-----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, WxO2zsVBpTbYc0mOO3Fzu+yuYI2wsCW/EJkzAMyvP7B6PBmDy+VLHR1/HfU5OMwz 2nVfNm+sw2bUSfRT6cTVog== 0001140661-02-000027.txt : 20020414 0001140661-02-000027.hdr.sgml : 20020414 ACCESSION NUMBER: 0001140661-02-000027 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20020206 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIMARK OIL & GAS LTD CENTRAL INDEX KEY: 0001050807 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-30196 FILM NUMBER: 02527908 BUSINESS ADDRESS: STREET 1: 1090 W GEORGIA ST #1305 STREET 2: VANCOUVER CITY: BC V6E 3V7 STATE: A1 BUSINESS PHONE: 6046859316 MAIL ADDRESS: STREET 1: 1090 W GEORGIA ST #1305 STREET 2: VANCOUVER CITY: BC V6E 3V7 20-F 1 tmkf20f.txt FORM 20-F (AUGUST 31, 2001) FORM 20-F [ ] Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 or [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2001 or [ ] 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: 000-30196 TRIMARK OIL & Gas Ltd. (Exact name of Registrant as specified in its charter) TRIMARK OIL & Gas Ltd. (Translation of Registrant's name into English) YUKON TERRITORY, CANADA (Jurisdiction of incorporation or organization) 1305 - 1090 WEST GEORGIA STREET, VANCOUVER, BRITISH COLUMBIA, V6E 3V7 (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. NONE Securities registered or to be registered pursuant to Section 12(g) of the Act. COMMON STOCK, NO PAR VALUE (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. NOT APPLICABLE (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 20,488,016 COMMON SHARES AS OF AUGUST 31, 2001 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 which financial statement item the registrant has elected to follow. Item 17 X Item 18 Page 1 of 75 --------- ----------- -1- GENERAL INFORMATION: UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN ARE TO CANADIAN DOLLARS. GLOSSARY The following is a glossary of oil and gas terms used in this report: anticlines Underground mountain-shaped strata covered with caprock or an impervious layer. BBL or barrel 34.972 Imperial gallons or 42 U.S. gallons. BCF One billion cubic feet. BOE Barrels of oil equivalent. BOPD Barrels of oil per day. BW Barrels of water. BWPD Barrels of water per day. farm-in Acquisition of all or part of the operating rights from the working interest owner to an assignee, by the assumption of all or some of the burden of development to earn an interest in the property. The vendor usually retains an overriding royalty but may retain any type of interest. farm-out Transfer of all or part of the operating rights from the working interest owner to an assignee, who assumes all or some of the burden of development in return for an interest in the property. The assignor usually retains an overriding royalty but may retain any type of interest. gross acres The total number of acres in which the Company holds a working interest or the right to earn a working interest. gross reserves The total reserves estimated to be economically recoverable. gross wells The total number of wells in which the Company has a working interest. isopach maps Maps showing variations in the thickness of a particular sedimentary bed and the interval or spacing between one sedimentary bed and another. liquids Crude oil and natural gas liquids. MBO One thousand barrels of oil. MCF One thousand cubic feet. MCFE One thousand cubic feet equivalent. md Millidarcies - a term used to measure the relative ease with which oil and gas can flow. MMBOE One million barrels of oil equivalent. MMCF One million cubic feet. -2- MMCFE One million cubic feet equivalent. MMCF/D One million cubic feet per day. net acres The gross acres multiplied by the percentage working interest therein owned or to be owned by the Company. net reserves The Company's lessor royalty, overriding royalty, and working interest share of reserves from the properties, after deduction of all freehold, and overriding royalties payable to others. net revenue The percentage interest in which the lessor has the right to interest receive a specified fractional share of the mineral produced from the property or value thereof. net wells The gross wells multiplied by the percentage working interest therein owned or to be owned by the Company. NGLs Natural gas liquids. present value The present value of estimated future net revenues computed by applying current prices of oil and gas reserves to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions. proved oil and Proved oil and gas reserves are the estimated quantities of gas reserves crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes: (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. -3- (iii)Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves", (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors, (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects, and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. proved developed Reserves that can be expected to be recovered through oil and gas existing wells with existing equipment and operating reserves methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. proved undeveloped Reserves that are expected to be recovered from new wells on reserves undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances are estimates for proved undeveloped reserves attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. proved properties Properties with proved reserves. unproved properties Properties with no proved reserves. reversionary A portion of an economic interest that will be returned to interest its former owner after a predetermined amount of production or income has been produced. undeveloped Lands on which there are no current reserves assigned. acreage water flooding The secondary recovery method in which water is forced down injection wells laid out in various patterns around the producing wells. The water injected displaces the oil and forces it to the producing wells. working interest The interest held by a company in an oil or natural gas property, which interest normally bears its proportionate share of the costs of exploration, development, and operation as well as any royalties or other production burdens. -4- workover A major remedial operation on a completed well to restore, maintain, or improve the well's production. Workovers use workover rigs and can take many forms such as acidizing or fracing the well or removal of sand or paraffin buildup. The term workover is also used for deepening an existing well or plugging back to produce from a shallower formation. Forward Looking Statements Pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), the Company cautions readers regarding forward looking statements found in the followin g discussion and elsewhere in this registration statement and in any other statement made by, or on the behalf of the Company, whether or not in future filings with the SEC. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. The Company disclaims any obligation to update forward looking statements. Readers should also understand that under Section 27A(b)(2)(D) of the Securities Act, and Section 21E(b)(2)(D) of the Securities Exchange Act, the "safe harbor" provisions of the PSLRA do not apply to statements made in connection with an initial public offering. -5- PART I ITEM 1. DIRECTORS, SENIOR MANAGEMENT AND ADVISORS. - -------------------------------------------------------------------------------- Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE. - -------------------------------------------------------------------------------- Not applicable. ITEM 3. KEY INFORMATION. - -------------------------------------------------------------------------------- Selected Financial Data The selected financial data of the Company for the years ended August 31, 2001, 2000 and 1999, was derived from the financial statements of the Company which have been audited by D & H Group (formerly Dyke & Howard), independent Chartered Accountants, as indicated in their report which is included elsewhere in this report. The selected financial data set forth for the years ended August 31, 1998 and 1997 are derived from the Company's audited financial statements, not included herein. The information in the following table was extracted from the more detailed consolidated financial statements and related notes included herein and should be read in conjunction with such financial statements and with the information appearing under the heading "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations." Reference is made to Note 11 of the Company's consolidated financial statements included herein for a discussion of the material differences between Canadian generally accepted accounting principles ("GAAP") and U.S. GAAP, and their effect on the Company's financial statements.
($ in 000, except per share data) ----------------------------------------------------------- Year Ended August 31, ----------------------------------------------------------- 2001 2000 1999 1998 1997 Revenues $635 $398 $143 $232 $156 Production $185 $155 $132 $107 $81 Depreciation, depletion and impairment $5,168 $78 $1,703 $1,983 $49 General and administrative $330 $462 $350 $217 $193 Net income (loss) $(5,048) $(297) $(2,042) $(2,076) $(167) Income (loss) per share $(0.29) $(0.02) $(0.40) $(0.84) $(0.16) Weighted average number of shares 17,361 14,771 5,058 2,458 1,059 Dividends per share $0.00 $0.00 $0.00 $0.00 $0.00 Working capital (deficiency) $(547) $1,262 $1,338 $(471) $282 Resource assets $7,022 $7,795 $5,096 $2,169 $801 Other assets $619 $773 - - - Shareholders' equity $7,094 $9,830 $6,434 $1,698 $1,083 Total assets $8,168 $10,137 $6,698 $2,225 $1,289
Adjustment to United States Generally Accepted Accounting Principles The consolidated financial statements of the Company have been prepared in accordance to Canadian GAAP which differ in certain material respects from US GAAP. Material differences between Canadian and US GAAP and their effect on the Company's consolidated financial statements are summarized in the tables below. -6- Consolidated Statement of Loss
2001 2000 1999 $ $ $ Net loss as reported under Canadian GAAP (5,048,280) (296,849) (2,042,191) Adjustments for related party transactions (ii) 815,793 - 450,084 Stock-based compensation (iv) (316,069) (98,126) (735,393) Other compensation expense (vii) (172,720) (134,742) (31,600) ----------- ----------- ----------- Net loss under US GAAP (4,721,276) (529,717) (2,359,100) =========== =========== =========== Weighted average number of common shares outstanding (i) 17,361,325 15,012,218 5,296,479 =========== =========== =========== Loss per share under US GAAP (0.27) (0.04) (0.45) =========== =========== ===========
Consolidated Balance Sheet
2001 2000 $ $ Total assets under Canadian GAAP 8,168,171 10,136,627 Adjustments for related party transactions (ii) (1,928,229) (2,744,022) Deferred tax asset (v) 2,490,000 1,651,821 Less: Valuation allowance (v) (2,490,000) (1,651,821) ----------- ----------- Total assets under US GAAP 6,239,942 7,392,605 =========== =========== Total liabilities under Canadian GAAP 1,073,829 306,565 ----------- ----------- Total liabilities under US GAAP 1,073,829 306,565 =========== =========== Total shareholders' equity under Canadian GAAP 7,094,342 9,830,062 Adjustments for related party transactions (ii) (1,928,229) (2,744,022) ----------- ----------- Total shareholders' equity under US GAAP 5,166,113 7,086,040 =========== ===========
(i) Earnings per Share UnderUS GAAP outstanding special warrants are included in the calculation of loss per share. (ii) Capital Contributions with Respect to Related Party Transactions During the year ended August 31, 1999, the Company acquired and disposed of certain petroleum interests with Hilton Inc. for a combination of monetary and non-monetary consideration. US GAAP requires that certain transfers of non-monetary assets to a company by its promoters or shareholders, in exchange for stock, should generally be recorded at the transferor's historical cost basis, whereas under Canadian GAAP, transfers of non-monetary assets may be recorded based on the fair value of either the stock issued or the assets acquired under certain circumstances. Under Canadian GAAP these transactions were recorded at their fair values. The transactions have been adjusted to reflect the transactions based on the historical cost basis. The net loss under US GAAP has also been adjusted for the subsequent amortization and impairment charges of a portion of these petroleum interest acquisitions costs. -7- (iii) Ceiling test on petroleum interests US GAAP requires that the net book value of proved petroleum interests not exceed the sum of the present value of estimated future net revenues (determined using current prices of petroleum production less estimated future expenditures to be incurred in developing and producing the proved reserves, discounted at ten percent). This ceiling test was performed effective August 31, 2001 and it was determined that no additional write-down of proved petroleum interests was necessary. (iv) The Company grants stock options which reserves common shares for issuance to employees and directors. Under Canadian GAAP, the issuance of stock options is not recognized for accounting purposes. Under US GAAP, the issuance of stock options requires an assessment to determine stock based compensation. Accordingly, the Company has applied the provisions of Financial Account Standards ("SFAS") 123 Accounting for Stock-Based Compensation to calculate stock-based compensation under US GAAP using the fair value method. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2001, 2000 and 1999:
2001 2000 1999 ------------------ ------------------ ----------------- Risk-free interest rate 4.81% - 6.47% 5.63% - 5.79% 6.25% - 7.5% Expected volatility 124% 87% 89% Expected lives 3 years 2 - 3 years 3 years
(v) Income Tax Under Canadian GAAP, deferred tax assets relating to the potential benefit of income tax loss carryforwards are not recognized unless there is virtual certainty of realization of the benefit. US GAAP provides similar treatment, but requires the benefit be recognized and a valuation allowance be recognized to fully offset the deferred tax asset. As at August 31, 2001, the Company has fully reserved the $2,490,000 tax benefit of operating loss carryforwards, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit cannot be determined. Of the total tax benefit, $838,179 is attributable to the year ended August 31, 2001. (vi) Private Placements of Common Stock and Special Warrants with Related Parties US GAAP requires disclosure of private placements conducted by the Company where directors and officers of the Company are participants. During the year ended August 31, 2001, directors, officers and companies controlled by the directors or officers acquired 2,284,000 shares or special warrants (2000 - 1,387,794; 1999 - 1,580,000) of the Company, pursuant to private placements conducted by the Company, for cash proceeds of $1,223,360 (2000 - $1,116,952; 1999 - $1,264,000). (vii) Private Placements of Common Stock The Company conducts the majority of its equity financings pursuant to private placements. Under the policies of the Canadian Venture Exchange, on which the Company's common stock is listed, the Company may provide a discount off the market price of the Company's common stock. US GAAP does not permit a discount from the market price. US GAAP requires the recognition of the market value of the Company's common stock as a credit to share capital, with a charge to operations for the portion of the discount relating to equity financings conducted with officers and directors of the Company and a charge to shareholders' equity, as a capital distribution, for the discount relating to the remaining portion of the equity financings. Under US GAAP, loss and capital distributions for the year ended August 31, 2001 would increase by $172,720 (2000 - $134,742; 1999 - $31,600) and $140,700 (2000 - $184,919; 1999 - $37,805), respectively, -8- and share capital, as at August 31, 2001 would increase by $961,402 (2000 - $647,982). There is no net change to shareholders' equity. The Company's consolidated statements of cash flow comply with US GAAP. New Technical Pronouncements In September 2000, SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB Statement No. 125" was issued. Adoption of SFAS No. 140 is not expected to have an impact on the Company's financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. For all business combinations for which the date of acquisition is after June 30, 2001, SFAS 141 also establishes specific criteria for the recognization of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain rather than deferred and amortized. SFAS 142 changes the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. The Company does not believe that the adoption of these statements will have a material effect on its financial position, results of operations, or cash flows. In June 2001, the FASB also approved for issuance SFAS 143, "Asset Retirement Obligations." SFAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including (1) the timing of the liability recognition, (2) initial measurement of the liability, (3) allocation of assets retirement cost to expense, (4) subsequent measurement of the liability, and (5) financial statement disclosure. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The adoption of SFAS 143 is not expected to have a material effect on the Company's financial position, results of operations, or cash flows. Exchange Rate History The following table sets forth the average exchange rate for one Canadian dollar expressed in terms of one U.S. dollar for the fiscal years ended August 31, 2001, 2000, 1999, 1998 and 1997. Period Average - ------ ------- September 1, 2000 - August 31, 2001 0.6537 September 1, 1999 - August 31, 2000 0.6805 September 1, 1998 - August 31, 1999 0.6682 September 1, 1997 - August 31, 1998 0.6901 September 1, 1996 - August 31, 1997 0.7296 The following table sets forth high and low exchange rates for one Canadian dollar expressed in terms of one U.S. dollar for the four-month period ended December 31, 2001. Month High Low - ----- ---- ---- July 2001 0.6622 0.6472 August 2001 0.6547 0.6456 September 2001 0.6437 0.6330 October 2001 0.6418 0.6287 November 2001 0.6363 0.6241 December 2001 0.6396 0.6254 -9- Exchange rates are based upon the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The noon rate of exchange on December 31, 2001, reported by the United States Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars was CDN$0.6279 (US$1.5925 = CDN$1.00). Risk Factors Due to the nature of the Company's business and the present stage of exploration on its oil and gas prospects, the following risk factors apply to the Company's operations: Accumulated Losses During the year ended August 31, 2001, the Company incurred a loss of approximately $5.0 million, and as at August 31, 2001, the Company had an accumulated deficit of approximately $12.4 million. To date the Company's oil and gas production has not generated sufficient operating cash flows to provide working capital for the Company's ongoing overhead, the funding of its petroleum property acquisitions and the exploration and development of these properties. There can be no assurances that the Company will be able to successfully develop its properties and achieve profitability from its operations. Exploration and Production Risks The business of exploring for and producing oil and gas involves a substantial risk of investment loss which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Drilling oil and gas wells involves the risk that the wells will be unproductive or that, although productive, the wells do not produce oil and/or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered, which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. As with any petroleum property, there can be no assurance that oil and gas will be produced from the properties in which the Company has interests. In addition, the marketability of oil and gas which may be acquired or discovered, will be affected by numerous factors beyond the control of the Company. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. The extent of these factors cannot be accurately predicted, but any one or a combination of these factors may result in the Company not receiving an adequate return on invested capital. There is no assurance that additional crude oil or natural gas in commercial quantities will be discovered by the Company. Financing Risks As at December 31, 2001, the Company had a working capital deficiency of approximately $920,000. The Company has anticipated exploration and development expenditures, completion costs and ongoing overhead for 2002 totaling approximately $1.9 million. The Company has primarily relied on the sale of its equity capital and disposition of petroleum interests to fund the acquisition, exploration and development of its petroleum properties. It has no assurance that additional funding will be available to it for exploration and development of its projects or to fulfil its obligations under any applicable agreements. There can be no assurance that the Company will be able to generate sufficient operating cash flow or obtain adequate financing in the future or that the terms of such financing will be favorable. Failure to generate additional operating cash flow or obtain additional financing could result in substantial dilution of the Company's petroleum interests, or delay or indefinite postponement of further exploration and development of its projects with the possible loss of such properties. As of the date of this report, the Company has initiated a number of alternatives to provide funding for its commitments. See "Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources." -10- Non-Operator Status At this stage of its business, the Company relies upon other project participants to provide and complete all project operations and responsibilities including operating, drilling, marketing and project administration. As a result, the Company has only a limited ability to exercise control over a significant portion of a project's operations or the associated costs of those operations. The success of a project is dependent upon a number of factors that are outside of the Company's area of expertise and project responsibilities. These factors include: (1) the availability of favorable term leases and required permitting for projects, (2) the availability of future capital resources by the Company and the other participants for the purchasing of leases and the drilling of wells, (3) the approval of other participants to the purchasing of leases and the drilling of wells on the projects, and (4) the economic conditions at the time of drilling, including the prevailing and anticipated prices for oil and gas. The Company's reliance on other project participants and its limited ability to directly control certain project costs could have a material negative effect on the Company's receipt of expected rates of return on the Company's investment in certain projects. Uninsurable Risks Although management believes the operator of any properties in which the Company and its subsidiaries may acquire interests, will acquire and maintain appropriate insurance coverage in accordance with standard industry practice, the Company and its subsidiaries may suffer losses from uninsurable hazards or from hazards which the operator has chosen not to insure against because of high premium costs or other reasons. The Company and its subsidiaries intend to continue to engage in the drilling of both exploratory and development wells. Exploratory wells have much greater dry hole risk than do wells which are drilled offsetting established production. The Company and its subsidiaries may become subject to liability for pollution, fire, explosion, blow-outs, cratering and oil spills against which are in excess of coverages, if any, maintained by the operator. Such events could result in substantial damage to oil and gas wells, producing facilities and other property and personal injury. The payment of any such liabilities may have a material, adverse effect on the Company's financial position. Anadarko, the operator of the East Lost Hills Joint Venture and the San Joaquin Joint Venture, maintains for each well a US$20 million operator's control of well and pollution coverage and US$30 million liability coverage on the ongoing drill programs. As of the date of this report the Company is not the operator of any of its petroleum and natural gas interests and does not maintain insurance coverage relating thereto. No Assurance of Titles It is the practice of the Company in acquiring oil and gas leases or undivided interests in oil and gas leases not to undergo the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease. Rather, the Company will rely upon the judgment of oil and gas lease brokers or landsmen who perform the field work in examining records in the appropriate governmental office before attempting to place under lease a specific mineral interest. This practice is widely followed in the oil and gas industry. Prior to the drilling of an oil and gas well, however, it is the normal practice in the oil and gas industry for the person or company acting as the operator of the well to obtain a preliminary title review of the spacing unit within which the proposed oil and gas well is to be drilled to ensure there are no obvious deficiencies in title to the well; however, neither the Company nor the person or company acting as operator of the well will obtain counsel to examine title to such spacing unit until the well is about to go into production. It frequently happens, as a result of such examinations, that certain curative work must be done to correct deficiencies in the marketability of the title, and such curative work entails expense. The work might include obtaining affidavits of heirship or causing an estate to be administered. It does happen, from time to time, that the examination made by the title lawyers reveals that the oil and gas lease or leases are worthless, having been purchased in error from a person who is not the owner of the mineral interest desired. In such instances, the amount paid for such oil and gas lease or leases is generally lost. To date the Company has not lost title to any of its oil and gas leases, nor is it aware that any of its currently held properties is subject to being lost as a result of faulty titles. -11- Environmental Regulations In general, the exploration and production activities of the Company are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on the Company's operations or financial condition to date. Specifically, the Company is subject to legislation regarding emissions into the environment, water discharges, and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and the Company is unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect the Company any differently or to any greater or lesser extent than other companies in the industry. The Company believes that its operations comply, in all material respects, with all applicable environmental regulations. Governmental Regulations Oil and gas exploration, development and production are subject to various types of regulation by local, state and federal agencies. Legislation affecting the oil and gas industry is under constant review for amendment and expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. The regulatory burden on the oil and gas industry increases the Company's cost of doing business and, consequently, affects its profitability. There is no assurance that laws and regulations enacted in the future will not adversely affect the oil and gas industry. However, since these regulations generally apply to all oil and gas producers, management of the Company believes that these regulations should not put the Company at a material disadvantage to other oil and gas producers. Most states in which the Company and its subsidiaries own and operate properties have statutes, rules and regulations governing conservation matters including the unitization or pooling of oil and gas properties, establishment of maximum rates of production from oil and gas wells and the spacing of such wells. Oil and gas mineral rights may be held by individuals or corporations and, in certain circumstances, by governments having jurisdiction over the area in which such mineral rights are located. As a general rule, parties holding such mineral rights grant licenses or leases to third parties to facilitate the exploration and development of these mineral rights. The terms of the leases and licenses are generally established to require timely development. Notwithstanding the ownership of mineral rights, the government of the jurisdiction in which mineral rights are located generally retains authority over the manner of development of those rights. In addition to royalties paid to freehold owners, each state generally imposes a production or severance tax with respect to production and sale of crude oil, natural gas and natural gas liquids within their respective jurisdictions. For the most part, state production taxes are applied as a percentage of production or sales. Payment of these taxes are in the normal course of operations in the oil and gas industry and should not have a material impact on the Company's financial condition. Natural Gas and Oil Prices In recent decades, there have been periods of both worldwide overproduction and underproduction of hydrocarbons and periods of both increased and relaxed energy conservation efforts. Such conditions have resulted in periods of excess supply of, and reduced demand for, crude oil on a worldwide basis and for natural gas on a domestic basis. These periods have been followed by periods of short supply of, and increased demand for, crude oil and, to a lesser extent, natural gas. The excess or short supply of crude oil has placed pressures on prices and has resulted in dramatic price fluctuations even during relatively short periods of seasonal market demand. The price of natural gas has exhibited market demand fluctuations; however, because most of the natural gas consumed within the United States is produced within the United States, the price of natural gas did not historically exhibit the dramatic price fluctuations that crude oil prices have experienced under conditions of high import levels. Recently, the price of natural gas has fluctuated dramatically due to changes in demand and significant fluctuations of supplies. The Company's financial results can be significantly affected by prices received from production of oil and gas as commodity prices fluctuate widely in -12- response to changing market forces. Specifically, a decrease in the price of oil or gas may reduce the revenue the Company receives from its oil and gas operations and/or may increase the Company's impairment or depletion expenses for a given period. In addition, a decrease in price may cause a decrease in the present value of the Company's estimated oil and gas reserves. Conversely, an increase in the price of oil or gas may increase the revenue received from the Company's oil and gas operations and/or may decrease the Company's impairment or depletion expenses for a given period. An increase in price may cause an increase in the present value of the Company's estimated oil and gas reserves. Competition The oil and gas industry is intensely competitive and the Company competes with other companies which have greater resources. Many of such companies not only explore for and produce crude oil and natural gas but also carry on refining operations and market petroleum and other products on a worldwide basis. Such companies may be able to pay more for productive oil and natural gas properties and exploratory prospects, and to define, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. The Company's ability to acquire additional properties and to discover reserves in the future will be dependent upon its ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. There is also competition between the oil and gas industry and other industries with respect to the supply of energy and fuel to industrial, commercial and individual customers. There is no assurance that the Company will be able to effectively compete against such companies. Risks Associated With Management of Growth Because of its small size, the Company desires to grow rapidly in order to achieve certain economies of scale. Although there is no assurance that this rapid growth will occur, to the extent that it does occur, it will place a significant strain on the Company's financial, technical, operational and administrative resources. As the Company expands its activities and increases the number of projects it is evaluating or in which it is participating, there will be additional demands on the Company's financial, technical and administrative resources. The failure to continue to upgrade the Company's technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the recruitment and retention of geoscientists and engineers, could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence upon Key Personnel The success of the Company's operations and activities is dependent to a significant extent on the efforts and abilities of its management. The loss of services of any of its management could have a material adverse effect on the Company. The Company has not obtained "key man" insurance for any of its management. Mr. Busby is the Chairman, President and Chief Executive Officer of the Company. The loss of the services of Mr. Busby may adversely affect the business and prospects of the Company. Mr. Busby's services are provided through DWB Management Ltd. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." Adequate Labor Corporate accounting, management and administration are provided, in part, by Chase Management Ltd. ("Chase"), a company owned by Mr. Nick DeMare, a director of the Company. As of the date of this report, the Company does not employ any personnel. In the event the Company needs to employ personnel, it will need to recruit qualified personnel to staff its operations. The Company believes that such personnel currently are available at reasonable salaries and wages in the geographic areas in which the Company and its subsidiaries operate. There can be no assurance, however, that such personnel will be available in the future. In addition, it cannot be predicted whether the labor staffing at any of the Company's projects will be unionized, which may result in potentially higher operating costs. Dividend Risks The Company has not paid any dividends on its common shares and does not intend to pay dividends on its common shares in the immediate future. Any decision to pay dividends on its common shares in the future will be made by the -13- board of directors on the Company on the basis of earnings, financial requirements and other such conditions that may exist at that time. Price Fluctuations: Share Price Volatility In recent years, the securities markets in Canada have experienced a high level of price and volume volatility, and the market prices of securities of many companies, particularly junior resource exploration companies like the Company, have experienced wide fluctuations which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. In particular, the per share price of the Company's common stock on the Canadian Venture Exchange fluctuated from a low of $0.11 to a high of $1.07 during the 12-month period ending December 31, 2001 and closed at $0.14 on December 31, 2001. There can be no assurance that these price fluctuations will not continue to occur. Currency Fluctuations Presently, the Company's petroleum activities are conducted in the United States and all petroleum revenues and expenditures are conducted in United States dollars. To date, all equity financing conducted by the Company has been conducted in Canadian dollars. The Company maintains its head office in Vancouver, Canada, and may, from time-to- time, maintain cash holdings in Canadian dollars. Recently the Canadian dollar has experienced a devaluation against the United States dollar. Continued devaluation of the Canadian dollar may have a material and adverse effect on the Company's operations. Conflicts of Interest Certain of the directors also serve as directors of other companies or have significant shareholdings in other companies and, to the extent that such other companies may participate in ventures in which the Company may participate, the directors of the Company may have a conflict of interest in negotiating and concluding terms relating to the extent of such participation. In the event that such a conflict of interest arises at a meeting of the board of directors, a director who has such a conflict will disclose the nature and extent of his interest to the board of directors and abstain from voting for or against the approval of such a participation or such terms. In accordance with the laws of the Yukon Territory, the directors of the Company are required to act honestly and in good faith with a view to the best interests of the Company. In determining whether the Company will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider the degree of risk to which the Company may be exposed and its financial position at that time. See also "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." Penny Stock Regulation The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stock". Generally, penny stocks are equity securities with a price of less than US$5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). If the Company's shares are traded for less than US$5 per share, as they currently are, the shares will be subject to the SEC's penny stock rules unless (1) the Company's net tangible assets exceed US$5,000,000 during the Company's first three years of continuous operations or US$2,000,000 after the Company's first three years of continuous operations; or (2) the Company has had average revenue of at least US$6,000,000 for the last three years. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prescribed by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must 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. These requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. As a result, the holders of the Common Stock may find it difficult to sell the Common Stock of the Company. These rules may restrict the ability of brokers -14- to sell the common stock and may reduce the secondary market for the common stock. A limited secondary market may result in a decrease in the shareholder value and/or a partial or total loss of an investor's investment. Enforcement of Legal Process Service of process upon individuals or firms that are not resident in the United States may be difficult to obtain within the United States. Some of the members of the Board of Directors and senior management of the Company reside outside the United States. Any judgment obtained in the United States against the Company or such persons may not be collectible within the United States. The Company has not appointed anyone to accept service of process on its behalf. ITEM 4. INFORMATION ON THE COMPANY. - -------------------------------------------------------------------------------- History and Development of the Company Name and Incorporation The head office and principal address of the Company is located at #1305 - 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7. The Company was incorporated under the laws of British Columbia, Canada, under the name of Golden Chance Resources Inc. on June 16, 1983. On December 14, 1993, the Company was continued under the Business Corporations Act (Yukon Territory). On the continuance the Company changed its authorized capital into "unlimited common shares without par value." On June 16, 1997, the Company changed its name to its current name, "Trimark Oil & Gas Ltd." The Company's common shares were listed on the Vancouver Stock Exchange (the "VSE") through November 28, 1999. Effective November 29, 1999, the VSE and the Alberta Stock Exchange (the "ASE") merged and began operations as the Canadian Venture Exchange (the "CDNX"). The merger of the VSE and the ASE to form the CDNX has not had a significant impact on the Company's operations. The CDNX classifies listed companies into two different tiers based on standards, which include historical financial performance, stage of development, and financial resources of the listed company. Tier I is the CDNX's premier tier and is reserved for the CDNX's most advanced issuers with the most significant financial resources. Tier I issuers benefit from decreased filing requirements and improved service standards. The majority of the companies listed on the CDNX are Tier II companies. The Company trades on the CDNX under the symbol "TMK" and is classified as a Tier II company. Effective August 7, 2000, the Company's common stock was listed for quotation on the Over-the-Counter Bulletin Board operated by the National Association of Securities Dealers under the symbol "TOGSF". The Company has one wholly-owned subsidiary, Trimark Resources Inc. ("Trimark Inc."), which was incorporated on June 4, 1993, under the laws of the state of Colorado. Trimark Inc. has one wholly-owned subsidiary, Safari Petroleum LLC ("Safari"), a limited liability company formed on June 14, 1995, under the laws of the state of Colorado. The Company, through Trimark Inc. and Safari, engages in oil and gas activities in the United States. The Company's corporate office is located at Suite 1305 - 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7. The Company's registered office is located at 3081 - 3rd Avenue, Whitehorse, Yukon, Canada. The phone number of the Company's registered office is (867) 668-4405 and the corporate office is (604) 685-9316. The Company does not have a registered agent in the United States. Exploration Expenditures During fiscal 1999, 2000 and 2001, the Company incurred $4.6 million, $2.8 million and $4.4 million, respectively, on the acquisition, exploration and development of its petroleum interests. During the past three fiscal years, the Company -15- has devoted its resources in developing its petroleum and natural gas prospects in California, as described in "Item 4. Information on the Company - Material Properties". The Company is continuing its participation in the exploration and development of its California properties. Business Overview Since October 1990, the Company has been active in the business of acquiring, exploring and developing oil and gas prospects in the United States. The Company's principal assets are its interests in the East Lost Hills Joint Venture, the San Joaquin Joint Venture and in Regional California. These assets are currently at the exploration stage. The Company is concentrating its oil and gas exploration efforts on these properties. These assets are described in detail in "Item 4. Information on the Company - Material Properties." -16- [Trimark Prospect and Well Locations Map] -17- 2002 Exploration Budget As of the date of this report the Company has active exploration and development projects ongoing in California. The Company anticipates that it could incur up to $1.5 million (US$933,000) in exploration and development expenditures for the 2002 calendar year determined as follows: 1. East Lost Hills - the partners have agreed to side-track the ELH #4 well, at a cost of US$6 million and complete drilling of the ELH #9 well, projected at US$6 million. The Company anticipates its share of drilling and completion costs to be approximately US$120,000. The partners have also determined to drill a water disposal well, at a cost of US$3.10 million, to facilitate increased production from the ELH #1 well. The Company's share of this cost is US$31,000. No additional budgets have been proposed by the operator. Depending on the results from the current program, the Company anticipates that the operator may propose to drill additional wells in 2002. No amounts have been budgeted for any additional drilling. The Company's share of exploration and development costs at East Lost Hills for 2002, is estimated to be US$151,000. 2. San Joaquin - drilling commenced on the Pyramid Hills Prospect in mid-November 2001 at a cost of US$14 million. The Company's share is US$560,000. 3. Regional California - the Company anticipates that it will participate in the drilling of a replacement well on the Basil Prospect. A definitive date and budget has not yet been proposed by the operator. However, management of the Company expects that the replacement well will be drilled between July 2002 and September 2002 at a cost of US$700,000, with the Company's share at US$222,000. The $1.5 million budget assumes that all wells currently in progress and planned will in fact all be drilled and completed. These projections and work schedules are contingent on many factors, many of which are beyond the Company's control. Work schedules can and will change based on results in the field. Actual costs may vary significantly from current estimates. The estimates provided are management's estimates of expenditures to be incurred. Sales and Revenue Distribution The Company sells its share of petroleum, natural gas and natural gas liquids produced from its wells to a variety of purchasers at the wellhead in the United States. All of its sales are conducted with unaffiliated customers. These purchasers provide a ready market for all of the Company's production and pay the local market price, which can fluctuate based upon prevailing market conditions. Due to the number of purchasers in each area, management does not believe that the loss of one or a number of purchasers would pose a significant risk to the continuity of the Company's operations. The Company does not maintain significant inventories of petroleum or natural gas liquids. There are currently no plans by management to engage in any further oil and gas activities in Canada. Total revenues reported for fiscal 1999, 2000 and 2001, were as follows: ($ in 000) -------------------------------------- Years Ended August 31, -------------------------------------- 2001 2000 1999 $ $ $ Oil and Gas Sales - United States 521 203 136 ---- ---- ---- Interest and Other - United States 15 58 - - Canada 99 137 7 ---- ---- ---- 114 195 7 ---- ---- ---- Total Revenues 635 398 143 ==== ==== ==== -18- Government Regulation Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition The Company's petroleum and natural gas exploration activities in the state of California are being undertaken in a highly competitive and speculative business atmosphere. In seeking any other suitable petroleum and natural gas properties for acquisition, the Company is competing with a number of other companies located in the state of California and elsewhere, including large oil and gas companies and other independent operators with greater financial resources. Management does not believe that the Company's initial competitive position in the petroleum and natural gas industry will be significant. Management does not foresee any difficulties in procuring drilling rigs or the manpower to run them in the area of its operations; however, several factors, including increased competition in the area, may limit the availability of drilling rigs, rig operators and related personnel and/or equipment; such an event may have a significant adverse impact on the profitability of the Company's operations. Competition in the petroleum and natural gas exploration industry exists in the form of competition to acquire the most promising acreage blocks and obtaining the most favorable prices for transporting the product. The Company, and ventures in which it participates, is relatively small compared to other petroleum and natural gas exploration companies and may have difficulty acquiring additional acreage and/or projects and arranging for the transportation of product, in the event the Company, or ventures in which it participates, is successful in its exploration efforts. Governmental Regulations and Environmental Laws The Company and any venture in which it participates, is required to obtain permits for drilling oil or gas wells. Exploration and production activities relating to oil and gas leases are subject to numerous environmental laws, rules and regulations. The Federal Clean Water Act requires the Company to construct a fresh water containment barrier between the surface of each drilling site and the underlying water table. Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the Company's operations and costs through their effect on oil and gas exploration, development and production operations. Environmental laws and regulations have changed substantially and rapidly over the last 20 years, and the Company anticipates that there will be continuing changes. Laws and regulations protecting the environment have generally become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a corporation liable for environmental damages without regard to negligence or fault on the part of such corporation. Such laws and regulations may expose the Company to liability for the conduct of operations or conditions caused by others, or for acts of the Company which were in compliance with all applicable laws at the time such acts were performed. Increasingly strict environmental restrictions and limitations have resulted in increased operating costs for the Company and other businesses throughout the United States, and it is possible that the costs of compliance with environmental laws and regulations will continue to increase. The modification of existing laws or regulations or the adoption of new laws or regulations relating to environmental matters could have a material adverse effect on the Company's operations. In addition, the Company's existing and proposed operations could result in liability for fires, blowouts, oil spills, discharge of hazardous materials into surface and subsurface aquifers and other environmental damage, any one of which could result in personal injury, loss of life, property damage or destruction or suspension of operations. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, requires payments for cleanup of certain abandoned waste disposal sites, even though such waste disposal activities were undertaken in compliance with regulations applicable at the time of disposal. Under the Superfund legislation, one party may, under certain circumstances, be required to bear more than its proportional share of cleanup costs at a site where it has responsibility pursuant to the legislation, if payments cannot be obtained from other responsible parties. Other legislation mandates cleanup of certain wastes at facilities that are currently being operated. States also have regulatory programs that can mandate waste cleanup. CERCLA authorizes the Environmental Protection Agency ("EPA") and, in some cases, third parties to take actions in response to threats to the public health -19- or the environment and to seek to recover from the responsible classes of persons the costs they incur. The scope of financial liability under these laws involves inherent uncertainties. It is not anticipated that the Company will be required in the near future to expend amounts that are material in relation to its total capital expenditures program by reason of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance. The Company believes it is presently in compliance with all applicable federal, state or local environmental laws, rules or regulations; however, continued compliance (or failure to comply) and future legislation may have an adverse impact on the Company's present and contemplated business operations. The foregoing is only a brief summary of some of the existing environmental laws, rules and regulations to which the Company's business operations are subject, and there are many others, the effects of which could have an adverse impact on the Company. Future legislation in this area will no doubt be enacted and revisions will be made in current laws. No assurance can be given as to what effect these present and future laws, rules and regulations will have on the Company's current and future operations. Principal Oil and Gas Properties Material Properties East Lost Hills Joint Venture and San Joaquin Joint Venture, California In February 1999, Berkley Petroleum Corp. ("Berkley") agreed to purchase from Armstrong Resources LLC ("Armstrong") an interest in various oil and gas prospects in the San Joaquin Basin. Neither Berkley or Armstrong are affiliates of the Company, and to the best of the Company's knowledge Berkley and Armstong are not affiliated with each other. In order to reduce its financial commitments, Berkley allowed other companies to participate with it in the acquisition. Hilton Petroleum Inc. ("Hilton Inc."), a wholly-owned subsidiary of Hilton Petroleum Ltd. ("Hilton"), acquired an 11% interest of which 4% was reserved for the Company. On February 26, 1999, the Company entered into an agreement to acquire, for a purchase price of approximately $2,151,000 (US$1,450,000), a 4% capital interest (3% working interest) in the San Joaquin Joint Venture from Hilton Inc. The agreement with Berkley and Armstrong requires that the Company pay 4% of the costs on the first three wells ("capital interest"), and 3% of the costs on all subsequent wells. The Company's share of net revenues, if any, will be approximately 2.5% in the San Joaquin Joint Venture ("net revenue interest"). The Company's agreement with Hilton Inc. was on identical terms as Hilton Inc.'s agreement with Berkley other than a promote fee of $74,170 (US$50,000) which has been capitalized as an acquisition cost. The Company is obligated to fund its prorata share of the exploration costs. Hilton is a public company which has certain directors and officers in common with the Company. As a condition of Berkley's acquisition of the San Joaquin Joint Venture properties, Berkley acquired, on a reversionary basis, Armstrong's 17.5% interest in the East Lost Hills Joint Venture. After a specified level of oil and gas revenue is generated the 17.5% interest will be returned to Armstrong. As part of the Company's acquisition of the 4% interest in the San Joaquin Joint Venture, the Company acquired a 0.7% (4% of 17.5%) reversionary working interest in the East Lost Hills Joint Venture. Of the approximately $2,151,000 (US$1,450,000) purchase price of the San Joaquin Joint Venture Interest and the 0.7% reversionary working interest, $1,038,000 (US$700,000) was allocated to the 0.7% reversionary working interest. On March 8, 1999, the Company entered into an agreement to acquire, from Hilton Inc., a 1% working interest in the East Lost Hills Joint Venture for approximately $2,972,000 (US$2,000,000) and sold to Hilton Inc. its 0.7% reversionary interest in the East Lost Hills Joint Venture at its recorded cost of $1,038,000 (US$700,000). The 0.7% interest was sold in order to fund the payment for the acquisition of the 1% working interest from Hilton Inc. The 1% working interest acquired by the Company from Hilton Inc. does not revert to Armstrong. The $1,038,000 proceeds from the sale were credited against the $2,972,000 payable to Hilton Inc. Of the remaining $1,934,000 (US$1,300,000) payable, $890,000 (US$600,000) was paid in cash and $1,044,000 (US$700,000) was paid by the issuance of 1,160,000 of the Company's common shares at a deemed price of $0.90 per share. The Company is also obligated to pay its proportionate share of all on-going exploration activities. The Company's share of net revenues, if any, will be approximately 0.80% in the East Lost Hills Joint Venture. -20- The Company closed the acquisition of the San Joaquin Joint Venture and the East Lost Hills Joint Venture in July 1999. The San Joaquin Joint Venture and the East Lost Hills Joint Venture are both situated in the oil-rich San Joaquin Basin, approximately 45 miles northwest of Bakersfield. As of August 31, 2001, the Company had recorded approximately $1.9 million in leasehold acquisition costs and $1.8 million in exploration and development expenditures on the East Lost Hills Joint Venture and $2.2 million in leasehold acquisition costs and $1.1 million in exploration and development expenditures on the San Joaquin Joint Venture. Based on the current approved work schedule and the progress of the current drilling program, management has budgeted US$151,000 for exploration and development on the East Lost Hills Joint Venture and US$560,000 on the San Joaquin Joint Venture. Other Properties Regional California The Company participated in the generation, acquisition and exploration of oil and gas projects in the San Joaquin Basin of California with California Exploration Ltd. ("CalEx"). The Company's initial capital interest was 23.333% which was increased to 31.666% effective December 1, 2000 and effective January 1, 2001, increased to 43.66668%. As of February 26, 2001 an oil and gas exploration agreement was signed with CalEx. Under the agreement, the Company, effective January 1, 2001, would reimburse CalEx for its 43.66668% share of all costs associated with the generation of oil and gas prospects including, but not limited to, overhead costs, geologic and geophysical costs and lease acquisition costs. In addition, the Company agreed to pay up to 43.66668% of drilling costs through completion and sales point for the first well drilled on a specific prospect. For any subsequent well drilled on a prospect or operating costs when operations commence, the Company would pay up to 32.749% of the costs. Other Assets In addition to its petroleum interests, the Company held the following assets as at December 31, 2001: (a) a US$400,000 unsecured convertible note (the "ALPNET Note") dated June 2, 2000, issued by ALPNET, Inc. ("ALPNET"), a public Utah company trading on the Over-the-Counter Bulletin Board. The ALPNET Note has a variable interest rate of US prime plus 2%, payable on a quarterly basis. The principal is repayable in three equal annual instalments commencing June 2, 2003. The Company has the right to convert all or any portion of the outstanding principal into common stock of ALPNET, on the basis of US$2.22 per share. ALPNET has the right to pay the full amount, or any portion, of the ALPNET Note prior to its maturity. In connection with the ALPNET Note, ALPNET granted the Company a warrant to purchase up to 90,090 common shares of ALPNET, at an exercise price of US$3.33 per share, on or before June 2, 2002. The closing price of ALPNET's common stock on December 31, 2001 was US$0.20. SDL plc., through a tender offer, acquired control of ALPNET on or about January 16, 2002 and is in the process of merging ALPNET into a wholly-owned subsidiary of SDL plc. On January 15, 2002, the Company, DNG Capital Corp., Donald W. Busby and the Donald W. Busby 1999 Trust (collectively the "Noteholders") entered into an agreement with SDL plc, to convert, with ten days' prior written notice to SDL plc, up to US$200,000 in principal amount of ALPNET promissory notes held by the Noteholders into 140,000 ordinary shares of SDL plc. Proportionally, the Company would be entitled to convert US$160,000 in principal amount of the ALPNET Note into 112,000 ordinary shares of SDL plc. SDL plc has also agreed to negotiate, on or after January 21, 2002, with the Company regarding the conversion of additional principal amounts. DNG Capital Corp. is a private company wholly-owned by Mr. DeMare, a director of the Company. Donald W. Busby is an officer and director of the Company and was the settlor and retains the power to remove the trustee of the Donald W. Busby 1999 Irrevocable Trust. -21- (b) during the year ended August 31, 2000, the Company provided a US$125,000 relocation loan to Donald W. Busby, the President, Chairman and CEO of the Company. The loan bears interest at 5% per annum, compounded monthly, and matures on March 27, 2002. As at December 31, 2001, the US$125,000 principal remained outstanding. Employees The Company's management functions are provided by private companies owned by officers and directors of the Company. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." In addition, the Company employs a number of consultants to perform specific functions, on an as needed basis. Organizational Structure The following chart sets forth the names of the Company and the significant subsidiaries, their respective jurisdictions of incorporation and the Company's ownership interests therein as of the date of this report. Unless otherwise indicated herein, the term "Company" means collectively the Company and its subsidiaries. ORGANIZATION CHART -------------------------------- | TRIMARK OIL & GAS LTD. | | (Yukon) | -------------------------------- | | -------------------------------- | TRIMARK RESOURCES INC. | | (Colorado) | | 100% | -------------------------------- | | -------------------------------- | SAFARI PETROLEUM LLC | | (Colorado) | | 100% | -------------------------------- Subsidiaries Trimark Resources Inc. The Company owns all of the outstanding common shares of Trimark Resources Inc. ("Trimark Inc."), a Colorado corporation, which was incorporated on June 4, 1993. As of the date of this report, Trimark Inc. holds the interests in the East Lost Hills and San Joaquin Joint Venture properties, the Regional California properties and other miscellaneous properties in the United States. Safari Petroleum LLC Trimark Inc. owns all of the interests in Safari Petroleum LLC ("Safari"), a Colorado limited liability company, which was formed on June 14, 1995. As of the date of this report, Safari holds interests in minor oil and gas properties in the United States. -22- Principal Properties Petroleum and Natural Gas Properties The Company's principal business is the acquisition of leasehold interests in petroleum and natural gas rights, and the exploration for and development, production and sale of petroleum and natural gas. All of the Company's properties are located in the continental United States. The Company owns interests in petroleum and natural gas properties in the United States, identified as follows: Material Properties East Lost Hills Joint Venture and San Joaquin Joint Venture, California Location The East Lost Hills Joint Venture and the San Joaquin Joint Venture are both situated in the San Joaquin Basin, approximately 45 miles northwest of Bakersfield, California. Property Description The San Joaquin Basin has proved to be one of the most productive hydrocarbon producing basins in the continental United States. To date, the approximately 14,000 square mile basin contains 20 fields classified as giant, with each having produced more than 100 MMBOE. The San Joaquin Basin contains six of the 25 largest oil fields in the U.S.A. and produces more than 78% of California's oil and gas production. Most of the production within the basin is located along the western and southern end of Kern County. The San Joaquin Basin has been dominated by major oil companies with large fee acreage holdings and has generally been under-explored by independent exploration and production companies. The large fields in the basin were discovered on surface anticlines and produce predominantly heavy oil from depths of less than 5,000 feet. As a consequence, basin operators have focused on engineering technologies related to enhanced production practices, including steam floods and, most recently, horizontal drilling. Deep basin targets, both structural and stratigraphic in nature, remain largely untested with modern seismic technology and the drill bit. The Lost Hills Field is an anticlinal structure formed by what appears to be a combination of compressional forces from the west, as well as right-lateral motion associated with movement of the San Andreas fault system. The Monterey and Temblor formations are broken by a high angle thrust fault on the west side of the structure. The East Lost Hills Joint Venture lies in the footwall side of this thrust fault, directly east of and structurally below the existing Lost Hills field. To date, the Lost Hills Field has produced over 115 MBO and 120 BCF of gas from Pleistocene, Pliocene and Miocene-age sands buried at depths of between 2,000 to 6,000 feet. The geological objectives at the East Lost Hills Joint Venture are stacked sands (layers of sand stacked one over the other) within the Temblor Group which are buried between 16,500 to 19,000 feet. The uppermost sand encountered by drilling in the Temblor Group is called the Temblor Sand. Other sands which lie below this interval have various local names, and vary in thickness and lateral distribution from well to well. The Temblor sands lie beneath the Miocene-age Monterey shale, which is a proven source rock, as well as an excellent vertical reservoir seal. Two dimensional ("2-D") seismic data reveals the presence of a fault-bounded structural high at Temblor level situated southeast of a well drilled by Shell and Arco (Shell-Arco #1-23-22, T25S, R20, section 22). An interpretation made by Armstrong suggests that this well did not penetrate the Temblor sands, but reached total depth while still drilling in steeply dipping Monterey shales in the hanging wall of the Lost Hills thrust block. Exploration East Lost Hills Joint Venture Work Program The East Lost Hills Joint Venture holds an interest in a significant number of leases totalling in excess of 32,000 acres. In order to maintain these leases the East Lost Hills Joint Venture has committed to drill certain lands. -23- The initial test well, the Bellevue #1-17, commenced drilling in May 1998, and was designed to test prospective Miocene sandstone reservoirs in the Temblor formation at depths to an anticipated 18,500 feet. On November 23, 1998, while drilling at 17,640 feet, the well blew out and ignited. An expert well control team was engaged to contain the fire. A relief well, the Bellevue #1R-ST-3, was commenced on December 18, 1998, in order to "kill" the flow of water and hydrocarbons flowing out of the Bellevue #1-17 well. On May 29, 1999, the kill operation was successfully completed. After the successful kill operation, the Bellevue #1R-ST-3 relief well continued with drilling towards a bottom hole location approximately 800 feet away from the bottom hole location of the Bellevue #1-17 well. On August 24, 1999, the operator announced that the well would be completed, having reached a total depth of 17,428 feet, approximately 180 feet into the Temblor formation. Between October 1, 1999, and October 22, 1999, the Bellevue #1R-ST-3 well was prepared for a completion test. On October 23, 1999, the completion test was implemented by perforating the casing and establishing communication with the pay zones so that gas could flow from the pay zones into the casing. Initial results were positive and the well flowed gas, albeit at restricted rates. The gas flowed, but only for a short period of time as the flow was cut off when the perforations were plugged off. In an attempt to re-establish communication, larger perforations were made but this too was unsuccessful and the well bore was plugged with formation sand, shale, and perforating debris. The well bore was cleaned up and in December 1999 was production tested and flowed gas at rates ranging between 1.3 and 5.0 MMCF/D. Condensate and water was obtained during the test. Pressure build-up analysis indicated that only the uppermost sand unit encountered in the Bellevue #1R-ST-3 well was contributing to the flow. The operator had considered either a re-drill or re-entry of this well bore. Management believes minimal maintenance costs will be incurred until the decision to re-drill or re-enter the well bore is made. On August 26, 1999, drilling began on the ELH #1 well, approximately two miles northwest of the #1R-ST-3 well. On April 12, 2000, this well had drilled to a total depth of 19,724 feet. Production testing began on May 28, 2000 and, based on the results of the production testing and other analysis, a natural gas discovery was determined at the East Lost Hills field. After completion of production facilities and a connection pipeline, this well commenced first production on February 6, 2001. Since shortly after commencing production on February 6, 2001, the production from the ELH #1 well has been constrained by a variety of factors. Most recently, the major constraint inhibiting production has been the lack of adequate capacity for disposal of the produced water. Production water has been and continues to flow through a disposal pipeline connected to disposal facilities owned by Chevron Texaco. Chevron Texaco limits the amount of water accepted at its disposal facility. During the fourth fiscal quarter, the ELH #1 well produced a total of approximately 365 MMCFE, averaging approximately four MMCFE per day. Water production during this period averaged approximately 6,350 BWPD. During the first months of production, the ELH #1 well was shut-in for varying time periods ranging from a few hours to multiple days due to operational difficulties at the Chevron Texaco processing plant, shut-in pressure testing at the well, rolling brown-outs that were affecting California at the time and for general maintenance/testing reasons. During this period of random shut-ins, produced water would typically load in the well and when the ELH #1 well was put back on line, the water to gas ratio would generally increase. Over a period of months, the water to gas ratio reached the point where Chevron Texaco is requiring a decrease in the overall flow accepted at the processing and disposal facilities. The water to gas ratio increase became most apparent late in the Company's fourth fiscal quarter and has continued. It is unknown whether this ratio increase is an independent function of the reservoir or if the decline in the performance of the well is attributable solely to water loading from curtailment in overall flow rates. The participants are currently in the process of preparing to a drill a water disposal well and to build associated pipeline and disposal facilities in order to remove the water disposal constraint that has affected the ELH #1 well. It is unknown whether removing the water disposal constraint will result in a decrease in the water to gas ratio. The ELH #2 well, located approximately 1.5 miles northwest of the ELH #1 well, was drilled and cased to a total depth of 18,011 feet. Initial production testing, in early March 2001, of the upper Temblor interval in the well resulted in limited wellbore influx of hydrocarbons (approximate flow rate of 3MMCF/D), higher than expected fluid content, and poorer than expected pressure response. Many of the initial production test results on the well have been influenced by mechanical difficulties associated with drill pipe that was inadvertently cemented across the testing interval. The ELH #2 well is currently shut-in awaiting pipeline connection. No definitive date for completion of this work program has been provided by the operator. -24- The ELH #3R west flank exploration well was drilled to a total measured depth of 21,769 feet to test the Temblor interval in a separate, seismically defined structure from the productive East Lost Hills structure. Due to steep dips encountered in the lower portion of the well, it was determined that the underlying secondary objective, the Point of Rocks formation, could not be reached in the existing wellbore. The well was plugged back to a 19,370 feet measured depth for testing of the lower Temblor. Multiple zones in the lower Temblor section were perforated and tested in the well. Communication was established with the formation during testing and no hydrocarbons were recovered. The well has been suspended pending analysis of new seismic data and additional offset well information. The ELH #4 well commenced drilling on November 26, 2000 and reached total depth of 20,800 feet on August 7, 2001. The objective in drilling the ELH #4 well was to achieve production rates substantially higher than those in the ELH #1 well. The wire-line logs indicate the reservoir quality of the sand packages in ELH #4 to be very similar to those in ELH #1. In the ELH #1 well, there was an area of lost circulation that did not occur on ELH #4. It should be noted that when drilling the ELH #1 substantially higher mud weights were used and this could account for some or all of the problems of lost circulation at ELH #1. In drilling the ELH #4 the well was cored in two different intervals with both 4" and 3" diameter core. Substantial time and money was spent on obtaining these core samples and detailed analysis of these samples has only recently been completed. In addition work is also ongoing in analyzing the results of the 3-D seismic shoot, which covers the entire East Lost Hills area. A decision was made to temporarily suspend the well in order to consider the results of core samples and seismic data. State and Federal regulations require that when a well is temporarily suspended all potential production zones must be sealed with cement plugs set above the zones. During the plugging operations on August 26, 2001, the ELH #4 well started to flow and it became necessary to flare off the gas and handle the produced condensate during the well control operations. The side-track of the ELH #4 well to position it over the top of the structure has commenced. This work program is expected to take approximately 100 days and should be completed by the end of the first quarter of 2002. As of December 31, 2001, this well was drilling at approximately 19,700 feet. The ELH #9 well commenced drilling in early August 2001, at a location approximately 2 miles southeast of the ELH #4 well. This well is projected to drill to approximately 21,000 feet and is designed to test the continuation of the East Lost Hills structure in the south easterly direction. The ELH #9 well was at 17,452 feet on December 31, 2001 and is expected to reach total depth by the end of the first quarter 2002. San Joaquin Joint Venture Work Program With respect to the San Joaquin Joint Venture, the operator commenced drilling the initial exploratory well on the first of the three initial prospects, Cal Canal, in June 1999. The Cal Canal well penetrated 1,230 feet of the Temblor formation with 775 feet of net sand and was drilled to a total depth of 18,100 feet. The well completion commenced on January 20, 2000. Non-commercial hydrocarbon flow rates were obtained from the initial perforated 10 foot zone. Several additional zones remain to be tested. The partners in the San Joaquin Joint Venture have decided to defer further completion or deepening of the existing well bore until information regarding reservoir quality and performance is obtained from on-going drilling efforts in the San Joaquin Basin. The San Joaquin Joint Venture has until February 28, 2002, unless extended, to further deepen the Cal Canal well, or the leases will terminate. The participants in this joint venture, on the recommendations of the operator, have determined that the Lucky Dog Prospect will not be drilled and accordingly, the joint venture has relinquished its interest in this prospect. Drilling of the Pyramid Hills Prospect (formerly Pyramid Power) commenced mid-November 2001 and is expected to reach total depth by the end of June 2002. The Pyramid Hills 1-9 was at 12,737 feet at December 31, 2001. Other Properties Regional California The Company participated in a regional exploration program in the San Joaquin Basin of California and to date a number of prospects have been drill tested. The prospects have much shallower target horizons and the costs to drill are substantially less than the East Lost Hills prospects. The Company had approximately a 36% - 44% capital interest before payout (27% - 33% working interest after payout) in the prospects tested. -25- During fiscal 2001 and to date, exploratory test wells have been drilled on the Mica, Sequoia, Parsley, Merlot and Basil Prospects. No hydrocarbon bearing sands were encountered on test wells on the Sequoia, Parsley and Merlot Prospects. These wells were plugged and abandoned. An initial test well on the Mica Prospect, the Mica 1-17, commenced drilling in late March 2001. On April 24, 2001, the Mica 1-17 was logged at a drill depth of 7,881 feet. It was determined that the well was outside the channel limits and was suspended for possible future sidetracking. Although the operator proposed a new location to drill the Mica 2-17 well, it was unable to extend the lease under acceptable terms. The Company does not intend to pursue any further exploration of these prospects and the operator has quitclaimed the leases and relinquished them to the vendor. California Exploration Ltd., the operator of the Regional California Prospects, has proposed to drill an additional well at the Basil Prospect. The Basil Prospect is located in the southern portion of the Sacramento Basin. This prospect is believed to be a structural fault trap documented with seismic and well data. This well must be drilled directional under a body of water from a land based position. The targets are believed to be at 4,500 feet but the well must be drilled 6,000 feet laterally to the target. The initial test well on the Basil Prospect commenced drilling on July 25, 2001 and was completed on August 28, 2001 at a depth of 7,829 feet. The Basil Prospect is adjacent to the Suisun producing field and separated by a fault. The Suisun #25 well was directionally drilled to a measured depth of 7,829 feet to test the Suisun and Domengine Sands for natural gas. At 5,550 feet the well encountered the trapping fault with a 440 unit gas spike supporting the sealing ability of the fault. The Suisun Sands were encountered at 6,545 feet - 132 feet high to prognosis. The first sands coming in high supports throw on the fault to be greater than expected. Once the sands were encountered the background gas increased by nearly 200 units (1 unit = 50 ppm Methane). Throughout the Suisun Sands the background gas remained between 100 and 200 units with several connection gas readings in excess of 300 units. The Domengine Sands were encountered at a measured depth of 7,120 feet - 162 feet high to prognosis. In the lower Domengine Sands, background gas readings remained in excess of 500 units. When pulling out of the hole the drill pipe became stuck at approximately 2,300 feet and after three days of recovery efforts the pipe, below 3,216 feet remained stuck. It was therefore determined to temporarily suspend the well. All indications on the mud log imply a discovery and it is intended to sidetrack this well from the same surface location using the existing casing down to 2,186 feet. The side-track will parallel the original hole to the same total depth of 7,829 feet. Due to environmental regulations the side-track cannot commence until a new permit has been obtained. A definitive drill date has not been determined but the operator expects that it will be between July 2002 and September 2002. The estimated cost of the replacement well is US$700,000, with the Company's share at US$222,000. Others In September 2000, the Company participated in the drilling of the Gus Landry well on the West Simon Prospect, situated in Jefferson Davis Parish, Louisiana. The well commenced production on September 25, 2000 and was shut-in on May 8, 2001 due to the increase in water production. The Gus Landry well has now been plugged and abandoned and the leases dropped. The Gus Landry well had produced approximately 102,400 MCF gas. The Company held a 24% working interest (15.9% net revenue interest). The Company also holds relatively minor interests in other oil and gas leaseholds, known as the East Blossom Project (San Joaquin County, California), and South Haskell Field (Haskell County, Texas). Oil and Gas Reserves The following tables set forth information regarding the Company's share of estimated proven oil and gas reserve quantities, reserve value and discounted future net revenues. The reserve related information for the year ended August 31, 2001 was determined through independent engineering evaluations completed by Petrotech Engineering Ltd. ("Petrotech"), an independent petroleum consulting firm. The reserve related information for the years ended August 31, 2000 and 1999 was determined through independent engineering evaluations completed by Lee Keeling and Associates, Inc. ("Lee Keeling"), a firm of independent petroleum consultants. The Company does not have any long-term supply or similar agreements with foreign governments or authorities in which the Company acts as producer. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve information represents estimates only and should not be construed as being exact: -26-
Present Value of Estimated Future Estimated Net Revenues Gas Future Net Before Income Taxes Gas Oil Equivalent Revenues (2) Discounted at 10% Period (MMCF) (MBO) (MMCFE)(1) (US$000) (US$000) Year Ended August 31, 2001 Proved developed reserves 533.5 27.9 700.9 1,638.4 793.0 Proved undeveloped reserves - - - - - ------- ----- ------- ------- ------- 533.5 27.9 700.9 1,638.4 793.0 ======= ===== ======= ======= ======= Year Ended August 31, 2000 Proved developed reserves 77.6 10.5 140.6 228.4 221.3 Proved undeveloped reserves 1,104.6 8.0 1,152.6 4,533.2 1,922.1 ------- ----- ------- ------- ------- 1,182.2 18.5 1,293.2 4,821.6 2,143.4 ======= ===== ======= ======= ======= Year Ended August 31, 1999 Proved developed reserves 345.6 24.1 490.2 413.2 273.0 Proved undeveloped reserves - - - - - ------- ----- ------- ------- ------- Total proved reserves 345.6 24.1 490.2 413.2 273.0 ======= ===== ======= ======= =======
(1) Oil production is converted to MCFE at the rate of six MCF of natural gas per barrel of oil. Liquids are converted to MCFE at the rate of seven gallons of liquids per MCF of natural gas. These conversions are based upon the approximate energy content of natural gas, liquids and oil. (2) Estimated future net revenue represents estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using oil and gas prices received and costs in effect as of the date of the estimates. The amounts shown do not give effect to non-property related expenses, such as general and administrative expenses, debt service and future income tax expense or depreciation, depletion and amortization. Acreage The following table sets forth as of December 31, 2001, the gross and net acres of developed and undeveloped oil and gas acreage that the Company holds. Additionally, the data set forth below are based on the Company's before payout working interests. In certain cases, the Company has a greater after payout working interest. In certain other cases, the Company has only an after payout working interest. As such, the amount of gross and net, developed and undeveloped acreage will increase when and if certain wells pay out. Developed Undeveloped --------------------- ---------------------- Gross Net Gross Net State Acres Acres Acres Acres - ----- ------- ------- ------- ------ California 1,920.0 19.2 53,827.2 1,054.6 ======= ==== ======== ======= Productive Oil and Gas Wells The following table sets forth certain information regarding the Company's ownership as of December 31, 2001 of productive oil and gas wells, operated and non-operated, in the areas indicated. Additionally, the data set forth below are based on the Company's before payout working interest. In some cases the Company has a greater working interest after payout. In certain other cases the Company has only an after payout working interest. As such, the number of gross and net wells will increase when and if certain wells pay out. Gross Net State Wells Wells - ----- ----- ----- California 1 0.01 ==== ==== -27- Volumes, Prices and Production Costs The following table sets forth certain information regarding the production volumes, average prices received and average production costs associated with the Company's sale of oil and gas for the periods. Year Ended August 31, ------------------------------------- 2001 2000 1999 Net production: Oil (Barrels) 2,851 3,069 3,424 Gas (MCF) 48,379 24,399 28,364 Average sales price: Oil (per Barrel) $42.90 $36.98 $19.97 Gas (per MCF) $9.16 $3.66 $2.38 Average production cost (MCF) $2.88 $3.61 $2.70 Principal Offices The Company's corporate office is located at Suite #1305, 1090 West Georgia Street, Vancouver, British Columbia, Canada. The corporate office facility is provided on a month-to-month basis by Chase as part of its agreement with the Company. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS. - -------------------------------------------------------------------------------- The following discussion of the results of operations of the Company for the fiscal years ended August 31, 2001, 2000, and 1999 should be read in conjunction with the consolidated financial statements of the Company and related notes included therein. The Company's consolidated financial statements are prepared in accordance with Canadian GAAP, the application of which, in the case of the Company, conforms in all material respects for the periods presented with U.S. GAAP except for the differences referred to in Note 11 of the consolidated financial statements of the Company included herein. The noon rate of exchange on December 31, 2001, reported by the United States Federal Reserve Bank of New York, for the conversion of Canadian dollars into United States dollars was CDN$0.6279 (US$1.5925 = CDN$1.00). The effects of inflation and price changes have not had a material impact on the Company's income or net sales revenues during the past three years. The Company's consolidated financial statements were prepared on a going concern basis which assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business. Overview The Company, through its subsidiaries, Trimark Inc. and Safari, is engaged in the business of exploring for and development of oil and gas prospects in the United States. Substantially all of the Company's oil and gas exploration activities are conducted jointly with others. Because the Company owns an undivided interest in each asset and is proportionately liable for its share of each liability, the consolidated financial information reflects the Company's proportionate interest in such activities. The Company sells all of its oil and gas production on a spot basis and does not utilize forward sales contracts. Under the full cost method, all costs related to the exploration for and development of petroleum and natural gas reserves are capitalized on a country-by-country basis. Costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration and development activities and costs of drilling both productive and non-productive wells. Proceeds from the sale of properties are applied against capitalized costs, without any gain or loss being recognized, unless such a sale would significantly alter the rate of depletion and depreciation. -28- Depletion of exploration and development costs and depreciation of production equipment is provided using the unit-of- production method based upon estimated proven petroleum and natural gas reserves. The costs of significant unevaluated properties are excluded from costs subject to depletion. For depletion and depreciation purposes, relative volumes of petroleum and natural gas production and reserves are converted at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil. In applying the full cost method, the Company performs a ceiling test whereby the carrying value of petroleum and natural gas properties and production equipment, net of recorded future income taxes and the accumulated provision for site restoration and abandonment costs, is compared annually to an estimate of future net cash flow from the production of proven reserves. Net cash flow is estimated using year end prices, less estimated future general and administrative expenses, financing costs and income taxes. Should this comparison indicate an excess carrying value, the excess is charged against earnings. Results of Operations Year Ended August 31, 2001 Compared to Year Ended August 31, 2000 During the year ended August 31, 2001, the Company recorded a loss of $5,048,280 ($0.29 per share), an increase in loss of $4,751,431 from the loss of $296,849 ($0.02 per share) incurred in 2000. The increase in loss for 2001 was due to a writedown of $4,790,379 relating to the Company's petroleum and natural gas interests. Revenue from oil and gas sales increased by 157% during 2001, from $202,714 in 2000 to $521,322 in 2001. The increase in 2001 was due to a combination of high commodity prices received during the first half of fiscal 2001 and increased production. Production commenced from the ELH #1 on February 6, 2001, and currently represents the only significant producing property interest to the Company. Revenue from oil sales increased 3% from $113,481 in 2000 to $116,910 in 2001. Oil production decreased 7% from 3,069 BBLS in 2000 to 2,851 BBLS in 2001 and average selling prices received increased 16%, from $36.98 /BBL in 2000 to $42.90/BBL in 2001, offsetting the decrease in production. Revenue from natural gas sales increased 353%, from $89,233 in 2000 to $404,412 in 2001. Natural gas production increased 98%, from 24,399 mcf in 2000 to 48,379 MCF in 2001. In addition, the average selling price of natural gas during 2001 received by the Company increased 150%, from $3.66/MCF in 2000 to $9.16/MCF in 2001. The increase in the average natural gas price was due to the demand for energy, particularly in California, from late 2000 to early 2001. The Company sells its oil and gas on a spot basis. The Company's production expenses increased 20% to $185,037 in 2001 from $154,529 in 2000 due to increased production. On a per unit basis, production expenses decreased to $2.88/MCF in 2001 from $3.61/MCF in 2000. During 2001, the Company recorded depreciation and depletion charges of $378,039, compared to $78,340 in 2000. The depreciation and depletion rate increased from $1.83/MCFE in 2000 to $5.88/MCFE in 2001, and reflects the unsuccessful exploration results in Regional California and other prospects during 2001. In addition, the Company recorded a non-cash impairment charge of $4,790,379 in 2001 as a result of the ceiling test performed effective August 31, 2001. The ceiling test is a cost recovery test and is not intended to result in an estimate of fair market value. General and administrative costs decreased by $132,184, from $462,429 in 2000 to $330,245 in 2001. Of the decrease, $113,332 is attributed to the effect of unrealized foreign exchange rate fluctuations on U.S. dollar denominated balances. The Company recorded a $56,600 foreign exchange loss in 2000, compared to foreign exchange gain of $56,732 in 2001. Audit and legal fees decreased by $16,832, from $76,082 in 2000 to $59,250 in 2001. During 2001, the Company expended $4,415,135 in expenditures on its petroleum interests, which was primarily comprised of the funding of: i) $852,502 towards the East Lost Hills and San Joaquin Projects, mainly in the funding of completion of the ELH #1 well, the drilling of the ELH #2, #3, #4 and #9 wells and the completion of the gas facility; ii) $3,516,024 for the acquisition, exploration and drilling costs of the Regional California Prospects; and iii) $46,609 on other minor prospects. -29- Year Ended August 31, 2000 Compared to Year Ended August 31, 1999 During the year ended August 31, 2000, the Company reported a net loss of $296,849 ($0.02 per share), a decrease of $1,745,342, from the loss of $2,042,191 ($0.40 per share) reported in 1999. Revenue from oil and gas sales increased 49% during 2000, from $135,865 in 1999 to $202,714 in 2000. Revenue from oil sales increased 66% due to the increased average selling price for oil during 2000. Oil production fell 10%, from 3,424 BBLS in 1999 to 3,069 BBLS in 2000, and average selling prices increased by 85%, from $19.97/BBL in 1999 to $36.98/BBL in 2000. Revenue from natural gas sales increased by 32%, from $67,476 in 1999 to $89,232 in 2000. Natural gas production decreased by 14%, from 28,364 MCF in 1999 to 24,399 MCF in 2000. The average selling price of natural gas increased by 54%, from $2.38/MCF in 1999 to $3.66/MCF in 2000. The Company's production expenses increased 18%, from $132,176 in 1999 to $154,529 in 2000. On a per unit basis, production expenses were $2.70/MCF in 1999 compared to $3.61/MCF in 2000. No impairment provisions were required in 2000 as a result of the ceiling test performed effective August 31, 2000. During 1999, the Company wrote-down the carrying value of its petroleum interests by $1,649,518. Excluding the ceiling test write-down made in 1999, depreciation and depletion expenses increased to $78,340 in 2000 from $53,982 in 1999. On a per unit basis, the rate was $1.83/MCF in 2000 compared to $1.10/MCF in 1999. Interest and other income increased substantially in 2000 to $195,735, compared to $7,464 in 1999. The significant increase in interest income in 2000 arose due to the impact of the high levels of cash and term deposits held during 2000 as a result of the financings conducted by the Company at the end of fiscal 1999 and early fiscal 2000. Liquidity and Capital Resources With the ongoing developments at East Lost Hills, the Company determined to focus its personnel and financial resources towards the development of its interests in the San Joaquin Basin and regional area of California. As of the date of this report, production from the ELH #1 well represents substantially all of the Company's petroleum and natural gas sales. As additional wells are drilled at the East Lost Hills and San Joaquin joint ventures and, if successful, brought on production, the Company anticipates that revenues will increase. It is not anticipated that operations will be self sustaining in the next 12 months. Future development of the Company's business will require additional, and substantial, capital expenditures. Depending upon the continuing results at East Lost Hills and the deep Temblor exploration program and at the Regional California programs, the Company will need to raise additional funds to cover capital expenditures. The disappointing pace of development at the San Joaquin Basin, the current low petroleum and natural gas prices and current economic climate has resulted in very low stock prices for the Company, making it very difficult to raise additional funding without substantial dilution. There is no assurance that the Company will be able to raise sufficient funding from cash flow, equity or debt financing, or from sales of interests in its properties to meet its upcoming capital requirements. During the year ended August 31, 2001, the Company completed private placements totaling 4,482,570 shares for proceeds of $2,395,560, of which $2,312,500 was received in 2001 and $83,000 was received in 2000. The Company has used the funds primarily to fund exploration and development of the East Lost Hills and San Joaquin Projects and exploration of the Regional California Program. During July and August 2001, the Company received a total of $553,200 pursuant to a debenture financing. The Company and the subscribers are currently negotiating a revision to the terms and features. At December 31, 2001, the Company had a working capital deficit of approximately $920,000, of which $553,200 represents advances made pursuant to a proposed debenture financing. The terms and conditions are being renegotiated. The Company anticipates that the advances will be classified as non-current liabilities upon finalization and closing. As at December 31, 2001, the Company had not entered into any commodity swap arrangements or hedging transactions. Although the Company has no current plans to do so, it may enter into commodity swap and/or hedging transactions in the future in conjunction with oil and gas production. The Company anticipates that it will continue to experience significant fluctuations in its working capital as it raises the necessary funding to continue to participate in ongoing drilling programs. -30- As of the date of this report, the Company anticipates that it could incur up to $1.5 million (US$933,000) in exploration and development expenditures for the 2002 calendar year. The $1.5 million budget assumes that all wells currently in progress will all be drilled and completed. These projections and work schedules are contingent on many factors, many of which are beyond the Company's control. Work schedules can and will change based on results in the field. Actual costs may vary significantly from current estimates. Research and Development During fiscal 1999, 2000 and 2001, the Company incurred $4.6 million, $2.8 million and $4.4 million, respectively, on the acquisition, exploration and development of its petroleum interests. During the period from September 1, 2001 to December 31, 2001, the Company had incurred approximately $210,000 in acquisition costs, and exploration and development expenditures. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. - -------------------------------------------------------------------------------- Directors and Senior Management The names, positions held with the Company and principal occupation during the five years prior to the date of this report of each director and officer of the Company as of the date of this report, are as follows:
Name Position with the Company Term of Office (for each office held) - ---- ------------------------- ------------------------------------- DONALD W. BUSBY(1) Chairman From April 1999 - present Bakersfield, California, U.S.A. President From September 1999 - present; and February 1997 - April 1999 Chief Executive Officer From February 1997 - present Director From December 1988 - present Promoter From December 1988 - present NICK DEMARE(1) Director January 1996 - present Burnaby, British Columbia, Canada President From January 1996 - February 1997 GEORGE MUSCROFT(1) Director From February 1997 - present Portland, Ontario, Canada RICHARD DARROW Director February 2001 - present Bakersfield, California, U.S.A. HARVEY LIM Corporate Secretary From December 1988 - present Burnaby, British Columbia, Canada Director From October 1990 - May 1994
(1) Member of the Audit Committee. Each officer's and director's term of office shall expire at the Company's next annual general meeting. The Company does not have an executive committee or a compensation committee. The Company's audit committee is responsible for reviewing the Company's financial statements before they are approved by the Company's directors. There are no family relationships between any directors or executive officers of the Company. To the best of the Company's knowledge, there are no arrangements or understandings with major shareholders, customers, suppliers, or others, pursuant to which any of the Company's officers or directors was selected as an officer or director of the Company. -31- Set forth below are brief descriptions of recent employment and business experience of the Company's officers and directors. Donald W. Busby (Age 64), Chairman, Chief Executive Officer, Promoter and Director Since June 1988, Mr. Busby has been the president and owner of DWB Management Ltd. Mr. Busby, through DWB, provides marketing, financial management and consulting services to various mineral exploration companies, including the Company. Since August 1990, Mr. Busby has been the owner and president of Boone Petroleum Inc., a private company owned by Mr. Busby. Mr. Busby currently serves as an officer and director of other public reporting companies. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest." Nick DeMare (Age 47), Director Mr. DeMare holds a Bachelor of Commerce degree from the University of British Columbia and is a member in good standing of the Institute of Chartered Accountants of British Columbia. Since May, 1991, Mr. DeMare has been the President of Chase Management Ltd., a private company which provides a broad range of administrative, management and financial services to private and public companies engaged in mineral exploration and development, gold and silver production, oil and gas exploration and production and venture capital. Mr. DeMare indirectly owns 100% of Chase. Mr. DeMare currently serves as an officer and director of other public reporting companies. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest." George Muscroft (Age 72), Director Mr. Muscroft holds a Bachelor of Science degree from the University of Toronto (1953) and has been a professional engineer since 1954. Since 1984, Mr. Muscroft has been the President of Modnar Enterprises, an independent consulting engineering firm. Richard Darrow (Age 81), Director Mr. Darrow holds a Master of Geology degree from the University of California at Berkley. Mr. Darrow is a petroleum geologist resident in Bakersfield, California and has extensive experience in the oil and gas industry. From 1953 through March 1984, Mr. Darrow was employed with Standard Oil Company of California. Since his retirement as a senior staff geologist, Mr. Darrow has been a self-employed consulting geologist. Mr. Darrow has an extensive geological knowledge of the San Joaquin and Sacramento oil and gas basins of California. Harvey Lim (Age 43), Corporate Secretary Mr. Lim holds a Bachelor of Commerce degree from the University of British Columbia and is a member in good standing of the Institute of Chartered Accountants of British Columbia. Mr. Lim was employed by Coopers & Lybrand (now PricewaterhouseCoopers LLC) from 1981 to 1988. From 1988 to 1991, Mr. Lim was employed as controller with Ingot Management Ltd. Since 1991, Mr. Lim has been employed by Chase Management Ltd. as controller. Mr. Lim currently serves as an officer and director of other public reporting companies. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest." Compensation During the fiscal year ended August 31, 2001, the directors and officers of the Company, as a group, had received or charged the Company a total of $157,239 for services rendered by the directors and officers or companies owned by the individuals. The Company is required, under applicable securities legislation in Canada, to disclose to its shareholders details of compensation paid to its directors and officers. The following fairly reflects all material information regarding compensation paid by the Company to its directors and officers, which information has been disclosed to the Company's shareholders in accordance with applicable Canadian law. -32- "Named Executive Officers" means the Chief Executive Officer ("CEO") of the Company, regardless of the amount of compensation of that individual, and each of the Company's four most highly compensated executive officers, other than the CEO, who were serving as executive officers at the end of the most recent fiscal year and whose total salary and bonus amounted to $100,000 or more. In addition, disclosure is also required for any individuals whose total salary and bonus during the most recent fiscal year was $100,000 whether or not they are an executive officer at the end of the fiscal year. The Company currently has one Named Executive Officer, Donald W. Busby (the "Named Executive Officer"). The following table sets forth the compensation awarded, paid to or earned by the Named Executive Officer during the financial years ended August 31, 1999, 2000 and 2001: Summary Compensation Table
Annual Compensation Long Term Compensation ------------------------------- -------------------------------- Awards Payouts ----------------------- ------- Securities Restricted Under Shares or All Other Options/ Restricted Other Name and Annual SARs Share LTIP Compen- Principal Salary Bonus Compensation granted Units Payouts sation Position Year(1) ($) ($) ($) (#)(2) ($) ($) ($) - -------------------- ------ ------ ----- ------------ ---------- ---------- ------- --------- Donald W. Busby 2001 Nil Nil Nil 393,000/Nil N/A N/A 105,296(3) Chairman, President, 2000 Nil Nil Nil Nil/Nil N/A N/A 60,000(3) CEO and Director 1999 Nil Nil Nil 605,100/Nil N/A N/A 69,987(3)
(1) Financial years ended August 31, 1999, 2000 and 2001. (2) Figures represent options granted during a particular year; see "Aggregate Option" table for the aggregate number of options outstanding at year end. (3) Amounts paid to private companies wholly owned by Mr. Busby. Long Term Incentive Plan Awards Long term incentive plan awards ("LTIP") means "any plan providing compensation intended to serve as an incentive for performance to occur over a period longer than one financial year whether performance is measured by reference to financial performance of the Company or an affiliate, or the price of the Company's shares but does not include option or stock appreciation rights plans or plans for compensation through restricted shares or units". The Company has not granted any LTIP's during the financial year ended August 31, 2001. Stock Appreciation Rights Stock appreciation rights ("SAR's") means a right, granted by an issuer or any of its subsidiaries as compensation for services rendered or in connection with office or employment, to receive a payment of cash or an issue or transfer of securities based wholly or in part on changes in the trading price of the Company's shares. No SAR's were granted to or exercised by the Named Executive Officer or directors during the financial year ended August 31, 2001. Option Grants in Last Fiscal Year The following table sets forth information concerning grants of options to the Named Executive Officer during the past fiscal year ended August 31, 2001: -33-
% of Total Options Granted to Market Value of Directors, Securities Securities Under Employees and Exercise or Underlying Options Options Granted Associates in Base Price on Date of Grant Expiration Name (#)(1) Fiscal Year(1) ($/Security) ($/Security) Date - --------------- ---------------- --------------- ------------ ----------------- ---------- Donald W. Busby 393,000 46.24% 0.60(2) 0.59 Jan. 25/04
(1) Percentage of all options granted during the last fiscal year ended August 31, 2001. (2) On December 31, 2001, the Company repriced, subject to Canadian Venture Exchange approval, the options to $0.15 per share. The closing price of the Company's shares on this date on the Canadian Venture Exchange was $0.14. Aggregated Option Exercises in Last Fiscal Year andFiscal Year-End Option Values The following table sets forth details of all exercises of stock options during the financial year ended August 31, 2001 by the Named Executive Officer and the fiscal year-end value of unexercised options on an aggregated basis:
Value of Unexercised Unexercised Options at In-the-Money Options Fiscal Year-End at Fiscal Year-End Securities Aggregate (#)(3) ($)(3)(4) Acquired on Value Exercise Realized Exercisable/ Exercisable/ Name (#)(1) ($)(2) Unexercisable Unexercisable - --------------- ----------- --------- -------------------- --------------------- Donald W. Busby Nil Nil 680,000/Nil 0(5)/Nil
(1) Number of common shares of the Company acquired on the exercise of stock options. (2) Calculated using the closing price of common shares of the Company on the Canadian Venture Exchange. (3) As freestanding SARs have not been granted, the number of shares relate solely to stock options. (4) Value of unexercised in-the-money options calculated using the closing price of common shares of the Company on the Canadian Venture Exchange on August 31, 2001 of $0.25 per share, less the exercise price of in-the-money stock options. (5) On December 31, 2001, the Company repriced, subject to Canadian Venture Exchange approval, the options to $0.15 per share. The closing price of the Company's shares on this date on the Canadian Venture Exchange was $0.14. Pension Plans The Company does not provide retirement benefits for directors or executive officers. Termination of Employment, Change in Responsibilities and Employment Contracts The Company has no plans or arrangements in respect of remuneration received or that may be received by the Named Executive Officer in the Company's most recently completed financial year or current financial year in respect of compensating such officers in the event of termination of employment (as a result of resignation, retirement, change of control, etc.) or a change in responsibilities following a change of control, where the value of such compensation exceeds $100,000 per executive officer. Compensation of Directors The following table sets forth stock options granted by the Company during the financial year ended August 31, 2001 to directors who are not Named Executive Officers of the Company: -34-
Market Value of % of Total Securities Underlying Securities Under Options Exercise or Options on Options Granted Granted in Base Price Date of Grant Expiration Name (#)(1) Financial Year(2) ($/Security)(3) ($/Security) Date - --------------- --------------- ---------------- ------------- --------------------- ---------- Nick DeMare 100,000 11.76% 0.60(4) 0.59 Jan.25/04 George Muscroft 60,000 7.06% 0.60(4) 0.59 Jan.25/04 Richard Darrow 100,000 11.76% 0.60(4) 0.59 Jan.25/04
(1) The options have no special vesting provisions. The market value of the common shares of the Company on the date of grant is the price at which the Company's shares closed for trading on the Canadian Venture Exchange on that day. Freestanding SARs have not been granted. (2) Percentage of all options granted during the fiscal year. (3) The exercise price of stock options was set according to the rules of the Canadian Venture Exchange. (4) On December 31, 2001, the Company repriced, subject to Canadian Venture Exchange approval, the options to $0.15 per share. The closing price of the Company's shares on this date on the Canadian Venture Exchange was $0.14. The following table sets forth details of all exercises of stock options/SARs during the financial year ended August 31, 2001 by directors who are not Named Executive Officers of the Company and the financial year-end value of unexercised options/SARs:
Value of Unexercised Unexercised In-the-Money Options/ Options/SARs at Fiscal SARs at Fiscal Year-End Securities Aggregate Year-End ($)(3)(4) Acquired on Value (#)(3) Exercise Realized Exercisable/ Exercisable/ Name (#)(1) ($)(2) Unexercisable Unexercisable - ---------------- ----------- --------- ---------------------- ---------------------- Nick DeMare Nil Nil 350,000(5)/Nil Nil/Nil George Muscroft Nil Nil 85,000/Nil Nil/Nil Richard Darrow Nil Nil 100,000/Nil Nil/Nil
(1) Number of common shares of the Company acquired on the exercise of stock options. (2) Calculated using the closing price of common shares of the Company on the Canadian Venture Exchange on the date of the exercise, less the exercise price per share. (3) As freestanding SARs have not been granted, the numbers relate solely to stock options. (4) Value of unexercised in-the-money options calculated using the closing price of common shares of the Company on the Canadian Venture Exchange on August 31, 2001, less the exercise price of in-the-money stock options. (5) Includes 250,000 options granted to Chase Management Ltd. ("Chase"), a private company wholly owned by Mr. DeMare. During the most recently completed financial year ended August 31, 2001, directors received compensation for services provided to the Company in their capacities as directors and/or consultants and/or experts as follows: Compensation Table Annual All other Compensation compensation Name of Director Year(1) - Directors fees - Consulting fees - ---------------- ------- ---------------- ----------------- Nick DeMare 2001 $Nil $47,110(2) George Muscroft 2001 $Nil $Nil Richard Darrow 2001 $Nil $4,833 (1) Financial year ended August 31, 2001. (2) Paid to Chase for accounting and professional services rendered by Chase personnel. -35- Employment Agreements The Company has directly entered into management contracts with companies controlled by Messrs. Busby and DeMare for accounting, professional and management services provided to the Company. Specifically, the Company has a management contract with DWB, a private company owned by Mr. Busby, at a rate of US$7,000 per month and with Chase, a company indirectly owned by Mr. DeMare, at a rate of $3,000 per month. In addition, the Company may be charged for additional services performed by DWB and Chase. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." Board Practices Audit Committee The Company's Audit Committee must be comprised of at least three directors, the majority of whom are not employees, control persons or members of management of the Company or any of its associates or affiliates. The board of directors of the Company, after each annual shareholder' meeting must appoint or re-appoint an audit committee. As of the date of this annual report, the members of the audit committee were Mr. Busby, Mr. DeMare and Mr. Muscroft. The Audit Committee must review the annual financial statements of the Company before they are approved by the board of directors of the Company. The board of directors of the Company must review, and if considered appropriate, approve the annual financial statements of the Company before presentation to the shareholders of the Company. Termination of Employment or Change of Control Other than as described in the Summary Compensation Table and above, the Company has no plans or arrangements in respect of remuneration received or that may be received by the Named Executive Officer in the Company's most recently completed financial year or current financial year in view of compensating such officers in the event of termination of employment (as a result of resignation, retirement, change of control, etc.) or a change in responsibilities following a change of control, where the value of such compensation exceeds $100,000 per executive officer. Employees During the years ended August 31, 2001, 2000 and 1999, the Company had no full-time or part-time employees in the area of management and administration. Corporate accounting, management and administration are provided, in part, by Chase, a company owned by Mr. Nick DeMare, a director of the Company. In the event the Company needs to employ personnel, it will need to recruit qualified personnel to staff its operations. The Company believes that such personnel currently are available at reasonable salaries and wages in the geographic areas in which the Company and its subsidiaries operate. There can be no assurance, however, that such personnel will be available in the future. Exploration activities are conducted by consultants, laborers and technicians hired for the duration of the exploration program. Share Ownership The following table sets forth certain information regarding ownership of the Company's shares by the Company's officers and directors as of December 31, 2001. -36-
Shares and Rights Beneficially Title of Class Name and Address of Owner Owned or Controlled (1) Percent of Class (1) - -------------- --------------------------- ---------------------------- -------------------- Common Stock Donald W. Busby 5,603,740(2)(3) 23.16% Bakersfield, California Common Stock Nick DeMare 1,214,584(4)(5) 5.71% Burnaby, British Columbia Common Stock George Muscroft 85,000(6) 0.41% Portland, Ontario Common Stock Richard Darrow 130,000(7) 0.63% Bakersfield, California Common Stock Harvey Lim 31,000 0.15% Burnaby, British Columbia
(1) Where persons listed on this table have the right to obtain additional shares of common stock through the exercise of outstanding options or warrants, these additional shares are deemed to be outstanding for the purpose of computing the percentage of common stock owned by such persons, but are not deemed to be outstanding for the purpose of computing the percentage owned by any other person. Based on 20,488,016 shares of common stock outstanding as of December 31, 2001. (2) Includes 1,224,300 shares of common stock held by Boone Petroleum Inc. ("Boone"), a private company wholly-owned by Mr. Busby and 674,000 shares held by the Donald W. Busby 1999 Irrevocable Trust ("Busby Trust"). (3) Includes warrants held by Boone to acquire an additional 1,758,640 common shares, warrants held by the Busby Trust to acquire an additional 1,266,800 common shares and options held by Mr. Busby to acquire 680,000 common shares. (4) Includes 6,000 common shares held directly by Mr. DeMare, 153,310 shares held by DNG Capital Corp. ("DNG"), a private company wholly-owned by Mr. DeMare, and 261,059 shares held by 888 Capital Corp. ("888"). 888 is a private company 50% owned by Mr. DeMare. (5) Includes warrants held by DNG to acquire an additional 116,000 common shares, warrants held by 888 to acquire 328,215 common shares and options to acquire an additional 350,000 shares. (6) Consists of options to acquire an additional 85,000 common shares. (7) Includes options to acquire 100,000 common shares. (8) Includes options to acquire 30,000 common shares. Stock Options Stock options to purchase securities from the Company are granted to directors and employees of the Company on terms and conditions acceptable to the regulatory authorities in Canada, notably the CDNX. Stock options must be approved by the Company's shareholders at an Annual General Meeting. The Company has no formal written stock option plan. Under the stock option program, stock options for up to 10% of the number of issued and outstanding shares of common stock may be granted from time to time, provided that stock options in favor of any one individual may not exceed 5% of the issued and outstanding shares of common stock. No stock option granted under the stock option program is transferable by the optionee other than by will or the laws of descent and distribution, and each stock option is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all stock options granted under the stock option program must be at least equal to the fair market value of such shares of common stock on the date of grant, and the maximum term of each stock option may not exceed five years. The exercise prices for stock options were determined in accordance with CDNX (formerly the VSE) guidelines and reflected the average closing price of the Company's common stock for the ten trading days on the CDNX (formerly the VSE) immediately preceding the date on which the directors granted and publicly announced the stock options. -37- As of December 31, 2001, the Company had granted an aggregate of 1,437,000 incentive stock options to purchase shares of the Company's common stock to the following persons: Nature No. of Exercise Optionee of Option Options Price/Share Expiry Date - -------- -- ------ ------- ----------- ----------- Donald W. Busby Director 287,000 $0.15(1) Jul. 23/02 Chase Management Ltd.(2) Employee 150,000 $0.15(1) Jul. 23/02 Earl Helsley(3) Employee 50,000 $0.15(1) Jul. 23/02 Betty L. Moody Employee 25,000 $0.15(1) Jul. 23/02 George Muscroft Director 25,000 $0.15(1) Oct. 1/02 Chase Management Ltd.(2) Employee 100,000 $0.15(1) Oct. 1/02 Donald W. Busby Director 393,000 $0.15(1) Jan. 25/04 George Muscroft Director 60,000 $0.15(1) Jan. 25/04 Nick DeMare Director 100,000 $0.15(1) Jan. 25/04 Dick Darrow Employee 100,000 $0.15(1) Jan. 25/04 Betty L. Moody Employee 15,000 $0.15(1) Jan. 25/04 Harvey Lim Employee 30,000 $0.15(1) Jan. 25/04 Arabella Smith Employee 15,000 $0.15(1) Jan. 25/04 Rosanna Wong Employee 15,000 $0.15(1) Jan. 25/04 Linda Liu Employee 15,000 $0.15(1) Jan. 25/04 Jacqueline Hibbs Employee 7,000 $0.15(1) Jan. 25/04 Kurt Johnson Employee 50,000(4) $0.15 Dec. 31/04 --------- TOTAL 1,437,000 ========= (1) On December 31, 2001, the Company repriced, subject to CDNX approval, all existing incentive stock options to $0.15 per share. (2) A private company indirectly wholly-owned by Mr. Nick DeMare. (3) Earl Helsley is the son-in-law of Donald W. Busby. (4) Granted on December 31, 2001, subject to CDNX approval. All of these options are non-transferable and currently terminate on the earlier of the expiry date or the 30th day following the day on which the director, officer or employee, as the case may be, ceases to be either a director, officer or employee of the Company. As of December 31, 2001, the directors and officers of the Company, as a group (5 persons), held options to purchase 1,245,000 shares of the Company's common stock. Warrants As of December 31, 2001, there were non-transferable common share purchase warrants exercisable for the purchase of 4,986,285 common shares, which expire at various times until August 15, 2003 and may be exercised at various prices ranging from $0.52 per share to $0.84 per share, as follows: Common Shares Issuable Exercise On Exercise of Warrants Price/Share Expiry ----------------------- ----------- ------ 1,185,715 $0.84 Apr. 11/02 118,570 $0.84 Jun. 19/02 500,000 $0.52 Jan. 16/03 1,700,000 $0.52 Mar. 6/03 400,000 $0.62 Aug. 15/02 1,082,000 $0.62 Aug. 15/03 --------- 4,986,285 ========= -38- As of December 31, 2001, the directors and officers of the Company, as a group (5 persons), held warrants to purchase 3,469,655 shares of the Company's common stock. Other Instruments In July 2001, the Company announced its intention to conduct a $1 million convertible debenture financing. Initially, the debentures were to bear interest at 10% per annum, with interest for the first year to be prepaid on closing in common shares of the Company at $0.35 per share. Interest thereafter would be paid quarterly in cash or shares at the holder's option. The debentures were proposed to have a three year term and be convertible into shares at $0.35 per share in year one, at $0.40 per share in year two and at $0.45 per share in year three. As at December 31, 2001, the Company has received $553,200 under the proposed financing. In light of the current market conditions, the Company and the debenture subscribers are negotiating a revision to the terms and features. Hilton has advanced $153,200 pursuant to the financing. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. - -------------------------------------------------------------------------------- Principal Holders of Voting Securities To the best of the Company's knowledge, it is not directly or indirectly owned or controlled by another corporation or by any foreign government. The following table sets forth certain information regarding ownership of the Company's shares by all persons who own greater than five percent (5%) of the Company's outstanding shares, as of December 31, 2001.
Shares and Rights Beneficially Title of Class Name and Address of Owner Owned or Controlled (1) Percent of Class (1) - -------------- ------------------------- ------------------------------ -------------------- Common Stock Donald W. Busby 5,603,740(2)(3) 23.16% Bakersfield, California Common Stock Nick DeMare 1,214,584(4)(5) 5.71% Burnaby, British Columbia Common Stock Hilton Petroleum Ltd. 3,720,000 15.37% Vancouver, British Columbia
(1) Where persons listed on this table have the right to obtain additional shares of common stock through the exercise of outstanding options or warrants, these additional shares are deemed to be outstanding for the purpose of computing the percentage of common stock owned by such persons, but are not deemed to be outstanding for the purpose of computing the percentage owned by any other person. Based on 20,488,016 shares of common stock outstanding as of December 31, 2001. (2) Includes 1,224,300 shares of common stock held by Boone and 674,000 shares held by the Busby Trust. (3) Includes warrants held by Boone to acquire an additional 1,758,640 common shares, warrants held by the Busby Trust to acquire an additional 1,266,800 common shares and options held by Mr. Busby to acquire 680,000 common shares. (4) Includes 6,000 common shares held directly by Mr. DeMare, 153,310 shares held by DNG and 261,059 shares held by 888. (5) Includes warrants held by DNG to acquire an additional 116,000 common shares, warrants held by 888 to acquire 328,215 common shares and options to acquire an additional 350,000 shares. None of the Company's principal shareholders have different voting rights than any of the Company's other common shareholders. Changes in Shareholdings There have been no significant changes to the above listed persons' ownership during the past three fiscal years. -39- Change of Control As of the date of this annual report, there are no arrangements known to the Company which may at a subsequent date result in a change of control of the Company. United States Shareholders As of December 21, 2001, there were approximately 18 registered holders of the Company's common shares in the United States, with combined holdings of 3,602,509 shares, representing 17.58% of the issued shares of the Company. Control by Foreign Government or Other Persons To the best of the Company's knowledge, the Company is not directly or indirectly owned or controlled by another corporation, any foreign government, or any other natural or legal person. Related Party Transactions Other than as disclosed below, for the year ended August 31, 2001 and the period from September 1, 2001 to December 31, 2001, the Company has not entered into any transactions or loans between the Company and any (a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company, and close members of any such individuals' family; (d) key management personnel and close members of such individuals' families; or (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly by any person described in (c) or (d) or over which such a person is able to exercise significant influence. 1. The Company has retained DWB, a private company wholly-owned by Donald Busby, the Chairman, President, Chief Executive Officer and a director of the Company, to provide marketing, consulting and management services. See "Item 6. Directors, Senior Management and Employees - Compensation." In consideration therefor, DWB is currently paid a monthly fee of US$7,000 and out-of-pocket disbursements incurred by DWB on behalf of the Company. Management believes the arrangement with Boone is fair to the Company and similar to terms which could be obtained from unrelated third parties. During the year ended August 31, 2001, and the period from September 1 , 2001 to December 31, 2001, the Company paid DWB $105,296 and $44,600, respectively. 2. The Company has retained Chase, a company wholly-owned by Mr. Nick DeMare, a director of the Company, to provide office premises, administrative, accounting and management services. In consideration therefor, Chase is paid a monthly fee of $3,000 and out-of-pocket disbursements incurred by Chase on behalf of the Company. In addition, Chase may also provide the Company additional services which are billed at rates which Chase charges to unrelated third parties. Management believes the arrangement with Chase is fair to the Company and similar to terms which could be obtained from unrelated third parties. During the year ended August 31, 2001 and the period from September 1, 2001 to December 31, 2001, the Company paid Chase $47,110 and $15,115, respectively. 3. During the year ended August 31, 2001, Hilton assisted Trimark in its financings, whereby Hilton sold 2,060,000 shares of the Company from its holdings for net proceeds of $1,125,616 and used the proceeds to purchase, in private placement offerings conducted by the Company, as described below, replacement shares of the Company. Hilton received warrants to purchase an additional 1,890,000 shares of the Company as part of the private placements. 4. The Company has completed previous private placements of common stock and convertible debentures, the subscribers of which include i) companies wholly-owned by current and former directors, officers and principal shareholders of the Company. The securities issued pursuant to such private placements were issued in accordance with the pricing policies of the CDNX. During the year ended August 31, 2001 and the period from September 1, 2001 to December 31, 2001, the Company conducted the following private placements: -40- (a) Common Stock
Participation Purchase Market Placee by Insiders Price Price(1) Comments - ------ ------------- ------- -------- -------- Period from September 1, 2001 to December 31, 2001 Nil Nil Fiscal Year Ended August 31, 2001 2,200,000 units $0.52 $0.58 - - Hilton Petroleum Ltd. 1,700,000 - - Boone Petroleum Inc. 500,000 Owned by Donald W. Busby ---------- 2,200,000 ========== 2,164,000 units $0.54 $0.62 - - DNG Capital Corp. 116,000 Owned by Nick DeMare - - 888 Capital Corp. 180,000 50% owned by Nick DeMare - - Hilton Petroleum Ltd. 380,000 - - Donald W. Busby 674,000 - - Boone Petroleum Inc. 814,000 Owned by Donald W. Busby --------- 2,164,000 ========= 118,750 units Nil $0.70 $0.77
(1) Quoted closing price on date of announcement of private placement. (b) Debentures
Participation Conversion Market Placee by Insiders Price Price(1) Comments - ------ ------------- ------- -------- -------- Fiscal Year Ended August 31, 2001 $553,200 10% debenture(2) $0.35 $0.35 - - Hilton Petroleum Ltd. $153,200
(1) Quoted closing price on date of announcement of convertible debenture financing. (2) The terms are currently are being renegotiated. See "Item 6. Directors, Senior Management and Employees - Other Instruments". See also "Item 6. Directors, Senior Management and Employees - Compensation." Indebtedness of Directors, Officers, Promoters and Other Management During the fiscal year ended August 31, 2000, the Company provided a relocation loan of US$125,000 to Mr. Busby to assist him in relocating to Bakersfield, California from Conifer, Colorado. The loan bears interest at 5% per annum, compounded monthly, and is due on March 27, 2002. The US$125,000 loan remained outstanding at August 31, 2001 and December 31, 2001. Other than as described above, none of the directors, officers, promoters or other members of management or their associates or affiliates of the Company was indebted to the Company during the fiscal year ended August 31, 2001 and the period from September 1, 2001 to December 31, 2001. Conflicts of Interest The table below shows that certain directors of the Company are also directors, officers or shareholders of other companies which are engaged in the business of acquiring, developing and exploiting natural resource properties. Such associations may give rise to conflicts of interest from time-to-time. The directors of the Company are required by law to act honestly and in good faith with a view to the best interest of the Company and to disclose any interest which they may have in any project or opportunity of the Company. However, each director has a similar obligation to other -41- companies for which such director serves as an officer or director. The Company has no specific internal policy governing conflicts of interest. As of the date of this report, no conflicts of interest have arisen, except as described below and above. Where conflicts of interests arose, the directors of the Company disclosed their interests and abstained from voting on the transaction. The following table identifies the name of each director of the Company and any company, which is a reporting issuer in Canada, and for which such director currently serves as an officer or director:
Principal Reporting Company Capacity Period Donald W. Busby Aladdin Resources Corp. President and Director January 2001 - present Hilton Petroleum Ltd. Director September 1995 - present Chairman April 1999 - present President September 1995 - March 1999 Nick DeMare Aladdin Resources Corp. Director January 2001 - present Secretary January 2001 - November 2001 Andean American Mining Corp. Secretary December 1995 - present Dial Thru International Inc. Director January 1991 - present GGL Diamond Corp. Director May 1989 - present Golden Peaks Resources Ltd. Director January 1992 - present Hilton Petroleum Ltd. Director October 1989 - present Hydromet Technologies Limited Director September 2000 - present Kookaburra Resources Ltd. Director June 1988 - present Peruvian Gold Limited Director February 1993 - present Planex Ventures Ltd. Director January 2000 - present George Muscroft Fenway Resources Ltd. Director September 1991 - present Primo Resources International Inc. Director December 1991 - present Richard Darrow None -- -- Harvey Lim Aladdin Resources Corp. Director January 2001 - November 2001 Secretary November 2001 - present Hilton Petroleum Ltd. Secretary June 1997 - present Peruvian Gold Limited Secretary October 1995 - present Planex Ventures Ltd. Director January 2000 - present
There are no known existing or potential conflicts of interest among the Company, promoters, directors, officers, principal holders of securities and persons providing professional services to the Company which could reasonably be expected to affect an investor's investment decision except as described in this section. The Company does not have any agreements with its officers or directors, including any officers or directors with a conflict of interest, with respect to the amount of time they must spend on the Company's business. ITEM 8. FINANCIAL INFORMATION. - -------------------------------------------------------------------------------- Description Page - ----------- ---- Audited Consolidated Financial Statements for the Years Ended August 31, 2001, 2000 and 1999 F-1 Significant Changes Not applicable. -42- Dividend Policy The Company has not paid any dividends on its common shares and does not intend to pay dividends on its common shares in the immediate future. Any decision to pay dividends on its common shares in the future will be made by the board of directors on the Company on the basis of earnings, financial requirements and other such conditions that may exist at that time. Legal Proceedings As of the date of this report, there are no legal proceedings. ITEM 9. THE OFFER AND LISTING. - -------------------------------------------------------------------------------- Price History Effective November 29, 1999, the Vancouver Stock Exchange and the Alberta Stock Exchange merged and began operations as the CDNX. The CDNX classifies listed companies into two different tiers based on standards, including historical financial performance, stage of development, and financial resources. Tier I is the CDNX's premier tier and is reserved for the CDNX's most advanced issuers with the most significant financial resources. Tier I issuers benefit from decreased filing requirements and improved service standards. The majority of companies listed on the CDNX are Tier II companies. The Company is classified as a Tier II company and trades on the CDNX under the symbol "TMK". There have been no trading suspensions imposed by the CDNX or any other regulatory authorities in the past three years. The following table sets forth the market price ranges and the aggregate volume of trading of the common shares of the Company on the VSE and, subsequently the CDNX, for the periods indicated: Canadian Venture Exchange Stock Trading Activity Sales Price --------------------------- Year Ended Volume High Low - ---------- ---------- ----- ------ August 31, 2001 20,477,177 $1.07 $0.20 August 31, 2000 36,805,840 $2.91 $0.37 August 31, 1999 13,753,883 $1.75 $0.21 August 31, 1998 845,041 $1.70 $0.25 August 31, 1997 1,145,411 $2.70 $0.84 Sales Price --------------------------- Quarter Ended Volume High Low - ------------- ---------- ----- ------ November 30, 2001 2,546,122 $0.27 $0.12 August 31, 2001 1,989,727 $0.61 $0.20 May 31, 2001 8,622,670 $1.07 $0.53 February 28, 2001 8,065,203 $0.82 $0.35 November 30, 2000 1,799,577 $0.85 $0.37 August 31, 2000 7,598,854 $1.30 $0.42 May 31, 2000 9,608,639 $1.40 $0.40 February 28, 2000 6,417,641 $1.56 $0.37 November 30, 1999 13,180,706 $2.91 $1.30 -43- Sales Price --------------------------- Month Ended Volume High Low - ------------- ---------- ----- ------ December 31, 2001 377,084 $0.16 $0.13 November 30, 2001 763,233 $0.23 $0.11 October 31, 2001 1,006,389 $0.27 $0.15 September 30, 2001 776,500 $0.26 $0.11 August 30, 2001 772,432 $0.40 $0.21 July 31, 2001 423,276 $0.40 $0.30 On August 7, 2000, the Company's common shares were approved for quotation on the Over-the-Counter Bulletin Board system operated by the National Association of Securities Dealers under the symbol "TOGSF". OTC-BB Trading Activity Sales Price (US $) --------------------------- Year Ended Volume High Low - ------------- ---------- ----- ------ August 31, 2001 3,532,700 $0.61 $0.16 August 31, 2000 69,700 $0.42 $0.34 Sales Price (US $) --------------------------- Quarter Ended Volume High Low - ------------- ---------- ----- ------ November 30, 2001 684,000 $0.17 $0.06 August 31, 2001 1,499,600 $0.40 $0.16 May 31, 2001 868,700 $0.61 $0.37 February 28, 2001 930,700 $0.53 $0.23 November 30, 2000 233,700 $0.55 $0.27 August 31, 2000 69,700 $0.42 $0.34 Sales Price (US $) --------------------------- Month Ended Volume High Low - ------------- ---------- ----- ------ December 31, 2001 224,700 $0.09 $0.07 November 30, 2001 84,900 $0.10 $0.08 October 31, 2001 334,800 $0.17 $0.06 September 30, 2001 264,300 $0.16 $0.06 August 31, 2001 217,600 $0.27 $0.16 July 31, 2001 1,027,000 $0.27 $0.20 ITEM 10. ADDITIONAL INFORMATION. - -------------------------------------------------------------------------------- Articles of Continuance and Bylaws The Company was incorporated under the laws of British Columbia, Canada on June 16, 1983 by registration of its Memorandum and Articles with the B.C. Registrar of Companies (the "BC Registrar") under the incorporation number 372193. On December 14, 1993, the Company was continued to the Yukon Territory, Canada by the registration of its Articles of Continuance with the Yukon Registrar of Companys under the access number 27053 (the "Yukon Registrar"). -44- The following is a summary of all material provisions of the Company's Articles of Continuance and Bylaws and certain provisions of the Yukon Business Corporations Act (the "Yukon Act"), applicable to the Company: A. Director's power to vote on a proposal, arrangement or contract in which the director is materially interested. A director or officer who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or proposed material contract must disclose the nature and extent of his interest in accordance with the Yukon Act. A director who holds such material interest may not vote on the transaction but will be counted in the quorum present at the meeting at which such vote is taken. A director that is a party to a material contract or proposed material contract cannot vote on any resolution to approve the contract unless the contract is: 1. an arrangement by way of security for money lent to or obligations undertaken by a director, or by a body corporate in which a director has an interest, for the benefit of the corporation or an affiliate; 2. a contract relating primarily to a director's remuneration as a director, officer, employee or agent of the corporation or an affiliate; 3. a contract for purchasing and maintaining insurance to cover directors against liability incurred by them as directors as specified under the Yukon Act; 4. a contract for the indemnification of a director by the corporation as specified under the Yukon Act; or 5. a contract with an affiliate. B. Director's power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body. The compensation of the directors is governed by the Company's By-laws which allow for the determination of remuneration to be paid by the Board of Directors. C. Borrowing powers exercisable by the directors. The directors may, on behalf of the Company: 1. borrow money on the credit of the corporation; 2. issue, reissue, sell or pledge debt obligations of the corporation; 3. give a guarantee on behalf of the corporation to secure performance of an obligation of any person, subject to certain conditions detailed in section 46 of the Yukon Act; or 4. mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the corporation, owned or subsequently acquired to secure any obligation of the corporation. D. Retirement and non-retirement of directors under an age limit requirement. There are no such provisions applicable to the Company under its Articles of Continuance, By-laws or the Yukon Act. E. Number of shares required for a director's qualification A director of the Company is not be required to hold a share in the capital of the Company as qualification of his office. -45- Description of Common Shares The authorized capital of the Company consists of an unlimited number of common shares without par value. A complete description is contained in the Company's Articles of Continuance. Of the Company's unlimited share capital, a total of 20,488,016 common shares were issued and outstanding as of December 31, 2001. All of the common shares of the Company rank equally as to voting rights, participation in a distribution of the assets of the Company on a liquidation, dissolution or winding-up of the Company and the entitlement of dividends. The holders of the common shares are entitled to receive notice of all shareholder meetings and to attend and vote at such meetings. Each common share carries with it the right to one vote. The common shares do not have preemptive or conversion rights. In addition, there are no sinking fund or redemption provisions applicable to the common shares. The declaration of dividends on the common shares of the Company is within the discretion of the Company's Board of Directors. The Company has not paid any dividends on its common shares and has no policy with respect to the payment of dividends. The Company's issued and outstanding common shares are not subject to further capital calls by the Company and there are no provisions in the Company's Articles of Continuance or Bylaws or the Yukon Act discriminating against any existing or prospective holder of the Company's common shares as a result of such shareholder owning a substantial number of shares. Neither the Articles of Continuance nor the Bylaws of the Company have any limitations on non-resident or foreign ownership of the Company's common shares. The Yukon Act provides that the rights and provisions attached to any class of shares may not be amended unless consented to by a separate resolution passed by a majority of not less than 2/3 of the votes cast, in person or by proxy, by holders of shares of that class. Shareholder Meetings The Company's first annual general meeting must take place within eighteen months of the date of its incorporation and thereafter an annual general meeting will be held not later than fifteen months from its last meeting of shareholders, at such time and place as may be determined by the directors. A notice of record date advising of the Company's annual general meeting and the date for which the determination of shareholders is to be fixed must be issued 7 days in advance of the record date. The notice of meeting, information circular, financial statements and proxy are to be mailed to the shareholders not less than 25 days prior to the meeting date. A quorum for the transaction of business at a general meeting is two shareholders present in person or represented by proxy representing a minimum of 5% of the issued voting shares in the Company. Only members who are registered holders of the Company's shares at the close of business on the record date (a date which is not more than 50 days, nor less than 35 days prior to the date of the meeting) who either attend the meeting or who have completed and delivered a form of proxy in the manner and subject to the provisions described above shall be entitled to vote or to have their shares voted at the meeting. On a show of hands, every person who is present and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a ballot thereon is so required or demanded, a declaration by the Chairman of the meeting that the vote upon the question has been carried or carried by a particular majority or not carried, an entry to that effect in the minutes of the meeting shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against any resolution or other proceeding in respect of the said question, and the result of the vote so taken shall be the decision of the members upon the said question. -46- Material Contract 1. Oil and Gas Prospect Exploration and Development Agreement dated February 26, 2000, between the Company and CalEx (successor to Pohle Oil & Gas Inc.) whereby the Company agreed to participate in the generation, acquisition and exploration of oil and gas projects in the San Joaquin Basin of California, described as Regional California. See "Item 4. Information on the Company - Other Properties - Regional California." Exchange Controls There are no governmental laws, decrees, or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends, or other payments to non-resident holders on the Company's Common Stock. Any remittances of dividends to United States residents are, however, subject to a 15% withholding tax (10% if the shareholder is a corporation owning at least 10% of the outstanding Common Stock of the Company) pursuant to Article X of the reciprocal tax treaty between Canada and the United States. See "Item 10. Additional Information-Taxation." Except as provided in the Investment Canada Act (the "Act"), there are no limitations specific to the rights of non- Canadians to hold or vote the common stock of the Company under the laws of Canada or in the charter documents of the Company. Management of the Company considers that the following general summary fairly describes those material provisions of the Act pertinent to an investment by an American investor in the Company. The Act requires a non-Canadian making an investment which would result in the acquisition of control of a Canadian business, the gross value of the assets of which exceeds certain threshold levels or the business activity of which is related to Canada's cultural heritage or national identity, to either notify, or file an application for review with, Investment Canada, the federal agency created by the Investment Canada Act. The notification procedure involves a brief statement of information about the investment of a prescribed form which is required to be filed with Investment Canada by the investor at any time up to 30 days following implementation of the investment. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada's cultural heritage and national identity. If an investment is reviewable under the Act, an application for review in the form prescribed is normally required to be filed with Investment Canada prior to the investment taking place and the investment may not be implemented until the review has been completed and the Minister responsible for Investment Canada is satisfied that the investment is likely to be of net benefit to Canada. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian must not implement the investment or, if the investment has been implemented, may be required to divest himself of control of the business that is the subject of the investment. The following investments by non-Canadians are subject to notification under the Act: (1) an investment to establish a new Canadian business; and (2) an investment to acquire control of a Canadian business that is not reviewable pursuant to the Act. The following investments by a non-Canadian are subject to review under the Act: (1) direct acquisitions of control of Canadian businesses with assets of $5 million or more unless the acquisition is being made by an American investor; (2) direct acquisitions of control of Canadian businesses with assets of $152,000,000 or more by an American investor; -47- (3) indirect acquisitions of control of Canadian businesses with assets of $5 million or more if such assets represent more than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by an American investor; (4) indirect acquisitions of control of Canadian businesses with assets of $152,000,000 or more by an American investor if such assets represent more than 50% of the total value of the assets of the entities, the control of which is being acquired; (5) indirect acquisitions of control of Canadian businesses with assets of $50 million or more even if such assets represent less than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by an American investor in which case there is no review; and (6) an investment subject to notification that would not otherwise be reviewable if the Canadian business engages in the activity of publication, distribution or sale of books, magazines, periodicals, newspapers, audio or video music recordings, or music in print or machine-readable form. Generally speaking, an acquisition is direct if it involves the acquisition of control of the Canadian business or of its Canadian parent or grandparent and an acquisition is indirect if it involves the acquisition of control of a non-Canadian parent or grandparent of an entity carrying on the Canadian business. Control may be acquired through the acquisition of actual or de jure voting control of a Canadian corporation or through the acquisition of substantially all of the assets of the Canadian business. No change of voting control will be deemed to have occurred if less than one-third of the voting control of a Canadian corporation is acquired by an investor. An American, as defined in the Act includes an individual who is an American national or a lawful, permanent resident of the United States, a government or government agency of the United States, an American-controlled corporation, limited partnership, trust or joint venture and a corporation, limited partnership, trust or joint venture that is neither American-controlled or Canadian-controlled of which two-thirds of its board of directors, general partners or trustees, as the case may be, are any combination of Canadians and Americans. The higher thresholds for Americans do not apply if the Canadian business engages in activities in certain sectors such as oil, natural gas, uranium, financial services (except insurance), transportation services or media activities. The Act specifically exempts certain transactions from either notification or review. Included among the category of transactions is the acquisition of voting shares or other voting interests by any person in the ordinary course of that person's business as a trader or dealer in securities. Given the nature of the Company's business and the size of its operations, management does not believe the Investment Canada Act would apply to an investment in the Company's shares by a U.S. investor. Taxation Material Canadian Federal Income Tax Consequences Management of the Company considers that the following discussion fairly describes the material Canadian federal income tax consequences applicable to a holder of Common Stock of the Company who is a resident of the United States and who is not a resident of Canada and who does not use or hold, and is not deemed to use or hold, his shares of Common Stock of the Company in connection with carrying on a business in Canada (a "non-resident shareholder"). This summary is based upon the current provisions of the Income Tax Act (Canada) (the "ITA"), the regulations thereunder (the "Regulations"), the current publicly announced administrative and assessing policies of Revenue Canada, Taxation and all specific proposals (the "Tax Proposals") to amend the ITA and Regulations announced by the Minister of Finance (Canada) prior to the date hereof. This description is not exhaustive of all possible Canadian federal income tax consequences and, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action. -48- Dividends Dividends paid on the common stock of the Company to a non-resident will be subject to withholding tax. The Canada-U.S. Income Tax Convention (1980) provides that the normal 25% withholding tax rate is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as the Company) to residents of the United States, and also provides for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation which is a resident of the United States which owns at least 10% of the voting shares of the corporation paying the dividend. Capital Gains In general, a non-resident of Canada is not subject to tax under the ITA with respect to a capital gain realized upon the disposition of a share of a corporation resident in Canada that is listed on a prescribed stock exchange. For purposes of the ITA, the Company is listed on a prescribed stock exchange. Non-residents of Canada who dispose of shares of the Company will be subject to income tax in Canada with respect to capital gains if: (a) the non-resident holder; (b) persons with whom the non-resident holder did not deal at arm's length; or (c) the non-resident holder and persons with whom the non-resident holder did not deal with at arm's length, owned not less than 25% of the issued shares of any class or series of the Company at any time during the five-year period preceding the disposition. In the case of a non-resident holder to whom shares of the Company represent taxable Canadian property and who is resident in the United States, no Canadian taxes will be payable on a capital gain realized on such shares by reason of the Canada-U.S. Income Tax Convention (1980) (the "Treaty") unless the value of such shares is derived principally from real property situated in Canada. However, in such a case, certain transitional relief under the Treaty may be available. Material United States Federal Income Tax Considerations The following discussion summarizes the material United States federal income tax consequences, under current law, applicable to a U.S. Holder (as defined below) of the Company's common stock. This discussion does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, nonresident alien individuals or foreign corporations, and shareholders owning common stock representing 10% of the vote and value of the Company. In addition, this discussion does not cover any state, local or foreign tax consequences. The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. In addition, this discussion does not consider the potential effects, both adverse and beneficial of recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. Holders and prospective holders of the Company's Common Stock should consult their own tax advisors about the federal, state, local and foreign tax consequences of purchasing, owning and disposing of shares of Common Stock of the Company. U.S. Holders As used herein, a "U.S. Holder" is defined as (i) citizens or residents of the U.S., or any state thereof, (ii) a corporation or other entity created or organized under the laws of the U.S., or any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income tax regardless of source or that is otherwise subject to U.S. federal income tax on a net income basis in respect of the common stock, or (iv) a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. fiduciaries who have the authority to control all substantial decisions of the trust, whose ownership of common stock is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their stock through the exercise of employee stock options or otherwise as compensation. -49- Distributions on Shares of Common Stock U.S. Holders receiving dividend distributions (including constructive dividends) with respect to the Company's common stock are required to include in gross income for United States federal income tax purposes the gross amount of such distributions to the extent that the Company has current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holder's United States federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's United States federal taxable income by those who itemize deductions. (See more detailed discussion at "Foreign Tax Credit" below.) To the extent that distributions exceed current or accumulated earnings and profits of the Company, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the common stock and thereafter as gain from the sale or exchange of such shares. Preferential tax rates for long-term capital gains are applicable to a U.S. Holder which is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder which is a corporation. Dividends paid on the Company's common stock will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. Foreign Tax Credit A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of the Company's common stock may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year. Subject to certain limitations, Canadian taxes withheld will be eligible for credit against the U.S. Holder's United States federal income taxes. Under the Code, the limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. Dividends paid by the Company generally will be either "passive" income or "financial services" income, depending on the particular U.S. Holder's circumstances. Foreign tax credits allowable with respect to each class of income cannot exceed the U.S. federal income tax otherwise payable with respect to such class of income. The consequences of the separate limitations will depend on the nature and sources of each U.S. Holder's income and the deductions appropriately allocated or apportioned thereto. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of common stock should consult their own tax advisors regarding their individual circumstances. Disposition of Shares of Common Stock A U.S. Holder will recognize gain or loss upon the sale of shares of common stock equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received; and (ii) the shareholder's tax basis in the common stock. This gain or loss will be capital gain or loss if the shares are a capital asset in the hands of the U.S. Holder, and such gain or loss will be long-term capital gain or loss if the U.S. Holder has held the common stock for more than one year. Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year. Deductions for net capital losses are subject to significant limitations. For U.S. Holders who are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders which are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted. Other Considerations The Company has not determined whether it meets the definition of a "passive foreign investment company" (a "PFIC"). It is unlikely that the Company meets the definition of a "foreign personal holding company" (a "FPHC") or a "controlled foreign corporation" (a "CFC") under current U.S. law. If more than 50% of the voting power or value of the Company were owned (actually or constructively) by U.S. Holders who each owned (actually or constructively) 10% or more of the voting power of the Company's common shares ("10% Shareholders"), then the Company would become a CFC and each 10% Shareholder would be required -50- to include in its taxable income as a constructive dividend an amount equal to its share of certain undistributed income of the Company. If (1) more than 50% of the voting power or value of the Company's common shares were owned (actually or constructively) by five or fewer individuals who are citizens or residents of the United States and (2) 60% or more of the Company's income consisted of certain interest, dividend or other enumerated types of income, then the Company would be a FPHC. If the Company were a FPHC, then each U.S. Holder (regardless of the amount of the Company's common shares owned by such U.S. Holder) would be required to include in its taxable income as a constructive dividend its share of the Company's undistributed income of specific types. If 75% or more of the Company's annual gross income has ever consisted of, or ever consists of, "passive" income or if 50% or more of the average value of the Company's assets in any year has ever consisted of, or ever consists of, assets that produce, or are held for the production of, such "passive" income, then the Company would be or would become a PFIC. The Company has not provided assurances that it has not been and does not expect to become a PFIC. Please note that the application of the PFIC provisions of the Code to resource companies is somewhat unclear. If the Company were to be a PFIC, then a U.S. Holder would be required to pay an interest charge together with tax calculated at maximum tax rates on certain "excess distributions" (defined to include gain on the sale of stock) unless such U.S. Holder made an election either to (1) include in his or her taxable income certain undistributed amounts of the Company's income or (2) mark to market his or her Company common shares at the end of each taxable year as set forth in Section 1296 of the Code. Information Reporting and Backup Withholding U.S. information reporting requirements may apply with respect to the payment of dividends to U.S. Holders of the Company's shares. Under Treasury regulations currently in effect, non-corporate holders may be subject to backup withholding at a 31% rate with respect to dividends when such holder (1) fails to furnish or certify a correct taxpayer identification number to the payor in the required manner, (2) is notified by the IRS that it has failed to report payments of interest or dividends properly or (3) fails, under certain circumstances, to certify that it has been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. Inspection of Documents Copies of the documents referred to in this annual report may be inspected at the Company's corporate office at Suite 1305 - 1090 West Georgia Street, Vancouver, British Columbia V6E 3V7, during normal business hours. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------------------- Not applicable. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. - -------------------------------------------------------------------------------- Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. - -------------------------------------------------------------------------------- Not applicable ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. - -------------------------------------------------------------------------------- Not applicable. -51- ITEM 15. [RESERVED] - -------------------------------------------------------------------------------- Not applicable. ITEM 16. [RESERVED] - -------------------------------------------------------------------------------- Not applicable. PART III ITEM 17. FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- See pages 55 through 75. ITEM 18. FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- Not applicable. -52- ITEM 19. EXHIBITS. - --------------------------------------------------------------------------------
Exhibit Number Description Page - -------------- ----------- ---- 1.1 Roll Over Articles of Golden Chance Resources Inc. and amendments N/A thereto.(1) 1.2 Certificate of Continuance and Articles of Continuance for Trimark Resources N/A Ltd. and amendments thereto.(1) 1.3 Bylaws of Trimark Resources Ltd.(1) N/A 3.1 Letter of Intent dated February 25, 1999, between Hilton Petroleum, Inc., STB N/A Energy Inc. and Berkley Petroleum Corp.(1) 3.2 Letter of Intent dated February 26, 1999, between Trimark Resources, Inc., N/A Hilton Petroleum, Inc. and STB Energy, Inc.(1) 3.3 Letter Agreement dated March 8, 1999, between Trimark Resources, Inc., N/A Hilton Petroleum, Inc. and STB Energy, Inc.(1) 3.4 Purchase and Sale Agreement dated June 15, 1999, between Hilton Petroleum, N/A Inc. and Trimark Resources, Inc.(1) 3.5 Letter of Intent dated April 12, 1999, between Trimark Oil & Gas Ltd. and N/A Philip Zaccaria and amendment dated May 14, 1999. (1) 3.6 Agreement dated April 11, 1997, between E.J. Helsley, Trimark Resources, N/A Inc. and International Trimark Resources Ltd.(1) 3.7 Agreement dated September 10, 1997, between Trimark Resources, Inc., N/A Trimark Oil & Gas Ltd. and Rainbow Oil & Gas, Inc.(1) 3.8 Agreement dated September 12, 1997, between Trimark Resources, Inc., N/A Trimark Oil & Gas Ltd. and STB Energy Inc.(1) 3.9 Agreement dated September 1, 1993, between Trimark Resources Inc. and N/A DWB Management Ltd.(1) 3.10 Participation Agreement dated October 8, 1997, between Trimark Resources, N/A Inc. and Texstar Petroleum, Inc. (2) 3.11 Mutual Settlement and Release Agreement dated December 15, 1999 (3) N/A 3.12 Form of Loan Agreement Between Donald W. Busby and Trimark Oil & Gas N/A Ltd. dated November 19, 1999(4) 3.13 Oil and Gas Prospect Exploration and Development Agreement dated February N/A 26, 2000(4)
(1) Previously filed as an exhibit to the Company's Registration Statement on Form 20-F, filed with the Commission on July 29, 1999. File number 0-30196. (2) Previously filed as an exhibit to the Company's Amended Registration Statement on Form 20-F/A Amendment No. 1, filed with the Commission on October 29, 1999. File number 0-30196. (3) Previously filed as an exhibit to the Company's Amended Registration Statement on Form 20-F/A Amendment No. 3, filed with the Commission on January 18, 2000. File number 0-30196. (4) Previously filed as an exhibit to the Company's Annual Report on Form 20-F, filed with the Commission on February 28, 2001. File number 0-30196. -53- SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. TRIMARK OIL & GAS LTD. Dated: February 1, 2002 /s/ Nick DeMare --------------------------- ------------------------------------ Nick DeMare, Director -54- - -------------------------------------------------------------------------------- TRIMARK OIL & GAS LTD. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- F-1 -55- AUDITORS' REPORT To the Shareholders of Trimark Oil and Gas Ltd. We have audited the consolidated balance sheets of Trimark Oil and Gas Ltd. as at August 31, 2001 and 2000 and the consolidated statements of loss and deficit and cash flow for the years ended August 31, 2001, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2001 and 2000 and the results of its operations and its cash flow for the years ended August 31, 2001, 2000 and 1999 in accordance with Canadian generally accepted accounting principles. Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected assets and shareholders' equity as at August 31, 2001 and 2000 and results of operations for the year ended August 31, 2001, 2000 and 1999 to the extent summarized in Note 11 to the consolidated financial statements. Vancouver, B.C. /s/ D&H Group November 27, 2001, except for Note 13 which is as of December 31, 2001 Chartered Accountants (D&H Group was formerly known as Dyke & Howard) D & H Group A Partnership of Corporations A Member of BHD Association with affiliated offices across Canada and Internationally 10th Floor, 1333 West Broadway, Vancouver, BC V6H 4C2 www.dhgroup.ca F 604-731-9923 T 604-731-5881 F-2 -56- TRIMARK OIL & GAS LTD. CONSOLIDATED BALANCE SHEETS AS AT AUGUST 31, 2001 AND 2000 (Expressed in Canadian Dollars) 2001 2000 $ $ A S S E T S CURRENT ASSETS Cash 214,390 1,306,708 Amounts receivable 48,942 261,634 Inventory 70,050 - Current portion of other assets (Note 4) 193,463 - ------------ ----------- 526,845 1,568,342 PETROLEUM AND NATURAL GAS INTERESTS (Note 3) 7,022,246 7,795,380 OTHER ASSETS (Note 4) 619,080 772,905 ------------ ----------- 8,168,171 10,136,627 ============ =========== L I A B I L I T I E S CURRENT LIABILITIES Accounts payable and accrued liabilities (Note 8(b)) 520,629 306,565 Advances (Note 5) 553,200 - ------------ ----------- 1,073,829 306,565 ------------ ----------- S H A R E H O L D E R S ' E Q U I T Y SHARE CAPITAL (Note 6) 19,537,102 17,141,542 SHARE SUBSCRIPTIONS RECEIVED (Note 6(a)) - 83,000 DEFICIT (12,442,760) (7,394,480) ------------ ----------- 7,094,342 9,830,062 ------------ ----------- 8,168,171 10,136,627 ============ =========== OPERATIONS (Note 1) APPROVED BY THE BOARD /s/ Donald W. Busby , Director - ------------------- /s/ Nick DeMare , Director - ------------------- The accompanying notes are an integral part of these consolidated financial statements. F-3 -57- TRIMARK OIL & GAS LTD. CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars)
2001 2000 1999 $ $ $ REVENUES Oil and gas sales 521,322 202,714 135,865 Interest and other 114,098 195,735 7,464 ------------ ----------- ----------- 635,420 398,449 143,329 ------------ ----------- ----------- EXPENSES Production 185,037 154,529 132,176 General and administrative 330,245 462,429 349,844 Depreciation, depletion and impairment 5,168,418 78,340 1,703,500 ------------ ----------- ----------- 5,683,700 695,298 2,185,520 ------------ ----------- ----------- NET LOSS FOR THE YEAR (5,048,280) (296,849) (2,042,191) DEFICIT - BEGINNING OF YEAR (7,394,480) (7,097,631) (5,055,440) ------------ ----------- ----------- DEFICIT - END OF YEAR (12,442,760) (7,394,480) (7,097,631) ============ =========== =========== LOSS PER COMMON SHARE $(0.29) $(0.02) $(0.40) ============ =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 17,361,325 14,770,945 5,057,787 ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 -58- TRIMARK OIL & GAS LTD. CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars)
2001 2000 1999 $ $ $ CASH PROVIDED FROM (USED FOR) OPERATING ACTIVITIES Net loss for the year (5,048,280) (296,849) (2,042,191) Items not involving cash Depreciation, depletion and impairment 5,168,418 78,340 1,703,500 Unrealized foreign exchange (39,638) - - ----------- ----------- ----------- 80,500 (218,509) (338,691) Decrease (increase) in amounts receivable 212,692 (233,245) 3,337 Increase in inventory (70,050) - - Increase in accounts payable and accrued liabilities 214,064 42,450 (197,772) ----------- ----------- ----------- 437,206 (409,304) (533,126) ----------- ----------- ----------- FINANCING ACTIVITIES Issuance of common shares 2,312,560 3,933,801 493,990 Issuance of special warrants - - 4,400,200 Issuance costs - (323,770) (276,404) Share subscriptions received - 83,000 1,116,570 Advances received (repayment of) 553,200 - (65,220) ----------- ----------- ----------- 2,865,760 3,693,031 5,669,136 ----------- ----------- ----------- INVESTING ACTIVITIES Petroleum and natural gas interests expenditures (4,415,135) (2,817,323) (4,625,161) Proceeds from sale of petroleum and natural gas interests 19,851 39,728 1,038,380 Additions to other assets - (772,905) - ----------- ----------- ----------- (4,395,284) (3,550,500) (3,586,781) ----------- ----------- ----------- DECREASE IN CASH FOR THE YEAR (1,092,318) (266,773) 1,549,229 CASH - BEGINNING OF YEAR 1,306,708 1,573,481 24,252 ----------- ----------- ----------- CASH - END OF YEAR 214,390 1,306,708 1,573,481 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 -59- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 1. OPERATIONS Trimark Oil & Gas Ltd. (the "Company") is an independent energy company engaged in the acquisition, exploration and development of crude oil and natural gas properties in the United States. As at August 31, 2001, the Company has a working capital deficiency of $546,984 and for the year ended August 31, 2001, the Company incurred a net loss of $5,048,280. The future viability of the Company is dependent upon the continued financial support of the Company's creditors, the ability to obtain additional financing to satisfy future working capital requirements and, in the longer term, the generation of profit and positive cash flow from business operations. 2. ACCOUNTING POLICIES Basis of Presentation These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The significant differences between these principles and those that would be accepted under United States generally accepted accounting principles ("US GAAP") are disclosed in Note 11. The preparation of financial statements in conformity with Canadian GAAP requires 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 the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Trimark Resources Inc. and Safari Petroleum, LLC. Intercompany balances and transactions are eliminated on consolidation. Petroleum and Natural Gas Interests The Company follows the full cost method of accounting for petroleum and natural gas operations. Under this method all costs related to the exploration for and development of petroleum and natural gas reserves are capitalized on a country-by-country basis. Costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration and development activities and costs of drilling both productive and non-productive wells. Proceeds from the sale of properties are applied against capitalized costs, without any gain or loss being recognized, unless such a sale would significantly alter the rate of depletion and depreciation. F-6 -60- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 2. ACCOUNTING POLICIES (continued) Depletion of exploration and development costs and depreciation of production equipment is provided using the unit-of-production method based upon estimated proven petroleum and natural gas reserves. The costs of significant unevaluated properties are excluded from costs subject to depletion. For depletion and depreciation purposes, relative volumes of petroleum and natural gas production and reserves are converted into equivalent units based upon relative energy content. Depreciation of the gathering facility is charged to earnings over an estimated useful life of 10 years on a straight-line basis. In applying the full cost method, the Company performs a ceiling test whereby the carrying value of petroleum and natural gas properties and production equipment, net of recorded future income taxes and the accumulated provision for site restoration and abandonment costs, is compared annually to an estimate of future net cash flow from the production of proven reserves. Net cash flow is estimated using year end prices, less estimated future general and administrative expenses, financing costs and income taxes. Should this comparison indicate an excess carrying value, the excess is charged against earnings. Substantially all of the Company's oil and gas exploration, development and production activities are conducted jointly with others and, accordingly, these consolidated financial statements reflect the Company's proportionate interest in such activities. Revenue Recognition The Company recognizes petroleum and natural gas revenues from its interests in producing wells as oil and gas is produced and sold from these wells. The Company has no gas balancing arrangements in place. Oil and gas sold is not significantly different from the Company's product entitlement. Cash Equivalents Cash includes cash and short-term deposits maturing within 90 days of the original date of acquisition. Inventory Inventory consists of materials inventory. The materials inventory balance include equipment held for future use and is accounted for based on the lower of moving average cost method or market. F-7 -61- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 2. ACCOUNTING POLICIES (continued) Foreign Currency Translation Monetary assets and liabilities are translated into Canadian dollars at the balance sheet date rate of exchange and non-monetary assets and liabilities at historical rates. Revenues and expenses are translated at appropriate transaction date rates except for amortization, depreciation and depletion, which are translated at historical rates. Gains and losses on translation are included in income. Income Taxes Income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the consolidated financial statements and their respective tax bases, using enacted income tax rates. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Share Option Plan The Company grants share options in accordance with the policies of the Canadian Venture Exchange (the "CDNX") as described in Note 6(c). No compensation expense is recognized for this plan when shares or share options are issued pursuant to the plan. Consideration paid for the shares on exercise of the share options is credited to share capital. Earnings (Loss) Per Share Earnings (loss) per common share amounts have been calculated and presented in accordance with the new recommendations of the Canadian Institute of Chartered Accountants. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares calculated excludes contingently returnable common shares. The computation of diluted earnings per share assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on earnings per share. The dilutive effect of outstanding options and warrants and their equivalents is reflected in diluted earnings per share by application of the treasury stock method. The new standard has been applied on a retroactive basis and had no impact on the amounts previously presented. F-8 -62- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 3. PETROLEUM AND NATURAL GAS INTERESTS
2001 2000 $ $ Evaluated Properties Acquisitions and leasehold costs 5,829,076 3,102,658 Exploration and development costs 4,185,331 751,038 Gathering facility 146,242 - ----------- ----------- 10,160,649 3,853,696 ----------- ----------- Unevaluated Properties Acquisitions and leasehold costs 2,680,558 6,057,733 Exploration costs 3,044,687 1,579,181 ----------- ----------- 5,725,245 7,636,914 ----------- ----------- 15,885,894 11,490,610 Less: accumulated depreciation, depletion and impairment (8,863,648) (3,695,230) ----------- ----------- 7,022,246 7,795,380 =========== ===========
Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a property. Exploration costs include the costs of geological and geophysical activity, dry holes and drilling and equipping exploratory wells. Development costs include costs incurred to gain access to prepare development well locations for drilling and to drill and equip development wells. During the year ended August 31, 2001, the Company wrote down the carrying value of its petroleum and natural gas interests by $4,790,379 from the ceiling test performed effective August 31, 2001. No write- down was required during the year ended August 31, 2000 from the ceiling test performed effective August 31, 2000. During the year ended August 31, 1999, the Company wrote down the carrying value of its petroleum and natural gas interests by $1,649,518 from the ceiling test performed effective August 31, 1999. The ceiling test is a cost-recovery test and is not intended to result in an estimate of fair market value. 4. OTHER ASSETS 2001 2000 $ $ Convertible note (a) 619,080 588,880 Loan to officer (b) 193,463 184,025 -------- -------- 812,543 772,905 Less current portion 193,463 - -------- -------- 619,080 772,905 ======== ======== F-9 -63- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 4. OTHER ASSETS (continued) (a) The Company holds a US$400,000 unsecured convertible note (the "ALPNET Note") issued by ALPNET, Inc. ("ALPNET"), a public Utah company trading on the facilities of the National Association of Securities Dealers. The ALPNET Note has a variable interest rate of US prime plus 2%, payable on a quarterly basis. The principal is repayable in three equal annual instalments commencing June 2, 2003. The Company has the right to convert all or any portion of the outstanding principal into common stock of ALPNET, on the basis of US$2.22 per share. ALPNET has the right to pay the full amount, or any portion, of the ALPNET Note prior to its maturity. In connection with the ALPNET Note, ALPNET granted the Company a warrant to purchase up to 90,090 common shares of ALPNET, at an exercise price of US$3.33 per share, on or before June 2, 2002. (b) During the year ended August 31, 2000, the Company provided a US$125,000 relocation loan to the President of the Company. The loan bears interest at 5% per annum, compounded monthly, and matures on March 27, 2002. During the year ended August 31, 2001, interest income of $9,968 (2000 - $4,018) was received. 5. ADVANCES During the year ended August 31, 2001, the Company received $553,200 pursuant to a proposed $1 million convertible debenture financing. The terms initially proposed was that the debentures bear interest at 10% per annum with interest for the first year to be prepaid on closing in common shares of the Company at $0.35 per share. Interest thereafter would be paid quarterly in cash or shares at the holder's option. The debentures were proposed to have a three year term and be convertible into shares at $0.35 per share in year one, at $0.40 per share in year two and at $0.45 per share in year three. In light of the current market conditions the Company and the subscribers are negotiating a revision to the terms and features. The Company has recorded $4,904 of interest expense, based on a rate of 10% per annum. The amount has been included in accounts payable and accrued liabilities. Hilton Petroleum Ltd. ("Hilton"), a public company which is a shareholder of the Company and in which certain of its officers and directors are also officers and directors of the Company, advanced $153,200. F-10 -64- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 6. SHARE CAPITAL Authorized - unlimited common shares without par value
Issued and outstanding - 2001 2000 1999 ------------------------- -------------------------- -------------------------- Number $ Number $ Number $ Balance, beginning of year 16,005,446 17,141,542 11,625,360 12,414,941 3,306,710 5,854,294 ------------ ------------ ------------ ------------- ------------ ------------- Issued during the year Private placements 4,482,570 2,395,560 3,699,279 4,399,261 - - Exercise of options - - 200,000 228,000 620,300 493,990 Exercise of special warrants - - - - 6,538,350 5,385,100 Exercise of warrants - - 325,000 286,000 - - Exercise of agents warrants - - 155,807 137,110 - - Acquisition of petroleum interest - - - - 1,160,000 1,044,000 ------------ ------------ ------------ ------------- ------------ ------------- 4,482,570 2,395,560 4,380,086 5,050,371 8,318,650 6,923,090 Issuance costs - - - (323,770) - (362,443) ------------ ------------ ------------ ------------- ------------ ------------- 4,482,570 2,395,560 4,380,086 4,726,601 8,318,650 6,560,647 ------------ ------------ ------------ ------------- ------------ ------------- Balance, end of year 20,488,016 19,537,102 16,005,446 17,141,542 11,625,360 12,414,941 ============ ============ ============ ============= ============ =============
(a) During the year ended August 31, 2001, the Company completed the following private placements: (i) 118,570 units at $0.70 per unit for proceeds of $83,000. Each unit is comprised of one common share and one share purchase warrant entitling the holder to purchase an additional share at $0.84 per share on or before June 19, 2002. The $83,000 gross proceeds were received at August 31, 2000 and recorded as share subscriptions received. As at August 31, 2001, the warrants remain outstanding; and (ii) 2,200,000 units, at $0.52 per unit, for proceeds of $1,144,000. Each unit is comprised of one common share and one share purchase warrant entitling the holder to purchase an additional share at $0.52 per share for a period of two years. The purchasers of the private placement are a private company owned by the President of the Company and Hilton. At August 31, 2001, the warrants remained outstanding; and F-11 -65- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 6. SHARE CAPITAL (continued) (iii) 2,164,000 units at $0.54 per unit for proceeds of $1,168,560, with officers, directors and insiders of the Company. Each unit is comprised of one common share and one share purchase warrant. Two warrants entitles the holder to purchase an additional share at an exercise price of $0.62 per share on or before August 15, 2003. The Company also granted warrants to its agents (the "Agents' Warrants") to purchase 400,000 common shares of the Company at an exercise price of $0.62 per share on or before August 15, 2002. At August 31, 2001, the warrants and Agents' Warrants remained outstanding. (b) During the year ended August 31, 2000, the Company completed a number of private placement financings, as follows: (i) 2,513,564 units, at $1.42 per unit, for proceeds of $3,245,491, net of finders fees and issue costs of $323,770. Each unit consisted of one common share and one share purchase warrant. Two warrants entitled the holder to purchase an additional share for a period of two years, at a price of $1.56 per share on or before September 24, 2000 and thereafter, at $1.73 per share on or before September 24, 2001. Subsequent to August 31, 2001, the warrants expired without exercise. Directors, officers and a company controlled by the President of the Company purchased 202,079 units. (ii) 1,185,715 units at $0.70 per unit, for proceeds of $830,000. Each unit consisted of one common share and one share purchase warrant. Each warrant entitles the holder to purchase an additional share for a period of two years, at a price of $0.84 per share on or before April 11, 2002. The Chairman, private corporations controlled by the President of the Company and a director of the Company purchased all of the units. As of August 31, 2001, the warrants remained unexercised. (c) The Company grants share options in accordance with the policies of the CDNX. Under the general guidelines of the CDNX the Company may reserve up to 10% of its issued and outstanding shares to its employees, directors or consultants to purchase common shares of the Company. Stock options to directors and employees of the Company and consultants to acquire shares were granted and outstanding as at August 31, 2001. These options are exercisable on varying dates expiring from fiscal 2002 to fiscal 2004 at prices ranging from $0.60 to $1.90 per share. F-12 -66- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 6. SHARE CAPITAL (continued) Details of options outstanding are as follows:
2001 2000 ------------------------------- ------------------------------- 2001 Weighted 2000 Weighted Number Average Number Average of Options Exercise Price of Options Exercise Price $ $ Balance, beginning of year 837,000 1.28 902,000 1.13 Granted 850,000 0.61 150,000 1.90 Exercised - - (200,000) 1.14 Cancelled/expired (100,000) 1.33 (15,000) 0.70 --------- --------- Balance, end of year 1,587,000 0.92 837,000 1.28 ========= =========
See also Note 13. (d) As at August 31, 2001, 10,417 common shares are held in escrow, the release of which is subject to the determination and direction of the regulatory authorities. 7. INCOME TAXES Future income tax assets and liabilities of the Company as at August 31, 2001 and 2000 are as follows: 2001 2000 $ $ Future income tax assets (liabilities) Losses carried forward 2,490,000 1,467,000 Other 152,000 214,000 Petroleum and natural gas interests 1,960,000 (227,000) ---------- ---------- 4,602,000 1,454,000 Valuation allowance (4,602,000) (1,454,000) ---------- ---------- Net future income tax asset - - ========== ========== F-13 -67- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 7. INCOME TAXES (continued)
2001 2000 $ $ Income tax rate reconciliation Combined federal and provincial income tax rate 44% 44% =========== ========= Expected income tax recovery 2,271,000 133,500 Foreign income tax rate differences (332,000) (79,000) Non-deductible depreciation and depletion (1,809,000) (27,000) Deductible petroleum and natural gas interest expenditures 643,000 275,000 Non-taxable unrealized foreign exchange gains 284,000 81,000 Other 62,000 62,000 Unrecognized benefit of income tax losses (1,119,000) (445,500) ----------- --------- Actual income tax recovery - - =========== =========
As at August 31, 2001, the Company has accumulated non-capital losses for Canadian income tax purposes of approximately $1,200,000, expiring from 2002 to 2008, and for United States income tax purposes of approximately US$3,600,000, expiring from 2008 to 2021, which are available for application against future taxable income, the related benefits of which have not been recognized in these financial statements. 8. RELATED PARTY TRANSACTIONS (a) During the year ended August 31, 2001, the Company was charged $157,239 (2000 - $120,264; 1999 - $144,232) for management, professional, accounting and administrative fees and professional fees provided by directors of the Company or companies controlled by directors of the Company. (b) As at August 31, 2001, accounts payable and accrued liabilities include $101,158 (2000 - $98,268) due to Hilton. (c) During the year ended August 31, 1999, the Company and Hilton entered into a number of agreements whereby the Company purchased, from Hilton, certain leasehold interests in unproved petroleum properties for US$3,450,000 and sold, to Hilton, certain leasehold interests for US$700,000. The net consideration of US$2,750,000 consisted of US$2,050,000 cash and US$700,000 paid by the issuance of 1,160,000 common shares of the Company. (d) See also Notes 4(b), 5 and 6. F-14 -68- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 9. SEGMENTED INFORMATION As at August 31, 2001, the Company and its subsidiaries operated in one industry segment, the exploration for, and the development and production of crude oil and natural gas. The Company's current petroleum interests are located in the United States and its corporate assets are located in Canada. Identifiable assets, revenues and net loss in each of these geographic areas are as follows: 2001 ----------------------------------------------------- Identifiable Net Assets Revenues Income (Loss) $ $ $ United States 7,349,920 536,864 (5,533,636) Canada 818,251 98,556 485,356 ---------- ---------- ----------- 8,168,171 635,420 (5,048,280) ========== ========== =========== 2000 ----------------------------------------------------- Identifiable Net Assets Revenues Income (Loss) $ $ $ United States 8,223,111 260,952 (54,324) Canada 1,913,516 137,497 (242,525) ---------- ---------- ----------- 10,136,627 398,449 (296,849) ========== ========== =========== 1999 ----------------------------------------------------- Identifiable Net Assets Revenues Income (Loss) $ $ $ United States 5,410,650 135,865 (1,645,195) Canada 1,287,345 7,464 (396,996) ---------- ---------- ----------- 6,697,995 143,329 (2,042,191) ========== ========== =========== F-15 -69- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 10. FINANCIAL INSTRUMENTS (a) Fair Values The fair values of financial instruments at August 31, 2001 and 2000, were estimated based on relevant market information and the nature and terms of financial instruments. Management is not aware of any factors which would significantly affect the estimated fair market amounts, however, such amounts have not been comprehensively revalued for purposes of these financial statements. Disclosure subsequent to the balance sheet dates and estimates of fair value at dates subsequent to August 31, 2001 and 2000 may differ significantly from that presented. Fair value approximates the amounts reflected in the financial statements for cash, accounts receivable and accounts payable and accrued liabilities and advances. The fair value of other assets at August 31, 2001, is estimated to be approximately $780,250. (b) Credit Risk Management The accounts receivable are from various companies operating in the oil and gas industry in the United States and are subject to normal industry credit risks. 11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (a) The consolidated financial statements of the Company have been prepared in accordance to Canadian GAAP which differ in certain material respects from US GAAP. Material differences between Canadian and US GAAP and their effect on the Company's consolidated financial statements are summarized in the tables below. Consolidated Statement of Loss
2001 2000 1999 $ $ $ Net loss as reported under Canadian GAAP (5,048,280) (296,849) (2,042,191) Adjustments for related party transactions (ii) 815,793 - 450,084 Stock-based compensation (iv) (316,069) (98,126) (735,393) Other compensation expense (vii) (172,720) (134,742) (31,600) ----------- ----------- ----------- Net loss under US GAAP (4,721,276) (529,717) (2,359,100) =========== =========== =========== Weighted average number of common shares outstanding (i) 17,361,325 15,012,218 5,296,479 =========== =========== =========== Loss per share under US GAAP (0.27) (0.04) (0.45) =========== =========== ===========
F-16 -70- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) Consolidated Balance Sheet
2001 2000 $ $ Total assets under Canadian GAAP 8,168,171 10,136,627 Adjustments for related party transactions (ii) (1,928,229) (2,744,022) Deferred tax asset (v) 2,490,000 1,651,821 Less: Valuation allowance (v) (2,490,000) (1,651,821) ----------- ----------- Total assets under US GAAP 6,239,942 7,392,605 =========== =========== Total liabilities under Canadian GAAP 1,073,829 306,565 ----------- ----------- Total liabilities under US GAAP 1,073,829 306,565 =========== =========== Total shareholders' equity under Canadian GAAP 7,094,342 9,830,062 Adjustments for related party transactions (ii) (1,928,229) (2,744,022) ----------- ----------- Total shareholders' equity under US GAAP 5,166,113 7,086,040 =========== ===========
(i) Earnings per Share Under US GAAP outstanding special warrants are included in the calculation of loss per share. (ii) Capital Contributions with Respect to Related Party Transactions As described in Note 8(c), during the year ended August 31, 1999, the Company acquired and disposed of certain petroleum interests with Hilton Inc. for a combination of monetary and non-monetary consideration. US GAAP requires that certain transfers of non-monetary assets to a company by its promoters or shareholders, in exchange for stock, should generally be recorded at the transferor's historical cost basis, whereas under Canadian GAAP, transfers of non- monetary assets may be recorded based on the fair value of either the stock issued or the assets acquired under certain circumstances. Under Canadian GAAP these transactions were recorded at their fair values. The transactions have been adjusted to reflect the transactions based on the historical cost basis. The net loss under US GAAP has also been adjusted for the subsequent amortization and impairment charges of a portion of these petroleum interest acquisitions costs. F-17 -71- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) (iii) Ceiling test on petroleum interests US GAAP requires that the net book value of proved petroleum interests not exceed the sum of the present value of estimated future net revenues (determined using current prices of petroleum production less estimated future expenditures to be incurred in developing and producing the proved reserves, discounted at ten percent). This ceiling test was performed effective August 31, 2001 and it was determined that no additional write-down of proved petroleum interests was necessary. (iv) The Company grants stock options which reserves common shares for issuance to employees and directors. Under Canadian GAAP, the issuance of stock options is not recognized for accounting purposes. Under US GAAP, the issuance of stock options requires an assessment to determine stock based compensation. Accordingly, the Company has applied the provisions of Financial Account Standards ("SFAS") 123 Accounting for Stock-Based Compensation to calculate stock-based compensation under US GAAP using the fair value method. The fair value of each option grant is estimated on the date of grant using the Black- Scholes option pricing model with the following assumptions used for grants in 2001, 2000 and 1999:
2001 2000 1999 ------------------ ----------------- ----------------- Risk-free interest rate 4.81% - 6.47% 5.63% - 5.79% 6.25% - 7.5% Expected volatility 124% 87% 89% Expected lives 3 years 2 - 3 years 3 years
(v) Income Tax Under Canadian GAAP, deferred tax assets relating to the potential benefit of income tax loss carryforwards are not recognized unless there is virtual certainty of realization of the benefit. US GAAP provides similar treatment, but requires the benefit be recognized and a valuation allowance be recognized to fully offset the deferred tax asset. As at August 31, 2001, the Company has fully reserved the $2,490,000 tax benefit of operating loss carryforwards, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit cannot be determined. Of the total tax benefit, $838,179 is attributable to the year ended August 31, 2001. F-18 -72- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) (vi) Private Placements of Common Stock and Special Warrants with Related Parties US GAAP requires disclosure of private placements conducted by the Company where directors and officers of the Company are participants. During the year ended August 31, 2001, directors, officers and companies controlled by the directors or officers acquired 2,284,000 shares or special warrants (2000 - 1,387,794; 1999 - 1,580,000) of the Company, pursuant to private placements conducted by the Company, for cash proceeds of $1,223,360 (2000 - $1,116,952; 1999 - $1,264,000). (vii) Private Placements of Common Stock The Company conducts the majority of its equity financings pursuant to private placements. Under the policies of the Canadian Venture Exchange, on which the Company's common stock is listed, the Company may provide a discount off the market price of the Company's common stock. US GAAP does not permit a discount from the market price. US GAAP requires the recognition of the market value of the Company's common stock as a credit to share capital, with a charge to operations for the portion of the discount relating to equity financings conducted with officers and directors of the Company and a charge to shareholders' equity, as a capital distribution, for the discount relating to the remaining portion of the equity financings. Under US GAAP, loss and capital distributions for the year ended August 31, 2001 would increase by $172,720 (2000 - $134,742; 1999 - $31,600) and $140,700 (2000 - $184,919; 1999 - $37,805), respectively, and share capital, as at August 31, 2001 would increase by $961,402 (2000 - $647,982). There is no net change to shareholders' equity. (b) The Company's consolidated statements of cash flow comply with US GAAP. (c) New Technical Pronouncements In September 2000, SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB Statement No. 125" was issued. Adoption of SFAS No. 140 is not expected to have an impact on the Company's financial statements. F-19 -73- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. For all business combinations for which the date of acquisition is after June 30, 2001, SFAS 141 also establishes specific criteria for the recognization of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain rather than deferred and amortized. SFAS 142 changes the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. The Company does not believe that the adoption of these statements will have a material effect on its financial position, results of operations, or cash flows. In June 2001, the FASB also approved for issuance SFAS 143, "Asset Retirement Obligations." SFAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including (1) the timing of the liability recognition, (2) initial measurement of the liability, (3) allocation of assets retirement cost to expense, (4) subsequent measurement of the liability, and (5) financial statement disclosure. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The adoption of SFAS 143 is not expected to have a material effect on the Company's financial position, results of operations, or cash flows. 12. SUPPLEMENTARY CASH FLOW INFORMATION Non-cash investing and financing activities were conducted by the Company as follows:
2001 2000 1999 $ $ $ Investing activities Acquisition of petroleum interests with issuance of shares - - (1,044,000) ========== ========== ========== Financing activities Issuance of shares for petroleum interests - - 1,044,000 Issuance of shares for special warrants exercised - - 5,385,100 Special warrants exercised - - (5,385,100) ---------- ---------- ---------- - - 1,044,000 ========== ========== ==========
F-20 -74- TRIMARK OIL & GAS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999 (Expressed in Canadian Dollars) 12. SUPPLEMENTARY CASH FLOW INFORMATION (continued) Other supplementary cash flow information: 2001 2000 1999 $ $ $ Interest paid in cash - 12,649 - ========== ========== ========== Income taxes paid in cash - - - ========== ========== ========== 13. SUBSEQUENT EVENT Subsequent to August 31, 2001, employee and director stock options to purchase 200,000 common shares of the Company expired. The Company has repriced the remaining stock options to purchase 1,387,000 shares to $0.15 per share and granted an option to an employee to acquire 50,000 shares at a price of $0.15 per share for a period of three years. F-21 -75- -----END PRIVACY-ENHANCED MESSAGE-----