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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
PROMAX ENERGY INC.
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(Exact name of Registrant as specified in its charter)
Commission File No.
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British Columbia, Canada
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(Jurisdiction of incorporation or organization)
Suite 200 707 - 7th Avenue S.W.
Calgary, Alberta, Canada
T2P 0Z2
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act.
Title of each class Name of each exchange on which
registered
None None
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
Common Stock
(Title of Class)
A total of 29,969,258 shares of common stock of Registrant were issued
and outstanding as of June 1, 2000. No other classes of stock were issued
and outstanding
Indicate by a 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 that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes No X
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Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 X Item 18
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TABLE OF CONTENTS
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PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . .3
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Control of Registrant. . . . . . . . . . . . . . . . . . . . 18
Item 5. Nature of Trading Market . . . . . . . . . . . . . . . . . . 20
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders. . . . . . . . . . . . . . . . . . . . . 21
Item 7. Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 8. Selected Financial Data. . . . . . . . . . . . . . . . . . . 28
Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 28
Item 9A. Quantitative and Qualitative Disclosures about Market Risk . 31
Item 10. Directors and Officers of Registrant . . . . . . . . . . . . 31
Item 11. Compensation of Directors and Officers . . . . . . . . . . . 33
Item 12. Options to Purchase Securities from Registrant
of Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 34
Item 13. Interest of Management in Certain Transactions . . . . . . . 35
PART II
Item 14. Description of Securities to be Registered . . . . . . . . . 35
PART III
Item 15. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 36
Item 16. Changes in Securities, Changes in Security for Registered
Securities and Use of Proceeds. . . . . . . . . . . . . . 36
PART IV
Item 17. Financial Statements . . . . . . . . . . . . . . . . . . . . 37
Item 18. Financial Statements . . . . . . . . . . . . . . . . . . . . 37
Item 19. Financial Statements and Exhibits. . . . . . . . . . . . . . 37
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As used herein, references to the "Company" and "Promax" refer to
Promax Energy Inc., and its subsidiaries, unless the context indicates
otherwise.
References to Shares herein refer to (i) Class "A" Voting - Common
Shares of the Company, no par value per Share (the "Common Shares").
The Company publishes its financial statements in Canadian dollars.
In this Form 20-F, references to "dollars" or "$" are to Canadian dollars.
Except as otherwise stated herein, all monetary amounts in this Form 20-F
have been presented in dollars.
The Company publishes annual reports containing annual audited
consolidated financial statements and opinions thereupon by independent
public auditors. Such financial statements are prepared on the basis of
generally accepted accounting principles in Canada ("Canadian GAAP")
expressed in Canadian dollars. The Company has published quarterly updates
and semi-annual reports containing unaudited financial information prepared
on the same basis as its audited Canadian GAAP consolidated financial
statements.
The discussion below contains certain "forward-looking statements" (as
such term is defined in the rules promulgated pursuant to the Securities
Act) that are based on the beliefs of the Company's management, as well as
the assumptions made by, and information currently available to, the
Company's management. Such forward-looking statements are subject to the
safe harbor created by the Private Securities Litigation Reform Act of
1995. The Company's actual result, performance or achievements in fiscal
2000 and beyond could differ materially from those expressed in, or implied
by, any such forward-looking statements. Factors that could cause or
contribute to such material differences include, but are not limited to,
those discussed in Item 1 of this Form 20-F, as well as those discussed
elsewhere in this Form 20-F. The Company undertakes no obligation to
release publicly any updates or revisions to any such forward-looking
statements that may reflect events or circumstances occurring after the
date of this Form 20-F.
PART I
Item 1. Description of Business.
---------------------------------
Promax Energy Inc., (the "Company") is a junior oil and gas
exploration company focusing primarily on natural gas exploration, recovery
and production. The Company's principal offices are located at Suite 200,
707 7th Avenue S.W., Calgary, Alberta, Canada T2P 0Z2.
The Company was originally incorporated in British Columbia, Canada,
as Red Fork Resources, Inc., to pursue gold mining opportunities. The
Company invested in a number of mining projects from 1980 to 1998. In
1981, the Company changed its name to Tamara Resources, Inc. The Company
again changed its name in 1994 to Matrix Energy, Inc. In 1998, many of the
Company's gold claims expired. At that time, the Company divested itself
of its few remaining gold properties and decided to focus its attention on
oil and natural gas exploration and production.
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On February 3, 1999, the Company changed its name to Promax Energy
Inc. In March 1999, the Company purchased a 30% working interest in 23,040
contiguous acres of oil and gas leases in 37 sections of developed and
undeveloped land; 15 miles of pipeline and surface dehydration facility; 21
standing gas wells with multiple horizons all of which were non-producing
in the Cessford area of South Eastern Alberta, Canada. By December 31,
1999, the Company increased its working interest in these properties and
facilities to 94.8%.
The Company acquired these interests from a number of parties by
issuing approximately 17,026,295 common shares and paying approximately
$2,686,068 to the various owners of the interests in the Cessford area.
The Cessford area is a well known gas prone area. In March 2000, the
Company retained Citadel Engineering, Ltd., ("Citadel") to analyze the
Company's holdings. Citadel prepared a Reserve Report on the 18 sections
of the Company's Cessford properties which have been proved up. The report
showed 23 billion standard cubic feet ("BSCF") of proved and 12 BSCF of
probable reserves related to those 18 sections. Said reserves were
appraised at CDN $32,000,000 using a 12% discount rate. On June 1, 2000,
Citadel updated its Reserve Report. Based on increased market price the
Company's reserves were appraised at CDN $55,745,000 using a 12% discount
rate. Citadel did not analyze the Company's holdings in the other 23
sections because those properties have not yet been proved up.
Real Property
--------------
The acreage the Company acquired potentially has nine geological
zones. From shallowest to deepest, these include Belly River, Milk River,
Medicine Hat, Second White Specks, Viking, Upper and Lower Mannville,
Glauconitic, Detrital and Bakken Sands. The Milk River and Medicine Hat
formations appear to be the most consistent for natural gas production as
they extend in area for over 65 miles.
The Colony and Glauconitic zones offer the potential for the greatest
natural gas reserves per well drilled. Because these zones are channel
mode in nature, however, natural gas will not appear in all areas. Given
its geological make up, the Glauconitic zone is well suited for geologic
and seismic testing.
Viking is divided into the Viking "A" and Viking "B" formations.
Viking "B", while less spectacular in flow rate is more consistent in it is
presentation. Because of this, the Company believes Viking "B" will be one
of its most productive formations.
Upper and Lower Mannville are currently the most prolific production
formations of the group. The Company believes this area's full potential
has not yet been realized. This group accounts for 23.6% of the total
discovered gas reserve in the Western Canadian Sedimentary Basin. A recent
study by the Geological Survey of Canada estimates that 39% of the total
gas resources of the Mannville group remain undiscovered.
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To date, the Detrital reserves in the Cessford area have been
classified as probable. Commercial gas has been produced in this area from
the Bakken Sands formation. The Company feels that through future drilling
it can establish reserves in this area.
The Company's land holdings are easily accessible for exploration and
development. The Energy Conservation Board of Alberta has designated the
Cessford grasslands as "Special Areas." This requires that there be only
minimal surface disturbance by entities operating in the area. This also
means the Company will be responsible to remediate surface damage caused in
these areas. The Company anticipates its remediation efforts will be
limited primarily to replanting native grasses. The Company believes that
the designation of these lands as Special Areas carries certain benefits
for the Company. Principally, the Company believes it will be much less
expensive to remediate the damage caused by its vehicles traveling on the
sparsely populated lands, than having to build and maintain costly roads.
Moreover, the Company's Cessford land interests involve only a few
landowners, making it easier for the Company to build and maintain good
working relationships.
All of the Company's land holdings are held under leasehold
agreements. Each of these lease agreements was obtained for a one time
charge, which the Company has already paid, as discussed above. These
lease agreements continue in perpetuity so long as the Company pursues oil
and gas operations. If the Company discontinues its oil and gas
operations, the properties revert to the Crown.
Production
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Existing Wells
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The Company has 21 standing natural gas and oil wells, seven of which
were drilled by the Company's predecessor in 1997 and 1998 with a 100%
success rate. Of the Company's 21 wells, 12 are currently tied into the
Company's existing pipeline.
In April 2000, the Company put the first of its tied-in wells into
production. A second tied-in well was put into production in May 2000. In
April and May 2000, the Company produced, had processed and sold 3,168
standard cubic foot ("MCF") and 6,519 MCF respectively. By July 2000, the
Company anticipates reactivating three more tied-in wells, at a cost of
approximately $50,000 per well. The Company also expects to tie-in and
produce six of its existing free standing wells by July 2000, at a cost of
about $100,000 per well. The Company is currently investigating another
six of its wells for completion, redrilling or refracturing so they can
productively be reactivated. The Company believes up to five of its 21
wells may be abandoned within the next year.
Drilling
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Currently, the Company is not engaged in any drilling activities. The
Company, however, has spent significant time investigating new drilling,
completion and production enhancement techniques. In particular, the
Company has studied improved drilling practices, including improved bits,
underbalanced drilling, better drilling fluids and cementing, enhanced
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fracturing technology, and drilling procedures which should increase
productivity, while reducing damage to producing zones. The Company
believes it has also improved its likelihood of locating natural gas
reserves because it has obtained access to an extensive seismic database
covering more than 500 miles of the Cessford area, which covers much of the
land held by the Company. This database should enhance the Company's
ability to identify targets within the region that in the past would have
been hard to detect, thereby increasing the likelihood of successful
drilling activities.
The Company would like to drill 15 new wells by year end 2000. The
Company estimates it will cost approximately $300,000 to drill, tie-in and
put into production each new well. The Company's ability to drill 15 new
wells by year end will be limited by several factors including, among other
things, available funding, time constraints, and the ability to identify
appropriate drilling sites. The Company expects to fund the cost of its
drilling activities with the proceeds from its currently open private
placement stock offering in Canada, bank loans and revenue from production.
The private placement is scheduled to close on June 30, 2000. The shares
are being offered at $0.50, with a maximum offering of 6,000,000 shares.
To date the Company has raised approximately $1,500,000 in the private
placement.
The Company will rely on management to identify potentially successful
drilling sites and to manage drilling activities. The Company does not
own, nor does it intend to purchase drilling equipment. Rather, the
Company will hire independent contractors to drill the new wells.
Farm-in Agreements
------------------
In addition to its own wells, the Company is negotiating farm-in
agreements with owners of other wells in the Cessford area. A farm-in
agreement typically provides the owner of a producing well access to a
pipeline to transport its oil or natural gas to a processing facility where
it can be processed and sold. The Company is currently negotiating farm-in
agreements with owners of gas wells in the area of the Company's existing,
or to be constructed, pipeline. The Company will tie-in these wells to its
pipeline and transport the gas to a processing facility. As is customary
in the industry, in exchange for these services, the Company will acquire a
percentage ownership in each farmed-in well. The Company anticipates it
will cost approximately $100,000 per well to tie-in these farm-in wells.
This estimate includes the cost of necessary surface equipment. At this
time, the Company is uncertain how many farm-in agreements it may
establish.
Transportation
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In addition to its land holdings, the Company currently owns 15 miles
of existing flow line. At the time the Company acquired the pipeline, it
was inactive. The Company recently had its pipeline recertified by an
independent contractor registered with the Energy Utilities Board. The
pipeline has been reactivated and is being used to transport natural gas
produced by its two recently reactivated wells. At the terminus of the
Company's existing flow line, there is a gas processing plant owned by an
independent third party.
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The Company has contracted for the construction of up to an additional
28 miles of flow line with construction to begin in June 2000. This
additional pipeline is needed so the Company can tie-in some of its
existing free standing wells, to tie in farm-in wells, and to tie-in new
wells the Company may drill. The projected cost of the additional pipeline
is $3,100,000. Rather than pay the entire cost up front, the Company has
negotiated an agreement with an independent contractor whereby the
contractor received an initial cash payment of $100,000. Once the first
leg of the pipeline is finished, the contractor will also receive a 4.8%
working interest from the Company, and will become a joint venture partner
with the Company. The contractor will receive monthly payments from the
Company based on a percentage of natural gas it produces and sells to
retire the outstanding $3,000,000 by the Company. The contractor will
retain title to the new pipeline until the balance has been fully paid.
Following retirement of the outstanding balance, the contractor will
receive a transportation royalty based on flow through the pipeline in
perpetuity. The Company has the right to buy back this transportation
royalty from the contractor at any time.
Processing
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The Company is currently having its natural gas processed at a
processing plant located at the terminus of the Company's existing
pipeline. This facility is capable of processing 13 million CF per day.
It is currently processing less than one million CF per day. Pursuant to
its agreement with owner of the processing plant, the Company pays a $250
per month processing fee and a flat fee of $0.35 or $0.25 per MCF based on
the pressure at which the gas is put into the processing plant. The
Company will be able to take advantage of the lower cost per MCF once daily
delivery to the plant reaches approximately 1.5 million CF per day.
The Company will continue to have its natural gas processed at the
plant until its daily production exceeds 10 million CF. At that time, the
Company will reactivate the inactive gas processing facility it currently
owns to process the natural gas production which exceeds the current
processing plant's capacity.
The term of the Company's agreement with the independent processing
plant is month to month. Either party may terminate the agreement by
providing the other 30 days written notice.
The processing plant is connected directly to the Nova Gas pipeline,
which is a network of pipelines extending approximately 13,500 miles. The
majority of natural gas transmitted within Canada is transmitted through
this pipeline. The Nova Gas pipeline also carries approximately one-third
of all natural gas exported from Canada to the United States. The Company
also has a direct connection to the Nova Gas pipeline via its inactive
processing plant.
Marketing and Sales
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It is standard practice in the industry for natural gas producers to
contract out the marketing and sales of its natural gas. The Company has
negotiated an agreement with Premstar Energy Canada, Ltd., ("Premstar") an
energy procurement and management service company. Premstar markets
natural gas in Canada and the United States. Premstar will purchase
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natural gas produced by the Company, and resell it on the spot market.
Premstar purchased all of the natural gas the Company produced in April and
May 2000. The Company anticipates Premstar will continue to purchase and
resell all of the natural gas the Company can produce for the foreseeable
future. If, however, Premstar cannot sell all of gas produced by the
Company, the Company may negotiate contracts with additional natural gas
marketers to sell the Company's natural gas.
Pursuant to the Company's agreement with Premstar, once the Company's
gas is placed in the Nova Gas pipeline the Company receives payment for it.
The purchase price the Company will receive will vary based on current
market price. As with its agreement with the gas processing plant, the
agreement with Premstar may be terminated at any time by either party upon
30 days written notice.
Market for our Product
----------------------
Use of natural gas in the end-user sector in Canada and the United
States is expected to increase significantly, particularly in the electric
utility industry where natural gas is the fuel of choice. Consumption of
natural gas for power generation in both countries is expected to double
between 1997 and 2010. Natural gas production in Canada is forecasted to
increase at an annual rate of two to three percent per year to meet ever
increasing consumption. The U.S. Energy Information Administration ("EIA")
estimates that natural gas imports from Canada will grow by 72% between
1996 and 2020, rising from 2.9 trillion standard cubic feet ("TCF") to 5.0
TCF. This increase in imports will only partly meet the forecasted growth
in U.S. consumption, which is anticipated to grow from 19 TCF in 1998 to 27
TCF by 2020.
The Company believes that environmental, economic, and national
security issues will play a factor in driving demand for natural gas. In
particular:
- Natural gas is a cleaner fossil fuel than either coal or oil
and is seen as a way to reduce greenhouse gas emissions;
- Reserves of natural gas are relatively abundant, competitively
priced and serviced by a well developed infrastructure; and
- Natural gas is an indigenous source of energy for Canada and
the United States.
Moreover, over the past decade, volatile hydrocarbon prices have
prompted the major oil and gas producers in Alberta to reconsolidate their
holdings, with an emphasis on exploring large areas. This has created
opportunities for emerging companies to gain a foothold in smaller
promising areas. Areas like Cessford offer minimal upside for mid-sized to
large oil and gas companies. The Company believes, however, that small
emerging companies, like Promax that have lower overhead and costs, can
profitably exploit these areas.
Risk Factors
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This Form 20-F contains various forward-looking statements. These
statements can be identified by the use of the forward-looking words
"anticipate," "estimate," "project," "likely," "believe," "intend,"
"expect," or similar words. These statements discuss future expectations,
contain projections regarding future developments, operations, or financial
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conditions, or state other forward-looking information. When considering
such forward-looking statements, you should keep in mind the risk factors
noted in this section and other cautionary statements throughout this
document. You should also keep in mind that all forward-looking statements
are based on management's existing beliefs about present and future events
outside of management's control and on assumptions that may prove to be
incorrect. If one or more risks identified in this document, or any
applicable filings materializes, or any other underlying assumptions prove
incorrect, our actual results may vary materially from those anticipated,
estimated, projected, or intended.
Among the key factors that may have a direct bearing on our operating
results are risks and uncertainties described under "Risk Factors,"
including those attributable to the lack of significant operating revenues,
exploration risks, and uncertainties regarding our ability to obtain
capital sufficient to continue our operations and pursue proposed business
strategy. We do not intend to update any forward-looking statements,
except as may occur as part of our ongoing periodic reports filed with the
SEC.
Risks of Natural Gas Drilling and Production
--------------------------------------------
Natural gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks
include:
- no commercially productive natural gas reservoirs will be
found;
- natural gas drilling and production activities may be
shortened, delayed or canceled; and
- our ability to develop, produce and market our reserves may be
limited by:
- title problems,
- weather conditions,
- compliance with governmental requirements, and
- mechanical difficulties or shortages or delays in the delivery
of drilling rigs, and other equipment.
The Company cannot assure that the wells it reactivates and the new
wells it drills will be productive or that the Company will recover all or
any portion of its investment. Drilling for natural gas may be
unprofitable due to dry wells and wells that are productive but do not
produce sufficient net revenues after drilling, operating and other costs.
In addition, the Company's properties may be susceptible to hydrocarbon
draining from production by other operations on adjacent properties.
Other operating risks include:
- fire;
- explosions;
- blow-outs;
- pipe failure;
- abnormally pressured formations; and
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- environmental hazards, including:
- oil spills,
- gas leaks,
- ruptures, and
- discharges of toxic gases.
If any of these operating risks occur, the Company could suffer
substantial losses. Substantial losses also may result from injury or loss
of life, severe damage to or destruction of property, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations.
In accordance with industry practice, the Company maintains insurance
against some, but not all, of the risks described above. The Company
cannot assure that its insurance will be adequate to cover losses or
liabilities. Also, the Company cannot predict the continued availability
of insurance at premium levels that justify its purchase.
Price Volatility
----------------
Historically, the price of natural gas has been volatile and subject
to wide fluctuations in response to numerous factors, including:
- changes in the supply and demand for such fuels;
- political conditions in oil, natural gas, and other fuel-
producing areas;
- the extent of domestic production and importation of such
fuels and substitute fuels in relevant markets;
- weather conditions;
- the competitive position of each such fuel as a source of
energy as compared to other energy sources;
- the refining capacity of processors;
- the effect of governmental regulation on the production,
transportation, and sale of oil, natural gas, and other fuels;
Low prices and/or highly volatile prices for natural gas may adversely
affect our ability to secure financing or enter into suitable arrangements
with industry participants. In addition, a low or volatile price for the
natural gas being recovered could adversely affect revenue and other
operations.
Environmental Regulations.
--------------------------
The Company's operations are subject to environmental laws and
regulations. Such laws and regulations may require completion of a costly
environmental impact assessment and government review process prior to
commencing exploratory and/or development activities. In addition, such
environmental laws and regulations may restrict, prohibit, or impose
significant liability in connection with spills, releases, or emissions of
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various substances produced in association with fuel exploration and
development. The Company believes it is currently in material compliance
with applicable laws and regulations. The Company cannot, however, provide
assurance of such compliance or that applicable regulations or
administrative policies or practices will not be changed by the various
governmental entities. The cost of compliance with current laws and
regulations or changes in environmental laws and regulations could require
significant expenditures. Moreover, if the Company breachs any governing
laws or regulations, it may be compelled to pay significant fines,
penalties, or other payments. Costs associated with environmental
compliance or noncompliance may have a material adverse impact on the
Company's financial condition or results of operations in the future.
Hedging Transactions may Limit Potential Gains.
-----------------------------------------------
In order to manage its exposure to price risks in the marketing of our
oil and natural gas production, the Company may enter into natural gas
price hedging arrangements with respect to a portion of its expected
production. The hedging arrangements may include futures contracts on the
New York Mercantile Exchange. While intended to reduce the effects of
volatile natural gas prices, such transactions may limit the Company's
potential gains if natural gas prices were to rise substantially over the
price established by the hedge. In addition, such transactions may expose
the Company to the risk of loss in certain circumstances, including
instances in which:
- production is less than expected;
there is a widening of price differentials between delivery
- points for production and
- the delivery point assumed in the hedge arrangement;
- the counterparties to the Company's futures contracts fail to
perform the contracts; or
- a sudden, unexpected event materially impacts oil or natural
gas prices.
Acquisition of New Reserves Depends on Successful Development and
Exploration Activities
------------------------------------------------------------------
The rate of production from natural gas properties declines as
reserves are depleted. The Company's proved reserves will decline as
reserves are produced unless it acquires additional properties containing
proved reserves, conducts successful exploration and development activities
or, through engineering studies, identifies additional reserves. The
Company's future natural gas production is therefore highly dependent upon
its level of success in acquiring or finding additional reserves. The
Company cannot assure that its exploration and development activities will
result in increases in reserves. The Company's operations may be
curtailed, delayed or cancelled if we lack necessary capital and by other
factors, such as title problems, weather, compliance with governmental
regulations, mechanical problems or shortages or delays in the delivery of
equipment.
The Company's ability to continue to acquire producing properties or
companies that own such properties assumes that major integrated oil
companies and independent oil companies will continue to divest many of
their oil and natural gas properties. The Company cannot assure that such
divestitures will continue or that it will be able to acquire such
properties at acceptable prices or develop additional reserves in the
future.
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Estimates of Proved Reserves and Future Net Revenue are Uncertain and
Inherently Imprecise
---------------------------------------------------------------------
This registration statement contains estimates of the Company's proved
natural gas reserves and the estimated future net revenue from such
reserves. The process of estimating natural gas reserves is complex and
involves decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data. Therefore, these
estimates are imprecise.
Actual future production, natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable
natural gas reserves most likely will vary from those estimated. Any
significant variance could materially affect the estimated quantities and
present value of reserves set forth in this registration statement. In
addition, the Company may adjust estimates of proved reserves to reflect
production history, results of exploration and development, prevailing
natural gas prices and other factors, many of which are beyond its control.
It cannot be assumed that the present value of future net revenues
referred to in this registration statement is the current market value of
the Company's estimated natural gas reserves. In accordance with SEC
requirements, the estimated discounted future net cash flows from proved
reserves are generally based on prices and costs as of the end of the year
of the estimate. Actual future prices and costs may be materially higher
or lower than the prices and costs as of the end of the year of the
estimate. Any changes in consumption by natural gas purchasers or in
governmental regulations or taxation will also affect actual future net
cash flows.
Dependence on Key Personnel
---------------------------
The Company depends heavily on the efforts of its officers, Alexander
T. Lemmens and James R. Clark; and Richard N. Mellis, a Company director.
The unavailability of these individuals could have a materially adverse
effect on the Company's business. The Company recently entered into one-
year service agreements to retain the services of these individuals. The
Company's success is also dependent upon its ability to obtain skilled
technical personnel, either through employment or as independent
contractors. While we have not experienced difficulties in employing or
retaining such personnel, our failure to do so in the future could
adversely affect our business.
Penny Stock Rule
----------------
The Company's common stock is covered by a Securities and Exchange
Commission rule that imposes additional sales practice requirements on
broker-dealers who sell these securities to persons other than established
customers and accredited investors, generally institutions with assets in
excess of $5,000,000 or individuals with net worth in excess of $1,000,000
or annual income exceeding$200,000 or $300,000 jointly with their spouse.
For transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and transaction prior to the
sale. Consequently, the rule may affect the ability of broker-dealers to
sell the Company's securities and also may affect the ability of purchasers
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of the Company's stock to sell their shares in the secondary market. It
may also cause broker-dealers to be less willing to make a market in the
Company's securities and it may affect the level of news coverage received
by the Company.
First Year Plan of Operation
----------------------------
Cash Considerations:
--------------------
As of March 31, 2000 Promax had $696,915 cash on hand. The Company
recently applied for and was granted a revolving term loan through Alberta
Treasury Branches. The Company is currently authorized to borrow up to
$1,000,000 at its current production level, with the possibility of gaining
access to up to $10,000,000 based on future production levels.
Promax also expects to raise up to $3,000,000 in a flow through
private placement of up to 6,000,000 shares at $0.50 per share. The
Company is currently offering shares for sale. The offering is being made
solely in Canada and will close on June 30, 2000. To date the Company has
raised approximately $1,500,000 through this private placement.
As discussed above, the Company has also negotiated an agreement with
an independent contractor to build up to 28 miles of pipeline for the
Company at an estimated cost of $3,100,000. The contractor will be
compensated as follows: an initial payment of $100,000; upon completion
of the first leg of the pipeline, the contractor will receive a 4.8 working
interest from the Company; the $3,000,000 outstanding balance will be
repaid from a percentage of sales on a monthly basis, until the contractor
is fully compensated; thereafter, the contractor will receive a
transportation royalty in perpetuity. The Company has the option to
purchase the transportation royalty at any time.
Cash flow from operations will increase dramatically in July 2000 when
the first leg of the new pipeline is completed. At that point earnings
before interest depreciation and taxes ("EBIDT") should exceed $350,000 per
month and grow to $900,000 per month by December 2000 as additional wells
are tied in.
The Company believes the above funds will be sufficient to meet its
current exploration and capital budget. Promax has a number of
opportunities to be involved in additional projects. The Company is
currently reviewing these opportunities. Additional capital will be
required if Promax elects to become involved. Capital markets will be
considered for funds to allow Promax to participate in these other
projects.
Expenditure Expected:
---------------------
During the year Promax anticipates spending funds on:
- Surface facilities for wells to be connected to the new
pipeline, at a cost of approximately $65,000 per well;
13
</Page>
<PAGE>
- Drilling and completion of up to fifteen new wells, which should
cost about $200,000 per well;
- Drillable land acquisitions. The Company anticipates it could
spend up to $500,000 on the acquisition of additional acreage
from the Crown;
- Fracing and workovers of several existing wells, which could cost
up to $150,000 per well.
- Tie in six additional wells, at an estimated cost of about
$100,000 per well.
- A portion of cash flow from natural gas sales will be used to pay
for up to an additional 28 miles of pipeline, at a cost of
$3,100,000, as discussed above.
- Costs to run the company include office rent, payroll,
administrative expense, consulting geological and engineering
personnel, gas processing fees, field operators, auditors,
lawyers, interest and various other expenses encountered by an
operating company.
Gas Plant:
----------
Promax will have its gas processed at an underutilized processing
plant located at the terminus of its existing pipeline. This plant has
capacity for 13 million cubic feet of gas per day. Currently the plant
handles less than 1 million cubic feet per day. The Company will plan for
additional facilities once Promax is producing in excess of 10 million
cubic feet per day.
Employees:
----------
As gas production increases there will be a staff increase, however,
this will be mainly at the field level. At this time, rather than hire
employees to address this need, the Company will seek to hire experienced
individuals on contract basis. The Company believes it may need an
additional three to four such individuals to supervise operations, order
out services required and enhance production.
New Products or Services
------------------------
There are no new products being developed, nor is there any research
and development activity being done by the Company other than monitoring
the industry for improvements in drilling and production technologies.
Item 2. Description of Property.
---------------------------------
Office Space
------------
The Company currently sub-leases 3700 square feet of office space in
downtown Calgary, Alberta for $4,600 per month. The Company's lease is for
a term of six months and expires September 1, 2000. The sub-lease is
renewable for a period of two years following expiration of the current
sub-lease. The Company is not leasing this office space from any officer,
director or affiliate of the Company. The Company believes this office
space is adequate for its current and anticipated needs for the foreseeable
future.
14
</Page>
<PAGE>
Oil and Natural Gas Properties
------------------------------
Developed and Undeveloped Acreage
---------------------------------
As of May 1, 2000, the Company's natural gas reserves included working
interests in 41 sections 18 of which have been developed in the
Cessford area of Alberta, Canada. The working interests held by the
Company include 21 standing gas wells with multiple horizons, seven of
which were drilled since 1997. The Company has no reserves offshore or
inside the United States. The following table sets forth the developed and
undeveloped leasehold acreage held by the Company at March 1, 2000.
Developed acres are acres that are spaced or assignable to productive
wells. Undeveloped acres are acres on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves. Gross acres are the total number of acres in
which the Company has a working interest. Net acres are the sum of the
Company's fractional interests owned in the gross acres.
<TABLE>
<CAPTION>
Gross Net Total
--------- --------- ---------
<S> <C> <C> <C>
Developed acreage:
Proven 10,240 9,708 19,948
Probable 1,280 955 2,335
Undeveloped acreage 14,720 13,955 28,675
--------- --------- ---------
Total acreage 26,240 24,618 50,958
</TABLE>
Title to Properties
-------------------
As is customary in the oil and gas industry, the Company conducts only
a perfunctory title examination at the time properties believed to be
suitable for drilling operations are first acquired. Prior to commencement
of drilling operations, a thorough drill site title examination is normally
conducted and curative work is performed with respect to significant
defects. During acquisitions, title reviews are performed on all material
properties being acquired.
Reserves
--------
Citadel Engineering, Ltd., ("Citadel"), the Company's independent
petroleum engineering consulting firm, has made estimates of the Company's
natural gas reserves as of March 1, 2000, with an update effective June 1,
2000. Citadel's report covers the estimated present value of future net
cash flows before income taxes (undiscounted, discounted at 10%, 12% and
15%) attributable to the Company's estimated future net cash flows
therefrom.
The quantities of the Company's proved reserves of natural gas
presented below include only those amounts which the Company reasonably
expects to recover in the future from probable natural gas reservoirs under
existing economic and operating conditions. Proved developed reserves are
limited to those quantities which are recoverable commercially at current
13
</Page>
<PAGE>
prices and costs, under existing regulatory practices and with existing
technology. Accordingly, any changes in prices, operating and development
costs, regulations, technology or other factors could significantly
increase or decrease estimates of Promax's proved developed reserves.
Promax's proved undeveloped reserves include only those quantities which
Promax reasonably expects to recover from the drilling of new wells based
on geological evidence from offsetting wells. The risks of recovering these
reserves are higher from both geological and mechanical perspective than
the risks of recovering proved developed reserves.
The following table sets forth estimates of the proved natural gas
reserves of the Company as of June 1, 2000, as evaluated by Citadel
Engineering, Ltd.
<TABLE>
<CAPTION>
Natural Gas (MMSCF)
Developed
W.I.O. Net
<S> <C> <C>
Proven Non-Producing 22,435 18,515
Probable Non-Producing 12,366 10,210
--------- ---------
Total 34,801 28,725
</TABLE>
Working Interest Ownership ("W.I.O.") means net reserves, after
deduction of all outside working interests, but before deduction of lessor
and overriding royalties and before Crown royalties. Net reserves ("Net")
means reserves after deduction of all outside working interests and
overriding and lessor royalties. The net cash flow forecasts are after
direct lifting costs, normal allocated overhead and future investments but
before income taxes. Crown Royalties in the Province of Alberta, as
applicable to natural gas, including rebates under ARTC, as revised from
time to time, have also been utilized.
The following table sets forth, as of June 1, 2000, estimates of
reserves and production forecasts. These estimates were prepared on the
basis of prevailing conditions, and generally accepted engineering methods.
Although these estimates are considered reasonable, future performance may
vary from the forecast presented herein and may justify either an increase
or decrease in the reserves. Probable reserves were risked at 50% and cash
flow values are quoted in a constant dollar basis at CDN $5.57/MCF using a
June 1, 2000 market price. The net cash flow forecasts are after direct
lifting costs, normal allocated overhead and future investments but before
income taxes. Crown Royalties in the Province of Alberta, as applicable to
natural gas, including rebates under ARTC, as revised from time to time,
have also been utilized.
<TABLE>
<CAPTION>
Constant Dollar
(in thousands)
Undiscounted Discounted
10% 12% 15%
<S> <C> <C> <C> <C>
Proved Producing $ 8,635 $ 4,119 $ 3,721 $ 3 ,251
Proved Developed
Non-Producing $79,648 $40,475 $36,705 $32,173
Probable 47,102 19,703 17,286 14,466
Total $135,385 $64,297 $57,712 $49,890
</TABLE>
13
</Page>
<PAGE>
As required by the Securities and Exchange Commission, the estimates
of net proved reserves and proved developed reserves and the estimated
future net revenues from such reserves set forth above, have been made in
accordance with the provisions of Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities."
Estimated future net cash flows from proved reserves are determined by
using estimated quantities of proved reserves and the periods in which they
are expected to be developed and produced based on economic conditions at
the date of the report. The estimated future production is priced at
current prices at the date of the report. The resulting estimated future
cash inflows are then reduced by estimated future costs to develop and
produce reserves based on cost levels at the date of the report. No
deduction has been made for depletion, depreciation or for indirect costs,
such as general corporate overhead. The discounted value was computed by
discounting future net revenues at the indicated percentage per annum,
without deduction for income taxes.
The estimation of natural gas reserves is a complex and subjective
process which is subject to continued revisions as additional information
becomes available. Reserve estimates prepared by different engineers from
the same data can vary widely. Assumptions have to be made regarding the
timing of future production and the timing and amount of future development
and production costs. The calculations assume that economic conditions
existing at the end of the reporting period will continue. Other, but
equally valid, assumptions might lead to a significantly different final
result. Therefore, the reserve data presented herein should not be
construed as being exact. Any reserve estimate presented herein should not
be construed as being exact. Any reserve estimate depends in part on the
quality of available data, engineering and geologic interpretation, and
thus represents only an informed professional judgment. Subsequent
reservoir performance may justify upward or downward revision of such
estimate. The information provided, therefore, does not represent
management's estimate of the Company's expected future cash flows or value
of proved and probable reserves.
The Company has filed estimates of proved and probable reserves with
the Canadian Venture Exchange. Those estimates do not differ materially
from those contained in this document.
Producing Wells
---------------
The Company has two producing wells as of June 1, 2000. Both of these
wells are existing wells which the Company re-activated in April and May
2000 after the Company's existing 15 miles of pipeline was re-certified.
The wells produce approximately 400 MCF per day.
Production, Unit Prices And Costs
----------------------------------
The following table sets forth information with respect to sales of
production and average unit prices and costs for the periods indicated.
17
</Page>
<PAGE>
<TABLE>
<CAPTION>
Year ended Years ended June
December 31, June 30, June 30,
1999 (2) 1998 1997
<S> <C> <C> <C>
Production:
Gas (MMSCF) NIL NIL NIL
Average sales prices (1) N/A N/A N/A
Average production costs N/A N/A N/A
per BOE (2)
</TABLE>
(1) The average sales prices for the years ended December 31, 1999,
and June 30, 1998 and 1997 would have been CDN $3.28 GJ for natural gas.
(2) The components of production costs may vary substantially among
wells depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and repair,
labor and utilities.
Drilling Activity
-----------------
The 21 standing gas wells in which the Company has a working interest
were all drilled prior to the Company's acquisition of said interest. To
date, the Company has not drilled any additional wells. The Company
anticipates beginning a drilling program during the summer of 2000 and may
drill up to 15 new wells prior to the winter of 2000.
The Company will contract out all drilling activities to independent
contractors. The Company owns no drilling equipment.
Present Activities
------------------
At the time the Company acquired its working interest in the Cessford
properties and assets, the 21 standing wells were all inactive, as was the
pipeline. The Company spent the past six months reactivating the pipeline
and having it recertified for use. In April 2000, the Company reactivated
the first of the 21 standing wells. The second was reactivated in May
2000. The Company anticipates reactivating three more of its standing
wells and tying in and putting into production six of its existing wells by
the end of June 2000.
Item 3. Legal Proceedings.
---------------------------
Neither the Company, nor any of its officers and directors is a party
to any litigation.
Item 4. Control of Registrant.
-------------------------------
To the best of the Company's knowledge, it is not directly or
indirectly owned or controlled by another corporation or by any foreign
government.
The following table sets forth as of March 29, 2000 the name and the
number of shares of the Registrant's Common Stock, no par value per share,
held of record or beneficially by each person who held of record, or was
known by the Registrant to own beneficially, more than 10% of the
18
</Page>
<PAGE>
29,969,258 issued and outstanding shares of the Registrant's Common Stock,
and the name and shareholdings of each director and of all officers and
directors as a group.
<TABLE>
<CAPTION>
Title of Amount and Nature of
Class Name of Beneficial Owner Beneficial Ownership Percentage of Class
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Alexander T. Lemmens(1) 5,760,000 19.2%
603 Willowbrook Drive S.E.
Calgary, Alberta T2J 1N6
Common Richard N. Mellis(2) 5,448,730 18.2%
434 Sierra Madre Court S.W.
Calgary, Alberta T3H 3M4
Common Starrock Resources Ltd.(2) 3,000,000 10.0%
Box 19, Site 10, R.R. #4
Calgary, Alberta T2M 4L4
Common Mustang Investments Ltd.(3) 3,000,000 10.0%
30-237 4th Ave. SW
Calgary, Alberta T2P 4X7
-------------------------------------------------------------------------------------
Common All Officers, Directors as a Group:
(4 persons) 14,175,940 47.3%
-------------------------------------------------------------------------------------
</TABLE>
(1) The shares attributed to Alexander T. Lemmens, a Company Officer and
Director, include 5,500,00 shares held personally by him, 250,000 shares
held of record by Annex Resources, Ltd., a company owned by him and his
wife, and 10,000 shares held of record by his daughter Michelle Lemmens.
(2) The shares attributed to Richard N. Mellis, a Company Director, include
3,000,000 shares held of record by Starrock Resources Ltd., Mr. Mellis is
the President of Starrock and may be deemed a beneficial owner of these
shares; 150,000 shares held of record by RNM Services Ltd., Mr. Mellis is
president of RNM and may be deemed the beneficial owner of these shares;
2,198,730 shares held of record by four companies in which Mr. Mellis' wife
is an officer or director, and may be deemed to be beneficially owned by
him; and 100,000 shares held of record by Mr. Mellis.
(3) The shares attributed to Mustang Investments, Ltd., include 2,500,000
share held of record by Mustang and 500,000 shares held of record by 773440
Alberta Ltd. Mustang has owns a controlling interest in 773440 Alberta
Ltd., and may be deemed to be the beneficial owner of these shares.
19
</Page>
<PAGE>
Item 5. Nature of Trading Market.
----------------------------------
The Company's common stock is listed on the Canadian Venture Exchange
("CDXN"), (formerly the Vancouver Stock Exchange), under the symbol "PMY".
The Company's securities are not listed on any stock exchange in the United
States and there is no established trading market for the securities of the
Company in the United States.
As of April 4, 2000 the Company had 142 shareholders holding
29,969,258 shares of common stock. Of the 142 shareholders, 125 are
Canadian residents, 9 are residents of the United States and 9 are
residents of other countries. The total number of Company common shares
held by residents of the United States is 135,981. The Company's common
stock is not traded or registered in the form of American Depositary
Receipts. The Company has never declared a dividend on its Common Stock.
<TABLE>
<CAPTION>
HIGH LOW VOLUME
---------- ---------- ----------
<S> <C> <C> <C>
First Quarter
January 1, 1998- $0.12 $0.12 9,200
Mar. 31, 1998
Second Quarter 0.25 0.13 277,100
Apr.1, 1998-
June 30, 1998
Third Quarter 0.23 0.10 359,400
July 1, 1998-
Sept. 30, 1998
Fourth Quarter 0.10 0.05 388,700
Oct. 1, 1998-
Dec. 31, 1998
First Quarter (Pre-Split) 0.09 0.07 49,000
Jan 1, 1999-
Feb. 2, 1999*
First Quarter (Post-Split) 1.15 0.31 106,003
Feb. 3, 1999*-
Mar. 31, 1999
Second Quarter 1.10 0.48 83,600
Apr. 1, 1999-
June 30, 1999
Third Quarter 0.53 0.30 55,500
July 1, 1999-
Sept 30, 1999
20
</Page>
<PAGE>
Fourth Quarter 0.48 0.24 147,080
Oct. 1, 1999-
Dec. 31, 1999
First Quarter 0.80 0.35 217,660
Jan. 1, 2000-
Mar. 31, 2000
---------------------------------------------------------------------------
</TABLE>
* On February 3, 1999, the Company reverse split its outstanding
common shares on a 5:1 share basis.
The above quotations, as provided by CDXN, (formerly VSE), represent
the high and low trades expressed in Canadian Dollars and the volume for
each of the above indicated quarters.
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders.
-------------------------------------------------------------------
There are no governmental laws, decrees or regulations in Canada
relating to restrictions on the export or import of capital, or affecting
the remittance of interest, dividends or other payments to non-resident
holders of the Company's common shares. Any remittances of dividends to
United States residents are, however, subject to a 15% withholding tax (5%
if the shareholder is a corporation owning at least 10% of the outstanding
common shares of the Company) pursuant to Article X of the reciprocal tax
treaty between Canada and the United States. See Item 7 - "Taxation."
Except as provided in the Investment Canada Act, there are no
limitations under the laws of Canada, the Province of British Columbia or
in the Memorandum or Articles of the Company on the right of foreigners to
hold or vote the common shares of the Company.
The Investment Canada Act requires a non-Canadian making an investment
to acquire control, directly or indirectly, of a Canadian business, the
gross assets of which exceed certain defined threshold levels, to file an
application for review with Investment Canada, the federal agency created
by the Act. Provisions of the Investment Canada Act are complex and any
non-Canadian contemplating an investment to acquire control of the Company
should consult professional advisors as to whether and how the Investment
Canada Act might apply. For the purposes of the Investment Canada Act,
direct acquisition of control means a purchase of the voting interests of a
corporation, partnership, joint venture or trust carrying on a Canadian
business, or any purchase of all or substantially all of the assets used in
carrying on a Canadian business. An indirect acquisition of control means a
purchase of the voting interest of a corporation, partnership, joint
venture or trust, whether a Canadian or foreign entity, which controls a
corporation, partnership, joint venture or trust company carrying on a
Canadian business in Canada.
21
</Page>
<PAGE>
Item 7. Taxation.
------------------
Material Canadian Federal Income Tax Consequences
-------------------------------------------------
The following is a summary that describes the material 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 of Canada and who does not use or hold, and is not deemed to use
or hold, his 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 administrative and assessing policies of the
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 provincial or foreign tax considerations
which may differ significantly from those discussed herein.
Dividends
---------
Dividends paid on the common shares of the Company to a non-resident
holder will be subject to withholding tax. The Canada-U.S. Income Tax
Convention (1980) (the"Treaty") provides that the normal 25% withholding
tax rate is reduced to 15% on dividends paid on shares of a corporation
resident in Canada (such as the Company) to residents of the United States,
and also provides for a further reduction of this rate to 5% where the
beneficial owner of the dividends is a corporation which is a resident of
the United States which owns at least 10% of the voting shares of the
corporation paying the dividend.
Capital Gains
-------------
A non-resident of Canada is not subject to tax under the ITA in
respect of a capital gain realized upon the disposition of a share of a
Canadian resident corporation that is listed on a prescribed stock
exchange, unless the share represents "taxable Canadian property" to the
holder thereof. The Company is a Canadian resident corporation and the
Canadian Venture Exchange is a prescribed stock exchange for purposes of
the ITA. A common share of the Company will be taxable Canadian property to
a non-resident holder if, at any time during the period of five years
immediately preceding the disposition, the non-resident holder, persons
with whom the non-resident holder did not deal at arm's length, or the non-
resident holder and persons with whom he did not deal at arm's length owned
not less than 25% of the issued shares of any class or series of the
Company. In the case of a non-resident holder to whom shares of the Company
represent taxable Canadian property and who is resident in the United
States, no Canadian taxes will be payable on a capital gain realized on
such shares by reason of the Canada-U.S. Income Tax convention (1980) (the
"Treaty") unless the value of such shares is derived principally from real
property situated in Canada. In such a case, certain transitional relief
under the Treaty may be available.
22
</Page>
<PAGE>
Material United States Federal Income Tax Consequences
------------------------------------------------------
The following is a summary of United States federal income tax
considerations material to a holder of Common Shares and who is a United
States citizen or resident or a United States domestic corporation who owns
the Common Shares as a capital asset ("United States Investor"). This
description is not exhaustive of all possible income tax consequences
applicable to United States Investors and does not address the tax
consequences of United States Investors subject to special provisions of
federal income tax law such as tax exempt organizations, trusts and
significant shareholders. Prospective investors are advised to consult
their own tax advisors with respect to their particular circumstances and
with respect to the effects of state, local or foreign tax laws to which
they may be subject.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations, court decisions and current
administrative rulings and pronouncements of the United States Internal
Revenue Service ("IRS") that are currently applicable, all of which are
subject to change, possibly with retroactive effect. There can be no
assurance that future changes in applicable law or administrative and
judicial interpretations thereof will not adversely affect the tax
consequences discussed herein. Investors are advised to consult their own
tax advisors regarding the tax consequences of acquiring, holding or
disposing of the Common Share in light of their particular circumstances.
Basis. A United States Investor will have a basis in the Common Share
equal to his or her purchase price for United States federal tax purposes.
Dividends. Cash dividends paid out of the Company's current and
accumulated earnings and profits to a holder of Common Share who is a
United States Investor will be taxed as ordinary income for United States
federal income tax purposes. Cash distributions in excess of the current
and accumulated earnings and profits of the Company will first be treated,
for United States federal income tax purposes, as a nontaxable return on
capital to the extent of the United States Investor's basis in the Common
Share and then as gain from the sale or exchange of a capital asset.
As discussed above in "Material Canadian Federal Income Tax
Considerations,"such dividends generally will also be subject to a Canadian
withholding tax. The deduction for dividends received which is usually
available to corporate shareholders is generally not available for
dividends paid from a foreign corporation such as the Company. Pursuant to
Sections 164 and 901 of the Code, a United States Investor may generally
elect, for U.S. federal income tax purposes, to claim either a deduction
from gross income for such Canadian withholding taxes or a credit against
its United States federal income taxes with respect to such Canadian taxes.
The choice of taking a deduction or claiming a credit is up to the
taxpayer.
23
</Page>
<PAGE>
In general, a United States Investor, other than a shareholder owning
10% or more of the voting power of the Company, will be entitled to claim a
foreign tax credit only for taxes, if any, imposed on dividends paid to
such United States Investor (such as withholding taxes) and not for taxes,
if any, imposed on the Company or on any entity in which the Company has
made an investment. The amount of the foreign tax credit that may be
claimed is limited to that proportion of the tax against which the credit
is taken that the holder's taxable income from non-United States sources
bears to the holder's entire taxable income for that taxable year. The
foreign tax credit limitation is applied separately to different categories
of income. Generally, for purposes of applying such foreign tax credit
limitations, dividends are included in the passive income category.
Dispositions of Common Shares. Subject to the discussion below of the
consequences of the Company being treated as a Passive Foreign Investment
Company or a Foreign Investment Company, gain or loss realized by a United
States Investor (other than a 10-percent shareholder of the Company) on the
sale or other disposition of Common Share will be subject to United States
federal income tax as capital gain or loss in an amount equal to the
difference between such United States Investor's basis in the Common Share
and the amount realized on the disposition. In general, such capital gain
or loss will be long-term capital gain or loss if the United States
Investor has held the Common Shares for more than one (1) year at the time
of the sale or exchange. In general, gain from a sale, exchange or other
disposition of the Common Share by a United States Investor will be treated
as U.S. source income.
Special United States Federal Income Tax Considerations
-------------------------------------------------------
Passive Foreign Investment Company. The Company believes that it is a
passive foreign investment company ("PFIC") for United States federal
income tax purposes with respect to a United States Investor. The Company
will be a PFIC with respect to a United States Investor if, for any taxable
year in which such United States Investor held the Company's shares, either
(i) at least 75% of the gross income of the Company for the taxable year is
passive income, or (ii) at least 50% of the Company's assets are
attributable to assets that produce or are held for the production of
passive income. In each case, the Company must take into account a pro
rata share of the income and the assets of any company in which the Company
owns, directly or indirectly, 25% on more of the stock by value (the "look-
through" rules). Passive income generally includes dividends, interest,
royalties, rents (other than rents and royalties derived from the active
conduct of a trade or business and not derived from a related person),
annuities, and gains from assets that produce passive income. As a non-
publicly held (for United States Federal income tax purposes), non-CFC, the
Company would apply the 50% asset test based on the value of the Company's
assets.
Because the Company is a PFIC, unless a United States Investor who
owns shares in the Company elects (a section 1295 election) to have the
Company treated as a"qualified electing fund" (a "QEF") as described below,
the following rules will apply:
1. Distributions made by the Company during a taxable year to a United
States Investor who owns shares in the Company that are an "excess
distribution"(defined generally as the excess of the amount received
with respect to the shares in any taxable year over 125% of the
24
</Page>
<PAGE>
average received in the shorter of either the three previous years or
such United States Investor's holding period before the taxable year)
must be allocated ratably to each day of such shareholder's holding
period. The amount allocated to the current taxable year and to years
when the corporation was not a PFIC must be included as ordinary
income in the shareholder's gross income for the year of distribution.
The remainder is not included in gross income but the shareholder must
pay a deferred tax on that portion. The deferred tax amount, in
general, is the amount of tax that would have been owed if the
allocated amount had been included inincome in the earlier year, plus
interest. The interest charge is at the rate applicable to
deficiencies in income taxes.
2. The entire amount of any gain realized upon the sale or other
disposition of the share will be treated as an excess distribution
made in the year of sale or other disposition and as a consequence
will be treated as ordinary income and, to the extent allocated to
years prior to the year of sale or disposition, will be subject to the
interest charge described above.
A shareholder that makes a section 1295 election will be currently
taxable on his or her pro rata share of the Company's ordinary earnings and
net capital gain (at ordinary income and capital gains rates, respectively)
for each taxable year of the Company, regardless of whether or not
distributions were received. The shareholder's basis in his or her shares
will be increased to reflect taxed but undistributed income. Distributions
of income that had previously been taxed will result in a corresponding
reduction of basis in the shares and will not be taxed against as a
distribution to the shareholder.
A shareholder may make a section 1295 election with respect to a PFIC
for any taxable year of the shareholder (shareholder's election year). A
section 1295 election is effective for the shareholder's election year and
all subsequent taxable years of the shareholder. (In temporary regulations,
Treasury provides procedures for both retroactive and protective
elections). Once a section 1295 election is made it remains in effect,
although not applicable, during those years that the Company is not a PFIC.
Therefore, if the Company requalifies as a PFIC, the section 1295 election
previously made is still valid and the shareholder is required to satisfy
the requirements of that election. Once a shareholder makes a section 1295
election, the shareholder may revoke the election only with the consent of
the Commissioner.
If the shareholder makes the section 1295 election for the first tax
year of the Company as a PFIC that is included in the shareholder's holding
period, the PFIC qualifies as a pedigreed QEF with respect to the
shareholder. If a QEF is an unpedigreed QEF with respect to the
shareholder, the shareholder is subject to both the non-QEF and QEF
regimes. Certain elections are available which enable shareholders to
convert an unpedigreed QEF into a pedigreed QEF thereby avoiding such dual
application.
A shareholder making the section 1295 election must make the election
on or before the due date, as extended, for filing the shareholder's income
tax return for the first taxable year to which the election will apply. A
shareholder must make a section 1295 election by completing Form 8621;
attaching said Form to its federal income tax return; receiving in the Form
the information provided in the PFIC Annual Information Statement or if the
25
</Page>
<PAGE>
shareholder calculated the financial information, a statement to that
effect; and filing a copy of the Form with the Philadelphia Service Center.
As provided in IRS Notice 88-125, the PFIC Annual Information Statement
must include the shareholder's pro rata shares of the ordinary earnings and
net capital gain of the PFIC for the PFIC's taxable year or information
that will enable the shareholder to calculate its pro rata shares. In
addition, the PFIC Annual Information Statement must contain information
about distributions to shareholders and a statement that the PFIC will
permit the shareholder to inspect and copy its permanent books of account,
records, and other documents of the PFIC necessary to determine that the
ordinary earnings and net capital gain of the PFIC have been calculated
according to federal income tax accounting principles. Temporary
regulations have recently clarified that a shareholder may obtain the
books, records and other documents of the foreign corporation necessary for
the shareholder to determine the correct earnings and profits and net
capital gain of the PFIC according to federal income tax principles and
calculate the shareholder's pro rata shares of the PFIC's ordinary earnings
and net capital gain. In that case, the PFIC must include a statement in
its PFIC Annual Information Statement that it has permitted the shareholder
to examine the PFIC's books of account, records, and other documents
necessary for the shareholder to calculate the amounts of ordinary earnings
and net capital gain.
Special rules apply with respect to the calculation of the amount of
the foreign tax credit with respect to excess distributions by a PFIC or
inclusions under a QEF.
Controlled Foreign Corporations. Sections 951 through 964 and Section
1248 of the Code relate to controlled foreign corporations ("CFCs"). A
foreign corporation that qualifies as a CFC will not be treated as a PFIC
with respect to a shareholder during the portion of the shareholder's
holding period after December 31, 1997, during which the shareholder is a
10% United States shareholder and the corporation is a CFC. (The PFIC
provisions continue to apply in the case of PFIC that is also a CFC with
respect to shareholders that are less than 10% United States shareholders).
The 10% United States shareholders of a CFC are subject to current
U.S. tax on their pro rata shares of certain income of the CFC and their
pro rata shares of the CFC's earnings invested in certain U.S. property.
The effect is that the CFC provisions may impute some portion of such a
corporation's undistributed income to certain shareholders on a current
basis and convert into dividend income some portion of gains on
dispositions of stock which would otherwise qualify for capital gains
treatment.
The Company does not believe that it will be a CFC. Even if the
Company were classified as a CFC in a future year, however, the CFC rules
referred to above would apply only with respect to 10% shareholders.
Personal Holding Company/Foreign Personal Holding Company/Foreign
Investment Company. A corporation will be classified as a personal holding
company (a"PHC") if at any time during the last half of a tax year (i) five
or fewer individuals (without regard to their citizenship or residence)
directly or indirectly or by attribution own more than 50% in value of the
corporation's stock and (ii) at least 60% of its ordinary gross income, as
specially adjusted, consists of personal holding company income (defined
26
</Page>
<PAGE>
generally to include dividends, interest, royalties, rents and certain
other types of passive income). A PHC is subject to a United States federal
income tax of 39.6% on its undistributed personal holding company income
(generally limited, in the case of a foreign corporation, to United States
source income).
A corporation will be classified as a foreign personal holding company
(an "FPHC") and not a PHC if at any time during a tax year (i) five or
fewer individual United States citizens or residents directly or indirectly
or by attribution own more than 50% of the total combined voting power or
value of the corporation's stock and (ii) at least 60% of its gross income
consists of foreign personal holding company income (defined generally to
include dividends, interest, royalties, rents and certain other types of
passive income). Each United States shareholder in a FPHC is required to
include in gross income, as a dividend, an allocable share of the FPHC's
undistributed foreign personal holding company income (generally the
taxable income of the FPHC, as specially adjusted).
A corporation will be classified as a foreign investment company (an
"FIC") if for any taxable year it (i) is registered under the Investment
Company Act of1940, as amended, as a management company or share investment
trust or is engaged primarily in the business of investing or trading in
securities or commodities (or any interest therein) and (ii) 50% or more of
the value or the total combined voting power of all the corporation's stock
is owned directly or indirectly (including stock owned through the
application of attribution rules) by United States persons. In general,
unless an FIC elects to distribute 90% or more of its taxable income
(determined under United States tax principles as specially adjusted) to
its shareholders, gain on the sale or exchange of FIC stock is treated as
ordinary income (rather than capital gain) to the extent of such
shareholder's ratable share of the corporation's earnings and profits for
the period during which such stock was held.
The Company believes that it is not and will not be a PHC, FPHC or
FIC. No assurance can be given, however, as to the Company's future
status.
U.S. Information Reporting and Backup Withholding. Dividends are
generally subject to the information reporting requirements of the Code.
Dividends may be subject to backup withholding at the rate of 31% unless
the holder provides a taxpayer identification number on a properly
completed Form W-9 or otherwise establishes an exemption.
The amount of any backup withholding will not constitute additional
tax and will be allowed as a credit against the United States Investor's
federal income tax liability.
Filing of Information Returns. Under a number of circumstances, a
United States Investor acquiring shares of the Company may be required to
file an information return at the Internal Revenue Center where they are
required to file their tax returns with a copy to the Internal Revenue
Service Center, Philadelphia, PA19255. In particular, any United States
Investor who becomes the owner, directly or indirectly, of 10% or more of
the shares of the Company will be required to file such a return. Other
filing requirements may apply, and United States Investors should consult
their own tax advisors concerning these requirements.
27
</Page>
<PAGE>
<PAGE>
Item 8. Selected Financial Data.
---------------------------------
The selected financial data presented below for the five year period
ended December 31 is derived from the Company's independent auditors. The
information set forth below should be read in conjunction with the
Consolidated Financial Statements of the Company (including related notes
thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE><CAPTION>
Promax Energy Inc.
(in Canadian dollars)
For Three
Months Ended For Year Ended
03/31/00 12/31/99 6/30/99 6/30/98 6/30/97 6/30/96 6/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue -$0- -$0- -$0- -$0- -$0- -$0- -$0-
Income (Loss)
from
Continuing
Operations (164,827) (131,522) (239,159) (181,079) (78,659) (95,555) (53,695)
Income (Loss)
from
Continuing
Operations
per Share (0.006) (0.015) (0.030) (0.029) (0.013) (0.019) (.01)
Total
Assets 12,651,774 11,793,553 3,801,707 934,768 356,657 308,203 55,297
Long-term
Debt,
Capital
Leases,
And
Redeemable
Preferred
Stock -0- -0- -0- -0- -0- -0- -0-
Cash Dividend
per Share -0- -0- -0- -0- -0- -0- -0-
</TABLE>
Since June 1, 1970, the government of Canada has permitted a floating
exchange rate to determine the value of the Canadian dollar as compared to
the United States dollar. For the past fiscal years ended December 31, the
following exchange rates were in effect for Canadian dollars exchanged for
United States dollars, expressed in terms of Canadian dollars (based on the
noon buying rates in New York City, for cable transfers in Canadian
dollars, as certified for customs purposes by the Federal Reserve Bank of
New York.)
<TABLE><CAPTION>
YEAR AVERAGE LOW-HIGH YEAR END/PERIOD END
---------- ---------- ---------------------- -------------------
<S> <C> <C> <C>
1995 $1.373 Low $1.346 High $1.413 $1.369
1996 $1.364 Low $1.338 High $1.375 $1.362
1997 $1.385 Low $1.349 High $1.427 $1.427
1998 $1.484 Low $1.417 High $1.543 $1.543
1999 $1.486 Low $1.461 High $1.519 $1.472
</TABLE>
The Company has not issued any dividends in the past five fiscal
years.
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
---------------------------------------------------------------------
28
</Page>
<PAGE>
The following discusses the Company's financial condition and results
of operations based upon its financial statements which have been prepared
in accordance with Canadian Generally Accepted Accounting Principles.
Results of Operations for the Three Months Ended March 31, 2000,
Compared to the Three Months Ended March 31, 1999.
----------------------------------------------------------------
Revenues:
---------
There were no operating revenues in either period, however there were
some fees charged of $22,924 in the 1999 period and interest income of
$2,373 in the 2000 period.
Expenses:
---------
General and administrative expenses increased by $153,672 from $13,528
for the three months ended March 31, 1999 to $167,200 for the three month
period to March 31, 2000. The significant increase was the result of the
Company hiring staff and consultants to proceed to put gas wells on stream.
Net Income (Loss):
------------------
The Company incurred a net loss during the period ended March 31, 2000
of ($164,827) compared to net income of $9,396 in the same period for 1999.
Results of Operations Six Month Period Ended December 31, 1999,
Compared to the Year Ended June 30, 1999
---------------------------------------------------------------
Revenue:
--------
There was no operating revenue in either of the periods.
Expenses:
---------
General and administrative expenses for the period ended December 31,
1999 were $105,540 compared to $127,358 for the year ended June 30, 1999.
The relative increase is largely related to accounting and legal fees that
increased from $16,703 to $25,943. These fees relate mainly to preparation
of a prospectus.
Net Loss:
---------
The Company incurred as net loss of $131,522 for the six months ended
December 31, 1999 compared to a net loss of $239,159 for the year ended
June 30, 1999. As there was no revenue, these losses were mainly general
and administrative costs associated with raising money and pursuing
business opportunities. A large part of the June 30, 1999 loss relates to
the write-off of resource properties and exploration costs totaling
$137,889.
Year Ended June 30, 1999, Compared to the Year Ended June 30, 1998
------------------------------------------------------------------
Revenue:
--------
There was no operating revenue in either of the periods.
Expenses:
---------
General and administrative expenses for the fiscal year ended June 30,
1999 increased by $45,130 from $82,228 from fiscal year 1998 to $127,358
for fiscal 1999. The main reason for the increase was an increase in
amortization from $1,274 in 1998 to $42,616 in 1999. During 1999 the
Company bought the Cessford property and there was amortization on the oil
and equipment that was purchased.
28 </Page>
<PAGE>
<PAGE>
Net Loss:
---------
The Company incurred a loss of $239,159 in fiscal 1999 compared to a
loss of $181,079 in fiscal 1998. The losses in both rears were composed
mainly of the expenses noted above combined with write-off of mineral
properties and exploration costs of $413,889 in 1999 and $106,272 in 1998.
Losses in 1999 were reduced by fee revenue to joint venture partners of
$26,249.
Year Ended June 30, 1998, Compared to the Year Ended June 30, 1997
------------------------------------------------------------------
Revenues:
---------
There was no operating revenue in either of the periods.
Expenses:
---------
General and administrative expenses for the fiscal year ended June 30,
1998 were $82,228 compared to $78,659 for fiscal 1997. Expenses were
similar for the two years as the Company changed emphasis from mining to
oil and gas.
Net Loss:
---------
The Company incurred a loss of $181,079 for fiscal 1998 compared to a
loss of $75,377 for fiscal 1997. 1998 losses included the write off of
mineral properties and exploration costs of $106,272.
Liquidity and Capital Resources
-------------------------------
The Company owns 41 sections of oil and gas mineral rights in the
Cessford area of Alberta, Canada, 21 standing gas wells and 15 miles of gas
pipeline. The Company anticipates that five of its gas wells will be
flowing by early June of 2000 and another six will be tied in with the
extension of the Company's pipeline by June 30, 2000. The Company has
already arranged for the financing necessary to build additional pipeline
and purchase facilities necessary to tie the wells into the pipeline. By
July 2000, the monthly revenue is expected to exceed $660,000 based on the
expectation of production levels of four million cubic feet per day of gas
and a sales price of $5.50 per thousand cubic feet.
The Company believes, through increasing cash flow as more wells are
tied in, an operating line of credit of $1,000,000, and planned equity
financing of up to $3,000,000, it should have sufficient funds to meet its
capital requirements this year.
The equity financing will be used for exploration activities. If the
Company is not successful in raising the full $3,000,000 then the number of
wells that were planned to be drilled will be reduced from a possible 15
wells to the number that funds raised support.
The Company has recently farmed-in on an additional 53 sections and is
close to finalizing additional farm-ins on another 24 sections. On a
number of these farm-in lands there are more wells to be tied into the
pipeline. By the year ended December 31, 2000 Promax expects to have in
excess of 25 wells tied in and producing in excess of 10 million cubic feet
of gas per day. Using a sales price of $5.50 per thousand cubic feet,
monthly revenue is expected to reach $1,650,000. At this level Promax will
have cash available to start an expanded drilling program in the spring of
2001.
As of March 31, 2000 and March 31, 1999, the Company's Working Capital
was $831,736 and $70,093 respectively. The increase in working capital was
30
</Page>
<PAGE>
<PAGE>
due to equity financing activities. As at December 31, 1999 and June 30,
1999 the Company's working capital was $187,832 and $24,642 respectively.
In both periods the Company raised equity capital. The Company has no long
term debt.
Cash and shares have been used to purchase a substantial interest in
the Cessford properties. Through raising capital and issuing shares, the
Company achieved a 94.8% working interest in the properties as of December
31, 1999. For the six months ended December 31, 1999 Shareholder's Equity
increased by $8,074,144 from $3,680,128 at June 30, 1999 to $11,754,272 at
December 31, 1999. This reflects the equity financing activity for this
time period.
The book value of the Company's interest in Resource Properties
increased by $7,832,148 from $2,742,077 at June 30, 1999 to $10,574,225 at
December 31, 1999.
Using a discount factor of 12%, the engineering evaluation of the 18
sections that have been proven up comes in at $55,745,000.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.
---------------------------------------------------------------------
Not applicable.
Item 10. Directors and Officers of Registrant.
-----------------------------------------------
<TABLE>
<CAPTION>
Date When Number of Common Shares
Principal Nominee became Beneficially
Name and Present Occupations for an Officer of Owned or Over
Position with the Preceding Five Director of Which Control or
Company Years the Company Direction is Exercised
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert L. Card Financial September 1993 735,500
Director Consultant, Aries
Management, Ltd.,
since 1980.
President and
Chairman of Matrix
Energy
(Predecessor of
the Company.)
-------------------------------------------------------------------------------------
31
</Page>
<PAGE>
-------------------------------------------------------------------------------------
Alexander T. President, CEO and January 2000 5,760,000
Lemmens, Chairman of Promax
Chairman and CEO Energy, Inc., since
2000; President,
Chairman of the
Board, and
Director of
Aldrilco Inc.,
from December 1997
to December 1999,
and prior thereto,
Vice-President of
Corporate
Development with
Precision Drilling
Corporation, 1994
to 1997.
-------------------------------------------------------------------------------------
Norman J. Oilfield Executive June 1997 2,013,310
McAllister and Consultant,
Director Canada West
Resources, Inc.,
since 1997.
President,
McAllister
Petroleum Services
from 1980 to 1997.
-------------------------------------------------------------------------------------
Richard N. Mellis Land and June 1998 5,448,630
Director Environmental
Consultant, R.N.M.
Services, Ltd.,
since 1984
-------------------------------------------------------------------------------------
James R. Clark Vice President, January 2000 68,400
Vice-president, Promax Energy
Secretary, since 2000. Vice
Treasurer President,
Aldrilco, Inc.,
1998 to 1999.
President, Nortech
Geomatics, Inc.,
1995 to 1998.
-------------------------------------------------------------------------------------
Shelia O'Shea President, Leross May 2000 150,000
Director Oilfield Services
since 1995.
Director,
Aldrilco, Inc.,
1996 to 1999.
-------------------------------------------------------------------------------------
</TABLE>
32
</Page>
<PAGE>
Item 11. Compensation of Directors and Officers.
-------------------------------------------------
The following table sets forth certain summary information concerning
the compensation paid or accrued during the Registrant's last completed
fiscal years to the Company's, or its principal subsidiaries, chief
executive officers during such period (as determined at December 31, 1999
the end of the Registrant's last completed fiscal year).
<TABLE>
<CAPTION>
Summary Compensation Table
------------------------------
Long Term Compensation
--------------------------
Annual Compensation Awards Payouts
------------------------------- ---------- ---------
Other Restri All
Name and Annual -icted Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary Bonus sation Awards /$SARS Payouts sation
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John R. MacMillan 12/99 $ -0- -0- -0- -0- -0- -0- -0-
Former President/ 6/99 -0- -0- -0- -0- -0- -0- -0-
Director
Lana Bea Turner 12/99 $ -0- -0- -0- -0- -0- -0- -0-
Former Secretary 6/99 12,000 -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------
</TABLE>
None of the Directors of the Company received any remuneration for
acting as Director of the Company. Directors of the Company are paid out-
of-pocket expenses incurred in attending meetings of the Board of
Directors.
During 1999, the Company did not have any bonus, deferred
compensation, employee benefit, or retirement plan. Such plans may be
adopted by the Company at such time as deemed reasonable by the board of
directors. The Company does not have a compensation committee, all
decisions regarding compensation are determined by the board of directors.
The Company did not grant any stock options or stock appreciation
rights to any of its executive officers during the year ended June 1999 or
the six months ended December 1999 (which is now the Company's fiscal year
end). In February, March, April and May 2000, the Company issued stock
options to purchase shares of the Company's common stock to its officers,
directors, employees and consultants. These options were not issued in
lieu of compensation.
There are no compensatory plans or arrangements, including payments to
be received from the Company, with respect to any person named in cash
compensation set out above which would in any way result in payments to any
such person because of his resignation, retirement, or other termination of
such person's employment with the company or its subsidiaries, or any
change in control of the Company, or a change in the person's
responsibilities following a changing in control of the Company.
In January 2000, the Company entered into a Services Agreement with
Annex Resources, Ltd., for engineering, planning and promotional services
33
</Page>
<PAGE>
<PAGE>
to be rendered by Alexander T. Lemmens, the Company's CEO, President and
Chairman of the Board. Annex is owned by Lemmens and his wife. Under the
Agreement, Lemmens receives compensation on an hourly basis at a rate of
$100 per hour, with a cap of $3,000 per month until cash flow is generated.
Once cash flow is generated, Lemmens will continue to be compensated at
$100 per hour, but the cap becomes $6,000 per month. The Agreement also
provides that Lemmens will receive an automotive allowance of $0.35/km plus
gas costs; reimbursement for normal business expenses as approved by Senior
Management; and a cellular phone for business use. The term of this
Services Agreement is one year.
In February 2000, the Company entered into a Services Agreement with
818708 Alberta, Ltd., for financial management, banking, planning and
promotional services to be rendered by James R. Clark, the Company's Vice
President, Secretary and Treasurer. 818708 Alberta is owned by Clark's
wife. Under the Agreement, Clark receives compensation on an hourly basis
at a rate of $75 per hour, with a cap of $3,000 per month until cash flow
is generated. Once cash flow is generated, Clark will continue to be
compensated at $75 per hour, but the cap becomes $6,000 per month. The
Agreement also provides that Clark will receive an automotive allowance of
$0.35/km plus gas costs; reimbursement for normal business expenses as
approved by Senior Management; and a cellular phone for business use. The
term of this Services Agreement is one year.
In February 2000, the Company entered into a Services Agreement with
RNM Services, Ltd., for land management, financing, planning and
promotional services to be rendered by Richard N. Mellis, a Company
Director. RNM is owned by Mellis. Under the Agreement, Mellis receives
compensation of $2,000 per month. The Agreement also provides that Mellis
will receive an automotive allowance of $0.35/km plus gas costs;
reimbursement for normal business expenses as approved by Senior
Management; and a cellular phone for business use.
The above services agreements between the Company and the above
affiliated persons are on terms at least as favorable as those that could
have been obtained from unaffiliated parties on an arm's length basis.
Item 12. Options to Purchase Securities From Registrant or
Subsidiaries.
------------------------------------------------------------
Stock Options
-------------
The Company has, from time to time, granted stock options to purchase
common shares to its officers, directors, consultants and employees. The
options have been granted on various terms resulting from negotiation
between the Company and such persons and the exercise price per share was
based on the average trading price of the Company's shares pursuant to the
policies of the Alberta Stock Exchange (the "Exchange"). The exercise
price for all options currently issued by the Company is equal to or in
excess of the market price of the Company's stock at the date of issuance
less the maximum discount permitted under the by-laws and polices of The
Alberta Stock Exchange (or any stock exchange on which the Shares are then
listed). The options are non-assignable and have been granted as
incentives and not in lieu of any compensation for services. As at June 1,
2000 the Company has granted outstanding options to its officers,
directors, consultants and employees to purchase an aggregate of 2,925,000
common shares as follows:
34
</Page>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Options
Held by
Directors
Number Exercise Expiry by Officers
of Shares Price Date and Directors
-----------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding Options 1,000,000 $0.50 Feb. 2, 2005 1,000,000
1,075,000 $0.42 Mar. 7, 2005 320,000
400,000 $0.35 Apr. 3, 2005 400,000
450,000 $0.42 May 5, 2005 -0-
-----------------------------------------------------
Total Options: 2,925,000 1,720,000
</TABLE>
The Company also has the following outstanding warrants and options to
purchase common shares of the Company:
<TABLE>
<CAPTION>
Warrants
--------
Number of Common
Shares Underlying Warrants Exercise Price Expiration Date
-------------------------- -------------- ---------------
<S> <C> <C>
310,000 $1.25 July 29, 2000
300,000 $1.00 August 6, 2000
1,866,000 $0.25 October 31, 2000
</TABLE>
Item 13. Interest of Management in Certain Transactions.
---------------------------------------------------------
In March 1999, the Company entered into a purchase agreement with
Starrock Resources, Ltd., ("Starrock") to purchase up to a 75% working
interest in oil and gas leases owned by Starrock in the Cessford area of
Alberta, Canada. The Company agreed to purchase this interest for
$8,000,000. In March 1999, the Company paid $2,677,018 in cash to acquire
30% of Starrock's working interest in the property. In October 1999, the
Company settled the remaining outstanding balance of $5,322,981.30, by
issuing 11,828,847 shares of its common stock to Starrock. Richard N.
Mellis, a Company director is the president if Starrock.
Also, during the fourth quarter of 1999, the Company purchased well
abandonment deposits for $65,439 and petroleum and natural gas leases for
$32,771 from Starrock.
No officer, director, or any associate of an officer or director is,
or within the past three years has been, indebted to the Company.
PART II
-------
Item 14. Description of Securities to be Registered.
-----------------------------------------------------
The Company's authorized share capital consists of 100,000,000 common
shares without par value, of which 29,969,258 were issued and outstanding
as of May 31, 2000.
All of the authorized common shares of the Company, once issued, rank
equally as to dividends, voting powers, and participation in assets.
35
</Page>
<PAGE>
Holders of common shares are entitled to one vote for each common share
held of record on all matters to be acted upon by the shareholders.
Holders of common shares are entitled to receive such dividends as may be
declared from time to time by the Board of Directors, in its discretion,
out of funds legally available therefore. The articles of the Company do
not provide for cumulative voting.
Upon liquidation, dissolution or winding up of the Company, holders of
common shares are entitled to receive pro rata the assets of Company, if
any, remaining after payments of all debts and liabilities. No common
shares have been issued subject to call or assessment. There are no pre-
emptive or conversion rights and no provisions for redemption or purchase
for cancellation, surrender, or sinking or purchase funds. There are no
restrictions on the repurchase or redemption of common shares by the
Company while there is any arrearage in the payment of dividends or sinking
fund instalments.
Provisions as to the modification, amendment or variation of the
rights attaching to the common shares or provisions are contained in the
British Columbia Company Act (the "BCCA"). The BCCA requires approval by a
special resolution (i.e., approved by at least three-quarters of the votes
cast at a meeting of the shareholders of the Company or consented to in
writing by each shareholder of the Company) of the Company's shareholders
in order to effect any of the following changes:
(a) subdivide all or any of its unissued, or fully paid issued,
shares with par value into shares of smaller par value;
(b) subdivide all or any of its unissued, or fully paid issued,
shares without par value so that the number of those shares is
increased;
(c) consolidate all or any of its shares with par value into shares
of larger par value;
(d) consolidate all or any of its shares without par value so that
the number of those shares authorized is reduced;
(e) change all or any of its unissued, or fully paid issued, shares
with par value into shares without par value;
(f) change all or any of its unissued shares without par value into
shares with par value;
(g) alter the name or designation of all or any of its shares,
whether issued or unissued; or
(h) alter the provisions as to the maximum price or consideration at
or for which shares without par value may be issued.
PART III
--------
Item 15. Defaults upon Senior Securities.
------------------------------------------
Not applicable.
Item 16. Changes in Securities, Changes in Securities and Use of
Proceeds
------------------------------------------------------------------
Not applicable.
36
</Page>
<PAGE>
PART IV
-------
Item 17. Financial Statements.
-------------------------------
(All numbers are Canadian Dollars unless otherwise noted)
Consolidated Financial Statements of the Company for the Three Months
Ended March 31, 2000 (unaudited) and Years Ended December 31, 1999, June
30, 1999, 1998 and 1997, reported on by Elliott, Tulk, Pryce, Anderson,
Chartered Accountants.
These financial statements are expressed in Canadian dollars and were
prepared in accordance with Canadian Generally Accepted Accounting
Principles, which are substantially the same as United States Generally
Accepted Accounting Principles. For a history of the exchange rates in
effect between the Canadian dollar and the United States dollar, see ITEM 8
- Selected Financial Data.
Item 18. Financial Statements.
-------------------------------
Not applicable.
Item 19. List of Financial Statements and Exhibits.
----------------------------------------------------
(a) Financial Statements
All Audited Statements are in Canadian Dollars and presented on a
consolidated basis.
Financial Statements Filed as Part of the Registration Statement:
Financial Statements of the Company for the Three Months Ended March
31, 2000 (unaudited) and Years Ended December 31, 1999, June 30, 1999, 1998
and 1997, reported on by Elliott, Tulk, Pryce, Anderson, Chartered
Accountants:
Auditor's Reports dated March 21, 2000, October 18, 1999, August 25,
1998, and October 28, 1997.
Balance Sheets
Statement of Loss and Deficit
Statement of Cash Flows
Notes to Financial Statements
37
</Page>
<PAGE>
(b) Exhibits. The following exhibits are included as part of this
report:
<TABLE>
<CAPTION>
Exhibit SEC Exhibit
Number Reference Title of Document Location
-------- ----------- ---------------------------------- ----------
<S> <C> <C> <C>
1.01 1 Articles of Incorporation 81
And Bylaws
1.02 1 Certificate of Incorporation 115
1.03 1 Certificate of Name Change to 117
Tamara Resources Inc.
1.04 1 Certificate of Name Change to 121
Matrix Energy Inc.
1.05 1 Certificate of Name Change to 125
Promax Energy Inc.
1.06 1 Certificate of Continuance 129
3.01 3 Agreement to Purchase and Sale 136
Dated March 19, 1999
3.02 3 Addendum to Agreement of March 205
19, 1999, Dated March 19, 1999
3.03 3 Addendum to Agreement of March 207
19, 1999, Dated May 11, 1999
3.04 3 Amending Agreement Dated 209
May 31, 1999
3.05 3 Revised Agreement of Purchase and 212
Sale, Dated August 27, 1999
3.06 3 Amending Agreement to Agreement 218
of Purchase and Sale, Dated
September 30, 1999
3.07 3 Pipeline Construction and Limited 224
Recourse Financing Agreement
38
</Page>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this Form 20-F to be signed on
its behalf by the undersigned, thereunto duly authorized.
Promax Energy Inc.
a British Columbia corporation
Dated: June 27, 2000 By: /S/ Alexander T. Lemmens,
------------------------------
Alexander T. Lemmens
President
Dated: June 27, 2000 By:/S/ James R. Clark,
------------------------------
James R. Clark
Chief Financial Officer
39
</Page>
<PAGE>
/Letterhead/
ProMax
Energy Inc.
First Quarter Report
March 31, 2000
40
</Page>
<PAGE>
/Letterhead/
ProMax Energy Inc.
TO THE SHAREHOLDERS
During the three month period ending March 31, 2000, ProMax Energy, Inc.
(the "Corporation") completed a $1,000,000 private placement that allowed
the Corporation to proceed to acquire various Working Interests, Joint
Venture Interests, and Gross Overriding Royalty Interests in exchange for
common shares of the corporation, which increased ProMax's interest to 94.8
percent in its core area of Cessford, Alberta. The funds from the private
placement will also allow the Corporation to begin the reactivation of at
least five wells and the tie-ins of six additional gas wells. Also within
the first quarter, a contract was entered into on a limited resource basis
to build 15 kilometers of pipeline that will bring the six wells on-stream.
With no debt and positive working capital the Corporation is prepared to
bring the gas from these wells to market in the near future.
ProMax Energy, Inc., is a junior oil and gas exploration and production
company focusing primarily on natural gas in south eastern Alberta. It has
acquired and executed Letter of Intent to develop 60,160 acres of oil and
gas leases with varying working interest of 50 to 100 percent. It will
also construct and operate up to 70 kilometers of gas gathering system;
acquiring and re-process up to 1400 kilometers of seismic; and tie-in and
operate up to 26 suspended gas wells. ProMax is well positioned to play a
key role in the development of AMI (Area of Mutual Interest) covering over
400,000 acres in its area of focus.
/S/ Alexander T. Lemmons
Alexander T. Lemmons
President and CEO
May 19, 2000
41
</Page>
<PAGE>
/Letterhead/
ProMax Energy, Inc.
BALANCE SHEET
(unaudited)
</TABLE>
<TABLE>
<CAPTION>
As at As at
March 31 March 31
2000 1999
$ $
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash 696,915 278,362
Accounts receivable 105,336 106,305
Deposits and prepaid expenses 114,388 -
------------ ------------
916,639 384,667
CAPITAL ASSETS 317,573 404,188
RESOURCE PROPERTIES 10,762,095 2,518,609
DEFERRED EXPLORATION EXPENSES 655,467 5,163
------------ ------------
12,651,774 3,312,627
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 46,712 114,574
Deposits held 38,191 200,000
------------ ------------
84,903 314,574
PROVISIONS FOR SITE RESTORATION 30,000 -
FUTURE INCOME TAXES 343,958 -
SHAREHOLDERS' EQUITY
CAPITAL STOCK 12,087,732 4,921,894
SUBSCRIPTIONS RECEIVED 2,425,796 -
RETAINED EARNINGS (DEFICIT) (2,320,615) (1,923,841)
------------ ------------
12,192,913 2,998,053
------------ ------------
12,651,774 3,312,627
============ ============
</TABLE>
42
</Page>
<PAGE>
/Letterhead/
ProMax Energy, Inc.
STATEMENT OF PROFIT AND LOSS
(unaudited)
<TABLE>
<CAPTION>
For the For the
Three Three
Months Months
Ended Ended
March 31 March 31
2000 1999
$ $
<S> <C> <C>
INCOME
Resources Properties - 22,924
Other 2,373 -
----------- -----------
2,373 22,924
----------- -----------
EXPENSES
General and Administrative 112,293 13,528
Oil and Gas Operations 3,655 -
Depreciation and Depletion 51,252 -
----------- -----------
167,200 13,528
----------- -----------
NET INCOME (LOSS) FOR THE PERIOD (164,827) 9,396
RETAINED EARNINGS (DEFICIT) - BEGINNING OF PERIOD (2,155,788) (1,933,237)
----------- -----------
RETAINED EARNINGS (DEFICIT) - END OF PERIOD (2,320,615) (1,923,841)
=========== ===========
</TABLE>
43
</Page>
<PAGE>
/Letterhead/
ProMax Energy, Inc.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the For the
Three Three
Months Months
Ended Ended
March 31 March 31
2000 1999
$ $
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings (loss) for the period
Items not involving cash: (164,827) 9,396
Amortization 51,252 -
----------- -----------
(113,575) 9,396
Change in non-cash working capital items (38,574) (270,589)
----------- -----------
(152,149) (261,193)
----------- -----------
FINANCING ACTIVITIES
Capital stock issued 826,377 2,459,500
----------- -----------
826,377 2,459,500
----------- -----------
INVESTING ACTIVITIES
Acquisition of resource properties (66,820) (1,523,149)
Acquisition of capital assets (2,078) (401,009)
----------- -----------
(68,898) (1,924,158)
----------- -----------
INCREASE (DECREASE) IN CASH 605,330 274,149
CASH - BEGINNING OF PERIOD 91,585 4,213
----------- -----------
CASH - END OF PERIOD 696,915 278,362
=========== ===========
</TABLE>
44
</Page>
<PAGE>
PROMAX ENERGY INC.
FINANCIAL STATEMENTS
FOR THE PERIODS ENDED
DECEMBER 31, 1999 AND JUNE 30, 1999
45
</Page>
<PAGE>
AUDITORS' REPORT
-----------------
To the Shareholders of
Promax Energy Inc.
We have audited the balance sheets of Promax Energy Inc. as at December 31,
1999 and June 30, 1999 and the statements of operations and deficit, and
cash flows for the periods then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management as well as evaluating the
overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1999 and
June 30, 1999 and the results of its operations and cash flows for the
periods then ended in accordance with generally accepted accounting
principles. As required by the British Columbia Company Act, we report
that, in our opinion, these principles have been applied on a basis
consistent with that of the preceding period.
/S/ "Elliott, Tulk, Pryce, Anderson"
CHARTERED ACCOUNTANTS
Vancouver, B.C.
March 21, 2000
46
</Page>
<PAGE>
PROMAX ENERGY INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
As at As at
December 31, June 30,
1999 1999
$ $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash 91,585 17,614
Accounts receivable 32,025 110,059
Deposits and prepaid expenses 103,503 18,548
------------ ------------
227,113 146,221
CAPITAL ASSETS (Note 3) 336,748 378,076
RESOURCE PROPERTIES (Note 4) 10,574,225 2,742,077
DEFERRED EXPLORATION EXPENSES (Note 5) 655,467 535,333
------------ ------------
11,793,553 3,801,707
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 23,361 33,051
Deposits held 15,920 88,528
------------ ------------
39,281 121,579
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 6) 5,704,394 5,189,394
SUBSCRIPTIONS RECEIVED (Note 6) 8,205,666 515,000
DEFICIT (2,155,788)(2,024,266)
------------ ------------
11,754,272 3,680,128
------------ ------------
11,793,553 3,801,707
============ ============
</TABLE>
APPROVED BY THE BOARD
/S/ Alexander T. Lemmens, Director
--------------------------
/S/ Richard Mellis Director
--------------------------
47
</Page>
<PAGE>
PROMAX ENERGY INC.
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
For the For the
six months twelve months
Ended ended
December June
31, 1999 30, 1999
$ $
<S> <C> <C>
EXPENSES
Accounting and legal 25,943 16,703
Administration - 12,500
Amortization 42,279 42,616
Bank charges and interest 186 327
Consulting fees 1,836 -
Equipment rental 2,040 1,487
Office and miscellaneous 11,322 13,087
Rent 11,388 14,796
Shareholder relations 1,190 2,505
Telephone and communications 867 5,420
Transfer agent and filing fees 6,982 15,486
Travel and entertainment 1,507 2,431
------------ ------------
105,540 127,358
------------ ------------
OTHER INCOME (EXPENSES)
Interest 1,633 237
Resource properties and
exploration costs written off - (137,889)
Fees 1,241 26,249
Public offering costs (28,856) -
Loss on sale of capital assets - (389)
------------ ------------
(25,982) (111,801)
------------ ------------
NET LOSS FOR THE PERIOD (131,522) (239,159)
DEFICIT - BEGINNING OF PERIOD (2,024,266) (1,785,107)
------------ ------------
DEFICIT - END OF PERIOD (2,155,788) (2,024,266)
============ ============
</TABLE>
48
</Page>
<PAGE>
PROMAX ENERGY INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the
six months twelve months
Ended ended
December June
31, 1999 30, 1999
$ $
------------ ------------
<S> <C> <C>
CASH FROM (USED IN)
OPERATING ACTIVITIES;
Net loss for the year (131,522) (239,159)
Items not involving cash
Amortization 42,279 42,616
Resource properties and exploration
Costs written off - 137,889
Loss on sale of capital assets - 398
------------ ------------
(89,243) (58,256)
Changes in non-cash working capital items (71,327) (507,548)
------------ ------------
(160,570) (568,804)
------------ ------------
FINANCING ACTIVITY
Share subscriptions received 396,460 3,015,000
------------ ------------
INVESTING ACTIVITY
Deferred exploration expenses (120,134) 121,559
Acquisition of resource properties (40,834) (2,175,077)
Acquisition of capital assets (951) (415,818)
------------ ------------
(161,919) (2,469,336)
------------ ------------
INCREASE (DECREASE) IN CASH 73,971 (20,140)
CASH - BEGINNING OF PERIOD 17,614 37,754
------------ ------------
CASH - END OF PERIOD 91,585 17,614
============ ============
</TABLE>
49
</Page>
<PAGE>
PROMAX ENERGY INC
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Company which, until 1999 was in the business of acquiring and
exploring resource properties, is in the business of oil and gas
exploration and development. On February 3, 1999 the Company changed
its name from Matrix Energy Inc. to Promax Energy Inc.
The recoverability of values assigned to resource properties is
dependent upon the discovery of economically recoverable reserves,
confirmation of the Company's interests in the underlying resource
claims, the ability to obtain necessary financing to complete
development, and future profitable production or proceeds from
disposition.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
generally accepted accounting principles in Canada, on the assumption
that the Company is a going concern. The ability of the Company to
continue as a going concern is dependent on its ability to obtain
necessary financing to discharge its liabilities as they become due,
and upon attaining future profitable operations.
Because a precise determination of certain assets and liabilities is
dependent on future events, the preparation of the financial
statements involves the use of estimates based on careful judgement.
These financial statements have, in management's opinion, been
prepared within reasonable limits of materiality using the significant
accounting policies noted below:
a) Resource properties
Costs relating to the acquisition and exploration of resource
properties are deferred until the properties are placed into
commercial production, sold, allowed to lapse or abandoned. These
costs are to be amortized over the estimated useful life of the
property following commencement of production, or written off as
properties are sold or abandoned. Costs ascribed to mineral
properties do not necessarily reflect present or future values.
b) Capital assets
Capital assets are stated at cost. Amortization is provided on
capital assets utilizing the straight line basis at the following
rates:
Computer equipment 20%
Furniture and fixtures 20%
Oil and gas equipment 20%
c) Loss per share
At the current stage of development in the Company's operations,
loss per share information is not considered meaningful and has
not been reported.
50
</Page>
<PAGE>
PROMAX ENERGY INC.
NOTES TO THE FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES Continued
d) Fair market value of financial instruments
The carrying value of cash, accounts receivable and accounts
payable approximate fair market value because of the short
maturity of those instruments.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 8,784 1,756 7,028 7,906
Furniture and fixtures 5,455 2,727 2,728 2,304
Oil and gas equipment 408,740 81,748 326,992 367,866
----------- ----------- ----------- -----------
422,979 86,231 336,748 378,076
=========== =========== =========== ===========
</TABLE>
4. RESOURCE PROPERTIES
<TABLE>
December 31, June 30,
1999 1999
$ $
<S> <C> <C>
Cessford, Alberta
Acquisition costs for 94.80% working interest in
certain petroleum and natural gas lands and leases
in the Cessford area of Alberta. 10,574,225 2,742,077
=========== ===========
</TABLE>
5. DEFERRED EXPLORATION EXPENSES
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
$ $
<S> <C> <C>
Cessford, Alberta
Balance, beginning of period 535,333 -
Consulting 61,191 13,453
Drilling 26,741 38,704
Management 28,343 16,626
Seismic - 466,550
Travel 3,859 -
----------- -----------
Balance, end of period 655,467 535,333
=========== ===========
</TABLE>
51
</Page>
<PAGE>
PROMAX ENERGY INC
NOTES TO FINANCIAL STATEMENTS
6. CAPITAL STOCK
<TABLE>
<CAPTION>
Authorized:
100,000,000 Common shares without par value
Allotted:
# $
<S> <C> <C>
June 30, 1998 1,550,000 232,500
Shares issued during the year (1,550,000) (232,500)
Subscriptions received - for cash 515,000 515,000
------------ ------------
June 30, 1999 515,000 515,000
Shares issued during the year (515,000) (515,000)
Subscriptions received - for cash 1,866,000 396,460
Subscriptions received - for resource property 16,850,948 7,809,206
------------ ------------
December 31, 1999 18,716,948 8,205,666
============ ============
Issued:
June 30, 1998 6,201,883 1,974,894
Issuance of allotted shares 1,550,000 232,500
Private placements - cash 1,500,000 225,500
Warrants exercised - cash 150,000 30,000
Consolidation 5:1 (7,521,507) -
Private placement - cash 5,580,000 2,232,000
Warrants exercised - cash 570,000 495,000
------------ ------------
June 30, 1999 8,030,376 5,189,894
Issuance of allotted shares 515,000 515,000
------------ ------------
December 31, 1999 8,545,376 5,704,894
============ ============
</TABLE>
Warrants and options:
Warrants have been issued entitling the holders thereof to purchase
10,000 shares at $1.25 per share until June 11, 2000.
No stock options were outstanding at December 31, 1999.
Escrowed shares:
60,000 shares are currently held in escrow subject to release upon
regulatory approval.
52
</Page>
<PAGE>
PROMAX ENERGY INC.
NOTES TO FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS
As disclosed in Note 4 the Company purchased the remaining interest of
the Cessford Resource property from Starrock Resources Ltd., a company
controlled by a director. Also during the period the Company purchased
well abandonment deposits for $65,439 and petroleum and natural gas
leases for $32,771 from Starrock Resources Ltd.
8. SUBSEQUENT EVENTS
Subsequent to December 31, 1999 the Company:
a) issued the allotted shares disclosed in Note 6; and
b) issued 2,531,584 shares for cash proceeds of $886,054.
c) issued notes payable for $130,100 to acquire certain resource
properties which were later paid by the issuance of 345,857
shares at deemed cost of $121,050 and $9,050 cash.
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year which could result in
errors when information using the year 2000 dates is processed. Such
errors could occur before, on or after January 1, 2000 and the effect
thereof cannot be determined. It is not possible to be certain that
all aspects of the Year 2000 Issue affecting the Company, including
those related to the efforts of customers, suppliers, or other third
parties, will be fully resolved.
53
</Page>
<PAGE>
PROMAX ENERGY INC.
(formerly Matrix Energy Inc.)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1999 AND 1998
54
</Page>
<PAGE>
/Letterhead/
AUDITORS' REPORT
----------------
To the Shareholders of
Promax Energy Inc. (formerly Matrix Energy Inc.)
We have audited the balance sheets of Promax Energy Inc. (formerly Matrix
Energy Inc.) as at June 30, 1999 and 1998 and the statements of operations
and deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management as well as evaluating the
overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at June 30, 1999 and
1998 and the results of its operations and cash flows for the years then
ended in accordance with generally accepted accounting principles. As
required by the British Columbia Company Act, we report that, in our
opinion, these principles have been applied on a basis consistent with that
of the preceding year.
/S/ "Elliott, Tulk, Pryce, Anderson"
CHARTERED ACCOUNTANTS
Vancouver, B.C.
October 18, 1999
55
</Page>
<PAGE>
PROMAX ENERGY, INC.
(formerly Matrix Energy, Inc.)
BALANCE SHEETS
AS AT JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash 17,614 37,754
Accounts receivable 110,059 9,941
Prepaid expenses 18,548 2,020
----------- -----------
146,221 49,715
CAPITAL ASSETS (Note 3) 378,077 5,272
RESOURCE PROPERTIES (Note 4) 2,742,077 85,000
DEFERRED EXPLORATION EXPENSES (Note 5) 535,333 794,781
----------- -----------
3,801,708 934,768
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 33,052 512,481
Deposits held 88,528 -
----------- -----------
121,580 512,481
----------- -----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 6) 5,189,394 1,974,894
SUBSCRIPTIONS RECEIVED (Note 6) 515,000 232,500
DEFICIT (2,024,266) (1,785,107)
----------- -----------
3,680,128 422,287
----------- -----------
3,801,708 934,768
=========== ===========
</TABLE>
APPROVED BY THE BOARD
/S/ Robert L. Card Director
-------------------
/S/ John R. MacMillan Director
---------------------
56
</Page>
<PAGE>
PROMAX ENERGY, INC.
(formerly Matrix Energy, Inc.)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
$ $
<S> <C> <C>
EXPENSES
Accounting and legal 16,703 9,628
Administration 12,500 32,125
Amortization 42,616 1,274
Bank charges and interest 327 240
Equipment rental 1,487 -
Office and miscellaneous 13,087 10,528
Rent 14,796 13,703
Shareholder relations 2,505 932
Telephone and communications 5,420 -
Transfer agent and filing fees 15,486 10,825
Travel and entertainment 2,431 2,973
----------- -----------
127,358 82,228
OTHER INCOME (EXPENSES)
Expense recoveries - 6,000
Interest 237 1,421
Resource properties and
exploration costs written off (137,889) (106,272)
Fees 26,249 -
Loss on sale of capital assets (398) -
----------- -----------
(111,801) (98,851)
----------- -----------
NET LOSS FOR THE YEAR (239,159) (181,079)
----------- -----------
DEFICIT - BEGINNING OF YEAR (1,785,107) (1,604,028)
----------- -----------
DEFICIT - END OF YEAR (2,024,266) (1,785,107)
=========== ===========
</TABLE>
57
</Page>
<PAGE>
PROMAX ENERGY, INC.
(formerly Matrix Energy, Inc.)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
$ $
<S> <C> <C>
CASH FROM (USED IN):
OPERATING ACTIVITIES
Net loss for the year (239,159) (181,079)
Items not involving cash
Amortization 42,616 1,274
Resource properties and
exploration costs written off 137,889 106,272
Loss on sale of capital assets 398 -
----------- -----------
(58,256) (73,533)
Change in non-cash working capital items (507,547) 287,276
----------- -----------
(565,803) 213,743
----------- -----------
FINANCING ACTIVITY
Share subscriptions received 3,015,000 256,500
----------- -----------
INVESTING ACTIVITIES
Deferred exploration expenses 121,559 (614,637)
Proceeds from disposal (acquisition)
of resources properties (2,175,077) 56,000
Acquisition of capital assets (415,819) (2,683)
----------- -----------
(2,469,337) (561,320)
----------- -----------
DECREASE IN CASH (20,140) (91,077)
CASH - BEGINNING OF YEAR 37,754 128,831
----------- -----------
CASH - END OF YEAR 17,614 37,754
=========== ===========
</TABLE>
58
</Page>
<PAGE>
PROMAX ENERGY INC.
(formerly Matrix Energy Inc.)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1. NATURE OF OPERATIONS
The Company which, until 1999 was in the business of acquiring and
exploring resource properties, is in the business of oil and gas
exploration and development. On February 3, 1999 the Company changed its
name from Matrix Energy Inc. to Promax Energy Inc.
The recoverability of values assigned to resource properties is
dependent upon the discovery of economically recoverable reserves,
confirmation of the Company's interests in the underlying resource
claims, the ability to obtain necessary financing to complete
development, and future profitable production or proceeds from
disposition.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
generally accepted accounting principles in Canada, on the assumption
that the Company is a going concern. The ability of the Company to
continue as a going concern is dependent on its ability to obtain
necessary financing to discharge its liabilities as they become due, and
upon attaining future profitable operations.
Because a precise determination of certain assets and liabilities is
dependent on future events, the preparation of the financial statements
involves the use of estimates based on careful judgement. These
financial statements have, in management's opinion, been prepared within
reasonable limits of materiality using the significant accounting
policies noted below:
a) Resource properties
Costs relating to the acquisition and exploration of resource
properties are deferred until the properties are placed into
commercial production, sold, allowed to lapse or abandoned. These
costs are to be amortized over the estimated useful life of the
property following commencement of production, or written off as
properties are sold or abandoned. Costs ascribed to mineral
properties do not necessarily reflect present or future values.
b) Capital assets
Capital assets are stated at cost. Amortization is provided on
capital assets utilizing the straight line basis at the following
rates:
Computer equipment 20%
Furniture and fixtures 20%
Oil and gas equipment 20%
c) Loss per share
At the current stage of development in the Company's operations,
loss per share information is not considered meaningful and has not
been reported.
59
</Page>
<PAGE>
PROMAX ENERGY INC.
(formerly Matrix Energy, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
d) Fair market value of financial instruments
The carrying value of cash, accounts receivable and accounts
payable approximate fair market value because of the short maturity
of those instruments.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
1999 1998
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 8,784 878 7,906 -
Furniture and fixtures 4,505 2,200 2,305 5,272
Oil and gas equipment 408,740 40,874 367,866 -
---------- ---------- ---------- ----------
422,029 43,952 378,077 5,272
========== ========== ========== ==========
</TABLE>
4. RESOURCE PROPERTIES
<TABLE>
<CAPTION>
1999 1998
$ $
----------- -----------
<S> <C> <C>
a) La Paz County, Arizona
A 100% interest in four unpatented mineral claims
in La Paz County, Arizona acquired for $6,000 plus
100,000 of its shares (lapsed in 1999). - 36,000
b) Oxide Peak, British Columbia
A 100% interest in two mineral claims in the Omineca
Mining Division of British Columbia acquired for
20,000 of its shares (lapsed in 1999). - 4,000
c) Tomcat Group, British Columbia
A 100% interest in two mineral claims in the Nicola
Mining Division of British Columbia acquired for
$25,000 plus 100,000 of its shares (lapsed in 1999). - 45,000
</TABLE>
60
</Page>
<PAGE>
PROMAX ENERGY INC.
(formerly Matrix Energy, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
4. RESOURCE PROPERTIES Continued
1999 1998
$ $
----------- -----------
<S> <C> <C>
d) Cessford, Alberta
i) The Company has a 30% interest, being 22.368%
of the total interest in petroleum and natural
gas lands and leases in the Cessford area of
Alberta. The Company has an option to acquire
a 14% interest, being 10.438% of the total
interest, per annum for the next five years,
commencing March 19, 2000, by making annual
payments of $1,064,596 plus interest at bank
prime. The Company also has the right to make
all or part of the first two annual payments
by issuing common shares at a price to be
determined by market conditions. As long as
the annual payments are current the Company
has the right to drill and produce the lands
as if it owned the total interest. 2,281,278 -
ii) Other miscellaneous Cessford interests. 460,799 -
------------ ------------
2,742,077 85,000
============ ============
61
</TABLE>
5. DEFERRED EXPLORATION EXPENSES
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
a) La Paz County, Arizona - 40,762
b) Oxide Peak, British Columbia - 22,694
c) Tomcat Group, British Columbia - 5,163
d) Amex Joint Venture, Alberta and Montana - 726,162
e) Cessford, Alberta 535,333 -
------------ ------------
535,333 794,781
============ ============
</TABLE>
62
</Page>
<PAGE>
PROMAX ENERGY INC.
(formerly Matrix Energy, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
6. CAPITAL STOCK
<TABLE>
<CAPTION>
Authorized:
100,000,000 Common shares without par value
Allotted: # $
<S> <C> <C>
June 30, 1997 - -
Subscriptions received 1,550,000 232,500
------------ ------------
June 30, 1998 1,550,000 232,500
Shares issued during the year (1,550,000) (232,500)
Subscriptions received - for resource property 482,000 482,000
Subscriptions received - for cash 33,000 33,000
------------ ------------
June 30, 1999 515,000 515,000
============ ============
Issued:
June 30, 1997 6,081,883 1,950,894
Shares issued for mineral properties 120,000 24,000
------------ ------------
June 30, 1998 6,201,883 1,974,894
Issuance of allotted shares 1,550,000 232,500
Private placements - cash 1,500,000 225,500
Warrants exercised - cash 150,000 30,000
Consolidation 5:1 (7,521,507) -
Private placement - cash 5,580,000 2,232,000
Warrants exercised - cash 570,000 495,000
------------ ------------
June 30, 1999 8,030,376 5,189,894
============ ============
</TABLE>
Warrants and options:
Warrants have been issued entitling the holders thereof to purchase
10,000 shares at $1.25 per share until June 11, 2000. No stock options
were outstanding at June 30, 1999.
Escrowed shares:
60,000 shares are currently held in escrow subject to release upon
regulatory approval.
63
</Page>
<PAGE>
PROMAX ENERGY INC.
(formerly Matrix Energy, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
7. RELATED PARTY TRANSACTIONS
Included in the determination of net loss for the year are expenses
recoverable from a company controlled by a director recorded at the
exchange amount of $Nil (1998 - $6,000). Deferred exploration costs
includes fees paid to a director recorded at the exchange amount of
$6,000.
8. SUBSEQUENT EVENTS
Subsequent to June 30, 1999 the Company:
a. exercised 100% of the outstanding options pursuant to the agreement
to acquire the Cessford Alberta resource property and will issue
11,828,847 shares at $0.45 per share to settle the obligation.
b. issued the allotted shares disclosed in Note 6.
c. terminated an engagement with Yorkton Securities Inc. to be their
Agent for a best efforts public offering and forfeited a deposit of
$15,000.
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year which could result in errors
when information using the year 2000 dates is processed. Such errors
could occur before, on or after January 1, 2000 and the effect thereof
cannot be determined. It is not possible to be certain that all aspects
of the Year 2000 Issue affecting the Company, including those related
to the efforts of customers, suppliers, or other third parties, will be
fully resolved.
64
</Page>
<PAGE>
MATRIX ENERGY INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1998 AND 1997
</Page>
<PAGE>
/Letterhead/
AUDITORS' REPORT
----------------
To the Shareholders of
Matrix Energy Inc.
We have audited the balance sheets of Matrix Energy Inc. as at June 30, 1998
and 1997 and the statements of operations and deficit, and changes in
financial position for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at June 30, 1998 and 1997
and the results of its operations and changes in its financial position for
the years then ended in accordance with generally accepted accounting
principles. As required by the British Columbia Company Act, we report that,
in our opinion, these principles have been applied on a basis consistent with
that of the preceding year.
/S/ "Elliott, Tulk, Pryce, Anderson"
CHARTERED ACCOUNTANTS
Vancouver, B.C.
August 25, 1998
65
</Page>
<PAGE>
MATRIX ENERGY, INC.
BALANCE SHEETS
AS AT JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
$ $
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash 37,754 128,831
Accounts receivable 9,941 5,896
Prepaid expenses 2,020 3,195
----------- -----------
49,715 137,922
CAPITAL ASSETS (Note 3) 5,272 3,863
MINERAL PROPERTIES (Note 4) 85,000 141,000
DEFERRED EXPLORATION EXPENSES (Note 5) 794,781 73,872
----------- -----------
934,768 356,657
----------- -----------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 512,481 9,791
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 6) 1,974,894 1,950,894
SUBSCRIPTIONS RECEIVED (Note 6) 232,500 -
DEFICIT (1,785,107) (1,604,028)
----------- -----------
422,287 346,866
----------- -----------
934,768 356,657
=========== ===========
</TABLE>
APPROVED BY THE BOARD
/S/ Robert L. Card Director
---------------------
/S/ Michael Iannacone Director
-----------------------
66
</Page>
<PAGE>
MATRIX ENERGY, INC.
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
$ $
----------- -----------
<S> <C> <C>
EXPENSES
Accounting and legal 9,628 3,465
Administration 32,125 36,050
Amortization 1,274 650
Bank charges and interest 240 236
Office and miscellaneous 10,528 8,196
Rent 13,703 15,400
Shareholder relations 932 1,957
Transfer agent and filing fees 10,825 6,556
Travel and entertainment 2,973 6,149
----------- -----------
82,228 78,659
----------- -----------
OPERATING LOSS (82,228) (78,659)
OTHER INCOME (EXPENSES)
Expense recoveries 6,000 -
Interest 1,421 3,282
Mineral properties and exploration
costs written off (106,272) -
----------- -----------
NET LOSS FOR THE YEAR (181,079) (75,377)
DEFICIT - BEGINNING OF YEAR (1,604,028) (1,528,651)
----------- -----------
DEFICIT - END OF YEAR (1,785,107) (1,604,028)
=========== ===========
</TABLE>
67
</Page>
<PAGE>
MATRIX ENERGY, INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
CASH FROM (USED IN):
OPERATING ACTIVITIES
Net loss for the year (181,079) (75,377)
Items not involving cash
Amortization 1,274 650
Mineral properties and
exploration costs written off 106,272 -
----------- -----------
(73,533) (74,727)
Change in non-cash working capital items 499,820 (20,003)
----------- -----------
426,287 (94,730)
----------- -----------
FINANCING ACTIVITY
Share subscriptions received 232,500 141,540
----------- -----------
INVESTING ACTIVITIES
Deferred exploration expenses (747,181) (44,267)
Acquisition of mineral property - (5,000)
Acquisition of capital assets (2,683) (3,559)
----------- -----------
(749,864) (52,826)
----------- -----------
DECREASE IN CASH (91,077) (6,016)
CASH - BEGINNING OF YEAR 128,831 134,847
----------- -----------
CASH - END OF YEAR 37,754 128,831
=========== ===========
</TABLE>
68
<PAGE>
<PAGE>
MATRIX ENERGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1. NATURE OF OPERATIONS
The Company is in the business of acquiring and exploring mineral
properties. There has been no determination whether properties held
contain mineral reserves which are economically recoverable.
The recoverability of values assigned to mineral properties is
dependent upon the discovery of economically recoverable reserves,
confirmation of the Company's interests in the underlying mineral
claims, the ability to obtain necessary financing to complete
development, and future profitable production or proceeds from
disposition.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
generally accepted accounting principles in Canada, on the assumption
that the Company is a going concern. The ability of the Company to
continue as a going concern is dependent on its ability to obtain
necessary financing to discharge its liabilities as they become due,
and upon attaining future profitable operations.
Because a precise determination of certain assets and liabilities is
dependent on future events, the preparation of the financial
statements involves the use of estimates based on careful judgement.
These financial statements have, in management's opinion, been
prepared within reasonable limits of materiality using the significant
accounting policies noted below:
a) Mineral properties
Costs relating to the acquisition and exploration of mineral
properties are deferred until the properties are placed into
commercial production, sold, allowed to lapse or abandoned. These
costs are to be amortized over the estimated useful life of the
property following commencement of production, or written off as
properties are sold or abandoned. Costs ascribed to mineral
properties do not necessarily reflect present or future values.
b) Capital assets
Capital assets consists of office furniture and equipment stated
at cost less accumulated amortization, which is recorded on the
straight line basis over five years.
c) Loss per share
At the current stage of development in the Company's operations,
loss per share information is not considered meaningful and has
not been reported.
d) Fair market value of financial instruments
The carrying value of cash, accounts receivable and accounts
payable approximate fair market value because of the short
maturity of those instruments.
69
</Page>
<PAGE>
MATRIX ENERGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Furniture and fixtures 7,710 2,438 5,272 3,863
=========== =========== =========== ===========
</TABLE>
4. MINERAL PROPERTIES
<TABLE>
<CAPTION>
1998 1997
$ $
----------- -----------
<S> <C> <C>
a) La Paz County, Arizona
A 100% interest in four unpatented mineral claims
in La Paz County, Arizona acquired for $6,000 plus
100,000 of its shares. 36,000 36,000
b) Oxide Peak, British Columbia
A 100% interest in two mineral claims in the Omineca
Mining Division of British Columbia acquired for
20,000 of its shares. 4,000 5,000
c) Tomcat Group, British Columbia
A 100% interest in two mineral claims in the Nicola
Mining Division of British Columbia acquired for
$25,000 plus 100,000 of its shares. 45,000 -
d) White Bear Arm Region, Labrador
100 mineral claims in the White Bear Arm region of
SE Labrador, Newfoundland (lapsed in 1998). - 50,000
e) Walpole, Saskatchewan
An option to two petroleum and natural gas leases
comprising of 640 acres, in the Walpole area of
Saskatchewan (lapsed in 1998). - 50,000
----------- -----------
85,000 141,000
=========== ===========
</TABLE>
70
</Page>
<PAGE>
MATRIX ENERGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
5. DEFERRED EXPLORATION EXPENSES
<TABLE>
<CAPTION>
1998 1997
$ $
------------ ------------
<S> <C> <C>
a) La Paz County, Arizona 40,762 40,006
b) Oxide Peak, British Columbia 22,694 22,594
c) Tomcat Group, British Columbia 5,163 -
d) Amex Joint Venture, Alberta and Montana 726,162 -
e) White Bear Arm Region, Labrador - 11,272
----------- -----------
794,781 73,872
=========== ===========
</TABLE>
In 1998 the Company entered into an agreement allowing it to earn a
participating interest in oil and gas leases in the Amex Joint Venture
of up to 50% before payout (37.5% after payout) by contributing
$10,500,000 of an estimated total of $21,000,000 expenditures relating
to the project.
6. CAPITAL STOCK
<TABLE>
<CAPTION>
Authorized:
25,000,000 Common shares without par value
Allotted:
# $
----------- -----------
<S> <C> <C>
June 30, 1996 285,000 85,500
Shares issued during year (285,000) (85,500)
----------- -----------
June 30, 1997 - -
Subscriptions received 1,550,000 232,500
----------- -----------
June 30, 1998 1,550,000 232,500
=========== ===========
Issued:
June 30, 1996 5,078,883 1,723,854
Issuance of allotted shares 285,000 85,500
Private placements - cash 215,000 64,500
Warrants exercised - cash 450,000 67,500
Warrants exercised - cash 53,000 9,540
----------- -----------
June 30, 1997 6,081,883 1,950,894
Shares issued for mineral properties 120,000 24,000
----------- -----------
June 30, 1998 6,201,883 1,974,894
=========== ===========
</TABLE>
71
</Page>
<PAGE>
MATRIX ENERGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
6. CAPITAL STOCK (continued)
Warrants and options:
Warrants have been issued entitling the holders thereof to purchase
500,000 shares in aggregate at $0.35 each until expiry on July 4,
1998.
The subscriptions received at June 30, 1998 entitle the subscribers to
shares as indicated above plus warrants to purchase 1,550,000 shares
at $0.20 each until July 29, 1999 or at $0.25 each thereafter until
expiry on July 29, 2000.
No stock options were outstanding at June 30, 1998.
Escrowed shares:
300,000 shares are currently held in escrow subject to release upon
regulatory approval.
7. RELATED PARTY TRANSACTIONS
Included in the determination of net loss for the year are expenses
recoverable from a company controlled by a director recorded at the
exchange amount of $6,000. Loss for the previous year includes fees
paid to a director and a company controlled by that director recorded
at the exchange amount of $5,800.
8. COMPARATIVE FIGURES
The comparative figures for 1997 have been reclassified where
necessary to ensure comparability with those of the current period.
Such reclassification has no impact on reported losses.
9. SUBSEQUENT EVENTS
Subsequent to June 30, 1998 the Company has:
a) issued the allotted shares disclosed in Note 6.
b) issued 150,000 shares at $0.20 each in respect of warrants
exercised.
c) received $225,000 pursuant to a private placement for 1,500,000
shares at $0.15 each subject to regulatory approval.
d) allowed the La Paz County mineral claims to lapse.
e) allowed the Oxide Peak Group mineral claims to lapse.
72
</Page>
<PAGE>
MATRIX ENERGY INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1997 AND 1996
73
</Page>
<PAGE>
/Letterhead/
AUDITORS' REPORT
----------------
To the Shareholders of
Matrix Energy Inc.
We have audited the balance sheet of Matrix Energy Inc. as at June 30, 1997
and 1996 and the statements of operations and deficit, and changes in
financial position for the year then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosure in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at June 30, 1997 and 1996
and the results of its operations and changes in its financial position for
the year then ended in accordance with generally accepted accounting
principles. As required by the British Columbia Company Act, we report that,
in our opinion, these principles have been applied on a basis consistent with
that of the preceding year.
The comparative figures presented for the year ended June 30, 1996 are based
upon financial statements which were examined by other auditors who expressed
their opinion without reservation in a report dated August 9, 1996.
/S/ "Elliot, Tulk, Pryce, Anderson"
CHARTERED ACCOUNTANTS
Vancouver, B.C.
October 28, 1997
74
</Page>
<PAGE>
/Letterhead/
MATRIX ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS AT JUNE 30, 1997 AND 1996
1997 1996
$ $
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash 128,831 134,847
Accounts receivable 5,896 1,354
Prepaid expenses 3,195 5,443
------------ ------------
137,922 141,644
CAPITAL ASSETS (Note 3) 3,863 954
MINERAL PROPERTIES (Note 4) 141,000 136,000
DEFERRED EXPLORATION EXPENSES 53,423 29,605
OTHER ASSETS 20,449 -
------------ ------------
356,657 308,203
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 9,791 27,500
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 5) 1,950,894 1,809,354
DEFICIT (1,604,028) (1,528,651)
------------ ------------
346,866 280,703
------------ ------------
356,657 308,203
============ ============
</Table
APPROVED BY THE BOARD
----------------------------
Director
----------------------------
Director
75
</Page>
<PAGE>
MATRIX ENERGY INC.
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
$ $
<S> <C> <C>
EXPENSES
Accounting and legal 3,465 5,410
Administrative 36,050 38,400
Amortization 650 294
Bank charges and interest 236 243
Office and miscellaneous 8,196 9,324
Rent 15,400 12,172
Shareholder relations 1,957 6,108
Transfer agent and filing fees 6,556 8,915
Travel and entertainment 6,149 14,689
------------ ------------
78,659 95,555
------------ ------------
OPERATING LOSS (78,659) (95,555)
OTHER INCOME
Interest 3,282 2,684
------------ ------------
NET LOSS FOR THE YEAR (75,377) (92,871)
------------ ------------
DEFICIT - BEGINNING OF YEAR (1,528,651) (1,435,780)
------------ ------------
DEFICIT - END OF YEAR (1,604,028) (1,528,651)
============ ============
</TABLE>
76
</Page>
<PAGE>
MATRIX ENERGY INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C>
CASH FROM (USED IN):
OPERATING ACTIVITIES
Net loss for the year (75,377) (92,871)
Item not involving cash:
Amortization 650 294
------------ ------------
(74,727) (92,577)
Change in non-cash working capital items (45,452) 24,498
------------ ------------
(120,179) (68,079)
------------ ------------
FINANCING ACTIVITIES
Share subscription received - 78,000
Capital stock issued for cash 141,540 194,550
------------ ------------
141,540 272,550
------------ ------------
INVESTING ACTIVITIES
Acquisition of mineral properties - (50,000)
Deferred exploration expenses (23,818) (29,605)
Acquisition of capital assets (3,559) -
------------ ------------
(27,377) (79,605)
------------ ------------
INCREASE (DECREASE) IN CASH (6,016) 124,866
CASH - BEGINNING OF YEAR 134,847 9,981
------------ ------------
CASH - END OF YEAR 128,831 134,847
============ ============
</TABLE>
77
</Page>
<PAGE>
MATRIX ENERGY INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
1. NATURE OF OPERATIONS
The Company is in the business of acquiring and exploring mineral
properties. There has been no determination whether properties held
contain mineral reserves which are economically recoverable.
The recoverability of valuations assigned to mineral properties is
dependent upon the discovery of economically recoverable reserves, the
ability to obtain necessary financing to complete development, and
future profitable production or proceeds from disposition.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Mineral Properties
Costs relating to the acquisition and exploration of mineral
properties are deferred until the properties are placed into
commercial production, sold allowed to lapse or abandoned. These
costs are to be amortized over the estimated useful life of the
property following commencement of production, or written off as
properties are sold or abandoned.
b) Capital assets
Capital assets are stated at cost less accumulated amortization,
which is recorded over the useful lives of the assets on the
straight line basis at the following annual rates:
Furniture and fixtures 20%
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
1997 1996
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Furniture and fixtures 5,027 1,164 3,863 954
=========== =========== =========== ===========
</TABLE>
4. MINERAL PROPERTIES
a) La Paz County, Arizona
In 1994, the Company acquired a 100% interest in four unpatented
mineral claims in La Paz Count, Arizona for $6,000 plus 100,000 of
its shares.
78
</Page>
<PAGE>
MATRIX ENERGY INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
4. MINERAL PROPERTIES (continued)
b) White Bear Arm Region, Labrador
In 1996, the Company acquired 100 mineral claims in the White Bear
Arm region of SE Labrador, Newfoundland, for $25,000 plus 100,000
of its shares.
c) Walpole, Saskatchewan
In 1996, the Company acquired an option to two petroleum and
natural gas leases comprising 640 acres, in the Walpole area of
Saskatchewan for $25,000 plus 100,000 of its shares.
d) Oxide Peak, British Columbia
In 1997, the Company acquired a 100% interest in two mineral claims
know as the Oxide Peak Group in the Omineca Mining Division of
British Columbia for an undertaking to issue 20,000 of its shares
as consideration.
5. CAPITAL STOCK
<TABLE>
<CAPTION>
Authorized:
25,000,000 Common shares without par value
Allotted:
# $
----------- -----------
<S> <C> <C>
June 30, 1995 50,000 7,500
Shares issued during year (50,000) (7,500)
Share subscriptions received 285,000 85,500
----------- -----------
June 30, 1996 285,000 85,500
Shares issued during year (285,000) (85,500)
----------- -----------
June 30, 1997 - -
=========== ===========
Issued:
June 30, 1995 3,581,883 1,479,304
Private placements - cash 1,297,000 194,550
Shares issued for mineral properties 200,000 50,000
----------- -----------
June 30, 1996 5,078,883 1,723,854
Private placements - cash 500,000 150,000
Warrants exercised - cash 450,000 67,500
Warrants exercised - cash 53,000 9,540
----------- -----------
June 30, 1997 6,081,883 1,950,894
=========== ===========
</TABLE>
79
</Page>
<PAGE>
MATRIX ENERGY INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
5. CAPITAL STOCK (continued)
Warrants and options:
Warrants have been issued entitling the holders thereof to purchase
500,000 shares in aggregate at $0.30 each until July 4, 1997 or at $0.35
each thereafter until expiry on July 4, 1998.
No stock options were outstanding at June 30, 1997.
Escrowed shares:
300,000 shares are currently held in escrow subject to release upon
regulatory approval.
6. RELATED PARTY TRANSACTIONS
Included in the determination of net loss for the year are fees paid to
a director and a company controlled by that director recorded at the
exchange amount of $5,800 (1996 - $32,500).
7. COMPARATIVE FIGURES
The comparative figures for 1996 have been reclassified where necessary
to ensure comparability with those of the current period. Such
reclassification has no impact on reported losses.
8. LOSS PER SHARE
At the current stage of development in the Company's operations, loss
per share information is not considered meaningful.
9. SUBSEQUENT EVENTS
Subsequent to June 30, 1997 the Company has:
a) issued 20,000 shares in respect of the Oxide Peak Group interest as
disclosed in Note 3(d).
b) acquired a 100% interest in the Tomcat Group of40 mineral claim
units in the Nicola Mining Division of British Columbia for $25,000
plus 100,000 of its shares.
c) allowed the option to the Saskatchewan petroleum and natural gas
leases to lapse.
80
</Page>
