Mutual Reliance Review System for Exemptive Relief Applications. Issuer exempt from certain disclosure requirements relating to the preparation of a business acquisition report under NI 51-102. In connection with preparation of business acquisition report, issuer granted relief from general prohibition contained in National Instrument 52-107 against a reservation or qualification of an audit opinion that would constitute a reservation under Canadian generally accepted auditing standards.
Applicable Ontario Provisions
National Instrument 51-102 - Continuous Disclosure Obligations.
National Instrument 52-107 - Acceptable Accounting Principles, Auditing Standards and Reporting Currency.
Titan Exploration Ltd., 2004 ABASC 1011
September 29, 2004
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ALBERTA, SASKATCHEWAN & ONTARIO
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
TITAN EXPLORATION LTD.
MRRS DECISION DOCUMENT
1. WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of Alberta, Saskatchewan and Ontario (the "Participating Jurisdictions") has received an application from Titan Exploration Ltd. ("Titan") in connection with the preparation and filing of a business acquisition report relating to a significant acquisition recently completed by Titan, which application requests relief from the general prohibition contained in National Instrument 52-107 against a reservation or qualification of an audit opinion that would constitute a reservation under Canadian generally accepted auditing standards ("GAAS").
2. AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the "MRRS"), the Alberta Securities Commission is the principal regulator for this application.
3. AND WHEREAS, unless otherwise defined, the terms herein have the meaning set out in National Instrument 14-101 - Definitions.
4. AND WHEREAS Titan has represented to the Decision Makers that:
4.1 On June 16, 2004, Titan Exploration Ltd. ("Titan" or the "Corporation") announced the acquisition of all of the issued and outstanding shares of Shawnee Oils Ltd. ("Shawnee"), a private company with assets located in southwest Saskatchewan. The acquisition of the shares of Shawnee closed on July 16, 2004. The business acquisition report (Form 51-102F4) in respect of the Shawnee acquisition is due on September 29, 2004.
4.2 Shawnee Oils Ltd. was, at the time of its acquisition by Titan, a private company actively engaged in the acquisition, exploration, development and production of oil and gas from properties located in southwest Saskatchewan.
4.3 At the time of its acquisition by Titan, Shawnee was not a reporting issuer in any jurisdiction and its securities were not listed on any stock exchange.
4.4 Shawnee's financial year end is September 30.
4.5 Titan was incorporated under the laws of Alberta on January 6, 2004. The registered office of the Corporation is located at 3300, 421 - 7th Avenue S.W., Calgary, Alberta, T2P 4K9 and its head office is located at 500, 555 - 4th Avenue S.W., Calgary, Alberta, T2P 3E7.
4.6 Titan is engaged in the acquisition, exploration, development and production of petroleum and natural gas in western Canada.
4.7 The authorized capital of Titan at the date hereof consists of an unlimited number of Class A Shares, an unlimited number of Class B Shares, and an unlimited number of Preferred Shares, of which 10,880,000 Class A Shares and 812,500 Class B Shares are issued and outstanding.
4.8 The Class A Shares and the Class B Shares are listed and posted for trading on the TSXV under the symbols "TTN.A" and "TTN.B" respectively.
4.9 Titan is a reporting issuer in the provinces of British Columbia, Alberta, Saskatchewan and Ontario and is not currently in default of the securities legislation in any of these jurisdictions.
4.10 Titan is, and was at the time of the acquisition of the shares of Shawnee, a "venture issuer" within the meaning of NI 51-102.
4.11 Titan's financial year end is December 31.
4.12 In connection with the preparation of the Form 51-102F4 in respect of the Shawnee acquisition, Titan engaged KPMG LLP to prepare audited financial statements for Shawnee for the year ended September 30, 2003 and to review the unaudited interim statements for the 9 month period ended June 30, 2004.
4.13 On September 24, 2004, KPMG advised that it could not calculate depletion and amortisation for Shawnee using the units-of-production method, as the information required to perform such calculations was not readily available. As such, KPMG wishes to include a qualification in its audit opinion in respect of the September 30, 2003 financial statements of Shawnee which reads as follows:
"As the information necessary to calculate depletion and amortization using the units-of-production method, including an amount for restoration and abandonment costs, is not readily available depletion and amortization on oil and gas properties is computed using the diminishing balance method. This practice is not in accordance with Canadian generally accepted accounting principles. Had the information been available to complete our audit, we might have determined adjustments to be necessary to petroleum properties and related equipment, amortization and depletion, net loss and deficit.
Except for the use of the diminishing balance method to record amortization and depletion and the lack of a provision for restoration and abandonment costs, as described in the previous paragraph, in our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at September 30, 2003 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles."
4.14 Based upon inquiries made of the former shareholders of Shawnee:
(a) it is unclear as to what information actually exists and whether or not it will be possible to obtain the relevant historical engineering reports for all of the fields or wells comprising the Shawnee assets, so as to permit the calculation of depletion and amortization using the units-of-production method; and
(b) Titan understands that a number of the properties of Shawnee were acquired piecemeal by Shawnee and/or its predecessor companies over many years and that certain of the information required to calculate the correct depletion rate on a units-of-production method may not exist.
4.15 Titan believes that a reserve report analysis to determine the reserves from the date of the first acquisition, accounting for reserve changes due drilling, acquisitions and divestitures would be extremely costly and require a significant amount of time.
5. AND WHEREAS under the MRRS, this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the "Decision").
6. AND WHEREAS each of the Decision Makers is satisfied that the test contained in the securities legislation of the Participating Jurisdictions (the "Legislation") that provides the Decision Maker with the jurisdiction to make the Decision has been met.
7. THE DECISION of the Decision Makers pursuant to the Legislation is that the general prohibition contained in NI 52-107 against an auditor's report containing a reservation or qualification be waived, so as to permit Titan to file the September 30, 2003 financial statements of Shawnee, together with the proposed reservation in the audit opinion of KPMG LLP:
(i) as part of its business acquisition report filing; and
(ii) as part of any future filing by Titan to the extent that the September 30, 2003 financial statements of Shawnee are required by the Legislation to be included in such filing.