you any assurance that any of these risks will not have a material adverse effect upon our business. We do not currently engage in activities to mitigate the effects of foreign currency fluctuations. If earnings from international operations increase, our exposure to fluctuations in foreign currencies may increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate foreign currency risks. We can give you no assurance as to the effectiveness of these efforts in limiting any adverse effects of foreign currency fluctuations on our international operations and our overall results of operations. . Our Statements About Anticipated Events Or Future Trends May Prove To Be Inaccurate In this annual report we have made a number of statements, which we refer to as "forward-looking statements," generally relating to our expectations or speculations as to future events and our observations as to trends and factors that may impact our future operating results. You can generally identify any forward-looking statements contained in this annual report through words such as "anticipate," "believe," "estimate," "expect," "budget" "project" and similar expressions. Forward-looking statements that may be contained in this annual report would, for example, include statements relating to: . the timing of our SFD survey activities and the amount of SFD Data we may acquire including, by way of example and not limitation, those statements contained in that section in Item of this annual report captioned "Business--Operational Practices In Conducting SFD Surveys-- How Fast Can We Acquire And Interpret SFD Data?;" . the timing and likelihood of success of our SFD Data interpretation activities including, by way of example and not limitation, those statements contained in that section in Item 1 of this annual report captioned "Business--Operational Practices In Conducting SFD Surveys-- How We Interpret SFD Data?;" . the timing and likelihood of success of our drilling and production plans including, by way of example and not limitation, those statements contained in that section in Item 1 of this annual report captioned "Business--Status Of Our Exploration Efforts" and Item 2 of this annual report captioned "Properties--Petroleum Properties?;" . the amount and character of future oil and gas revenues we may receive, the timing of receipt of revenues, and the timing of break- even, including, by way of example and not limitation, those statements contained in that section in Item 1 of this annual report captioned "Business--Status Of Our Exploration Efforts;" Item 2 of this annual report captioned "Properties--Petroleum Properties?;" Item 7 of this annual report captioned "Management's Discussion And Analysis of Financial Condition And Results Of Operations--Overview;" and Item 7 of this annual report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Capital Requirements;" . the amount and character of expenses we may incur, and the timing of these expenditures including, by way of example and not limitation, those statements contained in those sections in Item 7 of this annual report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Capital Requirements" and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Results Of Consolidated Operations-- Expectations Relative To Future Expense Levels;" . the amount and composition of our capital expense budget, and the timing of these capital outlays including, by way of example and not limitation, those statements contained in those sections in Item 7 of this annual report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Capital Requirements" and -38- "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Results Of Consolidated Operations-- Expectations Relative To Future Expense Levels;" and . our corporate objectives and growth strategies including, by way of example and not limitation, those statements contained in that section in Item 1 of this Annual Report captioned "Business--Corporate Objective." Whenever you read any forward looking statement contained in this annual report, you should be aware of and take into consideration that: . the forward-looking statement merely reflects the current expectations and speculation of our management as to anticipated events or observations relating to future trends based, in part, upon currently available information and our current business plan, and . actual results from these future events may differ materially from the results expected or speculated or trends observed as expressed in, or implied by, the forward-looking statement, as a result of changes in circumstances and events and other uncertainties and risks, including: [_] changes in our business plan and corporate strategies or that of our joint venture partners; [_] delays in our ability to conduct and complete SFD surveys or interpret SFD Data, [_] delays on the part of our joint venture partners in planning SFD survey activities, in conducting geologic and geophysical evaluations of recommended anomalies, in acquiring drilling rights, in conducting exploratory drilling activities and completing wells, and in connecting producing wells to pipelines and other production infrastructure; or [_] the occurrence of the various types of uncertainties and risk factors described above in this section as well as those described in Item 7A of this annual report captioned "Quantitative and Qualitative Disclosure About Market Risk;" and . the forward-looking statement must, in any event, be considered in context with the various disclosures made by our company in this annual report about our business. We are not obligated to update or revise any forward looking statement contained in this annual report to reflect new events or circumstances. You are also cautioned that we intend for all forward-looking statements contained in this annual report to be construed as "forward-looking statements" within the meaning Section 21E of the United States Securities Exchange Act of 1934, which establishes a safe-harbor from private actions for forward-looking statements as defined in that statute. . The Observations, Beliefs And Opinions Expressed In This Annual Report Relating To The Scientific Basis And Principles Of Our SFD Technology Represent Those Of Pinnacle Alone The observations, beliefs and opinions we express in this annual report relating to the scientific basis and principles of our SFD technology, and the ability of our SFD Technology to detect subsurface hydraulic and mechanical conditions, represent those of our company and our management alone, and should not be construed as representing those of any third party, including our joint venture partners and any professional geologists and engineers we may engage, except to the extent expressly stated in this annual report. We maintain the scientific and operating principles and mechanics of our SFD technology in strict confidence. While our joint venture partners and any professional geologists and engineers we may engage from time-to-time have observed the operations of our SFD technology while on survey assignment, and are given access to the results -39- of selected interpreted SFD Leads in connection with our recommendations, they have not been given any information relating to the scientific and operating principles and mechanics of our SFD technology other than general information consistent with the general observations, beliefs and opinions we express in this annual report. Our joint venture partners and any professional geologists and engineers we may engage do not hold themselves out as being experts in or otherwise having specific knowledge as to our SFD technology and its scientific basis and principles. Matters Relating To Our Common Stock . There Is Only A Limited Public Market For Our Common Stock There is only a limited public market for our common stock on the NASD OTC Electronic Bulletin, and we cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. We are under no obligation to take any action to improve the public market for our securities including, without limitation, filing an application to list our common stock on any stock exchange or any other over the other counter market. . Our Stock Price Is Extremely Volatile The market price for our common stock is extremely volatile and subject to significant price and volume fluctuations in response to a variety of external and internal factors. This is especially true with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in oil and gas prices, oil and gas inventory levels, regulatory and environment rules, and announcements of technology innovations or new products by other companies. Examples of internal factors, which can generally be described as factors that are directly related to our operating performance or financial condition, would include release of reports by securities analysts and announcements we may make from time-to-time relative to our operating performance, drilling results, advances in technology or other business developments. Because we are a development stage enterprise with a limited operating history and no revenues or profits, the market price for our common stock will be more volatile than that of a seasoned issuer. Changes in the market price of our common stock may have no connection with our operating results or prospects. No predictions or projections can be made as to what the prevailing market price for our common stock will be at any time. . You May Become Subject To The Penny Stock Rules If Our Stock Price Declines To Less Than $5 Since our common stock is not listed on a national stock exchange or quoted on the Nasdaq Market, it will become subject, in the event the market price for these shares declines to less than $5 per share, to a number of regulations known as the "penny stock rules." The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable they will reduce the level of trading activity in the secondary market for our common stock and may severely and adversely affect the ability of broker-dealers to sell our common stock. -40- . Our Common Stockholders Should Not Expect To Receive A Liquidation Distribution If we were to wind-up or dissolve our company and liquidate and distribute our assets, the holders of our common stock would share ratably in our assets only after we satisfy any amounts we would owe to our creditors and any amounts we would owe to our series "A" preferred stockholders as a liquidation preference ($7.50 per share, or $6,000,000 in the aggregate). If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors and preferred stockholders to enable you to receive any liquidation distribution with respect to any shares of our common stock you may hold. . Two Of Our Principal Stockholders Control Our Company Messrs. George Liszicasz and R. Dirk Stinson, our two principal stockholders and two of our directors, beneficially own over two-thirds of our common stock, and will therefore have the power, as a group, to elect a majority of our Board of Directors. Our Board, in turn, has the power to appoint our officers and to determine, in accordance with their fiduciary duties and the business judgment rule, our direction, objectives and policies, such as: . our business expansion or acquisition policies; . whether we should raise additional capital through financing or equity sources, and in what amounts; . whether we should retain our cash reserves for future product development, or distribute them as a dividend, and in what amounts; . whether we should sell all or a substantial portion of our assets, or should merge or consolidate with another corporation; and . transactions which may cause or prevent a change in control or the winding up and dissolution of our company. An investment in our common stock will entail entrusting these and similar decisions to our present management subject, of course, to their fiduciary duties and the business judgment rule. . There Is An Inherent Conflict In Interest Arising As a Result Of the Relationship Between Our Two Principal Stockholders And The Licensor Of Our SFD Technology Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control both our company and Momentum Resources Corporation, which has granted us an exclusive license to identifying oil and natural gas prospects using SFD Data while reserving the exclusive right to use the SFD technology for purposes other than oil and natural gas exploration. Although Mr. Liszicasz has entered into an employment agreement with us he is not obligated, and as a result of his relationship with Momentum may in the future not be able, to devote his entire undivided time and effort to or for our benefit. As a result of the foregoing relationships, certain conflicts of interests between our company and one or more of Momentum and Messrs. Liszicasz and Stinson may directly or indirectly arise, including the following: . Mr. Liszicasz's potential inability to devote his undivided time and attention to our affairs; and . the proper exercise by Messrs. Liszicasz or Stinson of their fiduciary duties on our behalf as directors and controlling stockholders of our company in connection with any matters concerning Momentum such as, by way of example and not limitation: -41- [_] disputes regarding the validity, scope or duration of the SFD Technology License; [_] the exploitation of corporate opportunities; [_] rights to proprietary property and information; [_] maintenance of confidential information as between entities; and [_] potential competition between our company and Momentum. While Messrs. Liszicasz and Stinson and our company have each executed certain disclosures and consents relating to these conflicts, these disclosures and consents will not remediate these conflicts, but will merely release Messrs. Liszicasz and Stinson from liability as a result of the conflicts so long as they use reasonable efforts to minimize the conflicts. In the event any of these conflicts prove to be irreconcilable, Messrs. Liszicasz and Stinson may be forced to resign their positions with our company. Item 7a. Quantitative and Qualitative Disclosure About Market Risk Oil And Gas Price Fluctuations Our primary market risks will be related to market changes in oil and gas prices. Since our prospective royalty revenues will be tied to the price at which our joint venture partners sell oil and gas on the world market, any fluctuations in these prices will directly and proportionately impact our royalty income base. For example, a 1% increase or decrease in oil or gas prices would result in a corresponding 1% increase or decrease in our oil or gas royalties. Should we elect a working interest in lieu of a royalty interest, our working interest revenue base would be similarly affected, except that this affect would not necessarily be proportional since production and marketing costs would most likely remain the same. For example, in the case of a decline in oil and gas prices where production and marketing costs are unaffected, the decline in our working interest revenues would most likely be greater, in percentage terms, than the decline in oil and gas prices. We do not anticipate that any decline in world oil and gas prices would adversely affect our operations--such as forcing our company or our joint venture partners to slow down or cut-back SFD survey or interpretation operations or staffing levels--insofar as a primary benefit of the SFD technology is to reduce finding costs, which benefit becomes more important as oil and gas prices decline. A decline in oil and gas prices could, however, force our joint venture partners to curtail exploration drilling operations since these operations are ordinarily funded out of available cash flow which, in turn, is dependent upon oil and gas prices. This eventuality would adversely affect our future cash flows since these prospects would not be drilled until our joint venture partner obtained sufficient capital. Even if exploration activities are curtailed, however, a decline in oil and gas prices raises opportunities to acquire and "bank" SFD-qualified prospects at lower acquisition prices, which can then be drilled when oil and gas prices increase. A decline in oil and gas prices could also lead our joint venture partners to "shut-in" an existing producing well, which would likely be a "marginal producing well," on the basis that the decline in price no longer makes the well economic to operate. In such an event we would no longer receive royalty or working interest revenues from the shut-in well. For further information on market risks, see Item 7, captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition--Uncertainties And Risk Factors Generally Relating To Our Company And Our Business--Volatility Of Oil And Natural Gas Prices." -42- Oil And Gas Price Fluctuations Our primary market risks will be related to market changes in oil and gas prices (See Item 7, captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition--Risks Relating To The Company And Its Business--Volatility Of Oil And Natural Gas Prices"). Since our prospective royalty revenues will be tied to the price at which our joint venture partners sell oil and gas on the world market, any fluctuations in these prices will directly and proportionately impact our royalty income base (i.e., a 1% increase or decrease in oil or gas prices would result in a corresponding 1% increase or decrease in our oil or gas royalties). Should we elect a working interest in lieu of a royalty interest, our working interest revenue base would be similarly affected, except that this affect would not necessarily be proportional since production and marketing costs would most likely remain the same. For example, in the case of a decline in oil and gas prices where production and marketing costs are unaffected, the decline in our working interest revenues would most likely be greater, in percentage terms, than the decline in oil and gas prices. We do not anticipate that any decline in world oil and gas prices would adversely affect our operations (i.e., force our company or our joint venture partners to slow down or cut-back SFD survey or interpretation operations or our staff) insofar as a primary benefit of the SFD technology is to reduce finding costs, which benefit becomes more important as oil and gas prices decline. A decline in oil and gas prices could, however, force our joint venture partners to curtail exploration drilling operations since these operations are ordinarily funded out of available cash flow which, in turn, is dependent upon oil and gas prices. This eventuality would adversely affect our future cash flows since these prospects would not be drilled until the joint venture partner obtained sufficient capital. (Even if exploration activities are curtailed, however, a decline in oil and gas prices raises opportunities to acquire and "bank" SFD-qualified prospects at lower acquisition prices, which can then be drilled when oil and gas prices increase). A decline in oil and gas prices could also lead our joint venture partners to "shut-in" an existing producing well (primarily "marginal producing wells") on the basis that the decline in price no longer makes the well economic to operate. In such an event we would no longer receive royalty or working interest revenues from the shut-in well. Currency Fluctuations An additional significant market risk relates to foreign currency fluctuations between American and Canadian dollars. Since our royalty or working interest revenues generated by our Canadian-based joint venture partners will be denominated in Canadian currency, our financial position could be adversely affected by American-Canadian currency fluctuations. We have not previously engaged in activities to mitigate the effects of foreign currency fluctuations due to the absence of Canadian revenues to date, and we anticipate that the exchange rate between the American and Canadian dollar will remain fairly stable. If earnings from our Canadian operations increase, our exposure to fluctuations in the American-Canadian exchange rate will increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate these foreign currency risks. We cannot give you any assurance that the use of exchange rate contracts or other mitigation efforts would effectively limit any adverse effects of foreign currency fluctuations on our Company's international operations and our overall results of operations. Interest Rate Fluctuations We currently maintain the bulk of our available cash in money-market accounts in U.S. dollars. Our interest income from these short-term investments could be adversely affected by any material changes in interest rates within the United States. -43- Item 8. Financial Statements And Supplementary Data Financial Statements and the Report of Independent Auditors are filed with this annual report on Form 10-K in a separate section following Part IV, as shown on the index under Item 14(a) of this annual report. Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure Not applicable. Part III Item 10. Our Directors And Executive Officers Information relating to our directors and executive officers required by this item will be contained in our definitive proxy statement to be distributed later this year pursuant to the rules of the Securities and Exchange Commission in advance of our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and Exchange Commission, the information relating to our directors and executive officers contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Stockholders is hereby incorporated into this annual report by reference. Item 11. Executive Compensation Information relating to executive compensation required by this item will be contained in our definitive proxy statement to be distributed later this year pursuant to the rules of the Securities and Exchange Commission in advance of our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and Exchange Commission, the information relating to executive compensation contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Stockholders is hereby incorporated into this annual report by reference. Item 12. Ownership Of Our Securities by Beneficial Owners And Management Information relating to the ownership of our securities by beneficial owners and our management required by this item will be contained in our definitive proxy statement to be distributed later this year pursuant to the rules of the Securities and Exchange Commission in advance of our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and Exchange Commission, the information relating to the ownership of our securities by beneficial owners and our management contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Stockholders is hereby incorporated into this annual report by reference. Item 13. Certain Relationships And Related Transactions Information relating to certain relationships and related transactions involving our beneficial owners, management and agents required by this item will be contained in our definitive proxy statement to be distributed later this year pursuant to the rules of the Securities and Exchange Commission in advance of our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and Exchange Commission, the information relating to certain relationships and related transactions involving our beneficial owners, management and agents contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Stockholders is hereby incorporated into this annual report by reference. -44- Part IV Item 14. Exhibits, Financial Statements, Schedules And Reports On Form 8--K (a)(1) Financial Statements: Report of Independent Auditors (Deloitte & Touche LLP)............................................. F-1 Consolidated Balance Sheets at December 31, 1999 and 1998.......................................... F-2 Consolidated Statements of Loss and Comprehensive Loss for the twelve-month periods ended December 31, 1999, 1998 and 1997................................................................... F-3 Consolidated Statements of Stockholders' Equity (Deficit) from inception (October 20, 1995) through December 31, 1999.......................................................................... F-4 Consolidated Statements of Cash Flows for the twelve-month periods ended December 31, 1999, 1998 and 1997........................................................................................... F-6 Notes to Consolidated Financial Statements......................................................... F-7
(a)(2) Schedules required by Regulation S--X are filed as an exhibit to this report: Independent Auditors' Report on Schedules and Consent Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements notes thereto (b) Exhibits 2.1 Reorganization Plan dated September 28, 1994 between Mega-Mart, Inc. and Auric Mining Corporation (1) 2.2 Reorganization Plan dated December 31, 1995 between Auric Mining Corporation and Fiero Mining Corporation (1) 2.3 Reorganization Plan dated January 20, 1996 between Auric Mining Corporation and Pinnacle Oil Inc. (1) 3.1 Articles of Incorporation for Auric Mining Corporation (1) 3.2 Amended Bylaws for Pinnacle Oil International, Inc. (1) 3.3 Certificate of Amendment of Articles of Incorporation of Pinnacle Oil International, Inc. (1) 4.1 Specimen Common Stock certificate (1) 1.2 Specimen Series A Preferred Stock certificate (1) 1.3 Form of Non-Qualified Stock Option Agreement for grants to directors (1) 1.4 1997 Pinnacle Oil International, Inc. Stock Plan (1) 1.5 Form of Incentive Stock Option Certificate for grants to employees (3) 1.6 Warrant certificate for 200,000 Common Shares issued to SFD Investment LLC (1) 9.1 Stockholder Agreement dated April 3, 1998 among Pinnacle Oil International, Inc., R. Dirk Stinson, George Liszicasz and SFD Investment LLC (1) 10.1 Partnership Agreement of Messrs. Liszicasz and Stinson dated September 1, 1995 (1) -45- 10.2 Agreement between Pinnacle Oil Inc. and Mr. Liszicasz dated January 1, 1996 (1) 10.3 Momentum Transfer Agreement dated June 18, 1996 (1) 10.4 Restated Technology Agreement dated August 1, 1996 (1) 10.5 Amendment to Restated Technology Agreement dated April 3, 1998 (1) 10.6 Letter Agreement with Encal Energy Ltd. dated December 13, 1996 (1) 10.7 Exploration Joint Venture Agreement with Encal Energy Ltd. dated February 19, 1997 (1) 10.8 Exploration Joint Venture Agreement with Encal Energy Ltd. dated September 15, 1997 (1) 10.9 Letter Agreement with Renaissance Energy Ltd. dated April 16, 1997 (1) 10.10 SFD Survey Agreement with Renaissance Energy Ltd. dated November 1, 1997 (1) 10.11 SFD Survey Agreement with Renaissance Energy Ltd. dated February 1, 1998 (Prospect Lands #1) (1) 10.12 SFD Survey Agreement with Renaissance Energy Ltd. dated February 1, 1998 (Prospect Lands #2) (1) 10.13 Joint Exploration and Development Agreement with CamWest Limited Partnership dated April 3, 1998 (1) 10.14 Assignment of Joint Exploration and Development Agreement with CamWest Exploration LLC dated January 29, 1999 (3) 10.15 Canadian Data License Agreement with Pinnacle Oil Canada Inc. dated April 1, 1997 (1) 10.16 American Data License Agreement with Pinnacle Oil Inc. dated April 1, 1997 (1) 10.17 Cost Recovery Agreement with Pinnacle Oil Canada Inc. dated April 1, 1997 (1) 10.18 Assignment Agreement with Pinnacle Oil Canada Inc. dated September 15, 1997 (1) 10.19 Assignment Agreement with Pinnacle Oil Canada Inc. dated April 1, 1997 (1) 10.20 Assignment Agreement with Pinnacle Oil Canada Inc. dated November 1, 1997 (1) 10.21 Employment Agreement dated April 1, 1997 with Mr. Dirk Stinson (1) 10.22 Employment Agreement dated April 1, 1997 with Mr. George Liszicasz (1) 10.23 Unsecured Convertible Promissory Note ($500,000) in favor of Mr. Liszicasz (1) 10.24 Unsecured Convertible Promissory Note ($500,000) in favor of Mr. Stinson (1) 10.25 Promissory Notes of Pinnacle Oil Inc. in favor of Messrs. Liszicasz and Stinson dated October 21, 1995 (1) 10.26 Registration and Participation Rights Agreement dated April 3, 1998 between Pinnacle Oil International, Inc. and SFD Investment LLC (1) 10.27 Form of Indemnification Agreement between Pinnacle Oil International, Inc. and each Director (1) 10.28 Lease Agreement between Phoenix Place Ltd. and Pinnacle Oil International, Inc. dated November 25, 1997 (1) 10.29 Employment Agreement dated July 9, 1998 with John M. Woodbury, Jr. (2) 10.30 Assignment of Joint Exploration and Development Agreement between CamWest Limited Partnership and CamWest Exploration LLC dated January 29, 1999 10.31 Settlement Agreement dated April 27, 1999 10.32 Employment Agreement dated May 1, 1999 with Daniel C. Topolinsky. 10.33 Employment Agreement dated July 1, 1999 with James R. Ehrets. 21. List of significant subsidiaries 23. Consent of Independent Auditors--Deloitte & Touche LLP -46- 24. Powers of Attorney 27. Financial Data Schedules 99.1 Report captioned "Evaluation of Stress Field Detector Technology--Implications for Oil and Gas Exploration in Western Canada" dated September 30, 1996 prepared by Rod Morris, P. geologist, A.P.E.G.G.A. (1) 99.2 Report regarding "Stress Field Detector Technology" dated May 22, 1998 prepared by Encal Energy Ltd. (1) 99.3 Report captioned "SFD Data Summary" dated August 26, 1998 prepared by CamWest, Inc. (2) 99.4 Report captioned "Pinnacle Oil International Inc.--Stress Field Detector Documentation of Certain Exploration and Evaluation Activities" dated February 27, 1998 prepared by Gilbert Laustsen Jung Associates Ltd. (1) (1) Previously filed by our company as part of our Registration Statement on Form 10 filed on June 29, 1998 (SEC File No. 0- 24027) (2) Previously filed by our company as part of our Amendment No. 1 to Registration Statement on Form 10 filed on August 31, 1998 (3) Previously filed by our company as part of our Annual Report on Form 10-K filed on March 31, 1999 -47- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 14, 2000. Calgary, Alberta, Canada PINNACLE OIL INTERNATIONAL, INC. By: /s/ George Liszicasz ---------------------------------------------- George Liszicasz Chief Executive Officer (principal executive officer) By: /s/ Daniel C. Topolinsky ---------------------------------------------- Daniel C. Topolinsky, President and Chief Operating Officer (principal executive officer) By: /s/ John M. Woodbury, Jr. --------------------------------------------- John M. Woodbury, Jr. Chief Financial Officer (principal accounting and financial officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on April 14, 2000, and in the capacities indicated. /s/ George Liszicasz Chief Executive Officer and Chairman - -------------------------------- George Liszicasz /s/ Daniel C. Topolinsky President and Chief Operating Officer - -------------------------------- Daniel C. Topolinsky and Director /s/ John M. Woodbury, Jr. Chief Financial Officer (principal - -------------------------------- John M. Woodbury, Jr. accounting and financial officer) and Secretary /s/ R. Dirk Stinson* Director - -------------------------------- R. Dirk Stinson /s/ Lorne W. Carson* Director - -------------------------------- Lorne W. Carson /s/ Jon E.M. Jacoby * Director - -------------------------------- Jon E.M. Jacoby /s/ K. Rick Turner * Director - -------------------------------- K. Rick Turner /s/ Dennis R. Hunter * Director - -------------------------------- Dennis R. Hunter /s/ John A. Thomson * Director - -------------------------------- John A. Thomson */s/ Daniel C. Topolinsky - -------------------------------- Daniel C. Topolinsky (Attorney in Fact) -48- Consolidated Financial Statements Pinnacle Oil International, Inc. (A Development Stage Enterprise) REPORT OF INDEPENDENT AUDITORS ------------------------------ To the Board of Directors and Shareholders of Pinnacle Oil International, Inc. We have audited the accompanying Consolidated Balance Sheets of Pinnacle Oil International, Inc. (a development stage enterprise) as of December 31, 1999 and 1998, and the related Consolidated Statements Of Loss And Comprehensive Loss, Shareholders' Equity (Deficit) and Cash Flows for each of the three years in the period ended December 31, 1999, and for the period from October 20, 1995 (date of inception) to December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The Company's consolidated financial statements for the period October 20, 1995 (date of inception) through December 31, 1996, were audited by other auditors whose report, dated March 15, 1997, expressed an unqualified opinion on those statements, and included an explanatory paragraph describing matters that raised a substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements for the period October 20, 1995 (date of inception) through December 31, 1996 reflect a net loss of $529,274 of the related total. The other auditors' report has been furnished to us, and our opinion, insofar as it relates to the amounts involved for such prior period, is based solely on the report of such other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards required that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of another auditor, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, in the period and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, and for the period from October 20, 1995 (date of inception) to December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Deloitte & Touche LLP Chartered Accountants Calgary, Alberta, Canada February 18, 2000, except for note 17 which is dated April 4, 2000 F-1 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Balance Sheets (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
At December 31, --------------------------------- 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents.................................................... $ 9,068,723 $ 4,713,822 Accounts receivable.......................................................... 101,731 120,100 Due from officers and employees.............................................. 3,219 1,335 Prepaid expenses and other................................................... 85,343 27,331 ----------- ----------- Total current assets....................................................... 9,259,016 4,862,588 Note receivable from officer [note 4]........................................... 34,550 35,413 Deferred costs [note 5]......................................................... -- 93,014 Unproved oil and natural gas properties [notes 2(g) and 6]...................... 775,159 -- Unproven petroleum properties, net of accumulated depletion of $0 [note 2(g)].................................................. 661,412 -- Other property and equipment, net of accumulated depreciation and amortization of $292,363 and $90,664, respectively [notes 2(h) and 7]........ 661,201 575,190 ----------- ------------ Total assets............................................................ $10,729,926 $ 5,566,205 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade payables............................................................... $ 32,716 $ 141,426 Wages and employee benefits payable.......................................... 132,685 17,290 Accrued oil and natural gas property costs................................... 382,386 -- Other accrued liabilities.................................................... 54,534 18,634 ----------- ------------ Total current liabilities.................................................. 602,321 177,350 Shareholders' equity: Series "A" convertible preferred stock; par value $0.001 per share, liquidation preference $7.50 per share: 800,000 shares authorized and 800,000 shares issued as of December 31, 1999 and December 31, 1998 [note 9].......................... 800 800 Common stock, par value $0.001 per share: 50,000,000 shares authorized; 12,856,816 shares issued as of December 31, 1999; 12,421,983 shares issued as of December 31, 1998 [note 8].................. 12,857 12,427 Warrants [notes 9 and 10]................................................... 1,132,000 1,132,000 Additional paid-in capital................................................... 16,330,692 10,040,031 Accumulated deficit during the development stage............................. (7,319,341) (5,796,403) Accumulated other comprehensive loss......................................... (29,403) -- ----------- ------------ Total shareholders' equity................................................. 10,127,605 5,388,855 ----------- ------------ Total liabilities and shareholders' equity.............................. $10,729,926 $ 5,566,205 =========== ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets F-2 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Statements Of Loss and Comprehensive Loss (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
October 20, 1995 (inception) to Twelve Months Ended December 31, 1999 -------------------------------------------------- 1999 1998 1997 (cumulative) ------------ ------------ ----------- --------------- Operating expenses: Administrative.................................. $ 1,132,390 $ 969,119 $ 742,438 $ 3,262,362 Amortization and depreciation [note 2(h)]....... 171,494 71,919 25,474 293,994 Research & development [note 2(i)].............. 272,489 57,823 103,079 534,401 Survey support.................................. 287,632 193,759 120,588 601,979 Survey operations and data analysis, net of amounts reimbursable by joint venture partners of $121,453 and $144,396 and $0 respectively [note 2(j)]...................... 30,354 30,206 -- 60,380 Write-down of assets............................ 588 -- 17,074 17,662 ------------ ------------ ----------- ------------- Total operating expenses..................... 1,894,947 1,332,646 1,008,653 4,770,778 Operating loss..................................... (1,894,947) (1,332,646) (1,008,653) (4,770,778) Other income (expenses): Interest income................................. 360,434 209,906 47,832 623,430 Interest expense on promissory notes............ -- (14,299) (110,000) (124,299) Other income.................................... -- 19,231 -- 19,231 Settlement of damages........................... -- -- 157,500 157,500 ------------ ------------ ----------- ------------- Total other income (expenses)................ 360,434 214,838 95,147 675,862 Net loss for the period............................ $ (1,534,513) $ (1,117,808) $ (913,321) $ (4,094,916) Other comprehensive loss: Foreign currency translation adjustments........ (29,403) -- -- (29,403) ============ ============ =========== ============= Comprehensive loss for the period.................. $ (1,563,916) $ (1,117,808) $ (913,321) $ (4,124,319) ============ ============ =========== ============= Basic and diluted loss per share [note 2(m)]....... $ (0.12) $ (0.35)/(1)/ $ (0.08) ============ ============ =========== Weighted average shares outstanding................ 12,684,289 12,392,011 11,979,385 ============ ============ ===========
(1) Basic and diluted loss per share for the twelve-month period ended December 31, 1998 includes an adjustment for a deemed distribution attributable to a beneficial conversion feature for series "A" preferred stock. See notes 2(m) and 9. The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of loss F-3 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
Accumulated Series "A" Other Convertible Compre- Common Stock Preferred Stock hensive ------------------- ----------------- Income Shares Amount Shares Amount ----------- --------- ------- ------ ------ 1995: Issued at inception for cash at $0.001 per share on October 20, 1995............................. -- 5,000,000 $ 5,000 -- $ -- Net loss for fiscal 1995........................... -- -- -- -- -- Net other comprehensive loss for fiscal 1995....... -- -- -- -- -- ----------- --------- ------- ------ ----- Balance -- December 31, 1995.................. -- 5,000,000 5,000 -- -- 1996: Issued on reverse acquisition on January 30, 1996.. -- 5,968,281 5,968 -- -- Issued for cash at $1 per share on May 29, 1996.... -- 975,000 975 -- -- Net loss for fiscal 1996........................... -- -- -- -- -- Net other comprehensive loss for fiscal 1996....... -- -- -- -- -- ----------- --------- ------- ------ ----- Balance -- December 31, 1996.................. 11,943,281 11,943 -- -- 1997: Issued for services at $2.31 1/2 per share on July 1, 1997..................................... -- 71,938 72 -- -- Net loss for fiscal 1997........................... -- -- -- -- -- Net other comprehensive loss for fiscal 1997....... -- -- -- -- -- ----------- --------- ------- ------ ----- Balance -- December 31, 1997.................. 12,015,219 12,015 -- -- Deficit Common Stock Accumulated Warrants Additional During the -------------------- Paid-in Development Number Amount Capital Stage ------ ------- --------- ----------- 1995: Issued at inception for cash at $0.001 per share on October 20, 1995............................. -- $ -- $ -- $ -- Net loss for fiscal 1995........................... -- -- -- -- Net other comprehensive loss for fiscal 1995....... -- -- -- (53,696) ------- --------- ---------- --------- Balance -- December 31, 1995.................. -- -- -- (53,696) 1996: Issued on reverse acquisition on January 30, 1996.. -- -- (5,968) -- Issued for cash at $1 per share on May 29, 1996.... -- -- 967,775 -- Net loss for fiscal 1996........................... -- -- -- -- Net other comprehensive loss for fiscal 1996....... -- -- -- (475,579) ------- --------- ---------- --------- Balance -- December 31, 1996.................. -- -- 961,807 (529,274) 1997: Issued for services at $2.31 1/2 per share on -- -- 166,469 -- July 1, 1997..................................... Net loss for fiscal 1997........................... -- -- -- -- Net other comprehensive loss for fiscal 1997....... -- -- -- (913,521) ------- --------- ---------- --------- Balance -- December 31, 1997.................. -- -- 1,128,276 (1,442,595)
[continued on next page] F-4 PINNACLE OIL, INTERNATIONAL, INC. (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Expresses in U.S. Dollars) - -------------------------------------------------------------------------------- 1998: Issued on conversion of promissory notes at $2.72 per share on February 1, 1998 (1), net of offering costs.................................. -- 411,764 412 -- -- -- Issued for cash at $7.50 per share on April 3, 1998 -- -- -- 800,000 800 -- Issued with series "A" preferred stock on April 3, 1998............................................ -- -- -- -- -- 200,000 Net loss for fiscal 1998........................... -- -- -- -- -- -- Net other comprehensive loss for fiscal 1998....... -- -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- Balance -- December 31, 1998.................. 12,426,983 12,427 800,000 800 200,000 1999: Issued for cash at $15 per share on May 17, 1999, net of issuance costs........................... -- 400,000 400 -- -- -- Options exercised for cash at prices between $8.12 1/2 and $9.50 per share during 1999 -- 35,000 35 -- -- -- Cancelled on October 14, 1999...................... -- (5,167) (5) -- -- -- Net loss for fiscal 1999........................... -- -- -- -- -- -- Net other comprehensive loss for fiscal 1999....... (29,403) -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- Balance -- December 31, 1999.................. (29,403) 12,856,816 $12,857 800,000 $ 800 200,000 ========== ========== ======= ======= ====== =======
1998: Issued on conversion of promissory notes at $2.72 per share on February 1, 1998 (1), net of -- 1,119,588 $ -- issuance costs.................................. Issued for cash at $7.50 per share on April 3, 1998 -- 7,792,167 (2,104,000) Issued with series "A" preferred stock on April 3, 1,132,000 -- (1,132,000) 1998............................................ Net loss for fiscal 1998........................... -- -- (1,117,808) Net other comprehensive loss for fiscal 1998....... -- -- -- ---------- ----------- ---------- Balance -- December 31, 1998.................. 1,132,000 10,040,031 (5,796,403) 1999: Issued for cash at $15 per share on May 17, 1999, net of issuance costs........................... -- 5,998,252 -- Options exercised for cash at prices between $8.12 1/2 and $9.50 per share during 1999 -- 303,979 -- Cancelled on October 14, 1999...................... -- (11,570) -- Net loss for fiscal 1999........................... -- -- 11,575 Net other comprehensive loss for fiscal 1999....... -- -- (1,534,513) ---------- ----------- ----------- Balance -- December 31, 1999.................. $1,132,000 $16,330,692 $(7,319,341) ========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of shareholders' equity F-5 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Statements Of Cash Flows (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
October 20, 1995 (inception) to Twelve Months Ended December 31, December 31, 1999 1999 1998 1997 (cumulative) ------------ ----------------- ----------- ------------- Operating activities: Net loss for the period................................ $ (1,534,513) $ (1,117,808) $ (913,321) $ (4,094,916) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of property and equipment............. 171,494 71,919 25,474 293,994 Write-down of property and equipment............... 588 -- 17,074 17,682 Amortization of deferred costs..................... 93,014 61,273 -- 154,267 Changes in non-cash working capital: Accounts receivable.............................. 24,783 (31,996) (80,044) (95,317) Due from officers and employees.................. (1,884) (1,335) 4,832 (3,219) Prepaid expenses................................. (58,012) 6,183 (31,877) (85,343) Trade payables................................... (108,296) (48,213) (5,393) 32,716 Wages and employee benefits...................... 115,395 (18,716) 36,006 132,685 Accrued oil and natural gas property costs....... 382,386 -- -- 382,386 Accrued liabilities.............................. 35,900 18,634 -- 54,534 Deferred financing through license fee offset.... (6,414) -- -- (6,414) Deferred financing for insurance premium......... -- -- 7,766 7,766 Consulting costs settled by issuance of common stock.......................................... -- -- 166,541 166,541 Interest costs settled by issuance of common stock.......................................... -- 10,000 10,000 120,000 ------------ ---------------- ----------- ------------- Net cash used in operating activities......... (885,973) (1,050,059) (662,942) (2,922,638) Financing activities: Funds borrowed from affiliates......................... -- -- 1,000,000 1,100,000 Repayment of funds borrowed from affiliates............ -- -- -- (100,000) Funds raised through the sale of common stock, net of issuance costs................................ 5,998,652 -- 6,972,402 Funds raised through the sale of preferred stock and warrants, net of issuance costs.................. -- 5,688,967 -- 5,688,967 Funds raised through the exercise of options........... 303,979 -- -- 303,979 Repayment of deferred financing for insurance premium.. -- (146,520) (146,520) ------------ ----------------- ----------- ------------- Net cash generated by financing activities...... 6,302,631 5,542,447 1,000,000 13,818,828 Investing activities: Funds invested in property and equipment............... (258,058) (591,492) (8,340) (988,355) Funds invested in petroleum properties................. (775,159) -- -- (775,159) Funds borrowed by an employee.......................... -- (35,760) -- (35,760) Repayment of funds borrowed by an employee............. 863 347 -- 1,210 ------------ ----------------- ----------- ------------- Net cash used in investing activities........... (1,032,354) (626,905) (8,340) (1,798,064) Effect of net other comprehensive loss.................... (29,403) -- -- (29,403) Net cash inflow........................................... 4,354,901 3,865,483 328,718 9,068,723 Cash position, beginning of period........................ 4,713,822 848,339 519,621 -- ------------ ----------------- ----------- ------------- Cash position, end of period.............................. $ 9,068,723 $ 4,713,822 $ 848,339 $ 9,068,723 ============ ================= =========== =============
Supplemental Disclosure Of Non-Cash Investing And Financing Activities On February 1, 1998, Pinnacle satisfied $1,000,000 in principal and $120,000 in accrued interest with respect to funds borrowed from an affiliate through the exercise of its right to convert the underlying notes into 411,764 shares of common stock. See note 8. The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of cash flows F-6 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 1. Organization And Operations (a) Our Company Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle"), a development stage enterprise, was incorporated under the laws of the State of Nevada on September 27, 1994, under the name "Auric Mining Corporation," and subsequently changed its name to Pinnacle Oil International, Inc. on February 23, 1996. We have two wholly owned subsidiaries, Pinnacle Oil Inc. ("Pinnacle U.S."), which was incorporated under the laws of the State of Nevada on October 20, 1995, and Pinnacle Oil Canada, Inc. ("Pinnacle Canada"), which was incorporated under the federal laws of Canada on April 1, 1997. (b) Our Business We are a technology-based reconnaissance exploration company which utilizes our proprietary stress field detection or "SFD" remote- sensing airborne survey technology, which we refer to as our "SFD Survey System," to quickly and inexpensively identify and high-grade oil and natural gas prospects. We conduct our reconnaissance exploration activities, as well as land acquisition, drilling, completion and production activities to exploit prospects identified using our SFD technology, through our two subsidiaries, Pinnacle Oil Inc. which focuses on United States-based exploration, and Pinnacle Oil Canada, Inc. which focuses on Canadian-based exploration. Pinnacle, in turn, focuses on research and development efforts to improve the efficacy of our SFD Survey System. Since we have not generated operating revenues to date, we should be considered a development stage enterprise. Although we have sufficient working capital as of December 31, 1999 to fund our current level of operations for several years assuming we make minimal investments in petroleum properties, our ability to continue as a going concern in the longer term will nevertheless be dependent upon our ability, either through our joint venture arrangements or for our own account, to successfully identify hydrocarbon bearing prospects, and to finance, develop, extract and market oil and natural gas from these prospects for a profit. We anticipate that we will continue to incur further operating losses until such time as we receive revenues from our joint venture partners with respect to prospects currently in the development stage, or through prospects we identify and exploit for our own account. 2. Significant Accounting Policies (a) Basis of Presentation We have prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States for annual financial reporting. F-7 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- (b) Consolidation We have consolidated the accounts of our wholly owned subsidiaries with those of Pinnacle in the course of preparing these consolidated financial statements. All significant intercompany balances and transactions amongst Pinnacle and its subsidiaries have been eliminated as a consequence of the consolidation process, and are therefore not reflected in these consolidated financial statements. (c) Reclassifications We have changed the manner of presentation in these consolidated financial statements and, as a consequence, have reclassified certain accounts and amounts reflected in our prior annual consolidated financial statements to conform to this change in presentation. (d) Estimates and assumptions The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results may differ from those estimates. (e) Cash and Cash Equivalents For purposes of preparing the consolidated balance sheets and statements of cash flow contained in these consolidated financial statements, we consider all investments with original maturities of ninety days or less to constitute "cash and cash equivalents." (f) Fair Value of Financial Instruments Our financial instruments consist of cash, accounts receivable, notes receivable, accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying values on our consolidated F-8 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- financial statements due to their short-term to maturity and similarity to current market rates. It is the opinion of our management that we are not exposed to significant interest, currency or credit risks arising from these financial instruments (g) Oil and Natural Gas Properties We follow the full cost method of accounting for oil and natural gas properties and equipment whereby we capitalize all costs relating to our acquisition of, exploration for and development of oil and natural gas reserves. These capitalized costs include land acquisition costs, geological and geophysical costs, costs of drilling both productive and non-productive wells, production equipment and related facilities and various costs associated with evaluating petroleum and natural gas properties for potential acquisition. Commencing upon production, these capitalized costs will also include SFD survey and data analysis costs. See note 2(k). We only capitalize overhead that is directly identified with acquisition, exploration or development activities. All costs related to production, general corporate overhead and similar activities are expensed as incurred. Under the full cost method of accounting, capitalized costs are accumulated into cost centers on a country-by-country basis. These costs, plus a provision for future development costs (including estimated dismantlement, restoration and abandonment costs) of proved undeveloped reserves, are then depleted and depreciated using the unit of-production method, based on estimated proved oil and gas reserves as determined by independent engineers where significant. For purposes of the depletion and depreciation calculation, proved oil and gas reserves are converted to a common unit of measure on the basis of their approximate relative energy content. In applying the full cost method of accounting, capital costs in each cost center less accumulated depletion and depreciation and related deferred income taxes are restricted from exceeding an amount equal to the sum of the present value of their related estimated future net revenues discounted at 10% less estimated future expenditures, and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of related tax effects. Should this comparison indicate an excess carrying value, a write-down would be recorded. The carrying values of unproved properties, which are excluded from the depletion calculation, are assessed on a quarterly basis to ascertain whether any impairment in value has occurred. This assessment typically includes a determination of the anticipated future net cash flows based upon reserve potential and independent appraisal where warranted. Impairment is recorded if this assessment indicates the future potential net cash flows are less than capitalized costs. All recoveries of costs through the sale or other disposition of oil and gas properties and equipment are accounted for as adjustments to capitalized costs, with no gain or loss recorded, unless the sale or disposition involves a significant change in the relationship between costs and the value of proved reserves or the underlying value of unproved property, in which case the gain or loss is computed and recognized. Our company conducts oil and natural gas exploration, drilling, development and production activities through our joint venture partners. These consolidated financial statements reflect only our proportionate interest in these activities. (h) Other Property and Equipment We carry our other capitalized property and equipment at cost. We depreciate or amortize our other capitalized property and equipment over their estimated service lives using the declining balance method as follows: F-9 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- Airplane................................... 25% Computer equipment......................... 30% Computer software.......................... 100% Equipment.................................. 20% Furniture and fixtures..................... 20% Leasehold improvements..................... 20% Tools...................................... 20% Vehicles................................... 30% When we retire or otherwise dispose of our other capitalized property and equipment, we remove their cost and related accumulated depreciation or amortization from our accounts, and record any resulting gain or loss in the results of operations for the period. Our management periodically reviews the carrying value of our property and equipment to ensure that any permanent impairment in value is recognized and reflected in our results of operations. (i) Research and Development Expenditures We expense all research and development expenditures we incur to develop, improve and test our SFD Survey System and related components, including allocable salaries. (j) Survey Support Expenditures We expense all survey support expenditures we incur, after netting costs which are reimbursable by our joint venture partners. Survey support expenditures consist primarily of the cost, including allocable salaries, to: . conduct field evaluations designed by our joint venture partners to evaluate the SFD Survey System (after netting costs which are reimbursable by our joint venture partners); and . develop, organize, staff and train our survey and interpretation operational functions. (k) Survey and Data Analysis Expenditures We expense all survey and data analysis costs we incur, after netting costs which are reimbursable by our joint venture partners. Survey and data analysis expenditures consist primarily of: . aircraft operating costs, travel expenses and allocable salaries of our personnel while on survey assignment (after netting costs which are reimbursable by our joint venture partners); and . allocable salaries of our personnel while interpreting SFD Data. Although we currently expense our survey and data analysis costs, we will, in the future, commencing on the earliest date that any of our initial exploration wells commence production, capitalize and amortize these costs using the unit of production method as a component of petroleum properties in accordance with the full cost method of accounting for oil and gas. (l) Foreign Currency Translation We use the United States dollar as our reporting currency. With respect to our subsidiaries whose functional currency is in Canadian dollars, we use the following methodology to convert their Canadian dollar denominated accounts and transactions into U.S. dollars for consolidation purposes: . all asset and liability accounts are translated into U.S. dollars at the rate of exchange in effect as of the end of the fiscal year; . all shareholders' equity accounts are translated into U.S. dollars using historical exchange rates; and . all revenue and expense accounts are translated into U.S. dollars at the average rate of exchange for the fiscal year. F-10 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- We record the cumulative gain or loss arising from the conversion of the noted Canadian dollar denominated accounts and transactions into U.S. dollars as a foreign currency translation adjustment as a component of accumulated other comprehensive income or loss for that period. (m) Basic And Diluted Loss Per Common Share Our basic loss per share is computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS No. 128"), by dividing the net loss for the period attributable to holders of our common stock by the weighted average number of shares of our common stock outstanding for the period. Our diluted loss per share is computed, also in accordance with SFAS No. 128, by including the potential dilution that could occur if holders of our dilutive securities were to exercise or convert these securities into our common stock. In calculating our diluted loss per share, we take into consideration deemed distributions analogous to the declaration of a dividend attributable to the beneficial conversion features affording a discount or benefit to the holders of our securities. See note 9. (n) Stock-based compensation In accounting for our employee and director stock options, we have elected to follow Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB 25"), and related interpretations. Pursuant to APB 25, we have not recorded any compensation expense for any period in these consolidated financial statements insofar as the exercise price for all options we have granted to date to our employees and directors have equaled the market price of the underlying common shares on the effective date of grant. See note 11. F-11 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- (o) Recent pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which as subsequently amended by SFAS No. 137, established accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value for fiscal quarters of fiscal years beginning after June 15, 2000. Our management has not had the opportunity to evaluate the impact of the adoption of SFAS Nos. 133 and 137 on consolidated financial position, results of operations or cash flows as we do not hold derivatives. F-12 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 3. Reverse Acquisition We acquired what is now our wholly-owned subsidiary, Pinnacle U.S., on January 20, 1996, in a transaction accounted for as a "reverse acquisition". This acquisition was effected through the issuance of 10,090,675 common shares of our company (then known as Auric Mining Corporation), constituting approximately 92% of its outstanding shares at that date, in exchange for all of the outstanding shares of Pinnacle U.S. As a result of the application of the noted accounting principles governing Reverse Acquisitions, Pinnacle U.S. (and not Auric Mining Corporation) was treated as the "acquiring" or "continuing" entity for financial accounting purposes. We have accounted for the Pinnacle U.S. acquisition as an issuance of stock by Pinnacle U.S. in exchange for the tangible net assets of Auric Mining Corporation, valued at fair value, which approximate historical costs. As a result, our consolidated statements of loss and shareholders' equity (deficit) included in these consolidated financial statements are deemed to be a continuation of Pinnacle U.S.'s financial statements, and therefore reflect: . Pinnacle U.S.'s operations from the date of its formation (October 20, 1995) through the effective date of the Reverse Acquisition (January 20, 1996); and . our consolidated operations after the effective date of the Reverse Acquisition (January 20, 1996). 4. Note Receivable From Officer In September 1998, we loaned the sum of Cdn. $54,756 (U.S. $35,760) to one of our officers in connection with his relocation to Calgary, Alberta. Pursuant to the terms of an underlying promissory note, the officer is required to repay the loan on a monthly basis, with a balloon payment due on October 3, 2003. The amount of the monthly payments is calculated on the basis of a 300-month amortization rate, principal plus interest, using a variable interest rate computed at our cost of funds, which we define as our floating interest rate for liquid investments (presently 5 1/2%). F-13 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 5. Deferred Costs On November 20, 1997, we purchased a three-year insurance policy, and financed the premium pursuant to a loan agreement in the original principal amount of $150,000, bearing interest at 6.44% per annum. We were obligated to make monthly payments of principal and interest in the amount of $4,884 to a maturity date of May 22, 1999, however, we elected to pay the outstanding balance in full in June 1998. 6. Oil And Natural Gas Properties Summarized below are the oil and natural gas property costs we capitalized for our fiscal years ended December 31, 1999 and December 31, 1998:
Twelve Months Ended December 31, -------------------------- 1999 1998 -------- ---------- Acquisition costs.............. $404,585 $ -- Exploration costs.............. 370,574 -- Development costs.............. -- -- Capitalized interest........... -- -- -------- ---------- $775,159 $ -- ======== ==========
Since all of our oil and gas properties as of December 31, 1999 were either not yet producing or still in the drilling stage, we have classified all of these properties as unproved properties. Consequentially, we did not record any depletion to date for these properties for the year ended December 31, 1999. Following the close of our year ended December 31, 1999, our management performed a property assessment with respect to each of our unproved properties as of December 31, 1999 to determine if any of these properties had been subject to any impairment in value, and concluded that no impairment had occurred. This assessment included a determination of the future production potential based upon SFD data, seismic data and exploration results. Our company is currently conducting active exploration and development programs with respect to each of these unproved oil and gas properties, and we anticipate that all of these properties will be evaluated and the associated costs transferred into the amortization base or impaired over the next five years. 7. Other Property And Equipment
December 31, ------------------------------ 1999 1998 --------- --------- Airplane ............................................................ $ 238,653 $ 220,092 Computer equipment .................................................. 189,586 73,145 Computer software ................................................... 71,174 15,165 Equipment ........................................................... 62,749 41,201 Furniture and fixtures .............................................. 165,274 132,425 Leasehold improvements .............................................. 102,761 72,793 SFD Survey System (including software) .............................. 59,169 47,918 Tools................................................................ 1,704 890 Vehicle ............................................................. 62,494 62,495 --------- --------- Property and equipment........................................... 953,564 666,124 Less accumulated depreciation and amortization ...................... (292,363) (90,664) --------- --------- Net property and equipment ...................................... $ 661,201 $ 575,460 ========= =========
8. Common Stock On January 31, 1997, two of our executive officer-directors at that time each loaned our company the sum of $500,000, for total loan proceeds of $1,000,000. These loans were extended by these officer-directors pursuant to unsecured, convertible promissory notes due January 31, 1998, together with interest accrued at a rate of 12% per annum. Each promissory note contained identical conversion provisions pursuant to which: . each officer-director could elect to convert any or all of the outstanding balance of his loan into common stock based upon a ratio of one share per $4.07 in converted principal and interest at any time; and . our company could convert any or all of the outstanding balance of either loan into common stock based upon a ratio of one share per $2.72 in converted principal and interest should we be unable to repay that amount by the January 31, 1998 due date. We exercised our right to convert the notes into 411,764 shares of common stock on February 1, 1998, in satisfaction of $1,200,000 in aggregate principal and accrued interest which became due on January 31, 1998. F-14 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- On May 17, 1999, we raised $6,000,000 in gross proceeds through a private placement of 400,000 shares of our common stock at $15 per share. Net proceeds to our company from this offering were $5,998,652, after deducting $1,348 in offering expenses. During 1999, we raised $303,979 in gross proceeds through our employees' exercise of incentive stock options entitling them to purchase 35,000 shares of our common stock at exercise prices between $8.25 and $9.50 per share. 9. Preferred Stock And Warrants On April 3, 1998, we completed a series of transactions pursuant to which: . Pinnacle U.S. entered into a joint venture agreement, and . we concurrently raised $6,000,000 in gross proceeds from an affiliate of the joint venture partner through the private placement to that party of 800,000 shares of our series "A" convertible preferred stock, and warrants to purchase 200,000 shares of our common stock at an exercise price of $7.50 per share. The net proceeds of this private placement were $5,688,867, after deducting $311,833 in offering expenses, including the cost of becoming a reporting company with the Securities and Exchange Commission. Each share of preferred stock is convertible into one common share at the election of the holder, and carries a $7.50 liquidation preference should our company wind-up and dissolve. We have reserved the right to redeem the preferred stock at a price of $7.50 per share if it has not been converted into common stock by April 3, 2000, and the holder forgoes a final opportunity to exercise his conversion rights to avoid redemption. The preferred shares are not entitled to payment of any dividends, although they are entitled under certain circumstances to participate in dividends on the same basis as if converted into common shares. Each warrant carries a $7.50 per share exercise price, and lapses to the extent not exercised by April 3, 2000. Insofar as the preferred shares and warrants contained beneficial conversion features affording a discount or benefit to the purchaser of these securities, we recorded a deemed distribution analogous to the declaration of a dividend to that purchaser. This deemed distribution resulted in: . an increase in additional paid-in capital of $2,104,000 to record the intrinsic value of the beneficial conversion feature of the preferred shares, i.e., the discount in the purchase price of these securities relative to the public trading price as of the date of issuance of the underlying common shares into which these preferred shares could be converted, without adjustment for discounts or restrictions; . a newly created warrant capital account to record the fair value of the warrants in the amount of $1,132,000, including the value of their beneficial conversion feature, as determined by the Black- Scholes method of valuation; and . a counterbalancing charge against our accumulated deficit capital account in the amount of $3,236,000. F-15 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- We also made appropriate adjustment for the deemed distribution in calculating our basic loss per common share. See note 2(m). 10. Performance Warrants On August 1, 1996, we granted a performance-based contractual right to be granted warrants to the licensor of our SFD technology, Momentum Resources Corporation, in connection with the amendment of our exclusive SFD technology license with Momentum to use the SFD technology for hydrocarbon exploration. The primary purpose of the amendment was to indefinitely extend the termination date of the license. Pursuant to this contractual right, Momentum Resources Corporation is entitled to a separate grant of warrants entitling it to purchase 16,000 shares of our common stock at the then current trading price for each month after December 31, 2000 in which production from SFD-identified prospects during that month exceeds 20,000 barrels of hydrocarbons. Momentum has not earned any warrants under the SFD technology license as of December 31, 1999. 11. Options Through December 31, 1999, we have granted options to selected employees and directors of our company pursuant to the following separate arrangements or plans (the "Plans"): . Separate free-standing directors options which we granted to selected directors as compensation for serving on our Board of Directors; . The 1997 Pinnacle Oil International, Inc. Stock Plan, pursuant to which 1,000,000 shares of our common stock were reserved for issuance to employees, directors and consultants in the form of stock options or outright stock grants; and . The 1999 Pinnacle Oil International, Inc. Executive Option Plan, pursuant to which 1,000,000 shares of our common stock were reserved for issuance to executive officers in the form of stock options. F-16 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- F-17 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- We have summarized below all transactions involving option grants under the Plans, including those option grants described above, for our three fiscal years ended December 31, 1999:
1999 1998 1997 ---------------------- ---------------------- ---------------------- Common Weighted Common Weighted Common Weighted Shares Average Shares Average Shares Average Under Exercise Under Exercise Under Exercise Options Price Options Price Options Price -------- --------- --------- --------- ------- -------- Outstanding at beginning of year 500,000 $ 7.47 215,000 $ 6.43 0 $ -- Granted.......................... 1,275,000 14.05 285,000 8.25 215,000 6.43 Exercised........................ (35,000) 8.68 0 0 0 0 Cancelled or lapsed.............. (25,000) 8.25 0 0 0 0 --------- --------- ------- Outstanding at end of year........... 1,715,000 12.33 500,000 7.47 215,000 6.43 ========= ========= ======= Exercisable at end of year........... 232,500 150,000 55,000 ========= ========= ======= Available for grant at end of year 460,000 710,000 950,000 ========= ========= =======
F-18 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- We have summarized below all outstanding options under the Plans as of December 31, 1999:
December 31, 1999 Grant Exercise ---------------------------- Type of Option Date Price Outstanding Vested ----------------------------------- -------- --------- ----------- ------- Director Non-qualified............. 5-12-97 $ 5.81 75,000 75,000 Director Non-qualified............. 5-20-97 5.25 90,000 90,000 Employee Incentive................. 11-24-97 9.50 37,500 7,500 Director Non-qualified............. 3-10-98 8.31 45,000 30,000 Employee Incentive................. 5-12-98 8.25 40,000 20,000 Employee Incentive................. 8-24-98 8.25 132,500 10,000 Employee Incentive................. 10-1-98 8.12 1/2 20,000 0 Employee Non-qualified............. 5-1-99 14.00 1,016,670 0 Employee Incentive................. 5-1-99 15.00 33,330 0 Employee Incentive................. 5-12-99 17.00 20,000 0 Employee Incentive................. 7-2-99 14.06 20,000 0 Employee Incentive................. 9-21-99 13.62 1/2 100,000 0 Employee Incentive................. 11-16-99 14.12 1/2 85,000 0 --------- ------- 1,715,000 232,500 ========= =======
The director options outstanding as of December 31, 1999 vest one-third on date of grant, and an additional one-third each on the first anniversary and second anniversaries of the grant date, respectively, subject to the re-election of each such director at each annual meeting of the Company or of its subsidiary. The employee options outstanding as of December 31, 1999 vest over three to five years from the grant date, depending upon the recipient, based upon the continued provision of services as an employee. Both the director and employee options generally lapse, if unexercised, five years from the date of vesting. Had we elected to follow the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"), we would have recorded additional compensation costs of approximately $3,253,147, $343,200 and $68,000 for the twelve-month periods ended December 31, 1999, December 31, 1998 and December 31, 1997, respectively. These amounts are determined using an option pricing model using the following assumptions: . no dividends are paid, . an average vesting period of four and one-half years, . a weighted average annualized volatility of our common share price of 63%; and . a weighted average annualized risk free interest rate at 6.67%. The following pro forma financial information presents the net loss for the period and loss per common share for these twelve-month periods had we adopted SFAS 123:
Year Ended December 31, ----------------------------------------------- 1999 1998 1997 ----------- ----------- ---------- Net loss for the period as reported................ $ 1,534,513 $(1,117,808) $ (913,321) Compensation expense computed under SFAS No. 123....................................... 3,253,147 (343,200) (68,000) Deemed distribution to holders of preferred stock and warrants................................. -- (3,236,000)/(1)/ -- ----------- ----------- ---------- Pro forma net loss for the period.................. $ 4,787,660 $(4,697,008) $ (981,321) ----------- ----------- ---------- Pro forma basic and diluted loss per common share.. $ (0.38) $ (0.38) $ (0.08) =========== =========== ==========
(1) This amount has been included to depict the impact of the valuation expense related to an adjustment for a deemed distribution attributable to a beneficial conversion feature for these instruments in the computation of pro forma loss and loss per common share. See notes 2(m) and 9. 12 Income Taxes (a) Net Operating Loss Carryforwards As of December 31, 1999, the following net operating loss carryforwards were available to reduce our taxable income in future years:
Country Amount Expiration Date ---------------------------------------------------------- ---------- --------------- United States............................................. $ 1,762,145 2010--2019 Canada.................................................... $ 2,202,880 2004--2006
F-19 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- (b) Deferred Assets As of December 31, 1999, our accounts contained the following deferred assets:
Statutory Tax Amount Tax Rate Benefit ------------- ---------- -------------- Tax asset related to depreciation............. $ (64,784) 44.62% $ (28,907) Tax benefit of loss carryforwards............. 3,965,025 44.62% 1,769,194 Valuation reserve............................. (1,740,287) -------------- $ -- ==============
As of December 31, 1998, our accounts contained the following deferred assets:
Statutory Tax Amount Tax Rate Benefit ------------- ---------- -------------- Tax asset related to depreciation............. $ 8,500 34% $ 2,900 Tax benefit of loss carryforwards............. 2,500,000 34% 850,000 Valuation reserve............................. (852,900) -------------- $ -- ==============
13. Litigation Settlement During the year ended December 31, 1997, we received $157,500 in cash in settlement of a lawsuit pertaining to a breach of contract action. 14. Related Party Transactions Summarized below is information concerning related party transactions and balances not disclosed elsewhere in these consolidated financial statements for our three fiscal years ended December 31, 1999:
December 31, ------------------------------------ 1999 1998 1997 --------- -------- -------- Collective legal fees accrued to two law firms in 1999, and three law firms in 1998 and 1997, with partners who were also directors of Pinnacle or Pinnacle Canada....................... $ 28,147 $142,131 $322,769 Collective wages, fees and benefits paid to three executive officers of Pinnacle in 1999, and two executive officers of Pinnacle in 1998 and 1997, who were also directors of Pinnacle.......... 491,021 240,000 165,101 Accounts payable due to executive officers........................ -- -- 12,167 Accounts receivable due from executive officers................... 1,565 1,335 --
Our rights to use our SFD technology arises from an SFD technology license which we acquired from the owner and licensor of that technology, Momentum Resources Corporation, pursuant to which we received the exclusive world- wide right to use the SFD technology for hydrocarbon exploration purposes. Momentum is controlled and indirectly owned by two of our F-20 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- significant stockholders, both of whom currently serve as directors and one of whom currently serves as one of our executive officers. We are obligated under the terms of the SFD technology license to pay Momentum a fee equal to 1% of any "Prospect Profits" (as that term is defined in the license) which we may receive on or before December 31, 2000, and 5% of any Prospect Profits which we may receive after December 31, 2000. No Prospect Revenue has been generated as of December 31, 1999. 15. Commitments At December 31, 1999, we had entered into joint venture agreements with two separate oil and gas exploration companies. We are required under these joint venture agreements to conduct SFD surveys to identify oil and natural gas prospective prospects on selected exploration areas of up to 2,400 square miles, and our joint venture partners are required to drill each SFD-identified prospect they accept under their respective agreement. We may elect each SFD-identified prospect they accept under their respective agreement. We may elect under each of these joint venture agreements to receive one of the two following payments streams for each SFD-identified prospect accepted and drilled by the joint venture partner; . A capital investment and generally risk-free overriding royalty of 5% to 8% of oil or natural gas revenues received by the joint venture partner with respect to the prospect; or . A working interest of up to 45% of the joint venture partner's revenues with respect to the prospect. In any situation where we elect to participate on a working interest basis, we must bear our share of mineral and drilling right acquisition (if necessary), drilling, completion and production costs incurred with respect to the prospect based upon our elected working interest percentage. Although we will bear our share of these costs, our joint venture partner will nevertheless remain responsible for conducing and managing all drilling, production and marketing activities to exploit the prospect. On November 25, 1997, we entered into a five-year non-cancelable operating lease for our principal executive offices. This lease, which consisted of 7,244 rentable square feet as of December 31, 1999, expires on January 21, 2003. Our combined obligations for base lease payments and building operating cost and other pass-through items as of December 31, 1999 was Cdn. $11,372 per month, which translates into U.S. $7,876 per month based upon the closing conversion rate as of December 31, 1999. F-21 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 16. Segmented Information We currently operate in only one business segment, oil and natural gas exploration, insofar as we intend to develop all oil and natural gas exploration prospects identified using our proprietary SFD survey technology either directly for our account or indirectly for our account through working interest or overriding royalty interests through our joint venture partners. We do not currently sell or market our SFD data as a separate product to third parties. As we are a development stage enterprise, the majority of our revenues through December 31, 1999, have been from interest earned on cash and cash equivalents. Summarized below is geographic information relating to: . revenues we have received from our external customers for our last three fiscal years ended December 31, 1999, allocated amongst the geographic areas in which the revenue is generated; . revenues we have received from sources other than our external customers for our last three fiscal years ended December 31, 1999, allocated amongst the geographic areas in which the revenue is generated; . our operating loss for our last three fiscal years ended December 31, 1999, allocated amongst the geographic areas in which the revenue and associated expenses are generated; and . our assets as of the last day of each fiscal year indicated, allocated amongst the geographic areas in which the assets are physically located or principally connected. F-22 PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Consolidated Financial Statements (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
United States Canada Total ------------- ----------- ------------ 1999: Assets..................................... $ 9,349,409 $ 1,380,517 $ 10,729,926 Revenues from external customers........... -- -- -- Revenues from other sources................ 355,727 4,707 360,434 Operating loss............................. (416,465) (1,118,041) (1,534,513) 1998: Assets..................................... $ 4,764,653 $ 801,552 $ 5,566,205 Revenues from external customers........... -- -- -- Revenues from other sources................ 215,503 13,634 229,137 Operating loss............................. (347,953) (769,855) (1,117,808) 1997: Assets..................................... $ 30,001 $ 1,149,860 $ 1,179,861 Revenues from external customers........... -- -- -- Revenues from other sources................ 203,316 2,016 205,332 Operating loss............................. (512,292) (401,029) (913,321)
In preparing the above table, we have eliminated all intersegment revenues, expenses and assets. 17. Subsequent Events (a) Preferred Stock and Warrants (see note 9) On April 3, 2000, the holder of warrants to purchase 200,000 shares of our common stock at an exercise price of $7.50 per share exercised these warrants, resulting in gross proceeds to our company of $1,500,000. (b) Options (see note 11) On February 15, 2000, we created the 2000 Pinnacle Oil International, Inc. Directors' Stock Plan, pursuant to which we reserved 400,000 shares of our common stock for the purpose of granting awards or stock grants to current or prospective directors. Also on February 15, 2000, we granted 15,000 non-qualified options under the 2000 Pinnacle Oil International, Inc. Directors' Stock Plan to our five outside independent directors as compensation for their services as members of our Board of Directors for the next three years. The purchase price for these options were fixed at $28.75 per share, reflecting the closing trading price of our common stock as of the date of grant. These options vest in equal increments on the first through third anniversary dates of the date of grant, respectively, based upon continued provision of services as a director, and lapse, if unexercised, five years after the vesting date, unless the optionee's status as a director is terminated, in which case they lapse two years from date of vesting. (c) Commitments (see note 15) On March 7, 2000, we entered into a lease amendment pursuant to which we expanded our principal executive offices by an additional 6,081 rentable square feet, bringing the total square footage rented to 13,325 square feet. As a result of this expansion, our base rental obligation for the balance of the term of our original office lease has been increased by Cdn. $6,588 per month, which translates into an additional U.S. $4,564 per month based upon the closing conversion rate as of December 31, 1999. Also as a result of this expansion, our building operating cost and other pass-through charges under the lease were increased by Cdn. $46,824 per year, which translates into an additional U.S. $32,442 per year based upon the closing conversion rate as of December 31, 1999. On March 20, 2000, we entered into an agreement to purchase a Piaggio P180 Avanti aircraft for a purchase price of $2,790,000, subject to us obtaining appropriate financing. The closing date for the acquisition is fixed by the agreement as of April 21, 2000. Under the terms of the agreement we paid a $30,000 deposit into escrow, which will be released to the seller of the aircraft if the transaction does not close due to our failure to procure financing. F-23 EX-10.30 2 ASSIGNMENT OF JOINT EXPLORATION AND DEVELOPMENT EXHIBIT 10.30 ASSIGNMENT OF JOINT EXPLORATION AND DEVELOPMENT AGREEMENT This Assignment is entered into among Camwest Limited Partnership, an Arkansas limited partnership ("Camwest"), CamWest Exploration LLC, an Arkansas limited liability company ("Exploration"), Pinnacle Oil International, Inc. a Nevada corporation ("POII), Pinnacle Oil, Inc., a Nevada corporation ("POI"), and Pinnacle Oil Canada, Inc., a corporation formed under the laws of Canada ("POC"). POII, POI, and POC are referred to herein collectively as "Pinnacle". RECITALS: A. Camwest and Pinnacle entered into a Joint Exploration and Development Agreement dated as of April 3, 1998 (the "Development Agreement"). B. Exploration has been formed by the members of Camwest to fund the capital requirements of and pursue the opportunities under the Development Agreement. C. In accordance with the terms hereof, Camwest wishes to assign its rights under the Development Agreement to Exploration. NOW THEREFORE in consideration of the above premises and the mutual promises stated below, the parties agree as follows: 1. Assignment. In exchange for the considerations set forth below and the ---------- mutual promises stated herein, Camwest hereby assigns to Exploration, and Exploration hereby accepts the assignment of, all of Camwest's right, title, and interest in, to, and under the Development Agreement. In consideration for the assignment set forth above, Exploration hereby agrees to reimburse Camwest for all cost and expenses heretofore incurred by Camwest with respect to the Development Agreement. The foregoing assignment shall be subject to the condition that Chase Bank of Texas, a secured creditor of Camwest, consents to such assignment. 2. Assumption. Exploration hereby assumes and agrees to perform, satisfy, ---------- and otherwise discharge all obligations of Camwest under the Development Agreement and to indemnify and hold Camwest harmless with respect to the same. Exploration further covenants with Pinnacle to carry out all obligations of Camwest under the Development Agreement and to be bound unequivocally by all terms and provisions of the Development Agreement. 3. Consent. Pinnacle by its signature below does hereby consent to the ------- assignment hereunder by Camwest of its interest in the Development Agreement to Exploration. Page 1 4. Counterparts. This Assignment may be executed in any number of ------------ counterparts, and each of such counterpart shall for all purposes be deemed an original and all such counterparts shall together constitute one document. IN WITNESS WHEREOF, the parties have caused this Assignment of Joint Exploration and Development Agreement to be executed as of the ____ day of March, 2000. Camwest Limited Partnership By: Camwest, Inc., General Partner By: /s/ Jackson Farrow Jr ----------------------------------- Title: Vice President -------------------------------- CamWest Exploration LLC By: Camwest, Inc., Manager By: /s/ Jackson Farrow Jr ----------------------------------- Title: Vice President -------------------------------- Pinnacle Oil International, Inc. By: George Liszicasz ----------------------------------- Title: CEO -------------------------------- Pinnacle Oil, Inc. By: George Liszicasz ----------------------------------- Title: CEO -------------------------------- Pinnacle Oil Canada, Inc. By: George Liszicasz ----------------------------------- Title: CEO -------------------------------- Page 2 EX-10.31 3 SETTLEMENT AGREEMENT DATED APRIL 27, 1999 EXHIBIT 10.31 SETTLEMENT AGREEMENT This Settlement Agreement is made between R. Dirk Stinson ("Dirk"), George Liszicasz ("George"), Pinnacle Oil International, Inc. ("Pinnacle") and Momentum Resources Corporation ("Momentum") as of this 27th day of April, 1999. 1. Dirk agrees that he will relinquish his position as President of Pinnacle and its subsidiaries to Daniel Topolinsky ("Daniel") effective as of the date and time that Daniel Topolinsky assumes such positions, and Pinnacle agrees that Dirk shall have no further obligations as an employee of Pinnacle and/or its subsidiaries thereafter, under his Employment Agreement with Pinnacle or otherwise. 2. Effective as of the date and time as Daniel Topolinsky becomes President of Pinnacle, Dirk will become a "Consultant" to Pinnacle for "strategic planning issues", as and when, requested by George, Daniel and/or the Board of Pinnacle from time-to-time. In connection therewith, Dirk and Pinnacle will enter into a non-exclusive Consulting Agreement for a term ending on December 31, 2002. The parties agree that Dirk's consulting obligations will supercede his employment obligations under his Employment Agreement with Pinnacle, and will provide that Dirk will be paid U.S. $1,000 per month for the provision of these consulting services, which amount shall be deemed fully earned as of the date of this Agreement, even if Pinnacle should elect not to utilize Dirk's consulting services, or should Dirk be unable to perform the consulting services for any reason. The Consulting Agreement will provide that Dirk will use reasonable efforts to be available by telephone, email or fax to provide consulting services to Pinnacle relating to strategic, corporate or project financing, and/or investor relations questions or issues as requested by George, Daniel and/or the Board of Pinnacle for a reasonable period of time not to exceed (without Dirk's consent) the greater of eight hours per month and 96 hours per year in the aggregate. Dirk's personal presence will not be required to provide these services. 3. Pinnacle, George and Dirk agree that Dirk's change in position from President to Consultant reflects the evolution of Pinnacle from a development stage company to an operating company, and the mutually agreed replacement of Dirk as President by Daniel as an experienced oil and gas executive, and there are no outstanding issues between Dirk and Pinnacle in connection with this change of position and responsibilities or any other matter. 4. Pinnacle, George and Dirk agree that all payments to Dirk that would have occurred under his Employment Agreement shall continue under the Consulting Agreement, and that all of Dirk's benefits thereunder shall accordingly be deemed fully earned and vested as of the date of his execution of this Settlement Agreement (although payment thereof shall continue as provided in the Employment Agreement until the December 31, 2002 scheduled expiration of the Employment Agreement); provided, however, the parties further agree as follows: (a) Dirk will not be paid a cell phone allowance or auto allowance. (b) Dirk will not be entitled to any bonuses to be paid at the discretion of the Board of Pinnacle. (c) After the expiration of six months, Dirk will agree to defer the payment of one-half of his combined monthly salary pursuant to an unsecured promissory note payable upon demand, together with interest at prime plus 2%, at such time as Pinnacle is realizing average net revenues over expenses (each determined on a cash flow basis) of U.S. $100,000 per month over a consecutive three month period. In determining cash flow, actual expenses for SFD technology and data acquisition development will be included, while amortization for SFD technology and data acquisition development will be excluded, capital investments in oil and has projects will be excluded, and bonuses paid to Pinnacle directors and employees will be excluded. This deferral will cease to apply and the promissory note will be payable upon Pinnacle raising U.S. $3,500,000 of equity financing, exclusive of the exercise of warrants by SFD Investment LLC if such warrants are exercised or US $5,000,000 if such warrants are not exercised. (d) Dirk will receive his annual non-discretionary performance bonus on the same basis as provided in his Employment Agreement (i.e., if net income after taxes exceeds $5 million, a bonus equal to 5% of net income after taxes); provided, however, the period for which Dirk shall be paid this performance bonus under will be extended for one year (i.e., to December 31, 2003). 5. Dirk will remain a Non-Series A Director of Pinnacle, but will resign his position as a director of each of Pinnacle's subsidiaries. 6. George agrees to cooperate in nominating, and to the extent necessary voting his shares in favor of, two Non-Series A Director nominees selected by Dirk (one of which will be Dirk should he continue as a director). Should the number of Non-Series A Directors be increased to nine or more, George agrees to cooperate in nominating, and to the extent necessary voting his shares in favor of, three Non-Series A Director nominees selected by Dirk (one of which will be Dirk should he continue as a director). 7. Dirk agrees to cooperate in nominating, and to the extent necessary (after ensuring the election of his nominees described in the immediately preceding paragraph) voting his shares in favor of, four Non-Series A Director nominees selected by George (one of which will be George should he continue as a director). Should the number of Non-Series A Directors be increased to nine or more, Dirk agrees to cooperate in nominating, and to the extent necessary (after ensuring the election of his nominees described in the immediately preceding paragraph) voting his shares in favor of, six Non-Series A Director nominees selected by George (one of which will be George should he continue as a director). 8. Each of Dirk and George agrees to grant to the other the first right to purchase any of their Pinnacle stock sold in a "block sale". Block sale will be defined as a sale of Pinnacle stock to a single purchaser or purchasers acting in concert by way of a single sale or series of transactions involving 500,000 shares of Pinnacle. The non-selling party will be granted the first right to purchase, for 30 days, the stock which the selling party plans to sell at the specified sale price. If the non- selling party does not purchase the stock within the 30 day period, the selling party may sell the stock during the next 180 day period for a price at or higher than the specified price without again offering the stock to the non-selling party. 9. The above voting and purchase rights will apply to December 31, 2003 and each of Dirk and George will enter into a Voting Trust Agreement to facilitate the foregoing if requested by the other. 10. Pinnacle and Momentum will review their relationship and unless there is a reasonable risk that the confidentiality of the SFD technology cannot be maintained, will amend the Restated Technology Agreement: (a) to provide that Momentum will directly license the SFD technology to Pinnacle for exclusive hydrocarbon exploitation purposes, although Momentum will nevertheless retain title to the SFD technology and all improvements to the SFD technology made my Momentum; (b) to provide that Pinnacle may directly fund improvements to the SFD technology which expenditures will be treated as advances against Momentum's royalties; provided that Momentum, acting though Dirk, will be provided an annual budget and the right to audit these costs and to have such costs approved by an independent auditor as fair, reasonable and necessary costs for the development of the SFD technology; and (c) to address any other matters directly related to the Pinnacle-Momentum relationship which need to be addressed including the "Change in Control" provision in the Restated Technology Agreement. To the extent there are any other issues, Pinnacle and Momentum will discuss a mutually satisfactory method to resolve these issues on a case by case basis. 11. Pinnacle and Momentum will not further amend the Restated Technology Agreement in any manner that will adversely affect Pinnacle's rights under the agreement without the consent of (i) a majority of the Non-Momentum related Pinnacle directors, and (ii) a majority of Pinnacle's Non-Momentum related stockholders. Amendments which will not adversely affect Pinnacle need only be approved by a majority of the Non-Momentum related Pinnacle directors. 12. George and Dirk will also meet and review the operating costs and other matters relating to Momentum operations including Dirk's plans to make Momentum an operating company. George agrees to give reasonable consideration to Dirk's plans and to work in good faith with Dirk to reach a mutually acceptable agreement on these matters. 13. In addition to the acts and deeds recited herein and contemplated to be performed, executed and/or delivered by each party herein, each party agrees to perform, execute and/or deliver or cause to be performed, executed and/or delivered any and all further acts, deeds and assurances as may, from time to time, be reasonably required by the other party to consummate the transactions contemplated in this Settlement Agreement. 14. This Settlement Agreement shall be governed by the laws of the Province of Alberta and shall bind and inure to the benefit of the parties and their respective successors and assigns and all parties agree to submit to the non-exclusive jurisdiction of the Alberta courts. 15. This Settlement Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of such counterparts together shall constitute one agreement, binding on all parties hereto. If a copy or counterpart of this Settlement Agreement is originally executed and such copy or counterpart is thereafter transmitted electronically by facsimile or similar device, such facsimile document shall for all purposes be treated as if manually signed by the party whose facsimile signature appears. 16. The parties hereto expressly acknowledge and agree that, with regard to the subject matter of this Settlement Agreement and the transactions contemplated herein, (1) there are no oral agreements between the parties hereto and (2) this Settlement Agreement (a) embodies the final and complete agreement between the parties, (b) supersedes all prior and contemporaneous negotiations, offers, proposals, agreements, commitments, promises, acts, conduct, course of dealing, representations, statements, assurances and understandings, whether oral or written, and (c) may not be varied or contradicted by evidence of any such prior or contemporaneous matter or by evidence of any subsequent oral agreement of the parties hereto. 17. No modification hereof shall be binding unless set forth in writing and signed by the party or parties to be bound by the modification. Executed this 27/th/ day of April, 1999. /s/ R. Dirk Stinson - ---------------------- ---------------------------------------------- Witness Dirk Stinson /s/ George Liszicasz - ---------------------- ---------------------------------------------- Witness George Liszicasz PINNACLE OIL INTERNATIONAL, INC. Per: /s/ R. Dirk Stinson ----------------------------------------- Per: /s/ George Liszicasz ----------------------------------------- MOMENTUM RESOURCES CORPORATION Per: /s/ R. Dirk Stinson ----------------------------------------- Per: /s/ George Liszicasz ----------------------------------------- EX-10.32 4 EMPLOYMENT AGREEMENT DATED MAY 1, 1999 EXHIBIT 10.32 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (the "Agreement"), dated effective as of May 1, 1999, is entered into by and between Pinnacle Oil International, Inc., a Nevada corporation (the "Company") and Daniel C. Topolinsky (the "Executive"), with reference to the following facts: RECITALS: -------- WHEREAS, the Company desires to employ the Executive as its President in order to enable the Company to avail itself of the skill, knowledge and experience of the Executive and to assure the successful management of the Company, and the Executive desires to become employed in such executive officers position or positions; WHEREAS, the Company and the Executive desire to enter into a written employment agreement formally documenting their relationship and setting forth the duties and responsibilities the Company desires the Executive to undertake, and which the Executive has agreed to undertake. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and for valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the parties to this Agreement (collectively "parties" and individually a "party") agree as follows: AGREEMENT: --------- 1. DEFINITIONS Set forth below are definitions of capitalized words or terms which (together with those common words and terms set forth in section 15(l)) are ------------- generally used throughout this Agreement, or references to sections or paragraphs containing those definitions (capitalized terms used only in a specific section or paragraph of this Agreement are defined in that section or paragraph): (a) "Advance" is defined in section 9. --------- (b) "Affiliate" means any "Person" (as defined below) controlling, controlled by, or under common control with a party. (c) "Agreement" means this Agreement, as originally executed and as it may be: (i) amended, modified, supplemented and/or restated from time to time (but only to the extent amended, modified, supplemented and/or restated in accordance with the terms of this Agreement); and/or (ii) renewed or extended in accordance with its terms. (d) "Applicable Laws" means any federal (both of the United States and Canada), state, provincial local or foreign laws or regulations as may be applicable. (e) "Board" means the Board of Directors of the Company, as such body may be reconstituted from time to time. (f) "Change In Control" hall mean the occurrence of any of the following events: (i) A "Control Acquisition" by an "Acquiring Person" pursuant to which Acquiring Person attains, by reason of and immediately after a transaction or series of related transactions, "Beneficial Ownership" of fifty percent (50%) or more of the "Total Combined Voting Power" of the Company's then outstanding "Voting Securities." The terms in quotations in the immediately preceding sentence shall, for purposes of this Agreement, have the following meanings: (1) "Acquiring Person" shall mean any "Person" which acquires the defined percentage of securities, with the exception of: (A) any Employee Benefit Plan (or a trust forming a part thereof) maintained by the Company, or by any corporation or entity in which the Company holds fifty percent (50%) or more of the "Voting Securities" (each, a "Controlled Subsidiary"); (B) the Company or any Controlled Subsidiary; or (C) any "Person" which acquires the threshold percentage of "Voting Securities" through a "Non-Control Transaction" (as defined below). (2) "Non-Control Transaction" shall mean any transaction in which the stockholders of the Company immediately before such transaction, directly or indirectly own immediately following such transaction at least a majority of the "Total Combined Voting Power" of the outstanding "Voting Securities" of the surviving corporation (or other entity) resulting from such transaction, in substantially the same proportion as such stockholders' ownership of the Company's "Voting Securities" immediately before such transaction. (3) "Person," "Beneficial Ownership," "Total Combined Voting Power" and "Voting Securities" shall have the meanings ascribed to such terms in Sections 13(d) and 14(d) of the Securities Exchange Act and Rule 13d-3 promulgated thereunder. Notwithstanding any other provision of this subsection (f)(i), a ----------------- Change In Control shall not be deemed to have occurred solely because any Person acquired Beneficial Ownership of more than the threshold percentage of the outstanding Voting Securities as a result of an acquisition of Voting Securities by the Company (each, a "Redemption") which, by reducing the number of Voting Securities outstanding, increased the percentage of outstanding Voting Securities Beneficially Owned by such Person; provided, however, that if (A) a Change In Control would occur as a result of a Redemption but for the operation of this sentence, and (B) after such Redemption, such Person becomes the Beneficial Owner of any additional Voting Securities, which increase the percentage of the then outstanding Voting Securities Beneficially Owned by such Person over the percentage owned as a result of the Redemption, then a Change In Control shall be deemed to have occurred. (ii) During any period of three (3) consecutive years after the date of this Agreement, the individuals who constituted the Board at the beginning of such period (the "Incumbent Board") cease to constitute a majority of the Board, for any reason(s) other than (1) the voluntary resignation of one or more Board members; (2) the refusal by one or more Board members to stand for election to the Board; and/or (3) the removal of one or more Board members for good cause; provided, however, (A) that if the nomination or election of any new director of the Company was approved by a vote of at least a majority of the Incumbent Board, such new director shall be deemed a member of the Incumbent Board; and (B) that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 -2- promulgated under the Securities Exchange Act of 1934), or as a result of a solicitation of proxies or consents by or on behalf of an Acquiring Person, other than a member of the Board (a "Proxy Contest"), or as a result of any agreement intended to avoid or settle any Election Contest or Proxy Contest. (iii) The Board or the stockholders of the Company approve: (1) A merger or consolidation or reorganization of the Company reorganization (each, a "Major Event") with (A) any Controlled Subsidiary, and the terms of the proviso to this subsection (f)(iii) ------------------- are not satisfied; or (B) any other corporation or other entity; unless such Major Event is a Non-Control Transaction; or (2) A complete liquidation or dissolution of the Company, and the terms of the proviso to subsection (f)(iii) are not satisfied; ------------------- or (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Controlled Subsidiary, and the terms of the proviso to subsection (f)(iii) are ------------------- not satisfied. Notwithstanding any other provision of this subsection ---------- (f)(iii), if the Executive or an Affiliate of the Executive who is then a -------- stockholder or director of the Company, either: (i) expressly voted in favor of the transaction constituting the Change In Control in such Person's capacity as either a stockholder or as a director of the Company; or (ii) expressly abstained from voting (other than by reason of an "interest" in a matter or transaction, as defined in the Nevada Revised Statutes); and/or (iii) failed or refused to vote, then the transaction shall not constitute a Change in Control. (g) "Company" means Pinnacle Oil International, Inc., a Nevada Corporation, and any successor and assign of the Company, as more particularly described in, or permitted and prescribed pursuant to, section 17(a). ------------- (h) "Disability" (or the related term "Disabled") means any of the following: (i) the receipt of any disability insurance benefits by the Executive; (ii) a declaration by a court of competent jurisdiction that the Executive is legally incompetent; (iii) the Executive's material inability due to medically documented mental or physical illness or disability to fully perform the Executive's regular obligations of his office and as an employee of the Company (with reasonable accommodations for such disability, if then required by Applicable Law), for a six (6) month continuous period, or for nine (9) cumulative months within any one (1) year continuous period; or (iv) the reasonable determination by the Board that the Executive will not be able to fully perform the Executive's regular obligations of his office and as an employee of the Company (with reasonable accommodations if then required by Applicable Law) for a six (6) month continuous period. If the Board determines that the Executive is Disabled under clause (iv) above, and the Executive ----------- disagrees with the conclusion of the Board, then the Company shall engage a qualified independent physician reasonably acceptable to the Executive to examine the Executive at the Company's sole expense. The determination of such physician shall be provided in writing to the parties and shall be final and binding upon the parties for all purposes of this Agreement. The Executive hereby consents to examination in the manner set forth above, and waives -3- any physician-patient privilege arising from any such examination as it relates to the determination of the purported disability. (i) "Employee Benefit Plan" is defined in section 4(c). ------------ (j) "Employee Deductions" are defined in section 6. --------- (k) "Monthly Salary" is defined in section 4(a). ------------ (l) "Performance Bonus" is defined in section 4(b). ------------ (m) "Person" (other than for purposes of determining a Change in Control) means an individual or natural person, a corporation, partnership (limited or general), joint-venture, association, business trust, limited liability company/partnership, business trust, trust (whether revocable or irrevocable), pension or profit sharing plan, individual retirement account, or fiduciary or custodial arrangement. (n) "Personal Time-Off" is defined in section 7. --------- (o) "Subsidiary" shall mean any corporation, partnership (limited or general), joint-venture, association, business trust, limited liability company/partnership, business trust or trust in which the Company holds a controlling interest, including but not limited to Pinnacle Oil, Inc., a Nevada corporation ("Pinnacle Oil"), and Pinnacle Oil Canada, Inc., a British Columbia corporation ("Pinnacle Canada"). (p) "Termination By Company For Cause" means a termination of the Executive caused by a determination of two-thirds of the Board, excluding the Executive if then a member of the Board, that one of the following events has occurred: (i) Any of the Executive's representations or warranties in this Agreement is not materially true, accurate and/or complete; (ii) The Executive has intentionally and continually breached or wrongfully failed and/or refused to fulfill and/or perform (A) any of the Executive's material obligations, promises or covenants under this Agreement, or (B) any of the material warranties, obligations, promises or covenants in any agreement (other than this Agreement) entered into between the Company and the Executive, without cure, if any, as provided in such agreement; (iii) The Executive has intentionally failed and/or refused to obey any lawful and proper order or directive of the Board, and/or the Executive has intentionally interfered with the compliance by other employees of the Company with any such orders or directives; (iv) The Executive has intentionally breached the Executive's fiduciary duties to the Company; (v) The Executive has intentionally caused the Company to be convicted of a crime, or to incur criminal penalties in material amounts; -4- (vi) The Executive has committed: (A) any act of fraud, misrepresentation, theft, embezzlement or misappropriation, and/or any other dishonest act against the Company and/or any of its Affiliates, subsidiaries, joint ventures; or (B) any other offense involving moral turpitude, which offense is followed by conviction or by final action of any court of law; or (C) a felony; (vii) The Executive repeatedly and intemperately used alcohol or drugs, to the extent that such use (A) interfered with or is likely to interfere with the Executive's ability to perform the Executive's duties, and/or (B) endangered or is likely to endanger the life, health, safety, or property of the Executive, the Company, or any other person; (viii) The Executive has intentionally demonstrated or committed such acts of racism, sexism or other discrimination as would tend to bring the Company into public scandal or ridicule, or could otherwise result in material and substantial harm to the Company's business, reputation, operations, affairs or financial position; and/or (ix) The Executive engaged in other conduct constituting legal cause for termination. No act, nor failure to act, on the Executive's part shall be considered "intentional" unless the Executive has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that the Executive's action or failure to act was in the best interests of the Company. In the event the Executive is both Disabled and the provisions of clause (vii) of this ------------ subsection (p) are applicable, the Company shall nevertheless have the right to - -------------- deem such event as a Termination By Company For Cause. (q) Termination By Executive For Good Reason" means the Executive's termination of this Agreement based on his reasonable determination that one of the following events has occurred: (i) Any of the Company's representations or warranties in this Agreement is not materially true, accurate and/or complete; (ii) The Company intentionally and continually breached or wrongfully failed to fulfill or perform (A) its material obligations, promises or covenants under this Agreement; or (B) any material warranties, obligations, promises or covenants of the Company in any agreement (other than this Agreement) entered into between the Company and the Executive, without cure, if any, as provided in such agreement; (iii) The Company terminated this Agreement and the Executive's employment hereunder (with the exception of Treasurer), and such termination does not constitute Termination By Company For Cause; (iv) Without the consent of the Executive, the Company: (A) substantially altered or materially diminished the position, nature, status, prestige or responsibilities of the Executive from those in effect by mutual agreement of the parties from time-to-time; (B) assigned additional duties or responsibilities to the Executive which were wholly and clearly inconsistent with the position, nature, status, prestige or responsibilities of the Executive then in effect; or (C) removed or failed to reappoint or re-elect the Executive to the Executive's offices -5- under this Agreement (as they may be changed or augmented from time-to-time with the consent of the Executive), or as a director of the Company, except in connection with the Disability of the Executive; (v) Without the consent of the Executive, the Company relocated the Company's principal operating offices from their present location, and as a result increased the Executive's ordinary commute from the Executive's temporary residence by more than thirty-five (35) miles; (vi) Without the consent ratification (express or implied) of the Executive, the Executive was removed from the Board without his consent; or the Company failed to nominate or reappoint the Executive to the Board (unless the Executive is deceased or Disabled, or such removal or failure is attributable to an event which would constitute Termination By Company For Cause), or if the Executive was so nominated, the stockholders of the Company failed to re-elect the Executive to the Board; (vii) The Company intentionally required the Executive to commit or participate in any felony or other serious crime; and/or (viii) The Company engaged in other conduct constituting legal cause for termination. In the event any of the events described above in this subsection (q) -------------- occurs, and such event is reasonably susceptible of being cured, the Company shall be entitled to a grace period of thirty (30) days following receipt of written notice of such event. If the Executive determines, in his sole discretion, that such event is not reasonably susceptible of being cured within a period of thirty (30) days), the Executive may grant a longer cure period to the Company to cure such event to the reasonable satisfaction of the Executive, provided the Company promptly commences and diligently pursues such cure. The noted grace periods shall not apply to any other event described in this subsection (q). - -------------- 2. EMPLOYMENT OBLIGATIONS (a) Engagement; Duties. The Company hereby engages the Executive as ------------------ its President, and the Executive accepts such position, upon the terms and conditions set forth herein. As the Company's President, the Executive shall do and perform all services, acts, or things necessary or advisable to discharge his duties as the Company's President under this Agreement and the Company's Bylaws including, but not limited to, the following: (i) Managing, conducting and supervising the day-to-day administrative business of the Company (and/or its Subsidiaries) such as, by way of example and not limitation, hiring and firing employees and consultants and establishing compensation levels for such employees and consultants; and negotiating and entering into contracts on behalf of the Company (and/or its Subsidiaries) with respect to the ordinary operations of the business of the Company (and/or its Subsidiaries) such as, by way of example and not limitation, exploration, equipment, purchase and lease contracts. -6- (ii) On behalf of the Company, negotiating and entering into agreements, contracts and/or joint ventures with third parties relating to the provision of the Company's SFD Data; (iii) Acting as the Company's liaison with its attorneys, certified public accountants, bankers, joint venture partners, market makers for the Company's securities and the investment community; and (iv) Developing and implementing long-term strategic, business and fiscal planning for the Company (and/or its Subsidiaries) and their businesses, including but not limited to plans or capital requirements for financing, the commercial exploitation of SFD Data, finance, and positioning the Company's securities in the various capital markets. The Executive shall report only to the Company's Chief Executive Officer and the Board, and any significant employment decisions and/or agreements, contracts and/or joint ventures negotiated by the Executive shall be subject to the review and approval/ratification of the Board. The Executive's responsibilities with respect to the Company and each of its Subsidiaries may be changed or supplemented by the Board from time-to-time, in their discretion. The Executive shall also hold such offices with the Subsidiaries and/or joint ventures of the Company as the Board may, in its discretion and with the consent of the Executive, from time-to-time determine. The Board shall determine the amount of the Executive's total remuneration which will be allocated to and paid by the Company and by each of its Subsidiaries. The Executive shall be reasonably available to travel as the needs of the Company's business may require. The Executive agrees to cooperate with and work to the best of his ability with the Company's (and/or its Subsidiaries') management team, which includes the Board and the executive officers, and to continually improve the Company's (and/or its Subsidiaries') reputation in its industry. (b) Performance. The Executive shall devote the Executive's entire ----------- and undivided business time, energy, abilities and attention solely and exclusively to the performance of the Executive's duties hereunder and the business of the Company (and/or its Subsidiaries); provided, however, the foregoing shall not be construed to prohibit the Executive from attending to personal matters from time-to-time as needed during business hours to the extent reasonably necessary to address such matters. The Executive shall at all times faithfully, loyally, conscientiously, diligently and, to the best of the Executive's ability, perform all of the Executive's duties and obligations under this Agreement, and otherwise promote the interests and welfare of the Company (and/or its Subsidiaries), all consistent with the highest and best standards of the Company's industry. The Executive: (i) shall strictly comply with and adhere to all Applicable Laws, and the Company's Articles of Incorporation, Bylaws and policies; (ii) shall obey all reasonable rules and regulations and policies now in effect or as subsequently modified governing the conduct of employees of the Company, and (iii) shall not commit any acts of gross negligence, willful misconduct, dishonesty, fraud or misrepresentation, racism, sexism or other discrimination, or any other acts which would tend to bring the Company (and/or its Subsidiaries) into public scandal or ridicule, or would otherwise result in material harm to the Company's business or reputation. (c) Facilities and Services. The Company (and/or its Subsidiaries) ----------------------- shall provide such support staff, facilities, equipment and supplies as are reasonably necessary or suitable for the adequate performance of the Executive's duties and obligations under this Agreement, including technical and secretarial help. -7- 3. TERM (a) Initial Term. The Company hereby employ the Executive pursuant to ------------ the terms of this Agreement, and the Executive hereby accepts such employment with the Company, for the period beginning on the date of this Agreement and ending on April 30, 2004 (the "Initial Term"). (b) Automatic Renewal; Termination by the Company. Unless this --------------------------------------------- Agreement is previously terminated by either party as provided in section 10 ---------- below, this Agreement will be automatically renewed for additional and consecutive one (1) year terms (each, a "Renewal Term") following the expiration of each Initial or Renewal Term, (each a "Term"), unless either party gives ------ written notice to the other party, no later than sixty (60) days prior to the expiration of the then pending Term, of its election not to automatically --- renew this Agreement for an additional year. 4. COMPENSATION (a) Monthly Base Salary. The Company shall pay or caused to be paid ------------------- to the Executive a monthly base salary of twenty thousand Canadian dollars (CDN $20,000) (the "Monthly Salary"). The Monthly Salary shall be payable in periodic installments as agreed from time-to-time by the Executive and the Board, but at least semi-monthly, and shall be subject to any Tax Withholdings and/or Employee Deductions that are applicable. In any pay period in which the Executive shall be employed for less than the entire number of business days in such pay period, the Monthly Salary for such pay period shall be prorated on the basis of the number of business days during which the Executive was actually employed during such pay period, divided by the actual number of business days in such pay period. Commencing on the first annual anniversary date of this Agreement, and on each annual anniversary date thereafter, the Monthly Salary then effective shall be increased by an amount equal to five percent (5%) of the Monthly Salary for the immediately prior year. Additionally, commencing on or prior to the first annual anniversary date of this Agreement, and on or prior to each annual anniversary date thereafter, the Board shall review the Executive's Monthly Salary to determine whether to increase the Monthly Salary by an amount in excess of said five percent (5%) increment, without any obligation by the Board to authorize such increase. (b) Performance Bonus. The Board shall from time-to-time, but not ----------------- less than one (1) time per year, evaluate the performance of the Executive and award to the Executive a performance bonus (the "Performance Bonus") in such amount as the Board may determine, in its sole discretion, to be reasonable, after taking into consideration other compensation paid or payable to the Executive under this Agreement, as well as the financial and non-financial progress of the business of the Company (and/or its Subsidiaries) and the contributions of the Executive toward that progress. Payment of the Performance Bonus shall be subject to any applicable Tax Withholdings and/or Employee Deductions. (c) Participation in Employee Benefit Plans. The Executive shall have --------------------------------------- the same rights, privileges, benefits and opportunities to participate in any employee benefit plans of the Company which may now or hereafter be in effect on a general basis for the Company's executive officers or employees, including without limitation retirement, pension, profit-sharing, savings and insurance (including, but not limited to, health, dental, disability and/or group insurance) (collectively, "Employee Benefit Plans"). (d) Stock Options. ------------- -8- (i) The Company agrees to grant to the Executive an option (the "First Option") to purchase up to three hundred thousand (300,000) unregistered shares of the Company's common stock, which right to purchase shall vest incrementally over a period of four (4) years based upon continuous employment, with the first increment of eighty-five thousand (85,000) shares vesting one year from the date of this Agreement, the second increment of ninety thousand (90,000) shares vesting two years from the date of this Agreement; the third increment of ninety-five thousand (95,000) shares vesting three years from the date of this Agreement, and the fourth increment of thirty thousand (30,000) shares vesting four years from the date of this Agreement The purchase price per share shall be U.S. $14 per share. (ii) The Company agrees to grant to the Executive an option (the "Second Option") to purchase up to two hundred thousand (200,000) unregistered shares of the Company's common stock, which right to purchase shall vest incrementally over a period of five (5) years based upon continuous employment, with the first increment of seventy-five thousand (75,000) shares vesting four year from the date of this Agreement, and the second increment of one hundred twenty-five thousand (125,000) shares vesting five years from the date of this Agreement. The purchase price per share shall be the closing sales price for the Company's common stock as quoted by the NASD Electronic Bulletin Board (or any replacement market or exchange) on April 30, 2001. (iii) The Company agrees, so long as it is a reporting company, to use its best efforts to register the options shares under an S-8 Registration Statement. (iv) The term for the Executive to exercise the First Option or Second Option (collectively, the "Option") with respect to any vested share shall expire five (5) years from the date of vesting of such share provided, however, if the Executive's employment with the Company has been previously terminated pursuant to section (vi) below, the expiration date ------------ shall be accelerated to two (2) years after the effective date of termination (if earlier than the option expiration date). (v) In the event of the death or Disability of the Executive, all unvested Options Shares which would have vested within the twelve (12) -------- month period following the date of death or Disability will vest effective as of the date of death or Disability, and the prospective right to purchase the balance of the remaining unvested option shares shall lapse. -------- (vi) In the event the Executive's employment with the Company is terminated, and such termination is attributable to (A) an event defined as Termination By Company for Cause; and/or (B) termination by the Executive which does not constitute Termination By Executive For Good Reason; then --- the prospective right to purchase unvested option shares shall lapse to the -------- extent such rights do not vest prior to the effective date of termination. (vii) In the event the Executive's employment with the Company is terminated, and such termination is attributable to (A) an event defined as a Termination by Executive for Good Reason; (B) termination by the Company which does not constitute a Termination By Company for Cause and/or (C) an event defined as a Change in Control; then the prospective right to purchase all unvested options shares which would have vested within the twelve (12) month period following the date of such event will vest effective as of the date of -9- such event, and the prospective right to purchase the balance of the remaining unvested option shares shall lapse. -------- (viii) The grant of the Options shall be evidenced by a Stock Option Certificate reflecting the above terms plus such additional terms and conditions as required by a Plan established by the Company and containing such other terms as the Company believes to be reasonable. (ix) The Executive shall be responsible for all income taxes (including tax withholdings) attributable to the grant or exercise of the Option, or the sale of the option shares acquired by exercise of the Option. 5. BUSINESS EXPENSES During the Term of this Agreement the Executive is authorized to incur, and the Company (and/or its Subsidiaries) shall directly pay or reimburse the Executive for his or her payment of the Executive's reasonable and necessary business expenses, duly and actually incurred by the Executive in connection with the duties and services to be performed by the Executive under this Agreement, including without limitation entertainment, meals, travel, lodging and other similar out-of-pocket expenses, upon the Executive's submission to the Company (and/or its Subsidiaries) of itemized expense statements setting forth the date, purpose and amount of the expense incurred, together with corresponding receipts showing payment by the Executive in cases where he or she seeks reimbursement, all in conformity with business expense payment and/or reimbursement policies as may be established by the Company (and/or its Subsidiaries) from time to time, all of which shall comply with the substantiation requirements of the Internal Revenue Code of 1986, as amended, and the Income Tax Act of Canada, as amended, and any other applicable taxing authorities, and regulations promulgated by such authorities thereto, pertaining to the deductibility of such expenses. Direct payment and/or reimbursement shall be made by the Company (and/or its Subsidiaries) no later than thirty (30) days of the Executive submission of the foregoing documentation. The Executive shall be entitled to direct payment and/or reimbursement in full for the aforesaid business expenses, notwithstanding that the Company is prohibited under the Code and/or regulations promulgated thereunder from deducting the entire amount of such expenses. The Company (and/or its Subsidiaries) shall have the option to pay directly the persons entitled to payment for such business expenses. 6. TAX WITHHOLDINGS AND EMPLOYEE DEDUCTIONS The Company (and/or its Subsidiaries) shall be entitled to deduct from any payments to the Executive pursuant to the terms of this Agreement (including any payments arising from the early termination of this Agreement), amounts sufficient to cover applicable federal (United States and Canada), state, provincial, local and/or foreign income tax withholdings and/or deductions as may be required in connection with such payment, including without limitation old-age and survivor's and other social security payments, state disability and other withholdings payment as may be required by law (collectively, the "Tax Withholdings"), as well as all other elective employee deductions applicable to such payment such as, for example, deductions relating to any Employee Benefit Plan in which the Executive participates (collectively, the "Employee Deductions"). 7. PERSONAL TIME-OFF -10- The Executive shall be entitled each calendar year during the term of this Agreement to such number of personal time-off days for such purposes, including vacations and time for personal affairs ("Personal Time-Off") as are approved by the Board, but not less than the greater of (i) fifteen (15) business days, or (ii) the number of personal time-off days (including vacation and personal days) generally given by the Company to its employees. Personal Time-Off shall be in addition to regular paid legal holidays provided to all employees of the Company. The Executive's compensation shall be paid in full with respect to approved Personal Time-Off days. Should the Executive fail to use all Personal Time-Off days in any calendar year, the Executive shall have the option of (i) receiving payment for such days on a pro rata basis, or (ii) "carrying-over" unused Personal Time-Off days to succeeding years. Personal time-off shall be taken during a period or periods mutually satisfactory to both the Company and the Executive. 8. INSURANCE If requested by the Company, the Executive shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain disability and/or life insurance on the life of the Executive. The Executive represents and warrants that he has no reason to believe that he is not insurable for disability or life coverage with a reputable insurance company at rates now prevailing in the city of the Company's principal executive offices, for healthy persons of the Executive's own age and gender. 9. ADVANCES The Company (and/or its Subsidiaries) may from time-to-time, upon written consent from the Chairman of the Board or the Board, and without any obligation to do so, make advances to the Executive against any compensation or other amounts to be paid by the Company (and/or its Subsidiaries) to the Executive (each, an "Advance"). Any amounts due hereunder to the Executive shall, at the election of the Company, be offset by any then outstanding Advances. Subject to the terms of any written agreement relating to Advances, in the event of termination of employment of executive, the Executive agrees that the Company (and/or its Subsidiaries) shall have the right to offset the amount of any and all outstanding Advance(s) against any salary or wages due, or any other amounts due to the Executive from the Company, and that any remaining balance of the Advance(s) shall be repaid by the Executive within thirty (30) days after the Executive's termination date. If such Advance(s) are not repaid within said thirty (30) days, simple interest shall accrue on the unpaid balance at the rate of ten percent (10%) per annum. The Executive agrees to pay all costs of collection incurred by the Company (and/or its Subsidiaries) with respect thereto, including reasonable attorneys' fees and legal costs. The Company's obligation to make payments to the Executive hereunder shall not, except with respect to Advance(s) as provided above, be affected by any circumstance, including without limitation any set-off, counterclaim, recoupment, defense or other right which the Company (and/or its Subsidiaries) may have against the Executive or others. -11- 10. TERMINATION OF AGREEMENT BEFORE EXPIRATION OF TERM (a) Death or Disability. Notwithstanding any other term of this ------------------- Agreement, the applicable Term shall terminate upon the death or Disability of the Executive, subject to compliance with Applicable Laws. (b) Change In Control. Notwithstanding any other term of this ----------------- Agreement, the applicable Term shall, at the election of the Executive, delivered by written notice to the Company, terminate effective upon the Change In Control. (c) Termination of Agreement by Company for Cause. Subject to --------------------------------------------- compliance with Applicable Laws, the Company may terminate this Agreement and the Executive's employment hereunder at any time in the event such termination constitutes Termination By Company For Cause, upon giving written notice to the Executive specifying in reasonable detail: (i) the event which constitutes the cause; (ii) the pertinent facts and circumstances underlying the cause; and (iii) the effective date of the termination(which date may, at the Company's election, be effective upon receipt of said written notice by the Executive). Such notice shall also afford the Executive an opportunity to be heard in person by the Board (with the assistance of the Executive's legal counsel, if the Executive so desires). Such hearing shall be held reasonably promptly after such notice but, in any event, before the effective date of the prospective termination. (d) Termination of Agreement by Executive for Good Reason. The ----------------------------------------------------- Executive may terminate this Agreement and the Executive's employment hereunder at any time in the event such termination constitutes Termination By Executive For Good Reason, upon giving written notice to the Company specifying in reasonable detail: (i) the event which constitutes the good reason; (ii) the pertinent facts and circumstances underling the good reason; and (iii) the effective date of termination (not to exceed ninety {90} days from the date of such notice, but which date may, at the Executive's election, be effective upon receipt of said written notice by the Company). 11. EFFECT OF TERMINATION ATTRIBUTABLE TO DEATH OR DISABILITY; TERMINATION BY COMPANY FOR CAUSE; TERMINATION BY EXECUTIVE WITHOUT GOOD REASON In the event the Executive's employment hereunder is terminated before the expiration of a Term, and such termination is attributable to (i) an event defined as Death or Disability; (ii) an event defined as Termination By Company For Cause; and/or (iii) termination by the Executive which does not constitute --- Termination By Executive For Good Reason, then all rights and obligations of the Company and the Executive under section 2 [Employment Obligations], section 4 --------- --------- [Compensation], section 5 [Business Expenses] and section 7 [ Personal Time-Off] --------- --------- shall terminate as of the effective date of the termination; provided, however: (a) The Company (and/or its Subsidiaries) shall pay the Executive's accrued but unpaid Monthly Salary and Personal Time-Off days through the effective date of the termination on or before the close of business on such effective date; and the Executive shall not be entitled to Monthly Salary and/or Personal Time-Off days after the effective date of the termination; -12- (b) The Company (and/or its Subsidiaries) shall pay any declared but unpaid Performance Bonus; (c) The Company (and/or its Subsidiaries) shall reimburse the Executive for any business expenses incurred prior to the effective date of the termination, within three (3) business days after the Executive's submission of the Executive's expense report to the Company; and (d) The Executive shall not be entitled to continue to participate in any Employee Benefit Plans except to the extent provided in such plans for terminated participants, or as may be required by Applicable Law. Notwithstanding the foregoing, amounts which are vested in any Employee Benefit Plans shall be payable in accordance with such plan. 12. EFFECT OF TERMINATION WHERE TERMINATION ATTRIBUTABLE TO CHANGE IN CONTROL; TERMINATION BY EXECUTIVE FOR GOOD REASON; TERMINATION BY COMPANY WITHOUT CAUSE In the event the Executive's employment hereunder is terminated before the expiration of a Term, and such termination is attributable to (i) an event defined as a Change in Control; (ii) an event defined as a Termination by Executive for Good Reason; and/or (iii) termination by the Company which does not constitute a Termination By Company for Cause; then all rights and obligations of the Company and the Executive under section 2 [Employment --------- Obligations], section 4 [Compensation], section 5 [Business Expenses], and --------- --------- section 7 [Personal Time-Off] shall terminate as of the effective date of the - --------- termination date; provided, however: (a) The Company (and/or its Subsidiaries) shall continue to pay the Executive's then effective Monthly Salary through the earlier of (i) the pending ------- Term of this Agreement or (ii) the period which expire eighteen (18) months after the effective date of termination, on the same basis as previously paid to the Executive, but subject to such minimum increases as are described in section ------- 4; - - (b) The Company (and/or its Subsidiaries) shall pay the Executive's declared but unpaid Performance Bonus; (c) At the election of the Executive, the Company (and/or its Subsidiaries) shall (i) permit the Executive to continue to participate in any Employee Benefit Plans, except to the extent prohibited in such plans for terminated employees, or as may be required by Applicable Law; or (ii) provide the Executive with additional compensation, payable on a monthly basis, which would approximate the cost to the Executive to obtain comparable benefits; (d) The Company (and/or its Subsidiaries) shall reimburse the Executive for the Executive's business expenses incurred through the effective date of the termination, within three (3) business days of the Executive's submission of the Executive's expense report to the Company; and The Executive shall not be required to mitigate the amount of any payment pursuant to this section 12 by seeking other employment or otherwise, ---------- and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment. The Executive, in turn, agrees that the provisions of this section 12 shall act as a ---------- severance payment to the -13- Executive, and as such shall satisfy all claims the Executive may have, whether at law or equity; in connection with the early termination of this Agreement. 13. REPRESENTATIONS AND WARRANTIES OF PARTIES (a) By All Parties. Each of the parties to this Agreement hereby -------------- represents and warrants to each of the other parties to this Agreement, each of which is deemed to be a separate representation and warranty, as follows: (i) Organization, Power and Authority. Such party, if an --------------------------------- entity, is duly organized, validly existing and in good standing under the laws of its state, territory or province of incorporation or organization, and has all requisite corporate or other power and authority to enter into this Agreement. (ii) Authorization. The execution and delivery of this ------------- Agreement by such party, and the performance by such party of the transactions herein contemplated, have, if such party is an entity, been duly authorized by its governing organizational documents, and are not prohibited by its governing organization documents, and no further corporate or other action on the part of such party is necessary to authorize this Agreement, or the performance of such transactions. (iii) Validity. This Agreement has been duly executed and -------- delivered by such party and, assuming due authorization, execution and delivery by all of the other parties hereto, is valid and binding upon such party in accordance with its terms, except as limited by: (1) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditor rights generally; and (2) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). (iv) Non-Contravention. Neither the execution or delivery of ----------------- this Agreement, nor the performance by such party of the transactions contemplated herein: (1) if such party is an entity, will breach or conflict with any of the provisions of such party's governing organizational documents; or (2) to the best of such party's knowledge and belief, will such actions violate or constitute an event of default under any agreement or other instrument to which such party is a party. (v) Legal Representation. Such party: (1) had the advice, or -------------------- sufficient opportunity to obtain the advice, of legal counsel separate and independent from legal counsel for any other party hereto; and (2) such party was not represented by the legal counsel of any other party hereto in connection with the transactions contemplated by this Agreement, nor was such party under any belief or understanding that such legal counsel was representing such party's interests. (vi) Fairness. The terms and conditions of the transactions -------- contemplated by this Agreement are fair and reasonable to such party based upon all of the facts and circumstances at the time this Agreement is entered into; and such party has voluntarily entered into the transactions contemplated by this Agreement, without duress or coercion. -14- (b) By Executive. The Executive hereby represents and warrants to the ------------ Company that the Executive is not Disabled at the time of the execution and delivery of this Agreement by the Executive. 14. NON-LIABILITY FOR EXECUTIVE'S DEBTS Except as provided under Applicable Laws, the Executive's rights and obligations under this Agreement shall not be subject to encumbrance or to the claims of the Executive's creditors (other than the Company), or subject to the debts, contracts or engagements of the Executive or the Executive's heirs, successors and assigns, and any attempt to do any of the foregoing shall be null and void ab initio and without force and effect. 15. INTERPRETATION AND CONSTRUCTION (a) Preparation of Agreement. The parties have participated jointly ------------------------ in the negotiation and drafting of this Agreement and each provision hereof. In the event any ambiguity, conflict, omission or other question of intent or interpretation arises, this Agreement shall be construed as if jointly drafted by the parties, and no presumption or burden of proof shall be presumed, implied or otherwise construed favoring or disfavoring any party by virtue of the authorship of this Agreement or of any provision hereof. (b) Performance on Business Day. In the event the date on which a --------------------------- party is required to take any action under the terms of this Agreement is not a business day, the action shall, unless otherwise provided herein, be deemed to be required to be taken on the next succeeding business day. For purposes of this section, the term "business day" shall mean Monday through Friday (excluding any legal holidays). (c) Survival of Representations and Warranties. All representations ------------------------------------------ and warranties made by any party in connection with any transaction contemplated by this Agreement shall, irrespective of any investigation made by or on behalf of any other party hereto, survive the execution and delivery of this Agreement and the performance or consummation of any transaction described in this Agreement, and shall continue in full force and effect forever thereafter (subject to any applicable statutes of limitation). (d) Independent Significance. The parties intend that each ------------------------ representation, warranty and covenant shall have independent significance. If any party has falsely made or breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not falsely made or breached shall not detract from or mitigate the fact that the party has falsely made or breached the first representation, warranty or covenant. (e) Entire Agreement; No Collateral Representations. Each party ----------------------------------------------- expressly acknowledges and agrees that this Agreement: (i) is the final, complete and exclusive statement of the agreement of the parties with respect to the subject matter hereof; (ii) supersede any prior or contemporaneous agreements, memorandums, proposals, commitments, guaranties, assurances, communications, discussions, promises, representations, understandings, conduct, acts, courses of dealing, warranties, interpretations or terms of any kind, whether oral or written (collectively and -15- severally, the "prior agreements"), and that any such prior agreements are of no force or effect except as expressly set forth herein; and (iii) may not be varied, supplemented or contradicted by evidence of prior agreements, or by evidence of subsequent oral agreements. No prior drafts of this Agreement, and no words or phrases from any prior drafts, shall be admissible into evidence in any action or suit involving this Agreement. (f) Amendment; Waiver; Forbearance. Except as expressly provided ------------------------------ herein, neither this Agreement nor any of the terms, provisions, obligations or rights contained herein, may be amended, modified, supplemented, augmented, rescinded, discharged or terminated (other than by performance), except by a written instrument or instruments signed by all of the parties to this Agreement. No waiver of: (i) any breach of any term, provision or agreement; (ii) the performance of any act or obligation under this Agreement; and/or (iii) any right granted under this Agreement, shall be effective and binding unless such waiver shall be in a written instrument or instruments signed by each party claimed to have given or consented to such waiver. Except to the extent that the party or parties claimed to have given or consented to a waiver may have otherwise agreed in writing, no such waiver shall be deemed a waiver or relinquishment of any other term, provision, agreement, act, obligation or right under this Agreement, or of any preceding or subsequent breach thereof. No forbearance by a party in seeking a remedy for any noncompliance or breach by another party hereto shall be deemed to be a waiver by such forbearing party of its rights and remedies with respect to such noncompliance or breach, unless such waiver shall be in a written instrument or instruments signed by the forbearing party. (g) Remedies Cumulative. The remedies of each party under this ------------------- Agreement are cumulative and shall not exclude any other remedies to which such party may be lawfully entitled. (h) Severability. If any term or provision of this Agreement, or the ------------ application thereof to any person or circumstance, shall to any extent be determined to be invalid, illegal or unenforceable under present or future laws, then, and in such event: (i) the performance of the offending term or provision (but only to the extent its application is invalid, illegal or unenforceable) shall be excused as if it had never been incorporated into this Agreement, and, in lieu of such excused provision, there shall be added a provision as similar in terms and amount to such excused provision as may be possible and still be legal, valid and enforceable; and (ii) the remaining part of this Agreement (including the application of the offending term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable) shall not be affected thereby, and shall continue in full force and effect to the fullest legal extent. (i) Time is of the Essence. Except and to the extent there is a ---------------------- specific cure provision in this Agreement, each party understands and agrees that: (i) time of performance is strictly of the essence with respect to each and every date, term, condition, obligation and provision hereof imposed upon such party; and (ii) the failure to timely perform any of the terms, conditions, obligations or provisions hereof by such party shall constitute a material breach and a noncurable (but waivable) default under this Agreement by such party. (j) Parties in Interest. Nothing in this Agreement shall confer any ------------------- rights or remedies under or by reason of this Agreement on any persons other than the parties hereto and their respective successors and assigns, if any, or as may be permitted hereunder; nor shall anything in this Agreement relieve or discharge the obligation or liability of any third person to any party to this -16- Agreement; nor shall any provision give any third person any right of subrogation or action against any party to this Agreement. (k) No Reliance Upon Prior Representations. Each party acknowledges -------------------------------------- that: (1) no other party has made any oral representation or promise which would induce such party, prior to executing this Agreement, to change such party's position to his, her or its detriment, to partially perform, or to part with value in reliance upon such representation or promise; and (2) such party has not so changed its position, performed or parted with value prior to the time of the execution of this Agreement, or such party has taken such action at its own risk. (l) Rules of Construction. In interpreting the meaning of this --------------------- Agreement: (i) the term "person" is defined in its broadest sense to include any individual or natural person, entity (as such term is defined in this subsection ---------- (l)) and/or fiduciary (as such term is defined in this subsection (l)), and - --- -------------- their respective successors and assigns; (ii) the term "entity" means any legal entity, including any corporation, association, joint stock company, partnership (limited, general or limited liability), joint-venture, and limited liability company, business trust, trust (whether revocable or irrevocable), pension or profit sharing plan, individual retirement account, or fiduciary or custodial arrangement; (iii) the term "fiduciary" means any person acting in a fiduciary capacity, including in their capacity as a trustee or a custodian; (iv) the term "affiliate" means any person controlling, controlled by, or under common control with a party (for purposes of the foregoing, the term "control" (including with the correlative meanings, the terms "controlled by" and "under common control with") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities or by contract or otherwise); (v) the term "subsidiary" means any entity in which a party holds a controlling interest; (vi) the words "herein" and "hereunder" and other words of similar report refer to this Agreement as a whole, and not to any particular sections, subsections, paragraph, subparagraph or other subdivision of this Agreement; (vii) the words "including," "includes," and "include" shall be deemed to be followed by the words "including without limitation;" (viii) the word "or" shall not be deemed to be exclusive unless the context indicates otherwise; and (ix) the word "all" shall be deemed to include the word "any," and vice versa. All pronouns and any variation thereof used in this Agreement shall be deemed to refer to the masculine, feminine, or neuter (as the case may be), and to the singular or plural (as the case may be), as the identity of the person or persons or the context may require for proper interpretation of this Agreement. Any references in this Agreement to "dollars" shall be deemed to refer to the currency of the United States of America, unless such reference specifically references a dollar-denominated currency of a country other than the United States of America. The headings used in this Agreement are for convenience and reference purposes only, and shall not be used in construing or interpreting the scope or intent of this Agreement or any provision hereof. Each cross-references in this Agreement shall, unless specifically directed to another agreement or document, be construed only to refer to provisions within this Agreement, and shall not be construed to refer to the overall transaction or to any other agreement or document. Each exhibit, addendum, schedule and/or attachment referenced in this Agreement shall be construed to be incorporated into this Agreement by such reference and made a part hereof. References to any agreements (other than this Agreement) shall include all amendments, modifications, supplements and/or renewals thereof. Unless the context requires otherwise: (1) any reference herein to any federal, state, local or foreign statutes or laws (collectively, the "Statutes") will be deemed to include all rules and regulations promulgated thereunder: and (2) any references herein to any Statute and/or any specific section or provision of any such Statute are intended to refer to such section or provision thereof as presently enacted and as subsequently amended, succeeded, recodified or renumbered. -17- 16. ENFORCEMENT (a) Governing Law. This Agreement and the rights and remedies of each ------------- party arising out of or relating to this Agreement (including equitable remedies) shall be solely governed by, interpreted under, and construed and enforced in accordance with the laws (without regard to the conflicts of law principles) of the Province of Alberta, as if this Agreement were made, and as if its obligations were to be performed in their entirety, within the Province of Alberta. (b) Recovery of Fees and Costs. If any party institutes, or should -------------------------- any party otherwise become a party to, any action or proceeding based upon or arising out of this Agreement, including the enforcement or interpretation of this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or any provision hereof, or for a declaration of rights in connection herewith, or for any other relief, including equitable relief, in connection herewith, the "prevailing party" (as such term is defined below) in any such action or proceeding, whether or not such action or proceeding proceeds to final judgment or determination, shall be entitled to receive from the non- prevailing party as a cost of suit, and not as damages, all fees, costs and expenses of enforcing any right of the prevailing party (collectively, "fees and costs"), including: (i) reasonable attorneys' fees and costs and expenses; (ii) witness fees (including experts engaged by the parties, but excluding officers, directors, employees, managers or general partners of the parties); (iii) accountants' fees; (iv) fees of other professionals and (v) any and all other similar fees incurred in the prosecution or defense of the action or proceeding; including the following: (1) postjudgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery and (5) bankruptcy litigation. All of the aforesaid fees and costs shall be deemed to have accrued upon the commencement of such action, and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of the aforesaid fees, costs and expenses incurred in enforcing such judgment and an award of prejudgment interest from the date of the breach at the maximum rate of interest allowed by law. The term "prevailing party" is defined as the party who is determined to prevail by the court after its consideration of all damages and equities in the action or proceeding (the court shall retain the discretion to determine that no party is the prevailing party, in which case no party shall be entitled to recover its fees and costs under this subsection (b)). -------------- 17. ASSIGNMENT AND DELEGATION; SUCCESSORS AND ASSIGNS. (a) Assignment or Delegation. Except as specifically provided in this ------------------------ Agreement, neither party (an "assigning party") may directly or indirectly sell, license, transfer or assign (whether through a merger, consolidation, conversion, sale of assets, sale or exchange of securities, or by operation of law, or otherwise) any of such party's rights or interests under this Agreement, or delegate any of such party's duties or obligations under this Agreement, in whole or in part, including to any subsidiary or to any affiliate, without the prior written consent of the other party (a "consenting party"), which consent may be withheld in the consenting party's sole and absolute discretion; provided, however: (i) Subject to prior compliance with subsection (iii) and ---------------- subsection (iv) below, an assigning party may assign all of the rights and --------------- interests and delegate all of the duties and obligations of the assigning party under this Agreement in connection with a transaction whose principal purpose is to change the State in which the assigning party is incorporated, or to form a holding company, or to effect a similar reorganization as to form of entity without change -18- of beneficial ownership, including through: (1) a merger or consolidation or stock exchange or divisive reorganization (i.e., spin-off, split-off or split-up) or other reorganization with respect to the assigning party and/or its stockholders; or (2) the sale, transfer, exchange or other disposition by the assigning party of its assets in a single or series of related transactions, so long as such transferee, purchaser or surviving person shall expressly assume such obligations of the assigning party; (ii) Subject to subsection (iii) and subsection (iv) below, an ---------------- --------------- assigning party may, with the prior written consent of the consenting party, which consent the consenting party may withhold in its sole and absolute discretion, assign all of the rights and interests and delegate all of the duties and obligations of the assigning party under this Agreement to any other person in connection with the transfer or sale of the entire business of the assigning party (other than with respect to a sale described in subsection (i) above), or the merger or consolidation of -------------- the assigning party with or into any other person (other than with respect to a merger or consolidation described in subsection (i) above), so long as -------------- such transferee, purchaser or surviving person shall expressly assume such obligations of the assigning party; (iii) Notwithstanding anything in subsection (i) or subsection -------------- ---------- (ii) above to the contrary, no assignment or transfer under subsection (i) ---- -------------- or subsection (ii) may be effectuated unless the proposed transferee or --------------- assignee first executes such agreements (including a restated employment agreement) in such form as the consenting party may deem reasonably satisfactory to: (1) evidence the assumption by the proposed transferee or assignee of the obligations of the assigning party; and (2) to ensure that the consenting party continues to receive such rights, benefits and protections (both legal and economic) as were contemplated by the consenting party when entering into this Agreement; and (iv) Notwithstanding anything in subsection (i) or subsection -------------- ---------- (ii) above to the contrary: (1) any assumption by a successor or assign ---- under subsection (i) or subsection (ii) above shall in no way release the -------------- --------------- assigning party from any of its obligations or liabilities under this Agreement; and (2) and any merger, consolidation, reorganization, sale or conveyance under subsection (i) or subsection (ii) above shall not be -------------- --------------- deemed to abrogate the rights of the consenting party elsewhere contained in this Agreement, including those resulting from a Change In Control. Any purported assignment or transfer in violation of the terms of this subsection (ii) shall be null and void ab initio and of no force and effect, and - --------------- shall vest no rights or interests in the purported assignee or transferee. (b) Successors and Assigns. Subject to subsection (b) above, each ---------------------- -------------- and every representation, warranty, covenant, condition and provision of this Agreement as it relates to each party hereto shall be binding upon and shall inure to the benefit of such party and his, her or its respective successors and permitted assigns, spouses, heirs, executors, administrators and personal and legal representatives, including any successor (whether direct or indirect, or by merger, consolidation, conversion, purchase of assets, purchase of securities or otherwise). 18. MISCELLANEOUS -19- (a) Costs and Expenses. Except as expressly set forth in this ------------------ Agreement, each party shall pay all legal and other fees, costs and expenses incurred or to be incurred by such party in negotiating and preparing this Agreement; in performing due diligence or retaining professional advisors; and in complying with such party's covenants, agreements and conditions contained herein. (b) Cooperation. Each party agrees, without further consideration, to ----------- cooperate and diligently perform any further acts, deeds and things, and to execute and deliver any documents that may be reasonably necessary or otherwise reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. (c) Notices. Unless otherwise specifically provided in this ------- Agreement, all notices, demands, requests, consents, approvals or other communications (collectively and severally called "notices") required or permitted to be given hereunder, or which are given with respect to this Agreement, shall be in writing, and shall be given by: (i) personal delivery (which form of notice shall be deemed to have been given upon delivery), (ii) by telegraph or by private airborne/overnight delivery service (which forms of notice shall be deemed to have been given upon confirmed delivery by the delivery agency), (iii) by electronic or facsimile or telephonic transmission, provided the receiving party has a compatible device or confirms receipt thereof (which forms of notice shall be deemed delivered upon confirmed transmission or confirmation of receipt), or (iv) by mailing in the United States mail by registered or certified mail, return receipt requested, postage prepaid (which forms of notice shall be deemed to have been given upon the fifth {5th} business day following the date mailed. Notices shall be addressed at the addresses first set forth below, or to such other address as the party shall have specified in a writing delivered to the other parties in accordance with this paragraph. Any notice given to the estate of a party shall be sufficient if addressed to the party as provided in this subsection (c). -------------- If to the Company: Pinnacle Oil International, Inc. 840 - 7th Avenue, SW, Suite 750 Calgary, Alberta, Canada T2P 3G2 If to Executive: Daniel C. Topolinsky 321 Roxboro Road S.W. Calgary, AB T2S 0R3 (d) Counterparts; Electronically Transmitted Documents. This -------------------------------------------------- Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument, binding on all parties hereto. Any signature page of this Agreement may be detached from any counterpart of this Agreement and reattached to any other counterpart of this Agreement identical in form hereto by having attached to it one or more additional signature pages. If a copy or counterpart of this Agreement is originally executed and such copy or counterpart is thereafter transmitted electronically by facsimile or similar device, such facsimile document shall for all purposes be treated as if manually signed by the party whose facsimile signature appears. (e) Execution by All Parties Required to be Binding. This Agreement ----------------------------------------------- shall not be construed to be an offer and shall have no force and effect until this Agreement is fully executed and delivered by all parties hereto pursuant to the terms of section18(d). Until such time as all parties fully ------------ -20- execute this Agreement, any party who has previously executed and delivered this Agreement may revoke such execution and delivery. WHEREFORE, the parties hereto have executed this Agreement in the City of Calgary, Province of Alberta, Canada, as of the date first set forth above. COMPANY: Pinnacle Oil International, Inc. a Nevada Corporation By: /s/ George Liszicasz ------------------------------------------ George Liszicasz, Chief Executive Officer EXECUTIVE: /s/ Daniel C. Topolinsky ---------------------------------------------- Daniel C. Topolinsky -21- EX-10.33 5 EMPLOYMENT AGREEMENT DATED JULY 1, 1999 EXHIBIT 10.33 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (the "Agreement"), dated effective as of July 1, 1999, is entered into by and between Pinnacle Oil International, Inc., a Nevada corporation (the "Company") and James R. Ehrets (the "Executive"), with reference to the following facts: RECITALS: -------- WHEREAS, the Company desires to employ the Executive as its Executive Vice President of Operations in order to enable the Company to avail itself of the skill, knowledge and experience of the Executive and to assure the successful management of the Company, and the Executive desires to become employed in such executive officers position or positions; WHEREAS, the Company and the Executive desire to enter into a written employment agreement formally documenting their relationship and setting forth the duties and responsibilities the Company desires the Executive to undertake, and which the Executive has agreed to undertake. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and for valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the parties to this Agreement (collectively "parties" and individually a "party") agree as follows: AGREEMENT: --------- 1. DEFINITIONS Set forth below are definitions of capitalized words or terms which (together with those common words and terms set forth in section 16(l)) are ------------- generally used throughout this Agreement, or references to sections or paragraphs containing those definitions (capitalized terms used only in a specific section or paragraph of this Agreement are defined in that section or paragraph): (a) "Advance" is defined in section 10. ---------- (b) "Affiliate" means any "Person" (as defined below) controlling, controlled by, or under common control with a party. (c) "Agreement" means this Agreement, as originally executed and as it may be: (i) amended, modified, supplemented and/or restated from time to time (but only to the extent amended, modified, supplemented and/or restated in accordance with the terms of this Agreement); and/or (ii) renewed or extended in accordance with its terms. (d) "Applicable Laws" means any federal (both of the United States and Canada), state, provincial local or foreign laws or regulations as may be applicable. (e) "Board" means the Board of Directors of the Company, as such body may be reconstituted from time to time. (f) "Change In Control" shall mean the occurrence of any of the following events: (i) A "Control Acquisition" by an "Acquiring Person" pursuant to which Acquiring Person attains, by reason of and immediately after a transaction or series of related transactions, "Beneficial Ownership" of fifty percent (50%) or more of the "Total Combined Voting Power" of the Company's then outstanding "Voting Securities." The terms in quotations in the immediately preceding sentence shall, for purposes of this Agreement, have the following meanings: (1) "Acquiring Person" shall mean any "Person" which acquires the defined percentage of securities, with the exception of: (A) any Employee Benefit Plan (or a trust forming a part thereof) maintained by the Company, or by any corporation or entity in which the Company holds fifty percent (50%) or more of the "Voting Securities" (each, a "Controlled Subsidiary"); (B) the Company or any Controlled Subsidiary; or (C) any "Person" which acquires the threshold percentage of "Voting Securities" through a "Non-Control Transaction" (as defined below). (2) "Non-Control Transaction" shall mean any transaction in which the stockholders of the Company immediately before such transaction, directly or indirectly own immediately following such transaction at least a majority of the "Total Combined Voting Power" of the outstanding "Voting Securities" of the surviving corporation (or other entity) resulting from such transaction, in substantially the same proportion as such stockholders' ownership of the Company's "Voting Securities" immediately before such transaction. (3) "Person," "Beneficial Ownership," "Total Combined Voting Power" and "Voting Securities" shall have the meanings ascribed to such terms in Sections 13(d) and 14(d) of the Securities Exchange Act and Rule 13d-3 promulgated thereunder. Notwithstanding any other provision of this subsection ---------- (f)(i), a Change In Control shall not be deemed to have occurred solely ------ because any Person acquired Beneficial Ownership of more than the threshold percentage of the outstanding Voting Securities as a result of an acquisition of Voting Securities by the Company (each, a "Redemption") which, by reducing the number of Voting Securities outstanding, increased the percentage of outstanding Voting Securities Beneficially Owned by such Person; provided, however, that if (A) a Change In Control would occur as a result of a Redemption but for the operation of this sentence, and (B) after such Redemption, such Person becomes the Beneficial Owner of any additional Voting Securities, which increase the percentage of the then outstanding Voting Securities Beneficially Owned by such Person over the percentage owned as a result of the Redemption, then a Change In Control shall be deemed to have occurred. (ii) During any period of three (3) consecutive years after the date of this Agreement, the individuals who constituted the Board at the beginning of such period (the "Incumbent Board") cease to constitute a majority of the Board, for any reason(s) other than (1) the voluntary resignation of one or more Board members; (2) the refusal by one or more Board members to stand for election to the Board; and/or (3) the removal of one or more Board members for good cause; provided, however, (A) that if the nomination or election of any new director of the Company was approved by a vote of at least a majority of the Incumbent Board, such new director shall be deemed a member of the Incumbent Board; and (B) that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 -2- promulgated under the Securities Exchange Act of 1934), or as a result of a solicitation of proxies or consents by or on behalf of an Acquiring Person, other than a member of the Board (a "Proxy Contest"), or as a result of any agreement intended to avoid or settle any Election Contest or Proxy Contest. (iii) The Board or the stockholders of the Company approve: (1) A merger or consolidation or reorganization of the Company reorganization (each, a "Major Event") with (A) any Controlled Subsidiary, and the terms of the proviso to this subsection (f)(iii) ------------------- are not satisfied; or (B) any other corporation or other entity; unless such Major Event is a Non-Control Transaction; or (2) A complete liquidation or dissolution of the Company, and the terms of the proviso to subsection (f)(iii) are not satisfied; ------------------- or (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Controlled Subsidiary, and the terms of the proviso to subsection (f)(iii) are ------------------- not satisfied. Notwithstanding any other provision of this subsection ---------- (f)(iii), if the Executive or an Affiliate of the Executive who is then a -------- stockholder or director of the Company, either: (i) expressly voted in favor of the transaction constituting the Change In Control in such Person's capacity as either a stockholder or as a director of the Company; or (ii) expressly abstained from voting (other than by reason of an "interest" in a matter or transaction, as defined in the Nevada Revised Statutes); and/or (iii) failed or refused to vote, then the transaction shall not constitute a Change in Control. (g) "Company" means Pinnacle Oil International, Inc., a Nevada Corporation, and any successor and assign of the Company, as more particularly described in, or permitted and prescribed pursuant to, section 18(a). ------------- (h) "Disability" (or the related term "Disabled") means any of the following: (i) the receipt of any disability insurance benefits by the Executive; (ii) a declaration by a court of competent jurisdiction that the Executive is legally incompetent; (iii) the Executive's material inability due to medically documented mental or physical illness or disability to fully perform the Executive's regular obligations of his office and as an employee of the Company (with reasonable accommodations for such disability, if then required by Applicable Law), for a six (6) month continuous period, or for nine (9) cumulative months within any one (1) year continuous period; or (iv) the reasonable determination by the Board that the Executive will not be able to fully perform the Executive's regular obligations of his office and as an employee of the Company (with reasonable accommodations if then required by Applicable Law) for a six (6) month continuous period. If the Board determines that the Executive is Disabled under clause (iv) above, and the Executive ----------- disagrees with the conclusion of the Board, then the Company shall engage a qualified independent physician reasonably acceptable to the Executive to examine the Executive at the Company's sole expense. The determination of such physician shall be provided in writing to the parties and shall be final and binding upon the parties for all purposes of this Agreement. The Executive hereby consents to examination in the manner set forth above, and waives -3- any physician-patient privilege arising from any such examination as it relates to the determination of the purported disability. (i) "Employee Benefit Plan" is defined in section 4(c). ------------ (j) "Employee Deductions" are defined in section 7. --------- (k) "Monthly Salary" is defined in section 4(a). ------------ (l) "Performance Bonus" is defined in section 4(b). ------------ (m) "Person" (other than for purposes of determining a Change in Control) means an individual or natural person, a corporation, partnership (limited or general), joint-venture, association, business trust, limited liability company/partnership, business trust, trust (whether revocable or irrevocable), pension or profit sharing plan, individual retirement account, or fiduciary or custodial arrangement. (n) "Personal Time-Off" is defined in section 8. --------- (o) "Subsidiary" shall mean any corporation, partnership (limited or general), joint-venture, association, business trust, limited liability company/partnership, business trust or trust in which the Company holds a controlling interest, including but not limited to Pinnacle Oil, Inc., a Nevada corporation ("Pinnacle Oil"), and Pinnacle Oil Canada, Inc., a British Columbia corporation ("Pinnacle Canada"). (p) "Termination By Company For Cause" means a termination of the Executive caused by a determination of two-thirds of the Board, excluding the Executive if then a member of the Board, that one of the following events has occurred: (i) Any of the Executive's representations or warranties in this Agreement is not materially true, accurate and/or complete; (ii) The Executive has intentionally and continually breached or wrongfully failed and/or refused to fulfill and/or perform (A) any of the Executive's material obligations, promises or covenants under this Agreement, or (B) any of the material warranties, obligations, promises or covenants in any agreement (other than this Agreement) entered into between the Company and the Executive, without cure, if any, as provided in such agreement; (iii) The Executive has intentionally failed and/or refused to obey any lawful and proper order or directive of the Board, and/or the Executive has intentionally interfered with the compliance by other employees of the Company with any such orders or directives; (iv) The Executive has intentionally breached the Executive's fiduciary duties to the Company; (v) The Executive has intentionally caused the Company to be convicted of a crime, or to incur criminal penalties in material amounts; -4- (vi) The Executive has committed: (A) any act of fraud, misrepresentation, theft, embezzlement or misappropriation, and/or any other dishonest act against the Company and/or any of its Affiliates, subsidiaries, joint ventures; or (B) any other offense involving moral turpitude, which offense is followed by conviction or by final action of any court of law; or (C) a felony; (vii) The Executive repeatedly and intemperately used alcohol or drugs, to the extent that such use (A) interfered with or is likely to interfere with the Executive's ability to perform the Executive's duties, and/or (B) endangered or is likely to endanger the life, health, safety, or property of the Executive, the Company, or any other person; (viii) The Executive has intentionally demonstrated or committed such acts of racism, sexism or other discrimination as would tend to bring the Company into public scandal or ridicule, or could otherwise result in material and substantial harm to the Company's business, reputation, operations, affairs or financial position; and/or (ix) The Executive engaged in other conduct constituting legal cause for termination. No act, nor failure to act, on the Executive's part shall be considered "intentional" unless the Executive has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that the Executive's action or failure to act was in the best interests of the Company. In the event the Executive is both Disabled and the provisions of clause (vii) of this ------------ subsection (p) are applicable, the Company shall nevertheless have the right to - -------------- deem such event as a Termination By Company For Cause. (q) Termination By Executive For Good Reason" means the Executive's termination of this Agreement based on his reasonable determination that one of the following events has occurred: (i) Any of the Company's representations or warranties in this Agreement is not materially true, accurate and/or complete; (ii) The Company intentionally and continually breached or wrongfully failed to fulfill or perform (A) its material obligations, promises or covenants under this Agreement; or (B) any material warranties, obligations, promises or covenants of the Company in any agreement (other than this Agreement) entered into between the Company and the Executive, without cure, if any, as provided in such agreement; (iii) The Company terminated this Agreement and the Executive's employment hereunder (with the exception of Treasurer), and such termination does not constitute Termination By Company For Cause; (iv) Without the consent of the Executive, the Company: (A) substantially altered or materially diminished the position, nature, status, prestige or responsibilities of the Executive from those in effect by mutual agreement of the parties from time-to-time; (B) assigned additional duties or responsibilities to the Executive which were wholly and clearly inconsistent with the position, nature, status, prestige or responsibilities of the Executive then in effect; or (C) removed or failed to reappoint or re-elect the Executive to the Executive's offices -5- under this Agreement (as they may be changed or augmented from time-to-time with the consent of the Executive), or as a director of the Company, except in connection with the Disability of the Executive; (v) Without the consent of the Executive, the Company relocated the Company's principal operating offices from their present location, and as a result increased the Executive's ordinary commute from the Executive's temporary residence by more than thirty-five (35) miles; (vi) Without the consent ratification (express or implied) of the Executive, the Executive was removed from the Board without his consent; or the Company failed to nominate or reappoint the Executive to the Board (unless the Executive is deceased or Disabled, or such removal or failure is attributable to an event which would constitute Termination By Company For Cause), or if the Executive was so nominated, the stockholders of the Company failed to re-elect the Executive to the Board; (vii) The Company intentionally required the Executive to commit or participate in any felony or other serious crime; and/or (viii) The Company engaged in other conduct constituting legal cause for termination. In the event any of the events described above in this subsection (q) -------------- occurs, and such event is reasonably susceptible of being cured, the Company shall be entitled to a grace period of thirty (30) days following receipt of written notice of such event. If the Executive determines, in his sole discretion, that such event is not reasonably susceptible of being cured within a period of thirty (30) days), the Executive may grant a longer cure period to the Company to cure such event to the reasonable satisfaction of the Executive, provided the Company promptly commences and diligently pursues such cure. The noted grace periods shall not apply to any other event described in this subsection (q). - -------------- 2. EMPLOYMENT OBLIGATIONS (a) Engagement; Duties. The Company hereby engages the Executive as ------------------ its Executive Vice President of Operations, and the Executive accepts such position, upon the terms and conditions set forth herein. As the Company's Executive Vice President of Operations, the Executive shall do and perform all services, acts, or things necessary or advisable to discharge his duties as the Company's Executive Vice President of Operations under this Agreement and the Company's Bylaws including, but not limited to, the following: (i) Planning, managing, conducting and supervising the day-to- day SFD survey and SFD interpretation operations of the Company (and/or its Subsidiaries), including the geological, geophysical, scientific, information systems, computer and aviation operational staff associated with such operations; and (ii) Acting as the Company's liaison with its joint venture and survey partners in connection with the Company ongoing projects for such partners. -6- The Executive shall report only to the Company's Chief Executive Officer and the Board, and any significant employment decisions and/or agreements, contracts and/or joint ventures negotiated by the Executive shall be subject to the review and approval/ratification of the Board. The Executive's responsibilities with respect to the Company and each of its Subsidiaries may be changed or supplemented by the Board from time-to-time, in their discretion. The Executive shall also hold such offices with the Subsidiaries and/or joint ventures of the Company as the Board may, in its discretion and with the consent of the Executive, from time-to-time determine. The Board shall determine the amount of the Executive's total remuneration which will be allocated to and paid by the Company and by each of its Subsidiaries. The Executive shall be reasonably available to travel as the needs of the Company's business may require. The Executive agrees to cooperate with and work to the best of his ability with the Company's (and/or its Subsidiaries') management team, which includes the Board and the executive officers, and to continually improve the Company's (and/or its Subsidiaries') reputation in its industry. (b) Performance. The Executive shall devote the Executive's entire ----------- and undivided business time, energy, abilities and attention solely and exclusively to the performance of the Executive's duties hereunder and the business of the Company (and/or its Subsidiaries); provided, however, the foregoing shall not be construed to prohibit the Executive from attending to personal matters from time-to-time as needed during business hours to the extent reasonably necessary to address such matters. The Executive shall at all times faithfully, loyally, conscientiously, diligently and, to the best of the Executive's ability, perform all of the Executive's duties and obligations under this Agreement, and otherwise promote the interests and welfare of the Company (and/or its Subsidiaries), all consistent with the highest and best standards of the Company's industry. The Executive: (i) shall strictly comply with and adhere to all Applicable Laws, and the Company's Articles of Incorporation, Bylaws and policies; (ii) shall obey all reasonable rules and regulations and policies now in effect or as subsequently modified governing the conduct of employees of the Company, and (iii) shall not commit any acts of gross negligence, willful misconduct, dishonesty, fraud or misrepresentation, racism, sexism or other discrimination, or any other acts which would tend to bring the Company (and/or its Subsidiaries) into public scandal or ridicule, or would otherwise result in material harm to the Company's business or reputation. (c) Facilities and Services. The Company (and/or its Subsidiaries) ----------------------- shall provide such support staff, facilities, equipment and supplies as are reasonably necessary or suitable for the adequate performance of the Executive's duties and obligations under this Agreement, including technical and secretarial help. 3. TERM (a) Initial Term. The Company hereby employ the Executive pursuant ------------ to the terms of this Agreement, and the Executive hereby accepts such employment with the Company, for the period beginning on the date of this Agreement and ending on April 30, 2004 (the "Initial Term"). (b) Automatic Renewal; Termination by the Company. Unless this --------------------------------------------- Agreement is previously terminated by either party as provided in section 11 ---------- below, this Agreement will be automatically renewed for additional and consecutive one (1) year terms (each, a "Renewal Term") following the expiration of each Initial or Renewal Term, (each a "Term"), unless either party gives ------ written notice to the other party, no later than sixty (60) days prior to the expiration of the then pending Term, of its election not to automatically renew --- this Agreement for an additional year. -7- 4. COMPENSATION (a) Monthly Base Salary. The Company shall pay or caused to be paid ------------------- to the Executive a monthly base salary of twenty thousand Canadian dollars (CDN $20,000) (the "Monthly Salary"). The Monthly Salary shall be payable in periodic installments as agreed from time-to-time by the Executive and the Board, but at least semi-monthly, and shall be subject to any Tax Withholdings and/or Employee Deductions that are applicable. In any pay period in which the Executive shall be employed for less than the entire number of business days in such pay period, the Monthly Salary for such pay period shall be prorated on the basis of the number of business days during which the Executive was actually employed during such pay period, divided by the actual number of business days in such pay period. Commencing on the first annual anniversary date of this Agreement, and on each annual anniversary date thereafter, the Monthly Salary then effective shall be increased by an amount equal to five percent (5%) of the Monthly Salary for the immediately prior year. Additionally, commencing on or prior to the first annual anniversary date of this Agreement, and on or prior to each annual anniversary date thereafter, the Board shall review the Executive's Monthly Salary to determine whether to increase the Monthly Salary by an amount in excess of said five percent (5%) increment, without any obligation by the Board to authorize such increase. (b) Performance Bonus. The Board shall from time-to-time, but not ----------------- one (1) time per year, evaluate the performance of the Executive and award to the Executive a performance bonus (the "Performance Bonus") in such amount as the Board may determine, in its sole discretion, to be reasonable, after taking into consideration other compensation paid or payable to the Executive under this Agreement, as well as the financial and non-financial progress of the business of the Company (and/or its Subsidiaries) and the contributions of the Executive toward that progress. Payment of the Performance Bonus shall be subject to any applicable Tax Withholdings and/or Employee Deductions. (c) Participation in Employee Benefit Plans. The Executive shall have --------------------------------------- the same rights, privileges, benefits and opportunities to participate in any employee benefit plans of the Company which may now or hereafter be in effect on a general basis for the Company's executive officers or employees, including without limitation retirement, pension, profit-sharing, savings and insurance (including, but not limited to, health, dental, disability and/or group insurance) (collectively, "Employee Benefit Plans"). (d) Stock Options. ------------- (i) The Company agrees to grant to the Executive an option (the "First Option") to purchase up to three hundred thousand (300,000) unregistered shares of the Company's common stock, which right to purchase shall vest in equal increments over a period of four (4) years based upon continuous employment, with the first increment of eighty-five thousand (85,000) shares vesting one year from the date of this Agreement, the second increment of ninety thousand (90,000) shares vesting two years from the date of this Agreement; the third increment of ninety-five thousand (95,000) shares vesting three years from the date of this Agreement, and the fourth increment of thirty thousand (30,000) shares vesting four years from the date of this Agreement The purchase price per share shall be U.S. $14 per share. (ii) The Company agrees to grant to the Executive an option (the "Second Option") to purchase up to two hundred thousand (200,000) unregistered shares of the Company's common stock, which right to purchase shall vest in equal increments over a period of five (5) years -8- based upon continuous employment, with the first increment of seventy-five thousand (75,000) shares vesting four year from the date of this Agreement, and the second increment of one hundred twenty-five thousand (125,000) shares vesting five years from the date of this Agreement. The purchase price per share shall be the closing sales price for the Company's common stock as quoted by the NASD Electronic Bulletin Board (or any replacement market or exchange) on April 30, 2001. (iii) The Company agrees, so long as it is a reporting company, to use its best efforts to register the options shares under an S-8 Registration Statement. (iv) The term for the Executive to exercise the First Option or Second Option (collectively, the "Option") with respect to any vested share shall expire five (5) years from the date of vesting of such share provided, however, if the Executive's employment with the Company has been previously terminated pursuant to section (vi) below, the expiration date shall be ------------ accelerated to two (2) years after the effective date of termination (if earlier than the option expiration date). (v) In the event of the death or Disability of the Executive, all unvested Options Shares which would have vested within the twelve (12) month -------- period following the date of death or Disability will vest effective as of the date of death or Disability, and the prospective right to purchase the balance of the remaining unvested option shares shall lapse. -------- (vi) In the event the Executive's employment with the Company is terminated, and such termination is attributable to (A) an event defined as Termination By Company for Cause; and/or (B) termination by the Executive which does not constitute Termination By Executive For Good Reason; then the --- prospective right to purchase unvested option shares shall lapse to the extent -------- such rights do not vest prior to the effective date of termination. (vii) In the event the Executive's employment with the Company is terminated, and such termination is attributable to (A) an event defined as a Termination by Executive for Good Reason; (B) termination by the Company which does not constitute a Termination By Company for Cause and/or (C) an event defined as a Change in Control; then the prospective right to purchase all unvested options shares which would have vested within the twelve (12) month - -------- period following the date of such event will vest effective as of the date of such event, and the prospective right to purchase the balance of the remaining unvested option shares shall lapse. - -------- (viii) The grant of the Options shall be evidenced by a Stock Option Certificate reflecting the above terms plus such additional terms and conditions as required by a Plan established by the Company and containing such other terms as the Company believes to be reasonable. (ix) The Executive shall be responsible for all income taxes (including tax withholdings) attributable to the grant or exercise of the Option, or the sale of the option shares acquired by exercise of the Option. 5. MOVING EXPENSES The Company (and/or its Subsidiaries) shall directly pay or reimburse the Executive for his or her payment of the Executive's reasonable and necessary moving expenses, duly and actually -9- incurred by the Executive in connection with the move of the Executive's household furnishings, belongings and automobiles to Calgary in connection with his employment with the Company. 6. BUSINESS EXPENSES During the Term of this Agreement the Executive is authorized to incur, and the Company (and/or its Subsidiaries) shall directly pay or reimburse the Executive for his or her payment of the Executive's reasonable and necessary business expenses, duly and actually incurred by the Executive in connection with the duties and services to be performed by the Executive under this Agreement, including without limitation entertainment, meals, travel, lodging and other similar out-of-pocket expenses, upon the Executive's submission to the Company (and/or its Subsidiaries) of itemized expense statements setting forth the date, purpose and amount of the expense incurred, together with corresponding receipts showing payment by the Executive in cases where he or she seeks reimbursement, all in conformity with business expense payment and/or reimbursement policies as may be established by the Company (and/or its Subsidiaries) from time to time, all of which shall comply with the substantiation requirements of the Internal Revenue Code of 1986, as amended, and the Income Tax Act of Canada, as amended, and any other applicable taxing authorities, and regulations promulgated by such authorities thereto, pertaining to the deductibility of such expenses. Direct payment and/or reimbursement shall be made by the Company (and/or its Subsidiaries) no later than thirty (30) days of the Executive submission of the foregoing documentation. The Executive shall be entitled to direct payment and/or reimbursement in full for the aforesaid business expenses, notwithstanding that the Company is prohibited under the Code and/or regulations promulgated thereunder from deducting the entire amount of such expenses. The Company (and/or its Subsidiaries) shall have the option to pay directly the persons entitled to payment for such business expenses. 7. TAX WITHHOLDINGS AND EMPLOYEE DEDUCTIONS The Company (and/or its Subsidiaries) shall be entitled to deduct from any payments to the Executive pursuant to the terms of this Agreement (including any payments arising from the early termination of this Agreement), amounts sufficient to cover applicable federal (United States and Canada), state, provincial, local and/or foreign income tax withholdings and/or deductions as may be required in connection with such payment, including without limitation old-age and survivor's and other social security payments, state disability and other withholdings payment as may be required by law (collectively, the "Tax Withholdings"), as well as all other elective employee deductions applicable to such payment such as, for example, deductions relating to any Employee Benefit Plan in which the Executive participates (collectively, the "Employee Deductions"). 8. PERSONAL TIME-OFF The Executive shall be entitled each calendar year during the term of this Agreement to such number of personal time-off days for such purposes, including vacations and time for personal affairs ("Personal Time-Off") as are approved by the Board, but not less than the greater of (i) fifteen (15) business days, or (ii) the number of personal time-off days (including vacation and personal days) generally given by the Company to its employees. Personal Time-Off shall be in addition to regular paid legal holidays provided to all employees of the Company. The Executive's compensation shall be paid in full with respect to approved Personal Time-Off days. Should the Executive fail to use all Personal Time-Off days in any calendar year, the Executive shall have the option of (i) receiving payment for such days on a pro rata basis, -10- or (ii) "carrying-over" unused Personal Time-Off days to succeeding years. Personal time-off shall be taken during a period or periods mutually satisfactory to both the Company and the Executive. 9. INSURANCE If requested by the Company, the Executive shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain disability and/or life insurance on the life of the Executive. The Executive represents and warrants that he has no reason to believe that he is not insurable for disability or life coverage with a reputable insurance company at rates now prevailing in the city of the Company's principal executive offices, for healthy persons of the Executive's own age and gender. 10. ADVANCES The Company (and/or its Subsidiaries) may from time-to-time, upon written consent from the Chairman of the Board or the Board, and without any obligation to do so, make advances to the Executive against any compensation or other amounts to be paid by the Company (and/or its Subsidiaries) to the Executive (each, an "Advance"). Any amounts due hereunder to the Executive shall, at the election of the Company, be offset by any then outstanding Advances. Subject to the terms of any written agreement relating to Advances, in the event of termination of employment of executive, the Executive agrees that the Company (and/or its Subsidiaries) shall have the right to offset the amount of any and all outstanding Advance(s) against any salary or wages due, or any other amounts due to the Executive from the Company, and that any remaining balance of the Advance(s) shall be repaid by the Executive within thirty (30) days after the Executive's termination date. If such Advance(s) are not repaid within said thirty (30) days, simple interest shall accrue on the unpaid balance at the rate of ten percent (10%) per annum. The Executive agrees to pay all costs of collection incurred by the Company (and/or its Subsidiaries) with respect thereto, including reasonable attorneys' fees and legal costs. The Company's obligation to make payments to the Executive hereunder shall not, except with respect to Advance(s) as provided above, be affected by any circumstance, including without limitation any set-off, counterclaim, recoupment, defense or other right which the Company (and/or its Subsidiaries) may have against the Executive or others. 11. TERMINATION OF AGREEMENT BEFORE EXPIRATION OF TERM (a) Death or Disability. Notwithstanding any other term of this ------------------- Agreement, the applicable Term shall terminate upon the death or Disability of the Executive, subject to compliance with Applicable Laws. (b) Change In Control. Notwithstanding any other term of this ----------------- Agreement, the applicable Term shall, at the election of the Executive, delivered by written notice to the Company, terminate effective upon the Change In Control. (c) Termination of Agreement by Company for Cause. Subject to --------------------------------------------- compliance with Applicable Laws, the Company may terminate this Agreement and the Executive's employment -11- hereunder at any time in the event such termination constitutes Termination By Company For Cause, upon giving written notice to the Executive specifying in reasonable detail: (i) the event which constitutes the cause; (ii) the pertinent facts and circumstances underlying the cause; and (iii) the effective date of the termination(which date may, at the Company's election, be effective upon receipt of said written notice by the Executive). Such notice shall also afford the Executive an opportunity to be heard in person by the Board (with the assistance of the Executive's legal counsel, if the Executive so desires). Such hearing shall be held reasonably promptly after such notice but, in any event, before the effective date of the prospective termination. (d) Termination of Agreement by Executive for Good Reason. The ----------------------------------------------------- Executive may terminate this Agreement and the Executive's employment hereunder at any time in the event such termination constitutes Termination By Executive For Good Reason, upon giving written notice to the Company specifying in reasonable detail: (i) the event which constitutes the good reason; (ii) the pertinent facts and circumstances underling the good reason; and (iii) the effective date of termination (not to exceed ninety {90} days from the date of such notice, but which date may, at the Executive's election, be effective upon receipt of said written notice by the Company). 12. EFFECT OF TERMINATION ATTRIBUTABLE TO DEATH OR DISABILITY; TERMINATION BY COMPANY FOR CAUSE; TERMINATION BY EXECUTIVE WITHOUT GOOD REASON In the event the Executive's employment hereunder is terminated before the expiration of a Term, and such termination is attributable to (i) an event defined as Death or Disability; (ii) an event defined as Termination By Company For Cause; and/or (iii) termination by the Executive which does not constitute --- Termination By Executive For Good Reason, then all rights and obligations of the Company and the Executive under section 2 [Employment Obligations], section 4 --------- --------- [Compensation], section 6 [Business Expenses] and section 8 [ Personal Time-Off] --------- --------- shall terminate as of the effective date of the termination; provided, however: (a) The Company (and/or its Subsidiaries) shall pay the Executive's accrued but unpaid Monthly Salary and Personal Time-Off days through the effective date of the termination on or before the close of business on such effective date; and the Executive shall not be entitled to Monthly Salary and/or Personal Time-Off days after the effective date of the termination; (b) The Company (and/or its Subsidiaries) shall pay any declared but unpaid Performance Bonus; (c) The Company (and/or its Subsidiaries) shall reimburse the Executive for any business expenses incurred prior to the effective date of the termination, within three (3) business days after the Executive's submission of the Executive's expense report to the Company; and (d) The Executive shall not be entitled to continue to participate in any Employee Benefit Plans except to the extent provided in such plans for terminated participants, or as may be required by Applicable Law. Notwithstanding the foregoing, amounts which are vested in any Employee Benefit Plans shall be payable in accordance with such plan. -12- 13. EFFECT OF TERMINATION WHERE TERMINATION ATTRIBUTABLE TO CHANGE IN CONTROL; TERMINATION BY EXECUTIVE FOR GOOD REASON; TERMINATION BY COMPANY WITHOUT CAUSE In the event the Executive's employment hereunder is terminated before the expiration of a Term, and such termination is attributable to (i) an event defined as a Change in Control; (ii) an event defined as a Termination by Executive for Good Reason; and/or (iii) termination by the Company which does not constitute a Termination By Company for Cause; then all rights and obligations of the Company and the Executive under section 2 [Employment --------- Obligations], section 4 [Compensation], section 6 [Business Expenses], and --------- --------- section 8 [Personal Time-Off] shall terminate as of the effective date of the - --------- termination date; provided, however: (a) The Company (and/or its Subsidiaries) shall continue to pay the Executive's then effective Monthly Salary through the earlier of (i) the pending ------- Term of this Agreement or (ii) the period which expires eighteen (18) months after the effective date of termination, on the same basis as previously paid to the Executive, but subject to such minimum increases as are described in section ------- 4; - - (b) The Company (and/or its Subsidiaries) shall pay the Executive's declared but unpaid Performance Bonus; (c) At the election of the Executive, the Company (and/or its Subsidiaries) shall (i) permit the Executive to continue to participate in any Employee Benefit Plans, except to the extent prohibited in such plans for terminated employees, or as may be required by Applicable Law; or (ii) provide the Executive with additional compensation, payable on a monthly basis, which would approximate the cost to the Executive to obtain comparable benefits; (d) The Company (and/or its Subsidiaries) shall reimburse the Executive for the Executive's business expenses incurred through the effective date of the termination, within three (3) business days of the Executive's submission of the Executive's expense report to the Company; and The Executive shall not be required to mitigate the amount of any payment pursuant to this section 13 by seeking other employment or otherwise, ---------- and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment. The Executive, in turn, agrees that the provisions of this section 13 shall act as a ---------- severance payment to the Executive, and as such shall satisfy all claims the Executive may have, whether at law or equity; in connection with the early termination of this Agreement. 14. REPRESENTATIONS AND WARRANTIES OF PARTIES (a) By All Parties. Each of the parties to this Agreement hereby -------------- represents and warrants to each of the other parties to this Agreement, each of which is deemed to be a separate representation and warranty, as follows: (i) Organization, Power and Authority. Such party, if an --------------------------------- entity, is duly organized, validly existing and in good standing under the laws of its state, territory or province of incorporation or organization, and has all requisite corporate or other power and authority to enter into this Agreement. -13- (ii) Authorization. The execution and delivery of this Agreement ------------- by such party, and the performance by such party of the transactions herein contemplated, have, if such party is an entity, been duly authorized by its governing organizational documents, and are not prohibited by its governing organization documents, and no further corporate or other action on the part of such party is necessary to authorize this Agreement, or the performance of such transactions. (iii) Validity. This Agreement has been duly executed and -------- delivered by such party and, assuming due authorization, execution and delivery by all of the other parties hereto, is valid and binding upon such party in accordance with its terms, except as limited by: (1) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditor rights generally; and (2) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). (iv) Non-Contravention. Neither the execution or delivery of ----------------- this Agreement, nor the performance by such party of the transactions contemplated herein: (1) if such party is an entity, will breach or conflict with any of the provisions of such party's governing organizational documents; or (2) to the best of such party's knowledge and belief, will such actions violate or constitute an event of default under any agreement or other instrument to which such party is a party. (v) Legal Representation. Such party: (1) had the advice, or -------------------- sufficient opportunity to obtain the advice, of legal counsel separate and independent from legal counsel for any other party hereto; and (2) such party was not represented by the legal counsel of any other party hereto in connection with the transactions contemplated by this Agreement, nor was such party under any belief or understanding that such legal counsel was representing such party's interests. (vi) Fairness. The terms and conditions of the transactions -------- contemplated by this Agreement are fair and reasonable to such party based upon all of the facts and circumstances at the time this Agreement is entered into; and such party has voluntarily entered into the transactions contemplated by this Agreement, without duress or coercion. (b) By Executive. The Executive hereby represents and warrants to the ------------ Company that the Executive is not Disabled at the time of the execution and delivery of this Agreement by the Executive. 15. NON-LIABILITY FOR EXECUTIVE'S DEBTS Except as provided under Applicable Laws, the Executive's rights and obligations under this Agreement shall not be subject to encumbrance or to the claims of the Executive's creditors (other than the Company), or subject to the debts, contracts or engagements of the Executive or the Executive's heirs, successors and assigns, and any attempt to do any of the foregoing shall be null and void ab initio and without force and effect. -14- 16. INTERPRETATION AND CONSTRUCTION (a) Preparation of Agreement. The parties have participated jointly ------------------------ in the negotiation and drafting of this Agreement and each provision hereof. In the event any ambiguity, conflict, omission or other question of intent or interpretation arises, this Agreement shall be construed as if jointly drafted by the parties, and no presumption or burden of proof shall be presumed, implied or otherwise construed favoring or disfavoring any party by virtue of the authorship of this Agreement or of any provision hereof. (b) Performance on Business Day. In the event the date on which a --------------------------- party is required to take any action under the terms of this Agreement is not a business day, the action shall, unless otherwise provided herein, be deemed to be required to be taken on the next succeeding business day. For purposes of this section, the term "business day" shall mean Monday through Friday (excluding any legal holidays). (c) Survival of Representations and Warranties. All representations ------------------------------------------ and warranties made by any party in connection with any transaction contemplated by this Agreement shall, irrespective of any investigation made by or on behalf of any other party hereto, survive the execution and delivery of this Agreement and the performance or consummation of any transaction described in this Agreement, and shall continue in full force and effect forever thereafter (subject to any applicable statutes of limitation). (d) Independent Significance. The parties intend that each ------------------------ representation, warranty and covenant shall have independent significance. If any party has falsely made or breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not falsely made or breached shall not detract from or mitigate the fact that the party has falsely made or breached the first representation, warranty or covenant. (e) Entire Agreement; No Collateral Representations. Each party ----------------------------------------------- expressly acknowledges and agrees that this Agreement: (i) is the final, complete and exclusive statement of the agreement of the parties with respect to the subject matter hereof; (ii) supersede any prior or contemporaneous agreements, memorandums, proposals, commitments, guaranties, assurances, communications, discussions, promises, representations, understandings, conduct, acts, courses of dealing, warranties, interpretations or terms of any kind, whether oral or written (collectively and severally, the "prior agreements"), and that any such prior agreements are of no force or effect except as expressly set forth herein; and (iii) may not be varied, supplemented or contradicted by evidence of prior agreements, or by evidence of subsequent oral agreements. No prior drafts of this Agreement, and no words or phrases from any prior drafts, shall be admissible into evidence in any action or suit involving this Agreement. (f) Amendment; Waiver; Forbearance. Except as expressly provided ------------------------------ herein, neither this Agreement nor any of the terms, provisions, obligations or rights contained herein, may be amended, modified, supplemented, augmented, rescinded, discharged or terminated (other than by performance), except by a written instrument or instruments signed by all of the parties to this Agreement. No waiver of: (i) any breach of any term, provision or agreement; (ii) the performance of any act or obligation under this Agreement; and/or (iii) any right granted under this Agreement, shall be -15- effective and binding unless such waiver shall be in a written instrument or instruments signed by each party claimed to have given or consented to such waiver. Except to the extent that the party or parties claimed to have given or consented to a waiver may have otherwise agreed in writing, no such waiver shall be deemed a waiver or relinquishment of any other term, provision, agreement, act, obligation or right under this Agreement, or of any preceding or subsequent breach thereof. No forbearance by a party in seeking a remedy for any noncompliance or breach by another party hereto shall be deemed to be a waiver by such forbearing party of its rights and remedies with respect to such noncompliance or breach, unless such waiver shall be in a written instrument or instruments signed by the forbearing party. (g) Remedies Cumulative. The remedies of each party under this ------------------- Agreement are cumulative and shall not exclude any other remedies to which such party may be lawfully entitled. (h) Severability. If any term or provision of this Agreement, or the ------------ application thereof to any person or circumstance, shall to any extent be determined to be invalid, illegal or unenforceable under present or future laws, then, and in such event: (i) the performance of the offending term or provision (but only to the extent its application is invalid, illegal or unenforceable) shall be excused as if it had never been incorporated into this Agreement, and, in lieu of such excused provision, there shall be added a provision as similar in terms and amount to such excused provision as may be possible and still be legal, valid and enforceable; and (ii) the remaining part of this Agreement (including the application of the offending term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable) shall not be affected thereby, and shall continue in full force and effect to the fullest legal extent. (i) Time is of the Essence. Except and to the extent there is a ---------------------- specific cure provision in this Agreement, each party understands and agrees that: (i) time of performance is strictly of the essence with respect to each and every date, term, condition, obligation and provision hereof imposed upon such party; and (ii) the failure to timely perform any of the terms, conditions, obligations or provisions hereof by such party shall constitute a material breach and a noncurable (but waivable) default under this Agreement by such party. (j) Parties in Interest. Nothing in this Agreement shall confer any ------------------- rights or remedies under or by reason of this Agreement on any persons other than the parties hereto and their respective successors and assigns, if any, or as may be permitted hereunder; nor shall anything in this Agreement relieve or discharge the obligation or liability of any third person to any party to this Agreement; nor shall any provision give any third person any right of subrogation or action against any party to this Agreement. (k) No Reliance Upon Prior Representations. Each party acknowledges -------------------------------------- that: (1) no other party has made any oral representation or promise which would induce such party, prior to executing this Agreement, to change such party's position to his, her or its detriment, to partially perform, or to part with value in reliance upon such representation or promise; and (2) such party has not so changed its position, performed or parted with value prior to the time of the execution of this Agreement, or such party has taken such action at its own risk. (l) Rules of Construction. In interpreting the meaning of this --------------------- Agreement: (i) the term "person" is defined in its broadest sense to include any individual or natural person, entity (as such term is defined in this subsection ---------- (l)) and/or fiduciary (as such term is defined in this subsection (l)), and - --- -------------- their respective successors and assigns; (ii) the term "entity" means any legal entity, including any -16- corporation, association, joint stock company, partnership (limited, general or limited liability), joint-venture, and limited liability company, business trust, trust (whether revocable or irrevocable), pension or profit sharing plan, individual retirement account, or fiduciary or custodial arrangement; (iii) the term "fiduciary" means any person acting in a fiduciary capacity, including in their capacity as a trustee or a custodian; (iv) the term "affiliate" means any person controlling, controlled by, or under common control with a party (for purposes of the foregoing, the term "control" (including with the correlative meanings, the terms "controlled by" and "under common control with") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities or by contract or otherwise); (v) the term "subsidiary" means any entity in which a party holds a controlling interest; (vi) the words "herein" and "hereunder" and other words of similar report refer to this Agreement as a whole, and not to any particular sections, subsections, paragraph, subparagraph or other subdivision of this Agreement; (vii) the words "including," "includes," and "include" shall be deemed to be followed by the words "including without limitation;" (viii) the word "or" shall not be deemed to be exclusive unless the context indicates otherwise; and (ix) the word "all" shall be deemed to include the word "any," and vice versa. All pronouns and any variation thereof used in this Agreement shall be deemed to refer to the masculine, feminine, or neuter (as the case may be), and to the singular or plural (as the case may be), as the identity of the person or persons or the context may require for proper interpretation of this Agreement. Any references in this Agreement to "dollars" shall be deemed to refer to the currency of the United States of America, unless such reference specifically references a dollar-denominated currency of a country other than the United States of America. The headings used in this Agreement are for convenience and reference purposes only, and shall not be used in construing or interpreting the scope or intent of this Agreement or any provision hereof. Each cross-references in this Agreement shall, unless specifically directed to another agreement or document, be construed only to refer to provisions within this Agreement, and shall not be construed to refer to the overall transaction or to any other agreement or document. Each exhibit, addendum, schedule and/or attachment referenced in this Agreement shall be construed to be incorporated into this Agreement by such reference and made a part hereof. References to any agreements (other than this Agreement) shall include all amendments, modifications, supplements and/or renewals thereof. Unless the context requires otherwise: (1) any reference herein to any federal, state, local or foreign statutes or laws (collectively, the "Statutes") will be deemed to include all rules and regulations promulgated thereunder: and (2) any references herein to any Statute and/or any specific section or provision of any such Statute are intended to refer to such section or provision thereof as presently enacted and as subsequently amended, succeeded, recodified or renumbered. 17. ENFORCEMENT (a) Governing Law. This Agreement and the rights and remedies of ------------- each party arising out of or relating to this Agreement (including equitable remedies) shall be solely governed by, interpreted under, and construed and enforced in accordance with the laws (without regard to the conflicts of law principles) of the Province of Alberta, as if this Agreement were made, and as if its obligations were to be performed in their entirety, within the Province of Alberta. (b) Recovery of Fees and Costs. If any party institutes, or should -------------------------- any party otherwise become a party to, any action or proceeding based upon or arising out of this Agreement, including the enforcement or interpretation of this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or any provision hereof, or for a declaration of rights in connection herewith, or for any other relief, including equitable relief, in connection herewith, the "prevailing party" (as such term is defined below) in any such action or proceeding, whether or not such -17- action or proceeding proceeds to final judgment or determination, shall be entitled to receive from the non-prevailing party as a cost of suit, and not as damages, all fees, costs and expenses of enforcing any right of the prevailing party (collectively, "fees and costs"), including: (i) reasonable attorneys' fees and costs and expenses; (ii) witness fees (including experts engaged by the parties, but excluding officers, directors, employees, managers or general partners of the parties); (iii) accountants' fees; (iv) fees of other professionals and (v) any and all other similar fees incurred in the prosecution or defense of the action or proceeding; including the following: (1) postjudgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery and (5) bankruptcy litigation. All of the aforesaid fees and costs shall be deemed to have accrued upon the commencement of such action, and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of the aforesaid fees, costs and expenses incurred in enforcing such judgment and an award of prejudgment interest from the date of the breach at the maximum rate of interest allowed by law. The term "prevailing party" is defined as the party who is determined to prevail by the court after its consideration of all damages and equities in the action or proceeding (the court shall retain the discretion to determine that no party is the prevailing party, in which case no party shall be entitled to recover its fees and costs under this subsection (b)). -------------- 18. ASSIGNMENT AND DELEGATION; SUCCESSORS AND ASSIGNS. (a) Assignment or Delegation. Except as specifically provided in this ------------------------ Agreement, neither party (an "assigning party") may directly or indirectly sell, license, transfer or assign (whether through a merger, consolidation, conversion, sale of assets, sale or exchange of securities, or by operation of law, or otherwise) any of such party's rights or interests under this Agreement, or delegate any of such party's duties or obligations under this Agreement, in whole or in part, including to any subsidiary or to any affiliate, without the prior written consent of the other party (a "consenting party"), which consent may be withheld in the consenting party's sole and absolute discretion; provided, however: (i) Subject to prior compliance with subsection (iii) and ---------------- subsection (iv) below, an assigning party may assign all of the rights and --------------- interests and delegate all of the duties and obligations of the assigning party under this Agreement in connection with a transaction whose principal purpose is to change the State in which the assigning party is incorporated, or to form a holding company, or to effect a similar reorganization as to form of entity without change of beneficial ownership, including through: (1) a merger or consolidation or stock exchange or divisive reorganization (i.e., spin-off, split-off or split-up) or other reorganization with respect to the assigning party and/or its stockholders; or (2) the sale, transfer, exchange or other disposition by the assigning party of its assets in a single or series of related transactions, so long as such transferee, purchaser or surviving person shall expressly assume such obligations of the assigning party; (ii) Subject to subsection (iii) and subsection (iv) below, an ---------------- --------------- assigning party may, with the prior written consent of the consenting party, which consent the consenting party may withhold in its sole and absolute discretion, assign all of the rights and interests and delegate all of the duties and obligations of the assigning party under this Agreement to any other person in connection with the transfer or sale of the entire business of the assigning party (other than with respect to a sale described in subsection (i) above), or the merger or consolidation of -------------- the assigning party with or into any other person (other than with respect to a -18- merger or consolidation described in subsection (i) above), so long as such -------------- transferee, purchaser or surviving person shall expressly assume such obligations of the assigning party; (iii) Notwithstanding anything in subsection (i) or subsection -------------- ---------- (ii) above to the contrary, no assignment or transfer under subsection (i) ---- -------------- or subsection (ii) may be effectuated unless the proposed transferee or --------------- assignee first executes such agreements (including a restated employment agreement) in such form as the consenting party may deem reasonably satisfactory to: (1) evidence the assumption by the proposed transferee or assignee of the obligations of the assigning party; and (2) to ensure that the consenting party continues to receive such rights, benefits and protections (both legal and economic) as were contemplated by the consenting party when entering into this Agreement; and (iv) Notwithstanding anything in subsection (i) or subsection ---------- (ii) above to the contrary: (1) any assumption by a successor or assign ---- under subsection (i) or subsection (ii) above shall in no way release the -------------- --------------- assigning party from any of its obligations or liabilities under this Agreement; and (2) and any merger, consolidation, reorganization, sale or conveyance under subsection (i) or subsection (ii) above shall not be -------------- --------------- deemed to abrogate the rights of the consenting party elsewhere contained in this Agreement, including those resulting from a Change In Control. Any purported assignment or transfer in violation of the terms of this subsection (ii) shall be null and void ab initio and of no force and --------------- effect, and shall vest no rights or interests in the purported assignee or transferee. (b) Successors and Assigns. Subject to subsection (b) above, each ---------------------- -------------- and every representation, warranty, covenant, condition and provision of this Agreement as it relates to each party hereto shall be binding upon and shall inure to the benefit of such party and his, her or its respective successors and permitted assigns, spouses, heirs, executors, administrators and personal and legal representatives, including any successor (whether direct or indirect, or by merger, consolidation, conversion, purchase of assets, purchase of securities or otherwise). 19. MISCELLANEOUS (a) Costs and Expenses. Except as expressly set forth in this ------------------ Agreement, each party shall pay all legal and other fees, costs and expenses incurred or to be incurred by such party in negotiating and preparing this Agreement; in performing due diligence or retaining professional advisors; and in complying with such party's covenants, agreements and conditions contained herein. (b) Cooperation. Each party agrees, without further consideration, to ----------- cooperate and diligently perform any further acts, deeds and things, and to execute and deliver any documents that may be reasonably necessary or otherwise reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. (c) Notices. Unless otherwise specifically provided in this ------- Agreement, all notices, demands, requests, consents, approvals or other communications (collectively and severally called "notices") required or permitted to be given hereunder, or which are given with respect to this Agreement, shall be in writing, and shall be given by: (i) personal delivery (which form of notice shall be deemed to have been given upon delivery), (ii) by telegraph or by private airborne/overnight delivery -19- service (which forms of notice shall be deemed to have been given upon confirmed delivery by the delivery agency), (iii) by electronic or facsimile or telephonic transmission, provided the receiving party has a compatible device or confirms receipt thereof (which forms of notice shall be deemed delivered upon confirmed transmission or confirmation of receipt), or (iv) by mailing in the United States mail by registered or certified mail, return receipt requested, postage prepaid (which forms of notice shall be deemed to have been given upon the fifth {5th} business day following the date mailed. Notices shall be addressed at the addresses first set forth below, or to such other address as the party shall have specified in a writing delivered to the other parties in accordance with this paragraph. Any notice given to the estate of a party shall be sufficient if addressed to the party as provided in this subsection (c). -------------- If to the Company: Pinnacle Oil International, Inc. 840 - 7th Avenue, SW, Suite 750 Calgary, Alberta, Canada T2P 3G2 If to Executive: James R. Ehrets 55 Blueridge Estates Site 19, Box 144 SS1 Calgary, Alberta, Canada T2M 4N3 (d) Counterparts; Electronically Transmitted Documents. This -------------------------------------------------- Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument, binding on all parties hereto. Any signature page of this Agreement may be detached from any counterpart of this Agreement and reattached to any other counterpart of this Agreement identical in form hereto by having attached to it one or more additional signature pages. If a copy or counterpart of this Agreement is originally executed and such copy or counterpart is thereafter transmitted electronically by facsimile or similar device, such facsimile document shall for all purposes be treated as if manually signed by the party whose facsimile signature appears. (e) Execution by All Parties Required to be Binding. This Agreement ----------------------------------------------- shall not be construed to be an offer and shall have no force and effect until this Agreement is fully executed and delivered by all parties hereto pursuant to the terms of section19(d). Until such time as all parties fully execute this ------------ Agreement, any party who has previously executed and delivered this Agreement may revoke such execution and delivery. WHEREFORE, the parties hereto have executed this Agreement in the City of Calgary, Province of Alberta, Canada, as of the date first set forth above. COMPANY: Pinnacle Oil International, Inc. a Nevada Corporation By: /s/ George Liszicasz ----------------------------------------- George Liszicasz, Chief Executive Officer EXECUTIVE: /s/ James R. Ehrets --------------------------------------------- James R. Ehrets -20- EX-21 6 LIST OF SIGNIFICANT SUBSIDIARIES Exhibit 21 List of Significant Subsidiaries - -------------------------------- Pinnacle Oil Inc., a Nevada corporation Pinnacle Oil Canada, Inc., a federal Canadian corporation EX-23 7 CONSENT OF INDEPENDENT AUDITORS-DELOITTE & TOUCHE Exhibit 23 PINNACLE OIL INTERNATIONAL, INC. INDEPENDENT AUDITORS' CONSENT We consent to the use of our report dated February 18, 2000, except for note 17 which is dated April 4, 2000, with respect to the consolidated financial statements of Pinnacle Oil International, Inc. included in this Annual Report on Form 10-K of Pinnacle Oil International, Inc. for the year ended December 31, 1999. Deloitte & Touche LLP Chartered Accountants Calgary, Alberta EX-24 8 POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY OF OFFICERS AND DIRECTORS OF PINNACLE OIL INTERNATIONAL, INC. The undersigned officer and/or director of Pinnacle Oil International, Inc., a Nevada corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending December 31, 1999, an Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints George Liszicasz, Daniel C. Topolinsky and John M. Woodbury, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission, and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 27th day of March, 2000. /s/ George Liszicasz -------------------- George Liszicasz POWER OF ATTORNEY OF OFFICERS AND DIRECTORS OF PINNACLE OIL INTERNATIONAL, INC. The undersigned officer and/or director of Pinnacle Oil International, Inc., a Nevada corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending December 31, 1999, an Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints George Liszicasz, Daniel C. Topolinsky and John M. Woodbury, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission, and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 27th day of March, 2000. /s/ R. Dirk Stinson ------------------- R. Dirk Stinson POWER OF ATTORNEY OF OFFICERS AND DIRECTORS OF PINNACLE OIL INTERNATIONAL, INC. The undersigned officer and/or director of Pinnacle Oil International, Inc., a Nevada corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending December 31, 1999, an Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints George Liszicasz, Daniel C. Topolinsky and John M. Woodbury, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission, and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 27th day of March, 2000. /s/ Lorne W. Carson ------------------- Lorne W. Carson POWER OF ATTORNEY OF OFFICERS AND DIRECTORS OF PINNACLE OIL INTERNATIONAL, INC. The undersigned officer and/or director of Pinnacle Oil International, Inc., a Nevada corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending December 31, 1999, an Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints George Liszicasz, Daniel C. Topolinsky and John M. Woodbury, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission, and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 27th day of March, 2000. /s/ Dennis R. Hunter -------------------- Dennis R. Hunter POWER OF ATTORNEY OF OFFICERS AND DIRECTORS OF PINNACLE OIL INTERNATIONAL, INC. The undersigned officer and/or director of Pinnacle Oil International, Inc., a Nevada corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending December 31, 1999, an Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints George Liszicasz, Daniel C. Topolinsky and John M. Woodbury, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission, and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 27th day of March, 2000. /s/ John A. Thomson ------------------- John A. Thomson POWER OF ATTORNEY OF OFFICERS AND DIRECTORS OF PINNACLE OIL INTERNATIONAL, INC. The undersigned officer and/or director of Pinnacle Oil International, Inc., a Nevada corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending December 31, 1999, an Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints George Liszicasz, Daniel C. Topolinsky and John M. Woodbury, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission, and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 27th day of March, 2000. /s/ Jon E. M. Jacoby -------------------- Jon E.M. Jacoby POWER OF ATTORNEY OF OFFICERS AND DIRECTORS OF PINNACLE OIL INTERNATIONAL, INC. The undersigned officer and/or director of Pinnacle Oil International, Inc., a Nevada corporation (the "Corporation"), which anticipates filing, with respect to its fiscal year ending December 31, 1999, an Annual Report on Form 10-K ("Report") with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints George Liszicasz, Daniel C. Topolinsky and John M. Woodbury, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Report, and any and all applications or other documents to be filed pertaining to such Report with the Securities and Exchange Commission, and with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. EXECUTED this 27th day of March, 2000. /s/ K. Rick Turner ------------------ K. Rick Turner EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PINNACLE OIL INTERNATIONAL INC.'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND PINNACLE OIL INTERNATIONAL INC.'S CONSOLIDATED STATEMENT OF LOSS FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 9,068,723 0 95,317 0 0 9,259,016 1,728,723 292,363 10,729,926 602,321 0 0 800 12,857 10,113,948 10,729,926 0 0 0 1,894,947 0 0 0 (1,563,289) 0 (1,563,289) 0 0 0 (1,563,289) (0.12) (0.12)
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