First Calgary Petroleums Ltd. For the year ending December 31, 2004

Transcription

1 First Calgary Petroleums Ltd. For the year ending December 31, 2004 TSX/S&P Industry Class = Annual Revenue = Canadian $1.7 million (translated from U.S. dollars at US$1 = Cdn $1.3015) 2004 Year End Assets = Canadian $511.5 million (translated from U.S. dollars at US$1 = Cdn $1.3015) Web Page (October, 2005) = Financial Reporting In Canada Survey Company Number 73

2 MANAGEMENT S REPORT TO THE SHAREHOLDERS Management is responsible for the integrity and objectivity of the financial statements. The accompanying financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada using estimates and careful judgment, particularly in those circumstances where transactions affecting a current period are dependent upon future events. The accompanying financial statements have been prepared using policies and procedures established by management and reflect fairly the Company s financial position, results of operations and changes in financial position, within reasonable limits of materiality and within the framework of the accounting policies outlined in the notes to the consolidated financial statements. Management has established and maintains a system of internal controls which is designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and the financial information is reliable and accurate. The consolidated financial statements have been examined by external auditors. Their examination provides an independent view as to management s discharge of its responsibilities insofar as they relate to the fairness of reported operating results and financial condition of the Company. The Audit Committee of the Board of Directors has reviewed the consolidated financial statements with management and the external auditors. The consolidated financial statements have been approved by the Board of Directors on the recommendation of the Audit Committee. Signed Richard G. Anderson President & Chief Executive Officer Signed Kenneth C. Rutherford Vice President, Finance & Chief Financial Officer March 28, 2005 Page 1 of 17

3 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of First Calgary Petroleums Ltd. as at December 31, 2004 and 2003 and the consolidated statements of operations and deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Signed KPMG LLP Chartered Accountants Calgary, Canada March 28, 2005 Page 2 of 17

4 Consolidated Balance Sheets December 31 (Expressed in thousands of U.S. dollars) Assets Current assets: Cash and short-term deposits (note 4) $ 81,874 $ 95,185 Accounts receivable Deposits and prepaid expenses ,989 95,655 Property, plant and equipment (note 5) 310,053 68,708 Liabilities and Shareholders' Equity $ 393,042 $ 164,363 Current liabilities: Accounts payable and accrued liabilities (note 6) $ 30,874 $ 12,544 Asset retirement obligations (note 7) Shareholders' equity: Capital stock (note 8) 377, ,181 Contributed surplus (note 8) 9,441 4,849 Cumulative translation adjustment 6,502 6,502 Deficit (31,402) (24,837) 361, ,695 Operations and commitments (note 3) $ 393,042 $ 164,363 See accompanying notes to consolidated financial statements. On behalf of the board: Signed Richard G. Anderson Director Signed Raymond P. Antony Director Page 3 of 17

5 Consolidated Statements of Operations and Deficit Years ended December 31 (Expressed in thousands of U.S. dollars) Revenue: Interest $ 1,290 $ 638 Expenses: General and administrative 4,027 2,604 Stock-based compensation (note 8) 5,181 4,679 Foreign exchange loss (gain) (1,542) 578 Capital taxes Depreciation Accretion of asset retirement obligations 12 7 Write-off of Yemen petroleum and natural gas properties (note 5) - 1,035 Algerian earthquake relief donation - 1,000 7,855 10,288 Loss for the year (6,565) (9,650) Deficit, beginning of year (24,837) (15,187) Deficit, end of year $ (31,402) $ (24,837) Loss per share (note 8) $ (0.04) $ (0.07) See accompanying notes to consolidated financial statements. Page 4 of 17

6 Consolidated Statements of Cash Flows Years ended December 31 (Expressed in thousands of U.S. dollars) Operating activities: Loss for the year $ (6,565) $ (9,650) Items not involving cash: Stock-based compensation 5,181 4,679 Foreign exchange loss (gain) (1,612) - Depreciation Accretion of asset retirement obligations 12 7 Write-off of Yemen petroleum and natural gas properties - 1,035 (2,917) (3,891) Change in non-cash working capital 1,430 1,549 (1,487) (2,342) Financing activities: Proceeds from issuance of shares 74, ,372 Proceeds from exercise of warrants 6,602 2,403 Proceeds from exercise of options 2,394 1,273 Issue costs (4,320) (8,453) 78, ,595 Investing activities: Capital expenditures (108,609) (46,207) Change in non-cash working capital 16,255 3,723 (92,354) (42,484) Increase (decrease) in cash and short-term deposits (14,923) 79,769 Effect of exchange rate fluctuations on cash and short-term deposits 1,612 2,994 Cash and short-term deposits, beginning of year 95,185 12,422 Cash and short-term deposits, end of year $ 81,874 $ 95,185 See accompanying notes to consolidated financial statements. Page 5 of 17

7 First Calgary Petroleums Ltd. (the Company ) is incorporated in Alberta under the Business Corporations Act (Alberta) and its primary business activity is the exploration for and development of petroleum and natural gas in Algeria. 1. Significant accounting policies: (a) Basis of presentation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. (b) Petroleum and natural gas operations: The Company follows the full cost method of accounting for petroleum and natural gas operations, whereby all costs of exploring for and developing petroleum and natural gas reserves are capitalized and accumulated in country-by-country cost centres. Such costs include land acquisition costs, geological and geophysical costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, interest costs on major development projects and overhead charges directly related to acquisition, exploration and development activities. The costs (including exploratory dry holes) in cost centres from which there has been no commercial production are not subject to depletion until commercial production commences. The capitalized costs are periodically assessed to determine whether it is likely such costs will be recovered in the future. To the extent there are costs which are not likely to be recovered in the future, they are written-off. The costs in cost centres from which there will be production, together with the cost of production equipment, will be depleted and depreciated on the unit-of-production method based on the estimated proved reserves after royalties. Petroleum and natural gas reserves and production will be converted into equivalent units based upon estimated relative energy content. Costs of acquiring and evaluating significant unproved properties are excluded from the depletion calculations. These unproved properties are assessed periodically to ascertain whether impairment in value has occurred. When proved reserves are assigned or the value of 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. Petroleum and natural gas properties are subject to a ceiling test in each reporting period to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying values of the petroleum and natural Page 6 of 17

8 gas properties. If the carrying value of the petroleum and natural gas properties is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds an estimated fair value. The fair value estimate is normally based on the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using forecast product prices and costs and are discounted using a risk-free interest rate. Proceeds from the sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the depletion rate by more than twenty per cent. Substantially all of the Company s exploration, development and production activities are conducted jointly with others and accordingly these financial statements reflect only the Company s proportionate interest in such activities. (c) Asset retirement obligations: The Company recognizes the estimated fair value of legal obligations associated with the retirement of petroleum and natural gas properties in the period in which they are incurred. The obligation is recorded as a liability with a corresponding increase in the carrying amount of the petroleum and natural gas properties. The incremental capitalized amount will be depleted on a unit-of-production basis over the life of the proved reserves. The obligation is increased each period, or accretes, due to the passage of time and is recorded in the statement of operations. Revisions to the estimated fair value would result in an adjustment to the obligation and carrying amount of the petroleum and natural gas properties. (d) Foreign currency: All operations are considered financially and operationally integrated. Results of operations are translated to the functional currency, using average rates for revenues and expenses, except depreciation which is translated at the rate of exchange applicable to the related assets. Monetary items denominated in foreign currencies are translated to the functional currency at exchange rates in effect at the balance sheet date and nonmonetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Foreign exchange gains and losses are recorded in the statement of operations. (e) Stock-based compensation: The Company accounts for all stock options and warrants granted using the fair value method. Under this method, compensation expense is measured at fair value at the grant date using the Black-Scholes option pricing model and recognized over the vesting period with a corresponding increase to contributed surplus. Page 7 of 17

9 Consideration received upon the exercise of stock options together with the amount of non-cash compensation expense recognized in contributed surplus is recorded as share capital. (f) Income taxes: The Company uses the asset and liability method of accounting for income taxes. Under this method current income taxes are recognized for the estimated income taxes payable for the current year. Future income taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes that are likely to be realized. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. (g) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses including depreciation and asset retirement obligations. The ceiling test is based upon estimates of market values of unproved properties, reserves, petroleum and natural gas prices, future costs and other assumptions. (h) Per share amounts: Basic per share amounts are computed by dividing the earnings or loss by the weighted average shares outstanding during the reporting period. Diluted amounts are computed using the treasury stock method. The treasury stock method assumes that proceeds received from the exercise of in-the-money options and warrants are used to repurchase shares at the average market price for the period. The difference between the number of shares that could have been purchased at market prices in the period and the number of in-the-money options and warrants is added to the weighted average shares outstanding. 2. Changes in accounting policies and restatement of prior periods: In the fourth quarter of 2003, the Company adopted three new accounting policies which resulted in the retroactive restatement of the previously reported 2003 interim financial statements. The new accounting policies were the change to the U.S. dollar as the Company s reporting currency, the recognition of compensation expense for stock options Page 8 of 17

10 granted to employees after January 1, 2003 and the new accounting standard for asset retirement obligations. 3. Operations and commitments: The Company s operations are in Algeria where it has the rights to explore, appraise and develop two blocks, Yacoub Block 406a ( Block 406a ) and Ledjmet Block 405b ( Block 405b ). The Company s rights and obligations in each block are set out in agreements with Sonatrach, the national oil company of Algeria. These agreements are structured such that the Company has committed to conduct certain minimum exploration activities over a period of time and in return earns an interest in commercial discoveries. (a) Block 406a: In 2000 the Company entered into a joint venture agreement with Sonatrach to explore Block 406a in the Berkine Basin. The Company is currently in the second exploration period which expires in November The remaining work obligation for the second exploration period is to drill two exploration wells, estimated to cost $18 million. If the Company fails to satisfy the work obligations, the rights, other than for areas for which an exploitation permit has been granted or requested, could be forfeited and the Company will be liable to pay Sonatrach a penalty of $12.75 million. In addition to the work commitments, the Company is obligated to pay an annual training bonus in the amount of $150 thousand for the duration of the contract. (b) Block 405b: In 2001 the Company entered into a production sharing contract with Sonatrach to explore and appraise Block 405b in the Berkine Basin. The Company is in the second exploration period which expires in December The remaining work obligation for the second exploration period is to drill one exploration well. The estimated cost of this work is $9.0 million. Should the Company fail to satisfy the work obligation of the second exploration period, the rights, other than for areas for which an exploitation permit has been granted or requested, could be forfeited and the Company will be liable to pay Sonatrach a penalty of $6.25 million. In addition to the work commitments, the Company is obligated to pay an annual training bonus in the amount of $150 thousand for the duration of the contract. The contract provides the Company with the right to appraise and develop the MLE reserves discovered with the MLE-1 well. As compensation for the right to access the MLE discovery, the Company is committed to pay Sonatrach a reserve-based access fee of $0.25 per barrel of oil equivalent calculated on the total estimated recoverable proved MLE reserves. The access fee will be determined at the time the MLE reserves are Page 9 of 17

11 declared commercial by Sonatrach and will be payable as a deduction from Sonatrach s share of the MLE development expenditures. While the Company currently has sufficient resources to meet its required work commitments, these resources may be directed to other, optional capital programmes depending on the success of expenditures and other opportunities which become available to the Company. In addition, the development of the Company s existing reserves through to commercial production will require additional funding in the form of equity, debt, joint ventures or some combination thereof. The Company has retained Lehman Brothers Europe Limited and Canaccord Capital Corporation to assist the Company in seeking and evaluating strategic alternatives. 4. Cash and short-term deposits: The Company considers deposits in banks, certificates of deposit and short-term investments with original maturities of three months or less as cash and short-term deposits. The components of cash and short-term deposits are as follows: Cash on deposit: U.S. dollars $ 1,833 $ 50,911 British pounds 1, Algerian dinars Canadian dollars Bank term deposits: British pounds 54,823 - Canadian dollars 22,079 42,644 U.S. dollars $ 81,874 $ 95, Property, plant and equipment: Accumulated Net book 2004 Cost depreciation value Petroleum and natural gas properties - Algeria $ 309,751 $ - $ 309,751 Office furniture and equipment $ 310,255 $ 202 $ 310,053 Included in Algerian petroleum and natural gas properties is $132.6 million representing the value attributable to the 10,150,000 common shares of the Company issued in October 2004 Page 10 of 17

12 to acquire an overriding five per cent net profits interest that previously encumbered Blocks 405b and 406a. Accumulated Net book 2003 Cost depreciation value Petroleum and natural gas properties - Algeria $ 68,409 $ $ 68,409 Office furniture and equipment $ 68,849 $ 141 $ 68,708 The Company held a ten per cent interest in a production sharing contract to explore Block 43 in Yemen. At December 31, 2003 the Company determined it was not prepared to fund any further activities on the block, and given the absence of a commercial discovery, wroteoff $1.0 million of costs related to the block. During the year, the Company capitalized $5.2 million ( $1.4 million) of overhead charges relating directly to the exploration and development activities in Algeria. 6. Accounts payable and accrued liabilities: Trade payables: U.S. dollars $ 13,004 $ 8,311 Algerian dinars 3, Canadian dollars 2, British pounds Capital accrual: U.S. dollars 11,550 2,931 $ 30,874 $ 12, Asset retirement obligations: The Company has an obligation to abandon and remediate its wells at the end of their useful lives provided Sonatrach does not elect to continue production after the hydrocarbon contracts expire. The present value of this obligation has been projected using estimates of the future costs and the timing of abandonment. At December 31, 2004 the Company estimated the present value of its asset retirement obligations to be $0.3 million ( $0.1 million) based on a future liability of $1.6 million ( $0.5 million). These costs are expected to be incurred near the end of the exploitation phase of the Algerian production sharing contract, being after A credit-adjusted risk-free discount rate of seven per cent and an inflation rate of two per cent were used to calculate the present value. Page 11 of 17

13 8. Capital stock: (a) Authorized share capital: Unlimited number of common shares without nominal or par value Unlimited number of preferred shares without nominal or par value (b) Issued share capital: Common shares: Number of Shares Amount Balance, December 31, ,629,726 $ 40,351 Issued on public offering (i) 14,893,620 23,121 Issued on public offering (ii) 35,000, ,251 Issued on exercise of share purchase warrants (iii) 2,448,408 2,403 Issued on exercise of stock options 2,084,932 1,273 Transfer from contributed surplus on exercise of stock options and warrants Issue costs - (8,453) Balance, December 31, ,056, ,181 Issued on acquisition of net profits interest (iv) 10,150, ,600 Issued on public offering (v) 6,000,000 74,242 Issued on exercise of share purchase warrants (vi) 1,844,424 6,602 Issued on exercise of stock options 2,035,565 2,394 Transfer from contributed surplus on exercise of stock options and warrants Issue costs - (4,320) Balance, December 31, 2004 (vii) 183,086,675 $ 377,288 (i) In February 2003 the Company issued 14,893,620 common shares for gross proceeds of $23.1 million (10,807,620 common shares at C$2.35 per share and 4,086,000 common shares at 0.95 per share). The issue costs were $1.7 million. In conjunction with the offering, the Company issued the agents 893,617 common share purchase warrants exercisable at a purchase price of C$2.60 per share until February 12, (ii) In October 2003 the Company issued 35,000,000 common shares for gross proceeds of $106.3 million (13,838,500 common shares at C$4.00 per share and 21,161,500 common shares at 1.79 per share). The issue costs were $6.7 million. In conjunction with the offering, the Company issued the agents 1,750,000 common share purchase warrants exercisable at a purchase price of C$5.00 per share until April 20, Page 12 of 17

14 (iii) In 2003 the Company issued 2,448,408 common shares pursuant to the exercise of the following common share purchase warrants: 1,368,000 at C$0.56 per share, 231,472 at C$1.11 per share and 848,936 at C$2.60 per share. (iv) In October 2004, the Company issued 10,150,000 common shares to acquire an overriding five per cent net profits interest that previously encumbered Blocks 405b and 406a. (v) In December 2004, the Company issued 6,000,000 common shares for gross proceeds of $74.2 million (4,637,192 common shares at 6.50 per share and 1,362,808 common shares at C$14.46 per share). The issue costs were $4.2 million. (vi) In 2004, the Company issued 1,844,424 common shares pursuant to the exercise of the following common share purchase warrants: 85,764 at C$1.11 per share, 44,681 at C$2.60 per share and 1,713,979 at C$5.00 per share. (vii) Subsequent to December 31, 2004, the Company issued 504,377 common shares pursuant to the exercise of 450,000 non-employee stock options at C$0.70 per share, 32,764 common share purchase warrants at C$1.11 per share and 21,613 common share purchase warrants at C$5.00 per share. (c) Employee stock options: Pursuant to the Stock Option Plan, the Company has 12,176,230 common shares reserved for issuance. Stock options granted under the plan have a term of five years and vesting terms are determined at the discretion of the Board, ranging between two and three years. The exercise price of each option is equal to the closing market price of the shares on the date preceding the date of the grant. The following table summarizes the changes in stock options outstanding: Number of Options Weighted Average Exercise Price Outstanding, December 31, ,110,033 C$ 0.88 Granted 4,180, Exercised (2,084,932) 0.82 Cancelled (186,700) 1.04 Outstanding, December 31, ,018, Granted 880, Exercised (2,035,565) 1.45 Cancelled (233,335) 6.55 Outstanding, December 31, ,629,501 C$ 3.47 Page 13 of 17

15 The following table summarizes information about the options outstanding and exercisable at December 31, 2004: Options Outstanding Options Exercisable Weighted Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Price Options Life Price Options Price C$ ,173, years C$ ,173,500 C$ 0.63 C$ , years , C$ ,030, years , C$ ,518, years ,680, C$ , years , C$ , years , ,629, years C$ ,793,058 C$ 2.66 (d) Common share purchase warrants: The following table summarizes the changes in common share purchase warrants outstanding: Number of Warrants Weighted Average Exercise Price Outstanding, December 31, ,718,000 C$ 0.67 Granted in connection with public offerings 2,643, Exercised (2,448,408) 1.32 Outstanding, December 31, ,913, Exercised (1,844,424) 4.76 Outstanding, December 31, ,785 C$ 3.15 At December 31, 2004, all of the 68,785 common share purchase warrants outstanding are exercisable; 36,021 expire on April 19, 2005 and the remaining 32,764 expire on June 9, (e) Non-employee stock options: In 2002 the Company granted consultants options to acquire 900,000 common shares at a price of C$0.70 per share. At December 31, 2004, all of these options remain outstanding, are fully vested and expire January 24, Page 14 of 17

16 (f) Stock-based compensation expense: For the year ended December 31, 2004, the Company recorded $5.2 million ( $4.7 million) as stock-based compensation expense with a corresponding increase in contributed surplus. The fair value of the options granted in 2004 was estimated to be C$5.34 per option (2003 C$3.02) and was determined using the Black-Scholes option pricing model with the following weighted average assumptions: expected volatility of 81 per cent ( per cent), risk-free interest rate of 3.7 per cent ( per cent) and expected lives of 3 years ( years). No compensation expense was recorded on options granted to employees prior to January 1, Had options granted to employees in 2002 been accounted for using the fair value method, net loss for the year ended December 31, 2004 would have been higher by $0.1 million ( $0.3 million). The pro forma fair values were determined using the Black-Scholes option pricing model with the following assumptions: expected volatility of 95 per cent, risk-free interest rate of 5 per cent and expected lives of 5 years. (g) Contributed surplus: The changes in contributed surplus balance are as follows: Balance, beginning of year $ 4,849 $ 405 Options granted 5,181 4,679 Options and warrants exercised (589) (235) Balance, end of year $ 9,441 $ 4,849 (h) Per share amounts: The loss per share is based on the weighted average shares outstanding for the year. The weighted average shares outstanding for 2004 was 167,749,193 ( ,088,467). The effect upon conversion of outstanding options and warrants is antidilutive. Page 15 of 17

17 9. Income taxes: Income tax expense differs from the amount that would be computed by applying the Canadian federal and provincial statutory income tax rates to the loss for the year as follows: Loss for the year $ (6,565) $ (9,650) Statutory tax rate 38.6% 40.6% Expected income tax recovery at statutory rate (2,534) (3,918) Increase (decrease) resulting from: Non-deductible stock-based compensation 2,000 1,900 Increase in valuation allowance 498 1,701 Other $ - $ - The components of the potential future income tax asset at December 31 are summarized below: Operating losses $ 4,115 $ 2,304 Property, plant and equipment 3,211 3,405 Share issue costs 3,255 3,061 10,581 8,770 Less: valuation allowance (10,581) (8,770) $ - $ Financial instruments: The Company is exposed to foreign currency fluctuations as it holds Canadian dollar and British pound cash and short-term deposits and accounts payable. In addition, a portion of the Company s operating activities are conducted in Canadian dollars. There are no exchange rate contracts in place. The fair value of the Company s financial instruments, including cash and short-term deposits, accounts receivable and accounts payable and accrued liabilities approximate their carrying values due to their short terms to maturity. 11. Leases: Page 16 of 17

18 The Company is committed to office and equipment leases over the next five years as follows: 2005 $ Segmented information: The Company s activities are conducted in two geographic segments: Canada and Algeria. All activities relate to exploration and development of petroleum and natural gas in Algeria Canada Algeria Yemen Total Revenue $ 1,290 $ - $ - $ 1,290 Expenses 7, ,855 Loss for the year (6,565) - - (6,565) Capital expenditures $ 67 $ 241,142 $ - $ 241,209 Assets $ 81,991 $ 311,051 $ - $ 393, Canada Algeria Yemen Total Revenue $ 638 $ $ $ 638 Expenses 8,183 1,070 1,035 10,288 Loss for the year (7,545) (1,070) (1,035) (9,650) Capital expenditures $ 94 $ 45,881 $ 232 $ 46,207 Assets $ 95,506 $ 68,857 $ $ 164,363 Capital expenditures in 2004 include the non-cash acquisitions of the overriding five per cent net profits interest of $132.6 million. Page 17 of 17