As filed with the Securities and Exchange Commission on December 19, 2002
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
_ Registration Statement pursuant to Section 12(b) or (g) of The Securities
Exchange Act of 1934
X Annual Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2002
_ Transition Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the transition period from ________ to _________
Commission file number: 0-29586
ENERGY POWER SYSTEMS LIMITED
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(Exact name of registrant as specified in this charter)
Province of Ontario, Canada
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(Jurisdiction of incorporation or organization)
2 Adelaide Street West, Suite 301, Toronto, Ontario, M5H 1L6
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(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 Shares, no par value
------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
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:
10,578,645 COMMON SHARES AT DECEMBER 6, 2002
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NO PREFERENCE SHARES ISSUED AND OUTSTANDING AT DECEMBER 6, 2002
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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 _ Inapplicable _
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 X Item 18 _
(Applicable only to Issuers involved in bankruptcy proceedings during the
past five years)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court:
Yes _ No _ Inapplicable X
ENERGY POWER SYSTEMS LIMITED FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1 Identity of Directors, Senior Management and Advisers .
(Not Applicable)
Item 2 Offer Statistics and Expected Timetable .
(Not Applicable)
Item 3 Key Information
Item 4 Information on the Company
Item 5 Operating and Financial Review and Prospects .
Item 6 Directors, Senior Management and Employees .
Item 7 Major Shareholders and Related Party Transactions .
Item 8 Financial Information
Item 9 The Offer and Listing
Item 10 Additional Information
Item 11 Quantitative and Qualitative Information 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
ENERGY POWER SYSTEMS LIMITED FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
PAGE
Item 15 Certain Disclosures
Item 16 [Reserved]
Item 17 Financial Statements
PART II
Item 19 Exhibits .
PART I
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), which reflect the Company's
current expectations regarding the future results of operations, performance and
achievements of the Company. The Company has tried, wherever possible, to
identify these forward-looking statements by, among other things, using words
such as "anticipate," "believe," "estimate," "expect" and similar expressions.
These statements reflect the current beliefs of management of the Company, and
are based on current available information. Accordingly, these statements are
subject to known and unknown risks, uncertainties and other factors which could
cause the actual results, performance or achievements of the Company to differ
materially from those expressed in, or implied by, these statements. (See, in
general, "Item 3. Key Information - Risk Factors" below.) The Company is not
obligated to update or revise these "forward-looking" statements to reflect new
events or circumstances.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
Energy Power Systems Limited ("EPS" or the "Company") for its twelve-month
fiscal periods ended June 30, 1998, June 30, 1999, June 30, 2000, June 30, 2001
and June 30, 2002, and are presented pursuant to Canadian Generally Accepted
Accounting Principles ("GAAP").
The selected consolidated statement of operations data set forth below are
for the twelve-month fiscal periods ended June 30, 1998, June 30, 1999, June 30,
2000, June 30, 2001 and June 30, 2002, and the selected consolidated balance
sheet data set forth below are as of June 30, 1998 through June 30, 2002. The
June 30, 2000, June 30, 2001 and June 30, 2002 statement of operations data and
June 30, 2002 and June 30, 2001 balance sheet data are derived from the
consolidated financial statements of the Company, which have been audited by BDO
Dunwoody LLP, Chartered Accountants. Financial data from previous years were
derived from the consolidated financial statements of the Company, which were
audited by Ernst & Young LLP, Chartered Accountants. The consolidated balance
sheet data set forth below at June 30, 1998 June 30, 1999 and June 30, 2000 and
operations data for the years ended June 30, 1998 and 1999 are derived from
audited financial statements not included elsewhere in this Annual Report.
The selected financial data should be read in conjunction with the
consolidated financial statements of the Company for the years ended June 30,
2002, June 30, 2001 and 2000 included elsewhere in this Annual Report and with
"Item 5 - Operating and Financial Review and Prospects" herein.
ENERGY POWER SYSTEMS LIMITED
PRESENTED PURSUANT TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CANADIAN $000S, EXCEPT % ITEMS AND PER SHARE DATA)
As of and for the
Twelve Month Period Ended June 30,
----------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- ------- --------
(Audited)
Statement of Operations Data:
Revenue - Industrial & Offshore Division (1) . . . . . . $ 28,803 $21,080 $18,924 $18,770 21,562
Revenue - Oil & Gas Division(1). . . . . . . . . . . . . - - - 314 448
Total Revenue. . . . . . . . . . . . . . . . . . . . . . 28,803 21,080 18,924 19,084 22,010
Cost of revenue - Industrial & Offshore Division(1). . . 24,843 17,923 15,128 16,420 18,400
Cost of revenue - Oil and Gas Division(1). . . . . . . . - - - 151 637
Total cost of revenue. . . . . . . . . . . . . . . . . . 24,843 17,923 15,128 16,571 19,037
Gross profit - Industrial & Offshore Division(1) . . . . 3,960 3,157 3,796 2,350 3,162
Gross profit - Oil & Gas Division(1) . . . . . . . . . . - - - 163 (189)
Total gross profit . . . . . . . . . . . . . . . . . . . 3,960 3,157 3,796 2,513 2,973
Income (loss) from operations. . . . . . . . . . . . . . 342 (1,550) (892) (1,966) (401)
Interest expense . . . . . . . . . . . . . . . . . . . . 235 232 214 257 136
Net loss from continuing operations before income taxes. (555) (2,069) (1,106) (2,223) (537)
Income taxes (benefit) . . . . . . . . . . . . . . . . . 41 215 331 (1,248) 594
Net loss from continuing operations. . . . . . . . . . . (596) (2,284) (1,437) (975) (1,131)
Loss from discontinued operations(3) . . . . . . . . . . (3,738) (5,697) (1,251) (2,660) -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . (4,334) (7,981) (2,688) (3,635) (1,131)
Weighted average common shares outstanding(2). . . . . . 1,886 2,307 3,136 4,257 6,638
Net loss from continuing Operations per share. . . . . . $ (0.32) $ (0.99) $ (0.46) $ (0.23) $ (0.17)
Net loss per share . . . . . . . . . . . . . . . . . . . $ (2.30) $ (3.46) $ (0.86) $ (0.85) $ (0.17)
As of and for the
Twelve Month Period Ended June 30,
----------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- ------- --------
(Audited)
Other Financial Data:
Cash flows provided by (used in)
Operating activities . . . . . . . . . . . . . . . (3,463) (646) (2,529) (1,313) (2,021)
Investing activities . . . . . . . . . . . . . . . 8,763 (2,601) 6,597 1,150 (2,999)
Financing activities . . . . . . . . . . . . . . . (6,237) 3,470 (2,534) (365) 9,387
Purchase of capital assets for cash . . . . . . . . . $ 873 $ 264 $ 181 $ 214 $ 163
Purchase of oil and gas properties for cash . . . . . - - - 1,728 2,759
Gross profit margin - Industrial & Offshore Division. 14% 15% 20% 13% 15%
Gross profit margin - Oil & Gas Division. . . . . . . - - - 52% -42%
Balance Sheet Information:
Working capital (deficiency). . . . . . . . . . . . . $ (3,104) $(4,542) $(1,925) $ 4,205 $ 7,314
Total assets. . . . . . . . . . . . . . . . . . . . . 29,002 30,051 23,511 19,050 25,314
Due to shareholders, less current portion . . . . . . 4,584 4,026 1,842 350 -
Total long-term debt, less current portion. . . . . . 3,243 2,333 738 646 502
Non-controlling interest. . . . . . . . . . . . . . . 1,382 - - - -
Shareholders' equity. . . . . . . . . . . . . . . . . 5,665 13,402 12,107 11,357 18,059
___________________
(1) Divisional information is presented based on the operations of the
subsidiaries within the division. Head office expenses are presented
separately.
(2) Adjusted for a four-for-one share consolidation effective January 29,
1999 and four-for-one share consolidation effective February 6, 2001.
(3) During fiscal 2001 the Company discontinued efforts to act as a
developer of independent power projects. As a result, the Power Division has
been treated as discontinued operations for accounting purposes, and prior
years' statements of operations have been restated.
During fiscal 2000 EPS disposed of its interest in Merlin Engineering and
suspended the operations of Atlantic Seaboard Holdings Inc. The activities
of these subsidiaries have been treated as discontinued operations for
accounting purposes. As a result, prior years' statements of operations have
been restated.
(4) See "Item 5 - Operating and Financial Review and Prospects - Critical
Accounting Principles and Estimates" below.
The following table sets forth selected consolidated financial data of the
Company as set forth in the preceding table, as reconciled pursuant to United
States Generally Accepted Accounting Principles:
ENERGY POWER SYSTEMS LIMITED
PRESENTED PURSUANT TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CANADIAN $000S, EXCEPT % ITEMS AND PER SHARE DATA)
As of and for the
Twelve Month Period Ended June 30,
----------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- ------- --------
(Audited)
Statement of Operations Data:
Revenue - Industrial & Offshore Division (1) . . . . . $ 28,803 $21,080 $18,924 $18,770 21,562
Revenue - Oil & Gas Division(1). . . . . . . . . . . . - - - 314 448
Total revenue. . . . . . . . . . . . . . . . . . . . . 28,803 21,080 18,924 19,084 22,010
Cost of revenue - Industrial & Offshore Division(1). . 24,843 17,923 15,128 16,420 18,400
Cost of revenue - Oil and Gas Division(1). . . . . . . - - - 151 1,681
Total cost of revenue. . . . . . . . . . . . . . . . . 24,843 17,923 15,128 16,571 20,081
Gross profit - Industrial & Offshore Division(1) . . . 3,960 3,157 3,796 2,350 3,162
Gross profit - Oil & Gas Division(1) . . . . . . . . . - - - 163 (1,233)
Total gross profit . . . . . . . . . . . . . . . . . . 3,960 3,157 3,796 2,513 1,929
Income (loss) from operations. . . . . . . . . . . . . 342 (1,649) (892) (2,170) (1,556)
Interest expense . . . . . . . . . . . . . . . . . . . 235 232 563 436 291
Net loss from continuing operations before tax . . . . (555) (2,167) (1,455) (2,606) (1,847)
Income taxes (benefit) . . . . . . . . . . . . . . . . - 215 331 (1,248) 594
Net loss from continuing operations. . . . . . . . . . (555) (2,382) (1,786) (1,358) (2,441)
Loss from discontinued operations(3) . . . . . . . . . (3,738) (5,697) (1,251) (2,660) -
Cumulative effect of a change in accounting principle. - - - - 2,057
Net loss . . . . . . . . . . . . . . . . . . . . . . . (4,293) (8,079) (3,037) (4,018) (4,498)
Deemed dividend on preferred shares. . . . . . . . . . - - - 420 -
Net loss available for common shareholders . . . . . . (4,293) (8,079) (3,037) (4,438) (4,498)
Weighted average common shares outstanding(2). . . . . 1,886 2,307 3,136 4,257 6,638
Net loss from continuing Operations per share. . . . . $ (0.29) $ (1.03) $ (0.57) $ (0.42) $ (0.37)
Net loss per share . . . . . . . . . . . . . . . . . . $ (2.28) $ (3.50) $ (0.97) $ (1.04) $ (0.68)
As of and for the
Twelve Month Period Ended June 30,
----------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- ------- --------
(Audited)
Other Financial Data:
Cash flows provided by (used in)
Operating activities . . . . . . . . . . . . . . . (3,463) (646) (2,529) (1,313) (2,021)
Investing activities . . . . . . . . . . . . . . . 8,763 (2,601) 6,597 1,150 (2,999)
Financing activities . . . . . . . . . . . . . . . (6,237) 3,470 (2,534) (365) 9,387
Purchase of capital assets for cash . . . . . . . . . $ 873 $ 264 $ 181 $ 214 $ 163
Purchase of oil and gas properties for cash . . . . . - - - 1,728 2,759
Gross profit margin - Industrial & Offshore Division. 14% 15% 20% 13% 15%
Gross profit margin - Oil & Gas Division. . . . . . . - - - 43% (275%)
Balance Sheet Information:
Working capital (deficiency). . . . . . . . . . . . . $ (3,104) $(4,542) $(1,812) $ 4,321 $ 7,314
Total assets. . . . . . . . . . . . . . . . . . . . . 29,002 30,051 23,511 19,084 24,270
Due to shareholders, less current portion . . . . . . 4,584 4,026 1,736 277 -
Total long-term debt, less current portion. . . . . . 3,243 2,333 738 646 502
Non-controlling interest. . . . . . . . . . . . . . . 1,382 - - - -
Shareholders' equity. . . . . . . . . . . . . . . . . 5,706 13,402 12,326 11,546 17,015
____________________
(1) Divisional information is presented based on the operations of the
subsidiaries within the division. Head office expenses are presented
separately.
(2) Adjusted for a four-for-one share consolidation effective January 29,
1999 and four-for-one share consolidation effective February 6, 2001.
(3) During fiscal 2001 the Company discontinued efforts to act as a
developer of independent power projects. As a result, the Power Division has
been treated as discontinued operations for accounting purposes, and prior
years' statements of operations have been restated.
During fiscal 2000 EPS disposed of its interest in Merlin Engineering and
suspended the operations of Atlantic Seaboard Holdings Inc. The activities
of these subsidiaries have been treated as discontinued operations for
accounting purposes. As a result, prior years' statements of operations have
been restated.
(4) See "Item 5 - Operating and Financial Review and Prospects - Critical
Accounting Principles and Estimates" below.
EXCHANGE RATE INFORMATION
The Company's accounts are maintained in Canadian dollars. In this Annual
Report, all dollar amounts are expressed in Canadian dollars except where
otherwise indicated.
The exchange rate used for the purpose of this Annual Report (other than
financial statement information) for the conversion of Canadian dollars ("CDN$")
into United States dollars ("US$") was US$0.6386 as of December 6, 2002). The
following table sets forth the exchange rates for the conversion of one Canadian
dollar into one United States dollar at the end of the following periods, the
high and low rates of exchange for such periods, and the average exchange rates
(based upon the average of the exchange rates on the last day of each month
during the periods). The rates of exchange set forth herein are derived from
the reciprocals of the noon buying rates in New York City for cable transfers
payable in Canadian dollars, as certified for customs purposes by the Federal
Reserve Bank of New York. The source of this data is the Federal Reserve
Bulletin and Digest.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Period End 0.66 0.66 0.68 0.68 0.68
Low. . . . 0.62 0.63 0.66 0.63 0.69
High . . . 0.66 0.68 0.70 0.69 0.73
Average* . 0.64 0.66 0.68 0.66 0.71
*Calculated by using the average of the exchange rates on the last day of each
month during the period.
December, November, October, September, August, July,
2002(1) 2002 2002 2002 2002 2002
------------------ ----------- --------- --------- ------- -----
Low 0.64 0.63 0.63 0.63 0.63 0.63
High 0.64 0.64 0.64 0.64 0.64 0.66
(1) Information for December 2002 is up to December 6, 2002.
The rate of exchange for the conversion of United States dollars into Canadian
dollars at December 6, 2002 was (US$1 = CDN$1.566 ).
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
The Company is subject to a number of significant uncertainties and risks,
including, without limitation, those described below and those described
elsewhere in this Annual Report, any of which may affect the Company in a manner
and to a degree which cannot be foreseen at this time.
GENERAL RISK FACTORS
EXPERIENCED A HISTORY OF LOSSES AND LIMITED OPERATING HISTORY. To date, we
have incurred significant losses. The Company has a limited operating history
upon which any evaluation of the Company and its long-term prospects might be
based. Although the Industrial & Offshore Division has been in business for many
years, the Company did not commence its business plan for the exploitation of
oil and gas until February of 2001. The Company is subject to the risks
inherent in a new business enterprise, as well as the more general risks
inherent to the operation of an established business. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
encountered by all companies engaged in the extremely volatile and competitive
oil and gas markets and industrial and fabrication and installation. Any future
success that the Company might achieve will depend upon many factors, including
factors which will be beyond its control. These factors may include changes in
technologies, price and product competition, developments and changes in the
international oil and gas market, changes in the Company's strategy, changes in
expenses, fluctuations in foreign currency exchange rates, general economic
conditions, both in the United States and Canada, and economic and regulatory
conditions specific to the areas in which the Company competes, among others. To
address these risks, the Company must, among other things, continue to respond
to competitive developments; attract, retain and motivate qualified personnel;
implement and successfully execute its business plan; comply with environmental
regulations; expand its portfolio of proven and prospective oil and gas
properties and /or negotiate additional working interests and prospect
participations; and expand and replace depleting oil and gas reserves. There can
be no assurance that the Company will be successful in addressing these risks.
VARIABILITY OF OPERATING RESULTS. The Company's operating results may in
the future fluctuate significantly depending upon a number of factors including
industry conditions, prices of oil and gas, rate of drilling success, rates of
production from completed wells and the timing of capital expenditures. Such
variability could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any failure or
delay in the realization of expected cash flows from operating activities could
limit the Company's future ability to continue exploration and to participate in
economically attractive oil and gas projects and/or industrial and offshore
projects.
MANAGEMENT OF GROWTH. The success of the Company will depend upon the
rapid expansion of its business. Such expansion will place a significant strain
on the Company's financial, management and other resources and will require the
Company to: (i) change, expand and improve its operating, managerial and
financial systems and controls; (ii) improve coordination between corporate
functions; and (iii) hire additional engineering, geophysical, geological,
professional, administrative and managerial personnel, among others. There can
be no assurance that the Company will be successful in hiring or retaining these
personnel to the extent required, or that it will be able to manage the
expansion of its operations effectively. If the Company were unable to
effectively manage growth, or if new personnel were unable to achieve
anticipated performance levels, the Company's business, financial position and
results of operations would be materially and adversely affected.
NEED FOR ADDITIONAL CAPITAL. Both the exploration and development of oil
and gas reserves (through the Oil & Gas Division) and the construction and
fabrication of infrastructure projects (through the Industrial and Offshore
Division) can be a capital intensive business. The Company makes, and will
continue to make, substantial expenditures for the exploration of oil and gas
and the construction and fabrication of infrastructure projects. Historically,
the Company has financed operations primarily with proceeds from the sale of its
equity securities in private offerings and loans from its principal
shareholders. The Company's management believes that the Company will be able
to finance its operations for the immediate future through existing working
capital and loan proceeds. The Company intends to satisfy any additional
working capital requirements from cash flow and by raising capital through
public or private sales of debt or equity securities, debt financing or
short-term loans, or a combination of the foregoing. The Company has no current
arrangements for obtaining additional capital, and no assurance can be given
that the Company, particularly due to its limited operating history and lack of
profits, will be able to secure additional capital, or on terms which will not
be objectionable to the Company or its then existing shareholders. Under such
circumstances, the failure or inability of the Company to obtain additional
capital on acceptable terms or at all could have a material adverse effect on
the Company, which could result in the Company being forced to materially scale
back or suspend operations, or forcing the Company to seek a merger or sale to a
third party.
OPERATING HAZARDS. The exploration and development projects in which the
Company will participate will be subject to the usual hazards incident to the
drilling of oil and gas wells, and construction and fabrication, such as
explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution,
and other environmental risks, machinery and equipment problems, and other such
risks. These hazards can cause personal injury and loss of life, severe damage
to and destruction of property and equipment, environmental damage and
suspension of operations. Company management may, in accordance with prevailing
industry practice, obtain insurance against some, but not all, of these risks.
The occurrence of an uninsured casualty or claim against the Company would have
an adverse impact on the financial condition of the Company.
OUR BUSINESS INVOLVES SIGNIFICANT CREDIT RISKS. Our Industrial & Offshore
Division usually must outlay our own funds to cover cost analysis, design and
similar costs associated with a contract. We can collect on such development
work only if we are the successful bidder, and then only on a delayed basis, if
at all. To the extent that our operations do not proceed as anticipated or we
do not win contracts for which we have expended development funds, we will need
additional funds to develop other business opportunities. If we are unable to
secure additional funding, or if we are unable to obtain adequate funds from
operations or external sources when required, such inability would have a
material adverse effect on the Company as a whole.
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATIONS WHICH INCREASE COSTS
AND SUBJECT US TO POTENTIAL LIABILITY. Our operations are subject to
environmental regulations promulgated from time to time by government agencies.
Environmental legislation provides for restrictions and prohibitions on spills,
releases or emissions of various substances produced in association with metal
fabrication, industrial installation and oil and gas activities, which would
result in environmental pollution. A violation of such legislation may result
in the imposition of fines and penalties. Environmental legislation is evolving
in a manner which will lead to stricter standards and enforcement and increasing
fines and penalties for non-compliance. The cost of compliance with changes in
governmental regulations have the potential to reduce the profitability of our
operations.
FOREIGN LAW MAY HINDER OUR ABILITY TO REPATRIATE FOREIGN HELD INVESTMENTS.
There may be restriction on the withdrawal of capital from a country in which
the Company is operating and other factors. There is no assurance that the laws
of any jurisdiction in which the Company holds investments may not change in a
manner that materially and adversely affects the business of the Company.
LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS. Our ability to continue our
business and to develop a competitive edge in the marketplace depends, in large
part, on our ability to attract and maintain qualified management and
engineering personnel. Competition for such personnel is intense, and there can
be no assurance that we will be able to attract and retain such personnel. Our
development to date has depended, and in the future will continue to depend, on
the efforts of our key executive officers, management and technical employees,
including our Chairman of the Board of Directors, James C. Cassina, President
and Secretary, Sandra J. Hall, John Brake, Chairman and Chief Executive Officer
of M&M Engineering Limited ("M&M") and M&M Offshore Limited ("MMO") and David
Myers President of M&M and President of MMO. The loss of any of these
individuals could have a material adverse effect on the Company.
RISK FACTORS RELATING TO MECHANICAL CONTRACTING AND FABRICATION
WE MAY BE UNABLE TO MANAGE OUR CREDIT RISK. With respect to mechanical
contracting, we are subject to the risk that a building or property owner will
be unable to pay for work performed and commitments made by us in the
performance of a contract. While we are typically paid monthly for work
performed to date, requisitions could remain unpaid for several months before we
take steps to limit our exposure. Slow receipt on collections can also result
from a general contractor's or an owner's financial or cash flow difficulties.
CHANGE ORDERS BRING RISK OF PRICE DISPUTES. In the course of construction,
an owner will often order changes in work. To avoid delays in the project, work
pursuant to a change order may commence prior to reaching an agreement on price
associated with the change order. Disputes may arise over price adjustments,
which may delay payment or reduce the amount of proceeds we receive. We
generally book payments due to change orders only when there is a contractual
right to payment or the owner or prime contractor agrees that an amount is due,
and then we book only the amount we deem to be reasonably collectible. However,
there can be no assurance that we will not incur losses as a result of change
orders.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our results of
operations may fluctuate significantly from quarter to quarter or year to year
because of a number of factors, including seasonal fluctuations in the demand
for mechanical contracting and fabrication (particularly lower demand during the
winter months) and competitive factors. Accordingly, quarterly comparisons of
our revenue and operating results should not be relied on as an indication of
future performance and the results of any quarterly period may not be indicative
of results to be expected for a full year.
MECHANICAL CONTRACTING AND FABRICATION INVOLVE A HIGH DEGREE OF OPERATIONAL
RISK. Our fabrication operations involve certain operating hazards that can
cause personal injury or loss of life, severe damage to and destruction of
property and equipment and suspension of operations. The failure of structural
components during and after installation can result in similar injuries and
damages. Litigation arising from such events may result in our being named a
defendant in lawsuits asserting large claims. We maintain such insurance
protection as we deem prudent. However, certain risks are either not insurable
or insurance is available only at rates that we consider uneconomical. There
can be no assurance that any such insurance will be sufficient or effective
under all circumstances or against all hazards to which we may be subject. A
successful claim for which we are not fully insured could have a material
adverse effect on the Company. Moreover, no assurance can be given that we will
be able to maintain adequate insurance in the future at rates we consider
reasonable.
THE MECHANICAL CONTRACTING AND FABRICATION BUSINESS IS HIGHLY COMPETITIVE.
In recent years the industry has been characterized by overcapacity, which
resulted in substantial pressure on pricing and operating margins. Overcapacity
in the industry may recur in the future. Contracts for mechanical contracting
and fabrication are usually awarded on a competitive bid basis. Although we
believe customers consider, among other things, the availability and technical
capabilities of equipment and personnel, efficiency, condition of equipment,
safety record and reputation, price competition is a primary factor in
determining which qualified contractor with available equipment is awarded a
contract. Some of our competitors, especially regional and national entities
outside of the Newfoundland area, are larger and have greater technical and
financial resources than we do.
OUR WORKERS HAVE UNION CONTRACTS. We are required to obtain all of our
labor for construction projects from unions pursuant to union contracts. The
union contracts impose standard wages, benefits and work rules which are more
costly than non-union labor. We believe that we maintain excellent
relationships with our unions, but could face a strike if union contracts are
not successfully negotiated. In addition, union workers typically refuse to
cross picket lines established by other striking union workers, and if they do
report for work during a strike, they may be unable to work due to lack of
materials or the failure of other contractors to complete their work.
RISK FACTORS RELATING TO INDEPENDENT POWER PROJECTS
DEVELOPMENT OF INDEPENDENT POWER PROJECTS ("IPPS") CANNOT BE ASSURED. The
successful completion of IPPs can be particularly difficult in countries which
have not uniformly embraced privatization, or where politically motivated
opposition is routinely mounted to initiatives of the existing leadership. In
addition, the development of IPPs sometimes results in litigation or threatened
litigation which must be resolved before successful development of IPPs can
occur.
HIGH DEBT LEVELS SUBJECT US TO RISK OF FORECLOSURE. Existing power
projects are expected to be highly leveraged. The indebtedness is typically
collateralized by the assets of the underlying project, and the Company's
ownership interest is typically subordinated to the lenders' interests. Should
a lender foreclose on a project's assets, there can be no assurance that the the
Company as an investor will maintain any ownership interest in the project, or
receive any compensation upon a sale of the foreclosed assets by such lender(s).
In addition to the foreclosure risk, high leverage and the lack of unencumbered
collateral can adversely affect the ability to obtain additional financing in
the future for working capital, capital expenditures or other purposes of the
particular plant. Such adverse consequences could have material and adverse
affect on the Company.
OUR INVESTMENT IN IPPS MAY NOT FUNCTION PROPERLY OR MAY SUFFER DAMAGES.
Our investment in IPPs involve many risks, including the breakdown or failure of
equipment or the performance of equipment at levels below those originally
projected, whether due to unexpected wear and tear, misuse or unexpected
degradation. Any of the foregoing could significantly reduce or eliminate
project revenues, or increase the cost of operating the project (including
maintenance and repair costs), thereby reducing our net income and funds
available. In addition, catastrophic events such as fires, earthquakes, floods,
volcanic eruptions or other similar events could result in personal injury, loss
of life, severe damage or destruction of our assets or suspension of operations.
Although the affiliated owner/operators will maintain insurance (including in
some cases, business interruption insurance) to protect against certain of these
risks, the proceeds of such insurance may not be adequate to cover reduced
revenues, increased expenses or other liabilities arising from the occurrence of
any of the events described above. Moreover, there can be no assurance that
such insurance coverage will be available in the future at commercially
reasonable rates, or that the insurance will cover all losses.
OUR FOREIGN OPERATIONS ENTAIL CURRENCY EXCHANGE RISKS. Our investments in
developing countries will make us subject to foreign currency fluctuations, and
such fluctuations may adversely affect our financial position and results.
Development costs and power sales may be in the buyer's currency. Hence,
decreases in the exchange rate for converting the foreign currency to Canadian
dollars would have an adverse effect on the Company. There can be no assurance
that any steps taken by management to address foreign currency fluctuations will
mitigate these adverse effects and, accordingly, the Company may suffer losses
due to such fluctuations.
UNCERTAIN POLITICAL AND ECONOMIC CONDITIONS COULD AFFECT OUR PROJECTS.
General political and economic conditions in the countries in which the project
investments are located could significantly affect each project's prospects.
The economies of many project countries differ significantly from the economies
of developed countries in many respects, including their structure, levels of
capital reinvestment, growth rate, government involvement, resource allocation,
self-sufficiency, rate of inflation and balance of payments position in
international trade. The success of the projects will depend upon the existence
of a political and economic environment which will accommodate project
development. In addition, future government actions concerning their economies
or the operation and regulation of nationally important facilities such as power
plants, have and will have a significant effect on operations. There can be no
assurance that future government actions over which we have no control will not
materially adversely affect a project's operations in a given country or our
financial condition as a whole.
FOREIGN OPERATIONS ENTAIL LEGAL RISKS. Each material agreement to which we
are a party relating to contracts for equity participation of power facilities
located in foreign countries may be governed by the laws of a foreign country,
and there are no assurances that such agreements can be enforced in Canadian
courts. The inability to enforce such agreements in Canada may have a material
adverse effect on the applicable project. Certain project countries do not have
well-developed legal systems and lack a developed, consolidated body of laws
governing foreign investment enterprises. In addition, the administration of
laws and regulations by government agencies in such countries may be subject to
considerable discretion. The projects may be adversely affected by new laws and
changes to existing laws (or interpretations thereof).
REGULATORY RISKS. All power projects in India are subject to governmental
and electric power regulation in virtually all aspects of their operations,
including, but not limited to, the amount and timing of electricity generation,
the performance of scheduled maintenance, compliance with power grid control and
dispatch directives, foreign ownership restrictions, dividend separation
restrictions and restrictions on fuel importation. Although the Company
anticipates that all necessary approvals eventually will be received, there can
be no assurance that this will occur, and the time and expense of obtaining such
approvals cannot be accurately predicted. In addition, there can be no
assurance that the number of required approvals will not be increased, or that
the requirements for such approvals will not be made more stringent in the
future.
RISK FACTORS RELATING TO OIL AND GAS DEVELOPMENT AND PRODUCTION
UNCERTAIN DISCOVERY OF VIABLE COMMERCIAL PROSPECTS. The Company's future
success may be dependent upon its ability to economically locate commercially
viable oil or gas deposits. The Company can make no representations, warranties
or guaranties that it will be able to consistently locate hydrocarbons or oil
and gas prospects, or that such prospects will be commercially exploitable.
There can be no assurance that the Company will be able to discover commercial
quantities of oil and gas. An inability of the Company to identify and exploit
commercially viable hydrocarbon deposits would have a material and adverse
effect on the Company's business and financial position.
RISK OF EXPLORATORY DRILLING ACTIVITIES. Pursuant to the Company's
business plan, the Company's Oil & Gas Division's revenues and cash flow will be
principally dependent upon the success of drilling and production from prospects
in which the Company participates. The success of such prospects will be
determined by the economical location, development and production of commercial
quantities of hydrocarbons. Exploratory drilling is subject to numerous risks,
including the risk that no commercially productive oil and gas reservoirs will
be encountered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors including unexpected formation and drilling
conditions, pressure or other irregularities in formations, blowouts, equipment
failures or accidents, as well as weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment.
The inability to successfully locate and drill wells that will economically
produce commercial quantities of oil and gas could have a material adverse
effect on the Company's business, financial position and results of operations.
DRILLING AND EXPLORATIONS PLANS SUBJECT TO CHANGE. This report includes
descriptions of the Company's future drilling and explorations plans with
respect to its properties. A prospect is a property which the Company and its
partners have identified what they believe based on available geological and
geophysical information to be indications of hydrocarbons. The Company's
properties are in various stages of exploration. Whether the Company ultimately
drills a property may depend of the following factors; receipt of additional
seismic data or reprocessing of existing data; material changes in oil or gas
prices; the costs and availability of drilling equipment; success or failure of
wells drilled in similar formations or which would use the same production
facilities; changes in estimates of costs to drill or complete wells; the
Company's ability to attract other industry partners to acquire a portion of
it's working interest to reduce exposure to costs of drilling and completion of
wells; decisions of the Company's joint working interest owners; and
restrictions of provincial regulators.
RESTRICTIONS ON DEVELOPMENT AND PRODUCTION AS A NON-OPERATOR. The Company
holds minority interests in certain of its properties, and therefore cannot
control the pace of an exploration or development program effecting drilling of
wells, or a plan for development and production. If a majority partner decides
to accelerate development of a program it may exceed the Company's ability to
meet its share of costs at a faster pace than anticipated and may surpass the
Company's ability to further finance its ongoing proportional obligation to fund
costs. If the Company were unable to meet its funding obligations with respect
to one or more propects(s), its proportional working interest in such
prospects(s) would be diluted.
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's Oil & Gas
Division's ultimate profitability, cash flow and future growth will be affected
by changes in prevailing oil and gas prices. Oil and gas prices have been
subject to wide fluctuations in recent years in response to changes in the
supply and demand for oil and natural gas, to market uncertainty and a variety
of additional factors that are beyond the control of the Company, including
economic, political and regulatory developments, and competition from other
sources of energy. It is impossible to predict future oil and natural gas price
movements with any certainty. The Company does not engage in hedging
activities. As a result, the Company may be more adversely affected by
fluctuations in oil and gas prices than other industry participants that do
engage in such activities. No assurances can be given as to the future level of
activity in the Company's Oil & Gas Division. An extended or substantial decline
in oil and gas prices would have a material adverse effect on (i) the volume of
oil and gas that could be economically produced by the Company; (ii) the
Company's access to capital; and (iii) the Company's financial position and
results of operations.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE EVENTS. Certain statements
included in this report contain estimates of the Company's oil and gas reserves
and the discounted future net revenues from those reserves, as prepared by
independent petroleum engineers and/or the Company. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves,
including many factors beyond the control of the Company. Those estimates are
based on several assumptions including constant oil and gas prices. Such
estimates are inherently imprecise indications of future net revenues. Actual
future production, revenues, taxes, operating expenses, development expenditures
and quantities of recoverable oil and gas reserves might vary substantially from
those assumed estimates. Any significant variance in these assumptions could
materially affect the estimated quantity and value of reserves. In addition the
Company's reserves might be subject to revisions based on upon future
production, results of future exploration and development, prevailing oil and
gas prices and other factors. Moreover, estimates of the economically
recoverable oil and gas reserves, classifications of such reserves and estimates
of future net cash flows prepared by independent engineers at different times
may vary substantially. Information about reserves constitutes forward-looking
statements.
ABILITY TO REPLACE RESERVES. The Company's future success of the Oil & Gas
Division depends upon its ability to find, develop and acquire oil and gas
reserves that are economically recoverable. As a result the Company must locate
and develop or acquire new oil and gas reserves to replace those being depleted
by production. Without successful exploration and acquisition activities, the
Company's reserves production and revenues will decline. No assurances can be
made that the Company will be able to find and develop or acquire additional
reserves at an acceptable cost.
COMPETITION. The Company's Oil & Gas Division will engage in the
exploration for and production of oil and gas, industries which are highly
competitive. The Company competes directly and indirectly with major and
independent oil and gas companies in its exploration for and development of
desirable oil and gas properties. Many companies and individuals are engaged in
the business of acquiring interests in and developing oil and gas properties in
the United States and Canada, and the industry is not dominated by any single
competitor or a small number of competitors. Many of such competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater historical market acceptance than the Company. The
Company's Oil & Gas Division will compete with numerous industry participants
for the acquisition of land and rights to prospects, and for the equipment and
labor required to operate and develop such prospects. Competition could
materially and adversely affect the Company's business, operating results and
financial condition. Such competitive disadvantages could adversely affect the
Company's ability to participate in projects with favorable rates of return.
CANADIAN GOVERNMENT REGULATION AND INDUSTRY CONDITIONS
COMPLIANCE WITH GOVERNMENTAL REGULATIONS. The oil and natural gas industry
is subject to extensive controls and regulations imposed by various levels of
the federal and provincial governments in Canada. It is not expected that any
of these controls or regulations will affect the operations of the Company in a
manner materially different than they would affect other oil and gas companies
of similar size. All current legislation is a matter of public record and the
Company is unable to accurately predict what additional legislation or
amendments may be enacted. All of the governmental regulations noted below may
be changed from time to time in response to economic or political conditions.
Company management believes that the trend of more expansive and stricter
environmental laws and regulations will continue. The implementation of new or
modified environmental laws or regulations could have a material adverse impact
on the Company.
CANADIAN GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS. The Company is
subject to various Canadian federal and provincial laws and regulations
including environmental laws and regulations. The Company believes that it is
in compliance with such laws and regulations, however, such laws and regulations
may change in the future in a manner which will increase the burden and cost of
compliance. In addition, the Company could incur significant liability for
damages, clean-up costs and penalties in the event of certain discharges into
the environment.
Certain laws and governmental regulations may impose liability on the
Company for personal injuries, clean-up costs, environmental damages and
property damages, as well as administrative, civil and criminal penalties. The
Company maintains limited insurance coverage for sudden and accidental
environmental damages, but does not maintain insurance coverage for the full
potential liability that could be caused by sudden and accidental
environmental damage. Accordingly, the Company may be subject to liability or
may be required to cease production from properties in the event of such
damages.
PROVINCIAL REGULATION - ROYALTIES AND INCENTIVES. In addition to federal
regulation, each province has legislation and regulations which govern land
tenure, royalties, production rates, extra-provincial export, environmental
protection and other matters. The royalty regime is a significant factor in the
profitability of oil and natural gas production. Royalties payable on
production from lands other than Crown lands are determined by negotiations
between the mineral owner and the lessee. Crown royalties are determined by
government regulation and are generally calculated as a percentage of the value
of the gross production, and the rate of royalties payable generally depends in
part on prescribed reference prices, well productivity, geographical location,
field discovery date and the type or quality of the petroleum product produced.
From time to time the governments of Canada, Alberta, British Columbia and
Saskatchewan have established incentive programs which have included royalty
rate reductions, royalty holidays and tax credits for the purpose of encouraging
oil and natural gas exploration or enhanced planning projects.
RISKS RELATING TO THE COMPANY'S COMMON STOCK
POSSIBLE VOLATILITY OF STOCK PRICE. The market price for the Company's
Common Stock may be volatile and subject to significant fluctuations in response
to a variety of internal and external factors, including the liquidity of the
market for the Common Stock, variations in the Company's quarterly operating
results, regulatory or other changes in the oil and gas industry generally,
announcements of business developments by the Company or its competitors,
changes in operating costs and variations in general market conditions. Because
the Company's Oil & Gas Division is in the development stage with a limited
operating history, the market price for the Company's Common Stock may be more
volatile than that of a seasoned issuer. Changes in the market price of the
Company' securities may have no connection with the Company's operating results.
No predictions or projections can be made as to what the prevailing market price
for the Company's Common Stock will be at any time.
PUBLIC TRADING MARKET. There is only a limited public market for the
Company's Common Stock, and no assurance can be given that a broad and/or active
public trading market will develop or be sustained. The Company's Common Stock
trades on the American Stock Exchange and the Frankfurt Stock Exchange. However,
there can be no assurance that the Company will continue to meet and maintain
listing requirements on either stock exchange. In addition, the Common Stock of
the Company has not been qualified under any applicable state blue sky laws, and
the Company is under no obligation to so qualify or register the Common Stock,
or otherwise take action to improve the public market for such securities. The
Company's Common Stock could have limited marketability due to the following
factors, each of which could impair the timing, value and market for such
securities: (i) lack of profits, (ii)need for additional capital, (ii) the
limited public market for such securities; (iii) the applicability of certain
resale requirements under the applicable Securities Act; (iv) applicable blue
sky laws and the other factors discussed in this Risk Factors section.
NO LIKELIHOOD OF DIVIDENDS. The Company plans to retain all available
funds for use in its business, and therefore does not plan to pay any cash
dividends with respect to its securities in the foreseeable future.
NO ASSURANCE OF LIQUIDATION DISTRIBUTION. If the Company were to be
liquidated or dissolved, holders of shares of its capital stock would be
entitled to share ratably in its assets only after satisfaction of the Company's
liabilities. After satisfaction of those liabilities and satisfaction of any
liquidation preference with respect to any then outstanding senior securities of
the Company (if any), the holders of the Common Stock would share ratably in the
remaining assets of the Company.
POTENTIAL ISSUANCE OF ADDITIONAL STOCK. As of the date of this Annual
Report the Company has outstanding (i) options to purchase up to 295,000 shares
of Common Stock issued to certain employees, directors and/or consultants, and
(ii) 40,000 outstanding warrants to purchase Common Stock held by third parties.
In addition, at the Company's Annual and Special Meeting scheduled for
December 30, 2002, management will propose: (i) a resolution to amend the
Company's Stock Option Plan to reserve for issuance thereunder 20% of the
Company's outstanding shares from time to time (as opposed to the present
800,000 shares so reserved), and (ii) a resolution authorizing the Company to
issue up to the number shares of Common Stock outstanding as of the date of this
Annual Report, for potential acquisitions, mergers and exploration and/or
development opportunities to complement the existing operations of the Company
or to provide working capital to the Company pursuant to one or more private
placements. As of the date of this annual report, there were 10,578,645 shares
of Common Stock outstanding. Under applicable law, any private placement by the
Company will be subject to regulatory and exchange approval, and to the
following restrictions: (1) it must be completed within a twelve month period
following the date the shareholder approval is given; and (2) it must comply
with applicable regulatory and exchange requirements and relevant private
placement pricing rules. To be approved, each of the noted resolutions must be
passed by a majority of the votes cast by shareholders at the December 30, 2002
meeting with respect to such resolutions. The issuance of additional shares of
Common Stock, whether through the Stock Option Plan, private placements or
otherwise, would adversely reduce the proportionate ownership and voting rights
and powers of the present holders of the Common Stock, and could also result in
dilution in the net tangible book value per share of Common Stock.
There can be no assurance that the Company will not, under certain
circumstances, issue additional shares of its Common Stock (See "Item 14 -
Material Modifications to the Rights of Security Holders" below).
NEED FOR INDEPENDENT INVESTMENT ANALYSIS AND DUE DILIGENCE REVIEW. The
independent legal, accounting or business advisors of the Company including,
without limitation, legal counsel for the Company (i) have not been appointed
by, and have not represented or held themselves out as representing the
interests of prospective investors in connection with this Annual Report, and
(ii) have not "expertized" or held themselves out as "expertizing" any portion
of this Annual Report, nor is legal counsel for the Company providing any
opinion in connection with the Company, its business or the completeness or
accuracy of this Annual Report. Neither the Company nor any of its respective
officers, directors, employees or agents, including legal counsel for the
Company, make any representation or express any opinion (i) with respect to the
merits of an investment in the Common Stock, including without limitation the
proposed value of the Company or of the Common Stock; or (ii) that this Annual
Report provides a complete or exhaustive description of the Company, its
business or relevant risk factors which an investor may now or in the future
deem pertinent in making his, her or its investment decision. Any prospective
investor in the Common Stock is therefore admonished to engage independent
accountants, appraisers, attorneys and other advisors to (a) conduct such due
diligence review as such investor may deem necessary and advisable, and (b) to
provide such opinions with respect to the merits of an investment in the Company
offered hereby and applicable risk factors upon which such investor may deem
necessary and advisable to rely. The Company will fully cooperate with any
investor who desires to conduct such an independent analysis so long as the
Company determines, in its sole discretion, that such cooperation is not unduly
burdensome.
POTENTIAL CONFLICTS OF BOARD AND COMMITTEES. Some of the directors and
officers of the Company are or may serve on the board of directors of other
companies from time to time. To avoid the possibility of conflicts of interest
which may arise out of their fiduciary responsibilities to each of the boards,
all such directors have agreed to abstain from voting with respect to a conflict
of interest between the applicable companies. In appropriate cases, the Company
will establish a special committee of independent directors to review a matter
in which several directors, or members of management, may have a conflict.
RELIANCE ON EXPERTISE OF CERTAIN PERSONS. The Company is dependent on the
advice and project management skills of various consultants including
geologists, geophysicists and engineers contracted by the Company from time to
time.
ITEM 4. INFORMATION ON THE COMPANY
Energy Power Systems Limited is a corporation amalgamated under the laws of
the Province of Ontario, and registered as an extra-provincial corporation in
Alberta and Newfoundland and Labrador, Canada. Energy Power Systems Limited is
an Energy Source and Service company operating an Industrial & Offshore Division
and an Oil & Gas Division. Through its wholly-owned subsidiary M&M Engineering
Limited, a company incorporated in the province of Newfoundland and Labrador,
Canada ("M&M") and its wholly owned subsidiary M&M Offshore Limited, a company
incorporated in the province of Newfoundland and Labrador, Canada ("MMO"), the
Company engages in industrial, mechanical contracting and fabrication (reference
to M&M may include MMO). In the Oil & Gas Division, through its directly-held
interests in oil and gas properties the Company participates in the exploration,
development and production of oil and gas reserves.
The chart below sets forth the corporate structure of the Company including its
material subsidiaries.
_________________________________
| |
| ENERGY POWER SYSTEMS LIMITED |
|_________________________________|
|
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| |
| |
________________________ ________________________
| | | |
| INDUSTRIAL & OFFSHORE | | OIL & GAS DIVISION |
| DIVISION | | |
|________________________| |________________________|
|
___________________________ ___________________________________
| | | North Eastern Constructors Limited|
| M&M Engineering Limited |------| (50% Owned) |
| (100% Owned) | | |___________________________________|
|___________________________| | ___________________________________
| | | Liannu, a Limited Partnership |
___________________________ |--| (49% Owned) |
| | | |___________________________________|
| M&M Offshore Limited | | ___________________________________
| (100% Owned) | | | 10915 Newfoundland Limited |
|___________________________| |--| (100% Owned) |
| | |___________________________________|
| | ___________________________________
| | | 11123 Newfoundland Limited |
| |--| (100% Owned) |
| |___________________________________|
|
| ___________________________________
| | Magna Services Inc. |
|---------------------| (50%) |
|___________________________________|
| ___________________________________
| |Newfoundland Services Alliance Inc.|
|---------------------| (20.83) |
|___________________________________|
The registered office and management office of the Company is 2 Adelaide
Street West, Suite 301, Toronto, Ontario, M5H 1L6, Telephone (416) 861-1484. The
Company's public filings can be accessed and viewed through the Company's
website www.epsx.com, under the heading "Investor Relations" and by clicking on
"Corporate Filings". A link to the Company's Canadian Securities Commissions
filings can be viewed via the System for Electronic Data Analysis and Retrieval
(SEDAR) at www.sedar.com, and the Company's United States Securities and
Exchange Commission filings can be viewed through the Electronic Data Gathering
Analysis and Retrieval System (EDGAR) at www.edgar-online.com. The Company's
Common Stock trades on the American Stock Exchange ("AMEX") under the symbol
"EGY" and on the Frankfurt Stock Exchange under the symbol "EPW" and WKN 919384.
The Industrial & Offshore Division through M&M and MMO operate from their
47,500 square foot fabrication facility and 15 acre property. M&M is an
industrial and mechanical contractor and MMO (i) produces steel components for
structures and heavy industry; (ii) manufactures pressurized vessels and tanks;
and (iii) provides in-plant fabrication, welding and assembly services for the
offshore oil sector and heavy industry. Reports estimate the potential oil
reserves of Atlantic Canada to be 40 billion barrels and the natural gas
reserves of Newfoundland Labrador alone are estimated at 62 trillion cubic feet.
The commercial and engineering successes of the Hibernia Project, the Terra Nova
Project and the Sable Island Project supports further development of Atlantic
Canada and its offshore infrastructure. Husky Oil's White Rose Project is
currently underway. Work has also commenced on the Voisey's Bay nickel mine.
Further development of Atlantic Canada's offshore infrastructure could stimulate
expansion of the Industrial & Offshore Division.
In fiscal year 2001, as part of an initiative to increase corporate cash
flow, the Company formed its Oil & Gas Division initially through the
acquisition of properties in 2 strategic areas of oil and gas development, the
proven historic region of Western Canada and the new frontier of Atlantic
Canada. In February 2001, the Company acquired an average 50% working interest
in the Sibbald area of Alberta. Two wells are currently producing gas from the
Balken formation and the Company believes the property has further potential for
additional Balken gas production, Belly River gas production and Glauconite oil
production. Also, in February 2001, the Company acquired a 25% interest in a
property consisting of over 500,000 acres, under permit for both conventional
and coalbed methane gas. This property is located within central Prince Edward
Island in Atlantic Canada, and is underlain by Carboniferous and Permian
sedimentary strata of the Maritimes Basin. Source rock studies indicate that the
early Carboniferous rocks are oil prone and the upper Carboniferous rocks are
gas prone. In addition excess coal gas expelled during coalification may have
charged nearby reservoirs.
In addition to the potential for discovery in Atlantic Canada, the Oil &
Gas Division has been expanding its portfolio of proven, producing and
prospective oil and gas properties through a multi-well drilling and exploration
program focused on prospective properties located in proven productive areas of
the Western Sedimentary Basin. The multi-well program involved partnering and
farm-in alliances with other oil and gas companies to share risk and diversify
opportunities. The Company believes that generating activity in both the eastern
and western regions will benefit the Company, as cash flow from production
increases on advanced properties in Western Canada could finance exploration and
development in Atlantic Canada.
The potential of the Company is underscored by market driven opportunities.
In North America there may be an over-reliance on overseas oil and expanding
long-term demand for natural gas. The development of Atlantic Canada's offshore
oil and gas sector is creating industrial opportunities for participation for
the Company's Industrial & Offshore Division in large scale infrastructure
projects. The Company intends to explore, exploit and acquire oil and gas
properties for commodity-based cash flow and to expand the business of its
Industrial & Offshore Division. The Company may develop its divisions into new
geographic areas and complementary lines of business.
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company was incorporated on October 5, 1988, under the Business
Corporations Act (Ontario), under the name Van Ollie Explorations Limited ("Van
Ollie"). Van Ollie originated as a mining exploration company and was inactive
from the time its initial exploration program was completed in 1990 until May 8,
1996, when Van Ollie acquired its interest in 1169402 Ontario Inc. ("1169402"),
whose principal asset was a 51% ownership interest in M&M. Through a share for
share exchange, the shareholders of 1169402 acquired approximately 97% of the
Common Stock of the Company and effectuated a change in control of the Company.
On July 1, 1996, 1169402 merged into the Company and, as a result of the merger,
the Company acquired a direct 51% ownership interest in M&M. The Company
acquired the remaining 49% interest in M&M on March 9, 1999. Effective January
29, 1999, the Company changed its name to "Engineering Power Systems Limited"
from "Engineering Power Systems Group Inc." and consolidated its share capital
on a one for four basis. Effective February 2, 2001 the Company changed its name
to "Energy Power Systems Limited" from "Engineering Power Systems Limited" and
consolidated its share capital on a one for four basis.
As noted above, prior to fiscal 2001 the Company was engaged in the
development of independent power projects, but discontinued its efforts as a
developer in 2001. As a result, the Power Division's prior activities have been
treated as discontinued operations for accounting purposes. Information
regarding the Company's ongoing investment interests in projects in Andhra
Pradesh and Karnataka, India is set forth below.
In March 1997, Oakwell Engineering Limited, a Singapore corporation
("Oakwell"), and the Andhra Pradesh State Electricity Board of the state of
Andhra Pradesh, India (the "APSEB") executed two identical Power Purchase
Agreements ("PPAs"), providing for Oakwell and/or its sponsors to build, own and
operate two identical 100 mega watt ("MW") net capacity diesel generator barge
mounted power plants ("BMPPs"), fueled by furnace oil (together 200 MW net
capacity) and sell electricity to APSEB on a take-or-pay basis for 15 years. In
June 1997, EPS and Oakwell formed an 87.5%/12.5% joint venture and incorporated
an Indian company, EPS Oakwell Power Limited ("EOPL"), to implement the
provisions of the PPAs. Disputes rose between the Company and Oakwell and a
Settlement Agreement was reached in December 1998 whereby Oakwell sold EPS all
of Oakwell's interest in the PPAs and EOPL to the extent permissible under
Indian law with a provision for Oakwell to relinquish same on an ongoing basis.
In 1999, under the terms of an agreement with the VBC Group of India
("VBC"), and in furtherance of the participation of VBC in the Project, EOPL's
name was changed to "Konaseema EPS Oakwell Power Ltd." ("KEOPL"). The initial
agreement with VBC was revised on August 10, 2000 (the "Revised VBC Agreement"),
and the certain Company expenditures related to the development of the Project
were capitalized at CDN$6.6 million and satisfied by KEOPL issuing equity to the
Company in the form of common shares and preference shares having an aggregate
value of approximately CDN$6.6 million.
On May 1, 2001 by a letter agreement between KEOPL and the Company, Clause
13 of the Revised VBC Agreement was modified whereby it was agreed that any
outstanding issues regarding Oakwell would be taken up by KEOPL, and not VBC or
EPS.
During the year 2001 KEOPL redeemed all of the preference shares and VBC
purchased approximately one third of the common shares held by the Company for a
total cash consideration of approximately $3.1 million. The then remaining
11,348,200 common shares of KEOPL (the "KEOPL Shares") are being held as an
investment and in accordance with terms of the Revised VBC Agreement, the
Company has the right but not the obligation to offer to sell its KEOPL Shares
to VBC on June 30, 2002 and if so offered VBC has the obligation to purchase
same for 113,482,000 Indian Rupees or net proceeds of approximately CDN$3.5
million.
On May 3, 2002, the Company tendered the KEOPL Shares to VBC for purchase
on or before June 30, 2002. On July 1, 2002, VBC raised a dispute with the
Company regarding the purchase and sale allegedly after VBC received a
communication from Oakwell alleging a potential claim by Oakwell against the
Company that could involve the KEOPL Shares. Via letter to VBC dated August 16,
2002 Oakwell informed VBC that Oakwell would no longer be seeking a claim to the
KEOPL Shares held by the Company and put for sale to VBC. The Company is
pursuing legal remedies against VBC and Oakwell to effect the sale of the KEOPL
Shares to VBC (See "Item 8 - Financial Information - Litigation"). The Company
estimates that the carrying amount of the investment in KEOPL will be fully
recovered. The actual recoverable amount is dependent upon future events and
could differ materially from the amount estimated by management.
On April 22, 1999, the Karnataka Power Transmission Corporation Limited
(formerly the Karnataka Electricity Board) of the State of Karnataka, India
("KPTCL") executed a PPA with Euro India Power Canara Private Ltd, a limited
liability company formed and incorporated in India ("EIPCL"). On October 12,
1999 the Company entered into a remuneration agreement for transfer of rights
and an escrow agreement with the Court (Germany) Appointed Receiver of
EuroKapital A.G.'s ("EuroKapital") assets to acquire the 67% interest in EIPCL
formerly held by EuroKapital for US$2.0 million. In the event that the Company
'exits' from the project prior to financial closure the EuroKapital interest in
the escrow account would be forfeited, if unpaid. The Company has a further
agreement to acquire an additional 23% of EIPCL with Seaking Engineers Limited
of India in exchange for taking a lead role to develop the PPA but has not to
date received the respective common share position. Under the PPA, EIPCL would
develop, procure, finance, construct, own, operate and maintain a 195 MW barge
mounted, combined cycle power generation facility, and sell electric energy
generated therefrom to KPTCL, and KPTCL would purchase 85% of such electric
energy from the project for the entire term of the PPA. Effective May 10, 2001
the Karnataka project was given the approval of the state government to be
converted to a coal fueled land based power project. The PPA has yet to be
amended and there are deficiencies in the State Government providing among other
requirements, payment guarantees for the Karnataka project (See "Item 8
-Financial Information - Litigation" below).
During fiscal 2000 the Company disposed of its interests in Merlin
Engineering A.S. ("Merlin") and divested ASI Holdings Inc. ("ASIH"). These
operations have been treated as discontinued operations for accounting purposes.
In December 2000, the Company issued 8,000,000 pre-consolidated units in a
private placement to arm's length investors. Each unit being comprised of (i)
one Common Share; (ii) one half Series A Common Share purchase warrant; and
(iii) one half Series B Common Share purchase warrant at a pre-consolidated
price of $0.10 per unit. (the "Unit" or "Units"). Each Series A Common Share
purchase warrant would entitle the holder to purchase one-half of a Common Share
of the Company, at a pre-consolidated exercise price of $0.13, for a period of
24 months from the date of issue. Each Series B Common Share purchase warrant
would entitle the holder to purchase one-half of a Common Share of the Company,
at a pre-consolidated exercise price of $0.20, for a period of 24 months from
the date of issue. The closing of the private placement occurred in two phases.
Phase one was completed in December 2000, and was comprised of the issuance of
the Common Shares and the issuance of the Series A Common Share purchase
warrants. Phase two was completed in January of 2001, and was comprised of the
issuance of the Series B Common Share purchase warrants after the shareholders
and TSX Venture Exchange (formerly the Canadian Venture Exchange) approved the
transaction. During fiscal 2001, the Company issued 1,000,000 consolidated
Common Shares upon the exercise of 1,000,000 consolidated Series A Common Share
purchase warrants for proceeds of $520,000. During fiscal 2002, the Company
issued 1,000,000 consolidated Common Shares upon the exercise of 1,000,000
consolidated Series B Common Share purchase warrant for proceeds of $800,000.
On March 30, 2001 the Company issued 1,200,000 Class A Preference
Shares-Series 2 (the "Series 2 Shares") for gross proceeds of $1.2 million, with
a cumulative preferential annual dividend rate of 5%. The Series 2 Shares are
redeemable by the Company, re-tractable after 5 years by the holder, and
convertible anytime during the first 30 months from March 30, 2001 into one
"Unit" at a rate of $1.25 per unit. Each unit consists of one Common Share and
one Common Share purchase warrant exercisable at $1.50 to acquire one Common
Share for a period of two years from conversion. After 30 months each "Unit" is
convertible at the 10 day weighted average trading price of the Common Shares
immediately prior to conversion (the "Conversion Price"). Each of such "Unit"
consists of one Common Share and one Common Share purchase warrant exercisable
at the Conversion Price plus 10%, and for a period of two years from conversion.
During fiscal 2002 holders of 1,200,000 Series 2 Shares in the capital of the
Company exercised their conversion rights and acquired 960,000 common shares and
960,000 common share purchase warrants. During fiscal 2002 holders exercised the
960,000 Common Share purchase warrants for proceeds to the Company of
$1,440,000.
In November of 2001 the Company issued two allotments of 350,000 units, in
two private placements to arm's length investors, each at a firm price of
US$4.00 per unit, for gross proceeds of US$2.8 million. Each of such unit was
comprised of one Common Share and one-tenth (1/10th) of one Common Share
purchase warrant. Each whole warrant entitled the holder to purchase one Common
Share at a purchase price of US$4.45 and was exercisable for a period of six
months after the applicable closing. On May 9, 2002 35,000 of the noted Common
Share purchase warrants expired under their own terms and on May 16, 2002 an
additional 35,000 Common Share purchase warrants expired under their own terms.
Effective December 31, 2001 the Company subscribed for 500 preference
shares in M&M for total consideration of $500,000. Effective June 30, 2002 the
Company subscribed for an additional 272 preference shares for total
consideration of $272,000. (See Item 7 - Major Shareholders and Related Party
Transactions)
In March of 2002 the Company issued 400,000 units in a private placements
to an arm's length investor at a firm price of US$4.00 per unit for gross
proceeds of US$1.6 million. Each of such units was comprised of one Common Share
and one-tenth (1/10th) of one Common Share purchase warrant. Each whole warrant
entitles the holder to purchase one Common Share at a purchase price of US$4.45
and is exercisable for a period of one year after the closing.
In February of 2001 the Company commenced operations of its Oil & Gas
Division with the purchase of oil and gas properties in Alberta and Prince
Edward Island, Canada. By June 30, 2001 the Company had purchased oil and gas
interests in approximately CDN$2.1 million of proved developed and undeveloped
oil and gas properties. These interests are held directly in the Company.
During the fiscal year ending June 30, 2002 the Company commenced a
drilling and exploration program resulting in expenditures of CDN$2.8 million
and participated in drilling four development wells, six exploratory wells and a
re-entry of a cased well bore. Of the eleven wells in which the Company
participated, two wells are producing oil, one well is producing natural gas and
liquids, four wells are shut in pending evaluation, tie in and pipeline
facilities, one well is suspended and three wells proved to contain uneconomic
hydrocarbons and have been abandoned. The majority of the division's properties
are in the exploration stage. The Company also participated in a 3D seismic
exploration program on our Prince Edward Island Property in Atlantic Canada to
delineate drilling targets for a proposed winter drilling program.
On May 22, 2002 the Company commenced trading on the American Stock
Exchange under the symbol "EGY".
B. BUSINESS OVERVIEW
INDUSTRIAL & OFFSHORE DIVISION
The Industrial & Offshore Division is headed by M&M, which was incorporated
in Newfoundland and Labrador in 1968. M&M is an industrial, mechanical
contractor whose business includes fabrication and installation of process
piping, installation of production equipment, steel tank erection, specialized
welding services and industrial maintenance. In 1987, M&M established a
wholly-owned subsidiary, MMO to provide specialized welding capabilities,
fabrication and servicing facilities to the offshore oil industry in
Newfoundland and Labrador and other Canadian markets. (References herein to M&M
include MMO unless specifically indicated.) Together they are involved in the
following businesses:
-Oil refinery installations and maintenance,
-Steel storage tanks, silos, stacks, penstocks and pipe spooling,
-Specialized welding and fabrication for the offshore oil industry,
-Process piping and equipment fabrication and installation,
-Structural and miscellaneous steel components,
-High pressure steam fitting and welding,
-Pulp and paper mill process installations,
-Mining process installations, and
-Fabricated structures for buildings.
Since 1987, MMO has completed a number of projects for the offshore oil
industry. MMO has a staff of fitters, welders and engineers, as well as
full-time quality assurance supervision. In performing shop fabrication and
servicing for the offshore industry, MMO has produced pipe spooling, permanent
and temporary guidebases, flow lines, tote tanks, caisson systems and manifolds.
MMO is also certified and registered for the manufacture and repair of pressure
vessels. In addition, MMO manufactures a wide range of steel storage tanks,
including those for petroleum products, which are manufactured under strict
Underwriters Laboratories of Canada 5600 series specifications. MMO also
performs specialized welding of casing connectors, choke and kill lines and
wellhead inlays using welding processes such as metallic inert gas, tungsten
inert gas, submerged arc welding, shielded arc welding and flux core arc
welding, in accordance with American Society of Mechanical Engineers and
Canadian Standards Association welding specifications.
The Industrial & Offshore Division is comprised of M&M & MMO, and conducts
part of its business through strategic alliances with other industry
participants. The Company consolidates its proportionate ownership interest in
each alliance venture.
Newfoundland Service Alliance Inc. ("NSA"), a Newfoundland and Labrador
Company, was incorporated in December 1996 to combine the expertise of its
shareholders in providing comprehensive onshore support services to the
Newfoundland and Labrador oil and gas industry. As of June 2002, NSA is jointly
owned by MMO (20.83%), G.J. Cahill & Company (1979) Limited ("Cahill") (20.83%),
New Valve Services and Consulting Inc. (20.83%), Peacock Inc. (20.83%), and
Siemans Westinghouse Ltd (16.68%).
Magna Services Limited ("Magna"), a Newfoundland and Labrador Company, was
incorporated in April 1997 to provide offshore support services to the
Newfoundland and Labrador oil and gas industry including the Hibernia and Terra
Nova offshore oil projects. Magna is jointly owned as to 50% by MMO and 50% by
Jendore Limited.
North Eastern Constructors Limited ("NECL"), a Newfoundland and Labrador
Company, was incorporated in September 2000 for the purpose of pursuing
opportunities at the Bull Arm Construction site located on the North East Coast
of Newfoundland. NECL is owned 50% by M&M, and 50% by Cahill.
Liannu Limited Partnership ("Liannu") is a limited partnership formed under
the laws of Newfoundland and Labrador in November, 2002 for the purpose of
providing services in Labrador including industrial mechanical contracting,
structural and steel fabrication and erection and other services including the
Voisey's Bay nickel mine development in Labrador. M&M is the general partner of
Liannu, and holds a .01% general partner's interest and a 48.99% limited
partner's interest in the partnership. The remaining 51% limited partnership
interests are held by two private individuals. As general partner, M&M will
charge a management fee equal to 5% of the contract price for contracts entered
into by the partnership.
Marketing and sales for M&M are carried out by its senior executives, with
the assistance of a team of experienced estimators and project managers. Nearly
all of the contracts and purchase orders obtained by M&M are acquired through
the bidding process. On Average approximately 80% of the work is obtained from
"invited tender" sources and the remaining 20% from an open tendering system.
M&M's clients are primarily large industrial customers, including the Hibernia
Management and Development Company Limited, Terra Nova, Newfoundland Power,
Corner Brook Pulp and Paper, Newfoundland and Labrador Hydro, North Atlantic
Refining Ltd., Newfoundland Transshipment Limited, Marine Atlantic Inc. and
McNamara Construction Company. M&M has successfully completed large projects for
a variety of Newfoundland and Labrador based industries. These projects are
similar in nature to those that M&M will bid for in the future. Major past
projects included:
North Atlantic Refining Ltd. - M&M was originally involved with the
construction of the 100,000 barrel per day oil refinery located at Come By
Chance, Newfoundland and Labrador, and for the past 25 years has provided annual
maintenance and construction services for that facility. In September 1998, M&M
was awarded the contract to rebuild four of the refinery's 18 process heaters at
a cost of CDN$8.8 million. In October 2000 during North Atlantic Refining
Limited's yearly maintenance shutdown M&M was involved in over CDN$5.8 million
of work performing modifications and repairs to piping systems, process heaters
and reactors. In September of 2001 M&M was awarded a contract for the rebuild of
a process heater and associated structural steel fabrication and installation.
Work on the contract resulted in over CDN$3.4 million of revenue, and required
upwards of 100 tradespeople. In addition, M&M was awarded a contract for the
provision of multi-trade labour and supervision, resulting in over $1.6 million
in revenue. These contracts were part of the Refinery's annual maintenance and
upgrading program.
Newfoundland Transshipment Project - The Newfoundland Transshipment Project
involved the construction of an onshore storage and transshipment facility for
the Hibernia Oil Development Project approximately 150 kilometers from St.
John's, Newfoundland and Labrador. For the initial phase of the project during
fiscal year 1998, M&M installed all mechanical equipment, process piping and
structural steel pipe and cable supports required at the project site, as well
as fabricated all of the pipe piling and structural girders required for the
transshipment loading dock. The initial phase of the project involved up to 200
tradespeople and approximately 150,000 man-hours, and generated approximately
CDN$12 million in revenues. Based in part on M&M's performance on the initial
phase of the project, in July 1999, M&M successfully won its bid for the second
"Terra Nova" phase of the project, which involved the construction and
installation of a 500,000 barrel tank, an additional loading dock and pipelines,
and resulted in revenues of over CDN$7 million During fiscal 2001 M&M won the
bid for Phase 3 of the project. M&M completed the project in the fourth quarter
of fiscal 2002, and that total revenues from the project were CDN$2.4 million.
Marine Atlantic Project - The Marine Atlantic Project in Port-aux-Basques,
Newfoundland and Labrador involved the mechanical upgrading of fuelling
facilities for Marine Atlantic's ferry services between Newfoundland and Nova
Scotia. The project was valued at $2.5 million and involved the supply and
installation of a high capacity pumping systems including 3,000 feet of new
pipelines along with electrical, instrumentation, insulation and structural
support systems. M&M completed the project during fiscal 2002.
Sandwell-HMI Projects - The Sandwell-HMI projects in Corner Brook,
Newfoundland and Labrador involve the fabrication and installation of various
piping, as well as the installation of pumps, tanks and associated process
equipment for Corner Brook Pulp & Paper's 15 mega-watt co-generation facility.
The project was awarded in three separate lots with a total contract value of
$3.4 million and it is ongoing, with an expected completion date of December,
2002.
McNamara Construction Project - The McNamara construction project involves
the fabrication and installation of twenty foot diameter penstock for the
Granite Canal Hydroelectric Development, located in Central Newfoundland. MMO
fabricated the penstock throughout the winter of 2001-02, and M&M began
installing it during 2002. The contract value is $2.4 million and it is ongoing,
with an expected completion date of December, 2002.
Newfoundland Power Project - The Newfoundland Power project involved the
fabrication of 1,191 meters of penstock, complete with expansion joints for the
Seal Cove Hydroelectric project, located in Seal Cove, Newfoundland and
Labrador. Total revenue of $1.3 million was partially recognized in the third
quarter of 2002, and is expected to continue through the project's completion in
the first fiscal quarter of 2003.
The most significant projects completed by M&M in the last fiscal year, and
through the date of this Annual Report, are summarized in the chart below.
DATE CUSTOMER PROJECT DESCRIPTION REVENUES
------------ ------------------- ------------------------------------------- -------------
May, Newfoundland Installation of 42 inch pipe at offshore CDN$2,412,749
2001 to Transhippment crude oil storage facilities in Whiffen
June, 2002 Limited Head, Newfoundland and Labrador
July, 2001 Marine Atlantic Inc. Upgrade ferry fueling facilities, including CDN$2,580,991
to January,
replacement of pumps and piping at Port-
2002 aux-Basques, Newfoundland and Labrador
September, McNamara Fabrication and installation of 20 foot CDN$2,430,078
2001 to Construction diameter penstock at Granite Canal
December, Company Hydroelectric Development, in Central
2002 (est.) Newfoundland.
September, North Atlantic Dismantle, repair and re-erection of heater CDN$3,431,117
2001 to Refining Ltd. 1002 stacks, platforms, radiant and
December, convection sections at the Come-By-
2001 Chance oil refinery.
July, 2002 North Atlantic Removal and replacement of two 60 foot CDN$2,009,480
to October, Refining Ltd. long underground sulphur storage tanks
2002 and fabrication and installation of
associated process piping.
October, North Atlantic Provision of multi-trade labour and CDN$1,647,269
2001 to Refining Ltd. supervision for annual refinery
December, maintenance turnaround.
2001
July, 2002 North Atlantic Removal of damaged floating roof CDN$810,200
to January, Refining Ltd. structure and repairs to tank bottom and
2003 (est.) roof at the Come-By-Chance refinery.
May, 2002 Sandwell-HMI Fabrication and installation of carbon steel, CDN$1,956,080
to stainless steel and chrome moly piping and
December, installation of pumps, tanks and associated
2002 (est.) process equipment at 15MW co-generation
facility in Corner Brook, Newfoundland
and Labrador
April, 2002 Sandwell-HMI Fabrication and installation of carbon steel, CDN$764,836
to stainless steel and chrome moly piping at
December, 15MW co-generation facility in Corner
2002 (est.) Brook, Newfoundland and Labrador.
March, 2002 Newfoundland Power Fabrication of 1,191 meters of penstock CDN$1,386,749
to Inc. complete with expansion joints for the Seal
September, Cove Hydroelectric Project
2002
Raw steel shapes, pipes and fittings comprise the majority of M&M's
purchasing requirements. M&M purchases such raw materials from a variety of
steel supply companies and warehouses in Newfoundland and Labrador and Eastern
Canada, and is not dependent on a single or limited supplier.
M&M generally retains approximately 76 employees, and up to 700 workers in
its fabrication and contracting facilities at peak periods. Management of the
Company believes labor relations are good and is not aware of any potential
labor dispute. M&M is a signatory to all applicable union agreements of the
Building Trades Council, and utilizes union labor for mechanical contracting
work. Approximately 30 employees of MMO are subject to a three-year contract
with the Fishermen Food and Allied Workers Union, which contract will terminate
February 28, 2005. M&M has a good employee health and safety record, and the
Company is not aware of any environmental, product liability or service
liability claims.
OIL & GAS DIVISION
The Company's Oil & Gas Division commenced operations February of 2001 as
part of an initiative to increase corporate cash flow. The Company formed an oil
and gas division initially through the acquisition of properties in 2 strategic
areas of oil and gas development, the proven historic region of Western Canada
and the new frontier of Atlantic Canada. The Company believes that generating
activity in both regions will benefit the Company as cash flow from production
increases on advanced properties in Western Canada could assist in funding
exploration in Atlantic Canada. Total production revenue for the year ended June
30, 2002 was CDN$448,463. During the fiscal year ending June 30, 2002 the
Company commenced a drilling and exploration program resulting in expenditures
of CDN$2.8 million. From the Company's participation in eleven wells, two wells
are producing oil, one well is producing natural gas and liquids, four wells are
shut in pending evaluation, tie in and pipeline facilities one well is
suspended, and the three remaining have been abandoned as uneconomic. The
Company also participated in a 3D seismic exploration program on its Prince
Edward Island Property in Atlantic Canada to delineate drilling targets for a
proposed winter drilling program. The majority of the division's properties are
in the exploration stage. Certain properties in which the division holds an
interest sells oil and gas production to integrated oil and gas companies and
marketing agencies. Sales prices are generally set at market prices available in
Canada and/or the United States.
The Company's Oil & Gas Division is not a seasonal business, but increased
consumer demand or changes in supply in certain months of the year can influence
the price of produced hydrocarbons, depending on the circumstances. Production
from the Company's oil and gas properties is the primary determinant for the
volume of sales during the year.
The division does not have a reliance on raw materials, as it operates in
an extractive industry.
There is an existing and available market for the oil and gas produced from
the division's properties. However, the prices which we obtain for our
production are subject to market fluctuations which are affected by many
factors, including supply and demand. Numerous factors beyond our control which
could affect pricing include:
o the level of consumer product demand;
o weather conditions;
o domestic and foreign governmental regulations;
o the price and availability of alternative fuels;
o political conditions;
o the foreign supply of oil and natural gas;
o the price of foreign imports; and
o overall economic conditions.
The division does not have a reliance on any significant patents or
licenses.
The oil and gas business is highly competitive in every phase. Many of
the division's competitors have greater financial and technical resources,
established multi-national operations, secured land rights and licenses which
the division may not have. As a result, the division may be prevented from
participating in drilling and acquisition programs.
The various Canadian provinces have established statutes and regulations
requiring permits for drilling, drilling bonds to cover plugging contingencies,
and reporting requirements on drilling and production activities. Activities
such as well location, method of drilling and casing wells, surface use and
restoration, plugging and abandonment, well density, and other matters are all
regulated by a governing body.
The division's activities are subject to numerous provincial and federal
statutes and regulations concerning the storage, use and discharge of materials
into the environment, and many other matters relating to environmental
protection. These regulations may adversely affect our operations and cost of
doing business. It is likely that these laws will become more stringent in the
future (See "Item 3 - Key Information - Risk Factors").
C. ORGANIZATIONAL STRUCTURE
The organizational structure of the Company and its divisions are displayed
in the chart (See "Item 4 - Information on the Company"). The Company holds 100%
of the equity and voting shares of M&M, a Newfoundland and Labrador corporation.
M&M in turn holds 100% of the equity and voting shares of MMO, a Newfoundland
and Labrador corporation. MMO in turn holds a 50% interest in Magna, a
Newfoundland and Labrador corporation and a 20.83% interest in NSA, a
Newfoundland and Labrador corporation. M&M acts as a general partner and owns a
0.01% general partner's interest and a 48.99% limited partner's interest in
Liannu, a registered limited liability partnership. In addition M&M owns a 50%
interest in NECL, a Newfoundland and Labrador corporation. M&M owns 100% of
10915 Newfoundland Limited, a Newfoundland and Labrador company, and 100% of
11123 Newfoundland Limited, a Newfoundland and Labrador company. Each of 10915
Newfoundland Limited and 11123 Newfoundland Limited owns a portion of the
facilities located in Port aux Basques, Newfoundland and Labrador.
The Oil and Gas Division consists of direct and indirect ownership in
various oil and gas properties located in Alberta, Ontario and Prince Edward
Island, Canada. As of June 30, 2002, the Company owns 11,348,200 issued common
shares, at a stated value of Indian Rupees 10 per share, of KEOPL, an Indian
corporation which is developing the Andhra Pradesh Project. The Company has a
67% voting interest in EIPCL, a company in India that is developing a power
project in the state of Karnataka, India. On October 12, 1999 the Company
entered into a remuneration agreement for transfer of rights and an escrow
agreement with the Court (Germany) Appointed Receiver of EuroKapital A.G.'s
("EuroKapital") assets to acquire the 67% interest in EIPCL formerly held by
EuroKapital for US$2.0 million. In the event that the Company 'exits' from the
project prior to financial closure the EuroKapital interest in the escrow
account would be forfeited, if unpaid.
D. PROPERTY, PLANT AND EQUIPMENT
The Company's executive and Oil & Gas Division offices are rented and
located at 2 Adelaide Street West, Suite 301, Toronto, Ontario, Canada. M&M
owns the facilities at 456 Logy Bay Road, St. John's, Newfoundland and Labrador,
Canada, consisting of buildings containing 40,000 square feet of fabrication
area and 7,500 square feet of office space. The land and improvements owned by
M&M are security for a first priority mortgage in favor of RoyNat, Inc., and a
second priority lien in favor of CIBC.
M&M, through its 100% ownership in 10915 Newfoundland Limited and 11123
Newfoundland Limited, owns land located on Caribou Road in Port Aux Basques,
Newfoundland and Labrador. The property consists of two parcels of land. The
larger of the two parcels is improved with a 52 foot high and 104 foot high
steel frame building, containing 44,000 square feet, designed for and utilized
as a fabrication and assembly shop. The second parcel of land is improved with a
large building containing a total of 96,000 square feet including an attached
two-story office section (with full basement) and a one-story office section.
M&M's ownership in the building may be subject to a third party debenture on the
leasehold interest that expires on December 22, 2008.
The Company's Oil & Gas Division's major activities are in the oil and
natural gas exploration and production business. The division began acquisitions
in February 2001 in the provinces of Alberta and Ontario, and acquired an
interest in exploration and development permits in the province of Prince Edward
Island. During the fiscal year ending June 30, 2002 the Company commenced a
drilling and exploration program resulting in expenditures of CDN$2.8 million
and participated in drilling four development wells, six exploratory wells and a
re-entry of a cased well bore. From the Company's participation in eleven wells,
two wells are producing oil, one well is producing natural gas and liquids, four
wells are shut in pending evaluation, tie in and pipeline facilities, one well
is suspended, and the three remaining have been abandoned as uneconomic. The
Company also participated in a 3D seismic exploration program on the Prince
Edward Island Property in Atlantic Canada to delineate drilling targets for a
proposed winter drilling program. The majority of the division's properties are
in the exploration stage.
The following information is in accordance with the Securities and Exchange
Commission rules for this Annual Report and may contain forward-looking
statements. Certain statements contained in this Annual Report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), which reflect the Company's
current expectations regarding the future results of operations, performance and
achievements of the Company. The Company has tried, wherever possible, to
identify these forward-looking statements by, among other things, using words
such as "anticipate," "believe," "estimate," "expect" and similar expressions.
These statements reflect the current beliefs of management of the Company, and
are based on current available information. Accordingly, these statements are
subject to known and unknown risks, uncertainties and other factors which could
cause the actual results, performance or achievements of the Company to differ
materially from those expressed in, or implied by, these statements. The
Company is not obligated to update or revise these "forward-looking" statements
to reflect new events or circumstances.
PROVED RESERVES: The following table reflects estimates of the Company's
proved reserves as at June 30, 2002 and June 30, 2001 as reported by independent
petroleum engineers Sproule Associates Limited stated in CDN dollars. All of
the Company's oil and gas reserves are located in Canada. The following
represents the Company's net interest in its reserves (after crown, freehold and
overriding royalties and interests owned by others) and estimated cash flow
figures before income tax are net of all royalties, operating and capital costs
and discounted at 10% to the Net Present Value ("NPV"):
2001 2002
-------------------- ----------------------
Gas Reserves (Mmcf) Mmcf NPV@10%(1) Mmcf NPV@10%(1)
Proved Developed 490 $1,471,000 550 $1,122,000
Proved Undeveloped 226 649,000 255 668,000
Total 716 2,120,000 805 $1,790,000
Solutions Gas Reserves (Mmcf) Mmcf Mmcf
Proved Developed - $ - 67 n/a(3)
Proved Undeveloped - - - n/a(3)
Total - - 67 n/a(3)
Natural Gas Liquids(Mbbl) Mbbl Mbbl
Proved Developed 16.4 n/a(2) 11.4 n/a(2)
Proved Undeveloped nil n/a(2) 1.0 n/a(2)
Total 16.4 n/a(2) 12.4 n/a(2)
Oil Reserves (Mbbl ) Mbbl Mbbl
Proved Developed 0.5 $5,000 35.1 $708,000
Proved Undeveloped nil nil nil nil
Total 0.5 $5,000 35.1 $708,000
Mbbl Equivalent (4) Mboe Mboe
Proved Developed 98.6 $1,476,000 149.3 $1,830,000
Proved Undeveloped 37.7 $649,000 43.5 68,000
Total 136.3 $2,125,000 192.8 $2,498,000
(1) Cash flows from the estimated proved reserves were discounted at 10% Net
Present Value ("NPV").
(2) Discounted cash flows from natural gas liquids were included with oil and
gas discounted cash flows.
(3) Discounted cash flows from solutions gas were included with oil discounted
cash flows.
(4) Gas was converted to Mbbl in the standard ratio of six mcf equals one
bbl.
PRODUCTIVE WELLS AND PRODUCTION. During fiscal 2002 the Company had
received revenues from 6 gas wells (2001 - 7), 4 oil wells(2001 - 2) and 3 wells
producing liquids (2001 - 3). Production amounts during the period ending June
30, 2002 and June 30, 2001 are as follows:
2001 2002
---- ----
Gross revenue from gas sales $349,337 $427,769
Gross revenue from liquid sales 14,842 27,590
Gross revenue from oil sales 9,314 61,780
Net mcf gas production 51,041 115,688
Net bbl liquids production 510 973
Net bbl oil production 211 1,714
Average production sales per mcf $6.84 $3.70
Average production sales per liquid bbl $29.10 $28.36
Average production sales per oil bbl $44.14 $36.04
Average revenue per boe $40.47 $23.54
Average production cost per boe $19.01 $16.06
Average netback per boe $21.46 $ 7.48
ABBREVIATIONS:
mcf: one thousand cubic feet
Mmcf: one million cubic feet
Mbbl: one thousand barrels
bbl: barrel
boe: barrels of oil equivalent converting 6 mcf of natural gas or
one barrel of natural gas liquids to one barrel of oil equivalent.
ACREAGE. The following table sets forth the developed and undeveloped
acreage of the projects in which the Company holds an interest, on both a gross
and a net basis as of June 30, 2002 and 2001. The developed acreage is stated on
the basis of spacing units designated by provincial authorities on the basis of
160 acre spacing unit for oil production and 640 acre spacing unit for gas
production in Alberta and 50 acre spacing unit for deep Ordovician and
Cambridge-age targets in Ontario and based on technical aspects of any
discovery.
LEASEHOLD ACREAGE
2001 2002
-------- ---------
Total Leasehold Acreage
Gross Acres 538,271 546,760
Net Acres 136,472 136,641
Developed Acreage
Gross Acres 3,764 6,499
Net Acres 1,218 1,745
Undeveloped Acreage
Gross Acres 534,507 540,261
Net Acres 135,254 134,896
DRILLING ACTIVITY. As of June 30, 2002 (2001 - nil) the Company through
the Oil & Gas Division had the following drilling activities (included in gross
and net development wells is the re-entry of a cased well bore). A gross well is
a well in which an interest is owned. The number of net wells represents the sum
of a fractional interest the Company owns in a gross wells.
Number of wells drilled: 2001 2002
--------------------------- ------ ------
Development wells Gross Net Gross Net
----- ---- ------ ----
Producing 0 0 2 24.19%
Shut-in 0 0 1 25.0%
Suspended** 0 0 1 30.0%
Abandoned 0 0 1 31.5%
Exploratory Wells
Producing 0 0 1 7.13%
Abandoned 0 0 2 12.5%
Shut-in * 0 0 3 11.66%
*Shut in wells tested hydrocarbons and are pending evaluation, tie
in and pipeline facilities.
**Suspended well is pending abandonment.
PRESENT ACTIVITIES, RESULTS OF EXPLORATION AND DRILLING PROGRAM. The Oil &
Gas Division has a portfolio of proven, producing and/or prospective oil and gas
properties in the Western Sedimentary Basin of Western Canada and in the
Maritimes Basin of Atlantic Canada. In October of 2001 the Company commenced a
multi-well drilling and exploration program focused on prospective properties
located in proven productive areas of Alberta, Canada, conducted with other oil
and gas companies to share risk, expertise and diversify opportunities. During
the fiscal year ending June 30, 2002 the Company expended CDN$2.8 million and
participated in drilling four development wells, six exploratory wells and a
re-entry of a cased well bore. Of the eleven wells in which the Company
participated, two wells are producing oil, one well is producing natural gas and
liquids, four wells are shut in pending evaluation, tie in and pipeline
facilities, one well is suspended and three wells proved to contain uneconomic
hydrocarbons and have been abandoned. The majority of the division's properties
are in the exploration stage. The Company also participated in a 3D seismic
exploration program on our Prince Edward Island Property in Atlantic Canada to
delineate drilling targets for a proposed winter drilling program.
FARROW, ALBERTA: The Company has a 31.5% participating interest in 1
sections of land (960 gross acres). The development well 8-26-19-24 W4 was spud
on October 10, 2001 and drilled to a depth of 1,725 meters (approximately 5,658
feet), and is currently producing from the Glauconite formation. A second
development well 16-26-19-24 W4M was spud on May 19, 2002 and drilled to a depth
of 1,762 meters (approximately 5,779 feet) and on May 27, 2002 was plugged and
abandoned after logging of the well bore indicated the formation did not contain
economic hydrocarbons.
CHERHILL, ALBERTA: The Company has a 30% participating interest in one (1)
section of land (640 gross acres) in the Cherhill area of Alberta. On January
10, 2002 the Company participated in drilling a development well 4-10-57-5 W5M
to a depth of 600 meters (approximately 1,970 feet) to test the Belly River
formation for gas. Subsequent testing indicated the Belly River formation did
not contain economic reserves and the well has been suspended. The Company and
its partners have assessed the potential of three separate sands in the Belly
River zones on the North half of the section. The Company and its partners
intend to commence drilling this opportunity during the winter.
EDSON, ALBERTA: The Company has a 10% participating interest in three (3)
sections (1,920 gross acres) in the Edson area of Alberta. The Edson exploratory
well 10-13-52-16W5M was spud on December 10, 2001, drilled to a depth of 3,149
meters (approximately 10,328 feet) to the Winterburn formation, and cased as a
Winterburn Gas well shut in pending pipeline and water disposal facilities.
LADYFERN MEARON PROPERTY, ALBERTA-BRITISH COLUMBIA BORDER: The Company
participated in this property by paying 25% of the drilling, completion and
flowline costs in an exploratory test well 13-36-93-13 W4M to earn a 17.5%
interest until payout and a 12.5% interest after payout in one (1) section (640
gross acres) and earned a 12.5% interest in an adjacent section (640 gross
acres). The exploratory well was spud on January 10, 2002 and drilled to a depth
of 2,776 meters (approximately 9,105 feet) to the Slave Point formation.
Logging of the well bore indicated that the Slave Point formation did not
contain economic hydrocarbons and was plugged and abandoned. The well bore was
completed in the Bluesky and on March 7, 2002 the well was plugged and
abandoned. On July 11, 2002 the lease covering these 2 sections expired.
STRATHMORE, ALBERTA: On August 8, 2001 the Company acquired a 33.33%
participating interest in section of land (320 gross acres) in a crown land
sale. The Company and its partners are assessing this prospect for the
development of a potential Glauconite Oil Channel.
SIBBALD PROPERTY, ALBERTA: The Sibbald property is located in Townships 28
and 29, Range 02 W4M, approximately 160 miles east of Calgary, Alberta. The
Company holds an average 50% working interest in approximately 4,480 gross acres
of land. Two wells are currently producing gas from the Bakken Formation of the
Mississippian Period. The Company's technical advisors have proposed an
exploration program to drill for Viking and Colony gas and workovers and testing
of existing well bores for Belly River gas and Glauconite oil.
CAROLINE PROPERTY, ALBERTA: The Company participated by paying a 22.5% of
the drilling costs to earn a 16.875% interest in 1 section of land (640 gross
acres) in Alberta. The development well 4-29-33-4 W5M was drilled to a depth of
2,725 meters (approximately 8,940 feet) to the Shunda formation and was
completed as a Glauconite gas well and a Rundle oil well. The well is currently
producing natural gas and liquids.
OLDS-INNISFAIL PROSPECT, ALBERTA: The Olds-Innisfail prospect encompasses 5
sections of land (3,680 gross acres). The initial exploration on this property
consisted of 3 prospective drilling locations. The first exploratory well
5-6-34-28 W4M was spud on October 19, 2001 and drilled to a depth of 2,148
meters (approximately 7,047 feet) to the Basal Quarts formation. The well was
completed as a Basal Quartz gas well and is currently shut in pending
evaluation. A second exploratory well 14-10-34-1 W4M was spud on November 2,
2002 and drilled to a depth of 1,946 meters (approximately 6,385 feet) to the
Viking formation. The well was completed as a Viking gas well and is currently
shut in pending pipeline capacity. A third exploratory well 16-20-33-18 W4M was
spud on November 13, 2002 and drilled to a depth of 1,880 meters (approximately
6,168 feet) to the Viking formation, and was subsequently plugged and abandoned.
The Company participated in this prospect by paying a 25% interest before payout
to earn a 12.5% interest after payout in each of the test wells and the earned
lands.
BRAZEAU RIVER PROSPECT, ALBERTA: This prospect is comprised of 2 sections
of land (1,280 gross acres). The Company participated in the re-entry of a cased
well bore 2-28-47-12 W5M by paying a 50% interest before payout, to earn a 25%
interest after payout in the well bore and lands. The development well was
re-entered and tested in the Rock Creek and Elkton formation and completed as a
Rock Creek oil well. The well is currently shut in pending economic evaluation
of pipeline tie in.
BIGSTONE & KAYBOB PROPERTIES, ALBERTA: The Bigstone property is located in
Township 61 Range 22 W5M in Alberta. The Company holds an average 20% interest
in approximately (640 gross acres) of land. One well at Bigstone is currently
producing natural gas and natural gas liquids. The Company has a 10% to 20%
working interest in approximately (1920 gross acres) of land located in Township
61, Range 19 and 21 W5M. There are currently two wells producing natural gas and
liquids.
ESSEX COUNTY, ONTARIO: During the year the Company participated by paying
8.839% to earn 7.13% in a horizontal exploratory test well. The test well was
drilled to a vertical depth of 792 meters (approximately 2,598 feet) with a true
vertical depth of 1,973 meters (6,473 feet) to the Sherman Falls formation. This
well was completed as a Sherman Falls oil well and is currently producing oil.
GOSFIELD AND ALDBOROUGH PROPERTIES, ONTARIO: The Company holds an 11.25% to
21.7% working interest in approximately (339 gross developed acres) of land
located in the Gosfield and Aldborough Townships in Ontario. Three wells are
currently in production. Two wells are producing oil and one is producing
natural gas.
PRINCE EDWARD ISLAND PROPERTY: In 2001 the Company acquired a 25% interest
in a property consisting of over 500,000 acres under permit for all hydrocarbons
including conventional and coalbed methane gas. The property is located within
central Prince Edward Island, Canada ("PEI") which is within the Southwestern
part of the Maritimes Basin and is underlain by Carboniferous and Permian
sedimentary strata of the Gulf of St Lawrence and Sydney Sub-Basin. These rocks
mainly consist of fine to coarse grain terrigenous clastic sediments including
carbonates, evaporates, coal beds and red-beds. Coal has been mined from these
coal measures within New Brunswick and Nova Scotia and they are similar in age
and lithology to the coals of Black Warrior, Appalachian and Illonois Basins of
the eastern United States. The Company also participated in a 3D seismic
exploration program on our PEI Property in Atlantic Canada to delineate drilling
targets for a proposed winter drilling program.
The Maritimes Basin is known to contain substantial coal reserves at depths
that are considered to be good for the retention of coalbed methane gas. Recent
work by the Geological Survey of Canada suggests that these coal measures are
coincident with mappable seismic horizons that occur over a 66,000 square
kilometer area of the Maritimes Basin. In addition, Grant and Moir, 1992,
suggest that seam thickness, coal density and methane content indicate a large
methane resource within this area. They have also shown that the coal measures
exist beneath PEI and could contain coalbed methane resources that are estimated
at 7.6 TCF.
According to a report prepared by Mercator Geological Services Limited, of
Dartmouth, Nova Scotia, detailed stratigraphic correlation of drill well data
has confirmed the presence of 20 coal seams of 2-3 meters in thickness, and
total accumulations of up to 40 meters underlie the property. Onshore and
offshore seismic data have also identified numerous coal-bearing horizons. This
data suggests that fracturing and cleating development has occurred within the
basin resulting in increased coal porosity. Experiments have shown that the
strata experienced temperatures equivalent to the oil and gas formational
window, and vitrinite reflectance data from coal samples has shown that the coal
rank is sufficient to produce high gas values. Theoretical gas calculations for
the coal underlying PEI have resulted in an estimated resource of 7.6 TCF.
The potential for conventional gas resources has also been documented
within the Maritimes Basin. Studies have shown that the coal rank is sufficient
to produce high gas values. Source rock studies indicate that the early
Carboniferous rocks are oil-prone and the upper Carboniferous rocks are gas
prone. In addition excess coal gas expelled during coalification may have
charged nearby reservoirs.
Management of the Company believes the conventional hydrocarbon potential
of the Maritimes Basin is exemplified by the Stoney Creek oil and gas field and
the East Point E-49 gas discovery, and the recent discoveries onshore in New
Brunswick. The Stoney Creek field reportedly produced over its lifetime 800,000
barrels of oil and 28 MMcf of natural gas. The East Point E-49 well, located
just off-shore at the north east point of PEI reportedly produced 5.3 MMcf/day
from a 12 meter sandstone interval during drill stem tests with an estimated
77.3 Bcf of gas in place. The onshore New Brunswick discoveries have indicated a
potential of 300 Bcf of natural gas. Management believes that these examples
demonstrate that the Carboniferous rocks of eastern Canada are capable of
generating and retaining hydrocarbons.
In addition, management believes that the PEI property offers potential for
both coalbed methane and conventional gas resources. An exploration program
focusing on geophysics and study of available drill well logs has been ongoing
with detailed assessment of existing seismic sections and maps being scanned and
converted to digital format. Approximately 450 kilometers (280 miles) of seismic
lines have been processed to date as well a 3D seismic study for the winter
drilling program. Consulting geologists and geophysicist have recommended the
acquisition and or production of further seismic data, among other sciences, to
help in formulating drill targets for an anticipated winter drilling program.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with the "Selected
Historical Financial Data of EPS" appearing above and the Company's Audited
Consolidated Financial Statements for the Fiscal Years Ended June 30, 2002 and,
2001 and 2000, the notes thereto and other financial information included
elsewhere in this Annual Report. Unless otherwise indicated, the following
discussion is based on Canadian dollars and presented in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). For reference to
differences between Canadian and US GAAP see note 17 of the consolidated
financial statements. Certain information contained below and elsewhere in this
Annual Report, including with respect to our plans and strategy for our
business, are forward-looking statements. See "Risk Factors" for a discussion
of important factors which could cause actual results to differ materially from
the forward-looking statements contained herein.
OVERVIEW
The Company is a corporation amalgamated under the laws of the Province of
Ontario and Provincially registered in the Provinces of Alberta and Newfoundland
and Labrador and is an energy source and service company that operates an
Industrial & Offshore Division, and an Oil & Gas Division. The audited
consolidated financial results for the fiscal periods ending June 30, 2002, 2001
and 2000 include the accounts of the Company and its wholly owned subsidiary
M&M, a Newfoundland and Labrador company, and M&M's wholly-owned subsidiary MMO,
a Newfoundland and Labrador company (reference to M&M may include MMO). MMO in
turn holds a 50% interest in Magna, a Newfoundland and Labrador corporation and
a 20.83% interest in NSA, a Newfoundland and Labrador corporation. M&M also
holds a 49% interest in Liannu, a Newfoundland and Labrador registered limited
liability partnership and a 50% interest in NECL, a Newfoundland and Labrador
corporation. M&M owns 100% of 10915 Newfoundland Limited and 11123 Newfoundland
Limited which each own facilities located in Port aux Basques, Newfoundland and
Labrador. M&M and MMO together operate from their 47,500 square foot fabrication
facility and 15 acre property. M&M is an industrial, mechanical contractor. MMO
(i) produces steel components for structures and heavy industry; (ii)
manufactures pressurized vessels and tanks; and (iii) provides in-plant
fabrication, welding and assembly services for the offshore oil sector and heavy
industry.
During fiscal 2001 the Company commenced its oil and gas operations. The
activities of the Company's Oil & Gas Division include exploration, development
and production of oil and natural gas. The Company's oil and gas properties are
located in the Canadian Provinces of Alberta, Ontario and Prince Edward Island.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND NEWLY ADOPTED ACCOUNTING POLICIES
The Company's significant accounting policies, estimates and changes to
accounting policies are described in the notes to the audited consolidated
financial statements. It is increasingly important to understand that the
application of generally accepted accounting principles involves certain
assumptions, judgments and estimates that affect reported amounts of assets,
liabilities, revenues and expenses. The application of principles can cause
varying results from company to company.
The most significant accounting policies that impact the Company and its
subsidiaries relate to revenue recognition policies, oil and gas accounting and
reserve estimates, accounting for joint ventures, capital assets, discontinued
operations, future income tax assets and liabilities, and stock based
compensation.
The most significant accounting estimates that impact the Company and its
subsidiaries relate to impairment of capital assets, contingent liabilities and
assets, and the valuation of the Company's investment in KEOPL.
The only new accounting policy that was adopted by the Company during the
fiscal year was that the Company adopted the new accounting policies for
Goodwill and Other Intangibles in accordance with new recommendations in the
CICA Handbook.
CRITICAL ACCOUNTING POLICIES:
Revenue recognition: Revenue for M&M & MMO is generated principally from
contracts or purchase orders awarded through a competitive bidding process.
Revenue from construction and fabrication contracts is recognized on the
percentage of completion basis, pursuant to which contract revenues are
recognized by assessing the value of the work performed in relation to the total
estimated cost of the contract based upon the contract value. Revenue from M&M &
MMO's venture partners (whether in corporate or partnership form) are recognized
based on their proportionate equity holdings in those entities.
Oil and gas revenue is recognized on actual production volumes and delivery
of the product to the market, based on the applicable operator's reports.
Oil and gas accounting and reserve estimates: The Company follows the full
cost method of accounting for oil and gas operations whereby all costs of
exploring for and developing oil and gas reserves are initially capitalized.
Such costs include land acquisition costs, geological and geophysical expenses,
carrying charges on non-producing properties, costs of drilling and overhead
charges directly related to acquisition and exploration activities.
Costs capitalized, together with the costs of production equipment, are
depleted on the unit-of-production method based on the estimated gross proved
reserves. Petroleum products and reserves are converted to equivalent units of
oil by converting natural gas at 6,000 cubic feet of gas to 1 barrel of oil.
Costs of acquiring and evaluating unproved properties are initially
excluded from depletion calculations. These unevaluated properties are assessed
periodically to ascertain whether impairment has occurred. When proved reserves
are assigned or the property is considered to be impaired, the cost of the
property or the amount of the impairment is added to costs subject to depletion
calculations.
Proceeds from a sale of petroleum and natural gas properties are applied
against capitalized costs, with no gain or loss recognized, unless such a sale
would significantly alter the rate of depletion.
In applying the full cost method, under Canadian GAAP, the Company performs
a ceiling test which restricts the capitalized costs less accumulated depletion
and amortization from exceeding an amount equal to the estimated undiscounted
value of future net revenues from proved oil and gas reserves (as determined by
independent engineers), based on sales prices achievable under existing
contracts and posted average reference prices in effect at the end of the
Company's fiscal year and current costs, and after deducting estimated future
general and administrative expenses, production related expenses, financing
costs, future site restoration costs and income taxes from such estimated future
revenue.
In applying the full cost method under US GAAP, the Company performs a
ceiling test based on the same calculations used for Canadian GAAP except the
Company is required to discount future net revenue at 10% and there is no
deduction from the US GAAP ceiling test for estimated future general and
administrative expenses and interest.
Joint Ventures: The Company's Industrial & Offshore Division carries out
part of its business in through three corporations and one limited partnership.
The Company's audited consolidated financial statements include the Company's
proportionate share of each of these entity's assets, liabilities, revenues and
expenses. MMO holds a 50% equity interest in Magna and a 20.83% equity interest
in NSA. M&M holds a 49% combined partnership interest in Liannu and a 50% equity
interest in NECL. To date Liannu and NECL have been inactive (See Note 6 to the
Company's Consolidated Financial Statements attached hereto).
Under US GAAP, the Company would instead use the equity method of
accounting for joint ventures rather than the proportionate consolidation method
of accounting. Under the US GAAP method the Company would present its net
investment in the joint venture on the consolidated balance sheet and present
its net share of equity income on the consolidated statement of loss and
deficit.
Capital Assets: Capital assets consist primarily of fabrication buildings,
office equipment, and manufacturing equipment. These assets are recorded at
cost less accumulated amortization and, if applicable, write down for
impairment.
Capital assets are amortized on the declining balance basis over their
estimated useful lives at the following rates:
Buildings 3%
Manufacturing equipment 20%
Tools and equipment 20%
Office equipment 20%
Vehicles 30%
Paving 7%
Equipment under capital leases 20%
Discontinued Operations: During fiscal 2001 the Company adopted a plan to
discontinue the operations of its Power Division. This division has been
treated as discontinued operations for accounting purposes (see Note 20). As
such the operations of the Company's Power Division have been excluded from the
audited consolidated statement of loss and deficit from continuing operations in
prior periods. The Company intends to monetize its investment in the Andhra
Pradesh Project, India.
During fiscal 2000 the Company disposed of its interests in Merlin and
divested ASIH. These operations have been treated as discontinued operations
for accounting purposes (see Note 20 to the Company's Audited Consolidated
Financial Statements attached hereto). As such, the operations of Merlin and
ASIH have been excluded from the audited consolidated statement of loss and
deficit from continuing operations in current and prior periods.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized at the date the
liability is incurred and is measured and recorded at fair value. This is
effective for exits or disposal activities initiated after December 31, 2002.
Management is of the opinion that the adoption of SFAS No. 146 will not impact
its financial position and results of operation.
Future Income Tax Assets and Liabilities: The Company uses the asset and
liability method of accounting for income taxes. Under this method, future
income tax assets and liabilities are determined based on differences between
the financial statement carrying amounts and their respective income tax bases
(temporary differences). Management regularly reviews its tax assets for
recoverability and establishes a valuation allowance based on historical taxable
income, projected future taxable income and the expected timing of the reversals
of existing temporary differences. As at June 30, 2002 the Company has $10.2
million of non-capital losses. The Company carries an income tax asset of $0.6
million related to those non-capital losses. In 2002 the Company took a
valuation allowance charge of $0.5 million which reduced the future tax asset by
$0.5 million.
Stock based compensation: The Company has established a stock option plan (the
"Plan") for directors, officers, key employees and consultants. No compensation
expense is recognized for these plans when stock or stock options are issued to
employees. Any consideration paid by employees on exercise of stock options or
purchase of stock is credited to share capital.
Under US GAAP (FAS 123), stock options granted to consultants are
recognized as an expense based on their fair value at the date of grant. Under
Canadian GAAP the options are disclosed and no compensation expense is recorded.
The calculation for the compensation for consultants of $8,621 (2001 - $112,040)
is based on the Black-Scholes option pricing model with the assumption of that
(i)no dividends are to be paid on common shares, a (ii)weighted average
volatility factor for the Company's share price of 0.31 for 20,000 options
issued during fiscal 2002, (iii) a volatility factor for the Company's share
price of 0.64 for 70,000 options and 0.43 for 20,000 options issued during
fiscal 2001,and (iv) a weighted average risk free interest rate of 5% over a
four year period, for a fair value of options of $2.70 ( 2001 -$ 3.10 and $1.50
respectively).
Under US GAAP the Company also follows APB 25 for options granted to
employees. For employees, compensation expense is recognized under the intrinsic
value method. Under this method, compensation cost is the excess, if any, of the
quoted market price at grant date over the exercise price. Such expense is
reflected over the service period; if for prior services, expensed at date of
grant; if for future services, expensed over vesting period. The exercise price
of the stock options outstanding to employees is equal or exceeds the market
value of the shares at the date granted, therefore, no compensation expense is
recognized at grant date for US GAAP purposes.
In March 2000, the Financial Accounting Standards Board Issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation", an interpretation of APB Opinion No. 25. The Company adopted the
interpretation for US GAAP purposes on July 1, 2000. Among other things, the
Interpretation requires that stock options that have been modified to reduce the
exercise price be accounted for as variable. As of July 1, 2000, under the
provisions of Interpretation No. 44, any options that are considered repriced
are accounted for as variable options from that date forward. Therefore, the
option value will be remeasured on a quarterly basis using the greater of the
exercise price or the July 1, 2000 fair market value as the basis for
determining increases in the intrinsic value of the options. During 2001, the
Company repriced 57,500 options with an intrinsic value of $92,000 which has
been included in the compensation expense adjustment. During 2002, these
repriced options were exercised and an additional intrinsic value of $102,550
was recorded to the compensation expense adjustment on their respective
measurement dates.
CRITICAL ACCOUNTING ESTIMATES
Impairment of Capital Assets: The Company has written down $0.3 million of
the carrying value of its Port aux Basques property to its estimated net
realizable amount of $0.1 million in 2002 ($1.5 million was charged 2001). The
net realizable amount was based on a recent third party offer for the property.
Contingent liabilities and assets: On August 28, 2002 the Company was
served a Writ of Summons from Oakwell Engineering Limited ("Oakwell") of
Singapore, a former joint venturer in a power project in Andhra Pradesh, India.
On November 8, 2002 the Company counter claimed against Oakwell for damages,
costs and interest (See Note 21 of the Audited Consolidated Financial Statements
attached hereto and "Item 8 - Financial Information - Litigation" below). No
provision has been made in the audited consolidated financial statements for
this claim. The Company estimates the range of liability related to pending
litigation where the amount and range of loss can be estimated. Where there is a
range of loss, the Company records the minimum estimated liability related to
those claims. As additional information becomes available, we assess the
potential liability related to our pending litigation and revise our estimates
accordingly. Revisions of our estimates of the potential liability could
materially impact our results of future operations. If the final outcome of such
litigation and contingencies differs adversely from that currently expected, it
would result in a charge to earnings when determined.
There are deficiencies in the State Government performance, including among
other requirements, the provision of payment guarantees for the Karnataka
project. The Company is pursuing legal recourses against the Government of
Karnataka and the Karnataka Power Transmission Corporation Limited. At the
current time no assessment can be made of the actual recoverable amount.
Accordingly no amount has been recorded in these audited consolidated financial
statements (See "Litigation in Item 8 - Financial Information").
Valuation of the Company's Investment in KEOPL: The Company owns 11,348,200
common shares of Rs. 10 each, of KEOPL (the "KEOPL Shares"), a company
incorporated in India, which is developing a Power project in Andhra Pradesh,
India. Pursuant to the Revised VBC Agreement dated August 10, 2000 between the
Company, VBC Group ("VBC"), KEOPL's parent company, and KEOPL, VBC is obligated
to purchase the Company's investment in KEOPL for INR 113,482,000 (approximately
CDN$3.5 million) on or before June 30, 2002 if the Company offers its KEOPL
Shares to VBC prior to June 30, 2002.
On May 3, 2002, the Company, pursuant to the Revised VBC Agreement, offered
and tendered the KEOPL Shares to VBC for purchase on or before June 30, 2002. On
July 1, 2002, VBC raised a dispute with the Company regarding the purchase and
sale allegedly after VBC received a communication from Oakwell alleging a
potential claim by Oakwell against the Company that could involve the KEOPL
Shares. (See "Litigation in Item 8 - Financial Information").
The investment in KEOPL is recorded at expected net recoverable amount of
$3.5 million. Management of the Company assessed the amount recoverable based on
the par value of the shares, and an assessment of VBC's ability to pay and of
the likelihood and timing of payment. At December 6, 2002 the value of the
aforementioned shares was $3.7 million based on current exchange rates. The
actual recoverable amount is dependant upon future events and litigation, and
could differ materially from the expected net recoverable amount.
Newly Adopted Accounting Policies
Goodwill: The Company has adopted new accounting policies for Goodwill as
required under the recommendations of the new CICA Handbook Section 1581,
Business Combinations, and Section 3062, Goodwill and Other Intangibles. The
newly adopted accounting policy is also consistent with FASB No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). Goodwill represents the excess purchase price paid for business
combinations over the value assigned to identifiable net assets acquired.
Goodwill is tested for impairment at least annually and an impairment loss is
recognized when the carrying amount of the goodwill of a reporting unit exceeds
the fair value of the goodwill. The fair value of the reporting unit is
obtained using the present value of expected cash flows. As a result of applying
the new standards, management has determined that the value of goodwill was
impaired, and accordingly a transitional impairment loss of $2,1 million has
been charged to opening deficit. Goodwill had previously been amortized over 10
years.
The adjusted net loss, basic loss per share from continuing operations and
basic loss per share for comparative fiscal years ending June 30, 2001 and 2000
if no amortization were recorded in those years, are as follows:
2002 2001 2000
---------- ---------- ----------
Reported net loss $(1,131,370) $(3,634,916) $(2,687,899)
Add back: Goodwill amortization - 261,258 261,258
Adjusted net loss $(1,131,370) $(3,373,658) $(2,426,641)
Basic loss per share:
Reported net loss for the year $ (0.17) $ (0.85) $ (0.86)
Goodwill amortization - 0.06 0.08
---------- ---------- ----------
Adjusted net loss for the year $ (0.17) $ (0.79) $ (0.78)
========== ========== ===========
The US GAAP method for the newly adopted accounting policies for Goodwill
is governed by statements by the FASB in June, 2001, when it issued FASB
Statement No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling of interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassifies the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
Management believes the adoption of this statement will have no material impact
on the financial statements.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill impairment at least annually. In addition,
SFAS 142 requires that the Company identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires that the Company complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. During 2002, the Company
adopted SFAS 142 early, and management determined that the value of goodwill was
impaired, resulting in a transitional impairment loss of $2,056,832. This amount
has been reported as a cumulative effect of a change in accounting principle in
the fiscal 2002 reconciliation to US GAAP under "Item 3 - Key Information -
Selected Financial Data" above. Goodwill had previously been amortized over 10
years.
RECENTLY ISSUED UNITED STATES ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for the fiscal year ending June 30,
2003. Management believes the adoption of this statement will have no material
impact on the financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuous operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively. Currently, the Company is assessing, but has not yet determined
how the adoption of SFAS 144 will impact its financial position and results of
operation.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 rescinds FASB No. 4 "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that statement, FASB No. 64
"Extinguishments of Debt made to Satisfy Sinking-Fund Requirements". This
statement also rescinds FASB No. 44, "Accounting for Intangible Assets of Motor
Carriers". This statement amends FASB No. 13, "Accounting for Leases", to
eliminate an inconsistency between required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions for debt extinguishments are applicable for
fiscal years beginning after May 15, 2002 and the provisions regarding lease
accounting are for transactions occurring after May 15, 2002. Management
believes the adoption of this statement will not have a material effect on the
financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized at the date the
liability is incurred and is measured and recorded at fair value. This is
effective for exits or disposal activities initiated after December 31, 2002.
Management is of the opinion that the adoption of SFAS No. 146 will not impact
its financial position and results of operation.
A. RESULTS OF OPERATIONS
The following discussion of the results of operations of the Company is a
comparison of the Company's two fiscal periods ended June 30, 2002 and 2001.
Revenue: The Company's consolidated revenues of $22.0 million for the year
ending June 30, 2002 increased by 15% from $19.1 million reported during the
same period the previous year. Revenue growth was driven by both a 15% increase
in revenues to $21.6 million from $18.8 million during 2001 derived from the
Company's Industrial & Offshore Division as well as a 33% increase in revenues
to $0.4 million from $0.3 million during 2001 from the Company's Oil & Gas
Division, which commenced February 1, 2001.
Gross Profit: Consolidated gross profit for the fiscal period ending June
30, 2002 increased 20% to $3.0 million from $2.5 million in 2001. The increase
was primarily due to increased gross profits from the Company's Industrial &
Offshore Division. This increase in gross profit was primarily driven by
increased revenue during the year as the Company's consolidated gross margin as
a percent of sales has remained reasonably consistent at 13.5% versus 13.2% for
the previous year. During the year gross profits from the Industrial & Offshore
Division increased 33% to $3.2 million from $2.4 million during 2001. This
increase was due to increased revenues during 2002. Gross margins for the
Company's Oil & Gas Division decreased to ($0.2) million from $0.2 million
during 2001. This decrease was primarily due to increased depletion of the
Company's reserves.
Administrative expenses: Administrative expenses of $4.2 million for the
twelve month period ending June 30, 2002 was 62% higher than administrative
expenses of $2.6 million the previous year. For the fiscal year 2002 the Company
incurred a foreign exchange loss of $0.2 million and in the fiscal year 2001 the
Company had a foreign exchange gain of $0.2 million. For the fiscal year 2002
professional fees increased to $0.3 million. In addition during the 2002 fiscal
year the Company wrote down its marketable securities by $0.1 million. The
Company also had increases in its general and administrative expenditures.
Other income: Included in other income is a litigation settlement of $0.7
million related to a claim against a company with respect to an asset purchase
agreement. Also included is an overprovision for costs related to the Port aux
Basques property settled for $0.2 million less than accrued. The balance of
other income relates mainly to credits received for workers compensation
adjustments of prior years.
Loss from Continuing Operations before Income Taxes: Losses from Continuing
Operations before Income Taxes decreased 77% by $1.7 million to $0.5 million
during fiscal 2002 from $2.2 million the previous year. The majority of the
decrease in losses was due to a non-cash write down of inactive capital assets
of $1.5 million during the previous fiscal period. In the current period the
Company wrote down an additional $0.3 million.
Current and Future Income Taxes: During the fiscal period ending June 30,
2002 a net future income tax charge of $0.6 million was incurred compared to a
net future income tax credit realization of $1.2 million during fiscal 2001. The
tax credit during fiscal 2001 was primarily due to a valuation allowance credit
of $1.1 million for expected future income from the Company's oil and gas
properties. During fiscal 2002 the statutory tax rate for the Company was 39%
and fiscal 2001 43%.
Net losses from Continuing Operations: Consolidated loss from continuing
operations for the twelve month period ending June 30, 2002 was $1.1 million,
10% more than the $1.0 million loss from continuing operations reported for the
previous twelve month period.
Net losses from Continuing Operations Per Share: As a result of the
foregoing, net losses from continuing operations per share for the twelve month
period ending June 30, 2002 decreased 22% to $0.17 per share from $0.23 per
share for fiscal 2001.
Discontinued Operations: Losses incurred from discontinued operations
result from the Company's discontinued Power Division in fiscal 2001. During the
current year the Company did not incur any losses from discontinued operations.
Losses from discontinued operations were $2.7 million for the twelve month
period ending June 30, 2001.
Net losses and Net losses per share: As a result of the foregoing, net loss
decreased 69% to $1.1 million as compared to a net loss incurred of $3.6 million
during the previous fiscal period. Net loss per share decreased 80% to $0.17 per
share for the fiscal period ending June 30, 2002 from $0.85 per share for the
previous twelve month period.
Goodwill: During the year the Company adopted new accounting policies for
Goodwill as required under the recommendations of the new CICA Handbook Section
1581, Business Combinations, and Section 3062, Goodwill and Other Intangibles
(see Critical Accounting Policies above). The new accounting policy has not been
adapted retroactively. The adjusted net loss and basic loss per share for the
comparative fiscal year ending June 30, 2001 if no amortization was recorded in
those years is a loss of $3.4 million versus the recorded amount of $3.6 million
in 2001 and a net loss per share of $(0.79) versus a loss per share of $(0.85)
reported in the financial statements.
The following discussion of the results of operations of the Company is a
comparison of the Company's two fiscal periods ended June 30, 2001 and 2000.
Revenue: The Company's consolidated revenues of $19.1 million for the year
ending June 30, 2001 increased by 1% from $18.9 million reported during the same
period the previous year. New sources of revenue from the Company's Oil & Gas
Division, which commenced February 1, 2001, contributed to this revenue growth.
Gross Profit: Consolidated gross margins for the fiscal period ending June
30, 2001 decreased 34% to $2.5 million from $3.8 million in 2000. The difference
was primarily due to decreased profit margins from the Company's Industrial &
Offshore Division. During fiscal 2001 gross profit margins from the Industrial &
Offshore Division were 13% compared to 20% the previous year. The difference is
attributable to both a high volume low margin contract included in revenues in
2001 and a high volume high margin contract included in revenues in 2000.
Consolidated gross profit includes a 43% gross profit margin derived from the
Company's Oil & Gas Division.
Administrative expenses: Administrative expenses of $2.6 million for the
twelve month period ending June 30, 2001 was substantially lower than
administrative expenses of $4.3 million for the previous twelve month period. In
2001 administrative expenses was reduced by previous years overprovision of
administrative expenses of approximately $1.0 million.
Loss from Continuing Operations before Income Taxes: Losses from Continuing
Operations before Income taxes increased 100% to $2.2 million during fiscal 2001
from $1.1 million the previous year. The majority of the increase was due to a
non-cash write down of inactive capital assets of $1.5 million. Before this
write down, the losses from continuing operations before income taxes would have
been reduced by 35% to $0.7 million. This reduction is due primarily to the
corporate restructuring which commenced during fiscal 2000.
Current and Future Income Taxes: Effective July 1, 2000, the Company
changed its method of accounting for income taxes from the deferral method to
the liability method. The liability method requires that accumulated tax
balances be adjusted to reflect changes in the tax rates. This standard was
applied retroactively; however, as permitted under the new rules, comparative
financial information has not been restated, as the difference was
insignificant. During the fiscal period ending June 30, 2001 a net future income
tax credit of $1.2 million was realized compared to a net future income tax
charge of $0.3 million during fiscal 2000. The tax credit during fiscal 2001 was
primarily due to a valuation allowance credit of $1.1 million for expected
future income from the Company's oil and gas properties. During fiscal 2001 the
statutory tax rate for the Company was 43% and fiscal 2000 45%.
Net losses from Continuing Operations: Consolidated loss from continuing
operations for the twelve month period ending June 30, 2001 was $1.0 million,
32% less than the loss from continuing operations reported for the previous
twelve month period.
Net losses from Continuing Operations Per Share: As a result of the
foregoing, net losses from continuing operations per share for the twelve month
period ending June 30, 2001 decreased 50% to $0.23 per share from $0.46 per
share for fiscal 2000.
Discontinued Operations: Losses incurred from discontinued operations
result from the Company's discontinued Power Division and the disposition of ASI
Holdings Limited and Merlin Engineering A.S. Losses from discontinued operations
increased 108% to $2.7 million for the twelve month period ending June 30, 2001
compared to $1.3 million in the previous fiscal period. The loss was primarily
due to the write down of the Karnataka Project and other charges taken against
the Company's Independent Power Projects.
Net losses and Net losses per share: As a result of the foregoing, net loss
increased 33% to $3.6 million as compared to a net loss incurred of $2.7 million
during the previous fiscal period. Net loss per share decreased 1% to $0.85 per
share for the fiscal period ending June 30, 2001 from $0.86 per share for the
previous twelve month period.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2002 were $5.6 million, compared to
$1.2 million at the end of the previous year. During the 2002 fiscal year the
Company issued common shares for cash of $9.4 million (See Note 10 of the
audited consolidated financial statements attached hereto). The primary use of
funds was applied to the exploration and development of oil and gas properties.
During the year the Company expended $2.8 million on the exploration and
development of new oil and gas reserves. In addition the Company repaid $0.4
million of shareholder loans for cash and utilized $0.6 million from its line of
credit. Cash of $2.0 million was used to fund the Company's operating
activities.
Cash resources at June 30, 2001 were $1.2 million, compared to $1.7 million
at the end of the previous year. During fiscal 2001 the Company recovered
approximately $3.4 million from its investment in KEOPL (the Andhra Pradesh
Project) and issued common and preference shares for a gross proceeds of $1.6
million. The available cash was used to acquire $1.7 million of oil and gas
properties and to repay $1.9 million in prior advances from shareholders. The
remainder of cash resources of approximately $1.3 million was applied to fund
operating activities.
The Company's primary sources of liquidity and capital resources
historically have been cash flows from the operations of the Industrial &
Offshore Division, issuance of share capital and advances from shareholders.
During fiscal 2001 and 2000 the Company recovered part of its investment in
KEOPL. During fiscal 2003, it is expected that primary sources of liquidity and
capital resources will be derived from the operations of the Industrial &
Offshore Division, revenues from the Oil & Gas Division and further recovery of
the Company's investment in KEOPL.
The Company's Industrial & Offshore Division maintains their own bank line
of credit facility. The Company's M&M and MMO subsidiaries credit facility,
through Canadian Imperial Bank of Commerce ("CIBC") was initially entered into
December 1994 and was amended on March 9, 2000. The CIBC credit facility
currently allows M&M to borrow up to the lesser of (i) $1.75 million, or (ii)
75% of receivables from government or large institutions/corporations and 60% of
other receivables to finance working capital requirements on a revolving basis.
The CIBC credit facility is payable upon demand. As of June 30, 2002, the
principal balance outstanding under the credit facility was $1.5 million,
compared to $0.8 million as at June 30, 2001. As security for repayment of the
credit facility, M&M granted to CIBC a first priority lien on pledged
receivables, inventory and specific equipment; a second priority lien on land,
buildings and immovable equipment; and an assignment of insurance. MMO also
guarantees the CIBC credit facility. The credit agreement requires M&M to
satisfy certain financial tests, limits the amount of indebtedness M&M may incur
and restricts the payment of dividends.
M&M is indebted to RoyNat, Inc. ("RoyNat") in the amount of $0.5 million as
of June 30, 2002 (compared to $0.6 million in 2001). This indebtedness arose in
connection with a mortgage loan, which was renewed August 2000.
The original credit was offered on May 18, 1990 by RoyNat to M&M in
connection with the purchase of its fabrication facility in St. John's,
Newfoundland and Labrador. The mortgage bears interest at RoyNat's cost of funds
plus 3.25%, and is payable in monthly principal payments of $7,000, plus
interest. As security, M&M granted a first priority lien on land and building,
and a secondary lien on all other assets of M&M, subject to a first priority
lien in favor of CIBC. MMO has also guaranteed this mortgage.
OUTLOOK AND PROSPECTIVE CAPITAL REQUIREMENTS: The Industrial & Offshore
Division is currently completing a backlog of contracts and are bidding on new
contracts for the third and fourth quarters. Further development of Atlantic
Canada's offshore infrastructure could feed further growth for the Industrial &
Offshore Division. In addition the Oil & Gas Division is adding positive cash
flow to fund corporate operations and future development and growth strategies.
At present the Company intends to expand its oil and gas interests. As part
of the Company's oil and gas exploration and development program the Company
expects to expend significant capital resources to expand its existing portfolio
of proved and probable oil and gas reserves. These expenditures can be funded
through existing cash held by the Company. Any excess expenditure may be funded
by additional share capital issued by the Company, debt or by other means.
Subsequent to year-end, Magna Services Limited required an increase in its
credit facility to the amount of $2,450,000. The facility is repayable on demand
on or before December 31, 2002 and bears interest at the Bank of Nova Scotia's
prime lending rate plus 2.00% per annum. As security for this facility, M&M was
required to confirm that they would subordinate repayment of $300,000 owed to
M&M by Magna until December 31, 2002. In addition, M&M executed a guarantee in
favour of the Bank of Nova Scotia of up to $500,000 until December 31, 2002 and
a permanent guarantee in favour of th bank of up to $75,000 of Magna's
obligations(See Note 7 of the Audited Consolidated Financial Statements attached
hereto).
With respect to anticipated capital expenditures over the next twelve
months, M&M is expected to expend approximately $0.5 million for new and used
manufacturing and office-related equipment. Such equipment, which could be
utilized to generate additional construction revenues, could be financed through
capital leases with equipment manufacturers or credit arrangements with M&M's
existing lenders, cash from its parent company or other means.
The Company's future profitability over the longer term will depend upon
its ability to successfully implement its business plan. M&M has, in the past,
focused on manufacturing and fabricating process piping, production equipment,
steel tanks and other metal products requiring specialized welding and
fabrication abilities. Management believes that several opportunities are
developing in the Atlantic provinces of Canada which will enable M&M to maintain
and increase this business. These include proposed offshore oil and gas projects
for the White Rose Oilfield, the Sable Island Offshore Energy Project, the
Hebron Oilfield, and the development of the Voisey's Bay nickel mine. It is also
anticipated by management that M&M will have recurring opportunities with
respect to the upgrade and maintenance of existing area infrastructure including
the Hibernia and Terra Nova oil fields, mechanical fabrication and maintenance
of production equipment for refineries, pulp and paper mills (including
environmental equipment) and private sector power generation projects (primarily
for mining and natural resources).
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ETC.
Not applicable.
D. TREND INFORMATION
SEASONALITY: The Company's Industrial & Offshore Division operates in a
cyclical and seasonal industry. Fabrication industry activity levels are
generally dependent on the level of capital spending in heavy industries such as
mining, forestry, oil and gas and petrochemicals. In addition the Company is
subject to seasonal levels of activity whereby business activities tends to be
lower during the winter months. The level of industry profits,
capacity-utilization in the industry and interest rates often affect capital
spending in these industries. Success in fabrication will be dependent on the
Industrial & Offshore Division's ability to secure and profitably perform
fabrication contracts. Fixed price fabrication contracts contain the risk of
bid error or significant cost escalation with regard to either labor or material
costs, combined with a limited ability to recover such costs from the applicable
client.
The Company's Oil & Gas Division is not a seasonal business, but increased
consumer demand or changes in supply in certain months of the year can influence
the price of produced hydrocarbons, depending on the circumstances. Production
from the Company's oil and gas properties is the primary determinant for the
volume of sales during the year.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The table on the next page sets forth the names of all directors and
executive officers of the Company as of the date of this Annual Report, with
each position and office held by them in the Company, and the period of service
as a director or as an officer.
Date First Elected as
Position with the Director or
Company and/or its Appointed Officer
Name Birthdate Subsidiaries of the Company
----- --------- ---------------------------------------------- --------------------
James C. Cassina 9/26/56 Chairman of the Board of Directors effective July 1, September 1996
2002. President and Chief Executive Officer of Energy
Power Systems Limited from July 22, 1998 to June 30,
2002; Director of Energy Power Systems Limited since
1996, President and Director of EPS Karnataka Power
Corp. since September 30, 1998; Director of KEOPL;
Director of EIPCL since October, 1999. Director of
M&M and MMO beginning June 20, 2002.
Sandra J. Hall 5/12/64 President of Energy Power Systems Limited beginning December 1997
July 1, 2002. Director of Energy Power Systems
Limited; Secretary of Energy Power Systems Limited
beginning July 22, 1998; Vice President of Corporate
Affairs from October 29, 1999 to June 30, 2002;
Director and Secretary-Treasurer of EPS Karnataka
Power Corp. since September 30, 1998. Director of
M&M and MMO beginning June 20, 2002.
Scott T. Hargreaves 6/10/67 Chief Financial Officer of Energy Power Systems February 1999
Limited beginning February 15, 1999
John H. Brake 5/4/41 Chairman, Chief Executive Office of M&M and MMO April 1996
MMO; Previously President of M&M and MMO; and
previously Director and President of Energy Power
Systems Limited until July 22, 1998.
Tom A. Warren 6/04/41 Controller, Director and Secretary of M&M and MMO; April 1996
Previously Director and Secretary of Energy Power
Systems Limited until July 22, 1998.
David R. Myers 1/14/51 President and Director of M&M and MMO effective April 1996
December 1, 2002; previously vice president of M&M
and MMO; Previously Director of Energy Power
Systems Limited until July 22, 1998.
Ramesh K. Naroola 9/26/45 Director of Energy Power Systems Limited since October 1999
October 1, 1999; Director of EPS Karnataka Power
Corp. since October 29, 1999.
Ian S. Davey 1/4/58 Director of Energy Power Systems Limited since December 1997
December 1997.
Milton Klyman . 9/1/25 Director of Energy Power Systems Limited from December 1997
December 1997 to September 2000, and again from
April 2001 to the date of this Annual Report.
Geoff C. Wells 4/25/67 Vice-President of M&M effective December 1, 2002. December 1,2002
Terry R. King 9/19/69 Vice-President of MMO effective December 1, 2002. December 1,2002
All of the directors will serve until the next Annual General Meeting or
until a successor is duly elected, unless the office is vacated in accordance
with the Articles of Amalgamation or Bylaws of the Company. Subject to the
terms of employment agreements, if any, executive officers are appointed by the
Board of Directors to serve until the earlier of their resignation or removal,
with or without cause, by the Directors.
There are no family relationships between any two or more Directors or
executive officers. There are no arrangements or understandings between any two
or more Directors or executive officers.
MR. JAMES C. CASSINA was appointed Chairman of the Company on July 1, 2002
and served as the President and Chief Executive Officer of the Company from July
1998 to June 30, 2002 and has been a Director of the Company since September
1996. On June 20, 2002, Mr. Cassina was appointed a Director of M&M and MMO. Mr.
Cassina is also the President and Director of EPS Karnataka Power Corp. since
September 1999. Prior thereto, Mr. Cassina was a self-employed business
consultant. During the past five years, Mr. Cassina has also served as President
and principal of Core Financial Enterprises Inc., a private investment company.
Mr. Cassina is a director of EIPCL since October 1999 and a director of KEOPL.
Mr. Cassina is an officer, director and principal of 1118836 Ontario Inc. Mr.
Cassina is an officer, director and principal shareholder in Bonanza Blue Corp.
MS. SANDRA J. HALL was appointed President of the Company on July 1, 2002,
and has been a Director of the Company since December 1997 and Secretary of the
Company since July 1998. From October 29, 1999 to June 30, 2002, Ms. Hall was
the Company's Vice President of Corporate Affairs. On June 20, 2002, Ms. Hall
was appointed a Director of M&M and MMO. Ms. Hall is Secretary-Treasurer and
Director of EPS Karnataka Power Corp. since September 1999. From September 1996
to April 2000 Ms. Hall served as comptroller of API Electronics Group Inc. From
1982 until September 1996, Ms. Hall was an accountant for Duguay and Ringler
Corporate Services. Ms. Hall is an officer and a director of Eugenic Corp. and
1407271 Ontario Ltd.
MR. SCOTT T. HARGREAVES has been Chief Financial Officer of the Company
since February 1999. He has been a Chartered Accountant since 1993 and a
Chartered Financial Analyst since 1998. Mr. Hargreaves is a member of the
Institute of Chartered Accountants of Ontario and the Institute of Chartered
Financial Analysts. For two years prior to joining the Company, he was a
corporate finance partner at Loewen, Ondaatje, McCutcheon Limited, a Toronto
based investment banker/broker. From September 1991 to October 1997 he worked as
an Assistant Vice President in corporate finance at Price Waterhouse, where he
specialized in the utilities sector.
MR. JOHN H. BRAKE was appointed Chairman and Chief Executive Officer of M&M
and MMO effective December 1, 2002, and was previously the President of M&M and
MMO from 1973 to November 30, 2002 and has been a director of M&M since 1973 and
MMO since its inception. Mr. Brake was also President of the Company from
February 1996 through July 1998. Mr. Brake is a member of the Association of
Professional Engineers and Geoscientists of Newfoundland and Labrador, the
Professional Engineers of Ontario, the Engineering Institute of Canada and the
Construction Labour Relations Association for the Province of Newfoundland and
Labrador. Mr. Brake is a founding director of the Newfoundland and Labrador
Construction Labour Relations Association, and a past President of the
Newfoundland and Labrador and Labrador Construction Association.
MR. TOM A. WARREN has been a director and the Secretary of M&M and MMO,
since April 1996. Mr. Warren was also a Director and Secretary of the Company
from May 1996 through July 1998. Mr. Warren has also been Controller of M&M &
MMO since 1981.
MR. DAVID R. MYERS was appointed President of M&M and MMO effective
December 1, 2002 and has been a director of M&M and MMO since 1973. Mr. Myers
was previously the Vice President of M&M and of MMO from 1974 to November 30,
2002. Mr. Myers was also a Director of the Company from May 1996 through July
1998.
MR. IAN S. DAVEY has been a Director of the Company since December 1997.
Mr. Davey has been President of TV Eye Entertainment Limited since 1993,
President of Compleat Communications Limited since 1990 and the President of
China One Communications since January 2001. Mr. Davey is a director of First
Strike Diamond Inc.
MR. RAMESH K. NAROOLA has been a director of the Company since October
1999. Mr. Naroola is a self-employed consultant in banking and labor law. He was
an Advisor to BHPE Kinhill Joint Venture on the Steel Authority of India Limited
Environment Project, National Mineral Development Corporation Project and the
Indian Railway Safety Training Project, Mechanism of ADB Funded Coal Handling
Project Paradip Port awarded to BHPE-KINHILL, 375 Km World Bank Funded Tamil
Nadu Highway Project, and 'Andhra Pradesh Urban Water Supply and Sanitation
Sector Strategy Study' Project. Mr. Naroola was a business advisor to Kinhill
Engineers-Australia and BHP Group-Australia. Until March 23, 1999 Mr. Naroola
has served on the Board of Directors of BHP Steel India Private Ltd., BHP
Minerals India Private Ltd., BHP Petroleum India Pvt. Ltd., BHPE Kinhill India
Private Ltd., and Kakinada Energy Ltd. Mr. Naroola has been an Advocate of the
Supreme Court of India, and is a Certified Life Associate of the Indian
Institute of Bankers and a Life Member of the Labor Law Society and Indian
Council of Arbitration and Indian Law Institute. Mr. Naroola is a director of
EPS Karnataka Power Corp., Asia Soft India Private Limited and IFOFI.com
Infotech India Private Limited.
MR. MILTON KLYMAN was a director of the Company from December 1997 to
September 2000. Mr. Klyman was re-appointed a director of the Company April
2001. Mr. Klyman is a self-employed financial consultant and has been a
Chartered Accountant since 1952. Mr. Klyman is a Life Member of the Canadian
Institute of Chartered Accountants. Mr. Klyman serves as a director on the
boards of various public companies including Academy Explorations Limited,
Century Financial Capital Group Inc., and OSE Corp.
MR. GEOFF C. WELLS is a mechanical engineering graduate from Memorial
University of Newfoundland and Labrador. He was appointed Vice-President of M&M
effective December 1, 2002. Mr. Wells joined M&M in 1991 and has been Project
Manager on several of M&M's major industrial projects related to Oil Refining,
Power Generation, Pulp and Paper as well as fabrication projects for the
offshore oil industry.
MR. TERRY R. KING is a civil engineering graduate from Memorial University
of Newfoundland and Labrador. He was appointed Vice-President of MMO effective
December 1, 2002. Mr. King joined MMO in 1997 and since that time has played a
key role in the development of special projects for MMO. He has served as
Project Manager on major offshore fabrication projects and also on a number of
MMO's industrial projects.
B. COMPENSATION
The Ontario Securities Act requires that the Company disclose information
about the compensation paid to, or earned by, the Company's Chief Executive
Officer and each of the other four most highly compensated executive officers of
the Company earning more than $100,000 in total salary and bonus for the fiscal
year ended June 30, 2002. The only executive officers of the Company for whom
disclosure is required are Messrs. Cassina, Brake, Hargreaves and Myers and Ms.
Hall. The aggregate amount of compensation (including salaries, bonuses and the
net amount realized on the exercise of stock options) paid and accrued by the
Company during the fiscal year ended June 30, 2002 to all directors, senior
management and administrative or supervisory personnel of the Company as a group
was CDN$1,811,326.
COMPENSATION OF SPECIFIED EXECUTIVE OFFICERS
The table on the next page presents, in accordance with the applicable
regulations under the Securities Act (Ontario) (the "Regulations") all annual
and long-term compensation for services rendered in any capacity to the Company
or its subsidiaries for the annual periods ended June 30, 2002, 2001 and 2000
(to the extent required by the Regulations). The Regulations require disclosure
for individuals who served as the Chief Executive Officer of the Company or were
among the most highly compensated executive officers (in terms of salary and
bonus) of the Company, provided that each such person's annual salary and bonus
exceeded CDN$100,000. The Company has five such individuals (including the
Chief Executive Officer of the Company) and their compensation stated in
Canadian dollars is listed below.
Registered Securities
Retirement under Net Value
Annual Plan Options HELD / Realized on
Compensation (CDN$) Employer SECURITIES Exercise of All Other
Fiscal ------------------- Contribution UNDER OPTION Stock Options Compensation
Name Year Salary Bonus (CDN$) (CDN$) (CDN$)
-------------------- ------ -------- ----- ------------ ------------- ------------- -------------
James C. Cassina 2002 $100,000 None None 120,000/150,000 $395,782 $ 17,342
2001 $100,000 None None 65,000/65,000 Nil $ 7,736
2000 $212,500 None None 15,625/15,625 Nil None
Sandra J. Hall(2) 2002 $ 48,000 None None 81,500/100,000 $340,684 $ 8,241
2001 $ 12,000 None None 65,000/65,000 Nil None
2000 $ 12,000 None None 6,250/3,750 Nil None
Scott T. Hargreaves 2002 $100,000 None None 25,000 / 25,000 $ 37,821 None
2001 $100,000 None None 10,000/10,000 Nil None
2000 $100,000 None None 5,625/3,125 Nil None
John H. Brake 2002 $119,676 None $ 9,575 10,000/10,000 $ 55,344 $ 7,936
2001 $122,863 $5,000 $ 9,418 10,000/10,000 Nil $ 10,788
2000 $121,897 $15,000 $ 9,732 12,500/12,500 Nil $ 10,644
David R. Myers 2002 $131,957 None $10,324 10,000/10,000 Nil $ 10,103
2001 $120,951 $20,000 $10,202 0 Nil $ 10,054
2000 $118,337 $14,500 $10,569 0 Nil $ 8,862
____________________
(1) All options for Common Stock were granted pursuant to the 1996 Stock
Option Plan amended December 2001.
(2) Effective July 1, 2002 the Board of Directors passed a resolution
setting Ms. Hall's annual salary as President at CDN$100,000.
COMPENSATION TO DIRECTORS
There was no monetary compensation paid by the Company to the directors,
during the fiscal year ended June 30, 2002 for their services in their capacity
as directors.
LONG-TERM INCENTIVE PLAN AWARDS
The Company did not have a long-term incentive plan during the fiscal year
ended June 30, 2002.
SHARE OPTIONS GRANTED
The following table summarizes the share options of the Company granted to
all Company executive officers and directors during the fiscal year ending June
30, 2002.
Market Value of
Shares (CDN$)
Fiscal Year Shares Exercise Underlying
of Option under Options Price Options on the
Name Grant Granted (#) (CDN) Date of Grant Expiration Date
-----------------------------------------------------------------------------------------------------
James C. Cassina 2002 150,000 $ 6.30 $ 6.18 January 8, 2006
John H. Brake 2002 10,000 $ 6.30 $ 6.18 January 8, 2006
Sandra J. Hall 2002 100,000 $ 6.30 $ 6.18 January 8, 2006
Scott T. Hargreaves 2002 25,000 $ 6.30 $ 6.18 January 8, 2006
Ramesh K. Naroola 2002 20,000 $ 6.30 $ 6.18 January 8, 2006
Milton Klyman 2002 5,000 $ 6.30 $ 6.18 January 8, 2006
David Myers 2002 10,000 $ 6.30 $ 6.18 January 8, 2006
Ian S. Davey 2002 2,500 $ 6.30 $ 6.18 January 8, 2006
All Officers and Directors 2002 322,500 $ 6.30 $ 6.18 January 8, 2006
SHARE OPTIONS EXERCISED The following executive officers exercised options
for Common Stock of the Company during the fiscal year ended June 30, 2002 as
follows:
Market Value
of
Shares (US$)
Fiscal Year Shares Exercise Underlying
of Option Options Price Options on the
Name Grant exercised (#) (CDN) Date of Exercise Exercise Date
--------------------------------------------------------------------------------------------------
James C. Cassina 2001 5,000 $ 1.50 $ 5.20 November 19, 2001
3,000 $ 1.50 $ 5.21 November 19, 2001
7,000 $ 1.50 $ 5.23 November 19, 2001
2,000 $ 1.50 $ 5.25 November 19, 2001
5,000 $ 1.50 $ 5.30 November 19, 2001
5,000 $ 1.50 $ 5.37 November 19, 2001
5,000 $ 1.50 $ 5.28 November 19, 2001
7,400 $ 1.50 $ 5.23 November 19, 2001
600 $ 1.50 $ 5.27 November 19, 2001
1,900 $ 4.00 $ 4.91 March 28, 2002
23,100 $ 4.00 $ 4.805 March 28, 2002
2002 10,000 $ 6.30 $ 4.696 April 1, 2002
5,000 $ 6.30 $ 4.71 April 1, 1002
10,000 $ 6.30 $ 4.69 April 1, 2002
4,500 $ 6.30 $ 4.60 April 2, 2002
500 $ 6.30 $ 4.58 April 2, 2002
John H. Brake 2001 5,000 $ 1.50 $ 3.50 October 5, 2001
1,000 $ 1.50 $ 5.38 January 18, 2002
1,000 $ 1.50 $ 5.38 January 18, 2002
1,000 $ 1.50 $ 5.38 January 18, 2002
2,000 $ 1.50 $ 5.39 January 18, 2002
Scott T. Hargreaves 2001 2,400 $ 4.00 $ 5.04 November 21, 2001
1,600 $ 4.00 $ 5.05 November 21, 2001
1,000 $ 4.00 $ 5.06 November 21, 2001
5,000 $ 4.00 $ 4.86 November 21, 2001
Sandra J. Hall 2001 5,000 $ 1.50 $ 3.22 August 30, 2001
10,000 $ 1.50 $ 3.26 August 30, 2001
1,000 $ 1.50 $ 3.55 October 5, 2001
1,000 $ 1.50 $ 3.48 October 5, 2001
1,000 $ 1.50 $ 3.53 October 5, 2001
2,000 $ 1.50 $ 3.50 October 5, 2001
6,000 $ 1.50 $ 5.26 November 19, 2001
4,000 $ 1.50 $ 5.25 November 19, 2001
10,000 $ 1.50 $ 5.23 November 19, 2001
3,400 $ 4.00 $ 5.02 November 23, 2001
1,600 $ 4.00 $ 5.05 November 23, 2001
1,000 $ 4.00 $ 5.47 January 23, 2002
3,800 $ 4.00 $ 5.46 January 23, 2002
800 $ 4.00 $ 5.48 January 23, 2002
8,400 $ 4.00 $ 5.45 January 23, 2002
1,000 $ 4.00 $ 5.41 January 23, 2002
5,000 $ 4.00 $ 5.53 January 23, 2002
2002 3,500 $ 6.30 $ 4.93 March 28, 2002
3,000 $ 6.30 $ 4.77 March 28, 2002
4,000 $ 6.30 $ 4.73 April 1, 2002
8,000 $ 6.30 $ 4.75 April 1, 2002
The following directors (excluding executive officers) exercised options
for Common Stock of the Company during the fiscal year ended June 30, 2002 as
follows:
Market Value
of
Shares (US$)
Fiscal Year Shares Exercise Underlying
of Option Options Price Options on the
Name Grant exercised (#) (CDN) Date of Exercise Exercise Date
------------------------------------------------------------------------------------------
Ramesh K. Naroola 2001 20,000 $1.50 $3.10 October 5, 2001
Milton Klyman 2001 3,000 $ 4.00 $ 5.20 November 19, 2001
2,000 $ 4.00 $ 5.21 November 19, 2001
Ian S. Davey 2001 5,000 $ 1.50 $ 4.77 October 11, 2001
5,000 $ 1.50 $ 5.28 November 19, 2001
1996 STOCK OPTION PLAN
The Company's Stock Option Plan (the "1996 Plan") was adopted by the Board
of Directors on March 25, 1996, and approved by a majority of the Company's
shareholders voting at the Annual General Meeting on April 30, 1996. The 1996
Plan was adopted to provide incentives for the directors, officers, employees,
consultants and other persons who provide ongoing services to the Company and
its subsidiaries, and to conform the plan to revised policies of the Toronto
Stock Exchange and Ontario Securities Commission.
The Board of Directors may at their discretion provide that options granted
under the 1996 Plan are subject to earlier termination upon the optionee's
termination of employment, retirement, death, permanent disability, or
commencement of bankruptcy. The maximum number of shares of Common Stock which
may be set aside for issuance under the 1996 Plan was initially 281,250 common
shares, however, the Board has the right, from time to time, to increase such
number subject to the approval of the shareholders of the Company. On December
28, 2001, shareholders approved an increase in the number of common shares
eligible for issuance pursuant to the grant of options to a maximum of 800,000.
At the December 30, 2002 Annual and Special Meeting, a resolution will be
submitted to the shareholders for approval, increasing the shares reserved for
issuance under the Plan to an amount equal to 20% of the Company's outstanding
shares from time to time. The maximum number of shares of Common Stock which may
be reserved for issuance to any one person under the 1996 Plan is 5% of the
Company's Common Shares outstanding at the time of the grant (calculated on a
non-diluted basis), less the number of shares reserved for issuance to such
person under any option to purchase Common Shares granted as a compensation or
incentive mechanism.
Any shares subject to an option which for any reason is cancelled or
terminated prior to exercise will be available for a subsequent grant under the
1996 Plan. Options granted under the 1996 Plan may be exercised for a period of
up to five years. The options are non-transferable. The 1996 Plan contains
provisions to adjust the number of shares issuable thereunder in the event of a
subdivision, consolidation, reclassification or change in the Common Stock, a
merger or any other relevant change in the Company's capitalization. The Board
of Directors may from time to time amend or revise the terms of the 1996 Plan,
or terminate the 1996 Plan at any time.
REGISTERED RETIREMENT PLAN
M&M maintains a registered retirement plan (the "RRP") for executive
management. The RRP is registered under the provisions of Section 146 et seq.
of the Income Tax Act of Canada and the regulations thereunder. Under the terms
of the RRP, if an employee elects to participate in the RRP he must contribute
5% of his or her base salary, and the employer must contribute an equal amount.
The employee does not pay income taxes on either the employee's or the
employer's contributions, although the employer may deduct its contributions as
a business expense. The RRP is administered by Manulife Financial on behalf of
M&M. Total employer contributions for M&M's fiscal years ended June 30, 2000,
2001 and 2002 were CDN$31,849, CDN$31,920, and CDN$31,923 respectively.
REGISTERED RETIREMENT SAVINGS PLAN
M&M maintains a registered retirement savings plan (the "RSP") for staff
and union employees that is registered under the provisions of Section 146 et
seq. of the Income Tax Act of Canada and the regulations thereunder. Under the
terms of the RSP, if an employee elects to participate, he or she must
contribute 2.5% of his or her base salary and the employer must contribute 1% of
such salary amount. The employee does not pay income taxes on either the
employee's or the employer's contributions, although the employer may deduct its
contributions as a business expense. The RSP is administered by the Desjardins
Financial Security (formerly: Laurentian Imperial Company) on behalf of M&M.
Total employer contributions for M&M's fiscal years ended June 30, 2000, 2001
and 2002 were CDN$9,649, CDN$10,935 and CDN$13,580 respectively.
EMPLOYMENT CONTRACTS
As of July 1, 1999, the Company and Mr. Cassina entered into a three-year
employment contract cancelable upon six-months' written notice with or without
cause, whereby Mr. Cassina would serve as Chief Executive Officer of the
Company. On June 30, 2002, the three-year contract between the Company and Mr.
Cassina expired under its own terms and was not renewed. On June 30, 2002 Mr.
Cassina resigned as President and Chief Executive Officer of the Company and was
appointed Chairman of the Board of Directors.
The Company has an employment contract with its Chief Financial Officer,
Mr. Scott Hargreaves. Entered into in February 1999, the agreement provides for
annual compensation of CDN$100,000 and potential bonuses and stock option grants
based on performance (in accordance with the Company's grants to other officers
and the Company's performance). The agreement is renewable upon the agreement of
both parties.
C. BOARD PRACTICES
The current terms of each of the Company's directors began on December 28,
2001 and will expire on the date of the Company's 2002 annual and special
meeting of shareholders on December 30, 2002. There was no compensation paid by
the Company to the directors, during the fiscal year ended June 30, 2002 for
their services in their capacity as directors. During the fiscal year ending
June 30, 2002 the Company granted to all officers and directors a total of
322,500 options to acquire Common Shares, exercisable at $6.30 until January 8,
2006.
There are no contracts with the Company or any of its subsidiaries
providing for benefits upon termination of an employee or a director.
COMMITTEES OF THE BOARD
The Board of Directors consists of five directors, three of which
"independant directors" in that they are "independent from management and free
from any interest and any business or other relationship which could, or could
reasonably be perceived to, materially interfere with the director's ability to
act with a view to the best interests of the Company, other than interests and
relationships arising from shareholding". The independent directors are Messrs.
Davey, Klyman and Naroola. It is the Company's practice to attempt to maintain
a diversity of professional and personal experience among its directors.
The Board of Directors discharges its responsibilities directly and through
committees of the Board of Directors, currently consisting of an Audit
Committee, Compensation Committee and Corporate Governance Committee.
Each of the Compensation Committee and the Corporate Governance Committee
consists of a majority of independent directors, while the Audit Committee
consists of only disinterested directors. Each Committee has a specific mandate
and responsibilities, as reflected in the adoption of formal charters for each
committee.
MEMBERS OF THE AUDIT COMMITTEE
The mandate of the Audit Committee is formalized in a written charter. The
members of the audit committee of the Board are Messrs. Naroola, Davey and
Klyman (Chairman). Based on his professional certification and experience, the
Board has designated Mr. Klyman as a "financial expert" under proposed
Securities and Exchange Commission Rules. The audit committee's primary duties
and responsibilities are to serve as an independent and objective party to
monitor the Company's financial reporting process and control systems, review
and appraise the audit activities of the Company's independent auditors,
financial and senior management, and to review the lines of communication among
the independent auditors, financial and senior management, and the Board of
Directors for financial reporting and control matters. (See "Item 15 - Certain
Disclosures")
MEMBERS OF THE COMPENSATION COMMITTEE
The mandate of the Compensation Committee is formalized in a written
charter. The members of the compensation committee of the Board are Messrs.
Cassina, Naroola and Davey. The Committee is responsible for making
recommendations to the Board of Directors on all matters relating to the
compensation of directors, the members of various other committees of the Board
and the senior officers of the Company. For this purpose the Compensation
Committee reviews all aspects of compensation paid to directors, committee
members, management and employees to ensure the Company's compensation programs
are competitive, and that the Company can attract, motivate and retain high
calibre individuals.
MEMBERS OF THE CORPORATE GOVERNANCE COMMITTEE
The mandate of the Corporate Governance Committee is formalized in a
written charter. The members of the corporate governance committee of the Board
are Messrs. Cassina, Naroola and Davey. The Committee's duties and
responsibilities include, but are not limited to, periodic review of the
criteria regarding the composition of the board of directors and committees of
the board of directors; assessing and providing recommendations on the
effectiveness of the board of directors as a whole, the committees of the board
of directors and the contribution of individual directors; supervising the
Company's securities compliance procedures; ensuring that an appropriate
selection process for new director and committee nominees is in place; and
dealing with succession planning issues relating to senior management.
D. EMPLOYEES
As of June 30, 2002 the Company had 137 employees, of which 3 were employed
in the Company's executive office in Toronto, Ontario, Canada, and 134 were
employed by M&M or MMO in Newfoundland and Labrador.
E. SHARE OWNERSHIP
The following table sets forth as of December 6, 2002 certain information
with respect to the amount and nature of beneficial ownership of the Common
Stock held by (i) each person who is a director or is or was a member of senior
management of the Company during the fiscal year; and (2) all directors and such
members of senior management of the Company, as a group.
Amount and
Nature of
Beneficial
Ownership
of Common
Name of Owner Identity Stock(2) Percentage(1)
----------------------------- -------------------------------------- -------------
James C. Cassina Chairman and Director, , 393,491 (3) 4%
of Energy Power
Systems Limited
Director of M&M and
MMO
Sandra J. Hall President, Director, and 81,500 *
Secretary of Energy
Power Systems Limited,
Director of M&M &
MMO
Scott T. Hargreaves Chief Financial Officer 25,000 *
of Energy Power
Systems Limited
John H. Brake Chairman and Chief 10,000 *
Executive Officer and
Director of M&M &
MMO
Tom A. Warren Director and Secretary of - *
M&M & MMO
Ian S. Davey Director, Energy Power Systems Limited 2,500 *
Ramesh K. Naroola Director, Energy Power 20,000 *
Systems Limited
Milton Klyman Director, Energy Power 5,000 *
Systems Limited
David R. Myers President and Director of 10,000 *
M&M and MMO
Geoff C. Wells Vice President of M&M - *
Terry R. King Vice President of MMO - *
All directors and members of 547,491 5%
senior management as a group
(11 persons)
_______________
* Less than 1%.
(1) Unless otherwise indicated, the persons named have sole ownership,
voting and investment power with respect to their stock, subject to applicable
laws relative to rights of spouses. Percentage ownership is based on 10,578,645
shares of Common Stock outstanding on the transfer records of the Company as of
December 6, 2002.
(2) Includes the number of shares of Common Stock which would be
outstanding if all options held by that person that are currently exercisable or
become exercisable within 60 days were exercised. See table of Share Options
Granted above.
(3) Includes 181,250 shares of Common Stock owned by Core Financial
Enterprises Inc., a private Ontario company, of which Mr. Cassina is the
President, sole director and a controlling shareholder. Mr. Cassina directly
owns 92,241 shares of Common Stock, and beneficially owns 120,000 shares of
Common Stock issuable upon exercise of management options.
As of the date of this Annual Report, to the knowledge of management of the
Company, there are no arrangements which could at a subsequent date result in a
change in control of the Company. As of such date, and except as disclosed
herein, the management of the Company has no knowledge that the Company is owned
or controlled directly or indirectly by another corporation or any foreign
government.
WARRANTS ISSUED AND OUTSTANDING
The following table sets forth outstanding warrants for Common Shares of
the Company as of December 6, 2002.
Number of
Shares of
Common Stock
Purchasable by Exercise
Date of Exercise of Price
Issuance Warrant Holder Warrants (US) Expiry Date
------------------------------------------------------------------------------------
March 13, 2002 KTH Holdings Inc. 40,000 US$4.45 March 13, 2003
Total Warrants Outstanding 40,000
==============
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
As of December 6, 2002 there are no shareholders known to the Company to be
beneficial owners of over 5% of the Company's common shares.
The following table discloses the geographic distribution of the majority of the
holders of record of the Company's common stock as of December 6, 2002.
COUNTRY NUMBER OF NUMBER OF PERCENTAGE OF PERCENTAGE
SHAREHOLDERS SHARES SHAREHOLDERS OF SHARES
------------ ---------- -------------- -----------
Canada 3,331 8,823,180 94.02% 83.41%
--------- ------------ ---------- -------------- -----------
USA 205 1,724,697 5.79% 16.30%
--------- ------------ ---------- -------------- -----------
All Other 7 30,768 0.19% 0.29%
--------- ------------ ---------- -------------- -----------
Total 3,543 10,578,645 100% 100%
--------- ------------ ---------- -------------- -----------
B. RELATED PARTY TRANSACTIONS
During the last three fiscal years ended June 30, 2002, and through the
date of this Annual Report, the Company has entered into certain transactions
with its directors, executive officers or 10% security holders.
As of July 1, 1999, the Company and the former President Mr. Cassina
entered into a three-year employment contract cancelable upon six-months'
written notice with or without cause, whereby Mr. Cassina would serve as Chief
Executive Officer of the Company. The contract specifies that Mr. Cassina would
be paid a base annual salary of CDN$250,000 with a possible bonus of up to 200%
of such salary. Pursuant to the contract, Mr. Cassina would be granted 500,000
stock options (125,000 post consolidated), 250,000 (62,500 post consolidated)
exercisable at CDN$3.50/share ($14.00 post consolidated) and 250,000 (62,500
post consolidated) exercisable at CDN$5.00/share ($20.00 post consolidated).
Early termination of the contract by the Company would trigger a one-time
severance payment of a minimum of CDN$2 million. In April 2000 the Company and
Mr. Cassina agreed to a reduction in annual salary to CDN$100,000, and that
250,000 stock options (62,500 post consolidated) previously reserved for Mr.
Cassina would be waived. Effective June 30, 2002 the employment contract expired
under its own terms and was not renewed.
In September 1999 the Company completed a private placement with Aarken
Consultants Pvt. Ltd., an Indian corporation, of which Mr. Naroola was an
officer, director and 50% shareholder. In the placement, Aarken Consultants
Pvt. Ltd. acquired 150,000 (37,500 post consolidated) units comprised of 150,000
Common Shares (37,500 post consolidated) and 150,000 warrants (37,500 post
consolidated) to purchase Common Shares at $2.25 ($9.00 post consolidated) until
September 27, 2002, in consideration of a forgiveness of debt of CDN$225,000. On
December 1, 2000 Aarken Consultants Pvt. Ltd. voluntarily released 150,000
warrants (37,500 post consolidated) to purchase Common Shares at $2.25
(post-consolidated $9.00) until September 27, 2002. Aarken Consultants Pvt.
Ltd. perform legal and advisory services to the Company with respect to the
power projects in India. Management believes that such services are performed
for the same compensation as that between third parties dealing at arms length.
In February 2001 the Company and Rally Energy Corp., ("Rally") entered into
a Purchase and Sale Agreement whereby the Company acquired Rally's interest in
the Sibbald Property in Alberta and additional minor interests held by Rally in
properties in Ontario. Ms. Hall, a Director, Secretary and Vice President
Corporate Affairs of the Company, was at the time the Purchase and Sale
Agreement was entered into also a director and officer of Rally. At that time,
Ms. Hall did not hold or control greater than 5% of the issued and outstanding
shares of the Company or of Rally. However, Ms. Hall disclosed her respective
board positions to each board and abstained from voting on the resolutions for
both the Company and Rally. Ms. Hall subsequently resigned as a director and
officer of Rally on June 28, 2001.
Mr. Klyman was a director of the Company from December 29, 1997 until the
Annual and Special Meeting held September 12, 2000 at which time he did not
stand for election. Mr. Klyman was a director of Rally until Rally's Annual
Meeting held on June 28, 2001. During the Purchase and Sale of the
Sibbald/Ontario Properties to the Company in March 2001 Mr. Klyman was a
director of Rally but not a director of the Company. The purchase and sale was
negotiated at arms length and the purchase price was determined pursuant to an
independent evaluation report on the Sibbald property prepared by Gilbert
Laustsen Jung, and production revenues. In April of 2001 the Company requested
that Mr. Klyman join the Board of the Company in order for the Company to avail
itself of Mr. Klyman's financial expertise, and fulfill certain listing
requirements of the American Stock Exchange.
Mr. Cassina, Chairman and a director of the Company was an insider of Rally
until January of 2001 by virtue of Mr. Cassina's direct or indirect control over
approximately 14% of the issued and outstanding shares of Rally. Prior to the
Company's entering into the Purchase and Sale Agreement with Rally Mr. Cassina
had reduced his interest in Rally to less than 10% of the outstanding shares of
Rally. The sale of the Sibbald Property by Rally to the Company was decided by
the Board of Directors of Rally, and Mr. Cassina played no role in the Rally
decision. However, Mr. Cassina voted in favour of the acquisition on behalf of
the Company, in his position as a director. The purchase and sale was negotiated
at arms length and the purchase price was determined pursuant to an independent
evaluation report on the Sibbald property prepared by Gilbert Laustsen Jung, and
production revenues.
In March of 2001 the Company and OSE Corp. ("OSE") (formerly Oil Springs
Energy Corp.) entered into a Purchase and Sale Agreement whereby the Company
acquired an average 20% working interest in three producing gas properties
located within Alberta in the areas known as Bigstone and Kaybob. Mr. Cassina
was a director of OSE. Mr. Cassina disclosed his respective positions to each
board and abstained from voting on the resolutions of the board for each of the
Company and OSE. The purchase and sale of the interest was negotiated at arms
length and the purchase price was determined pursuant to an evaluation assessed
by an independent geological consultant to the Company.
Mr. Klyman was a director of the Company from December 29, 1997 to
September 12, 2000 at which time he did not stand for election. Mr. Klyman has
been a director of OSE from April 1, 1994 to the date of this Annual Report.
During the Purchase and Sale of the Kaybob/Bigstone/Ontario Properties in March
2001 Mr. Klyman was a director of OSE but not a director of the Company. The
purchase and sale was negotiated at arms length and the purchase price was
determined pursuant to third party evaluation
The maximum aggregate amount outstanding under all executive loans to
officers during the last three fiscal years occurred in the fiscal year ended
June 30, 2000, and was equal to CDN$35,000 in the aggregate. During the fiscal
year ending June 30, 2002, the largest aggregate amount of outstanding loans to
an officer of the Company's subsidiary was CDN$13,054. As of December 6, 2002
$8,668 of such loan remained outstanding.
For the fiscal years ending June 30, 2002, 2001 and 2000 the Company
charged a management fee to M&M. The management fee totaled $365,000 during
fiscal 2002, $300,000 during fiscal 2001 and $320,000 during fiscal 2000.
Effective December 31, 2001 the Company subscribed for 280 Class A
Preference Shares (the "Preference Shares") in M&M for total cash consideration
of $280,000.
Effective December 31, 2001 the Company transferred its ownership of the
two properties located in Port aux Basques, Newfoundland and Labrador to 10915
Newfoundland Limited and 11123 Newfoundland Limited, two 100% owned subsidiaries
of the Company. The Transfer Shed was sold to 10915 Newfoundland Limited at its
book value of $220,000 and the Fabrication Building was sold to 11123
Newfoundland at its book value of $1.00. Effective December 31, 2001 the Company
subscribed for 220 preference shares in M&M for total consideration of $220,000.
The Preference Shares were issued to the Company in exchange for all the issued
and outstanding shares of 10915 Newfoundland Limited. Effective December 31,
2001 the Company sold all the issued and outstanding shares in 11123
Newfoundland Limited to M&M for total consideration of $1.
Effective June 30, 2002 the Company subscribed for an additional 272
preference shares in M&M for total consideration of $272,000. In exchange for
the preference shares the Company settled its accounts receivable from M&M in
the amount of $272,000.
During September 2002 the Company advanced a non-interest bearing demand
loan in the amount of $500,000 to M&M. The demand loan was repaid in full in
November 2002.
Magna required an increase in its credit facility to the amount of
$2,450,000. The facility is repayable on demand on or before December 31, 2002
and bears interest at the Bank of Nova Scotia's prime lending rate plus 2.00%
per annum. As security for this facility, M&M was required to confirm that they
would subordinate repayment of $300,000 owed to M&M by Magna until December 31,
2002. In addition, M&M executed a guarantee in favour of the Bank of Nova Scotia
of up to $500,000 until December 31, 2002 and a permanent guarantee in favour of
the bank of up to $75,000 of Magna's obligations (See Note 7 of the Audited
Consolidated Financial Statements attached hereto).
For the fiscal year ending June 30, 2002 the Company was indebted in the
amount of $315,004 to Core Financial Enterprises Inc. of which Mr. James Cassina
a director of the Company is the sole officer, director and a controlling
shareholder of Core Financial Enterprises Inc. The amount is non-interest
bearing and due on demand.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
Financial Information regarding the Company may be found in the Company's
Consolidated Financial Statements for the fiscal years ended June 30, 2000 2001
and 2002 and the notes thereto included in the Exhibits in this Annual Report,
and under "Item 5 - Management's Discussion and Analysis of Financial Condition
and Results of Operations" above.
LITIGATION
As of the date of this Annual Report, the Company has the following pending
litigation, actions or proceedings, each of which could have a material effect
on the Company's financial condition or profitability. The Company expresses no
opinion about the potential outcome of the litigation and or arbitration
proceedings described below.
The Company owns 11,348,200 common of Rs. 10 each (the "KEOPL Shares"), of
Konaseema EPS Oakwell Power Limited ("KEOPL"), a company incorporated in India,
which is developing a power project in Andhra Pradesh, India (the "KEOPL
Project"). Pursuant to the Revised VBC Agreement dated August 10, 2000 between
the Company, VBC Group ("VBC"), KEOPL's parent company, and KEOPL, VBC is
obligated to purchase the KEOPL Shares held by the Company for INR 113,482,000
(approximately Cdn. $3.5 million) on or before June 30, 2002 if the Company
offers its KEOPL Shares to VBC prior to June 30, 2002. The Company offered and
tendered the KEOPL Shares to VBC on May 3, 2002, for purchase on or before June
30, 2002.
On July 1, 2002, VBC raised a dispute with the Company regarding the
purchase and sale allegedly after VBC received a communication from Oakwell
alleging a potential claim by Oakwell against the Company that could involve the
KEOPL Shares. Via letter to VBC dated August 16, 2002 Oakwell informed VBC that
Oakwell would no longer be seeking a claim to the KEOPL Shares owned by the
Company and put for sale to VBC.
The Company is pursuing legal remedies against VBC and Oakwell to effect
the sale of the KEOPL Shares to VBC. On August 23, 2002 the Company filed an
action in the Supreme Court, State of New York, County of New York (Index
#603111/02) against Oakwell for tortious interference with contract and for
libel. On July 25, 2002 under the terms of the Revised VBC Agreement the Company
served in India a Notice of Arbitration upon VBC.
On December 29, 1998 the Company and Oakwell entered into a
Settlement Agreement (the "Agreement") relating to a power project in Andhra
Pradesh India (the "Project"). Subsequent to the Agreement, a change of
circumstances materially affected the Project which may affect the terms of the
Agreement. On September 26, 2002, Oakwell filed a Writ of Summons against the
Company. In such writ, Oakwell claims the sum of US$2,790,000, an amount
equivalent to 6.25% of the actual cash available for foreign repatriation from
the Project in the first five years after the commercial operation date, or in
the alternative, damages, interest at 8% per annum and indemnity costs. On
November 8, 2002 the Company cross-claimed against Oakwell for US$5,015,000 plus
damages, costs and interest. Oakwell has claimed repudiation of the Agreement.
Oakwell has renounced further performance of the Agreement which has been
accepted by the Company.
On April 22, 1999, the Karnataka Power Transmission Corporation Limited
(formerly the Karnataka Electricity Board) of the State of Karnataka, India
("KPTCL") executed a PPA with EIPCL, a limited liability company incorporated in
India. The Company is recognized as a Sponsor of the PPA by KPTCL and has
certain rights of ownership in EIPCL. (See "Item 4A - History and Development").
Effective May 10, 2001 the project was given the approval by the State
Government to be converted to a coal fueled land based power project. The PPA
has yet to be amended and there are deficiencies in the State Government's
performance, including among other requirements, the provision of payment
guarantees for the Karnataka project. Pursuant to Clause 14.1 (a) of the PPA,
EIPCL served upon KPTCL and the Government of Karnataka ("GOK") a Notice of
Arbitration on September 24, 2002 and under Clause 14.1 (b) of the PPA served a
Second Notice of Arbitration on November 7, 2002. On December 10, 2002, EIPCL
served a formal communication calling upon KPTCL and GOK to appoint a technical
and or financial expert to resolve the outstanding issues in accordance with
Clause 14.2 of the PPA. The Company also filed Notice U/S 80 of the Civil
Procedure Code, 1908 against GOK and KPTCL for losses and damages due to delay
in implementation of the Karnataka project.
During fiscal 2002 the Company resolved a litigation against BFC
Construction Corporation related to a claim against them with respect to an
asset purchase agreement. The Company was paid $650,000 and the litigation was
dismissed.
On November 12, 2002, M&M claimed a Mechanics' Lien upon the lands and
estate of Corner Brook Pulp and Paper Limited (the "Corner Brook Pulp and Paper
Mill") of Newfoundland and Labrador in the amount of CDN$3,012,076. At the
request of Sandwell-HMI g.p. of Montreal, Quebec, M&M provided labor and
materials in relation to the modification of a power boiler located at the
Corner Brook Pulp and Paper Mill.
ITEM 9. THE OFFER AND LISTING
As this is an Annual Report, only items 9A(4) and 9C are applicable.
A. PRICE HISTORY
The Company's Common Stock currently trades on The American Stock Exchange
("AMEX") under the symbol "EGY" and on the Frankfurt Stock Exchange under the
symbol "EPW" and WKN 919384.
Prior to the American Stock Exchange listing, the Company's Common Stock
was listed over the counter on the NASD OTC Bulletin Board from July 11, 1997
until May 21, 2002 under the trading symbol "EYPSF". The Common Stock was
listed under the symbol "YPX" on the TSX Venture Exchange (formerly, The
Canadian Venture Exchange) ("TSXV") and was previously listed on the Canadian
Dealing Network Inc. ("CDN"). In the third quarter of 2000, some companies that
were quoted on CDN were invited to apply for listing on the TSXV. The Company
made the application for listing on the TSXV, was approved for listing and began
trading on the TSXV on October 2, 2000. The Company voluntarily de-listed its
Common Stock from trading on the TSXV effective the close of business on October
19, 2001.
The following table sets forth the reported high and low sale prices and
volume of trading of shares of Common Stock as reported by the CDN and by TSXV
in Canadian dollars for the periods indicated:
PERIOD HIGH LOW VOLUME
-----------------------------------------------------------
FISCAL YEAR 2001 Year Ended $ 6.40 $ .20 120,407
6/30/01
FISCAL YEAR 2000 Year Ended $ 14.40 $ 1.00 268,198
6/30/00
FISCAL YEAR 1999 Year Ended $ 64.00 $ 4.40 432,833
6/30/99
FISCAL YEAR 1998 Year Ended $104.00 $20.00 897,790
6/30/98
FISCAL YEAR 2002 First Quarter $ 6.00 $ 3.30 80,440
BY QUARTER Second Quarter $ 8.30 $ 3.74 256,699
(2)(3)
FISCAL YEAR 2001 First Quarter $ 1.00 $ 1.00 2,660
BY QUARTER Second Quarter $ 1.00 $ 0.20 15,692
Third Quarter $ 4.60 $ 0.84 20,057
Fourth Quarter $ 6.40 $ 3.20 81,998
FISCAL YEAR 2000 First Quarter $ 14.40 $ 8.00 28,763
BY QUARTER Second Quarter $ 11.00 $ 4.00 184,811
Third Quarter $ 6.40 $ 3.20 40,751
Fourth Quarter $ 5.40 $ 1.00 13,873
___________________
Note: The numbers have been adjusted to reflect the consolidation of shares
as follows:
(1) Effective February 6, 2001, the Company consolidated its issued and
outstanding common shares on the basis of four-for-one.
(2) For the period to October 19, 2001
(3) The Company's Common Stock ceased trading on October 19, 2001 and the
last trading price was $5.40 per share.
The following table sets forth the reported high and low sale prices and volume
of trading of shares of Common Shares as reported by the NASD OTC Bulletin Board
in US dollars for the periods indicated:
PERIOD HIGH LOW VOLUME
--------------------- ------ ------ ----------
FISCAL YEAR 2002 Year Ended $ 6.01 $ 2.15 66,786,900
6/30/02
FISCAL YEAR 2001 Year Ended $ 4.48 $ 0.20 5,130,350
6/30/01
FISCAL YEAR 2000 Year Ended $ 1.50 $ 0.88 866,450
6/30/00
FISCAL YEAR 1999 Year Ended $38.00 $ 3.25 1,674,144
6/30/99
FISCAL YEAR 1998 Year Ended $78.00 $16.00 85,919
6/30/98
FISCAL YEAR 2002 First Quarter $ 3.49 $ 2.15 4,661,500
BY QUARTER Second Quarter $ 5.99 $ 2.34 33,906,300
Third Quarter $ 6.01 $ 3.13 22,395,500
Fourth Quarter (2)(3) $ 4.80 $ 2.76 5,823,600
FISCAL YEAR 2001 First Quarter $ 1.25 $ 0.63 23,625
BY QUARTER Second Quarter $ 0.75 $ 0.20 145,325
Third Quarter $ 3.44 $ 0.38 1,861,600
Fourth Quarter $ 4.48 $ 1.98 3,099,800
FISCAL YEAR 2000 First Quarter $10.75 $ 5.75 294,800
BY QUARTER Second Quarter $ 8.13 $ 3.00 273,675
Third Quarter $ 4.75 $ 2.75 207,725
Fourth Quarter $ 3.88 $ 0.88 90,250
Note: The numbers have been adjusted to reflect the consolidation of shares
as follows:
(1) Effective February 6, 2001, the Company consolidated its issued and
outstanding common shares on the basis of four-for-one.
(2) For the period April 1, 2002 to May 21, 2002.
(3) The Company's Common Stock ceased trading on October 19, 2001 and the
last trading price was US$3.90 per share.
The closing price on the NASD OTC Bulletin Board for the Common Stock on
May 21, 2002 was US$3.90.
The following table sets forth the reported high and low sale prices and volume
of trading of shares of Common Shares as reported by the Frankfurt Stock
Exchange in Euro dollars for the periods indicated:
PERIOD HIGH LOW VOLUME
-------------------------------------------------------------
FISCAL YEAR 2002 YEAR ENDED $6.60 $1.50 22,175
6/30/02
FISCAL YEAR 2002 First Quarter $3.40 $2.70 -
BY QUARTER Second Quarter $6.20 $2.60 12,525
Third Quarter $6.60 $4.10 8,170
Fourth Quarter $5.20 $1.50 1,480
CALENDAR YEAR 2002, January $6.60 $4.20 4,170
BY MONTH February $6.60 $4.10 1,700
March $5.70 $4.60 2,300
April $5.20 $4.00 500
May $3.70 $2.90 980
June $3.60 $1.50 -
July $1.75 $1.20 625
August $1.30 $1.20 -
September $1.60 $0.55 -
October $1.00 $0.65 -
November $0.75 $0.65 -
December(2) $0.65 $0.63 -
Note(1): The Company commenced trading on the Frankfurt Stock Exchange
September 14, 2001.
Note (2): December figures are from December 1, 2002 to December 6, 2002.
The closing price on the Frankfurt Stock Exchange for the Common Stock on
December 6, 2002 was EUR $0.65.
The following tables set forth the reported high and low sale prices and volume
of trading of shares of Common Stock as reported by the American Stock Exchange
in US dollars for the periods indicated:
PERIOD HIGH LOW VOLUME
----------------------------------------------------------
FISCAL YEAR 2002 YEAR ENDED $4.75 $1.52 1,682,300
6/30/02
FISCAL YEAR 2002 Fourth $4.75 $1.52 1,682,300
BY QUARTER Quarter
CALENDAR YEAR 2002, May $4.75 $2.76 603,400
BY MONTH June $3.53 $1.52 1,078,900
July $1.90 $1.15 940,200
August $1.40 $1.19 401,800
September $1.30 $0.50 762,900
October $1.25 $0.63 501,600
November $0.88 $0.65 439,400
December (2) $0.80 $0.57 189,900
Note (1): The Company commenced trading on the American Stock Exchange May 22,
2002.
Note (2): December figures are from December 1, 2002 to December 6, 2002.
The closing price on the American Stock Exchange for the Common Stock on
December 6, 2002 was US$0.69
C. MARKETS
The Company's Common Stock trades on the American Stock Exchange and the
Frankfurt Stock Exchange and no assurance can be given that a broad and/or
active public trading market will be sustained and that the Company will
maintain listing requirements on either Stock Exchange.
The Common Shares are issued in registered form and shareholder information
is taken from the records of Equity Transfer Services Inc. (located in Toronto,
Canada), the registrar and transfer agent for the Company's Common Shares. As
of December 6, 2002 there were 3,543 registered shareholders and 10,578,645
shares outstanding. Since a portion of the Common Shares are held by
intermediaries and brokers in street name, the Company cannot estimate the
number of beneficial holders of its Common Shares.
Since a portion of the Common Shares are held by intermediaries and brokers
in street name, the Company is unaware of how many outstanding shares of its
Common Shares are held by United States residents. In accordance with Rule
12g5-1 of the Securities Exchange Act of 1934, the Company's share register
indicated, as of December 6, 2002, 205 stockholders having addresses in the
United States (including voting trustees, depositories, share transfer agents,
or any person acting on behalf of the Company within the United States), which
persons held 1,724,697 of the issued and outstanding Common Shares, representing
approximately 16.3% of the total issued and outstanding shares of Common Shares
as of such date.
ITEM 10. ADDITIONAL INFORMATION
As this is an Annual Report, only items 10B through 10E and item 10H are
applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The Company's corporation number as assigned by Ontario is 1186693. The
Company's Articles of Amalgamation (as amended, the "Articles") state that there
are no restrictions on the business the Company may carry on, but do not contain
a stated purpose or objective.
No Director of the Company is permitted to vote on any resolution to
approve a material contract or transaction in which such Director has a material
interest. (Bylaws, Paragraph 17). Neither the Articles nor the Bylaws of the
Company limit the directors' power, in the absence of an independent quorum, to
vote compensation to themselves or any members of their body. The Bylaws provide
that directors shall receive remuneration as the board of directors shall
determine from time to time. (Bylaws, Paragraph 15). Neither the Articles nor
the Bylaws of the Company discuss the retirement or non-retirement of directors
under an age limit requirement or the number of shares required for director
qualification.
Under the Articles and Bylaws, the board of directors may, without the
authorization of the shareholders, (i) borrow money upon the credit of the
Company; (ii) issue, reissue, sell or pledge debt obligations of the Company;
whether secured or unsecured (iii) give a guarantee on behalf of the Company to
secure performance of obligations; and (iv) charge, mortgage, hypothecate,
pledge or otherwise create a security interest in all currently owned or
subsequently acquired real or personal, movable or immovable, tangible or
intangible, property of the Company to secure obligations of the Company.
Except for certain provisions of the Articles relating to the Class A
Preferred Shares described below, neither the Articles nor the Bylaws of the
Company address the process by which the rights of holders of stock may be
changed. Thus the general provisions of the Ontario Business Corporations Act
apply.
The Company is authorized to issue an unlimited number of Common Shares, of
which 10,578,645 shares were outstanding as of December 6, 2002. In addition,
the Company is authorized to issue an unlimited number of shares of "blank
check" Class A Preferred Shares issuable in Series with such rights, preferences
and privileges as may be determined from time-to-time by the Company's Board of
Directors, subject to the basic provisions for the Class A Preferred Shares that
are applicable to each series as contained in the Articles of the Company. On
November 17, 1998, the Company amended its articles of incorporation to
authorize the first series of the Class A Preferred Shares, an unlimited number
of Class A Preferred Shares, Series 1 (the "Series 1 Shares"). The Series 1
Shares are non-cumulative, convertible, non-voting and redeemable, at a price
ranging from CDN$2.20 to CDN$3.00 per share, at the option of the Company. As of
the date of this Annual Report none of the Series 1 Shares have been issued. On
February 2, 2001 the Company amended its Articles to authorize the second series
of the Class A Preferred Shares, an unlimited number of Class A Preferred
Shares, Series 2 (the "Series 2 Shares") ranking senior with the Series 1 Shares
to the Common Shares. The Series 2 Shares are cumulative, convertible, voting
and redeemable, at CDN$1.00 per Series 2 Share after 5 years from issuance. As
at the date of this annual report there were no Series 2 Shares outstanding.
A description of the rights, preferences and privileges relating to each
class of the Company's shares is as follows:
DIVIDEND RIGHTS.
SERIES 1 SHARES. The Company's Articles provide that an annual preferential
dividend equal to $0.20 per share for each Series 1 Share shall be declared from
available legal capital each year; provided, however, that if such capital is
not available, the related dividend is extinguished and is not cumulative. The
preferential dividend on Series 1 Shares must be paid before any dividend or
distribution on the Common Shares.
SERIES 2 SHARES. The Company's Articles provide that an annual preferential
5% cumulative cash dividend per share for each Series 2 Share, exclusive of any
other series of Preference Shares shall be declared from available legal capital
each year. The preferential dividend on Series 2 Shares must be paid before any
dividend or distribution on the Common Shares or any other class or series of
Preferred shares.
VOTING RIGHTS. Neither the Company's Articles nor its Bylaws provide for
the election or reelection of directors at staggered intervals. The holders of
Common Shares have equal voting rights at meetings of the Company's
shareholders. Each holder of a Common Share shall have one vote for each Common
Share held at any meeting of the Company's shareholders. The holders of the
Series 2 Shares shall be entitled as such to receive notice of and to attend and
to vote at any meeting of shareholders of the Company. Each holder of a Series 2
Share shall have one vote for each Series 2 Share held at any meeting of the
Company's shareholders.
The Series 1 Shares are non-voting with three exceptions: (i) if any
preferred dividends have been declared but remain unpaid, the Company may not
pay dividends on Common Shares or redeem Common Shares, unless such action is
approved by a two-thirds majority vote of the Series 1 Shares, (ii) if any
preferred dividends have been declared but remain unpaid, the Company may not
create or issue any equity shares equal to or superior to the Series 1 Shares,
unless such action is approved by a two-thirds majority vote of the Series 1
Shares, and (iii) the Series 1 shareholders are entitled to notice of, and
attendance and voting at, any shareholders' meeting relating to the winding up
or dissolution of the Company.
CONVERSION RIGHTS.
SERIES 1 SHARES. The Company's Articles provide that the Series 1 Shares
are convertible into Common Shares at the rate of one Common Share for each
Series 1 Share converted.
SERIES 2 SHARES. The Company's Articles provide that the holder of Series 2
Shares may, at the holder's option, convert such shares into units (the
"Units"). Each Unit is comprised of one Common Share and one common share
purchase warrant (the "Warrants"). The conversion rate during the first 30
months after issuance is one Unit for each 1.25 Series 2 Shares being converted,
with each Warrant included in the Unit exercisable at $1.50 to acquire one
Common Share for a period of 2 years. Thereafter, each Series 2 Share is
convertible into one Unit at the 10 day weighted average trading price of the
Common Shares of the Company prior to conversion (the "Conversion Price"), with
each Warrant included in the Unit exercisable at a price equal to the Conversion
Price plus 10% to acquire one Common Share for a period of 2 years.
RIGHTS TO SHARE IN ANY SURPLUS IN THE EVENT OF LIQUIDATION. Under the
Company's Articles, upon the dissolution, winding up or liquidation of the
Company, holders of Series 2 Shares are entitled to receive a sum equivalent to
the amount paid for the Series 2 Shares plus any declared but unpaid dividends,
prior to any distribution to the holders of Common Shares or shares ranking
junior to the Series 2 Shares, and holders of Series 1 Shares are entitled to
receive a sum equivalent to the amount paid for the Series 1 Shares plus any
declared but unpaid dividends, prior to any distribution to the holders of
Common Shares or shares ranking junior to the Series 1 Shares. Holders of Series
1 and 2 Shares are not entitled to share in any further distribution of the
assets or property of the Company. Holders of the Common Shares are entitled to
receive any remaining property of the Company upon dissolution, after the noted
liquidation preference.
REDEMPTION PROVISIONS. Under the Company's Articles the Company may redeem
the Series 1 Shares at any time on notice to holders of the Series 1 Shares, at
a price per share ranging from $2.20 to $3.00, depending on the date of the
redemption. Upon receipt of such notice, each holder of Series 1 Shares may
elect to convert the shares to Common Shares, at a formula defined in the
Articles, rather than have the shares redeemed. Apart from the limitations
contained in the Articles, the Company's redemption of Series 1 Shares is
governed by the Ontario Business Corporations Act.
Under the Company's Articles, after five years from March 30, 2001 the
holders of the Series 2 Shares shall be entitled to require the Company to
redeem, subject to the requirements of the Ontario Business Corporations Act,
the whole or any part of the Series 2 Shares, at a price per share of $1.00. In
addition, the Company may redeem at any time from the date of issuance of the
Series 2 Shares the whole or any part of the then outstanding Series 2 Shares
upon payment for each Series 2 Share to be redeemed of $1.00 plus all declared
and unpaid dividends thereon. Upon receipt of such notice, each holder of Series
2 Shares may elect to convert the shares to Common Shares, at a formula defined
in the Articles, rather than have the shares redeemed. Apart from the
limitations contained in the Articles, the Company's redemption of Series 2
Shares is governed by the Ontario Business Corporations Act.
OTHER PROVISIONS. Neither the Company's Articles nor its Bylaws contain
sinking fund provisions, provisions allowing the Company to make further capital
calls with respect to any shareholder of the Company, or provisions which
discriminate against any holders of securities as a result of such shareholder
owning a substantial number of shares.
Annual general meetings of the Company's shareholders are held on such day
as is determined by resolution of the directors. (Bylaws, Paragraph 45). Special
meetings of the Company's shareholders may be convened by order of the Chairman
or Vice-Chairman of the Board, the Managing Director, the President if he is a
director, a Vice-President who is a director, or the board of directors.
(Bylaws, Paragraph 46). Shareholders of record must be given notice of such
special meeting not less than 33 days nor more than 50 days before the date of
the meeting. Notices of special meetings of shareholders must state the nature
of the business to be transacted in detail and must include the text of any
special resolution or bylaw to be submitted to the meeting. (Bylaws, Paragraph
47). The Company's board of directors is permitted to fix a record date for any
meeting of the shareholders (Bylaws, Paragraph 51) that is between 35 and 50
days prior to such meetingThe only persons entitled to admission at a meeting of
the shareholders are shareholders entitled to vote, the Company's directors, the
Company's auditors, and others entitled by law, by invitation of the chairman of
the meeting, or by consent of the meeting. (Bylaws, Paragraph 50).
Neither the Articles nor the Bylaws of the Company discuss limitations on
the rights to own securities or exercise voting rights thereon, and there is no
provision of the Company's Articles or Bylaws that would delay, defer or prevent
a change in control of the Company, or that would operate only with respect to a
merger, acquisition, or corporate restructuring involving the Company or any of
its subsidiaries. The Company's Bylaws do not contain a provision indicating an
ownership threshold above which shareholder ownership must be disclosed.
With respect to the matters discussed in this Item 10B, the law applicable
to the Company is not significantly different from United States law. With the
exception of the voting rights of Series 1 holders noted above, neither the
Articles nor the Bylaws contain provisions governing changes in capital that are
more stringent than the conditions required by Ontario law.
MATERIAL CONTRACTS
The following table briefly summarizes each material contract, other than
contracts entered into in the ordinary course of business, to which the Company
or any subsidiary is a party, for the two years immediately preceding the filing
of this Annual Report. More detailed summaries of the noted agreements are
presented in the exhibits below.
DATE PARTIES TITLE, TERMS AND CONDITIONS CONSIDERATION
-----------------------------------------------------------------------------------------------------
February EPS, BFC Full and final mutual release for resolution CDN$650,000
2002 Construction of litigation
Corporation
May 21, EPS, American Form 8-A12B Statement of Securities to be registered for US$25,000
2002 Stock Exchange trading on the American Stock Exchange duly filed with
the SEC via EDGAR on May 21, 2002.
August EPS, KEOPL, VBC AGREEMENT US$1,110,992
2000 Ferro Alloys Agreement to recapitalize KEOPL by initial issuance of in 2000
Limited 38% equity to EPS and 62% equity to VBC; and for a US$978,400
series of purchases by VBC of EPS shares. first quarter
2001
May 2001 EPS, KEOPL, VBC AGREEMENT - MATERIAL CHANGE OF CIRCUMSTANCES IN Amendment to
Ferro Alloys KEOPL AND THE PROJECT August 2000
Limited Agreement for contingent allotment of KEOPL shares to Agreement
EPS and recognition of any Oakwell issues as project
issues to be taken up by KEOPL not VBC or EPS.
February EPS, CMB Energy PURCHASE AND OPTION AGREEMENT PRINCE CDN$300,000
2001 Corp. EDWARD ISLAND PROPERTY, CANADA -
Agreement by EPS to purchase from CMB Energy Corp.,
a 25% interest in 525,857 acre exploration permits located
in Prince Edward Island, Canada for both coalbed
methane and conventional gas with an option to earn an
additional 10% interest.
March EPS, Rally Energy PURCHASE AND SALE AGREEMENT SIBBALD CDN$600,000
2001 Corp. AREA, ALBERTA AND ONTARIO PROPERTY
Agreement by EPS to purchase an average 25% of Rally
Energy Corp's ("Rally") interest in the Sibbald Area
Property Alberta and 100% of Rally's interest in the
Ontario Properties effective February 1, 2001 with an
option to acquire an additional 25% average interest from
Rally in the Sibbald Property for a period of six months of
the effective date.
March EPS, Rally Energy PURCHASE AND SALE AGREEMENT SIBBALD CDN$550,000
2001 Corp. AREA, ALBERTA
Agreement by EPS to purchase an additional average 25%
of Rally Energy Corp's ("Rally") interest in the Sibbald
Area Property Alberta effective April 1, 2001.
April 2001 EPS, Oil Springs PURCHASE AND SALE AGREEMENT KAYBOB & CDN$296,000
Energy Corp. BIGSTONE AREA, ALBERTA AND ONTARIO
PROPERTY
Agreement by EPS to Purchase Oil Springs Energy Corp's
10.08% to 20% interests in the Alberta Properties and a
2.45% interest in the Ontario Property.
June 2001 EPS, Rally Energy AGREEMENT FOR THE PURCHASE, SALE AND $335,000
Corp. CONVEYANCE OF ASSETS SIBBALD PROPERTY,
ALBERTA
Agreement to purchase an average 25% interest in
Townships 28, 29 and 30 the Sibbald Property, Alberta by
issuing 90,000 common shares.
D. EXCHANGE CONTROLS
There are no governmental laws, decrees or regulations in Canada that
restrict the export or import of capital, or affect the remittance of dividends,
interest or other payments to a non-resident holder of common stock of the
Company, other than withholding tax requirements (See "E - Taxation" below).
Except as provided in the Investment Canada Act, there are no limitations
imposed under the laws of Canada, the Province of Ontario, or by the constituent
documents of the Company on the right of a non-resident to hold or vote the
common stock of the Company.
The Investment Canada Act (the "ICA"), which became effective on June 30,
1985, regulates the acquisition by non-Canadians of control of a Canadian
business enterprise. In effect, the ICA requires review by Investment Canada,
the agency which administers the ICA, and approval by the Canadian government,
in the case of an acquisition of control of a Canadian business by a
non-Canadian where: (i) in the case of a direct acquisition (for example,
through a share purchase or asset purchase), the assets of the business are
CDN$5 million or more in value; or (ii) in the case of an indirect acquisition
(for example, the acquisition of the foreign parent of the Canadian business)
where the Canadian business has assets of CDN$5 million or more in value or if
the Canadian business represents more than 50% of the assets of the original
group and the Canadian business has assets of CDN$5 million or more in value.
Review and approval are also required for the acquisition or establishment of a
new business in areas concerning "Canada's cultural heritage or national
identity" such as book publishing, film production and distribution, television
and radio production and distribution of music, and the oil and natural gas
industry, regardless of the size of the investment.
As applied to an investment in the Company, three methods of acquiring
control of a Canadian business would be regulated by the ICA: (i) the
acquisition of all or substantially all of the assets used in carrying on the
Canadian business; (ii) the acquisition, directly or indirectly, of voting
shares of a Canadian corporation carrying on the Canadian business; or (iii) the
acquisition of voting shares of an entity which controls, directly or
indirectly, another entity carrying on a Canadian business. An acquisition of a
majority of the voting interests of an entity, including a corporation, is
deemed to be an acquisition of control under the ICA. An acquisition of less
than one-third of the voting shares of a corporation is deemed not to be an
acquisition of control. An acquisition of less than a majority, but one-third or
more, of the voting shares of a corporation is presumed to be an acquisition of
control unless it can be established that on the acquisition the corporation is
not, in fact, controlled by the acquirer through the ownership of voting shares.
For partnerships, trusts, joint ventures or other unincorporated entities, an
acquisition of less than a majority of the voting interests is deemed not to be
an acquisition of control.
In 1988, the ICA was amended, pursuant to the Free Trade Agreement dated
January 2, 1988 between Canada and the United States, to relax the restrictions
of the ICA. As a result of these amendments, except where the Canadian business
is in the cultural, oil and gas, uranium, financial services or transportation
sectors, the threshold for direct acquisition of control by US investors and
other foreign investors acquiring control of a Canadian business from US
investors has been raised from CDN$5 million to CDN$150 million of gross assets,
and indirect acquisitions are not reviewable.
In addition to the foregoing, the ICA requires that all other acquisitions
of control of Canadian businesses by non-Canadians are subject to formal
notification to the Canadian government. These provisions require a foreign
investor to give notice in the required form, which notices are for information,
as opposed to review, purposes.
E. TAXATION
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Management of the Company has been advised by its Canadian legal counsel
that the following general summary fairly describes the principal Canadian
federal income tax consequences applicable to a holder of Common Shares of the
Company who is a resident of the United States and who is not a resident, or
deemed to be a resident, of Canada and who does not use or hold, and is not
deemed to use or hold, his or her Common Shares 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 administration and assessing policies of Canada
Customs and Revenue Agency, 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, nor does it take into account any income tax
laws or considerations of any province or territory of Canada or foreign tax
considerations which may differ significantly from those discussed herein. The
following discussion is for general information only and is not intended to be,
nor should it be construed to be, legal or tax advice to any holder of Common
Shares of the Company, and no opinion or representation with respect to the
Canadian Federal Income Tax consequences to any such holder or prospective
holder is made. ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF COMMON SHARES
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS ABOUT THE FEDERAL, PROVINCIAL AND
FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF COMMON SHARES OF
THE COMPANY.
DIVIDENDS
Dividends paid on the Company's Common Shares to a non-resident holder will
be subject to a 25% withholding tax pursuant to the provision of the ITA. The
Canada-US Income Tax Convention (the "Treaty") provides that the normal 25%
withholding tax rate is generally reduced to 15% on dividends paid on shares of
a corporation resident in Canada (such as the Company) to residents of the
United States. However, if the resident of the United States is a corporation
which owns at least 10% of the voting stock of the Company, the withholding tax
rate on dividends is reduced to 5%.
CAPITAL GAINS
A non-resident of Canada is subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of a corporation if the
shares are considered to be "taxable Canadian property" of the holder within the
meaning of the ITA and no relief is afforded under any applicable tax treaty.
For purposes of the ITA, a Common Share of the Company will be taxable Canadian
property to a non-resident holder if the non-resident holder and/or persons with
whom that holder does not deal at arm's length hold 25% or more of the issued
shares of any class or series of the capital stock of the Company at any time
during the 60 month period immediately preceding the disposition of the Common
Share.
In the case of a non-resident holder to whom shares of the Company
represent taxable Canadian property and who is a resident in the United States
and not a former resident of Canada, no Canadian taxes will be payable on a
capital gain realized on such shares by reason of the Treaty unless the value of
such shares is derived principally from real property situated in Canada within
the meaning of the Treaty.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain possible United States
Federal income tax consequences, under current law, generally applicable to a US
Holder (as defined below) of the Company's Common Shares. This discussion does
not address all potentially relevant Federal income tax matters and does not
address consequences peculiar to persons subject to special provisions of
Federal income tax law, such as those described below as excluded from the
definition of a US Holder. In addition, this discussion does not cover any
state, local or foreign tax consequences (See "Certain Canadian Federal Income
Tax Consequences" above).
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. The following
discussion is for general information only and it is not intended to be, nor
should it be construed to be, legal or tax advice to any holder or prospective
holder of Common Shares, and no opinion or representation with respect to the
United States Federal income tax consequences to any such holder or prospective
holder is made. Accordingly, holders and prospective holders of Common Shares
of the Company should consult their own tax advisors about the Federal, state,
local, and foreign tax consequences of purchasing, owning and disposing of the
Company's Common Shares.
US HOLDERS
As used herein, a "US Holder" includes a holder of Common Shares of the
Company who is a citizen or resident alien of the United States, a corporation
created or organized in or under the laws of the United States or of any
political subdivision thereof and any other person or entity whose ownership of
Common Shares is effectively connected with the conduct of a trade or business
in the United States. A US Holder does not include 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,
non-resident alien individuals or foreign corporations whose ownership of Common
Shares 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.
DISTRIBUTIONS ON COMMON SHARES OF COMPANY
US Holders receiving distributions (including constructive distributions)
with respect to Common Shares 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 US Holder's United States Federal Income tax liability or, alternatively,
may be deducted in computing the US Holder's United States Federal taxable
income by corporate holders and those individual holders who itemize deductions.
Distributions which are treated as dividends will be taxed as ordinary income at
the federal maximum individual rate of 38.6% (See more detailed discussions 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 US Holder's adjusted basis in the Common Shares, and
thereafter as gain from the sale or exchange of the Common Shares.
Preferential tax rates for long-term capital gains are applicable to a US
Holder which is an individual, estate or trust. The maximum capital gains rate
for individuals is 20% (10% for individuals in the 15% tax bracket). Generally,
a special lower rate of 18% (8% for individuals in the 15% tax bracket) applies
to transactions after December 31, 2000 when the asset was held more than 5
years. There are currently no preferential tax rates for long-term capital gains
for a US Holder which is a corporation.
Dividends paid on the Company's Common Shares will not generally be
eligible for the dividends received deduction (the "DRD") provided to
corporations receiving dividends from certain United States corporations. A US
Holder which is a corporation may, under certain circumstances, be entitled to a
70% deduction of the United States source portion of dividends received from the
Company (unless the Company qualified as a "foreign personal holding company" or
a "passive foreign investment company", as defined below) if such US Holder owns
shares representing at least 10% of the voting power and value of the Company.
However, since the Company does not expect to have significant amounts of "US
earnings," the DRD deduction will not generally be available to US Holders. The
availability of this deduction is subject to several complex limitations which
are beyond the scope of this discussion.
FOREIGN TAX CREDIT
A US Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of the Company's Common Shares may be
entitled, at the option of the US Holder, to either a tax deduction or a tax
credit for such foreign tax paid or withheld. Generally, it is 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. The election to claim a tax credit is made on
a year by year basis and applies to all foreign taxes paid by (or withheld from)
the US Holder during that year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate shares of the US Holder's United States income
tax liability that the US Holder's foreign source income bears to his, her or
its worldwide taxable income. In the determination of the application of this
limitation, the various items of income deduction must be classified into
foreign and domestic sources. Complex rules govern this classification process.
There are further limitations on the foreign tax credit for certain types of
income such as "passive income," "high withholding tax interest," "financial
services income," "shipping income," and certain other classifications of
income. 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 the Company's Common Shares should consult their own tax advisors regarding
their individual circumstances.
DISPOSITION OF COMMON SHARES OF COMPANY
A US Holder will recognize a gain or loss upon the sale of Common Shares of
the Company equal to the difference, if any, between the amount of cash plus the
fair market value of any property received, and the shareholder's tax basis in
the Common Shares of the Company. This gain or loss will be a capital gain or
loss if the Common Shares are a capital asset in the hands of the US Holder. In
such event the gain or loss will be a short-term or long-term capital gain or
loss depending upon the holding period of the US Holder being less than or 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.
Generally, deductions for net capital losses are subject to significant
limitations. However, individuals may apply up to US$3,000 of net capital
losses against ordinary income after all other gains are eliminated. For US
Holders who are individuals, any unused portion of such net capital loss may be
carried over indefinitely to be used in later tax years until such net capital
loss is thereby exhausted. For US 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
In the following circumstances, the above sections of this discussion may
not describe the United States Federal income tax consequences resulting from
the holding and disposition of the Company's Common Shares:
FOREIGN PERSONAL HOLDING COMPANY. If at any time during a taxable year more
than 50% of the total combined voting power or the total value of the Company's
outstanding shares is owned, actually or constructively, by five or fewer
individuals who are citizens or residents of the United States and 60% or more
of the Company's gross income for such year was derived from certain passive
sources (e.g. from dividends received from its subsidiaries), the Company would
be treated as a "foreign personal holding company." In that event, US Holders
that hold Common Shares of the Company would be required to include in gross
income for such year their allowable portions of such passive income to the
extent the Company does not actually distribute such income.
FOREIGN INVESTMENT COMPANY. If 50% or more of the combined voting power or
total value of the Company's outstanding shares are held, actually or
constructively, by citizens or residents of the United States, United States
domestic partnerships or corporations, or estates or trusts other than foreign
estates or trusts (as defined by the Code Section 7701(a)(31)), and the Company
is found to be engaged primarily in the business of investing, reinvesting, or
trading in securities, commodities, or any interest therein, it is possible that
the Company might be treated as a "foreign investment company" as defined in
Section 1246 of the Code, causing all or part of any gain realized by the US
Holder selling or exchanging Common Shares of the Company to be treated as
ordinary income rather than capital gain.
PASSIVE FOREIGN INVESTMENT COMPANY. As a foreign corporation with US
Holders, the Company could potentially be treated as a passive foreign
investment company ("PFIC"), as defined in Section 1296 of the Code, depending
upon the percentage of the Company's income which is passive, or the percentage
of the Company's assets which are held for the purpose of producing passive
income.
Section 1296 of the Code defines a PFIC as a corporation that is not formed
in the United States and, for any taxable year, either (i) 75% or more of its
gross income is "passive income", which includes interest, dividends and certain
rents and royalties or (ii) the average percentage, by fair market value (or, if
the company is a controlled foreign corporation or makes an election, by
adjusted tax basis) of its assets that produce or are held for the production of
"passive income" is 50% or more.
A US shareholder who holds stock in a foreign corporation during any year
in which such corporation qualifies as a PFIC is subject to US federal income
taxation under one of two alternative tax regimes at the election of each such
US shareholder. The following is a discussion of these two alternative tax
regimes as applied to US shareholders of the Company.
A US shareholder who elects in a timely manner (an "Electing US
Shareholder") to treat the Company as a Qualified Election Fund ("QEF"), as
defined in the Code, will be subject, under Section 1293 of the Code, to current
federal income tax for any taxable year in which the Company qualifies as a PFIC
on his or her pro-rata share of the Company's: (i) "net capital gain" (the
excess of net long-term capital gain over net short-term capital loss), which
will be taxed as long-term capital gain to the Electing US Shareholder and (ii)
"ordinary earnings" (the excess of earnings and profits over net capital gain),
which will be taxed as ordinary income to the Electing US Shareholder, in each
case, for the shareholder's taxable year in which (or with which) the Company's
taxable year ends, regardless of whether such amounts are actually distributed.
The effective QEF election also allows the Electing US Shareholder to (i)
generally treat any gain realized on the disposition of his or her Common Shares
(or deemed to be realized on the pledge of his or her Common Shares) as capital
gain; (ii) treat his or her share of the Company's net capital gain, if any, as
long-term capital gain instead of ordinary income, and (iii) either avoid
interest charges resulting from PFIC status altogether, or make an annual
election, subject to certain limitations, to defer payment of current taxes on
his or her share of the Company's annual realized net capital gain and ordinary
earnings subject, however, to an interest charge. If the Electing US Shareholder
is not a corporation, such an interest charge would be treated as "personal
interest" that can be deducted only when it is paid or accrued, and is only 10%
deductible in taxable years beginning before 1990 and not deductible at all in
taxable years beginning after 1990.
The procedure with which a US shareholder must comply in making an
effective QEF election will depend on whether the year of the election is the
first year in the US shareholder's holding period in which the Company is a
PFIC. If the US shareholder makes a QEF election in such first year, then the US
shareholder may make a timely QEF election by simply filing the appropriate
documents at the time the US shareholder files its tax return for such first
year. If, however, the Company qualified as a PFIC in a prior year, then in
addition to filing documents, the US shareholder must elect to recognize (i) any
gain that he would otherwise recognize if the US shareholder sold his or her
stock on the application date, under the rules of Section 1291 discussed below;
or (ii) if the Company is a controlled foreign corporation, the US shareholder
will be deemed to have made a timely QEF election.
When a timely QEF election is made, if the Company no longer qualifies as a
PFIC in a subsequent year, normal Code rules will apply. It is unclear whether a
new QEF election is necessary if the Company thereafter re-qualifies as a PFIC.
US shareholders should seriously consider making a new QEF election under those
circumstances.
If a US shareholder does not make a timely QEF election during a year in
which it holds (or is deemed to have held) the Common Shares in question, and
the Company is a PFIC (a "Non-electing US Shareholder"), then special taxation
rules under Section 1291 of the Code will apply to (i) gains realized on the
disposition (or deemed to be realized by reason of a pledge) of his or her
Common Shares and (ii) certain "excess distributions," as specially defined, by
the Company.
A Non-electing US Shareholder generally would be required to pro-rate all
gains realized on the disposition of his or her Common Shares and all excess
distributions over the entire holding period for the Common Shares. All gains or
excess distributions allocated to prior years of the US shareholder (other than
years prior to the first taxable year of the Company during such US
shareholder's holding period and beginning after January 1, 1987 for which it
was a PFIC) would be taxed at the highest tax rate for each such prior year
applicable to ordinary income. The Non-electing US Shareholder also would be
liable for interest on the foregoing tax liability for each such prior year
calculated as if such liability had been due with respect to each such prior
year. A Non-electing Shareholder that is not a corporation must treat this
interest charge as "personal interest" which, as discussed above, is partially
or wholly non-deductible. The balance of the gain or the excess distribution
will be treated as ordinary income in the year of the disposition or
distribution, and no interest charge will be incurred with respect to such
balance.
If the Company is a PFIC for any taxable year during which a Non-electing
US Shareholder holds Common Shares, then the Company will continue to be treated
as a PFIC with respect to such Common Shares, even if it is no longer
definitionally a PFIC. A Non-electing US Shareholder may terminate this deemed
PFIC status by electing to recognize a gain (which will be taxed under the rules
discussed above for Non-Electing US Shareholders) as if such Common Shares had
been sold on the last day of the last taxable year for which it was a PFIC.
Under Section 1291(f) of the Code, the Department of the Treasury has
issued proposed regulations that would treat as taxable certain transfers of
PFIC stock by Non-electing US Shareholders that are generally not otherwise
taxed, such as gifts, exchanges pursuant to corporate reorganizations, and
transfers at death.
Certain special, generally adverse, rules will apply with respect to the
Common Shares while the Company is a PFIC whether or not it is treated as a QEF.
For example, under Section 1297(b)(6) of the Code, a US shareholder who uses
PFIC stock as security for a loan (including a margin loan) will, except as may
be provided in the regulations, be treated as having made a taxable disposition
of such stock.
The foregoing discussion is based on existing provisions of the Code,
existing and proposed regulations thereunder, and current administrative rulings
and court decisions, all of which are subject to change. Any such change could
affect the validity of this discussion. In addition, the implementation of
certain aspects of the PFIC rules requires the issuance of regulations which in
many instances have not been promulgated and which may have retroactive effect.
There can be no assurance that any of the proposals will be enacted or
promulgated, and if so, the form they will take or the effect that they may have
on this discussion. Accordingly, and due to the complexity of the PFIC rules, US
persons who are shareholders of the Company are strongly urged to consult their
own tax advisors concerning the impact of these rules on their investment in the
Company.
CONTROLLED FOREIGN CORPORATION. If more than 50% of the voting power of all
classes of stock or the total value of the stock of the Company is owned,
directly or indirectly, by citizens or residents of the United States, United
States domestic partnerships and corporations or estates or trusts other than
foreign estates or trusts, and each of such individuals and/or entities owns 10%
or more of the total combined voting power of all classes of stock of the
Company or the total value of the stock (each, a "United States Shareholder"),
the Company could be treated as a "controlled foreign corporation" under Subpart
F of the Code. This classification would result in many complex consequences,
including the required inclusion into income by such United States Shareholders
of their pro rata shares of "Subpart F income" of the Company (as specially
defined by the Code) and the Company's earnings invested in US property and
earnings invested in "excess passive assets" (as defined by the Code). In
addition, under Section 1248 of the Code, gain from the sale or exchange of
Common Shares by a US person who is or was a United States Shareholder (as
defined in the Code, a holder of Common Shares who is or was a United States
Shareholder at any time during the five year period ending with the sale or
exchange) is treated as ordinary dividend income to the extent of earnings and
profits of the Company attributable to the stock sold or exchanged. Because of
the complexity of Subpart F, and because it is not clear that Subpart F would
apply to the holders of Common Shares, a more detailed review of these rules is
outside the scope of this discussion.
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, DIVIDENDS, ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
On September 12, 2000, at a Special Meeting of Shareholders of the Company,
the shareholders approved the consolidation of the Company's issued Common
Shares on the basis that every four (4) pre-consolidation common shares would be
converted into one (1) post-consolidation Common Share. On February 2, 2001 the
Company filed Articles of Amendment consolidating the issued Common Shares on a
one for four basis.
In December 2000, the Company issued 8,000,000 pre-consolidated units in a
private placement to arm's length investors. Each unit being comprised of (i)
one Common Share; (ii) one half Series A Common Share purchase warrant; and
(iii) one half Series B Common Share purchase warrant at a pre-consolidated
price of $0.10 per unit. (the "Unit" or "Units"). Each Series A Common Share
purchase warrant would entitle the holder to purchase one-half of a Common Share
of the Company, at a pre-consolidated exercise price of $0.13, for a period of
24 months from the date of issue. Each Series B Common Share purchase warrant
would entitle the holder to purchase one-half of a Common Share of the Company,
at a pre-consolidated exercise price of $0.20, for a period of 24 months from
the date of issue. The closing of the private placement occurred in two phases.
Phase one was completed in December 2000, and was comprised of the issuance of
the Common Shares and the issuance of the Series A Common Share purchase
warrants. Phase two was completed in January of 2001, and was comprised of the
issuance of the Series B Common Share purchase warrants after the shareholders
and TSX Venture Exchange (formerly the Canadian Venture Exchange) approved the
transaction. During fiscal 2001, the Company issued 1,000,000 consolidated
Common Shares upon the exercise of 1,000,000 consolidated Series A Common Share
purchase warrants for proceeds of $520,000. During fiscal 2002, the Company
issued 1,000,000 consolidated Common Shares upon the exercise of 1,000,000
consolidated Series B Common Share purchase warrant for proceeds of $800,000.
On March 30, 2001 the Company issued 1,200,000 Class A Preference
Shares-Series 2 (the "Series 2 Shares") for gross proceeds of $1.2 million, with
a cumulative preferential annual dividend rate of 5%. The Series 2 Shares are
redeemable by the Company, re-tractable after 5 years by the holder, and
convertible anytime during the first 30 months from March 30, 2001 into 1 "Unit"
at a rate of $1.25 per unit. Each unit consists of 1 Common Share and 1 Common
Share purchase warrant exercisable at $1.50 to acquire 1 Common Share for a
period of two years from conversion. After 30 months each "Unit" is convertible
at the 10 day weighted average trading price of the Common Shares immediately
prior to conversion (the "Conversion Price"). Each of such "Unit" consists of 1
Common Share and 1 Common Share purchase warrant exercisable at the Conversion
Price plus 10%, and for a period of two years from conversion. During the fiscal
year ended June 30, 2002 holders of 1,200,000 Series 2 Shares in the capital of
the Company exercised their conversion rights and acquired 960,000 common shares
and 960,000 common share purchase warrants. During the fiscal year ended June
30, 2002 holders exercised the common share purchase warrants for proceeds to
the Company of $1.44 million.
During the fiscal year ended June 30, 2002 holders of 1,200,000 Series 2
Preference shares in the capital of the Company exercised their conversion
rights and acquired 960,000 common shares at $1.25 per share for total
consideration of $1,200,000 and 960,000 common share purchase warrants with an
exercise price of $1.50 per warrant. The holders, during the fiscal year ended
June 30, 2002, exercised the 960,000 common share purchase warrants at $1.50
each for proceeds to the Company of $1,440,000.
The Company issued two private placements of 350,000 units to third party
investors, at a price of US$4.00 per unit on November 9, 2001 and November 16,
2001 respectively for gross proceeds of US$2.8 million. Each unit was comprised
of 350,000 Common Shares and one-tenth of one Common Share purchase warrant.
Each whole warrant entitles the holder to purchase one common share at a
purchase price of US$4.45 per Common Share exercisable for a period of six
months after closing. On May 9, 2002, 35,000 warrants expired under their own
terms and on May 16, 2002, 35,000 warrants expired under their own terms.
On March 13, 2002 the Company issued 400,000 units at a price of US$4.00
per unit for gross proceeds of US$1.6 million. Each unit was comprised of one
Common Share and one-tenth of one Common Share purchase warrant. Each whole
warrant entitles the holder to purchase one Common Share at a purchase price of
US$4.45 per Common Share exercisable for a period of one year after closing.
For information regarding use of proceeds please refer to "Item 5 - B,
Liquidity and Capital Resources".
SHAREHOLDER PROPOSALS AT DECEMBER 30, 2002 MEETING
--------------------------------------------------------
PROPOSED SHARE CONSOLIDATION
At the Annual and Special Meeting of the Company to be held on December 30,
2002, the Company will be seeking advance shareholder approval for a reverse
split of the Company's existing issued and outstanding Common Shares. To be
approved, the special resolution must be passed by at least two-thirds of the
votes cast by shareholders at the Meeting in respect of this special resolution.
Management of the Company having regard to the recent decline in the share
price, the listing standards, policies and requirements of the American Stock
Exchange (the "Exchange") and the general need for flexibility to enhance future
financing opportunities, have determined it would be in the best interests of
the Company and its shareholders to approve a proposal for a reverse split. The
reverse split, if approved, would consolidate the Company's issued and
outstanding Common Shares in a range up to one (1) for three (3) (the "Ratio").
Once the Ratio is determined by the Board of Directors, the number of Common
Shares each shareholder holds will be determined accordingly. The Ratio will be
determined by the Board of Directors in good faith based upon all relevant
factors, and the Board of Directors reserves the right to not proceed with the
reverse split if it feels the action is not in the Company's best interest.
Common Shares issued pursuant to the reverse split will be fully paid and
non-assessable. The reverse split will not alter the relative voting and other
rights of holders of the Common Shares, and each Common Share will continue to
entitle the holder to one vote. As a result of the reverse split, the number of
Common Shares presently outstanding will be consolidated. Current shareholders
percentage ownership in the Company will remain essentially unchanged. No
fractional shares will be issued in connection with the reverse split. The
reverse split will not affect the Company's shareholders' equity as reflected on
our financial statements, except to change the number of issued and outstanding
Common Shares.
PROPOSED APPROVAL FOR PRIVATE PLACEMENTS
At the Annual and Special Meeting of the Company to be held on December 30,
2002, the Company will also seek advance shareholder approval for share
issuances by the Company, pursuant to one or more private placements. To be
approved, the resolution must be passed by a majority of the votes cast by
shareholders at the Meeting with respect to the resolution. Management of the
Company is continuing to evaluate potential acquisitions and exploration and
development opportunities to complement the existing operations of the Company
and to enhance future growth. In order to find a suitable acquisition and or to
provide working capital, the Company may be required to raise additional capital
by way of one or more private placements with or without combined possible debt
financing. The Company proposes that the private placement(s) for which advance
approval is being sought be restricted to a maximum of 100% of the number of
Common Shares issued and outstanding at the date of the this Annual Report,
being 10,578,645 Common Shares. Any private placement proceeded with by the
Company under the advance approval may be subject to regulatory and exchange
approval and to the following additional restrictions:
(a) It must be completed within a twelve month period following the date the
shareholder approval is given; and
(b) It must comply with applicable regulatory and exchange requirements and
relevant private placement pricing rules.
The Board of Directors of the Company do not necessarily intend to
authorize the issuance of the entire number of shares authorized pursuant to the
proposed resolution. The private placements will be negotiated only if the
directors consider the terms reasonable in the circumstances and if the
directors consider that the funds are required to maintain or expand the
Company's operations. If approved by the shareholders, the resolution would
permit the Board of Directors to issue such shares in one or more placements, at
such price or prices and on such terms as the Board of Directors of the Company
considers appropriate, subject to the restrictions referred to above.
PROPOSED MODIFICATION OF STOCK OPTION PLAN
At the Annual and Special Meeting of the Company to be held on December 30,
2002, management of the Company will propose a resolution that the maximum
number of Common Shares of the Company eligible to be issued pursuant to the
grant of options under the Company's Stock Option Plan be increased to 20% of
the issued and outstanding Common Shares of the Company from time to time.
To maximize the utility of the Plan, and to attract and retain, it is the
view of the Board that it is desirable to increase the number of Common Shares
eligible for issuance. Pursuant to applicable securities regulations, however,
shareholder approval is required for any such amendment to the Plan. To be
approved, the resolution must be passed by a majority of the votes cast by the
shareholders at the Meeting with respect to this resolution.
ITEM 15. CERTAIN DISCLOSURES
CONTROL AND PROCEDURES
Evaluation of disclosure controls and procedures. Within the 90-day period
prior to the filing date of this Annual Report on Form 20-F, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer believe that:
The Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports it files
or submits to regulatory bodies with Canada and the United States is recorded,
processed, summarized and reported with the time periods specified.
That Company's disclosure controls and procedures operate such that
important information flows to appropriate collection and disclosure points in a
timely manner and are effective to ensure that such information is accumulated
and communicated to the Company's management, and made known to the Company's
Chief Executive Officer and Chief Financial Officer, including the period when
this Annual Report on Form 20-F was prepared, as appropriate to allow timely
decision regarding the required disclosure.
There have been no significant changes in the Company's internal controls
or in other factor that could significantly affect the Company's internal
controls subsequent to their evaluation, nor have there been any corrective
actions with regard to significant deficiencies or material weaknesses.
AUDIT COMMITTEE FINANCIAL EXPERTS
The mandate of the Audit Committee is formalized in a written charter. The
members of the Audit Committee of the Board are Messrs. Naroola, Davey and
Klyman (Chairman). Mr. Klyman has been a Chartered Accountant since 1952 and is
a Life Member of the Canadian Institute of Chartered Accountants. Mr. Klyman
has many years experience with compilation and review of financial statements
and serves as a director on the boards of public companies including Academy
Explorations Limited, Century Financial Capital Group Inc., and OSE Corp.
Based on his professional certification and experience, the Board has designated
Mr. Klyman as a "financial expert" under proposed Securities and Exchange
Commission Rules.
The audit committee's primary duties and responsibilities are to serve as
an independent and objective party to monitor the Company's financial reporting
process and control systems, review and appraise the audit activities of the
Company's independent auditors, financial and senior management, and to review
the lines of communication among the independent auditors, financial and senior
management, and the Board of Directors for financial reporting and control
matters.
The mandate of the Audit Committee is formalized in a written charter (the
"Charter"). No member of the Audit Committee is exempt from the Charter
(Exhibit 3.68).
CODE OF CONDUCT
The Company maintains a Corporate Code of Conduct and it is a fundamental
policy of the officers and management (the "Employees") of the Company to
conduct its business with honesty and integrity and in accordance with the
highest legal and ethical standards. Employees include officers and management
of the Company and its subsidiaries. Under the Code of Conduct it is the
individual Employee's responsibility to exercise good judgement and act in a
manner that will fulfil all legal requirements and will reflect favourably upon
the Company. Employees are encouraged to comply with the spirit as well as the
letter of the policy. In particular, Employees are prohibited from attempting
to achieve indirectly (through the use of agents or other intermediaries) what
is forbidden directly. No officer, director or member of management is exempt
from the Code of Conduct. (Exhibit 3.69).
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
See the Consolidated Financial Statements and Exhibits listed in Item 19,
and filed as a part of this Annual Report.
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements, including:
(i) Auditors' Report of BDO Dunwoody LLP on the consolidated financial
statements for the years ended June 30, 2002, 2001 and 2000.
(ii) Consolidated Balance Sheets at June 30, 2002 and 2001.
(iii) Consolidated Statements of Loss and Deficit for the years ended June
30, 2002, 2001 and 2000.
(iv) Consolidated Statements of Cash Flows for the years ended June 30,
2002, 2001, and 2000.
(v) Summary of significant accounting policies.
(vi) Notes to consolidated financial statements.
(vii) Interim Consolidated Statements of Operations and Deficit and
Consolidated Statement of Changes in Financial Position for the three-month
periods ended September 30, 2002 and 2001.
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 2002, 2001 AND 2000
(EXPRESSED IN CANADIAN DOLLARS)
CONTENTS
--------------------------------------------------------
AUDITORS' REPORT 2
COMMENTS BY AUDITOR FOR U.S. READERS ON
CANADA-U.S. REPORTING DIFFERENCE 3
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 4
Statements of Loss and Deficit 5
Statements of Cash Flows 6
Summary of Significant Accounting Policies 7-10
Notes to Consolidated Financial Statements 11-33
================================================================================
AUDITORS' REPORT
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS OF
ENERGY POWER SYSTEMS LIMITED
We have audited the consolidated balance sheets of Energy Power Systems Limited
as at June 30, 2002 and 2001 and the consolidated statements of loss and deficit
and consolidated statements of cash flows for the years ended June 30, 2002,
2001 and 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with Canadian and U.S. generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 2002 and
2001 and the results of its operations and its cash flows for the years ended
June 30, 2002, 2001 and 2000 in accordance with Canadian generally accepted
accounting principles.
(signed) BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
August 29, 2002
================================================================================
COMMENTS BY AUDITOR FOR U.S. READERS
ON CANADA-U.S. REPORTING DIFFERENCE
--------------------------------------------------------------------------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Company's financial statements, such as the change described in Note 5 to
the financial statements. Our report to the shareholders dated August 29, 2002
is expressed in accordance with Canadian reporting standards which do not
require a reference to such a change in accounting principles in the Auditors'
Report when the change is properly accounted for and adequately disclosed in the
financial statements.
(signed) BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
August 29, 2002
============================================================================================
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30 2002 2001
--------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 5,610,621 $ 1,242,621
Marketable securities (market value $283,800; $255,290 - 2001) 283,800 221,213
Accounts receivable (Note 1) 5,218,201 4,331,086
Inventories and work in progress 2,652,816 1,039,853
Due from co-venturer (Note 6) 159,110 208,652
Prepaid expenses 59,618 67,329
Investment (Note 2) - 3,500,000
Future income tax asset (Note 11) 61,473 235,000
---------------------------
14,045,639 10,845,754
INVESTMENT (Note 2) 3,500,000 -
OIL AND GAS PROPERTIES (Note 3) 4,400,078 2,017,493
CAPITAL ASSETS (Note 4) 2,834,859 3,268,096
FUTURE INCOME TAX ASSET (Note 11) 533,527 862,000
GOODWILL (Note 5) - 2,056,832
--------------------------
$ 25,314,103 $ 19,050,175
===========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness (Note 7) $ 1,462,766 $ 829,001
Accounts payable and accrued liabilities 4,022,114 4,200,868
Due to shareholders (Note 8) 628,346 1,162,403
Current portion of long term debt (Note 9) 185,925 182,151
Future income tax liability (Note 11) 432,490 266,000
--------------------------
6,731,641 6,640,423
DUE TO SHAREHOLDERS (Note 8) - 350,000
LONG-TERM DEBT (Note 9) 501,670 646,311
FUTURE INCOME TAX LIABILITY (Note 11) 22,110 56,000
--------------------------
7,255,421 7,692,734
--------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 10) 42,096,732 32,207,289
Deficit (24,038,050) (20,849,848)
--------------------------
18,058,682 11,357,441
--------------------------
$ 25,314,103 $ 19,050,175
===========================================================================================
On behalf of the Board:
(signed) Sandra J. Hall
---------------------------
Director
(signed) James C. Cassina
----------------------------
Director
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
===========================================================================================
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE YEARS ENDED JUNE 30 2002 2001 2000
-------------------------------------------------------------------------------------------
REVENUE $ 22,010,321 $ 19,083,808 $ 18,924,369
COST OF SALES AND OIL AND GAS OPERATING COSTS
(including amortization of capital assets and
depletion $574,208; 2001 - $258,629; 2000 - $ 211,703)
19,037,135 16,571,162 15,127,539
-------------------------------------------
GROSS PROFIT 2,973,186 2,512,646 3,796,830
-------------------------------------------
EXPENSES
Administrative expenses 4,191,316 2,626,513 4,344,657
Amortization of goodwill - 261,258 261,258
Amortization of capital assets 124,405 157,111 154,416
Interest 78,334 165,965 100,588
Interest on long term debt 57,675 90,523 113,959
-------------------------------------------
4,451,730 3,301,370 4,974,878
-------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE
THE FOLLOWING UNDERNOTED ITEMS (1,478,544) (788,724) (1,178,048)
OTHER INCOME (Note 12) 1,258,677 66,218 72,486
WRITE DOWN OF INACTIVE CAPITAL ASSETS (316,668) (1,500,000) -
-------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (536,535) (2,222,506) (1,105,562)
-------------------------------------------
INCOME TAXES (Note 11)
Current (39,765) - 36,045
Future 634,600 (1,248,100) 330,300
Utilization of loss carryforwards - - (35,000)
-------------------------------------------
594,835 (1,248,100) 331,345
-------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (1,131,370) (974,406) (1,436,907)
LOSS FROM DISCONTINUED OPERATIONS (Note 20) - (2,660,510) (1,250,992)
-------------------------------------------
NET LOSS FOR THE YEAR (1,131,370) (3,634,916) (2,687,899)
==========================================================================================
DEFICIT, beginning of year (20,849,848) (17,214,932) (14,527,033)
TRANSITIONAL IMPAIRMENT LOSS (Note 5) (2,056,832) - -
-------------------------------------------
DEFICIT, beginning of year, as restated (22,906,680) (17,214,932) (14,527,033)
-------------------------------------------
DEFICIT, end of year $(24,038,050) $(20,849,848) $(17,214,932)
==========================================================================================
NET LOSS FROM CONTINUING OPERATIONS
PER SHARE (Note 16) $ (0.17) $ (0.23) $ (0.46)
==========================================================================================
NET LOSS FOR THE YEAR PER SHARE (Note 16) $ (0.17) $ (0.85) $ (0.86)
==========================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
===========================================================================================
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE YEARS ENDED JUNE 30 2002 2001 2000
-------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss from continuing operations for the year $(1,131,370) $ (974,406) $(1,436,907)
Adjustments to reconcile net loss to net cash
provided by operating activities
Amortization of goodwill - 261,258 261,258
Amortization of capital assets and depletion 698,613 415,740 366,119
Income taxes 634,600 (1,248,100) 330,300
Loss on sale of capital assets (7,895) 7,796 1,825
Gain on sale of marketable securities (22,311) - -
Valuation provision on marketable securities 108,376 - -
Unrealized foreign exchange loss - - 50,000
Write down of inactive capital assets 316,668 1,500,000 -
Professional fees settled by issuance of
shares - - 225,000
Net change in non-cash working capital
balances (Note 13) (2,617,222) (1,223,064) 160,235
-------------------------------------------
Cash used by operating activities
from continuing operations (2,020,541) (1,260,776) (42,170)
Cash used by discontinued operations - (52,278) (2,487,076)
-------------------------------------------
(2,020,541) (1,313,054) (2,529,246)
-------------------------------------------
INVESTING ACTIVITIES
Purchase of marketable securities, net (148,652) (221,213) -
Due from co-venturers 49,542 (91,968) -
Purchase of oil and gas assets (2,759,206) (1,727,857) -
Purchase of capital assets (163,087) (213,991) (181,447)
Proceeds from sale of capital assets 22,900 27,000 55,500
Other assets - 3,355,025 598,318
Restricted cash - - 2,095,984
Investing activities of discontinued operations - 22,900 4,028,962
-------------------------------------------
(2,998,503) 1,149,896 6,597,317
-------------------------------------------
FINANCING ACTIVITIES
Bank indebtedness 633,765 321,779 (135,854)
Long term debt, net (198,207) (277,187) (469,954)
Due to related parties - - 490,098
Advances from(repayments to) shareholders (404,057) (1,930,057) 282,137
Issuance of common shares 9,355,543 1,350,000 -
Issuance of preference shares - 250,000 -
Financing activities of discontinued operations - (79,803) (2,700,596)
-------------------------------------------
9,387,044 (365,268) (2,534,169)
-------------------------------------------
NET INCREASE (DECREASE) IN CASH DURING THE YEAR 4,368,000 (528,426) 1,533,902
CASH AND CASH EQUIVALENTS, beginning of year 1,242,621 1,771,047 237,145
-------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 5,610,621 $ 1,242,621 $ 1,771,047
==========================================================================================
SEE SUPPLEMENTARY CASH FLOW INFORMATION (Note 13 (a))
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
================================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
NATURE OF BUSINESS
AND PRINCIPLES OF
CONSOLIDATION
Energy Power Systems Limited ("EPS" or the "Company") is a
corporation amalgamated under the laws of the Province of Ontario. The
Company's business focus is to explore and develop oil and gas reserves. These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries M&M Engineering Limited ("M&M") and its wholly-owned
subsidiary M&M Offshore Limited ("MMO") whose business focus is engineering
mechanical contracting and steel fabrication in Newfoundland.
Pursuant to Articles of Amendment dated February 2, 2001 the Company
changed its name from Engineering Power Systems Limited to Energy Power Systems
Limited.
During fiscal 2001 the Company decided to discontinue efforts to act as a
developer of independent power projects. The Company is seeking a developer who
will purchase its interest in the Karnataka Project. In addition, the Company
intends to monetize its investment in the Andhra Pradesh Project. This segment
has been treated as discontinued operations for accounting purposes (see Note
20). As such the operations of the Company's Power Division have been excluded
from the consolidated statement of loss and deficit from continuing operations
in current and prior periods.
During fiscal 2000, EPS disposed of its interests in Merlin Engineering
A.S. ("Merlin") and divested ASI Holdings Inc. ("ASIH"). These operations have
been treated as discontinued operations for accounting purposes (see Note 20).
As such, the operations of Merlin and ASIH have been excluded from the
consolidated statement of loss and deficit from continuing operations in current
and prior periods.
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in Canada.
OIL AND GAS
PROPERTIES
The Company follows the full cost method of accounting for oil
and gas operations whereby all costs of exploring for and developing oil and gas
reserves are initially capitalized. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling and overhead charges directly related to
acquisition and exploration activities.
Costs capitalized, together with the costs of production equipment, are
depleted on the unit-of-production method based on the estimated gross proved
reserves. Petroleum products and reserves are converted to equivalent units of
natural gas at approximately 6,000 cubic feet to 1 barrel of oil.
================================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
OIL AND GAS
PROPERTIES -
(CONTINUED)
Costs acquiring and evaluating unproved properties are initially excluded
from depletion calculations. These unevaluated properties are assessed
periodically to ascertain whether impairment has occurred. When proved reserves
are assigned or the property is considered to be impaired, the cost of the
property or the amount of the impairment is added to costs subject to depletion
calculations.
Proceeds from a sale of petroleum and natural gas properties are applied
against capitalized costs, with no gain or loss recognized, unless such a sale
would significantly alter the rate of depletion. Alberta Royalty Tax Credits
are included in oil and gas sales.
In applying the full cost method, the Company performs a ceiling test which
restricts the capitalized costs less accumulated depletion and amortization from
exceeding an amount equal to the estimated undiscounted value of future net
revenues from proved oil and gas reserves, as determined by independent
engineers, based on sales prices achievable under existing contracts and posted
average reference prices in effect at the end of the year and current costs, and
after deducting estimated future general and administrative expenses, production
related expenses, financing costs, future site restoration costs and income
taxes.
ROYALTIES
As is normal to the industry, the Company's production is subject
to crown, freehold and overriding royalties, and mineral or production taxes.
These amounts are reported net of related tax credits and other incentives
available.
ENVIRONMENTAL AND
SITE RESTORATION
COSTS
A provision for environmental and site restoration costs is made when
restoration requirements are established and costs can be reasonably estimated.
The balance of future salvage value of assets is netted against the future site
restoration accrual. The accrual is based on management's best estimate of
these future costs on the ratio of actual production to proved producing
reserves.
ACCOUNTING
ESTIMATES
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and reported amounts of revenues and
expenses during the reporting period. By their nature, these estimates are
subject to measurement uncertainty and the effect on the consolidated financial
statements of changes in such estimates in future periods could be material.
================================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
REVENUE
RECOGNITION
Industrial and Offshore Division
Revenue from engineering construction and fabrication contracts is
recognized on the percentage of completion method. The percentage of completion
method recognizes revenue by assessing the value of the work performed in
relation to the total estimated cost of the contract based on the contract
value. Contract costs include all direct material and labour costs and those
indirect costs related to contract performance such as supplies, tools and
repairs. Administrative and general overheads are charged to expense as
incurred. Contract losses are provided for in full in the year in which they
become apparent.
Oil and Gas Division
Oil and gas revenue is recognized on actual production, and upon delivery
of the product to the customer based on the operators' reports.
MARKETABLE
SECURITIES
Marketable securities are valued at the lower of cost or market
on a portfolio basis.
INVESTMENT
The investment in Konaseema EPS Oakwell Power Limited ("KEOPL")
is recorded at expected net recoverable amount. The actual recoverable amount is
dependent on future events and could differ materially from the actual amount
recovered.
INVENTORIES
Inventories of finished goods are valued at the lower of cost
and net realizable value. Raw materials are valued at the lower of cost and
replacement cost.
JOINT VENTURES
The Company uses the proportionate consolidation method to
account for its non oil and gas joint ventures.
The majority of the Company's petroleum and natural gas exploration
activities are conducted jointly with others. These financial statements
reflect only the Company's proportionate interest in such activities.
CAPITAL ASSETS
Capital assets consist primarily of fabrication buildings,
office equipment, and manufacturing equipment. These assets are recorded at
cost less accumulated amortization and write down for impairment.
Capital assets are amortized on the declining balance basis over their
estimated useful lives at the following rates:
Buildings 3%
Manufacturing equipment 20%
Tools and equipment 20%
Office equipment 20%
Vehicles 30%
Paving 7%
Equipment under capital leases 20%
================================================================================
ENERGY POWER SYSTEMS LIMITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
GOODWILL
Goodwill represents the excess purchase price paid for business
combinations over the value assigned to identifiable net assets acquired.
Goodwill is tested for impairment at least annually and an impairment loss is
recognized when the carrying amount of the goodwill of a reporting unit exceeds
the fair value of the goodwill. The fair value of the reporting unit is
obtained using the present value of expected cash flows.
MARKETING AND
PROMOTION COST
Marketing and promotion costs for new business opportunities
are charged to administrative expenses as incurred.
FOREIGN CURRENCY
TRANSLATION
Foreign currency accounts are translated to Canadian dollars as
follows:
At the transaction date, each asset, liability, revenue or expense is
translated into Canadian dollars by the use of the exchange rate in effect at
that date. At the year end date, monetary assets and liabilities are translated
into Canadian dollars by using the exchange rate in effect at that date and the
resulting foreign exchange gains and losses are included in income in the
current period.
INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Under this method, future income tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between financial reporting and tax bases of assets and liabilities and
available loss carryforwards. A valuation allowance is established to reduce
tax assets if it is more likely than not that all or some portions of such tax
assets will not be realized.
STOCK BASED
COMPENSATION
The Company has established a stock option plan (the "Plan")
for directors, officers and key employees. No compensation expense is
recognized for these plans when stock or stock options are issued to employees.
Any consideration paid by employees on exercise of stock options or purchase of
stock is credited to share capital.
CASH AND CASH
EQUIVALENTS
Cash and cash equivalents consist of cash on hand, bank balances
and investments in money market instruments with maturities of three months or
less.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
1. ACCOUNTS RECEIVABLE
Receivables consist of the following:
2002 2001
----------------------
Trade $4,930,847 $4,161,427
Holdbacks 287,354 169,659
----------------------
$5,218,201 $4,331,086
======================
2. INVESTMENT
Investment consists of the following:
2002 2001
----------------------
Investment in Konaseema EPS Oakwell Power Limited $3,500,000 $3,500,000
----------------------
Less: current portion - 3,500,000
----------------------
Long term portion $3,500,000 $ -
======================
The Company owns 11,348,200 ordinary equity shares of Rs. 10 each, of Konaseema
EPS Oakwell Power Limited ("KEOPL") (the "KEOPL Shares"), a company incorporated
in India, which is developing the Andhra Pradesh Project. Pursuant to the
Revised VBC Agreement dated August 10, 2000 between the Company, VBC Group
("VBC"), KEOPL's parent company, and KEOPL, VBC shall purchase the Company's
investment in KEOPL for INR 113,482,000 (approximately Cdn. $3,500,000) on or
before June 30, 2002 if the Company offers its KEOPL Shares to VBC prior to June
30, 2002.
On May 3, 2002, the Company, pursuant to the Revised VBC Agreement, offered and
tendered the KEOPL Shares to VBC for purchase on or before June 30, 2002. On
July 1, 2002, VBC raised a dispute regarding the purchase and sale of the KEOPL
shares.
The Company is pursuing legal remedies against VBC to effect the purchase and
sale of the KEOPL shares to VBC. The Company estimates that the carrying
amounts of the investment in KEOPL will be fully recovered. The actual
recoverable amount is dependent upon future events and could differ materially
from the amount estimated by management.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
3. OIL AND GAS PROPERTIES
During the year, the Company commenced an exploration and drilling program
resulting in expenditures of $2,759,206. During the previous year the Company
acquired various working interests in producing and non-producing oil and gas
properties in Alberta, Ontario and Prince Edward Island. As consideration, the
Company paid $1,727,857 cash and issued 90,000 common shares for $335,000.
These properties are carried at cost set out below:
Petroleum and natural gas properties and equipment
ACCUMULATED
DEPLETION AND NET BOOK
COST AMORTIZATION VALUE
-----------------------------------------
June 30, 2002 $4,822,063 $ 421,985 $4,400,078
=========================================
June 30, 2001 $2,062,857 $ 45,364 $2,017,493
=========================================
As at June 30, 2002, costs of acquiring unproved properties in the amount of
$1,186,516 (2001 - $376,842) were excluded from depletion calculations.
The Company is required to fund its share of costs and expenses. Failure to
fund expenditures will in some cases result in a dilution of its interests.
--------------------------------------------------------------------------------
4. CAPITAL ASSETS
Capital assets consists of the following:
2002 2001
ACCUMULATED Accumulated
COST AMORTIZATION Cost Amortization
Land $ 342,884 $ - $ 544,009 $ -
Building 2,139,887 623,270 2,643,700 935,005
Manufacturing equipment 764,482 671,672 755,032 645,057
Tools and equipment 1,164,421 869,526 1,087,315 805,440
Office equipment 311,029 217,999 281,107 200,264
Vehicles 199,805 150,625 204,707 137,452
Paving 37,460 15,999 36,152 14,433
Equipment under capital leases 879,687 455,705 811,907 358,182
----------------------------------------------------
5,839,655 3,004,796 6,363,929 3,095,833
----------------------------------------------------
Net book value $2,834,859 $ 3,268,096
=====================================
The Company's ownership in the building located in Port aux Basques,
Newfoundland, which is an inactive asset with a carrying amount of $100,000
(2001 - $407,705) may be subject to a third party debenture of $500,000 on the
leasehold interest that expires on December 22, 2008. The Company's position
with respect thereto is that it does not believe the debenture holder's security
interest is valid.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
5. GOODWILL
During the year, the Company adopted the recommendations of the new CICA
Handbook Section 1581, Business Combinations, and Section 3062, Goodwill and
Other Intangibles. As a result of applying the new standards, management
determined that the value of goodwill was impaired and accordingly a
transitional impairment loss $2,056,832 has been charged to opening deficit.
Goodwill had previously been amortized over 10 years.
Goodwill is recorded net of the transitional impairment loss of $2,056,832
and accumulated amortization prior to adoption of $615,417 (2001 - $615,417).
The adjusted net loss, basic loss per share from continuing operations and
basic loss per share for comparative fiscal years ending June 30, 2001 and 2000
if no amortization was recorded in those years are as follows:
2002 2001 2000
--------------------------------------
Reported net loss $ (1,131,370) $(3,634,916) $(2,687,899)
Add back: Goodwill amortization - 261,258 261,258
---------------------------------------
Adjusted net loss $ (1,131,370) $(3,373,658) $(2,426,641)
=======================================
Basic loss per share:
Reported net loss for the year $ (0.17) $ (0.85) $ (0.86)
Goodwill amortization - 0.06 0.08
--------------------------------------
Adjusted net loss for the year $ (0.17) $ (0.79) $ (0.78)
======================================
--------------------------------------------------------------------------------
6. JOINT VENTURES
The Company's subsidiary, M&M, carries on part of its business in four joint
ventures, Newfoundland Service Alliance Inc. ("NSA"), a 20% owned joint venture
Magna Services Inc. ("Magna"), a 50% owned joint venture, Liannu, a limited
partnership, which the Company owns 49% and acts as the general partner and
North Eastern Contractors Limited, a 50% joint venture.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
6. JOINT VENTURES - (CONTINUED)
During the 2002 fiscal year the Company recorded $1,584,865 (2001 - $1,354,170)
of revenue from NSA and eliminated on proportionate consolidation $330,180 (2001
- $225,695). The Company also recorded revenue from Magna of $ Nil (2001 -
$166,836) and eliminated $ Nil (2001 - $83,418).
The following is a summary of the combined financial information relating to the
Company's proportionate interest in these joint ventures, unadjusted for
transactions between the joint venture and the Company:
PROPORTIONATE SHARE OF JOINT
VENTURES' FINANCIAL INFORMATION
2002 2001
-----------------------------
Balance sheet
Current assets $ 1,215,722 $ 562,138
Non current assets 3,636 4,375
Current liabilities (1,206,601) (555,763)
Operations
Revenue 2,932,433 2,860,599
Operating expenses and amortization 2,932,564 2,860,429
Net income (131) 170
Cash flows
Operating activities (117,249) (179,002)
Investing activities 19,000 75,966
Financing activities 50,000 (51)
--------------------------------------------------------------------------------
7. BANK INDEBTEDNESS
Bank indebtedness of M&M represents a revolving credit facility payable on
demand and bears interest at prime plus 2.25% from November 15, 2001 and prime
plus 2.0% for previous periods (average 2002 - 6.26%; 2001 - 8.66%).
The bank indebtedness is collateralized by a general assignment of accounts
receivable and inventory, a demand debenture providing a second fixed charge
over property and immovable equipment, a first fixed charge over certain
equipment and a floating charge over all assets.
The credit agreement which M&M has with the bank contains certain restrictive
covenants with respect to maintenance of certain financial ratios, declaration
and payment of dividends, advancement of funds to and from related parties and
acquisition of unfunded capital assets in excess of $400,000 (2001 - $400,000).
As at June 30, 2002 M&M was in compliance with these covenants.
During 2002, one of M&M's joint ventures obtained a credit facility in the
amount of $150,000, which is repayable on demand and bears interest at the
bank's prime lending rate plus 2.00% per annum. As security for this facility,
M&M postponed its claim for $50,000 owed to them by the joint venture until
repayment of the credit facility to the bank and provided a guarantee of $75,000
(see also Note 18).
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
8. DUE TO SHAREHOLDERS
The amount due to shareholders is comprised of a non-interest bearing promissory
note of $313,300 (2001 - $989,172) and a non-interest bearing amount due to a
shareholder of $315,046 (2001 - $523,231).
The promissory notes were fully repaid subsequent to June 30, 2002.
--------------------------------------------------------------------------------
9. LONG-TERM DEBT
2002 2001
---------------------------
Roynat Inc. mortgage maturing in 2008 with interest at Roynat
cost of funds plus 3.25% ( 2002 - 6.26%; 2001 - 9.24%)
repayable in monthly principal payments of $7,000, plus
interest. The mortgage is collateralized by a first charge
on land and building of M&M, and a floating charge on
all other assets subject to a prior floating charge in
favour of the Canadian Imperial Bank of Commerce (see
Note 7) $ 521,400 $605,400
Capital leases on equipment, with interest at 5.4% to
16.3% (2001 - 7.2% to 16.7%) compounded semi-
annually, repayable in blended monthly payments of
10,200 (2001 - $10,000) 166,195 223,062
--------------------------
687,595 828,462
Less: Current portion 185,925 182,151
---------------------------
$ 501,670 $646,311
===========================
Principal repayments on long-term debt in each of the next five years are
estimated as follows:
2003 $185,925
2004 120,808
2005 106,978
2006 88,484
2007 and thereafter 185,400
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
10. SHARE CAPITAL
(a) Authorized
Unlimited Common shares, without par value
Unlimited Class A Preference shares, Series 1
Unlimited Class A Preference shares, Series 2
(b) Issued
NUMBER OF
SHARES CONSIDERATION
----------------------------
Common shares
Balance, as at June 30, 2000 12,670,678 $29,322,289
Returned to treasury (25,000) -
Issued pursuant to a private placement (i) 8,000,000 800,000
Share consolidation (ii) (15,482,259) -
Warrants exercised 1,000,000 520,000
Options exercised (iii) 20,000 30,000
Issued for acquisition of oil and gas property (iv) 90,000 335,000
--------------------------
Balance, as at June 30,2001 6,273,419 31,007,289
Issued pursuant to a private placement (v), net of
issue costs of $273,525 1,100,000 6,668,993
Warrants exercised 1,960,000 2,240,000
Options exercised (vi) 277,500 926,550
Settlement of professional fees (vii) 7,726 53,900
Conversion of Preference shares (viii) 960,000 1,200,000
-------------------------
Balance, as at June 30, 2002 10,578,645 $42,096,732
=========================
Class A Preference shares, Series 2
Issued for cash and settlement of debt (viii)
during 2001 and balance, as at June 30, 2001 960,000 $ 1,200,000
Conversion to common shares (960,000) (1,200,000)
-------------------------
Balance, as at June 30, 2002 - $ -
=========================
Total issued share capital as at June 30, 2001 $ 32,207,289
===============
Total issued share capital as at June 30, 2002 $ 42,096,732
===============
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
10. SHARE CAPITAL - (CONTINUED)
(i) On December 28, 2000 the Company issued 8,000,000 pre-consolidated units
from treasury to arms length parties. Each unit was ascribed a value of $0.10
and was comprised of one common share, a 1/2 Series A common share purchase
warrant and a 1/2 Series B common share purchase warrant. Each whole post
consolidated Series A common share purchase warrant and each whole post
consolidated Series B common share purchase warrant entitles the holder thereof
to purchase one common share at a price of $0.52 per share and $0.80 per share
respectively on or before December 28, 2002 and January 16, 2003 respectively.
(ii) On September 12, 2000, at a Special Meeting of Shareholders of the
Company, the shareholders approved the consolidation of the Company's issued
common shares on the basis that every four (4) pre-consolidation common shares
will be converted into one (1) post-consolidation common share. On February 2,
2001 the Company filed Articles of Amendment consolidating the issued common
shares on a one for four basis.
(iii) On February 6, 2001 the Company issued 20,000 options to a consultant
for professional services. On June 6, 2001 the consultant exercised the 20,000
options for consideration of $30,000.
(iv) On June 30, 2001 the Company issued 90,000 common shares from treasury
to an arms length party for consideration of $335,000 for the acquisition of
producing and non-producing oil and gas properties.
(v) During the year the Company entered into three private placements with
arms length parties as follows:
(a) The Company issued two allotments of 350,000 units at a price of US
$4.00 per unit on November 9, 2001 and November 16, 2001 respectively for gross
proceeds of US $2.8 million. Each unit was comprised of 350,000 common shares
and one-tenth of one common share purchase warrant. Each whole warrant entitles
the holder to purchase one common share at a purchase price of US $4.45 per
common share exercisable for a period of six months after closing. On May 9,
2002, 35,000 warrants expired under their own terms and on May 16, 2002, 35,000
warrants expired under their own terms.
(b) On March 13, 2002 the Company issued 400,000 units at a price of U.S.
$4.00 per unit for gross proceeds of US $1.6 million. Each unit was comprised
of one common share and one-tenth of one common share purchase warrant. Each
whole warrant entitles the holder to purchase one common share at a purchase
price of US $4.45 per common share exercisable for a period of one year after
closing.
(vi) On October 4, 2001 the Company issued 20,000 options to a consultant
for professional services. On November 12, 2001 the consultant exercised the
20,000 options for consideration of $85,000. On November 8th, and 12th
consultants exercised 4,000 and 20,000 options respectively for total proceeds
of $96,000. During the year employees of the Company exercised a total of
233,500 options for total consideration of $745,550.
(vii) On October 19, 2001 the Company issued 7,726 common shares for total
consideration of $53,900 to a former professional engaged by the Company for
settlement of professional fees.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
10. SHARE CAPITAL - (CONTINUED)
(viii) On February 2, 2001 the Company issued 960,000 Class A Preference
shares, Series 2 from treasury to arms length parties. Each Series 2 share
carries a 5% cumulative preferred annual dividend. Each Series 2 share is
convertible during the first 30 months from the date of issuance into one unit
of the Company at the rate of $1.25 per unit. Each unit is comprised of one
common share and one common share purchase warrant. Each common share purchase
warrant is exercisable at $1.50 for one common share for a period of two years
after conversion. After 30 months each Series 2 share is convertible into one
unit at the weighted average price of the market value of the Company's common
shares during the period 10 days prior to conversion (the "Conversion Price").
Each unit is comprised of one common share and one common share purchase warrant
exercisable at 10% above the Conversion Price for one common share for a period
of two years after conversion. As consideration, $950,000 of promissory notes
payable to the shareholders were applied to shareholder loans and $250,000 of
cash was received.
During the year holders of 960,000 Series 2 Preference shares in the
capital of the Company exercised their conversion rights and acquired 960,000
common shares at $1.25 per share for total consideration of $1,200,000 and
960,000 common share purchase warrants with an exercise price of $1.50 per
warrant. The holders subsequently exercised the 960,000 common share purchase
warrants at $1.50 each for proceeds to the Company of $1,440,000.
(c) Warrants
The following common share purchase warrants are outstanding as at June 30,
2002:
NUMBER OF
WARRANTS EXPIRY DATE PRICE
96,000 October 4, 2002 $ 9.60
40,000 March 13, 2003 US $4.45
The continuity of the common share purchase warrants is as follows:
NUMBER OF
WARRANTS
Balance, as at June 30, 2000 4,523,885
Share consolidation (Note 10 (b)(ii)) (3,392,914)
Cancelled (812,054)
Issued to non-controlling shareholders 2,000,000
Exercised (1,000,000)
------------
Balance, as at June 30, 2001 1,318,917
Issued to non-controlling shareholders 110,000
Issued upon conversion of Series 2 Preference shares 960,000
Exercised (1,960,000)
Expired (292,917)
-----------
Balance, as at June 30, 2002 136,000
===========
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
10. SHARE CAPITAL - (CONTINUED)
(d) Stock Option Plan
The Company has a Stock Option Plan (the "Plan") to provide incentive for the
directors, officers, employees, consultants and service providers of the Company
and its subsidiaries. The maximum number of shares which may be set aside for
issuance under the Plan is 800,000 common shares (2001 - 281,250 common shares).
Under the Plan, the Company has granted the following stock options as at June
30, 2002:
NUMBER OF EXERCISE EXPIRY
HOLDER OPTIONS PRICE DATE
Directors and employees 274,000 $ 6.30 January 8, 2006
Consultant 21,000 4.00 June 14, 2005
The continuity of stock options is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
Balance, June 30, 2000 422,500 $ 4.02
Share consolidation (Note 10 (b)(ii)) (316,875) 16.07
Cancelled (105,625) 16.07
Issued 275,000 2.73
Exercised (20,000) 1.50
-----------------------
Balance, June 30, 2001 255,000 2.82
----------------------
Issued 342,500 6.18
Expired (25,000) 4.00
Exercised (277,500) 3.34
-----------------------
Balance, June 30, 2002 295,000 $ 6.14
=======================
All options are vested and exercisable.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
11. INCOME TAXES
Effective July 1, 2000, the Company changed its method of accounting for income
taxes from the deferral method to the liability method. The liability method
requires that accumulated tax balances be adjusted to reflect changes in the tax
rates. This standard was applied retroactively; however, the difference was
insignificant.
Significant components of the Company's future tax assets and liabilities are as
follows:
2002 2001
--------------------------
FUTURE INCOME TAX ASSETS:
Non-capital loss carryforwards $ 4,016,968 $ 3,698,000
Capital losses 2,340,635 2,465,000
Oil and gas properties 578,230 20,000
--------------------------
6,935,833 6,183,000
Non-capital losses applied (773,833) (21,000)
Valuation allowance (5,567,000) (5,065,000)
--------------------------
$ 595,000 $ 1,097,000
==========================
Current portion $ 61,473 $ 235,000
==========================
Long term portion $ 533,527 $ 862,000
==========================
FUTURE INCOME TAX LIABILITIES
Capital assets $ (119,375) $ (56,000)
Work in progress (985,495) (196,000)
Holdbacks (123,563) (91,000)
--------------------------
(1,228,433) (343,000)
Non capital losses applied 773,833 21,000
--------------------------
$ (454,600) $ (322,000)
==========================
Current portion $ (432,490) $ (266,000)
==========================
Long term portion $ (22,110) $ (56,000)
==========================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
11. INCOME TAXES - (CONTINUED)
The Company's provision for income taxes is comprised as follows:
2002 2001 2000
--------------------------------------
Net loss from continuing operations $(536,535) $(2,222,506) $(1,105,562)
======================================
Combined federal and provincial income tax
rate 39% 43% 45%
======================================
Recovery of income tax calculated at
statutory rates $(209,249) $ (955,678) $ (497,502)
Increase (decrease) in taxes resulting from:
Non-deductible expenses 21,263 672,578 461,000
Amortization of goodwill - 112,000 118,000
Depletion of oil and gas properties 146,883 20,000 -
Other 133,938 - (352,498)
Benefits of previously unrecorded losses - (1,097,000) -
Losses not recognized for income
tax purposes - - 602,345
Valuation allowance adjustment 502,000 - -
--------------------------------------
Provision for income taxes $ 594,835 $(1,248,100) $ 331,345
======================================
The Company and its subsidiaries have non-capital losses of approximately
$10,200,000 which are available to reduce future taxable income. These
non-capital losses expire as follows:
2003 $26,000
2004 887,000
2005 2,900,000
2006 1,938,000
2007 1,427,000
2008 1,580,000
2009 1,442,000
--------------------------------------------------------------------------------
12. OTHER INCOME
Included in other income is a litigation settlement of $650,000 related to a
claim against a company with respect to an asset purchase agreement. Also
included is an overprovision for costs related to the Port aux Basques property
settled for $214,500 less than accrued. The balance of other income relates
mainly to credits received for workers compensation adjustments of prior years.
--------------------------------------------------------------------------------
13. CHANGES IN WORKING CAPITAL AND NON-CASH TRANSACTIONS
Non-cash working capital transactions relating to funds from operations are as
follows:
2002 2001 2000
--------------------------------------
Accounts receivables $ (887,115) $ (997,513) $(580,536)
Inventories and work in progress (1,612,963) 485,491 (168,205)
Prepaid expenses 7,711 13,758 (6,195)
Accounts payable and accrued liabilities (124,855) (724,800) 915,171
--------------------------------------
$(2,617,222) $(1,223,064) $ 160,235
======================================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
13. CHANGES IN WORKING CAPITAL AND NON-CASH TRANSACTIONS (CONTINUED)
(a) Supplemental Cash Flow Information
2002 2001 2000
----------------------------
Cash paid for interest $136,009 $256,488 $241,247
Cash paid for taxes - - 19,501
(b) Non-Cash Transactions
The Company entered into the following non-cash transactions:
2002 2001 2000
----------------------------
Shares issued pursuant to settlement
of professional fees $53,900 $- $225,000
Shares issued pursuant to private
placement in settlement of
promissory notes - 950,000 768,000
Shares issued pursuant to exercise
of warrant in settlement of
promissory notes 480,000 - -
Shares issued to former subsidiary,
Merlin - - 400,000
Shares issued for acquisition of Oil
and Gas Properties - 335,000 -
Capital assets purchased through
capital leases 57,340 95,694 172,755
--------------------------------------------------------------------------------
14. COMMITMENTS
Operating Leases
The Company has entered into agreements to lease vehicles and office equipment
for various periods until the year 2007. The minimum rental commitments under
operating leases are estimated as follows:
2003 $90,489
2004 55,460
2005 22,000
2006 7,276
2007 3,032
----------
178,257
==========
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
15. FINANCIAL INSTRUMENTS
The carrying values of the primary financial instruments of the Company, with
the exception of long-term debt, approximate fair values due to the short-term
maturities and normal trade credit terms of those instruments. Included in cash
is $2,613,213 held at one financial institution and $2,693,179 held at a
financial intermediary.
The fair value of long-term debt and amounts due to shareholders approximates
carrying value in 2002 and 2001 as the terms were renegotiated.
The Company provides services and sells its products to many customers. Four
customers represent 53% (2001 - three customers represents 53%) of the trade
accounts receivable at year-end. One customer represents 31% (2001 - one
customer represents 40%; 2000 - one customer represents 39%) of the revenue for
the year. Two suppliers represent 28% (2001 - three suppliers represent 33%) of
the trade accounts payable at year-end.
--------------------------------------------------------------------------------
16. PER SHARE INFORMATION
In 2001 the Company adopted the treasury method for computing earnings per share
and fully diluted earnings per share. The treasury method has been applied
retroactively. Net loss per share has been determined using the weighted
average number of common shares outstanding as at June 30, 2002 - 6,638,384
(2001 - 4,256,502; 2000 - 3,135,857).
In each of the fiscal years the exercise of warrants and stock options would be
anti-dilutive. The weighted average number of common shares and net loss per
share figures for prior year have been retroactively restated for the reverse
stock split.
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES
The Company's accounting policies do not differ materially from accounting
principles generally accepted in the United States ("US GAAP") except for the
following:
(a) Stock Options
Under US GAAP (FAS 123), stock options granted to consultants are
recognized as an expense based on their fair value at the date of grant. Under
Canadian GAAP the options are disclosed and no compensation expense is recorded.
The calculation for the compensation of $8,621 (2001 - $112,040) is based on the
Black-Scholes option pricing model with the assumption that no dividends are to
be paid on common shares, a weighted average volatility factor for the Company's
share price of 0.31 for 20,000 options issued during fiscal 2002 and a
volatility factor for the Company's share price of 0.64 for 70,000 options and
0.43 for 20,000 options issued during fiscal 2001, a weighted average risk free
interest rate of 5% over a four year period and a fair value of options of $2.70
( 2001 - $3.10 and $1.50 respectively).
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(a) Stock Options - (Continued)
The Company follows APB 25 for options granted to employees. For
employees, compensation expense is recognized under the intrinsic value method.
Under this method, compensation cost is the excess, if any, of the quoted market
price at grant date over the exercise price. Such expense is reflected over the
service period; if for prior services, expensed at date of grant; if for future
services, expensed over vesting period. The exercise price of the stock options
outstanding to employees is equal or exceeds the market value of the shares at
the date granted, therefore, no compensation expense is recognized at grant date
for US GAAP purposes.
(b) Interest Free Loans
Under US GAAP, the benefit of interest free loans is reflected as a
discount to the debt and a credit to paid in capital. This discount is computed
using the current borrowing rate available to the Company and amortized over the
life of the debt.
(c) Joint Venture
Under US GAAP, the Company would use the equity method of accounting for
joint ventures rather than the proportionate consolidation method of accounting.
For further information see Note 6.
(d) Comprehensive Income
Under US GAAP, comprehensive income must be reported which is defined as
all changes in equity other than those resulting from investments by owners and
distributions to owners.
(e) Marketable Securities
Under accounting principles generally accepted in Canada, gains (losses) in
shares of public companies are not recognized until investments are sold unless
there is deemed to be an impairment in value which is other than temporary.
Under US GAAP, such investments are recorded at market value and the unrealized
gains and losses are recognized as a separate item in the shareholder's equity
section of the balance sheet unless impairments are considered other than
temporary.
(f) Preference Shares
In 2001 under US GAAP, the Company has recorded a deemed dividend of
approximately $420,000 for the beneficial conversion under the terms of the
preferred shares.
(g) Oil and Gas Properties
Under US GAAP, the Company is required to discount future net revenues at
10% for purposes of calculating any required ceiling test write-down. Under
Canadian GAAP, future net revenues are not discounted, however, they are reduced
for estimated future general and administrative expenses and interest. As a
result the carrying value of the oil and gas properties under US GAAP would be
written down to discounted future net revenues.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(h) Recently Adopted Accounting Standards
In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 dealing with revenue recognition which is effective in the
fourth quarter of the Company's 2000 fiscal year. The adoption of this Staff
Accounting Bulletin did not have a material effect on the Company's financial
statements.
In March 2000, the Financial Accounting Standards Board Issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation", an interpretation of APB Opinion No. 25. The Company adopted the
interpretation on July 1, 2000. Among other things, the Interpretation requires
that stock options that have been modified to reduce the exercise price be
accounted for as variable. As of July 1, 2000, under the provisions of
Interpretation No. 44, any options that are considered repriced are accounted
for as variable options from that date forward. Therefore, the option value
will be re-measured on a quarterly basis using the greater of the exercise price
or the July 1, 2000 fair market value as the basis for determining increases in
the intrinsic value of the options. During 2001, the Company repriced 57,500
options with an intrinsic value of $92,000 which has been included in the
compensation expense adjustment. During 2002, these repriced options were
exercised and an additional intrinsic value of $102,550 was recorded to the
compensation expense adjustment on their respective measurement dates.
In June 2001, the FASB issued FASB Statement No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that the Company reclassifies the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141. Management
believes the adoption of this statement will have no material impact on the
financial statements.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill impairment at least annually. In addition,
SFAS 142 requires that the Company identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires that the Company complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. During 2002, the Company
early adopted SFAS 142, management has determined that the value of goodwill was
impaired, accordingly a transitional impairment loss $2,056,832 has been
reported as a cumulative effect of a change in accounting principle. Goodwill
had previously been amortized over 10 years. This change in accounting policy
has been applied by recording a cumulative adjustment in 2002.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(h) Recently Adopted United States Accounting Standards (continued)
Goodwill is recorded net of the transitional impairment loss of $2,056,832
and accumulated amortization prior to adoption of $615,417 (2001 - $615,417).
The adjusted net loss from continuing operations per US GAAP, basic and
diluted net loss per share from continuing operations and basic and diluted net
loss per share for comparative fiscal years ending June 30, 2001 and 2000 if no
amortization was recorded in those years are as follows:
2002 2001 2000
-----------------------------------------
Reported net loss from continuing
operations per US GAAP $ (2,441,721) $(1,357,753) $(1,785,582)
Add back: Goodwill amortization - 261,258 261,258
-----------------------------------------
Adjusted net loss from continuing
operations per US GAAP $ (2,441,721) $(1,096,495) $(1,524,324)
=========================================
Basic and diluted net loss per share from
continuing operations per US GAAP
Reported net loss from continuing
operations per US GAAP $ (0.37) $ (0.42) $ (0.57)
Goodwill amortization - 0.06 0.08
------------------------------------------
Adjusted net loss from continuing
operations $ (0.37) $ (0.36) $ (0.49)
===========================================
Basic and diluted net loss per share
per US GAAP:
Reported net loss per US GAAP $ (0.68) $ (1.04) $ (0.97)
Goodwill amortization - 0.06 0.08
-------------------------------------------
Adjusted net loss for the year
per US GAAP $ (0.68) $ (0.98) $ (0.89)
============================================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
(h) Recently Issued United States Accounting Standards (continued)
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability
for an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for the fiscal year ending June 30,
2003. Management believes the adoption of this statement will have no material
impact on the financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuous operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively. Currently, the Company is assessing, but has not yet determined
how the adoption of SFAS 144 will impact its financial position and results of
operation.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 rescinds FASB No. 4 "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that statement, FASB No. 64
"Extinguishments of Debt made to Satisfy Sinking-Fund Requirements". This
statement also rescinds FASB No. 44, "Accounting for Intangible Assets of Motor
Carriers". This statement amends FASB No. 13, "Accounting for Leases", to
eliminate an inconsistency between required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions for debt extinguishments are applicable
for fiscal years beginning after May 15, 2002 and the provisions regarding lease
accounting are for transactions occurring after May 15, 2002. Management
believes the adoption of this statement will not have a material effect on the
financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized at the date the
liability is incurred and is measured and recorded at fair value. This is
effective for exits or disposal activities initiated after December 31, 2002.
Management is of the opinion that the adoption of SFAS No. 146 will not impact
its financial position and results of operation.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
If US GAAP were followed, the effect on the consolidated balance sheet would be
as follows:
2002 2001
--------------------------
Total assets per Canadian GAAP $25,314,103 $19,050,175
Unrealized gain on marketable securities (e) - 34,077
Writedown oil and gas properties (g) (1,044,000) -
--------------------------
Total assets per US GAAP $24,270,103 $19,084,252
==========================
Total liabilities per Canadian GAAP $ 7,255,421 $ 7,692,734
Unamortized debt discount (b) - (155,180)
--------------------------
Total liabilities per US GAAP $ 7,255,421 $ 7,537,554
==========================
Total shareholders' equity per Canadian GAAP $18,058,682 $11,357,441
Other paid in capital adjustment per US GAAP
Compensation expense (a) 413,102 301,931
Debt discount (b) 683,162 683,162
Unrealized gain on marketable securities (e) - 34,077
Deficit adjustments per US GAAP
Amortization of debt discount (683,162) (527,982)
Compensation expense (413,102) (301,931)
Writedown oil and gas properties (1,044,000) -
--------------------------
Total shareholders' equity per US GAAP $17,014,682 $11,546,698
==========================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
17. RECONCILIATION TO ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES - (CONTINUED)
If US GAAP were followed, the effect on the consolidated statements of loss would be as
follows:
2002 2001 2000
----------------------------------------
Net loss from continuing operations
according to Canadian GAAP $(1,131,370) $ (974,406) $(1,436,907)
Compensation expense adjustment (a) (111,171) (204,040) -
Amortization of debt discount (b) (155,180) (179,307) (348,675)
Writedown oil and gas properties (g) (1,044,000) - -
----------------------------------------
Net loss from continuing operations
according to US GAAP (2,441,721) (1,357,753) (1,785,582)
Loss from discontinued operations - (2,660,510) (1,250,992)
---------------------------------------
Net loss according to US GAAP before
cumulative effect of a change in accounting
principle (2,441,721) (4,018,263) (3,036,574)
Cumulative effect of a change in accounting
principle (2,056,832) - -
----------------------------------------
Net loss according to US GAAP (4,498,553) (4,018,263) (3,036,574)
Unrealized (loss) gain on
marketable securities (e) (34,077) 34,077 -
---------------------------------------
Comprehensive net loss according to
US GAAP $(4,498,553) $(4,018,263) $(3,036,574)
========================================
Net loss according to US GAAP $(4,498,553) $(4,018,263) $(3,036,574)
Deemed dividend on preferred shares (f) - (420,000) -
----------------------------------------
Net loss available for common shareholders $(4,498,553) $(4,438,263) $(3,036,574)
========================================
Basic and diluted net loss per common
share from continuing operations
according to US GAAP $ (0.37) $ (0.42) $ (0.57)
========================================
Loss per common share for the cumulative
effect of a change in accounting
principle for GAAP $ (0.31) $ - $ -
========================================
Basic and diluted net loss per common
share according to US GAAP $ (0.68) $ (1.04) $ (0.97)
========================================
Shares used in the computation of basic
and diluted earnings per share 6,638,384 4,256,502 3,135,857
========================================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
18. SUBSEQUENT EVENT
Subsequent to year-end, one of M&M's joint ventures required an increase in its
credit facility to the amount of $2,450,000. The facility is repayable on
demand on or before December 31, 2002 and bears interest at the bank's prime
lending rate plus 2.00% per annum. As security for this facility, M&M was
required to confirm that they would not claim repayment of $300,000 owed to them
by the joint venture until December 31, 2002. M&M was also required to provide
a guarantee of $500,000 until December 31, 2002. Along with the existing
postponement of $50,000 and permanent guarantee of $75,000 (see Note 7), M&M's
commitment is now at $350,000 postponement and $575,000 guarantee.
--------------------------------------------------------------------------------
19. SEGMENTED INFORMATION
The Company's operations are separated into two distinct segments; the
Industrial & Offshore Division, consisting of the operations of M&M and its
wholly-owned subsidiary MMO, and the Oil & Gas Division performing oil and gas
exploration and production. M&M and MMO are engineering and construction
companies, performing installation, erection, welding, maintenance and ancillary
fabrication services.
The following is the Company's segmented information for continuing operations:
For the year ended June 30, 2002
INDUSTRIAL &
OFFSHORE OIL & GAS 2002
DIVISION DIVISION CORPORATE TOTAL
------------------------------------------------------
Revenue $21,561,858 $ 448,463 $ - $22,010,321
Interest expense 131,084 - 4,925 136,009
Amortization 321,991 376,622 - 698,613
Net earnings (loss) from
continuing operations $ 187,642 $ (690,758) $ (628,254) $(1,131,370)
Capital assets and Oil and
Gas Interests $ 2,834,859 $4,400,078 $ - $ 7,234,937
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
19. SEGMENTED INFORMATION (CONTINUED)
For the year ended June 30, 2001
INDUSTRIAL &
OFFSHORE OIL & GAS 2001
DIVISION DIVISION CORPORATE TOTAL
-----------------------------------------------------
Revenue $18,770,318 $ 313,490 $ - $19,083,808
Interest expense 251,592 - 4,896 256,488
Amortization 631,634 45,364 - 676,998
Net earnings (loss) from
continuing operations $(2,100,005) $1,239,633 $ (114,034) $ (974,406)
Capital assets and Oil and
Gas Interests $ 3,268,096 $2,017,493 $ - $ 5,285,589
For the year ended June 30, 2000
INDUSTRIAL &
OFFSHORE OIL & GAS 2000
DIVISION DIVISION CORPORATE TOTAL
-----------------------------------------------------
Revenue $18,924,369 $ - $ - $18,924,369
Interest expense 214,548 26,700 - 241,248
Amortization 627,377 - - 627,377
Net earnings (loss) from
continuing operations $ 520,852 $ - $(1,957,759) $(1,436,907)
--------------------------------------------------------------------------------
20. DISCONTINUED OPERATIONS
Effective June 30, 2001 the Company adopted a formal plan to dispose of its
power segment of business (the "Power Division"). The Company intends to
exercise its option under the terms of the Revised VBC Agreement to cause VBC to
purchase the Company's equity shares in the KEOPL (see Note 2) and has adopted a
formal plan of disposition of its interest in the Karnataka Project.
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
20. DISCONTINUED OPERATIONS - (CONTINUED)
Effective May 30, 2000, the Company divested its 51% ownership interest in its
Norwegian engineering design subsidiary, Merlin, for $10 cash. Effective June
30, 2000 the Company adopted a formal plan of disposition for its barge mounted
power plant construction subsidiary ASIH.
The results of each of Power Division, Merlin and ASIH have been accounted for
as discontinued operations. Estimated disposal costs have been included in the
loss from discontinued operations.
The accounting for these discontinued operations is summarized as follows:
2002 2001 2000
-----------------------------------
Revenues
Merlin $ - $ - $ 5,575,145
ASIH - - -
Power division - - -
-----------------------------------
$ - $ - $ 5,575,145
===================================
Earnings (loss) from operations
Merlin $ - $ - $ (41,428)
ASIH - - (688,221)
Power division - (48,414) (667,658)
----------------------------------
- (48,414) (1,397,307)
----------------------------------
Gain (loss) from disposal of operations
Merlin - - 666,610
ASIH - - (520,295)
Power division - (2,612,096) -
---------------------------------
- (2,612,096) 146,315
---------------------------------
Loss from discontinued operations $ - $(2,660,510) $(1,250,992)
=================================
The Company's consolidated balance sheets include the following amounts related
to the discontinued operations:
2002 2001
----------------------
Investment $3,500,000 $3,500,000
======================
Total net assets $3,500,000 $3,500,000
======================
================================================================================
ENERGY POWER SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------
21. CONTINGENT LIABILITY
Writ of Summons
On August 28, 2002, Oakwell Engineering Limited ( "Oakwell"), a company
incorporated in the Republic of Singapore, which was the former joint venturer
with the Company in the Project referred to in Note 2, pursuant to a Settlement
Agreement (the "Agreement") dated December 29, 1998 entered into between Oakwell
and the Company, filed a Writ of Summons against the Company. Oakwell's claim
against the Company is the sum of US $2,790,000, an amount equivalent to 6.25%
of the actual cash available for foreign repatriation from the Project in each
of the first five years after the commercial operation date of the Project or in
the alternative, damages; interest at 8% per annum and indemnity costs. The
Company intends to counter claim against Oakwell for damages, costs and
interest. Oakwell has claimed repudiation of the Agreement. Oakwell has
renounced further performance of the Agreement which has been accepted by the
Company.
Subsequent to the Agreement, a change of circumstances materially affected
the Project which may affect the terms of the Agreement. Management will seek
all legal remedies to defend against this claim. No provision has been made to
these financial statements for the claim.
Energy Power Systems Limited
Consolidated Financial Statements
September 30, 2002
(Unaudited)
(Expressed in Canadian Dollars)
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEET
(EXPRESSED IN CANADIAN DOLLARS)
SEPTEMBER 30, 2002 JUNE 30, 2002
(UNAUDITED) (AUDITED)
ASSETS
CURRENT
Cash $ 4,432,280 $ 5,610,621
Marketable securities 284,235 283,800
Receivables 11,798,444 5,218,201
Due from co-venturer 1,083,942 159,110
Inventories and work in progress 981,379 2,652,816
Prepaid expenses 53,113 59,618
Future income tax asset 61,473 61,473
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 18,694,866 14,045,639
Oil and gas interests (net of accumulated
depletion) 4,413,251 4,400,078
Capital assets (net of accumulated
depreciation and amortization) 2,800,037 2,834,859
Investment 3,500,000 3,500,000
Future income tax asset 533,527 533,527
--------------------------------------------------------------------------------
$ 29,941,681 $ 25,314,103
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness $ 2,226,438 $ 1,462,766
Accounts payable and accrued liabilities 7,925,465 4,022,114
Due to shareholders 315,000 628,346
Current portion of long-term debt 185,925 185,925
Future income tax liability 432,490 432,490
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,085,318 6,731,641
Long-term debt 454,093 501,670
Future income tax liability 22,110 22,110
TOTAL LIABILITIES 11,561,521 7,255,421
--------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 42,096,732 42,096,732
Deficit (23,716,572) (24,038,050)
TOTAL SHAREHOLDERS' EQUITY $ 18,380,160 $ 18,058,682
--------------------------------------------------------------------------------
$ 29,941,681 $ 25,314,103
================================================================================
The accompanying notes to the financial statements are an integral part of these
financial statements
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF EARNINGS AND DEFICIT
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
----------------------------------
FOR THE THREE
MONTH PERIOD
ENDING SEPTEMBER 30
2002 2001
---------------- --------------
Sales $ 10,462,874 $ 5,540,561
--------------------------------------------- ---------------- --------------
Cost of sales (including depreciation
and depletion of $117,619; 2001 - $61,587) 9,175,826 4,540,241
---------------- -------------- ---------
Gross profit 1,287,048 1,000,320
Administrative expenses 896,717 660,023
Amortization of goodwill - 65,314
Amortization of capital assets 17,179 39,810
Interest and bank charges 40,208 32,015
Interest on long-term debt 11,466 17,426
--------------------------------------------- ---------------- --------------
965,570 814,588
---------------- --------------
Earnings before the following 321,478 185,732
--------------------------------------------- ---------------- --------------
Other income - 224,287
--------------------------------------------- ---------------- --------------
NET EARNINGS $ 321,478 $ 410,019
--------------------------------------------- ---------------- --------------
Deficit, beginning of period (24,038,050) (20,849,848)
--------------------------------------------- ---------------- --------------
Deficit, end of period ($23,716,572) ($20,849,848)
================================================================================
NET EARNINGS PER COMMON SHARE
---------------------------------------------
Net earnings per share $ 0.04 $ 0.07
--------------------------------------------- ---------------- --------------
Weighted average common shares
---------------------------------------------
outstanding (thousands) 10,579 6,300
--------------------------------------------- ---------------- --------------
FULLY DILUTED NET EARNINGS PER COMMON SHARE
---------------------------------------------
Net earnings per share $ 0.03 $ 0.05
--------------------------------------------- ---------------- --------------
Weighted average fully diluted common shares
---------------------------------------------
outstanding (thousands) 11,010 8,695
--------------------------------------------- ---------------- --------------
The accompanying notes to the financial statements are an integral part of these
--------------------------------------------------------------------------------
financial statements
---------------------
ENERGY POWER SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
----------------------------------
FOR THE THREE MONTH PERIOD
ENDING SEPTEMBER 30
2002 2001
------------ -----------
OPERATING ACTIVITIES
-------------------------------------------
Net earnings $ 321,478 $ 410,019
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization of goodwill - 65,314
Amortization of capital assets 134,798 101,397
Future income taxes, net - (745)
------------------------------------------- ------------ -----------
456,276 575,985
Net change in non-cash working capital
Receivables (6,580,243) (489,890)
Inventories and work in progress 1,671,437 (982,454)
Prepaid expenses 6,505 (35,012)
Accounts payable and accrued liabilities 3,903,351 256,834
----------------------------------------------------------------------
CASH USED IN OPERATIONS (542,674) (674,537)
FINANCING ACTIVITIES
Bank indebtedness 763,672 586,598
Long term debt, net (47,577) (52,485)
Repayment to shareholders (313,346) 177
Issue of common shares - 823,246
------------------------------------------- ------------ -----------
CASH PROVIDED BY FINANCING ACITIVITIES 402,749 1,357,536
INVESTING ACTIVITIES
Purchase of capital assets (26,027) (27,762)
Purchase of oil and gas interests (87,122) (115,938)
Due from co-venturer (924,832) (275,158)
Marketable securities (435) (158,405)
----------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (1,038,416) (577,263)
NET INCREASE IN CASH (1,178,341) 105,736
Cash, beginning of period 5,610,621 1,242,621
------------------------------------------- ------------ -----------
CASH, END OF PERIOD $ 4,432,280 $1,348,357
======================================================================
The accompanying notes to the financial statements are an integral part of these
financial statements
---------------------
CASH, END OF PERIOD CONSISTS OF:Cash $4,432,280 $1,348,357
---------- ----------
ENERGY POWER SYSTEMS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 2002
------------------------------------------------------------
(EXPRESSED IN CANADIAN DOLLARS)
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements have been prepared
following the same accounting policies and methods of computation as the
consolidated financial statements for the year ended June 30, 2002. These
interim financial statements should be read in conjunction with the Company's
audited consolidated financial statements together with notes for the year ended
June 30, 2002.
2. SEGMENTED INFORMATION
The Company's operations are separated into two distinct segments; the
Industrial & Offshore Division, consisting of the consolidated operations of M&M
Engineering Limited, a wholly owned subsidiary, and the Oil & Gas Division
performing oil and gas exploration and production. M&M is an industrial
contracting company performing fabrication and installation of process piping,
installation of production equipment, steel tank erection, specialized welding
services and industrial maintenance. Results for the three months ending
September 30, 2002 and September 30, 2001are as follows:
FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2002
Industrial
& Offshore Oil & Gas Corporate Total
Revenue 10,306,317 156,557 - 10,462,874
Interest expense 49,901 - 1,773 51,674
Amortization and depletion 60,849 73,949 - 134,798
Net earnings (loss) 689,503 (21,761) (346,264) 321,478
===============================================================================================
Capital assets and
oil and gas interests 2,800,037 4,413,251 - 7,213,288
===============================================================================================
FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2001
Industrial
& Offshore Oil & Gas Corporate Total
Revenue 5,402,224 138,337 - 5,540,561
Interest expense 49,441 - - 49,441
Amortization and depletion 152,357 14,354 - 166,711
Net earnings 323,438 37,929 48,652 410,019
===============================================================================================
Capital assets and
oil and gas interests 3,236,702 2,119,077 - 5,355,779
===============================================================================================
3. SUBSEQUENT EVENTS
On October 4, 2002 96,000 warrants exercisable at $9.60 expired.
4. SHARE CAPITAL
(a) Authorized and Issued:
Authorized:
-----------
Unlimited number of Common Shares, without par value
Unlimited number of Class A Preference Shares, Series I
Unlimited number of Class A Preference Shares, Series II
Issued
------
Common shares
# Consideration
Balance, as at June 30, 2002 10,578,645 $42,096,732
Balance, as at September 30, 2002 10,578,645 $ 42,096,732
(b) Common share purchase warrants outstanding consist of the following:
EXERCISE EXPIRY 2002 2001
PRICE DATE # #
$8.00 March 9, 2002 - 222,917
$9.60 October 4, 2002 96,000 96,000
US$4.45 March 13, 2003 40,000 -
--------------------------------------------------------------------------------
136,000 318,917
================================================================================
(c) Common share purchase options outstanding consist of the following:
EXERCISE EXPIRY 2002 2001
PRICE DATE HOLDER # #
$ 1.50 February 6, 2005 Directors and employees - 105,000
$ 4.00 June 14, 2005 Directors and consultants 21,000 110,000
$ 6.30 January 8, 2006 Directors and employees 274,000 -
--------------------------------------------------------------------------------
295,000 215,000
================================================================================
(b) Exhibits
1. Articles of incorporation and bylaws as currently in effect:
1.1* Articles of Amalgamation effective July 1, 1996 amalgamating Energy
Power Systems Group, Inc. with 1169402 Ontario Inc.
1.2* Bylaws of Van Ollie Explorations Ltd.
1.3* Articles of Amendment dated November 17, 1998.
1.4* Articles of Amendment dated January 29, 1999.
2. Instruments defining rights of holders of equity or debt securities
being registered:
2.1* Specimen common share certificate
2.2* See Articles of Amalgamation described above in item 1.1
2.3* Van Ollie Explorations Limited 1996 Stock Option Plan
2.4* Form of Stock Option Agreement for Management Stock Options
2.5 * Warrants to Purchase 580,000 Common Shares issued to Fieldston Traders
Limited
3. Certain material contracts:
3.1* Agreement of Purchase and Sale of Shares dated as of March 19, 1996
between Core Financial Enterprises Inc., Castle Capital, Inc. and
M&M Engineering Limited
3.2* Memorandum of Agreement effective March 19, 1996 between Core Financial
Enterprises Inc. and 1169402 Ontario Inc.
3.3* Share Exchange Agreement made as of March 25, 1996 between 1169402
Ontario Inc. Shareholders, Van Ollie Explorations Limited and
1169402 Ontario Inc.
3.4* Van Ollie Explorations Limited 1996 Stock Option Plan effective March
25, 1996
3.5* Agreement made as of April 19, 1996 between Van Ollie Explorations
Limited, Fieldston Traders Limited and ASI Holdings, Inc.
3.6* Agreement of Purchase and Sale executed July 31, 1996 between Energy
Power Systems Group Inc., Castle Capital, Inc., ASI Holdings, Inc. and
Atlantic Seaboard Industries Limited
3.7* Redeemable Convertible Term Note executed July 31, 1996 by Energy Power
Systems Group Inc. in favor of Castle Capital Inc.
3.8* Debenture ($1,750,000) Issued to RoyNat, Inc, by M&M Limited dated May
18, 1990
3.9* Priorities Agreement dated May 18, 1990 between Canadian Imperial Bank
of Commerce, RoyNat, Inc. and M&M Limited
3.10* Corporate Agreement of Guarantee dated May 18, 1990 by MMO Limited in
favor of RoyNat, Inc.
3.11* Letter Agreement dated June 6, 1996 between Canadian Imperial Bank of
Commerce and M&M Limited
3.12* Demand Debenture ($2,600,000) executed October 9, 1992 issued to
Enterprise Newfoundland and Labrador Corporation by Atlantic Seaboard
Industries Limited
3.13* Agreements as of September 30, 1996 between Energy Power Systems Group
Inc., Atlantic Seaboard Industries Limited and Enterprise
Newfoundland and Labrador Corporation
3.14* Letter Agreement dated October 17, 1991 between Atlantic Canada
Opportunities Agency and Atlantic Seaboard Industries Limited
3.15* Agreement dated April 4, 1994 between Gateway Seafoods, Inc. and
Atlantic Seaboard Industries Limited
3.16* Lease No. 94873 dated September 8, 1993 to Atlantic Seaboard
Industries Limited
3.17* Grant Pursuant to Lease 94873 to Energy Power Systems Group Inc.
3.18* Consulting Agreement dated July 1, 1996 between James C. Cassina and
Energy Power Systems Group Inc.
3.19* Heads of Agreement dated May 31, 1996 between G.J. Cahill & Co. 1979
Ltd., MMO, SEA Systems Limited, Westinghouse Canada Inc. and Mobile
Valve Repair
3.20* Technology License' Manufacturing and Machinery Sale Agreement dated
as of January 13, 1988 between Vetco Gray Canada Inc. and M&M
Limited, and Addendum dated January 13, 1988
3.21* Letter Agreement between Tampico Pte. Ltd. and Atlantic Seaboard
Industries Limited dated June 18, 1997, awarding Engineering,
Procurement & Construction Contracts for two (2) 100 Megawatt Barge
Mounted Power Plants for Kakinada, Andhra Pradesh, India
3.22* Co-Operation Agreement dated as of October 17, 1997, between Oakwell
Engineering Limited and Energy Power Systems Group, Inc.
3.23* Shareholders Agreement dated as of October 17, 1997, between Oakwell
Engineering Limited and Energy Power Systems Group, Inc.,
relating to EPS Oakwell Power Limited
3.24* Power Purchase Agreement dated as of March 31, 1997, between the
Andhra Pradesh State Electricity Board and Oakwell Engineering Limited
Singapore - Project A
3.25* Power Purchase Agreement dated as of March 31, 1997, between the
Andhra Pradesh State Electricity Board and Oakwell Engineering Limited
Singapore - Project B
3.26* Newfoundland Service Alliance Inc. - Newfoundland Certificate of
Incorporation dated December 4, 1996
3.27* Unanimous Shareholders Agreement dated December 4, 1996 between
Newfoundland Service Alliance Inc., Westinghouse Canada Inc., G.J.
Cahill & Co. 1979 Ltd., MMO, SEA Systems Limited and New Valve
Services and Consulting Inc.
3.28* Magna Services Limited - Newfound Certificate of Incorporation dated
April 23, 1997
3.29* Turnkey Engineering Procurement, Construction (EPC) Contract between
Atlantic Seaboard Industries Limited and EPS Oakwell Power
Limited
3.30* RoyNat Loan Extension Letter Agreement dated November 3, 1997 between
M&M Limited and RoyNat Inc.
3.31* Land Transfer Agreement from The Town of Channel-Port Aux Basques to
Atlantic Seaboard Industries Limited
3.32* Guarantees of the State of Andhra Pradesh dated December 3, 1997 by
the State of Andhra Pradesh in favor of EPS Oakwell Power
Limited
3.33* Gateway Loan Extension dated November 7, 1997 between Gateway Seafood
Inc. and Atlantic Seaboard Industries Limited
3.34* Operations and Maintenance Frame Agreement dated November 25, 1994
between Atlantic Seaboard Industries Limited and JKL
(International) Ltd.(Revised to reflect O&M by CMS on those
projects in which CMS is an equity partner)
3.35* Engineering and Project Management Contract dated June 30, 1997
between Atlantic Seaboard Industries Ltd. and Merlin
Engineering A.S.
3.36* Letter Agreement dated December 5, 1997 between Atlantic Seaboard
Industries Ltd. and JKL-Shipbrokers A.S.
3.37* Agreement between Energy Power Systems Group Inc., Merlin Engineering
A.S. and Per Huse dated October 12, 1997
3.38* Memorandum of Understanding among Per Huse, Energy Power Systems Group
Inc. and Merlin Engineering A.S. dated December 15, 1997
3.39* February 1998 Proposal by SNC-Lavalin Inc. to Energy Power Systems
Group Inc. and Related Correspondence
3.40* Memorandum of Understanding dated February 23, 1998 between Atlantic
Seaboard Industries Limited and SNC-Lavalin Inc.
3.41* Energy Power Systems Group Inc. - Amendment to Articles of the
Corporation filed February 24, 1998
3.42* Letter Agreement dated February 13, 1998 between Oakwell Engineering
Limited and Energy Power Systems Group Inc.
3.43* Gateway Loan Extension dated January 14, 1998 between Gateway Seafood
Inc. and Atlantic Seaboard Industries Ltd.
3.44* Fuel Supply Agreement dated January 1, 1998 between Indian Oil
Corporation Ltd. and EPS Oakwell Power Ltd.
3.45* Agreement between ASIL and Global Trading of New Jersey, Inc. dated
July 23, 1997
3.46** May 6, 1998 Extension of Cooperation Agreement between Energy Power
Systems Group Inc. and Oakwell Engineering Limited
3.47** Gateway Loan Extension dated May 5, 1998 between Gateway Seafood Inc.
and Atlantic Seaboard Industries Ltd.
3.48**** Remuneration Terms for the Chief Executive Employment Contract
dated August 2, 1999
3.49**** Remuneration Agreement for the transfer of all rights in Euro India
Power Canara Private Ltd. by and between EPS Karnataka
Power Corp. and EuroKapital AGI.K./Receiver dated October 12,
1999
3.50**** First Amendment to the Remuneration Agreement for the transfer of
all Rights in Euro India Power Canara Ltd. dated December
17, 1999
3.51**** Escrow Agreement by and between EPS Karnataka Power Corp., the
Court Appointed Receiver for EuroKapital Assets and Mr. Rahul
Mathan, Escrow Agent, dated October 13, 1999
3.52**** Asset Purchase Agreement between BFC Construction Corporation and
Construction Foundation BFC Limited and Innovative Steam
Technologies Ltd. and BFC Industrial-Nicholls Radtke Ltd. and
Energy Power Systems Limited dated September 24, 1999
3.53**** Memorandum of Agreement among VBC Group and EPS-OAKWELL Power
Company Limited, Energy Power Systems Limited and Oakwell
Engineering Limited dated July 16, 1999
3.54**** Memorandum of Agreement by and between Engineering Power Systems
Group Inc. and CMS Generation Co. dated July 1, 1998
3.55**** Acquisition Agreement dated as of March 9, 1999 between Engineering
Power Systems Limited and Fieldston Traders Limited
3.56**** Acquisition Agreement dated March 9, 1999 between Energy Power
Systems Limited and Piccalino Far East Limited
3.57***** Agreement among VBC Group and EPS-Oakwell Power Company Limited,
Energy Power Systems Limited and Oakwell Engineering Limited dated
August 10, 2000.
3.58***** Second Amendment to the Remuneration Agreement for the transfer of
all Rights in Euro India Power Canara Ltd. dated February
2, 2000.
3.59****** Articles of Amendment dated February 2, 2001.
3.60****** Purchase and Option Agreement Prince Edward Island Property,
Canada dated February 9, 2001.
3.61****** Purchase and Sale Agreement Sibbald Area Alberta and Ontario
Property dated March 23, 2001
3.62****** Purchase and Sale Agreement Sibbald Area Alberta dated March 23,
2001
3.63****** Articles of Amendment dated April 4, 2001
3.64****** Purchase and Sale Agreement Kaybob & Bigstone Area Alberta and
Ontario Property dated April 6, 2001
3.65****** May 1, 2001 amendment to the August 10, 2000 agreement among VBC
Group and EPS-Oakwell Power Company Limited, Energy Power Systems
Limited and Oakwell Engineering Limited.
3.66****** Agreement for the Purchase and Sale and Conveyance of Assets,
Sibbald Property dated June 30, 2001.
3.67*******Full and Final Mutual Release between Energy Power Systems
Limited and BFC Construction Corporation
3.68*******Energy Power Systems Limited Audit Committee Charter
3.69*******Energy Power Systems Limited Corporate Code of Conduct
99******* Certifications Under Section 906
___________________
* Previously filed by Registrant as part of Registration Statement on Form
20-F (SEC File No. 0-29586)
** Previously filed by Registrant as part of Amendment #2 to Registration
Statement on Form 20-F on May 18, 1998 (SEC File No. 0-29586)
*** Previously filed by Registrant on Form 6-K on November 30, 1999
**** Previously filed by Registrant as part of Registration Statement on
Form 20-F on January 10, 2000 (SEC File No. 0-29586)
***** Previously filed by Registrant as part of Registration Statement on
Form 20-F on January 15, 2001 (SEC File No. 0-29586)
****** Previously filed by Registrant as part of Registration Statement on
Form 20-F on December 27, 2001 (SEC File No. 0-29586)
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.
ENERGY POWER SYSTEMS LIMITED______________________________________
_By (signed) Sandra J. Hall_______________________
------------------------------
Sandra J. Hall, President
Date:
Dec. 19, 2002__________
-----------------
CERTIFICATION
I, Sandra J. Hall, President, certify that:
1. I have reviewed this annual report on Form 20-F of Energy Power Systems
Limited;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures and internal
controls and procedures for financial reporting (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for financial
reporting to be designed under their supervision, to provide reasonable
assurances that the registrant's financial statements are fairly presented in
conformity with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and internal controls and procedures for financial reporting as
of the end of the period covered by this report ("Evaluation Date");
d) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and procedures for
financial reporting based on our evaluation as of the Evaluation Date;
e) Disclosed to the registrant's auditors and the audit committee of
the board of directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial reporting
which could adversely affect the registrant's ability to record, process,
summarize and report financial information required to be disclosed by the
registrant in the reports that it files or submits under the Act (15 U.S.C. 78a
et seq.), within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls and procedures for financial reporting; and
f) Indicated in this report any significant changes in the registrant's
internal controls and procedures for financial reporting or in other factors
that could significantly affect internal controls and procedures for financial
reporting made during the period covered by this report, including any actions
taken to correct significant deficiencies and material weaknesses in the
registrant's internal controls and procedures for financial reporting.
Date: December 19, 2002
-------------------
By: (signed) Sandra J. Hall
-------------------------------
Sandra J. Hall
President
CERTIFICATION
I, Scott T. Hargreaves, Chief Financial Officer, President, certify that:
1. I have reviewed this annual report on Form 20-F of Energy Power Systems
Limited;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures and internal
controls and procedures for financial reporting (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for financial
reporting to be designed under their supervision, to provide reasonable
assurances that the registrant's financial statements are fairly presented in
conformity with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and internal controls and procedures for financial reporting as
of the end of the period covered by this report ("Evaluation Date");
d) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and procedures for
financial reporting based on our evaluation as of the Evaluation Date;
e) Disclosed to the registrant's auditors and the audit committee of
the board of directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial reporting
which could adversely affect the registrant's ability to record, process,
summarize and report financial information required to be disclosed by the
registrant in the reports that it files or submits under the Act (15 U.S.C. 78a
et seq.), within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls and procedures for financial reporting; and
f) Indicated in this report any significant changes in the registrant's
internal controls and procedures for financial reporting or in other factors
that could significantly affect internal controls and procedures for financial
reporting made during the period covered by this report, including any actions
taken to correct significant deficiencies and material weaknesses in the
registrant's internal controls and procedures for financial reporting.
Date: December 19, 2002
-------------------
By: (signed) Scott T. Hargreaves
------------------------------------
Scott T. Hargreaves
Chief Financial Officer
Exhibit 3.67
FULL AND FINAL MUTUAL RELEASE
WHEREAS ENERGY POWER SYSTEMS LIMITED, plaintiff, commenced an action in the
Ontario Superior Court of Justice on April 25, 2001, as Court File No.
01-CV-208611 (the "Action") against BFC CONSTRUCTION CORPORATION, INNOVATIVE
STEAM TECHNOLOGIES LTD., BFC INDUSTRIAL-NICHOLLS RADTKE LTD. and CONSTRUCTION
BFC FOUNDATION LTEE, defendants.
AND WHEREAS THE PARTIES HERETO have agreed to fully and finally settle and
for all purposes resolve the Action, all of the issues therein, and without
limiting the generality of the foregoing, all of the matters in respect of which
relief is claimed by the plaintiff therein including the proposed purchase by
the plaintiff from the defendants of the undertaking, property and assets of the
defendant, Innovative Steam Technologies ("the matters in dispute").
IN CONSIDERATION of the payment of the sum of SIX-HUNDRED AND FIFTY
THOUSAND CANADIAN DOLLARS (CAD$650,000.00) by the defendants to the plaintiff,
and the dismissal of the action herein without costs.
AND IN CONDIERATION OF the covenants set out herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto on behalf of themselves, their heirs,
successors and assigns, and their subsidiaries, affiliates, associated
companies, successors and assigns, and together with all respective officers,
directors, employees, servants and agents and their successors and assigns, DO
HEREBY RELEASE, REMISE AND FOREVER DISCHARGE each other and their respective
professional advisers from (i) any and all actions, causes of action, claims,
contracts, covenants, debts, dues, accounts, liens, costs and demands
whatsoever, arising or existing up to the present time, and (ii) any cause,
matter or thing in any way pertaining to the issues in the Action and the
matters in dispute whenever arising.
IN FURTHER CONSIDERATION of the mutual covenants contained herein, the
parties do hereby agree and undertake that they will not make any claim, assert
any cause of action or initiate any proceeding against each other or against any
person, partnership, corporation, or any other entity, who or which might claim
contribution, indemnity or other relief as against any of them, under the
provisions of any statute, or at law, in this jurisdiction or any other, in
respect of the matters subject to this Full and Final Mutual Release.
IT IS AGREED AND UNDERSTOOD that the parties shall not subsequently make
any claim, assert any cause of action or initiate any proceeding against each
other, including for contribution or indemnity, or by way of third or subsequent
party claim or otherwise, as a result of any proceeding commenced by any person,
partnership, corporation, or any other entity, against the parties hereto, or
any of them, arising out of the matters released herein.
IT IS AGREED AND UNDERSTOOD that the exchange of the aforesaid
consideration shall not be deemed to be an admission of liability whatsoever by
the parties, which liability is in fact specifically and expressly denied.
IT IS AGREED AND UNDERSTOOD that this Full and Final Mutual Release shall
be binding upon the heirs, executors, administrators, successors, assigns and/or
legal or personal representatives, as the case may be, of the parties hereto.
THE PARTIES DECLARE THAT each of them has been given sufficient time to
consider its actions and to seek such independent legal or other advice as he,
she or it deems appropriate with respect to this matter including with respect
to this Full and Final Mutual Release. The parties hereto freely and
voluntarily accept the terms of this Full and Final Mutual Release for the
purpose of making full and final compromise, adjustment and settlement of all
claims, or potential claims, as aforesaid, and acknowledge that no
representation of fact or opinion, threat or inducement has been made or given
to induce signing of this Full and Final Mutual Release.
THIS FULL AND FINAL MUTUAL RELEASE may be executed in counterparts, each of
which so executed shall be deemed to be an original and such counterparts
together shall constitute one and the same instrument, notwithstanding their
date of actual execution.
IN WITNESS WHEREOF the parties hereto have hereunto set the hands and seals
this 8th day of February, 2002.
SIGNED IN THE PRESENCE OF:
)
) ENERGY POWER SYSTEMS LIMITED
)
)
"JANICE MALMHOLT" ) PER: "SANDRA J. HALL"
-------------------- ------------------
C/S
---
WITNESS SANDRA J. HALL
SIGNED IN THE PRESENCE OF:
)
) BFC CONSTRUCTION CORPORATION
)
)
_ "SIGNED" ) PER: "L. BRIAN SWARTZ" C/S
----------- -----------------------------------------------
WITNESS L. BRIAN SWARTZ
VICE PRESIDENT LEGAL AND
CORPORATE SECRETARY
SIGNED IN THE PRESENCE OF:
)
) INNOVATIVE STEAM TECHNOLOGIES LTD.
)
)
_ "SIGNED" ) PER: "L. BRIAN SWARTZ" C/S
----------- -----------------------------------------------
WITNESS L. BRIAN SWARTZ
VICE PRESIDENT LEGAL AND
CORPORATE SECRETARY
SIGNED IN THE PRESENCE OF:
)
) BFC INDUSTRIAL-NICHOLLS RADTKE LTD.
)
)
_ "SIGNED" ) PER: "L. BRIAN SWARTZ" C/S
----------- -----------------------------------------------
WITNESS L. BRIAN SWARTZ
VICE PRESIDENT LEGAL AND
CORPORATE SECRETARY
SIGNED IN THE PRESENCE OF:
)
) CONSTRUCTION BFC FOUNDATION LTEE
)
)
_ "SIGNED" ) PER: "L. BRIAN SWARTZ" C/S
----------- -----------------------------------------------
WITNESS L. BRIAN SWARTZ
VICE PRESIDENT LEGAL AND
CORPORATE SECRETARY
Exhibit 3.68
ENERGY POWER SYSTEMS LIMITED
(THE "COMPANY")
AUDIT COMMITTEE CHARTER
-------------------------
This Audit Committee Charter (the "Charter") has been adopted by the Board of
Directors (the "Board") of the Company. The Audit Committee of the Board (the
"Committee") shall review and reassess this charter annually and recommend any
proposed changes to the Board for approval.
ROLE AND INDEPENDENCE: ORGANIZATION
The Committee assists the Board on fulfilling its responsibility for oversight
of the quality and integrity of the accounting, auditing, internal control and
financial reporting practices of the Company. It may also have such other
duties as may from time to time be assigned to it by the Board.
The Audit Committee is to be comprised of at least three directors. Each of the
Committee members must be independent from management (a majority of this
Committee may not be non-independent directors) and free from any relationship
that, in the opinion of the Board, would interfere with the exercise of his or
her independent judgement as a member of the Committee. Each Committee member
shall also meet the independence and financial literacy requirements for serving
on audit committees, and at least one member shall have accounting or related
financial management expertise. The Committee shall maintain free and open
communication with the independent auditors and management of the Company.
Each member of the Committee serves during the pleasure of the Board and, in any
event, only so long as he or she is a director. The directors may fill
vacancies in the Committee by election from among their number.
In discharging its oversight role, the Committee is empowered to investigate any
matter relating to the Company's accounting, auditing, internal control or
financial reporting practices brought to its attention, with full access to all
the Company's books, records, facilities and personnel. The Committee may
retain outside counsel, auditors or other advisors.
One member of the Committee shall be appointed as chair. The chair shall be
responsible for leadership of the Committee, including scheduling and presiding
over meetings and making regular reports to the Board. The chair will also
maintain regular liaison with the CEO, CFO, and the lead independent audit
partner.
The Committee shall meet at least four times a year, or more frequently as the
Committee considers necessary. Opportunities should be afforded periodically to
the external auditor and to senior management to meet separately with the
independent members of the audit committee.
RESPONSIBILITIES
Although the Committee may wish to consider other duties from time to time, the
general recurring activities of the Committee in carrying out its oversight role
are described below.
- Recommending to the Board the independent auditors to be retained (or
nominated for shareholder approval) to audit the financial statements of the
Company. Such auditors are ultimately accountable to the Board and the
Committee, as representatives of the shareholders;
- Evaluating, together with the Board and management, the performance of the
independent auditors and, where appropriate, replacing such auditors;
- Obtaining annually from the independent auditors a formal written
statement describing all relationships between the auditors and the Company. The
Committee shall actively engage in a dialogue with the independent auditors with
respect to any relationship that may impact the objectively and the independence
of the auditors and shall take, or recommend that the Board take, appropriate
actions to oversee and satisfy itself as to the auditors' independence;
- Reviewing the audited financial statements and discussing them with
management and the independent auditors. Consideration of the quality of the
Company's accounting principles as applied in its financial reporting. Based on
such review, the Committee shall make its recommendation to the Board as to the
inclusion of the Company's audited financial statement in the Company's Annual
Report to Shareholders;
- Overseeing the relationship with the independent auditors, including
discussing with the auditors the nature of the audit process, receiving and
reviewing audit reports, and providing the auditors full access to the Committee
(and the Board) to report of any and all appropriate matters;
- Review and approve audit fees;
- Discussing with management and the independent auditors the quality and
adequacy of and compliance with the Company's internal controls;
- Review and discuss all related party transactions, involving the Company;
- Discussing with management and/or the Company's general counsel any legal
matters relating to the Corporate Code of Conduct (including the status of
pending litigation) that may have a material impact on the Company's financial
statements, and any material reports or inquiries from regulatory or
governmental agencies; and
- Publicly disclose the receipt of warning about any violations of corporate
governance rules.
The Committee's job is one of oversight. Management is responsible for the
preparation of the Company's financial statements and the independent auditors
are responsible for auditing those financial statements. The Committee and the
Board recognize that management and the independent auditors have more resources
and time, and more detailed knowledge and information regarding the Company's
accounting, auditing, internal control and financial reporting practices than
the Committee does; accordingly the Committee's oversight role does not provide
any expert or special assurance as to the financial statements and other
financial information provided by the Company to its shareholders and others.
Exhibit 3.69
1.1
ENERGY POWER SYSTEMS LIMITED
(THE "COMPANY")
CORPORATE CODE OF CONDUCT
-------------------------
1. GENERAL STATEMENT
------------------
(a) Statement of Policy
---------------------
It is a fundamental policy of the Company to conduct its business with
honesty and integrity and in accordance with the highest legal and ethical
standards.
The policy set forth in this statement provides guidance in specific
situations. It is not possible to provide guidance for all situations that may
arise; therefore, it is the individual employee's responsibility to exercise
good judgement and act in a manner that will fulfil all legal requirements and
will reflect favourably upon the Company.
Employees shall comply with the spirit as well as the letter of this
policy. In particular, employees shall not attempt to achieve indirectly
(through the use of agents or other intermediaries) what is forbidden directly.
(b) Applicability
-------------
This policy applies to all officers and employees of the Company and of the
Company's subsidiaries. References to employees include references to officers
and references to the Company include references to subsidiaries, unless
otherwise stated.
This policy also applies, where appropriate, to members of the Boards of
Directors of the Company and of its subsidiaries.
(c) Implementation
--------------
Each new employee will be provided with a copy of the policy. All
officers, managers, and other employees of the Company will be required annually
to certify that:
(i) They have personally read and understand the policy;
(ii) They have taken appropriate steps to bring the policy to the
attention of each employee under their supervision who is authorized to make
commitments on behalf of the Company or is in a position to influence decisions;
and,
(iii) They have complied with the policy and know of no violations by
employees under their supervision except violations that have been reported.
Employees having questions as to interpretation or procedure under this
policy should consult the President or their immediate supervisor.
Compliance with the policy is essential. Violations will result in
disciplinary action, including dismissal where warranted.
2.1
2. CONFIDENTIALITY
---------------
Information as to proposed acquisitions, or other transactions or proposed
transactions of the Company or its related companies with third parties must
also be regarded as confidential until such information has been publicly
disclosed.
Confidentiality also applies to those methods, practices and procedures
considered by the Company to be private and confidential, including internal
communications such as memorandums, instructions, announcements, operations or
policy manuals, and data processing software programs.
3.1
3. MISREPRESENTATION
-----------------
Employees are expected to maintain the highest standards of honesty and
integrity at all times. The manner in which an employee conducts him/herself is
always open to public scrutiny.
An action which is perceived, correctly or incorrectly, as being improper
or unethical can lead to allegations which can harm or embarrass the employee,
the Company and its affiliates. It is important that all employees recognize
this and look beyond their intentions to the perceptions someone else may make.
The Company cannot tolerate the issuance of misleading or false information
for any reason. Nor can it tolerate the omission of known facts and/or the
exclusion of details which, if known, could affect a decision by a fellow
employee, a business or a customer. Care must also be taken to avoid making
promises or commitments which cannot be met by the Company.
4.1
4. COMPLIANCE WITH REGULATORY AND EXCHANGE AUTHORITIES
--------------------------------------------------------
The business of the Company is regulated by the applicable regulatory and
exchange authorities. It is imperative that all applicable reporting and filing
requirements are complied with.
5.1
5. RELATED PARTY TRANSACTIONS
----------------------------
INTRODUCTION
------------
Under the Ontario Securities Act auditors and other persons providing
professional services to the Company are required to promptly report any breach
of the restricted party provisions to the Board of Directors.
The related party restrictions are complex and in the event that an
employee is in doubt as to whether a transaction is a potential related party
transaction, or may require the prior approval of the Board of Directors, the
transaction should be reported in writing to the Secretary of the Company.
Definition of Related Party
------------------------------
A related party of an issuer or of an interested party in connection with a
transaction, as the case may be, means a person or company, other than a bona
fide lender, that at the relevant time and after reasonable inquiry, is known by
the issuer the interested party, or a director of senior officer of the issuer
or interest party to be
(a) A person or company, whether alone or jointly or in concert with others,
that holds securities of the issuer or of the interest party sufficient to
affect materially the control of the issuer or of the interested party;
(b) A person or company in respect of which a person or company referred to
in paragraph (a) whether alone or jointly or in concert with other, holds
securities sufficient to affect materially the control of the first-mentioned
person or company referred to in this paragraph (b)
(c) A person or company in respect of which the issuer or the interested
party, whether alone or jointly or in convert with others, holds securities
sufficient to affect materially the control of the person or company
(d) A person or company that beneficially owns, or exercises control or
direction over, voting securities of the issuer or of the interested party
carrying more than 10 percent of the voting rights attached to all of the issued
and outstanding voting securities of the issuer or of the interested party
(e) A director or senior officer
i. of the issuer or of the interested party, or
ii. of a related party within the meaning of paragraph (a) (b) (c) (d) (f)
or (g) of the issuer or of the interested party
(f) A person or company that manages or directs, to any substantial degree,
the affairs or operations of the issuer or the interested party under an
agreement, arrangement or understanding between the person or company and the
issuer or the interested party, including the general partner of an issuer or
interested party that is a limited partnership; and
(g) An affiliated entity of, a person controlling, or a company controlled
by, any of the persons or companies described in paragraphs (a) through (f).
Related Party Transactions
Means in respect of an issuer, a transaction between or involving the issuer and
a person or company that is a related party of the issuer at the time the
transaction is agreed to, whether or not there are also other parties to the
transaction, as a consequence of which, either by itself or together with other
related transactions between or involving the issuer and the related party or a
person or company acting jointly or in concert with the related party, whether
or not there are also other parties to the transaction, the issuer directly, or
indirectly
(a) Purchases or acquire an asset from the related party for valuable
consideration;
(b) Purchases or acquires, jointly or in concert with the related party, an
asset from a third party of the proportion of the asset acquired by the issuer
is less than the proportion of the consideration paid by the issuer;
(c) Assumes or otherwise becomes subject to a liability of the related party
(d) Sells, transfer or disposes of an asset to the related party
(e) Sells, transfers or disposes of, jointly or in convert with the related
party, an assets to a third party if the proportion of the consideration
received by the issuer is less than the proportion of the asset sold,
transferred or disposed by the issuer.
(f) Leases property to or from the related party.
(g) Issues a security to the related party or subscribes for a security of
the related party
(h) Amends or agrees to the amendment of the terms of a security of the
issuer of the security is beneficially owned or is one over which control or
direction is exercised by the related party, or agrees to the amendment of the
terms of a security of the related party is the security is beneficially owned
by the issuer or is one over which the issuer exercises control or direction.
(i) Borrows money from or lends money to the related party
(j) Releases, cancels or forgives a debt or liability owed by the related
party.
(k) Provides a guarantee or collateral security for a debt or liability of
the related party, or amends or agrees to the amendment of the terms of the
guarantee or security.
(l) Is a party to an amalgamation, arrangement or merger with the related
party, other than a transaction referred to in paragraph (m), or
(m) Participates in a transaction with the related party that is a going
private transaction in respect of the related party or would be a going private
transaction in respect of the related party except that it comes with the
exception in paragraph (e) of the definition of going private transactions.
6.1
6. CONFLICTS OF INTEREST
-----------------------
A. General
-------
While Section 5 "Related Party Transactions" deals with prohibitions
imposed by legislation in regard to related party transactions, this section
deals with conflicts of interest in a more general sense.
The guidelines in this Section 6 are in addition to and not in substitution
for the guidelines set out in Section 5.
The Canadian and United States securities regulatory authorities emphasize that
all registrants should be most conscious of their responsibilities in these
situations and weigh the burden of dealing in an ethical manner with the
conflicts of interest against the advantages of acting as a director of a
reporting issuer, many shareholders of which may be clients of the registrant.
Directors, officers or employees of the Company must conduct their personal
affairs so as to avoid any situation that could give rise to conflict or
perceived conflict with the interests of the Company.
A conflict of interest is deemed to exist when a director, officer or
employee is in a position, as a result of the nature of their relationship with
the Company, to further any personal financial interest or the financial
interests of family, a friend or business associates.
B. Officers and Employees
------------------------
The Company has developed the following guidelines for officers and
employees of the Company:
(a) An officer or employee may not invest in, or hold a position with
any supplier, customer or competitor of the Company (except for an investment in
publicly traded securities as described below);
(b) An officer or employee may not accept favours, gifts, preferences,
special considerations or other things of more than nominal value from any
person or entity with which the Company has relations which might influence the
judgement of the officer or employee in carrying out his or her duties and
responsibilities to the Company;
(c) An officer or employee may not disclose or use confidential
information gained by reason of his or her relationship with the Company for his
or her own personal profit or advantage or the profit or advantage of family,
friends or business associates;
(d) An officer or employee may not engage in activities or investments
which compete with the business of the Company and, in particular, may not
compete in respect of the acquisition or disposition of rights or property;
(e) An officer or employee must not engage in outside employment,
activities or positions which interfere in any significant way with the
performance of his or her duties to the Company.
The following situations would not be considered conflicts of interest:
(a) Ownership of an insignificant amount of the publicly traded
securities of a supplier, customer or competitor of the Company;
(b) A transaction or relationship disclosed in accordance with this
policy and determined by the Company not to be a prohibited conflict of
interest.
C. Directors
---------
While it is recognized that not all of the guidelines applicable to
officers and employees will be applicable to members of the Board of Directors,
directors must be particularly vigilant in avoiding conflicts or perceived
conflicts between their personal or business interests and the interests of the
Company. In particular, a director shall not permit himself or herself to be
placed in a position which might give rise to the appearance that the director
is acting in concert with another person to participate in or enter into an
investment or other transaction with the Company that would be prohibited or
restricted if entered into with the Company by the director or an entity in
which the director or a member of the director's family has an interest.
Directors must also guard against any interests or relationships which might
reasonably be expected to affect the exercise of the best judgement of the
director with respect to the director's responsibilities in regard to the
Company's investments or other transactions or activities.
Directors must disclose all conflicts or perceived conflicts of interest in
writing to the Company or request that disclosure be entered in the minutes of
board or committee meetings at which such disclosure is made. A director must
not participate in any discussions regarding transactions, proposed transactions
or activities of the Company in respect of which he or she has a conflict or
perceived conflict of interest, nor may the director vote on any resolutions to
approve such transactions, proposed transactions or activities. A director is
obliged to disclose a conflict or perceived conflict of interest to the Company
even if the transaction, proposed transaction or activity does not require the
approval of the Board of Directors or a committee. A director who knowingly
violates the stricture against being present at or voting on a contract in which
the director has a conflict of interest ceases to be a director of the Company.
AUDIT COMMITTEE
The audit committee of the Board of Directors has the responsibility for
establishing the audit policies and monitoring the investment portfolio of the
Company. Accordingly, members of the audit committee must adhere to extremely
high standards in avoiding conflicts or perceived conflicts and the Company has
established additional disclosure guidelines with the intention of extending the
disclosure rule to situations where there may be a perceived conflict of
interest but no actual conflict exists and the legislation governing conflicts
does not apply. The guidelines are also intended to ensure that members do not
receive or are not perceived to receive a direct or indirect benefit from any
transaction involving the Company.
When the audit committee is considering a transaction for approval, any
member of the committee who in the previous two years has conducted business,
directly or indirectly, with any party to the transaction other than the
Company, or who in the previous two years has been involved with any party to
the transaction other than the Company whether as an employee, consultant,
adviser, director, direct or indirect shareholder or otherwise (or a member of
whose family has so conducted business or been so involved), will forthwith
disclose the nature of such business or involvement to the Company either in
writing or by requesting that such disclosure be entered in the minutes of the
meeting of the committee at which such disclosure is made. The audit committee
may then, in its discretion, require that such member not participate in any
discussion regarding the transaction being considered for approval, vote on any
resolution to approve such transaction, or attempt in any other way to influence
the decision of the committee in respect of such transaction.
A member of the audit committee required to make disclosure pursuant to the
preceding paragraph (and any members of the family of such committee member)
shall not receive any benefit or advantage, or future benefit or advantage,
directly or indirectly, from any party to the transaction (other than the
Company) or any person associated, affiliated or acting in concert with such a
party, as a result of the transaction, unless the member first discloses the
details regarding the benefit or advantage to the committee. The committee may
then require the member to refrain from participating in discussions regarding
future transactions, or impose any other terms or conditions that the committee
in its discretion may deem advisable.
7.1
7. QUESTIONABLE OR IMPROPER PAYMENTS OR USE OF THE COMPANY'S ASSETS
-------------------------------------------------------------------------
The use of any funds or assets of the Company for any unlawful or improper
purpose is strictly prohibited.
In this section, the word 'payment' or 'payments' is deemed to include any
gift or entertainment unless it is reasonable in nature, frequency, and cost.
Reasonable business entertainment would include, for example, lunch, dinner, or
occasional athletic or cultural events; gifts of nominal value, entertainment at
facilities of the Company or sponsored by the Company. Reasonable business
entertainment would also include traditional promotional events sponsored by the
Company or the corporate sponsorship of a cultural event.
No payment from the Company's funds or assets shall be made to or for the
benefit of an existing or prospective client or any representative of a client,
or supplier for the purpose of improperly obtaining a sale, purchase, contract
or other commercial benefit.
Employees of the Company shall not accept payments from any current or
prospective client or representative of a client or supplier for the purpose of
improperly obtaining or encouraging any sale, purchase, contract or other
commercial benefit.
It is strictly prohibited to provide payment from the Company's funds or
assets to or for the benefit of a representative of any provincial or federal
government, for example, to expedite the processing of an application.
8.1
8. POLITICAL, CHARITABLE, AND CULTURAL CONTRIBUTIONS
-----------------------------------------------------
Political, charitable, cultural, and other public relations contributions
may be made only with the prior approval of the President and Chief Executive
Officer of the Company.
9.1
9. BOOKS AND RECORDS OF THE COMPANY
-------------------------------------
The Company's books, records, and accounts shall accurately and fairly
reflect the transactions of the Company in reasonable detail and in accordance
with all applicable legislative and regulatory requirements and with the
Company's accounting practices and policies.
For example:
(a) No false or deliberately inaccurate entries (such as overbilling)
shall be made for any reason. Discounts, rebates, credits and allowances do not
create overbillings when lawfully granted; the reasons for the grant should be
set forth in the Company's records, including the party requesting the
treatment;
(b) No payment shall be made with the intention or understanding that
all or any part of it is to be used for any purpose other than that described by
the document supporting the payment;
(c) No undisclosed or unrecorded funds or assets shall be established
for any purpose; or
(d) No false or misleading statements, written or oral, shall be made
to any internal or external accountant, auditor or regulatory authority with
respect to the Company's financial statements.
10.1
10. PAYMENT OF AMOUNTS DUE CUSTOMERS, AGENTS, OR DISTRIBUTORS
----------------------------------------------------------------
All commission or agency arrangements and arrangements must be in writing
and provide for the services to be performed and for a fee which is reasonable
in amount and reasonably related to the service to be rendered.
All payments for fees, commissions, discounts, or rebates must be made by
the Company's cheque (not by cashier's cheque or in currency) in the name of the
agent, distributor, or customer.
A credit memorandum is the preferred method of affecting a rebate and
should be issued to the customer unless the Company's cheque is necessary due to
the nature of the transaction. Cheques should refer to the applicable
transaction or file number and indicate the amount of discount or rebate and the
reason therefore.
All payments for fees, commissions, discounts, or rebates shall be fully
disclosed and the accounting records maintained by the accounting department.
Proper documentation of contracts and agreements shall be maintained.
11.1
11. INSIDER TRADING
----------------
REPORTING REQUIREMENTS
-----------------------
Under the current Ontario legislation, it is an offence for any person in a
"special relationship" with a "reporting issuer" to purchase or sell securities
of the reporting issuer with knowledge of a material fact or material change
with respect to the reporting issuer that has not been generally disclosed. For
these purposes, a material fact or material change is essentially something
which may reasonable be expected to have a significant impact on the market
price or value of the securities of the reporting issuer. This will include
facts or changes with respect to subsidiaries of the reporting issuer if they
are material to the reporting issuer itself.
It is also an offence for a reporting issuer or any person in a special
relationship with the reporting issuer to inform another person or company of an
undisclosed material fact or material change with respect to the reporting
issuer other than in the necessary course of business.
Who is in a "special relationship" with Energy Power? (EPS)
(a) Insider, affiliates, associates, directors, officer and employees EPS
(insiders of EPS include directors and senior officers of subsidiaries of EPS);
(b) A person or company that is proposing to make a take-over bid for the
securities of EPS ("take-over bidder") and any insider, affiliate, associate,
director, officer or employee thereof;
(c) A person or company that is proposing to become a party to
reorganization, amalgamation, merger or arrangement with EPS or to acquire a
substantial portion of its property (a "merger partner") and any insider,
affiliate, associate, director, officer or employee thereof.
(d) A person or company that is engaging in or proposes to engage in any
business or professional activity with or on behalf of EPS, takeover bidder or
merger partner, and any director, officer or employee thereof; and
(e) A person or company that leans of a material fact or material change (a
"tippee") from any other person or company in the special relationship (a
"tipper") where the tippee knows or ought reasonably to have known that the
tipper is a person of company in that special relationship.
Specific Rules
IN LIGHT OF THE RESTRICTIONS ON INSIDER TRADING SET FORTH ABOVE AND THE
SEVERE PENALTIES FOR BREACHING SUCH RESTRICTIONS, THE FOLLOWING RULES WILL
HENCEFORTH APPLY TO ALL DIRECTORS, OFFICERS AND EMPLOYEES OF EPS AND ITS
SUBSIDIARIES:
1. No individual shall disclose to any other party outside the EPS
organization any material information of which he/she is aware regarding EPS or
any company with respect to which EPS is a potential take-over bidder or merger
partner until such information has been generally disclosed. Disclosure within
the EPS organization shall be on a "need to know" basis having due regard to the
need to keep disclosure to a minimum.
2. No individual with knowledge of material information with respect to EPS
or any company with respect to which, to the knowledge of such individual, EPS
is a potential take-over bidder or merger partner, shall trade in any securities
of EPS or such target company or merger partner, as the case may be, until such
material information has been generally disclosed.
3. Subject to paragraph 2, individuals may trade freely in securities of EPS
during the periods commencing 48 hours after release of EPS's interim financial
statements and ending 60 days thereafter.
For the purposes of paragraphs 1 and 2 above, information shall be deemed
to be generally disclosed after one full trading day has elapsed from the time
that a press release (or other document generally available to wire services and
the news media) containing the information is issued.
REPORTING OBLIGATIONS OF INSIDERS OF EPS
A person or company, who becomes an insider of a reporting issuer, shall
within 10 days from the day that he, she or it becomes an insider, or such
shorter period as may be prescribed by the regulations, file a reports as of the
day on which he, she or it became an insider disclosing any direct or indirect
beneficial ownership of or control or direction over securities of the reporting
issuer as may be required by the regulations.
1. Insiders
The following persons are insider of EPS and are therefore subject to the
reporting obligations
- Every director or senior officer of EPS
- Every director or senior officer of a company that is an insider of EPS;
- Every director or senior officer of a company that is a subsidiary of EPS;
- Any person or company who beneficially owns, directly or indirectly,
voting securities of EPS or who exercises control or direction over voting
securities of EPS or a combination of both carrying more than 10% of the voting
rights attached to all voting securities of EPS.
2. Where to Report
Insiders are subject to reporting obligation under the legislation of Ontario,
British Columbia, Alberta and Newfoundland Securities Commission together with a
reporting obligation to the Securities and Exchange Commission.
3. What to Report
An insider is required to report any direct or indirect beneficial
ownership of or control or direction over securities of a reporting issuer (i.e.
EPS).
4. When to File
Within 10 days from the day on which the change takes place, or such
shorter period as may be prescribed by the regulations, file a report of direct,
indirect beneficial ownership of or control or direction over securities of the
reporting issuer as of the day on which the change took place and the change or
changes at occurred, giving any details of each transaction as may be required
by the regulations.
5. Form of Report
Insider trading reports are filed in the Provinces of Ontario, British
Columbia, Alberta and Newfoundland using Form 55-102F.
Exhibit 99
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Energy Power Systems
Limited (the "Company") for the year ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Sandra J.
Hall, President of the Company, certify, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: (signed) Sandra J. Hall
--------------------------
Sandra J. Hall, President
ENERGY POWER SYSTEMS LIMITED
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Energy Power Systems
Limited (the "Company") for the year ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Scott T.
Hargreaves, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
3. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
4. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: (signed) Scott T. Hargreaves
-------------------------------
Scott T. Hargreaves, Chief Financial Officer
ENERGY POWER SYSTEMS LIMITED