<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q/A
AMENDMENT NO. 1
-----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _______
COMMISSION FILE NO. 0-24027
PINNACLE OIL INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 61-1126904
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SUITE 750 PHOENIX PLACE, 8407TH AVENUE, S.W., CALGARY, ALBERTA, CANADA T2P 3G2
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (403) 264-7020
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRATION WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES [ ] NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
12,426,983 SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE
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<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION................................................................ 2
ITEM 1. FINANCIAL STATEMENTS................................................................. 2
Consolidated Balance sheets.......................................................... 2
Consolidated Statements Of Loss...................................................... 3
Consolidated Statements Of Shareholders' Equity...................................... 4
Consolidated Statements Of Cash Flow................................................. 5
Notes To Financial Statements........................................................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
General.............................................................................. 12
Overview............................................................................. 12
Results Of Operations Of The Company (Including Predecessor, Pinnacle Oil)........... 14
Liquidity And Capital Resources...................................................... 15
Outlook And Prospective Capital Requirements......................................... 16
Foreign Exchange..................................................................... 16
Effect Of Inflation.................................................................. 16
Year 2000 Compliance................................................................. 17
Uncertainties And Risk Factors....................................................... 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 25
PART II OTHER INFORMATION.................................................................... 25
ITEM 1. LEGAL PROCEEDINGS.................................................................... 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................ 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 25
ITEM 5. OTHER INFORMATION.................................................................... 26
ITEM 6. EXHIBITS............................................................................. 26
Exhibits............................................................................. 26
Reports on Form 8-K................................................................. 26
</TABLE>
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<PAGE>
ADVISEMENT
This Report contains "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and is subject to the safe harbors created by those sections. These forward-
looking statements generally reflect the Company's current expectations
regarding the future results of operations, performance and achievements of the
Company, or industry results. The Company has tried, wherever possible, to
identify these forward-looking statements by, among other things, using words as
"believe," "anticipate," "expect,""intend," "may," "will" and other similar
expressions. However, these words are not the exclusive means of identifying
such statements. Any statements in this Report which refer to expectations,
projections or other characterizations of future events or circumstances also
constitute forward-looking statements.
The forward-looking statements contained in this Report reflect the current
beliefs of management of the Company, and are based on currently available
information. Accordingly, these forward-looking statements are subject to known
and unknown risks, uncertainties and other factors, including those identified
in Part I of this Report captioned "Item 2 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations; Uncertainties and
Risk Factors," which may cause the actual results, performance or achievements
of the Company to differ materially from those expressed in, or implied by, such
forward-looking statements.
The Company undertakes no obligation to publicly release the results of any
revision to any forward-looking statement contained in this Report which may be
made to reflect events or circumstances occurring subsequent to the filing of
this Report with the Securities and Exchange Commission ("SEC"). Readers are
urged to carefully review and consider the various disclosures made by the
Company in this Report and in the Company's other Reports filed with the SEC
that attempt to advise interested parties of the risks and factors that may
affect the Company's business.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE OIL INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $5,302,646 $1,068,887
Accounts receivable............................................................ 107,347 70,452
Prepaid expenses and other..................................................... 139,021 13,584
---------- ----------
Total current assets......................................................... 5,549,014 1,152,923
Promissory note from employee (note 4)........................................... 35,860 --
Property and equipment, net of accumulated depreciation and amortization of
$55,108 and $12,486, respectively............................................... 321,419 78,654
---------- ----------
Total assets................................................................. $5,906,293 $1,231,577
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................................... $161,928 $82,778
Loans payable to affiliates.................................................... -- 14,962
---------- ----------
Total current liabilities.................................................... 161,928 97,740
Promissory notes payable (note 5)................................................ -- 1,080,000
---------- ----------
Total liabilities............................................................ 161,928 1,177,740
Shareholders' equity:
Series "A" convertible preferred stock, par value $0.001 per share
800,000 shares authorized; 800,000 shares issued as of September 30, 1998; no
shares issued as of September 30, 1997....................................... 800 --
Common stock, par value $0.001 per share
50,000,000 shares authorized; 12,426,983 shares issued as of September 30,
1998; 12,015,219 shares issued as of September 30, 1997...................... 12,427 12,015
Warrants....................................................................... 1,132,000 --
Additional paid-in capital..................................................... 10,013,021 1,128,276
Accumulated deficit during the development stage............................... (5,413,883) (1,086,454)
---------- ----------
Total shareholders' equity................................................... 5,744,365 53,837
Total liabilities and shareholders' equity................................... $5,906,293 $1,231,577
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part
of these balance sheets.
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<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF LOSS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 20,
1995
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
------------- 1998
1998 1997 (CUMULATIVE)
---- ---- ------------
<S> <C> <C> <C>
Operating expenses:
Administrative................................................. $ 754,226 $ 523,085 $ 1,905,079
Amortization and depreciation.................................. 36,353 19,207 86,934
Exploration expenditures, net of exploration costs
reimbursed by joint-venture partners.......................... 74,226 70,205 295,902
Survey system development...................................... 17,417 58,968 120,418
Write-down of automotive....................................... -- -- 17,074
---------- ---------- -----------
Total operating expenses................................... (882,222) (671,465) (2,425,407)
Operating loss................................................... (882,222) (671,465) (2,425,407)
Other income (expenses):
Interest cost on promissory notes.............................. (14,298) (80,000) (124,298)
Interest income................................................ 150,836 36,787 203,926
Other income................................................... 10,396 -- 10,396
Settlement of damages.......................................... -- 157,500 157,500
---------- ---------- -----------
Total other income (expenses).............................. 146,934 114,287 247,524
Net loss for the period.......................................... $ (735,288) $ (557,178) $(2,177,883)
========== ========== ===========
Basic and diluted loss per share (note 6)........................ $ (0.32) $ (0.05)
========== ==========
Weighted average shares outstanding.............................. 12,286,678 11,967,260
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
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<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A DEFICIT
CONVERTIBLE COMMON STOCK ACCUMULATED
COMMON STOCK PREFERRED STOCK WARRANTS ADDITIONAL DURING THE
------------ --------------- -------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT NUMBER AMOUNT CAPITAL STAGE
------ ------ ------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued at inception --
October 20, 1995......... 5,000,000 $5,000 - $ - - $ - $ - $ -
Net loss --
Fiscal 1995.............. - - - - - - - (53,696)
---------- ------- ------- ---- ------- ---------- ----------- -----------
Balance --
December 31, 1995........ 5,000,000 5,000 - - - - - (53,696)
Issued on Reverse
Acquisition --
January 30, 1996......... 5,968,281 5,968 - - - - (5,968) -
Issued for cash --
May 29, 1996............. 975,000 975 - - - - 967,775 -
Net loss --
Fiscal 1996.............. - - - - - - - (475,578)
---------- ------- ------- ---- ------- ---------- ----------- -----------
Balance --
December 31, 1996........ 11,943,281 11,943 - - - - 961,807 (529,274)
Issued for services --
July 1, 1997............. 71,938 72 - - - - 166,469 -
Net loss --
Fiscal 1997.............. - - - - - - - (913,321)
---------- ------- ------- ---- ------- ---------- ----------- -----------
Balance --
December 31, 1997........ 12,015,219 12,015 - - - - 1,128,276 (1,442,595)
Issued on conversion of
promissory notes --
February 1, 1998......... 411,764 412 - - - - 1,119,588 -
Issued for cash --
April 3, 1998............ - - 800,000 800 - - 7,765,157 (2,104,000)
Issued for cash --
April 3, 1998............ - - - - 200,000 1,132,000 - (1,132,000)
Net loss --
Nine months ended
September 30, 1998....... - - - - - - - (735,288)
---------- ------- ------- ---- ------- ---------- ----------- -----------
Balance --
September 30, 1998....... 12,426,983 $12,427 800,000 $800 200,000 $1,132,000 10,013,021 (5,413,883)
========== ======= ======= ==== ======= ========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
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<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OCTOBER 20,
1995
(INCEPTION) TO
NINE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 30, 1998
---------------------------
1998 1997 (CUMULATIVE)
------------ ------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net loss for the period........................................ $ (735,288) $ (557,178) $ (2,177,883)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization................................................ 36,353 19,207 86,748
Write-down of property and equipment......................... -- -- 28,077
Accrued interest on promissory notes......................... 10,000 80,000 120,000
Costs settled by issuance of common stock................... -- 166,541 166,541
Accounts receivable......................................... (19,243) (57,560) (102,515)
Prepaid expenses and other.................................. (105,507) (11,947) (139,021)
Accounts payable............................................ (63,717) (112,254) 161,928
Due from (to) officers...................................... -- 14,962 (4,832)
------------ ------------- ---------------
Net cash used in operating activities....................... (877,402) (458,229) (1,860,957)
Financing activities:
Proceeds of promissory notes.................................. -- 1,000,000 1,100,000
Repayment of promissory notes................................. -- -- (100,000)
Issuance of common stock...................................... -- -- 980,000
Issuance of preferred stock and warrants...................... 6,000,000 -- 6,000,000
Share issuance costs.......................................... (333,158) -- (339,408)
Repayment of long-term debt................................... (146,520) -- (146,520)
------------ ------------- --------------
Net cash generated by financing activities................ 5,520,322 1,000,000 7,494,072
Investing activities:
Deferred financing............................................ (4,884) -- (12,650)
Deferred costs................................................ 154,287 -- 154,287
Loan to employee.............................................. (35,861) -- (35,861)
Acquisition of property and equipment......................... (302,155) 7,497 (436,245)
------------ ------------- --------------
Net cash generated by (used in) investing activities...... (188,613) 7,497 (330,469)
Net cash inflow (outflow)...................................... 4,454,307 549,268 5,302,646
Cash position, beginning of period............................. 848,339 519,619 --
------------ ------------- ---------------
Cash position, end of period................................... $5,302,646 $1,068,887 $5,302,646
============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
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<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
- -------------------------------------------------------------------------------
NOTE 1 -- BUSINESS
(A) NATURE OF BUSINESS
Pinnacle Oil International, Inc. (the "Company"), together with its wholly-
owned subsidiaries, Pinnacle Oil Inc. ("Pinnacle U.S.") and Pinnacle Oil
Canada Inc. ("Pinnacle Canada"), is a remote-sensing technology company
principally engaged in the business of hydrocarbon (oil and natural gas)
exploration and, through their strategic partners, the exploitation of
hydrocarbon accumulations identified by Pinnacle U.S. and Pinnacle Canada.
The Company and its subsidiaries identify commercially viable hydrocarbon
accumulations ("SFD Prospects") through the analysis of certain information
("SFD Data") provided exclusively to the Company and its subsidiaries for
hydrocarbon exploration purposes by Momentum Resources Corporation
("Momentum"). The SFD Data is generated by Momentum's proprietary Stress
Field Detector, or "SFD," used in conjunction with the Company's
proprietary electronic data acquisition and global positioning systems
(collectively, the "SFD Survey System"). Momentum is controlled and
indirectly owned by certain officers, directors and significant
shareholders of the Company, and provides the SFD Data to the Company
pursuant to the terms of a Restated Technology Agreement (the "License").
The Company's current business strategy is to enter into joint venture and
other arrangements through its subsidiaries with a small and select number
of reputable, experienced, well-capitalized hydrocarbon exploration,
drilling and production companies pursuant to which the Company and its
subsidiaries will identify SFD Prospects in geographically defined
exploration areas selected by these strategic partners in return for a
revenue-based royalty or working interest (as opposed to a fixed fee), and
the strategic partner will finance the acquisition and development of the
SFD Prospects. These strategic arrangements will ultimately encompass both
domestic prospects (located within the United States and Canada) and
international prospects, as well as off-shore prospects.
As currently structured, Pinnacle Canada will enter into arrangements with
Canadian strategic partners to exploit to exploit SFD Prospects principally
located in Canada, and Pinnacle U.S. will enter into arrangements with
American strategic partners to exploit SFD Prospects principally located in
the United States. To effectuate such structure, Pinnacle Canada and
Pinnacle U.S. have each entered into certain sublicensing arrangements with
the Company pursuant to which each of such subsidiaries receive SFD Data
from the Company in payment of a royalty to the Company based upon such
subsidiary's respective revenues.
As of September 30, 1998, Pinnacle Canada and Pinnacle U.S. have each
entered into joint venture agreements with two such strategic partners, and
Pinnacle Canada has entered into an SFD survey agreement with a third such
strategic partner. Each of these agreements provide for the payment of a
royalty to Pinnacle Canada or Pinnacle U.S. (as the case may be) by the
strategic partner, currently in the range of 5% to 8%, based upon revenues
resulting from the sale of hydrocarbons produced by SFD Prospects
identified by such subsidiary. In any situation where Pinnacle Canada or
Pinnacle
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<PAGE>
U.S. is being paid a royalty with respect to an SFD Prospect identified by
such subsidiary, each strategic partner will be responsible, at its own
cost and risk, to acquire the necessary property or drilling rights for
such prospect (if it has not already done so), and to conduct all drilling,
production and marketing activities necessary to exploit such prospect.
Each of these agreements also provides for the strategic partner to pay all
(in the case of the SFD survey agreement and one of the joint venture
agreements), or one-half of all (in the case of the other joint venture
agreement), of the survey costs incurred by Pinnacle Canada or Pinnacle
U.S. (as the case may be).
The joint venture agreements each also permit Pinnacle Canada or Pinnacle
U.S. (as the case may be) to elect to receive a higher working interest (in
percentage terms relative to a royalty interest) with respect to
hydrocarbons produced by any SFD Prospect identified by such subsidiary, in
which case such subsidiary must bear its share of the acquisition (if
necessary), drilling and production costs incurred with respect to such
prospect based upon such subsidiary's working interest for such prospect.
Notwithstanding that Pinnacle Canada or Pinnacle U.S. (as the case may be)
bear a share of the costs in such circumstances, the strategic partner will
nevertheless still be responsible for conducting and managing all drilling,
production and marketing activities to exploit the SFD Prospect.
Although Pinnacle Canada and Pinnacle U.S. have retained the noted working-
interest rights with their current strategic partners, and although the
Company and its subsidiaries have the right to explore and exploit
hydrocarbon accumulations for their own accounts and, subject to certain
limitations under the joint venture agreements, for additional strategic
partners, the Company's current near-term intentions (subject to future
developments) are: (i) to limit its exploration efforts to Pinnacle
Canada's and Pinnacle U.S.'s current strategic partners subject to their
financial and operational ability to develop all SFD Prospects tendered to
each such partner, and (ii) for each of Pinnacle Canada and Pinnacle U.S.
to elect to receive a royalty interest (in lieu of a working interest) on
all SFD Prospects developed by their strategic partners unless and until
such time as the Company and/or such subsidiaries have accrued substantial
working capital from the receipt of royalties or other income or other
sources of capital as will enable them to elect to participate on a working
interest basis with respect to selected SFD Prospects should management
determine it advisable to do so.
The Company completed the last of the field evaluations designed by its
strategic partners to evaluate and test the SFD Survey System in early
1998, and Pinnacle Canada has since completed its SFD Prospect
identification activities for one strategic partner under the SFD survey
agreement, and Pinnacle Canada and Pinnacle U.S. are now actively engaged
in SFD Prospect identification activities for the other two strategic
partners under the joint venture agreements. Although Pinnacle Canada and
Pinnacle U.S. (as the case may be) have tendered a number of SFD Prospects
to each of these strategic partners through September 30, 1998, none of
these prospects have been drilled as of such date, and the Company does not
anticipate that the strategic partners will commence drilling activities
until the last half of the fourth quarter of 1998, at the earliest.
Since the Company does not presently have revenues, it is considered a
development stage company, and will continue to be considered a development
stage company until such time as its strategic partners drill commercially
productive wells and commence the payment of royalties to Pinnacle Canada
and Pinnacle U.S.
(B) DEVELOPMENT OF COMPANY
The Company was initially incorporated in Nevada on September 27, 1994
under the name "Auric Mining Corporation" ("Auric"). Auric was formed by
Mega-Mart, Inc. ("Mega-Mart"), a Delaware corporation formed on January 28,
1987, for the purpose of facilitating the change of Mega-Mart's
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<PAGE>
corporate domicile from Delaware to Nevada. On September 28, 1994, Auric
and Mega-Mart entered into a Plan Of Reorganization pursuant to which the
shareholders of Mega-Mart contributed all of their outstanding shares of
common stock in Mega-Mart to Auric in exchange for 1,096,500 shares of
Auric common stock, constituting 100% of its outstanding capital stock. The
Plan of Reorganization also contemplated a subsequent merger of Mega-Mart
into Auric, however, the parties subsequently determined not to merge the
companies, thereby retaining Mega-Mart as a wholly owned subsidiary of
Auric. Auric subsequently determined that its investment in Mega-Mart was
without value, and abandoned this investment.
On December 12, 1995, Pinnacle U.S. and the Company (as Auric) entered into
a letter of intent under which: (i) the Company agreed to issue 10,090,675
shares of its common stock, constituting approximately 92% of its
outstanding shares of common stock, to the shareholders of Pinnacle U.S. in
exchange for all of the outstanding shares of common stock of Pinnacle
U.S.; (ii) the Company agreed to solicit shareholder consent to a 6:1
reverse stock split immediately prior to the share exchange; and (iii) the
Company agreed to change its name to "Pinnacle Oil International, Inc."
upon consummation of the reorganization. Pinnacle U.S. was a Nevada
Corporation formed on October 20, 1995 for the purpose of engaging in
hydrocarbon exploration utilizing SFD Data generated by the SFD Survey
System. On January 12, 1996, the shareholders and directors of the Company
approved the transactions contemplated by the letter of intent, and
consented to a 6:1 reverse stock split. A formal Plan of Reorganization
and Acquisition was executed and effective as of January 20, 1996, and the
change in the Company's name to "Pinnacle Oil International, Inc." was
effective on February 23, 1996.
As a result of the noted transactions, Pinnacle U.S. became a wholly owned
subsidiary of the Company, and currently conducts the Company's operations
in the United States. The Company formed Pinnacle Canada, a federal
Canadian corporation, on April 1, 1997 to conduct the Company's operations
in Canada.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States and reflect the following
significant accounting policies:
(A) BASIS OF PRESENTATION
These consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Pinnacle U.S. and Pinnacle Canada. All
significant intercompany balances and transactions have been eliminated on
consolidation.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
reporting and pursuant to the instructions of the United States Securities
and Exchange Commission relating to the preparation of Forms 10--Q and
Article 10 of Regulation S--X. While these financial statements reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for fair presentation of the result of the interim period, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For
further information, refer to the financial statements and footnotes
thereto included in the Company's Registration Statement (Amendment No. 2)
on Form 10 filed with the Securities and Exchange Commission on September
10, 1998.
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<PAGE>
(B) ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
(C) RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities, which standardizes the accounting for derivative instruments.
SFAS 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The impact of SFAS 133 on the Company's financial
statements is not expected to be material.
NOTE 3 -- ACQUISITION OF SUBSIDIARY
The Company (when Auric) acquired Pinnacle U.S. in a transaction accounted for
as a "Reverse Acquisition" in accordance with United States Generally Accepted
Accounting Principles. As a result of the application of these accounting
principles, Pinnacle U.S. (and not Auric) was treated as the "acquiring" or
"continuing" entity for financial accounting purposes. The business combination
has been accounted for as an issuance of stock by Pinnacle U.S. in exchange for
the tangible net assets of Auric, valued at fair value, which approximate
historical costs. Accordingly, the consolidated statements of loss and
shareholders' equity (deficit) of the Company for the year ended December 31,
1995 and each period thereafter are deemed to be a continuation of Pinnacle
U.S.'s financial statements, and therefore reflect (i) the operations of
Pinnacle U.S. since October 20, 1995, the date of Pinnacle U.S.'s formation,
through to the date the Plan of Reorganization and acquisition was executed
(January 20, 1996), and (ii) the operations of the Company after January 20,
1996. The acquisition was effected by the issuance of 10,090,675 common shares
of the Company, constituting approximately 92% of its outstanding shares, in
exchange for all of the outstanding shares of Pinnacle U.S.
NOTE 4 -- PROMISSORY NOTES PAYABLE
During the nine-month period ended September 30, 1998, the Company loaned an
employee the sum of Cdn. $54,756 (U.S. $35,760) for the purchase of a residence
in connection with the employee's relocation to Calgary, Alberta. The terms of
the underlying promissory note provide for principal and accrued interest on the
loan to be repaid on a monthly basis, with payment of principal determined on
the basis of a 300-month amortization rate, and with interest computed at the
Company's cost of funds (presently 5 1/2%).
NOTE 5 -- PROMISSORY NOTES PAYABLE
During the year ended December 31, 1997, two officers and directors of the
Company loaned the Company $1,000,000 pursuant to unsecured, convertible
promissory notes. These loans, which bear interest at the rate of 12% per
annum, were payable on or before January 31, 1998. The officers had the right,
pursuant to the terms of the promissory notes, to convert the obligations under
the notes into the Company common stock based upon a ratio of one share per
$4.07 in converted principal and interest, and the Company had the right,
pursuant to the terms of the promissory notes, to convert the obligations under
the notes into the Company's common stock based upon a ratio of one share per
$2.72 in converted principal and interest. The Company
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<PAGE>
elected in February 1998, after the notes became due, to convert the notes into
411,764 shares of common stock in settlement of $1,000,000 in principal and
$120,000 in accrued interest.
NOTE 6 -- SHARE CAPITAL AND OPTIONS AND WARRANTS
In February 1998, the Company issued 411,764 shares of common stock to two
officers and directors of the Company in settlement of $1,120,000 in principal
and accrued interest under two unsecured convertible promissory notes held by
such officers and directors. (See Note 5)
In April 1998, in connection with entering into a joint venture agreement, the
Company raised $6,000,000 through a private placement to an affiliate of the
joint-venture partner of: (i) 800,000 shares of series A convertible preferred
stock, par value $0.001 (which preferred stock was authorized by the Company on
April 1, 1998); and (ii) two-year warrants to purchase 200,000 shares of the
Company's common stock at $7.50 per share. Each share of preferred stock (1) is
convertible into one common share, (2) commencing April 3, 2000, may be redeemed
by the Company at $7.50 per share, and (3) has a $7.50 liquidation preference.
The preferred shares are not entitled to payment of any dividends, although such
shares may, under certain circumstances, participate in dividends on the same
basis as if such shares had been converted into common shares.
Insofar as the preferred shares and warrants contained beneficial conversion
features affording a discount or benefit to the holders of such securities, the
Company recorded a deemed distribution analogous to the declaration of a
dividend to the such holders. This deemed distribution resulted in the Company
(i) increasing its accumulated deficit by $3,236,000 to recognize the intrinsic
value of such beneficial conversion features, (ii) increasing its additional
paid-up capital by $2,104,000 in connection with the issuance of the preferred
shares, and (iii) recording the fair value of the warrants in the amount of
$1,132,000. The intrinsic value of the beneficial conversion feature of the
preferred shares recorded by the Company reflects the discount in the purchase
price of such securities relative to the public trading price as of the date of
issuance of the underlying common shares into which the preferred shares could
be converted, without adjustment for discounts or restrictions. The fair value
of the warrants recorded by the Company reflects the value of such warrants
(including the beneficial conversion feature) as determined by the Black-Scholes
method of valuation. Appropriate adjustment for the deemed distribution was
also taken into consideration in calculating the Company's basic loss per common
share, thereby increasing the basic loss per share from $0.06 to $0.32.
As of September 30, 1998, there were outstanding options to purchase 440,000
shares of the Company's common stock, of which 125,000 options were vested, as
set forth below:
<TABLE>
<CAPTION>
Options Options
Effective Outstanding Vested
Type of Option Grant Exercise Sept. 30, Sept. 30, Expiration
Date Price 1998 199 Date
- ------------------------------------ ---------- -------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Director Non-qualified.............. 5-12-97 $5.81(1) 45,000 45,000 8-28-01
Director Non-qualified.............. 5-12-97 $5.81(1) 30,000 20,000(3) (8)
Director Non-qualified.............. 5-20-97 $5.25(1) 90,000 60,000(3) (8)
Employee Incentive.................. 11-24-97 $9.50(1) 50,000 0(4) (8)
Director Non-qualified.............. 3-10-98 $8.31(1) 45,000 0(3) (8)
Employee Incentive.................. 5-12-98 $8.25(2) 30,000 0(4) (8)
Employee Incentive.................. 5-12-98 $8.25(2) 30,000 0(5) (8)
Employee Incentive.................. 8-24-98 $8.25(2) 70,000 0(6) (8)
Employee Incentive.................. 8-24-98 $8.25(1) 50,000 0(7) (8)
------------- --------------
440,000(9) 125,000(10)
</TABLE>
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(1) The exercise price for these options was the trading price as of the
effective date of grant.
(2) The exercise price for these options was the trading price as of the
effective date of approval by the Compensation Committee of the Board.
(3) These options vested one-third each on the grant date. These options vest
an additional one-third each on the first anniversary and second
anniversaries of the grant date, respectively, subject to the re-election
of each such director at each annual meeting of the Company or of its
subsidiary.
(4) These options vest one-fifth each on the first through fifth anniversary
dates of grant, respectively, based upon the continued provision of
services as an employee.
(5) These options vest one-third each on the first through third anniversary
dates of grant, respectively, based upon the continued provision of
services as an employee.
(6) These options vest 10,000, 10,000, 16,667, 16,666 and 16,667 shares on the
first through fifth anniversary dates of employment (July 8, 1998),
respectively, based upon the continued provision of services as an
employee.
(7) These options vest 7,500 shares each on the first through third anniversary
dates of grant, respectively, and 13,750 shares each on the fourth through
fifth anniversary dates of grant, respectively, based upon the continued
provision of services as an employee.
(8) These options lapse, if unexercised, five years from the date of vesting.
(9) As of September 30, 1997, 165,000 director non-qualified options and no
employee incentive options were outstanding.
(10) As of September 30, 1997, 55,000 director non-qualified options and no
employee incentive options were vested.
In August 1996, in connection with the amendment of the License by Momentum for
the purpose, among other things, of indefinitely extending the termination date
of the License, the Company agreed it would grant to Momentum, commencing on
January 1, 2001, Performance Options to purchase 16,000 shares of Company's
Common Stock at the then current trading price for each month (after 2000) in
which SFD Prospect production exceeds 20,000 barrels of hydrocarbons. No
Performance Options have been granted as of September 30, 1998.
NOTE 7 -- COMMITMENTS
In January 1998, the Company entered into a five-year non-cancelable operating
lease for office space. As of September 30, 1998, future annual base rent
payments based upon current square footage and commitments, but exclusive of
operating cost and other pass-through items, were as follows (in Canadian
dollars):
<TABLE>
<S> <C>
1998 (3 MONTHS)................................................................................ $ 17,151
1999 (12 MONTHS)............................................................................... 68,604
2000 (12 months)............................................................................... 68,604
2001 (12 months)............................................................................... 68,604
2002 (12 months)............................................................................... 68,604
2003 (1 month)................................................................................. 5,717
</TABLE>
NOTE 8 -- SUBSEQUENT EVENTS
In October 1998, subject to the completion of a three-month probationary period,
the Company agreed to grant incentive stock options to an employee of the
Company to purchase 25,000 shares of common stock at a price of $8.12 1/2, based
upon the closing stock trading price for the effective date of employment.
These options vest 5,000 shares each on the first through fifth anniversary
dates of the effective date of employment, respectively, based upon continued
provision of services as an employee, and lapse, if unexercised, five years
after the vesting date.
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<PAGE>
In October, 1998, the Company purchased an AeroCommander 685 aircraft at a
purchase cost of $200,000 (exclusive of associated transactional costs).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion of the consolidated financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto included in Item 2 of
Part I of this Report.
OVERVIEW
Pinnacle Oil International, Inc. (the "Company"), together with its wholly-owned
subsidiaries, Pinnacle Oil Inc. ("Pinnacle U.S.") and Pinnacle Oil Canada Inc.
("Pinnacle Canada"), is a remote-sensing technology company principally engaged
in the business of hydrocarbon (oil and natural gas) exploration and, through
their strategic partners, the exploitation of hydrocarbon accumulations
identified by Pinnacle U.S. and Pinnacle Canada.
The Company and its subsidiaries identify commercially viable hydrocarbon
accumulations ("SFD Prospects") through the analysis of certain information
("SFD Data") provided exclusively to the Company and its subsidiaries for
hydrocarbon exploration purposes by Momentum Resources Corporation ("Momentum").
The SFD Data is generated by Momentum's proprietary Stress Field Detector, or
"SFD," used in conjunction with the Company's proprietary electronic data
acquisition and global positioning systems (collectively, the "SFD Survey
System"). Momentum is controlled and indirectly owned by certain officers,
directors and significant shareholders of the Company, and provides the SFD Data
to the Company pursuant to the terms of a Restated Technology Agreement (the
"License").
The Company's current business strategy is to enter into joint venture and other
arrangements through its subsidiaries with a small and select number of
reputable, experienced, well-capitalized hydrocarbon exploration, drilling and
production companies pursuant to which the Company and its subsidiaries will
identify SFD Prospects in geographically defined exploration areas selected by
these strategic partners in return for a revenue-based royalty or working
interest (as opposed to a fixed fee), and the strategic partner will finance the
acquisition and development of the SFD Prospects. These strategic arrangements
will ultimately encompass both domestic prospects (located within the United
States and Canada) and international prospects, as well as off-shore prospects.
As currently structured, Pinnacle Canada will enter into arrangements with
Canadian strategic partners to exploit to exploit SFD Prospects principally
located in Canada, and Pinnacle U.S. will enter into arrangements with American
strategic partners to exploit SFD Prospects principally located in the United
States. To effectuate such structure, Pinnacle Canada and Pinnacle U.S. have
each entered into certain sublicensing arrangements with the Company pursuant to
which each of such subsidiaries receive SFD Data from the Company in payment of
a royalty to the Company based upon such subsidiary's respective revenues.
As of September 30, 1998, Pinnacle Canada and Pinnacle U.S. have each entered
into joint venture agreements with two such strategic partners, Encal Energy
Ltd. ("Encal") and CamWest Limited Partnership ("CamWest"), and Pinnacle Canada
has entered into an SFD survey agreement with Renaissance Energy Ltd.
("Renaissance"). Each of these agreements provide for the payment of a royalty
to Pinnacle Canada or Pinnacle U.S. (as the case may be) by the strategic
partner, currently in the range of 5% to 8%, based upon
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<PAGE>
revenues resulting from the sale of hydrocarbons produced by SFD Prospects
identified by such subsidiary. In any situation where Pinnacle Canada or
Pinnacle U.S. is being paid a royalty with respect to an SFD Prospect identified
by such subsidiary, each strategic partner will be responsible, at its own cost
and risk, to acquire the necessary property or drilling rights for such prospect
(if it has not already done so), and to conduct all drilling, production and
marketing activities necessary to exploit such prospect. Each of these
agreements also provides for the strategic partner to pay all (in the case of
the SFD survey agreement and one of the joint venture agreements), or one-half
of all (in the case of the other joint venture agreement), of the survey costs
incurred by Pinnacle Canada or Pinnacle U.S. (as the case may be).
The joint venture agreements each also permit Pinnacle Canada or Pinnacle U.S.
(as the case may be) to elect to receive a higher working interest (in
percentage terms relative to a royalty interest) with respect to hydrocarbons
produced by any SFD Prospect identified by such subsidiary, in which case such
subsidiary must bear its share of the acquisition (if necessary), drilling and
production costs incurred with respect to such prospect based upon such
subsidiary's working interest for such prospect. Notwithstanding that Pinnacle
Canada or Pinnacle U.S. (as the case may be) bear a share of the costs in such
circumstances, the strategic partner will nevertheless still be responsible for
conducting and managing all drilling, production and marketing activities to
exploit the SFD Prospect.
Although Pinnacle Canada and Pinnacle U.S. have retained the noted working-
interest rights with their current strategic partners, and although the Company
and its subsidiaries have the right to explore and exploit hydrocarbon
accumulations for their own accounts and, subject to certain limitations under
the joint venture agreements, for additional strategic partners, the Company's
current near-term intentions (subject to future developments) are: (i) to limit
its exploration efforts to Pinnacle Canada's and Pinnacle U.S.'s current
strategic partners subject to their financial and operational ability to develop
all SFD Prospects tendered to each such partner, and (ii) for each of Pinnacle
Canada and Pinnacle U.S. to elect to receive a royalty interest (in lieu of a
working interest) on all SFD Prospects developed by their strategic partners
unless and until such time as the Company and/or such subsidiaries have accrued
substantial working capital from the receipt of royalties or other income or
other sources of capital as will enable them to elect to participate on a
working interest basis with respect to selected SFD Prospects should management
determine it advisable to do so.
The Company completed the last of the field evaluations designed by its
strategic partners to evaluate and test the SFD Survey System in early 1998, and
Pinnacle Canada has since completed its SFD Prospect identification activities
Renaissance under the SFD survey agreement, and Pinnacle Canada and Pinnacle
U.S. are now actively engaged in SFD Prospect identification activities for
Encal and CamWest, respectively, under their joint venture agreements. Although
Pinnacle Canada and Pinnacle U.S. (as the case may be) have tendered a number of
SFD Prospects to each of these strategic partners through September 30, 1998,
none of these prospects have been drilled as of such date, and the Company does
not anticipate that the strategic partners will commence drilling activities
until the last half of the fourth quarter of 1998, at the earliest.
The Stress Field Detector and its underlying technology, upon which the Company
is dependent for SFD Data, is a recently developed proprietary technology owned
by Momentum. Working with Momentum the Company has applied a significant
portion of its working capital toward: (i) developing and refining the data
acquisition systems used with the SFD Survey System, including adopting it for
airborne surveys and incorporating a global positioning system; (ii) conducting
initial exploratory activities using the SFD Survey System to develop and refine
the data acquisition system; and (iii) conducting additional exploratory
activities to confirm the efficacy of the Stress Field Detector for the
Company's strategic partners to date. Although the Company entered into the
noted agreements with its three strategic partners, activities under such
agreements to identify prospects have only recently commenced, and no revenues
have been generated to date. Pursuant to the terms of the License, the Company
will pay Momentum a fee equal to 1% of "Prospect Profits" (as such
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<PAGE>
term is defined in the amended License) received by the Company and its
subsidiaries on or before December 31, 2000, and 5% of Prospect Profits received
by the Company and its subsidiaries after December 31, 2000.
Since the Company has not generated operating revenues to date, it should be
considered a development stage entity. Although the Company, as a result of a
$6 million private placement of convertible preferred stock and warrants in
April 1998, has sufficient working capital as of the date of this Report
($5,387,086) to fund operations for several years, the Company's ability to
continue as a going concern in the longer term will nevertheless be dependent
upon any joint venture or other arrangement in which the Company participates
successfully identifying, financing, developing, extracting and marketing oil
and natural gas accumulations for a profit, and making distributions of
distributable cash flow from such profits to its participants, including the
Company. The Company expects it will continue to incur further losses until
such time as such joint ventures and/or other arrangements make such
distributions in meaningful amounts. (See "Outlook and Prospective Capital
Requirements" below).
RESULTS OF OPERATIONS OF THE COMPANY (INCLUDING PREDECESSOR, PINNACLE OIL)
The Company had no revenues for its nine-month interim fiscal periods ended
September 30, 1998 and 1997.
The Company incurred operating expenses of $882,222 for its nine-month interim
fiscal period ended September 30, 1998, as compared to $671,465 for its
corresponding nine-month interim fiscal period ended September 30, 1997.
The increase in operating expense for the Company's nine-month interim fiscal
period ended September 30, 1998 was primarily attributable to an increase in (i)
administrative expense to $754,226, as compared to $523,085 for the prior
corresponding interim fiscal period; and (ii) amortization and depreciation to
$36,353 as compared to $19,207 for the prior fiscal period; partially offset by
a reduction in survey system development from $58,968 for the prior fiscal
period to $17,417. The increase in administrative expense was primarily
attributable to: (i) greater legal fees incurred to support the Company's
increased level of business activities in the first two fiscal quarters of 1998,
including negotiating and entering into various agreements (including those with
certain of the Company's strategic partners), raising capital and preparing
securities filings; and (ii) increases in wages and benefits. The increase in
amortization and depreciation was attributable to the acquisition of additional
computer and electronic equipment resulting from the further development and
refinement of the data acquisition systems used with the SFD Survey System,
including adopting it for airborne surveys and incorporating a global
positioning system. The decline in survey system development costs were
attributable to a decline in the use of outside consultants.
The Company incurred $14,298 in interest expense for its nine-month interim
fiscal period ended September 30, 1998, as compared to $80,000 for its nine-
month interim fiscal period ended September 30, 1997. The noted expense
represented interest accrued on $1 million in loans made to the Company in
January of 1997 by Messrs. R. Dirk Stinson and George Liszicasz, which loan was
converted into Common Stock in February 1998. Interest expense for the nine-
month interim fiscal period ended September 30, 1998 was lower than the amount
incurred for the corresponding prior interim fiscal period insofar as the loan
balances were carried for only one month for the former interim fiscal period,
as compared to eleven months for the latter interim fiscal period.
The Company earned $150,836 in interest income for its nine-month interim fiscal
period ended September 30, 1998, as compared to $36,787 for its nine-month
interim fiscal period ended September 30, 1997. The increase in interest income
was attributable to higher cash balances in the Company's accounts for the nine-
month interim fiscal period ended September 30, 1998 as a result of a $6,000,000
private placement of the Company's securities in April 1998.
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<PAGE>
For the reasons just noted, net loss for the Company's nine-month interim fiscal
period ended September 30, 1998 increased to $735,288, as compared to a net loss
of $557,178 for the Company's nine-month interim fiscal period ended September
30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow requirements from the inception of Pinnacle Oil (October
20, 1995) through September 30, 1998 were funded principally from: (i) the
private placement of the Company's Common Stock in the amount of $975,000 in
February 1996, (ii) loans to the Company by Messrs. Liszicasz and Stinson in the
amount of $1,000,000 in January 1997, and (iii) the private placement of
convertible preferred stock and warrants in the amount of $6 million in April of
1998.
As of December 31, 1997, the Company was indebted to Messrs. George Liszicasz
and Dirk Stinson in the amounts of $555,000 each, pursuant to two unsecured
loans, each in the original principal amount of $500,000 made to the Company by
each of these affiliates on January 31, 1997. These loans bore interest at the
rate of 12% per annum, and were repayable on January 31, 1998. The promissory
notes provided that Messrs. Liszicasz and Stinson could elect to convert the
outstanding principal and interest under the loans into the Company's Common
Stock at the rate of $4.07 per share, and that the Company could elect to
convert the outstanding principal and interest under the loans into the
Company's Common Stock at the rate of $2.72 per share. These loans were each
converted by the Company into 205,882 shares of Common Stock on February 1,
1998, due to the Company's inability to repay such notes on their respective due
dates.
The Company's cash position as of September 30, 1998 and September 30, 1997 was
$5,302,646 and $1,068,887, respectively, as compared to $848,339 and $519,621 as
of the beginning of each such interim period, respectively. The Company
principally maintains its cash in a money-market account which invests in United
States government and government-backed securities.
The $4,454,307 increase in the Company's cash position for the nine-month
interim fiscal period ended September 30, 1998 was attributable to $5,520,322 in
cash generated by financing activities, partially offset by $877,402 in cash
used in operating activities and $188,613 in cash used in investing activities.
The $549,268 increase in the Company's cash position for the corresponding prior
interim fiscal period ended September 30, 1997 was attributable to $1,000,000 in
cash provided by financing activities and $7,497 in cash generated by investing
activities, partially offset by $458,229 in cash used in operating activities.
The Company's operating activities required cash in the amount of $877,402 for
the nine-month fiscal period ended September 30, 1998, as compared to cash
requirements of $458,229 for the corresponding prior nine-month fiscal period
ended September 30, 1997. The $877,402 in cash used in operating activities for
the nine-month interim fiscal period ended September 30, 1998 reflected the
Company's net loss of $735,288 for such period, as decreased for non-cash
deductions (interest accrued of $10,000 and amortization of $36,353), and a net
decrease in non-cash working capital balances ($178,467). The $458,229 in cash
used in operating activities for the nine-month interim fiscal period ended
September 30, 1997 reflected the Company's net loss of $557,178 for such period,
as decreased for non-cash deductions (interest accrued of $80,000, amortization
of $19,207 and satisfaction of costs with issuance of stock), and a net decrease
in non-cash working capital balances ($166,799).
The Company generated cash of $5,520,322 from financing activities for the nine-
month fiscal period ended September 30, 1998, as compared to generating cash of
$5,520,322 from financing activities for the nine-month fiscal period ended
September 30, 1998 was comprised of the net proceeds of the sale of preferred
stock and warrants in the amount of $5,666,842, partially offset by the
repayment of debt in the amount of $146,520. The $1,000,000 in cash generated
by financing activities for the nine-month fiscal period ended September 30,
1997 was comprised of the proceeds of loans made to the Company by Messrs.
Liszicasz and Stinson.
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<PAGE>
The Company used cash in the amount of $188,613 for investing activities for the
nine-month fiscal period ended September 30, 1998, as compared to the generation
of cash by investing activities in the amount of $7,497 for the corresponding
prior nine-month fiscal period ended September 30, 1997. The principal use of
cash in investing activities was to acquire property and equipment.
OUTLOOK AND PROSPECTIVE CAPITAL REQUIREMENTS
The Company's ability to begin earning revenues and profits is dependent upon
joint ventures or other arrangements in which the Company participates
successfully identifying, financing, developing, extracting and marketing oil
and natural gas accumulations for a profit, and making distributions of
distributable cash flow from such profits to the parties to such ventures,
including to the Company. As of the date of this Report, the Company has
commenced identifying and tendering what it considers to be commercially viable
SFD Prospects to each of its three strategic partners, and anticipates, based
upon discussions with each of its strategic partners, that such strategic
partners will commence drilling activities with respect to SFD Prospects
confirmed with seismic data by the end of 1998. The Company does not anticipate
it will receive meaningful revenues until 1999 at the earliest.
No assurance can be given that the SFD Prospects described above, if confirmed
by the Company's strategic partners using seismic or other methodologies, will
be drilled at all or by projected drilling dates due to, among other things,
factors such as the perceived economics of drilling at such time, the ability of
the strategic partner to obtain property rights (where necessary) on favorable
terms or at all, and the ability of the strategic partner to timely schedule a
drilling rig and other drilling services. Even if an SFD Prospect is drilled,
no assurance can be given that the well will produce commercially viable
quantities of oil or gas. See "Uncertanties and Risk Factors--Risks Relating to
the Company and its Business," generally, and "--Reliance on Joint Venture
Partners--Non-Operator Status" and "--Risk of Exploratory Drilling Activities"
particularly.
The Company expects it will continue to incur further losses until such time as
any joint venture or other arrangement makes distributions in meaningful
amounts. The Company estimates it will incur operating costs of approximately
$1.5 million over the twelve-month period ended September 30, 1999. In April of
1998, the Company raised $6 million through a private placement of convertible
preferred stock and warrants, which will enable the Company to fund its
operations for at least the next twelve months following the date of this
Report.
FOREIGN EXCHANGE
The Company's business to date is principally conducted in Canada and the United
States, in transactions denominated in Canadian and United States dollars,
respectively. The Company maintains its cash and investments predominately in
United States denominated funds, and only converts such funds into Canadian
dollars at such time as necessary to pay Canadian expenses. Management does not
believe that the fluctuation in the value of the United States dollar in
relation to the Canadian dollar in the last three fiscal periods has adversely
affected the Company's operating results. No assurance can be given, however,
that adverse currency exchange rate fluctuations will not occur in the future,
which would affect the Company's operating results.
EFFECT OF INFLATION
In the Company's view, at no time during any of the last three fiscal periods
have inflation or changing prices had a material impact on the Company.
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<PAGE>
YEAR 2000 COMPLIANCE
Management has reviewed the Company's internal computer systems and software
products for Year 2000 problems, and believes they are generally Year 2000
compliant. In the event Year 2000 considerations do arise, management does not
believe such considerations will materially impact the Company's internal
operations or future financial or operating results or future financial
condition. Management also does not believe that the Company's internal
operations or future financial or operating results or future financial
condition will be materially affected by any Year 2000 considerations which may
effect the Company's strategic partners.
UNCERTAINTIES AND RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN
THIS REPORT, THE FOLLOWING UNCERTAINTIES AND RISK FACTORS SHOULD BE CONSIDERED
CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS.
RISKS RELATING TO THE COMPANY AND ITS BUSINESS
CONTINUING OPERATING LOSSES; DEVELOPMENT STAGE ENTITY. The Company has not
generated operating revenues to date, and should be considered a development
stage entity. The Company's ability to increase revenues and generate profits
will depend primarily upon the successful implementation of the Company's
business plan. It is anticipated that such implementation will depend upon one
or more of the Company's joint ventures successfully drilling and producing
commercially viable quantities of oil or natural gas from SFD Prospects
identified by the Company, and making distributions to the Company of gross-
overriding royalties and, in certain cases, working interest distributions, to
the Company. No assurance can be given that the Company will be successful in
implementing its business plan, or that the revenues of the Company will
increase, or that the Company will be able to achieve or maintain profitable
operations. The extremely limited operating history of the Company makes the
prediction of future results of operations difficult or impossible.
LIMITED OPERATING HISTORY. The Company has a limited operating history upon
which any evaluation of the Company and its long-term prospects might be based.
The Company did not commence its business plan for the exploitation of the SFD
Survey System until December of 1995. The Company is subject to the risks
inherent in a new business enterprise, as well as the more general risks
inherent to the operation of an established business. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
encountered by all companies engaged in the extremely volatile and competitive
oil and gas markets. Any future success that the Company might achieve will
depend upon many factors, including factors which will be beyond its control or
which cannot be predicted at this time. These factors may include changes in
hydrocarbon and exploration technologies, price and product competition,
developments and changes in the international oil and gas market, changes in the
Company's strategy, changes in expenses, the timing of research and development
expenditures, the level of the Company's international revenues, fluctuations in
foreign currency exchange rates, general economic conditions, both in the United
States and Canada, and economic and regulatory conditions specific to the areas
in which the Company competes, among others. (See "Canadian Government
Regulation and Industry Conditions"). To address these risks, the Company must,
among other things, continue to respond to competitive developments; attract,
retain and motivate qualified personnel; implement and successfully execute its
business plan; obtain additional and viable joint venture partners; negotiate
additional working interests and participations; and upgrade and perfect the SFD
Survey System. There can be no assurance that the Company will be successful in
addressing these risks.
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<PAGE>
UNCERTAIN DISCOVERY OF VIABLE COMMERCIAL PROSPECTS. The Company's future
success is dependent upon its ability, through utilization of the SFD Survey
System, to economically locate commercially viable hydrocarbon accumulations for
development by its strategic partners. Based on the Company's business plan,
the Company will be dependent on both (i) the efficacy of the SFD Survey System
in locating SFD Prospects; and (ii) the cooperation and capital of joint-venture
and other strategic partners in exploiting such prospects. Although the results
of the SFD Survey System have been satisfactorily tested by the Company's
strategic partners, the Company can make no representations, warranties or
guaranties that the SFD Survey System will be able to consistently locate
hydrocarbons or oil and gas prospects, or that such prospects will be
commercially exploitable. There can be no assurance that the Company will be
able to discover commercial quantities of oil and gas, or that the Company's
joint venture partners will have success in acquiring properties at low finding
costs and in drilling productive wells. Because the Company's revenues will be
solely from gross-overriding royalties and, in certain cases, working interest
distributions, from its strategic partners with respect to prospects identified
by the SFD Survey System, an inability of the Company to identify and exploit
commercially viable hydrocarbon accumulations would have a material and adverse
effect on the Company's business and financial position.
UNCERTAIN MARKET ACCEPTANCE OF THE SFD SURVEY SYSTEM AND STRATEGIC PARTNER
PARTICIPATION. The market for the Company's SFD Survey System is undeveloped,
and such technology must compete with established geological and geophysical
technologies which have already achieved market acceptance. As is typical in
the case of any new technology, demand and market acceptance for new services
are subject to a high level of uncertainty and risk. Because the market for the
Company's exploration services is new and evolving, it is difficult to predict
the future growth rate, and the size of the potential market. There can be no
assurance that a market for the Company's services will develop, or be
sustainable. If the market fails to develop, or if the Company's services do
not achieve or sustain market acceptance, the Company's business, results of
operations and financial condition would be materially and adversely affected.
RELIANCE ON STRATEGIC PARTNERS--NON-OPERATOR STATUS. The Company has and will
rely upon its strategic partners for opportunities to participate in exploration
prospects, through gross overriding royalties from producing SFD Prospects and,
in certain cases, equity participation on a working interest basis from
producing SFD Prospects. The Company focuses exclusively on exploration and the
review and identification of viable prospects through the SFD Survey System, and
relies upon its strategic partners to provide and complete all other project
operations and responsibilities, including land acquisition, drilling, marketing
and project administration. As a result, the Company has only a limited ability
to exercise control over the selection of prospects for development, drilling or
production operations, or the associated costs of such operations. The success
of each project will be dependent upon a number of factors which are outside the
Company's control, or controlled by the Company's strategic partner(s) as the
operators of the project(s), in accordance with the applicable agreements
between the Company and such strategic partners. Such factors include: (i) the
selection and approval of prospects for lease/ acquisition and exploratory
drilling; (ii) obtaining favorable leases and required permitting for projects;
(iii) the availability of capital resources of the strategic partner for land
acquisition and drilling expenditures; (iv) the timing of drilling activity, and
the economic conditions at such time, including then prevailing prices for oil
and gas; and (iv) the timing and amount of distributions from the production.
The Company's reliance on its strategic partners, and its limited ability to
directly control project operations, costs and distributions, could have a
material adverse effect on the realization of return from the Company's interest
in projects, and on the Company's overall financial condition.
RISK OF EXPLORATORY DRILLING ACTIVITIES. Pursuant to the Company's business
plan, the Company's revenues and cash flow will be principally dependent upon
the success of drilling and production from prospects in which the Company
participates through agreements with its strategic partners, in the form of a
gross overriding royalty or, in certain cases, a working interest or other
participation right. The success of such prospects will be determined by the
economical location, development and production of commercial
-18-
<PAGE>
quantities of hydrocarbons. Exploratory drilling is subject to numerous risks,
including the risk that no commercially productive oil and gas reservoirs will
be encountered. The cost to the applicable strategic partner of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or canceled as a result of a variety of factors including
unexpected formation and drilling conditions, pressure or other irregularities
in formations, equipment failures or accidents, as well as weather conditions,
compliance with governmental requirements and shortages or delays in the
delivery of equipment. The inability to successfully locate and drill wells that
will economically produce commercial quantities of oil and gas would have a
material adverse effect on the Company's business, financial position and
results of operations.
VOLATILITY OF OIL AND NATURAL GAS PRICES. Although the Company's primary
efforts are focused on locating commercially viable prospects and obtaining
gross overriding royalty and, in certain cases, working interest participations,
the Company's ultimate profitability, cash flow and future growth will be
affected by changes in prevailing oil and gas prices. Oil and gas prices have
been subject to wide fluctuations in recent years in response to relatively
minor changes in the supply and demand for oil and natural gas, to market
uncertainty and a variety of additional factors that are beyond the control of
the Company, including economic, political and regulatory developments, and
competition from other sources of energy. It is impossible to predict future
oil and natural gas price movements with any certainty. The Company does not
engage in hedging activities. As a result, the Company may be more adversely
affected by fluctuations in oil and gas prices than other industry participants
that do engage in such activities. No assurances can be given as to the future
level of activity in the oil and gas exploration and development industry, or as
to the future demand for the technology offered by the Company. An extended or
substantial decline in oil and gas prices would have a material adverse effect
on (i) the ability of the Company to negotiate favorable joint ventures with
viable industry participants; (ii) the volume of oil and gas that could be
economically produced by the joint ventures in which the Company participates;
(iii) the Company's access to capital; and (iv) the Company's financial position
and results of operations.
COMPETITION. The Company competes directly with independent, technology-driven
exploration and service companies, and indirectly (through its strategic
partnerships) with major and independent oil and gas companies in its
exploration for and development of desirable oil and gas properties. With
respect to the SFD Survey System, the Company has experienced and expects to
continue to experience competition from numerous hydrocarbon exploration
competitors, which offer a wide variety of geological and geophysical services.
Many of such competitors have substantially greater financial, technical, sales,
marketing and other resources, as well as greater historical market acceptance
than the Company. Accordingly, such competitors or future competitors may be
able to respond more quickly to changes in customer requirements, or to devote
greater resources to the development, promotion and sales of their services than
the Company. There can be no assurance that the Company's competitors will not
develop exploration services that are superior to those of the Company, or that
such technologies will not achieve greater market acceptance than the SFD Survey
System. Increased competition could impair the Company's ability to attract
viable industry participants, and to negotiate favorable participations and
joint ventures with such parties, which could materially and adversely affect
the Company's business, operating results and financial condition.
The Company's strategic partners will engage in the exploration for and
production of oil and gas, industries which are highly competitive. Many
companies and individuals are engaged in the business of acquiring interests in
and developing onshore oil and gas properties in the United States and Canada,
and the industry is not dominated by any single competitor or a small number of
competitors. The Company's strategic partners will compete with numerous
industry participants for the acquisition of land and rights to prospects, and
for the equipment and labor required to operate and develop such prospects.
Many of these competitors have financial, technical and other resources
substantially in excess of those available to the Company. Such
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<PAGE>
competitive disadvantages could adversely affect the Company's ability to
participate in projects with favorable rates of return.
TECHNOLOGICAL CHANGES. The oil and gas industry is characterized by rapid
technological advancements and the frequent introduction of new products,
services and technologies. As new technologies develop, the Company may be
placed at a competitive disadvantage, and competitive pressures may force the
Company to improve or complement the SFD Survey System, or to implement
additional technologies at substantial cost. In addition, other oil and gas
exploration companies may implement new technologies before the Company, and
such companies may be able to provide enhanced capabilities and superior quality
compared with those of the Company. There can be no assurance that the Company
will be able to respond to such competitive pressures and implement or enhance
its technology on a timely basis, or at an acceptable cost. One or more of the
technologies currently utilized by the Company or implemented in the future may
become obsolete. In such case, the Company's business, financial condition and
results of operations could be materially adversely affected.
OPERATING HAZARDS. The exploration and development projects in which the
Company will participate through its strategic partners will be subject to the
usual hazards incident to the drilling of oil and gas wells, such as explosions,
uncontrollable flows of oil, gas or well fluids, fires, pollution and other
environmental risks. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, environmental damage
and suspension of operations. Company management that the applicable joint
venture operator will, in accordance with prevailing industry practice, maintain
insurance against some, but not all, of these risks. The occurrence of an
uninsured casualty or claim would have an adverse impact on the affected
strategic partner, and indirectly on the financial condition of the Company.
VARIABILITY OF OPERATING RESULTS. The Company's operating results may in the
future fluctuate significantly depending upon a number of factors including
industry conditions, prices of oil and gas, rate of drilling success, rates of
production from completed wells and the timing of capital expenditures. Such
variability could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any failure or delay
in the realization of expected cash flows from initial operating activities
could limit the Company's future ability to continue exploration and to
participate in economically attractive projects.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent on the continued efforts of its senior management team, which currently
is composed of a small number of individuals, including Mr. George Liszicasz,
the Chief Executive Officer and a director of the Company, who is responsible
for the development of the SFD Survey System (including the SFD Technology) and
the interpretation of SFD Data, and Mr. Dirk Stinson, the President and a
director of the Company, who is responsible for the overall management of, and
strategic planning for, the Company. The Company has entered into employment
agreements with each of these executive officers, although they are not
obligated, (and as a result of their relationships with Momentum may in the
future be unable), to devote their entire undivided time and effort to or for
the benefit of the Company. The Company does not currently carry key person
life insurance on either of these executive officers, although it is in the
process of procuring a 10-year keyman term insurance policy in the amount Cdn.
$7 million on the life of Mr. Liszicasz. The loss of the services of either of
Messrs. Liszicasz or Stinson could have a material adverse effect on the
business, results of operations and financial condition of the Company. The
services of Mr. Liszicasz would be particularly difficult to replace since he is
the inventor of, and has intimate knowledge of, the theoretical basis of the SFD
Survey System and, in particular, the SFD Technology and the SFD Sensor, and has
also developed the methodologies used to interpret the SFD Data. The Company is
presently training personnel to operate the SFD Survey System and to interpret
the SFD Data; however, no assurance can be given that these personnel could
fully replace Mr. Liszicasz with respect to these functions, at least in the
short-term. Moreover, the
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<PAGE>
Company does not know if it would be able to successfully replicate the SFD
Survey System and, in particular, the SFD Technology and the SFD Sensor, in the
event of the loss of Mr. Liszicasz. The Company's ability to implement its
growth strategies also depends upon its continuing ability to attract and retain
highly qualified engineering, managerial, sales and marketing and administrative
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain its key managerial and/or
technical employees, or that it will be able to attract and retain additional
highly qualified managerial and/or technical personnel in the future. The
inability to attract and retain the necessary personnel could impede the growth
of the Company. (See "Management of Growth" below).
MANAGEMENT OF GROWTH. The success of the Company will depend upon the rapid
expansion of its business. Such expansion will place a significant strain on the
Company's financial, management and other resources and will require the Company
to: (i) change, expand and improve its operating, managerial and financial
systems and controls; (ii) improve coordination between corporate functions; and
(iii) hire additional geophysical, geological, professional, administrative and
managerial personnel. There can be no assurance that the Company will be
successful in hiring or retaining these personnel to the extent required, or
that it will be able to manage the expansion of its operations effectively. If
the Company were unable to effectively manage growth, or if new personnel were
unable to achieve anticipated performance levels, the Company's business,
financial position and results of operations will be materially and adversely
affected.
IMPORTANCE OF TRADEMARKS AND PROPRIETARY RIGHTS. The business of the Company
is to interpret and utilize SFD Data to identify commercially viable oil and
natural gas accumulations. The Company has the exclusive right to utilize the
SFD Data for hydrocarbon exploration, pursuant to a Restated Technology
Agreement with Momentum Resources Corporation, a Bahamas corporation
("Momentum"). Momentum claims common law ownership of the SFD Technology.
However, Momentum has not obtained patent or trademark protection for either (i)
the technology, or (ii) the names "Stress Field Detector," "SFD" or "SFD
Technology." Based in part on an opinion of patent counsel, management of
Momentum and the Company believe that the disclosure risks inherent in patent or
trademark registration far outweigh any legal protections which might be
afforded by patent or trademark protection. In the absence of trademark
protection, the Company may be unable to take advantage of potential brand name
recognition for the technology. In the absence of significant patent or
copyright protection, the Company may be vulnerable to competitors who attempt
to imitate the SFD Survey System, or to develop functionally similar
technologies. Although the Company believes that it has all rights necessary to
market its services without infringing upon any patents, copyrights or
trademarks held by others, there can be no assurance that conflicting patent,
copyright or trademark rights do not exist. The Company relies upon trade
secret protection and confidentiality and/or license agreements with its
employees, consultants, customers, venture partners and others to protect its
proprietary rights. Furthermore, management of the Company does not believe
that if Momentum were to apply for and receive patent protection, that such
patent protection would necessarily protect Momentum or the Company from
competition. Momentum and the Company therefore anticipate continued reliance
upon contractual rights and on common law validating trade secrets. The steps
taken by Momentum and the Company to protect their respective rights may not be
adequate to deter misappropriation, or to preclude an independent third party
from developing functionally similar technology. There can be no assurance that
others will not independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to the Momentum's or the
Company's trade secrets, or otherwise disclose aspects of the technology, or
that the Company can meaningfully protect its trade secrets. Litigation to
enforce and/or defend intellectual property rights is costly, and either
Momentum or the Company may not have sufficient resources to pursue such
litigation.
CANADIAN GOVERNMENT REGULATION AND INDUSTRY CONDITIONS
COMPLIANCE WITH GOVERNMENTAL REGULATIONS. The oil and natural gas industry is
subject to extensive controls and regulations imposed by various levels of the
federal and provincial governments in Canada. It is
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<PAGE>
not expected that any of these controls or regulations will affect the
operations of the Company in a manner materially different than they would
affect other oil and gas companies of similar size. All current legislation is a
matter of public record and the Company is unable to accurately predict what
additional legislation or amendments may be enacted. All of the governmental
regulations noted below may be changed from time to time in response to economic
or political conditions. Company management believes that the trend of more
expansive and stricter environmental laws and regulations will continue. The
implementation of new or the modified environmental laws or regulations could
have a material adverse impact on the Company.
PRICING AND MARKETING OF OIL AND NATURAL GAS. In Canada, producers of oil
negotiate sales contracts directly with oil purchasers, with the result that the
market determines the price of oil. The price depends in part on oil quality,
prices of competing fuels, distance to market, the value of refined products and
the supply/demand balance. Oil exports may be made pursuant to export contracts
with terms not exceeding one year in the case of light crude, and not exceeding
two years in the case of heavy crude, provided that an order approving any such
export is obtained from the National Energy Board ("NEB"). Any oil export to be
made pursuant to a contract of longer duration (to a maximum of 25 years)
requires an exporter to obtain an export license from the NEB and the issue of
such a license requires the approval of the Governor in Council. In Canada the
price of natural gas sold in inter-provincial and international trade is
determined by negotiation between buyers and sellers. Natural gas exported from
Canada is subject to regulation by the NEB and the federal government of Canada.
Exporters are free to negotiate prices and other terms with purchasers, provided
that the export contracts must continue to meet certain criteria prescribed by
the NEB and the government of Canada. Natural gas exports for a term of less
than two years or for a term of two to 20 years (in quantities of not more than
30,000 m/3//day), must be made pursuant to an NEB order. Any natural gas export
to be made pursuant to a contract of longer duration (to a maximum of 25 years)
or a larger quantity requires an exporter to obtain an export license from the
NEB and the issue of such a license requires the approval of the Governor in
Council.
THE NORTH AMERICAN FREE TRADE AGREEMENT. On January 1, 1994 the North American
Free Trade Agreement ("NAFTA") among the governments of Canada, the United
States and Mexico became effective. The NAFTA carries forward most of the
material energy terms contained in the Canada-United States Free Trade
Agreement. In the context of energy resources, Canada continues to remain free
to determine whether exports to the United States or Mexico will be allowed,
provided that any export restrictions do not: (i) reduce the proportion of
energy resource exported relative to domestic use (based upon the proportion
prevailing in the most recent 36 month period); (ii) impose an export price
higher than the domestic price; and (iii) disrupt normal channels of supply.
All three countries are prohibited from imposing minimum export or import price
requirements. The NAFTA contemplates the reduction of Mexican restrictive trade
practices in the energy sector and prohibits discriminatory border restrictions
and export taxes. The agreement also contemplates clearer disciplines on
regulators to ensure fair implementation of any regulatory changes and to
minimize disruption of contractual arrangements, which is important for Canadian
natural gas exports.
PROVINCIAL REGULATION--ROYALTIES AND INCENTIVES. In addition to federal
regulation, each province has legislation and regulations which govern land
tenure, royalties, production rates, extra-provincial export, environmental
protection and other matters. The royalty regime is a significant factor in the
profitability of oil and natural gas production. Royalties payable on
production from lands other than Crown lands are determined by negotiations
between the mineral owner and the lessee. Crown royalties are determined by
government regulation and are generally calculated as a percentage of the value
of the gross production, and the rate of royalties payable generally depends in
part on prescribed reference prices, well productivity, geographical location,
field discovery date and the type or quality of the oil or natural gas produced.
From time to time the governments of Canada, Alberta, British Columbia and
Saskatchewan have established incentive programs which have included royalty
rate reductions, royalty holidays and tax credits for the purpose of encouraging
oil and natural gas exploration or enhanced planning projects.
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<PAGE>
CANADIAN ENVIRONMENTAL REGULATION. The oil and natural gas industry is
currently subject to environmental regulation pursuant to provincial and federal
legislation. Environmental legislation provides for restrictions and
prohibitions on releases or emissions of various substances produced or utilized
in association with certain oil and gas industry operations. In addition,
legislation requires that well and facility sites be abandoned and reclaimed to
the satisfaction of provincial authorities. A breach of such legislation may
result in the imposition of fines and penalties. In Alberta, environmental
compliance has been governed by the Alberta Environmental Protection and
Enhancement Act ("AEPEA") since September 1, 1993. In addition to replacing a
variety of older statutes which related to environmental matters, AEPEA also
imposes certain new environmental responsibilities on oil and natural gas
operators in Alberta and in certain instances also imposes greater penalties for
violations. British Columbia's Environmental Assessment Act became effective
June 30, 1995. This legislation rolls the previous processes for the review of
major energy projects into a single environmental assessment process which
contemplates public participation in the environmental review.
The Company is committed to meeting its responsibilities to protect the
environment wherever it operates and anticipates making increased, although not
material, expenditures of both a capital and expense nature as a result of the
increasingly stringent laws relating to the protection of the environment.
RISKS RELATING TO THE COMPANY'S COMMON STOCK
POSSIBLE VOLATILITY OF STOCK PRICE. The market price for the Company's Common
Stock may be volatile and subject to significant fluctuations in response to a
variety of internal and external factors, including the liquidity of the market
for the Common Stock, variations in the Company's quarterly operating results,
regulatory or other changes in the oil and gas industry generally, announcements
of business developments by the Company or its competitors, changes in operating
costs and variations in general market conditions. Because the Company is a
development stage entity with a limited operating history and no prior revenues,
the market price for the Company's Common Stock may be more volatile than that
of a seasoned issuer. Changes in the market price of the Company's securities
may have no connection with the Company's operating results. No predictions or
projections can be made as to what the prevailing market price for the Company's
Common Stock will be at any time.
LIMITED PUBLIC TRADING MARKET; RESTRICTIONS ON TRANSFERABILITY. There is only
a limited public market on the NASD Electronic Bulletin Board for the Common
Stock, and no assurance can be given that a broad and/or active public trading
market for such securities will develop or be sustained. The Company is under
no obligation to take any action to improve the public market for such
securities, including without limitation filing an application to list of the
Common Stock on any stock exchange. Investors in the Common Stock will not be
able to sell, transfer or otherwise dispose of such securities unless and until
such securities are registered and/or qualified with the Securities and Exchange
Commission and any applicable state, territorial or provincial securities
regulatory agencies under applicable blue sky laws, and such investors furnish
the Company a satisfactory opinion from their legal counsel, at their own
expense, in form and substance satisfactory to the Company and its counsel, that
such sale, transfer or disposition is otherwise exempt from registration or
qualification under the Securities Act and any applicable blue sky laws. There
can be no assurance that any exemption(s) from such registration or
qualification will be available. Even if an exemption from registration and/or
qualification were available, Common Stock would nevertheless have limited
marketability due to the following factors, each of which could impair the
timing, value and market for such securities: (i) the Company's limited
operating history, lack of profits, need for additional capital, and the other
factors discussed in this Uncertainties and Risk Factors section; (ii) the
limited public market for such securities; (iii) the lack of qualification of
such securities under applicable blue sky laws; (iv) the applicability of
certain resale requirements or under the Securities Act and applicable blue sky
laws; and (v) the fact that such securities will, in the aggregate, constitute a
nominal minority interest in the Company.
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<PAGE>
NO LIKELIHOOD OF DIVIDENDS. The Company plans to retain all available funds
for use in its business, and therefore does not plan to pay any cash dividends
with respect to its securities in the foreseeable future. Hence any investors
in the Common Stock could not expect to receive any distribution of cash
dividends with respect to such securities.
NO ASSURANCE OF LIQUIDATION DISTRIBUTION. If the Company were to be liquidated
or dissolved, holders of shares of its capital stock would be entitled to share
ratably in its assets only after satisfaction of the Company's liabilities.
After satisfaction of those liabilities and satisfaction of any liquidation
preference with respect to any then outstanding senior securities of the Company
(if any), the holders of the Common Stock would share ratably in the remaining
assets of the Company. If such liquidation or dissolution were attributable to
the failure or inability of the Company to profitably operate its business, then
it is likely that the Company would have material liabilities at the time of
such liquidation or dissolution. Accordingly, no assurance can be given that
sufficient assets would remain available after the payment of creditors in the
liquidation or dissolution of the Company to enable the holders of the Company's
capital stock to recover their investment or any portion thereof.
CONTROL BY MANAGEMENT. All decisions with respect to the management of the
Company will be made by the Board of Directors and officers of the Company, who
beneficially own approximately 70% of the Common Stock. The present
stockholders of the Company have the power to elect the Board of Directors who
shall, in turn, have the power to appoint the officers of the Company and to
determine, in accordance with their fiduciary duties and the business judgment
rule, the direction, objectives and policies of the Company, including without
limitation the purchase of businesses or assets; the sale of all or a
substantial portion of the assets of the Company; the merger or consolidation of
the Company with another corporation; raising additional capital through
financing and/or equity sources; the retention of cash reserves; the expansion
of the Company's business and/or acquisitions; the filing of a registration
statement with the Securities and Exchange Commission for an initial public
offering of the Company's capital stock; transactions which may cause or prevent
a change in control of the Company; or the winding up and dissolution of the
Company.
CONFLICTS OF INTEREST. Mr. George Liszicasz (the Chief Executive Officer and a
director and principal stockholder of the Company) and Mr. Dirk Stinson (the
President and a director and principal stockholder of the Company) indirectly
own and control Momentum. Momentum owns the SFD Technology, and provides raw
SFD Data to the Company for its exclusive use in identifying oil and natural gas
prospects under the License. However, Momentum reserves the exclusive right
under the License to use SFD Technology and the SFD Data for purposes other than
oil and natural gas exploration. Additionally, although Messrs. Liszicasz and
Stinson have entered into employment agreements with the Company, they are not
obligated, (and as a result of their relationships with Momentum may in the
future be unable), to devote their entire undivided time and effort to or for
the benefit of the Company. As a result of the foregoing relationships amongst
the Company, Momentum and Messrs. Liszicasz and Stinson, certain conflicts of
interests between the Company and one or more of Momentum and Messrs. Liszicasz
and Stinson may directly or indirectly arise including, among others: (i) the
inability of Messrs. Liszicasz and Stinson to devote their undivided time and
attention to the affairs of the Company; and (ii) the proper exercise by Messrs.
Liszicasz and Stinson of their fiduciary duties on behalf of the Company in
connection with any matters concerning Momentum such as, by way of example and
not limitation, disputes regarding the validity, scope or duration of the
License; the exploitation of corporate opportunities; rights to proprietary
property and information; maintenance of confidential information as between
entities; and potential competition between the Company and Momentum. The
Company and Messrs. Liszicasz and Stinson have executed disclosures and consents
with respect to these conflicts. Nevertheless, such disclosures and consents
will not remediate any such conflicts, but will merely release Messrs. Liszicasz
and Stinson from liability as a result of such conflicts so long as they use
reasonable efforts to minimize the conflicts. In the event any of the conflicts
prove to be irreconcilable, Messrs. Liszicasz and Stinson may be forced to
resign their positions with the Company.
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<PAGE>
POTENTIAL ISSUANCE OF ADDITIONAL STOCK. As of the date of this Report, the
Company has granted options to certain current and past directors of the Company
and its subsidiaries to purchase up to 210,000 shares of Common Stock. The
Company has also approved a stock option plan wherein the Company is authorized
to issue up to one million shares of Common Stock, pursuant to options to
purchase Common Stock, or outright grants of Common Stock, to the employees,
directors and/or consultants of the Company. As of the date of this Report, the
Company has granted options under this plan to certain employees to purchase an
additional 230,000 shares of Common Stock. In addition, as of the date of this
Report, the Company has issued 800,000 shares of Series A Convertible Preferred
Stock (the "Preferred Shares") and 200,000 warrants for Common Stock of the
Company (the "Warrants"). The Preferred Shares are convertible to Common Stock,
and the Warrants are exercisable until April 3, 2000. The issuance of additional
shares of Common Stock could adversely reduce the proportionate ownership and
voting rights and powers of the present holders of the Common Stock, and could
also result in dilution in the net tangible book value per share of Common
Stock. There can be no assurance that the Company will not, under certain
circumstances, issue additional shares of its Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this Report, there are no material pending legal proceedings
or, to the knowledge of the Company, contemplated or threatened legal
proceedings, to which the Company or its subsidiaries are or may become a party,
or with respect to properties of the Company or of its subsidiaries. As of the
date of this Report, there are, to the knowledge of the Company, no material
proceedings to which any director, officer of affiliate of the Company is a
party adverse to the Company or its subsidiaries or has a material interest
adverse to the Company or its subsidiary.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company hereby incorporates by reference the description of the issuances of
the Company's unregistered securities during the fiscal year beginning January
1, 1998 contained in Item 7 of Amendment No. 2 to the Company's Registration
Statement on Form 10 as filed with the Securities and Exchange Commission on
September 10, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on September 30, 1998. At
the meeting Messers. George Liszicasz, R. Dirk Stinson, Lorne W. Carson and
Dennis R. Hunter were elected by the holders of the Company's Common Stock to
serve as Non-Series A Directors of the Company, and Messers. Jon E.M. Jacoby and
K. Rick Turner Hunter were elected by the holders of the Company's Series A
Convertible Preferred Stock to serve as the Mandatory Series A Director and
Additional Series A Director, respectively, of the Company. The tally of the
votes are set forth below:
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<PAGE>
<TABLE>
<CAPTION>
VOTE
-----------------------------------------------------------------------
NAME FOR AGAINST ABSTAIN WITHHELD
- ------------------------------------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Non-Series A Directors:
George Liszicasz...................... 10,988,369 0 5,800 0
R. Dirk Stinson....................... 10,988,369 0 5,800 0
Lorne W. Carson....................... 10,988,369 0 5,800 0
Dennis R. Hunter...................... 10,988,369 0 5,800 0
Mandatory Series A Director:
Jon E.M. Jacoby....................... 800,000 0 0 0
Additional Series A Director:
K. Rick Turner........................ 800,000 0 0 0
</TABLE>
The holders of the Company's Common Stock also ratified the appointment of
Deloitte & Touche as the Company's independent auditors for the fiscal year
ended December 31, 1998 by the following vote: 10,990,543 shares voting For, 0
shares voting AGAINST, 2,090 shares witheld, and 1,536 shares ABSTAINING. These
were no broker non-votes with respect to any matter presented for vote at the
Annual Meeting.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
EXHIBITS
Exhibit 27 Financial Data Table
REPORTS ON FORM 8--K
None
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated at Calgary, Alberta, Canada, this 2nd day of December, 1998.
PINNACLE OIL INTERNATIONAL, INC.
By: /s/ John M. Woodbury, Jr.
----------------------------------------------
John M. Woodbury, Jr., Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PINNACLE OIL
INTERNATIONAL INC.'S CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND
PINNACLE OIL INTERNATIONAL INC.'S CONSOLIDATED STATEMENT OF LOSS FOR THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,302,646
<SECURITIES> 0
<RECEIVABLES> 107,347
<ALLOWANCES> 0
<INVENTORY> 0
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0
800
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</TABLE>
