SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 0R 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 31, 1999
EUROGAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 33-1381-D 87-0427676
---------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
942 EAST 7145 SOUTH, SUITE 101A
MIDVALE, UTAH 84047
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 255-0862
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 31, 1999, the Company completed the acquisition of 14,100,000
shares of Big Horn Resources, Ltd., cumulating a series of related transactions
described in the following paragraphs.
On February 4, 1999, Big Horn Resources Ltd., a Calgary, Alberta-based
oil and gas producer ("Big Horn") issued 10,000,000 common shares to
EuroGas, Inc. ("EuroGas") under the terms of an October 5, 1998 subscription
agreement between Big Horn and EuroGas for $4,205,500 or $0.42 per share
($6,500,000 Canadian dollars or $0.65 Canadian dollars per share). EuroGas
paid $500,000 and caused Big Horn to issue 1,500,000 of the 10,000,000
common shares to Oxbridge Limited, Rockwell Limited, and Conquest Financial
Corporation (referred to herein collectively as "ORC"), three individual
shareholders of Big Horn and EuroGas, as payment for an option to acquire an
additional 3,000,000 Big Horn common shares and for warrants to acquire
2,000,000 Big Horn common shares at $0.55 per share ($0.85 Canadian dollars
per share) from ORC.
ORC verbally agreed on October 5, 1998 to sell and EuroGas agreed to
purchase 5,600,000 common shares of Big Horn, which include the 1,500,000
common shares described above, for $2,940,224 or $0.66 per share ($4,480,000
Canadian dollars or $0.80 Canadian dollars per share). On March 31, 1999,
EuroGas completed the acquisition of the 5,600,000 Big Horn common shares
from ORC by executing promissory notes in the aggregate amount of
$1,840,224, and by canceling a note receivable from Rockwell Limited in the
amount of $1,100,000.
Big Horn is a full-service producer of oil and natural gas, producing
an average of 640 equivalent barrels of oil per day, with proven reserves of
approximately 1.9 million barrels of equivalent oil and with a net present
value of approximately $8 million, based on a 10% discount rate.
<PAGE>
Item 7. Financial Statements and Exhibits
(A) Financial statements of business acquired.
See Exhibit Index, Exhibit 99.1
(B) Pro forma financial information.
See Exhibit Index, Exhibit 99.1
(C) Exhibits. The following exhibits are
incorporated herein by this reference:
Exhibit No. Description of Exhibit
----------- ----------------------
99.1 EuroGas, Inc.
Index to financial statements
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this Current Report
on Form 8-K to be signed on its behalf by the undersigned thereunto
duly authorized.
EUROGAS, INC.
By: /s/ HANK BLANKENSTEIN
--------------------------------------
Hank Blankenstein, Vice President and
Treasurer
Date: June 14, 1999
Page
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS F-2
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the Year Ended December 31, 1998 F-3
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for Three Months Ended March 31, 1999 F-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements F-5
BIG HORN RESOURCES, LTD.
Auditors' Report to the Directors F-6
Consolidated Balance Sheets December 31, 1998 and 1997 F-7
Consolidated Statements of Earnings and Deficit for the Years
Ended December 31, 1998 and 1997 F-8
Consolidated Statements of Changes in Financial Position
for the Years Ended December 31, 1998 and 1997 F-9
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1998 and 1997 F-10
<PAGE>
EUROGAS, INC.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
On March 31, 1999, Eurogas completed the acquisition of 14,100,000
common shares (slightly more than a 50% interest) of Big Horn Resources
Ltd. ("Big Horn"), an oil and gas exploration and production company
operating in Western Canada. The accompanying unaudited condensed pro
forma consolidated statements of operations have been prepared to
present the results of operations of EuroGas, Inc. and
Subsidiaries as if the acquisition of Big Horn had occurred on
January 1, 1998. By the date of the closing of the acquisition
on March 31, 1999, EuroGas had made cash payments of $4,723,498
on October 17, 1998, executed promissory notes on March 30, 1999
in the aggregate amount of $1,840,224, and had canceled a note
receivable from one of Big Horn shareholders in the amount of
$1,100,000. These payments, and the face amounts of the notes,
were discounted by $70,238 using a 10% discount rate to
establish the purchase price on October 5, 1998, the date the
parties agreed to the terms of these transactions, of $7,593,484.
The acquisition was accounted for under the purchase method of
accounting. The purchase price was determined based upon the
fair value of the consideration paid. The purchase price was
allocated to the acquired net assets of Big Horn based upon
their relative fair values on the effective date of the
acquisition. The fair value of the acquired properties was
determined by independent engineers. The purchase price exceeded
the fair value of the net assets acquired by $3,512,792 which
was recognized by EuroGas, Inc. as a non-recurring impairment
expense at the date of the acquisition.
The following financial information was derived from, and should
be read in conjunction with the consolidated statements of
operations of EuroGas, Inc. and subsidiaries and of Big Horn for
the year ended December 31, 1998 and the consolidated statement
of operations of EuroGas, Inc. and subsidiaries for the three
months ended March 31, 1999. The operations of Big Horn were
included in the consolidated results of operations of EuroGas,
Inc. and subsidiaries from October 5, 1998. Accordingly,
adjustments have been made to eliminate the duplication of the
Big Horn operations for the three months ended December 31,
1998. Since the results of operations from Big Horn are included
in the consolidated results of operations for the three months
ended March 31, 1999, amounts for Big Horn have not been
presented separately for that period. The unaudited condensed
consolidated pro forma statements of operations have been
included herein for comparative purposes only and do not purport
to be indicative of the results of operations which actually
would have been obtained had the agreement been completed on
January 1, 1998, or the results of operations which may be
obtained in the future. In addition, future results may vary
significantly from the results reflected in these pro forma
financial statements.
F-2
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
BIG HORN PRO FORMA PRO FORMA
EUROGAS, INC. RESOURCES ADJUSTMENT RESULTS
------------ ------------ ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
REVENUE AND INCOME
Oil and gas sales $ 879,404 $ 2,711,520 (A) $ (879,404) $ 2,138,415
(C) (573,105)
Interest and other income 746,346 63,443 (A) (62,521) 747,268
------------ ------------ ----------- -----------
TOTAL REVENUE AND INCOME 1,625,750 2,774,963 (1,515,030) 2,885,683
------------ ------------ ----------- -----------
COSTS AND EXPENSES
Oil and gas production costs 305,009 828,950 (A) (305,009) 828,950
Impairment of mineral interest
and equipment 3,512,792 1,281,221 (D) (3,512,792) -
(F) (1,281,221)
Royalties - 573,105 (C) (573,105) -
Depreciation, depletion, and
amortization 293,955 872,579 (B) (7,114) 913,295
(A) (246,125)
General and administrative 7,804,401 222,826 (A) (41,121) 7,986,106
Interest 465,371 96,240 (A) (61,412) 500,199
Foreign exchange net losses 130,419 - - 130,419
Income tax provision - (480,813) - (480,813)
------------ ----------- ----------- ----------
TOTAL COSTS AND EXPENSES 12,511,947 3,394,108 (6,027,899) 9,878,156
------------ ----------- ----------- ----------
LOSS BEFORE MINORITY INTEREST (10,886,197) (619,145) 4,512,869 (6,992,473)
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARY (137,983) - (E) 67,927 (70,056)
------------ ----------- ----------- -----------
NET INCOME (LOSS) $(11,024,180) $ (619,145) $ 4,580,796 $(7,062,529)
============ =========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.11)
===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE CALCULATIONS 64,129,062
===========
</TABLE>
Notes to Unaudited Condensed Pro Forma Statements of Operations are
presented on page F-5.
F-3
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
(CONTINUED)
Historical and
Pro Forma
Results
--------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999
REVENUE AND INCOME
Oil and gas sales $ 740,894
Interest and other income 69,597
------------
TOTAL REVENUE AND INCOME 810,491
COSTS AND EXPENSES
Oil and gas production costs 172,144
Depreciation, depletion, and amortization 295,717
General and administrative 2,481,064
Interest 123,264
Foreign exchange net losses (65,628)
Realized loss on sale of securities 82,350
------------
TOTAL COSTS AND EXPENSES 3,088,911
------------
LOSS BEFORE MINORITY INTEREST (2,278,420)
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARY (92,711)
------------
NET LOSS $ (2,371,131)
============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.03)
============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE CALCULATIONS 78,920,472
============
F-4
<PAGE>
EUROGAS, INC. AND SUBSUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
NOTE 1 -- Pro forma adjustment are as follows:
A - Adjustments to eliminate duplicated Big Horn operations from October
5, 1998 through December 31, 1998. The EuroGas condensed
consolidated statement of operations for the year ended December 31,
1998 includes the results of operations of Big Horn from the date of
its acquisition on October 5, 1998.
B - Adjustment to reflect depletion expense based upon Eurogas' purchase
price assuming the acquisition occurred on January 1, 1998.
C - Adjustment to classify royalties according to U.S. generally
accepted accounting principles.
D - Adjustment to exclude from the pro forma results a nonrecurring
impairment charge directly attributable to the acquisition.
E - Adjustment to reflect minority interest had the acquisition occurred
on January 1, 1998
F - Adjustment to reflect impairment as recognized by EuroGas.
NOTE 2 - The translation to U.S. Dollars and adjustments to U.S. generally
accepted accounting principles of the Big Horn financial statements, which
were prepared in Canadian dollars and Canadian generally accepted
accounting principles, was done using the average exchange rate for the
year ended December 31, 1998, as follows:
<TABLE>
<CAPTION>
Canadian U.S.
Financial U.S. GAAP U.S. GAAP Exchange Financial
Statements Adjustments Balance Rate Statements
---------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Revenue and Income
Oil and gas sales $4,021,076 $4,021,076 1.483 $2,711,520
Interest and other
income 94,084 94,084 1.483 63,443
---------- ---------- ------ ----------
Total Revenues and Income 4,115,160 4,115,160 1.483 2,774,963
Costs and Expenses
Oil and gas production costs 1,229,300 1,229,300 1.483 828,950
Impairment of mineral
interest and equipment - $ 1,900,000 1,900,000 1.483 1,281,221
Royalties 849,892 849,892 1.483 573,105
Depreciation, depletion,
and amortization 1,365,000 (71,000) 1,294,000 1.483 872,579
General and administrative 330,442 330,442 1.483 222,826
Interest 142,720 142,720 1.483 96,240
Foreign exchange net losses - - -
Income tax provision (713,027) (713,027) 1.483 (480,813)
---------- ----------- ---------- -------- ----------
Total Costs and Expenses 3,917,354 1,115,973 5,033,327 1.483 3,394,108
---------- ----------- ---------- -------- ----------
Net Income $ 197,806 $ 1,115,973 $ (918,167) 1.483 $ (619,145)
========== =========== ========== ======== ==========
</TABLE>
F-5
<PAGE>
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of Big Horn Resources Ltd.
as at December 31, 1998 and 1997 and the consolidated statements of
earnings 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 financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at December
31, 1998 and 1997 and the results of its operations and the changes in its
financial position for the years then ended in accordance with generally
accepted accounting principles in Canada.
KPMG LLP
Chartered Accountants
Calgary, Canada
March 26, 1999
F-6
<PAGE>
Big Horn Resources Ltd.
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
DECEMBER 31 December 31
1998 1997
-------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $252,175 $76,240
Accounts receivable 1,702,025 1,851,835
Prepaid expenses and other assets 12,986 5,336
- --------------------------------------------------------------------------
1,967,186 1,933,411
CAPITAL ASSETS (NOTE 3) 15,181,925 4,428,367
- --------------------------------------------------------------------------
$17,149,111 $6,361,778
==========================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $1,867,680 $1,946,172
- --------------------------------------------------------------------------
1,867,680 1,946,172
BANK INDEBTEDNESS (NOTE 4) 1,421,759 1,600,000
Provision for future abandonment and
site restoration costs 191,670 50,000
- --------------------------------------------------------------------------
3,481,109 3,596,172
- --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (NOTE 5) 18,209,175 7,504,585
DEFICIT (4,541,173) (4,738,979)
- --------------------------------------------------------------------------
13,668,002 2,765,606
SUBSEQUENT EVENTS (NOTE 8)
- --------------------------------------------------------------------------
$17,149,111 $6,361,778
==========================================================================
APPROVED ON BEHALF OF THE BOARD:
---------------------------- -------------------------------
DIRECTOR DIRECTOR
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
Big Horn Resources Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
-------------------------------------------------------------------------
YEAR Year
ENDED Ended
DECEMBER 31 December 31
1998 1997
---------------------------------------------------------------------------
REVENUE
Oil and gas sales $3,807,620 $2,637,805
Alberta royalty tax credit 213,456 93,981
Interest and other income 94,084 4,813
-------------------------------------------------------------------------
4,115,160 2,736,599
-------------------------------------------------------------------------
EXPENSES
Operating expenses 1,229,300 858,848
Royalties 849,892 759,855
General and administrative 330,442 243,413
Interest on long-term debt 142,720 93,121
Depletion and depreciation (note 3) 1,365,000 5,118,937
-------------------------------------------------------------------------
3,917,354 7,074,174
-------------------------------------------------------------------------
NET EARNINGS (LOSS) 197,806 (4,337,575)
DEFICIT - BEGINNING OF YEAR (4,738,979) (401,404)
-------------------------------------------------------------------------
DEFICIT - END OF YEAR ($4,541,173) ($4,738,979)
=========================================================================
BASIC EARNINGS (LOSS) PER SHARE $0.01 ($0.46)
=========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
Big Horn Resources Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
- --------------------------------------------------------------------------
YEAR Year
ENDED Ended
DECEMBER 31 December 31
1998 1997
-------------------------------------------------------------------------
Cash provided by (used in):
Operations
Net earnings (loss) $197,806 ($4,337,575)
Add non-cash items:
Depletion and depreciation 1,365,000 5,118,937
-------------------------------------------------------------------------
Funds from operations 1,562,806 781,362
Net change in non-cash working
capital items (644,282) (522,658)
-------------------------------------------------------------------------
918,524 258,704
-------------------------------------------------------------------------
Financing
Issue of share capital 10,704,590 3,492,035
Increase (decrease) in bank
indebtedness (178,241) 208,074
Working capital - 150,000
-------------------------------------------------------------------------
10,526,349 3,850,109
-------------------------------------------------------------------------
Investing
Acquisition of Ironwood Petroleum
Ltd., net of cash acquired (6,548,925) -
Additions to capital assets (4,720,013) (4,032,573)
-------------------------------------------------------------------------
(11,268,938) (4,032,573)
Increase in cash 175,935 76,240
Cash, beginning of year 76,240
-------------------------------------------------------------------------
Cash, end of year $252,175 $76,240
=========================================================================
Funds from operations per share $0.10 $0.08
=========================================================================
See accompanying notes to consolidated financial statements
F-9
<PAGE>
Big Horn Resources Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
__________________________________________________________________________
1. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada.
Substantially all of the exploration and production activities of the
Company are conducted jointly with others and these consolidated
financial statements reflect only the Company's proportionate
interest in such activities. These consolidated financial statements
include the accounts of Ironwood Petroleum Ltd. ("Ironwood")
effective from October 1, 1998.
(d) Petroleum and natural gas properties
The Company follows the full cost method of accounting for petroleum
and natural gas properties. All costs related to the exploration for
and the development of oil and gas reserves are capitalized on a
country by country basis. Costs capitalized include land acquisition
costs, geological and geophysical expenditures, lease rentals on
undeveloped properties and costs of drilling productive and
non-productive wells. Proceeds from the disposal of properties are
applied as a reduction of cost without recognition of a gain or loss
except where such disposals would result in a major change in the
depletion rate.
Capitalized costs are depleted and depreciated using the unit of
production method based on the estimated gross proven oil and natural
gas reserves before royalties as determined by independent engineers.
Units of natural gas are converted into barrels of equivalents on a
relative energy content basis.
Capitalized costs, net of accumulated depletion and depreciation,
are limited to estimated future net revenues from proven reserves,
based on year-end prices, undiscounted, less estimated future site
restoration costs, general and administrative expenses, financing
costs and income taxes.
Estimated future abandonment and site restoration costs are
provided for over the life of proven reserves on a unit of production
basis. The annual charge is included in depletion and depreciation
expense and actual abandonment and site restoration costs are charged
to the provision as incurred.
The amounts recorded for depletion and depreciation and the
provision for future abandonment and site restoration costs are based
on estimates of proven reserves and future costs. The recoverable
value of capital assets is based on a number of factors including the
estimated proven reserves and future costs. By their nature, these
estimates are subject to measurement uncertainty and the impact on
financial statements of future periods could be material.
(b) Per share data
Per share amounts are calculated based on the weighted average
number of shares outstanding during the year. The exercise of stock
options and warrants would not have a material dilutive effect on the
per share data.
(c) Financial instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable, accrued liabilities and bank
indebtedness. The fair values of all of the Company's financial
instruments approximate their carrying values.
(d) Estimates and assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
2. ACQUISITION
Effective October 1, 1998 the Company acquired all of the issued
and outstanding shares of Ironwood for $7,230,361 including
acquisition costs of $143,191.
This business combination has been accounted for using the
purchase method based on the assets and liabilities of Ironwood as at
September 30, 1998. The results of operations of Ironwood have been
included in the Company's consolidated financial statements effective
from October 1, 1998.
Details of the acquisition are as follows:
Assets acquired:
Current assets, excluding cash $613,792
Capital assets 7,342,545
----------
7,956,545
Liabilities assumed:
Current liabilities 1,321,742
Provision for future abandonment
and site restoration costs 85,670
----------
1,407,412
Net non-cash assets acquired 6,548,925
Cash acquired 681,436
----------
Net assets acquired $7,230,361
==========
Consideration:
Cash $7,230,361
==========
F-13
<PAGE>
3. CAPITAL ASSETS
------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------------------------
Accumulated
depletion and
Cost depreciation Net
-------------------------------------------------------------------------
Petroleum and natural
gas properties $22,716,141 $7,593,981 $15,122,160
Office furniture and
equipment 91,265 31,500 59,765
-------------------------------------------------------------------------
$22,807,406 $7,625,481 $15,181,925
=========================================================================
December 31, 1997
-------------------------------------------------------------------------
Accumulated
depletion and
Cost depreciation Net
-------------------------------------------------------------------------
Petroleum and natural
gas properties $10,672,915 $6,304,981 $4,367,934
Office furniture and
equipment 71,933 11,500 60,433
-------------------------------------------------------------------------
The provision for depletion and depreciation in 1998 and 1997
includes the following components:
1998 1997
-------------------------------------------------------------------------
Amortization of capital assets $1,309,000 $ 982,800
Provision for future abandonment and
site restoration 56,000 36,000
Write-down of abandoned overseas properties - 300,137
Ceiling test adjustment - 3,800,000
-------------------------------------------------------------------------
$1,365,000 $5,118,937
=========================================================================
As at December 31, 1998 costs of undeveloped land of $3,100,00
(1997 - $824,712) have been excluded from the calculation of
depletion expense.
4. BANK INDEBTEDNESS
Bank indebtedness represents the outstanding balance under an
authorized line of credit of $7,000,000 (1997 - $2,300,000) with the
Alberta Treasury Branches. Drawings under the line of credit bear
interest at 1% above the bank's prime lending rate. Security is
provided by a first charge over all of the Company's assets. The
balance is repayable on demand.
5. SHARE CAPITAL
(a) Authorized
Unlimited number of voting common shares without nominal or par value.
(b) Issued
-------------------------------------------------------------------------
Number of
common
shares Amount
-------------------------------------------------------------------------
Balance at December 31, 1996 8,818,221 $4,012,550
Shares issued on exercise of warrants 436,250 305,377
Shares issued on exercise of warrants ( see
note 5(c) ) 500,000 115,000
Shares issued on exercise of stock options 73,500 26,460
-------------------------------------------------------------------------
9,827,971 4,459,387
Proceeds received on issue of Special
Warrants, net of issue costs of $388,802
(see note 5(d)) - 3,045,198
-------------------------------------------------------------------------
Balance at December 31, 1997 9,827,972 7,504,585
Shares issued on conversion of Special
Warrants ( see note 5(d) ) 3,434,000 -
Shares issued on exercise of stock options 564,500 172,260
Shares issued as compensation 10,220 9,198
Shares issued on private placement
(see note 5(e) ) 3,210,000 3,600,000
Shares issued on private placement
(see note 5(f) ) 1,075,500 914,175
Proceeds received from private placement
subscription ( see note 5(g) ) - 6,500,000
Share issue costs - (491,043)
-------------------------------------------------------------------------
Balance, December 31, 1998 18,122,191 $18,209,175
=========================================================================
(c) On August 26, 1997, 500,000 common shares were issued to an
officer and director of the Company on the exercise of
500,000 share purchase warrants at a price of $0.23 per share
for an aggregate consideration of $115,000.
(d) On September 16, 1997, the Company issued 592,000 Special
Warrants at a price of $2.00 per Special Warrant. Each
Special Warrant entitled the holder to acquire one common
share, one flow-through common share and one share purchase
warrant at no additional cost. Each share purchase warrant
entitled the holder to purchase an additional share of the
Company at a price of $1.25 per share exercisable until
September 21, 1998. On September 17, 1997 the Company issued
2,250,000 Special Warrants, of which 1,125,000 were
flow-through Special Warrants, at a price of $1.00 per
Special Warrant. Each Special Warrant entitled the holder to
acquire one common share and one share purchase warrant at no
additional cost. Each share purchase warrant entitled the
holder to purchase an additional share of the Company at a
price of $1.25 per share exercisable until September 21,
1998. The net proceeds to the Company from both issues were
$3,045,585. These proceeds were received in 1997. All of
the common shares referred to above were issued in 1998. The
share purchase warrants expired unexercised on September 21,
1998.
(e) On March 20, 1998, the Vancouver Stock Exchange approved a
non-brokered private placement of 3,000,000 common shares at a price
of $1.20 per share for proceeds of $3,600,000. The private placement
included 2,000,000 share purchase warrants exercisable up to March
22, 1999 at a price of $1.50 per common share. In addition, 210,000
common shares were issued as a finder's fee. The share purchase
warrants expired unexercised on March 22, 1999.
(f) On December 31, 1998 the Company issued 1,075,500 flow-through
common shares through a non-brokered private placement. Proceeds to
the Company from this issue were $914,175. Pursuant to the
flow-through share agreement, the Company will renounce $914,175 of
income tax deductions to the subscribers to these shares. At
December 31, 1998 $379,547 had been renounced.
(g) As described in note 2, the Company acquired, effective October
1, 1998, all of the issued and outstanding shares of Ironwood for
$7,230,361. This acquisition was partly financed by the issuance of
10,000,000 common shares at a price of $0.65 per share. This private
placement received final approval by the Toronto Stock Exchange on
January 29, 1999 and the common shares were issued from treasury on
February 4, 1999. The remaining funds held in escrow pursuant to the
private placement were released to the Company on February 5, 1999 in
the amount of $4,278,241. These funds are recorded as a reduction in
the Company's bank indebtedness at December 31, 1998.
(h) Options:
Number of options
Exercise price Expiry date
175,000 $0.69 November 25, 2001
85,000 $0.92 July 16, 2002
30,000 $1.15 March 09, 2003
85,000 $1.15 March 09, 2006
534,500 $0.98 May 26, 2008
25,000 $0.97 July 30, 2008
--------------------------------------------------
934,500
==================================================
(i) Warrants:
There are 50,000 share purchase warrants held by a company controlled
by a consultant to the Company as partial consideration for the purchase
of certain petroleum and natural gas properties. These warrants are
exercisable up to June 10, 1999 at an exercise price of $1.15.
There are 225,000 broker warrants outstanding related to the issue of
the Special Warrants referred to in note 5(d). These warrants vest as
to 1/4 on each of September 19, 1998, March 19, 1999, September 19, 1999
and March 19, 2000. These warrants are exercisable at a price of $1.00
per common share. The warrants will expire if not exercised on or
before the September 19, 2000.
6. INCOME TAXES
The income tax provision is calculated by applying Canadian
federal and provincial statutory tax rates to pre-tax income with
adjustments as set out in the following table:
[S] [C] [C]
1998 1997
Net earnings (loss) before income taxes $197,806 $(4,337,575)
Combined federal and provincial income tax
rate 45% 45%
Computed income tax provision $ 89,013 $(1,951,909)
Increase (decrease) resulting from:
Non-deductible Crown royalties 330,734 315,925
Resource allowance (248,225) (143,808)
Alberta Royalty Tax Credit (96,056) -
Recognition of accounting loss
carry-forwards (361,939) -
Depletion on assets with no tax base 285,237 818,100
Accounting losses not recognized - 1,001,208
--------- ----------
Other $ - $ -
========= ==========
At December 31, 1998 the Company had approximately $12,697,000 (
1997 - $6,240,000 ) of tax pools available to reduce future taxable
income.
(g) 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. Date-sensitive
systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information using year 2000 dates is
processed. In addition, similar problems may arise in some systems
which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before,
on or after January 1, 2000 and, if not addressed, the impact on
operations and financial reporting may range from minor errors to
significant system failure which could affect the Company's ability
to conduct normal business operations. 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.
8. SUBSEQUENT EVENTS
(a) On January 1, 1999 the Company amalgamated with its wholly-owned
subsidiary, Ironwood Petroleum Ltd. under the continuing name Big Horn
Resources Ltd.
(b On February 4, 1999 the Company issued 10,000,000 common shares
from treasury as described in note 5(g).
(c) On February 5, 1999 the Company received the remaining proceeds
from escrow from its private placement as described in note 5(g).
9. DIFFERENCES IN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BETWEEN
CANADA AND THE UNITED STATES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada.
Differences in accounting principles as they pertain to the accompanying
financial statements are immaterial except as described below:
(a) Under U.S. GAAP the carrying value of petroleum and natural gas
properties and related facilities, net of deferred income taxes, is
limited to the present value of after-tax future net revenue from
proven reserves based on prices and costs at the balance sheet date
and discounted at 10%, plus the lower of cost and fair value of
unproven properties. The application of the full cost ceiling test
under U.S. GAAP resulted in a write-down of capitalized costs in 1998.
(b) Under U.S. GAAP deferred income tax assets or liabilities are
computed on the difference between financial statements and income
tax bases of assets and liabilities. Deferred income tax provisions
are based on the change during the period in the related deferred
income tax asset or liability accounts.
(c) Under U.S. GAAP future income taxes are recognized on the
difference between the book value and the tax value of net assets
acquired on a purchase.
(d) Under U.S. GAAP issuances of "flow through" shares are recorded
net of the deferred income tax effect of the deductions renounced to
investors.
The impact of the differences between Canadian and U.S. GAAP on the
consolidated statements of earnings and deficit are as follows:
1998 1997
-------------------------
Net earnings (loss) under Canadian GAAP 197,806
Ceiling test write-down (1,900,000) -
Application of liability method for
income taxes 713,027 1,303,782
Adjustment of depletion 71,000 160,000
--------------------------------------------------------------------
Net loss under U.S. GAAP (918,167) (2,873,793)
--------------------------------------------------------------------
Earnings per share under U.S. GAAP (0.06) (0.31)
The impact of the differences between Canadian and U.S. GAAP on the
consolidated balance sheets are as follows:
CANADIAN INCREASE US GAAP
--------------------------------------------
December 31, 1998
Capital assets 15,181,925 (1,128,460) 14,053,465
Deferred income taxes - 240,003 240,003
Share capital (18,209,175) 1,195,231 (17,013,944)
Deficit 4,541,173 (306,774) 4,234,399
December 31, 1997
Capital assets 4,428,367 (1,240,000) 3,188,367
Deferred income - 1,352,905 1,352,905
Share capital (7,504,585) 1,309,841 (6,194,744)
Deficit 4,738,979 (1,422,746) 3,316,233
