FAN ENERGY INC, SB-2/A, 2000-05-19

FAN ENERGY INC
SB-2/A, 2000-05-19
CRUDE PETROLEUM & NATURAL GAS

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As Filed with the Securities and Exchange Commission on May 19, 2000
Registration No. 333-36516

This amendment also constitutes
Post-Effective Amendment No. 3 to
Registration Statement Number
333-47699 pursuant to Rule 429

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------

AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
-------------------------

FAN ENERGY INC.
--------------------------------------------
(Name of small business issuer in its charter)

Nevada 1311
----------------------------- ---------------------------
(State or jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)

77-0140428
-----------------
(I.R.S. Employer
Identification No.

George H. Fancher Jr.
1801 Broadway, Suite 720 1801 Broadway, Suite 720
Denver, Colorado 80202 Denver, Colorado 80202
(303) 296-6600 (303) 296-6600
--------------------------------------- ----------------------------
(Address and telephone number of (Name, address and telephone
principal executive offices and address number of agent for service)
of principal place of business)

With Copies to:

Alan W. Peryam, LLC
1120 Lincoln Street, Suite 1000
Denver, Colorado 80203
(303) 866-0900

Approximate date of proposed sale to the public: As soon as practicable
following the date on which the Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRA TION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

<PAGE>

<TABLE>
<CAPTION>
Fan Energy Inc.
Cross Reference Sheet

PART I
INFORMATION REQUIRED IN THE PROSPECTUS

Item
Number Form SB-2 Item Number Caption or Location in Prospectus
- - ------ --------------------- ---------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front of Registration Statement and Outside
Front Cover of Prospectus Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of
of Prospectus Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factors
6. Dilution Comparative Data
7. Selling Security Holders Principal and Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
12. Description of Securities Description of Securities
13. Interests of Named Experts and Counsel Experts, Legal Matters
14. Disclosure of Commission Position on Plan of Distribution
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis or Plan
Plan of Operation of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Dividend Policy and Related Stockholder Matters
Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Experts
Accountants on Accounting and Financial
Disclosure
</TABLE>

(ii)

<PAGE>

[Red Herring Disclosure]

The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission becomes effective. This preliminary
prospectus is not an offer to sell these securities nor does it seek to buy
these securities in any jurisdictions where the offer or sale is not permitted.

<PAGE>

SUBJECT TO COMPLETION DATED MAY __,2000

Initial Public Offering
Prospectus
[logo] FAN ENERGY INC.

A Minimum of 400,000 units
up to a Maximum of 3,000,000 units

Each unit includes of one share of our common stock and
one warrant to purchase one additional share

This is an initial public offering of common stock and warrants of Fan
Energy, Inc. Selling Stockholders may also sell up to 900,000 shares of our
common stock using this prospectus. We will not receive any proceeds from shares
of common stock sold by selling stockholders.

We are making this offering on a "best efforts" basis, and no one has
committed to purchase any of the units. No underwriter is assisting us to make
this offering. We must sell at least 400,000 units within 120 days of the date
of this prospectus if any are sold. The directors and officers of Fan may
purchase up to 400,000 units to complete the minimum offering. We explain the
terms and conditions of our offering under "Plan of Distribution" beginning on
page 42.

No public market currently exists for the units or our common stock or
warrants. The units, common stock and warrants will not be listed in the NASDAQ
Stock Market. We will seek to have our common stock included in the OTC Bulletin
Board maintained by the National Association of Securities Dealers, Inc.
following completion of the offering.

Per Total Total
Unit Minimum Maximum
---- ------- -------
Public Offering Price .............................. $ 0.10 $ 40,000 $ 300,000
Proceeds, before expenses, to Fan Energy ........... $ 0.10 $ 40,000 $ 300,000
Proceeds, before expenses, to Selling Stockholders.. $ 0.10 $ 90,000 $ 90,000

- - --------------------------------------------------------------------------------

These are speculative securities. You will experience significant dilution.
You should purchase shares only if you can afford a loss of your investment. See
"Risk Factors" beginning on page ___.

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus is
truthful or complete. It is a criminal offense to represent otherwise.

- - --------------------------------------------------------------------------------

The date of this prospectus is _________ __, 2000

<PAGE>

[INSIDE FRONT COVER]

We have registered 900,000 shares which may be sold from time to time using
this prospectus by nine persons who hold the shares. The identification of these
persons is set forth under "Selling Stockholders." These shares are issuable
upon exercise of outstanding stock purchase warrants. Shares could be sold by
the holders after exercise of the warrants directly, through agents, dealers or
underwriters, in the over-the-counter market, or otherwise, including privately
negotiated transactions by the holders, on terms and conditions determined at
the time of any such sale by the Selling Stockholder. No broker, dealer or other
person has undertaken to purchase or sell any of the securities to be offered by
the Selling Stockholders. Expenses of any such sales of common stock will be
borne by the parties as they may agree. The means of selling these shares is
described in "Plan of Distribution."

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, units consisting of our common stock and warrants only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of the units.

TABLE OF CONTENTS

Page No.

PROSPECTUS SUMMARY......................................................... 4
RISK FACTORS............................................................... 8
USE OF PROCEEDS........................................................... 18
COMPARATIVE DATA.......................................................... 19
DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS........................... 20
MANAGEMENT'S PLAN OF OPERATION............................................ 21
BUSINESS AND PROPERTIES................................................... 24
MANAGEMENT................................................................ 34
PRINCIPAL AND SELLING SHAREHOLDERS........................................ 38
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS...................... 40
PLAN OF DISTRIBUTION...................................................... 41
DESCRIPTION OF SECURITIES................................................. 45
LEGAL MATTERS............................................................. 47
EXPERTS................................................................... 47
ADDITIONAL INFORMATION.................................................... 48
INDEX TO FINANCIAL STATEMENTS............................................. 49

We intend to furnish our stockholders with annual reports containing
audited financial statements.

<PAGE>

This prospectus contains certain "forward-looking statements" which involve
substantial risks and uncertainties. When used in this prospectus the
forward-looking statements are often identified by the use of such terms and
phrases as "anticipates," "believes," "intends," "estimates," "plans,"
"expects," "seeks," "scheduled," "foreseeable future" and similar expressions.
The "safe harbor" for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995 specifically does not apply to
statements made in connection with an initial public offering. Although we
believe the understandings and assumptions on which the forward-looking
statements in this prospectus are based are reasonable, our actual results,
performances and achievements could differ materially from the results in, or
implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors."

Prospectus Summary

The following is a summary of the information included in this prospectus.
You should also read the detailed information, including Risk Factors and
financial statements, which follow this summary. There is no assurance that we
will ever generate a profit from oil and natural gas operations. Except as
otherwise indicated, information in this prospectus assumes no exercise of
outstanding stock options or warrants, including warrants included in the units

Fan Energy Inc.

Fan Energy Inc. is an independent energy company engaged in the exploration
and acquisition of crude oil and natural gas reserves. Fan's predecessor was
originally formed as an Idaho corporation in the early 1900s, and was not
successful in exploring mining properties. In 1988 the predecessor was merged
into a newly-formed Nevada corporation which never conducted operations and had
no assets or liabilities through the end of 1996. In early 1997 the corporation
was reactivated when the holder of a majority of the outstanding shares
transferred control of the inactive corporation. The new shareholder elected new
directors and officers and caused Fan to effect a 10-into-1 reverse stock split.
Thereafter, Fan raised capital through the sale of its securities and acquired
interests in two oil and gas properties for cash and common stock. The name of
the corporation was changed to Fan Energy Inc. in December 1997.

Our business presently is acquiring and developing oil and natural gas
properties. We intend to develop oil and natural gas properties in areas of the
United States where there are known producing horizons and significant available
undeveloped acreage. We plan to utilize the knowledge and experience of our
management to increase our oil and natural gas reserves and our revenue from
production of those resources. Our present activities are focused in the Green
River Basin in Wyoming and the Sacramento Basin in central California where our
existing properties are located.

We hold an undivided net interest equal to approximately 20% in a 5,760
acre prospect located in Sweetwater County, Wyoming. Two exploratory wells have
been drilled on the prospect, with the first well completed as an apparent oil
producer and the second as a marginally productive natural gas well. Both wells
were shut-in for the winter months of 1999 and early 2000 because of the
weather. The operator of the well, Fancher Oil LLC, expects additional wells to
be drilling on this prospect in 2000 and thereafter. Because of our limited
financial resources, it is likely that we will farm-out all or a portion of our
interest in these properties for development by others, with the expectation
that we would receive a reduced interest in future wells, and most of our share
of drilling and development expenses would be paid by other participants. We
also have the right to participate with a minority working interest in other
prospects which the Operator intends to explore in the vicinity of this prospect
and which could result in the drilling of other exploratory wells in 2000 or
thereafter.

3
<PAGE>

We also hold an undivided 25% working interest in an exploratory prospect
located in the Sacramento Basin near Sacramento, California which has been held
for sale since late 1998. In 1998, we participated in drilling five exploratory
wells on the property, one of which was completed as a producer. The successful
well was placed on production early in 1999. Our principal revenue is derived
from our share of production from this well. We are seeking to sell our interest
in these properties and the producing well in the Sacramento Basin. We presently
have only limited production, and cash flow, and limited oil and natural gas
reserves.

Business Strategy

Our intended strategy is to develop and increase oil and natural gas
reserves, production and revenue and includes the following key elements. Fan is
a small company with limited resources and we may be unable to fully achieve
these goals.

o Utilize State-of-the-Art Technologies. Certain of our officers, directors
and consultants have experience in utilizing 3-D Seismic data and related
"state-of-the-art" technologies for analyzing oil and natural gas drilling
and development opportunities. We intend to continue to analyze and review
oil and natural gas prospects which we hold or acquire based on analysis of
3-D Seismic data and related technologies. Our efforts will be focused on
improving drilling success rates and accelerating the development of oil
and natural gas reserves.

o Develop Drillsite Inventory. Our interests in the California and Wyoming
prospects include an inventory of up to approximately 18 potential
exploratory and development oil and natural gas wells. This estimate is
based on our review of the completed 3-D Seismic data and the three
successful wells drilled on the prospects. We may also elect to participate
in the drilling of other exploratory wells on nearby Wyoming prospects
where we have the right to acquire a working interest. Our present cash
resources will enable us only to pay for a very small share of drilling and
completion costs for two to three exploratory wells on the these prospects.

o Acquire Interests in Producing Oil and Natural Gas Properties. We will
continue to evaluate potential acquisitions of interests in producing and
nonproducing oil and natural gas properties in the United States and Canada
which may become available on terms which we believe will be attractive and
which have the potential to add to our reserves and production through the
application of lower risk exploitation and exploration techniques. These
acquisitions would be subject to the availability of properties deemed
suitable by the Board of Directors, availability of our financial
resources, location and other factors.

o Other Business Opportunities. We will also consider other business
opportunities which become available, including opportunities outside the
oil and gas business.

Our executive offices are located at 1801 Broadway, Suite 720, Denver,
Colorado 80202, where we share offices with George H. Fancher Jr., the Company's
Chairman. The telephone number is (303) 296-6600. We also share an office at
14555 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85254 with Arizona
Corporate Management, Inc., a business owned by William E. Grafham, President.
The phone number is (602) 483-8848.

4
<PAGE>

<TABLE>
<CAPTION>
The Offering

<S> <C>
Securities offered by Fan: A minimum of 400,000 units, and a maximum of 3,000,000
units. Each unit includes one share of our common stock and
one warrant. Each warrant will entitle a holder to purchase one
additional share of common stock at a price of $0.10 per share
at any time for a period of three years from the date of this
prospectus.

Common stock offered by Selling Up to 900,000 shares issuable upon exercise of outstanding
Stockholders: warrants held by nine persons. The Selling Stockholders have
agreed not to sell or otherwise transfer securities held
by them for at least 120 days from the date of this
prospectus and until 30 days after we complete this
offering; thus, our offering will not be concurrent with
sales by Selling Stockholders. See "Risk Factors-Potential
Sales by Selling Stockholders" and "Plan of Distribution."
Common stock to be outstanding after
the offering

After minimum offering 9,851,492 shares of common stock.

After maximum offering 12,451,492 shares of common stock.

Use of proceeds We will use the net proceeds from the sale of the units to
fund anticipated development drilling and completion
activities only. We expect at least $25,000 in net
proceeds from completion of the minimum offering and up to
as much as $285,000 if all the units are sold.

Our officers and directors may purchase up to 400,000
units, although they are not obligated to do so. We refer
you to the following sections of this prospectus: "Plan of
Distribution" and "Use of Proceeds" where more detailed
information is provided.

Risk factors The audit report of the independent accountants contains a
"going concern" qualification. You should not invest in units
unless you can afford the loss of your entire investment. Please
review carefully the entire prospectus and consider, among
other things, the "Risk Factors," which contain a detailed
discussion of these risks.

5
<PAGE>

<S> <C>
Trading We plan to request one or more broker-dealers which are
members of the NASD to apply to have the shares of our
common stock listed on the OTC Bulletin Board Market
maintained by the NASD at the conclusion of the offering. No
present arrangements have been made for common stock to be
listed on the OTC Bulletin Board and we do not plan to request
that either units or warrants be listed. Unless our common
stock is listed on the OTC Bulletin Board, there will be no
public market for our common stock following the offering.
</TABLE>

Summary Financial Information

The following summary financial information for the periods stated
summarizes certain information from our financial statements included elsewhere
in this prospectus. You should read this information in conjunction with
Management's Plan of Operations and the Financial Statements and the related
Notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
Cumulative
Amounts From
Twelve Months Ended Three Months Ended January 1,
December 31, March 31, 1997 to
---------------------- -------------------- March 31,
1998 1999 1999 2000 2000
---- ---- ---- ---- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue............................................ $ -- $ 152,832 $ 20,662 $ 41,370 $ 194,202
Costs and expenses................................. 1,456,553 588,379 64,017 62,623 2,306,787
Net(loss).......................................... (1,456,553) (435,547) (43,355) (21,253) (2,112,585)
Net loss per share................................. (0.17) (0.04) (.004) (.002) (0.28)
Weighted average number of shares outstanding ..... 8,567,537 10,051,567 10,051,704 9,451,492 7,431,318

December 31, March 31,
1999 2000
----------- ---------
(Unaudited)
<S> <C> <C>
Balance Sheet Data:
Working capital ................................... $ 8,540 $ 24,137
Total assets....................................... 385,026 348,917
Total liabilities.................................. 48,897 34,041
Stockholders' equity............................... 336,129 314,876

</TABLE>

6
<PAGE>

RISK FACTORS

The securities offered by this prospectus are very speculative and involve
a high degree of risk. You should carefully consider the following factors and
other information in this prospectus before deciding to invest in the units.

Fan has been operating its business only since 1998. Fan may not be
successful in its business.

Fan was substantially reorganized and entered a new line of business in
late 1997. Through December 31, 1999 the only business conducted by Fan was to
acquire undivided minority interests in three natural gas exploratory prospects
and to participate in drilling seven exploratory wells. Four of the wells were
unsuccessful. We plan to conduct limited operations, primarily by continuing to
participate as a minority owner in the exploration of our two prospects, one of
which is being held for sale. Our oil and natural gas exploration and
development business is subject to all the risks inherent in the establishment
by a new business enterprise, particularly including a shortage of cash, minimal
cash flow and lack of substantial capitalization. We do not anticipate that we
will receive any substantial cash flow from our initial exploratory activities
until at least several additional successful wells have been drilled, completed
and placed on production. We presently lack sufficient capital resources to
drill a sufficient number of wells to establish significant cash flow. We
anticipate that various complications and delays may be encountered in
connection with our oil and gas drilling activities.

Fan is a development stage company and has generated operating losses since
inception. Our auditors' audit report includes an explanatory paragraph which
questions whether we have sufficient capital to enable us to continue as a going
concern. We require additional financing in order to continue our business
operations. Failure to receive financing would place us in jeopardy.

Fan has incurred the following operating losses:

o Approximately $199,000 for the year ended December 31, 1997;
o $1,457,000 for the year ended December 31, 1998;
o $436,000 for the year ended December 31, 1999; and
o an additional $21,300 for the quarter ended March 31, 2000.

At the end of the most recent fiscal year, we had working capital only about
$8,000 which increased to only $24,000 by the end of the first quarter. The
auditors' reports for Fan's financial statements for the periods ending December
31, 1997, 1998 and 1999 all contain an explanatory paragraph as to whether we
have sufficient operating capital to enable us to continue as a going concern.
We intend to use our available cash resources and proceeds of this offering and
the proceeds, if any, from the exercise of outstanding stock purchase warrants
to continue to participate in the drilling of our Wyoming oil and natural gas
prospects. We intend to participate in drilling one to two additional wells
during 2000, but we will require additional capital resources to do so. Our
anticipated share of the expenses of drilling additional wells and completing
any successful wells exceeds our present cash resources. Therefore, there can be
no assurance that we will have sufficient funds available to complete any
drilling. If we complete the sale of at least the minimum units being offered,
and if outstanding stock purchase warrants which expire in 2000 are exercised,
we would have sufficient funds available to complete the initial portion of our
planned drilling in 2000. There can be no assurance that required additional
financing will be obtained or that any other financing would be available to us
from other sources.

7
<PAGE>

If we complete only the minimum offering described in this prospectus, we
will need additional financing.

We will be looking to the following sources for operating capital during
the balance of 2000:

o The net proceeds from this offering;
o Proceeds, if any, from the exercise of outstanding stock purchase
warrants, which would total as much as $177,000 if all warrants are
exercised; and
o Cash flow of around $11,000 to $13,000 per month from the sale of oil
and natural gas produced from the three existing wells in which we
hold an interest.

To pay our ongoing operating expenses through the end of 2000 and to participate
in the drilling of three wells on our Wyoming prospect will require capital of
approximately $300,000. Thus, we will need to secure additional financing by the
end of 2000 in order to grow our business. If we are unable to secure additional
financing, we may have to:

o Forfeit our interest in wells proposed to be drilled;
o Assign our interest in exploratory prospects to other participants on
such terms as can be negotiated; or
o Sell a portion of our interest in existing producing property and use
the sale proceeds to fund our participation in new projects.

It is important to remember:

o Acquiring commercial drilling and producing oil and natural gas
properties requires substantial capital;
o We may need to raise additional funds through public or private
financings or borrowings;
o We may not be able to raise sufficient additional funds to carry out
our intended business;
o If we cannot obtain sufficient additional capital resources, our
operations and financial condition will suffer;
o Any capital resources which are available may not be available on
terms that are advantageous to us;
o If we issue additional equity or other securities to raise funds, the
ownership interest of stockholders at that time will be diluted; and
o Any additional securities issued to raise capital may have better
rights, preferences are privileges than your common stock.

This offering will be made by officers and directors of Fan.

We are making the offering described in this prospectus on a direct
participation basis by our officers and directors. None of such persons has any
recent experience in the sale of securities in such an offering. For this reason
we cannot offer assurance that the offering will be successfully completed. It
is unlikely that all units offered will be sold. In addition, because we do not
have an underwriter to assist in this offering, it may be more difficult for us
to complete the offering and to establish a liquid public trading market
following the offering. Our officers and directors or their associates may
purchase units in this offering in order to help us to complete the sale of at
least the minimum offering. However, they are not obligated to purchase any
units. For a description of our plans to complete the offering see "Plan of
Distribution."

8
<PAGE>

Selling Stockholders may sell shares.

We have also registered 900,000 shares of common stock underlying
exercisable stock purchase warrants for resale by the holders. A potential
conflict of interest exists between our offering, described in this prospectus,
and the sale of shares by selling stockholders. The nine persons who hold these
securities have each agreed not to sell or transfer (i.e., to "lock-up") their
Fan common stock until the later of:

o 120 days following the date of this prospectus; or
o Until 30 days after Fan has completed or discontinued its offering,
whichever is later.

No concurrent offering by the Selling Stockholders and Fan is expected. However,
the fact that these shares will become available for sale may adversely affect
the willingness of brokers or dealers to seek to have Fan's stock listed in the
OTC Bulletin Board market for public trading or to make a market in Fan's common
stock following the offering. Also, the availability of such shares for sale may
adversely affect any public trading market which may develop following the
offering. The Selling Stockholders may sell their shares after their lock-up
agreements expire whether or not Fan completes the minimum offering.

Fan is in the early stages of our planned development activities and our
activities may not be successful.

Our strategy includes:

o The use of 3-D Seismic and other state-of-the-art technology to
maximize the potential of our properties;
o The drilling of additional wells in our Wyoming prospect; and
o Drilling additional wells in the area, assuming that our evaluation of
our initial two wells favorable. Our success in this project will be
materially dependent upon whether the initial few exploratory wells in
the area are commercially productive wells and whether we can acquire
interests in additional exploratory prospects on favorable terms.

We can offer no assurance as to whether we will drill enough productive wells to
establish significant oil or natural gas reserves and generate positive cash
flow in the future. If we drill a significant number of nonproductive wells, our
business, financial condition and results of our operations would be adversely
affected.

As a result of the early stage of our business activities, we do not yet
know whether our exploration activities will be successful.

We will have limited management participation.

Our officers and directors have been compensated primarily with common
stock of Fan and are not employed on a full time basis. Each of our officers and
directors are expected to devote only a small portion of their time to our
business and affairs and all such persons presently have other business affairs
to which they each devote most of their time. The success of Fan in developing
reserves of oil and natural gas and cash flow from oil and gas production will
be primarily dependent upon the active participation of George H. Fancher Jr.,
Fan's Chairman and William E. Grafham, the President of Fan. Both of Messrs.
Fancher and Grafham have substantial experience in the oil and gas business, but
both also have significant and demanding outside personal business interests,
the effect of which will be to minimize the amount of time that either has to
devote to Fan's business or affairs. Mr. Fancher, the Chairman and Chief

9
<PAGE>

Operating Officer, plans to devote about 10% of his available business time to
Fan's business. Mr. Grafham expects to devote only such as may be required for
Fan's business. This limited time of availability of management may adversely
affect our ability to identify and acquire interests in other oil and gas
properties or to efficiently oversee the day-to-day development of our existing
exploratory endeavors. We do not have key man life insurance on the lives of,
nor any employment agreement with, any of our officers or directors.

Our chairman has a potential conflict of interest with Fan.

Fan's directors and officers are all involved in other business and have
other interests in the oil and gas business which may present conflicts of
interest with respect to Fan's business. Mr. Fancher is involved on a full time
basis for his own account as an independent oil and gas producer and his
business serves as operator for two of our producing wells. Mr. Fancher often
permits others to participate (i.e., acquire a working interest) in his oil and
gas projects. Mr. Fancher has represented to Fan that oil or natural gas
prospects which he offers to third parties for participating, in which Mr.
Fancher, in his sole discretion, believes to be appropriate for Fan, will be
offered to Fan on terms no less available to Fan than are available to any third
party. Also, oil and gas business opportunities generated by others and made
available to Mr. Fancher for his participation, which he in his sole discretion,
believes to be appropriate for Fan, will be made available to Fan on the same
terms as are offered to Mr. Fancher. Mr. Fancher may or may not participate in
such ventures for his own account. Fan will participate in an oil and gas
prospect made available by Mr. Fancher only if a majority of Fan's directors,
other than Mr. Fancher, approve the investment. Each of the other directors has
existing personal interest in various aspects of the oil and gas business and
each intends to continue such activities on his own behalf. However, each of the
directors has represented that any business opportunity in the oil or natural
gas business involving property located within 50 miles of any existing property
in which Fan holds an interest will be first offered to Fan before the director
or officer pursues the opportunity for his own benefit.

Fan lacks a significant operating history.

We have a limited operating history upon which investors may base their
evaluation of our future prospect. The financial results from our recent
historical periods may or may not be indicative of future results. We can make
no assurance that we will experience growth of revenue, oil and natural gas
reserves or production. Any future growth of our oil and natural gas reserves
from production and operations would place significant demands on our financial,
operational and administrative resources.

We are subject to the risk of volatile oil and natural gas prices.

Prices available for future production of oil and natural gas will
determine many aspects of Fan's future financial viability, including:

o Revenue;
o Results of operations, profitability and growth; and
o The carrying value of oil and natural gas reserves acquired or
developed by Fan.

Historically, the markets for oil and natural gas have been volatile and such
volatility may continue or recur in the future. Various factors beyond our
control will effect the prices of oil and natural gas, including the worldwide
and domestic supplies of oil and natural gas, the ability of members of the
Organization of Petroleum Exporting Countries to agree to and maintain oil price
and production controls, political instability or armed conflict in oil or

10
<PAGE>

natural gas producing regions, the price and level of foreign imports, the level
of consumer demand, the price, availability and acceptance of alternative fuels,
the availability of pipeline capacity, weather conditions, domestic and foreign
government regulations and taxes and the overall economic environment.

Any significant decline in the price of oil or natural gas will adversely
affect us and could require an impairment in the carrying value of any reserves
which we may develop in the future.

We do not control our oil and gas properties; therefore we are dependent
upon the Operator to determine how to develop the prospects.

We do not expect to be the Operator of any of our oil or natural gas
prospects. All of our oil and natural gas properties presently consist of
minority undivided interests in properties operated by other parties. For the
most part Fan does not have the right to determine the means, timing or
expenditures made in connection with operations, although Fan, or any other
owner of an undivided interest, may propose certain exploration activities and
become the Operator for that activity if the operator declines to act. Thus, we
will be unable to control material aspects of commercialization of our principal
assets and will be dependent upon the expertise, experience, ability, diligence
and financial condition of those who operate the various properties. An
Operator's failure to properly perform could adversely affect Fan.

Fan will experience drilling and operating risks.

Oil and natural gas drilling activities are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered. We can make no assurance that wells in which we have an interest
will be productive or that we will recover all or any portion of our drilling or
other exploratory costs. Drilling for oil or natural gas usually involves some
unprofitable efforts, not only from dry wells but from wells that are productive
but do not produce sufficient net revenue to return a profit after drilling,
operating and other costs. The costs of drilling, completing and operating wells
is often uncertain. Our drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, many of which are beyond our control,
including the following:

o Economic conditions;
o Title problems;
o Compliance with governmental and tribal requirements;
o Water shortages;
o Weather conditions;
o Shortages and delays in equipment or services.

Our future drilling activities may not be successful and, if unsuccessful, such
failure may have a material adverse affect on our future results of operations
and ability to participate in other projects.

Our operations are also subject to hazards and risks inherent in drilling
for and producing and transporting oil and natural gas, including such hazards
as:

o Fires; o Natural disasters;
o Explosions; o Encountering formations with abnormal
o Blowouts; pressures;
o Pipeline ruptures; o Cratering;
o Spills

11
<PAGE>

Any of these types of hazards and risks can result in the loss of
hydrocarbons, environmental pollution, personal injury claims and other damages
to properties. As protection against such operating hazards, Fan intends to
maintain insurance coverage against some, but not all of these potential risks.
We also may elect to self insure in circumstances in which we believe that the
cost of insurance, although available, is excessive relative to the risks
presented. The occurrence of an event that is not covered, or not fully covered,
by third party insurance could have a material adverse affect on Fan's business,
financial condition and results of operations.

Fan must comply with significant government regulation.

Oil and natural gas operations are subject to extensive federal, state and
local laws and regulations relating to the exploration for, and development,
production and transportation of, oil and natural gas, as well as safety
matters, which may changed from time to time in response to economic conditions.
Matters subject to regulation by federal, state and local authorities include:

o Permits for drilling operations; o Road and pipeline construction;
o Reports concerning operations; o The spacing of wells;
o Unitization and pooling of properties; o Taxation; and
o Environmental protection o Production rates.

There can be no assurance that delays will not be encountered in the preparation
or approvals of such requirements or that the results of such regulations will
not require us to alter our development plans. Any delays in obtaining approvals
or material alterations to our development plans could have a material adverse
effect on our operations. From time to time regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and natural gas below actual production capacity in order to conserve
supplies of oil and natural gas. Fan believes we are and will continue to be in
substantial compliance with all applicable laws and regulations. However, the
requirements imposed by such laws and regulations are frequently changed and
subject to interpretation. We are unable to predict the ultimate cost of
compliance with these requirements or their effect on our operations.
Significant expenditures may be required to comply with governmental laws and
regulations and may have a material adverse affect on our financial condition
and future results of operations.

Fan must comply with environmental regulations.

Exploratory and other oil and natural gas wells must operated in compliance
with complex and changing environmental laws and regulations adopted by federal,
state and local government authorities. The implementation of new, or the
modification of existing, laws and regulations could have a material adverse
affect on properties in which Fan may have an interest. Discharge of oil,
natural gas or other pollutants to the oil, soil or water may give rise to
significant liabilities of Fan to government and third parties and may require
Fan to incur substantial cost of remediation. Fan may be required to agree to
indemnify sellers of properties purchased against certain liabilities for
environmental claims associated with those properties. We can give no assurance
that existing environmental laws or regulations, as currently interpreted, or as
they may be reinterpreted in the future, or future laws or regulations will not
materially adversely affect our results of operations and financial conditions.

12
<PAGE>

Development of oil and natural gas reserves.

Our future success will depend upon our ability to find, develop or acquire
oil and natural gas reserves that are economically recoverable. Once
established, our proved reserves would decline as they are depleted by
production unless we continue to successful explore and acquire additional
proved oil and natural gas reserves. We must continue our exploratory drilling
or otherwise acquire proved reserves to continue to increase its reserves and
its production. Our strategic plan includes increasing our reserve base through
exploratory drilling, development and exploitation of our existing properties
and acquiring other producing properties if we have sufficient capital
resources. We can give no assurance that our planned development and
exploitation projects will result in significant additional reserves or that we
will have success drilling productive wells with reserves greater than finding
and development costs.

Fan's existing stockholders will continue to have control.

Upon completion of the minimum offering, our directors and executive
officers will own approximately 43.8% of its outstanding common stock
(approximately 35.1% if all units offered are sold). As a result, these
stockholders, as a group, will probably be able to continue to control the
outcome of stockholder votes, including votes concerning the following:

o The election of directors;
o The adoption or amendment of provisions in Fan's Certificate of
Incorporation or Bylaws; and
o The approval of mergers and other significant corporate transactions.

These factors may also have the effect of delaying or preventing a change in the
management or voting control of Fan, including transactions that would otherwise
could involve payment of a premium for prevailing market prices to holders of
common stock.

We will face substantial competition.

We will be competing with may other companies, nearly all of which will
have substantially larger financial resources, operations, staffs and
facilities. We will continue to face intense competition from both major and
independent oil and natural gas companies when it seeks to acquire desirable
producing properties or new leases for future exploration and to market its oil
and natural gas production. These competitors have financial and other resources
substantially in excess of ours. The effects of this highly competitive
environment will likely have a material adverse effect on Fan.

Acquiring interests in other properties involves substantial risks.

We intend to evaluate and to acquire interest in oil and natural gas
properties in areas where various members of management have experience or
knowledge, and which in management's judgement will provide attractive
investment opportunities for the addition of production and oil and gas
reserves. To acquire producing properties or undeveloped exploratory acreage
will acquire an assessment of a number of factors including:

o Value of the gas properties and likelihood of future production;
o Recoverable reserves;
o Operating costs;
o Potential environmental and other liabilities;

13
<PAGE>

o Drilling and production difficulties; and
o Other factors beyond Fan's control

Such assessments will necessarily be inexact and uncertain. Fan intends to
perform such reviews in a manner which it believes at the time to be generally
consistent with industry practices. Such reviews, however, may not reveal all
existing or potential problems, nor would it permit a buyer to become
sufficiently familiar with such properties to assess fully the deficiencies or
benefits. For instance, inspections may not be performed on every well, and
structural or environmental problems may not be observable even when an
inspection is undertaken. Fan would generally expect to assume preexisting
liabilities, including environmental liabilities, and generally would acquire
interests in new properties on an "as is" basis. With respect to its two
acquisitions of properties to date, Fan has no material commitments to make
capital expenditures to comply with existing environmental or similar
requirements. We can make no assurance that any future acquisitions will be
beneficial, and any unsuccessful acquisition would have a material adverse
affect on Fan.

Absence of dividends on common stock.

We have never declared or paid cash dividends on our common stock and we do
not anticipate that we will pay dividends in the future. Fan anticipates that
future earnings, if any, will be retained for development of our business.

There is a large number of units available for future sale.

If the minimum offering is completed, we will have a total of 9,851,492
shares outstanding, or 12,451,492 shares if all units offered are sold. Also,
warrants included in the units will be exercisable by the holders to purchase
additional common stock, and the Selling Stockholders will hold warrants to
purchase up to 900,000 additional shares. Of the outstanding shares, the common
stock included in the units and 2,623,533 presently outstanding shares will be
freely tradeable without restriction or registration under the Securities Act of
1933, as amended. The remaining 5,148,171 outstanding shares of common stock
will be "restricted securities" as that term is defined by Rule 144 as
promulgated under the Securities Act, and 900,000 additional restricted shares
issuable on exercise of warrants will be registered for resale. We describe
these matters in more detail elsewhere in this prospectus under the caption
"Shares Available for Future Sale."

Prior to the offering, there has been no public market for the common stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of the common stock in any market which may develop. Nevertheless,
sales of substantial amounts of such shares in any public market, or the
perception that such sales could occur, could materially and adversely affect
the market price of the common stock and could impair Fan's future ability to
raise capital through an offering of its equity securities.

Investors will face immediate and substantial dilution.

Purchasers in the offering will experience an immediate and substantial
dilution in net tangible book value pershare of approximately $0.0655 (66%) if
only the minimum offering is completed, or $0.0518 (52%) if all units offered by
Fan are sold.

14
<PAGE>

Offering price determination.

The offering price for the units was arbitrarily determined. The offering
price was established by Fan based on such factors as our capital requirements,
financial condition and prospects, percentage ownership to be held by investors
following the offering, management and the general condition of securities
markets and the oil and gas market at the time of the offering. The offering
price does not bear any relationship to our assets, book value, earnings history
or other established criteria of value. The public offering price of the units
should not be considered an indication of the actual value of Fan's securities.

Fan's common stock has not been publicly traded and its market price
following the offering is likely to be volatile.

There has been no public market for our common stock prior to this
offering. The initial public offering price of the common stock may not be
indicative of future market prices. A public market for the common stock may not
develop. If public trading does develop, it may be terminated with little
notice. The market price of the common stock and price at which we may sell
securities in the future could be subject to large fluctuations for a number of
reasons, including the following:

o Changes and variations in our operating results;
o Litigation;
o Market conditions;
o The prices of oil and natural gas;
o Liquidity of Fan and its ability to raise additional funds;
o The number of market makers for Fan's common stock; and
o Other similar factors.

If our operating results are below the expectations of public market
analysts or investors in one or more future periods, it is likely that the price
of our common stock would be materially adversely affected. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected market prices of equity securities of many energy
companies, particularly emerging and new companies. General market fluctuations
may also adversely affect the market price of the common stock.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The Commission's regulations generally define a penny stock to be an
equity security that has a price of less than $5.00 per unit, subject to certain
exceptions, none of which are applicable to Fan. Without an exception, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith.

In addition, unless and until securities of Fan are listed for trading on
NASDAQ or Fan has $2 million in net tangible assets, trading in Fan's securities
will be subject to Rule 15c2-6 promulgated under the Securities Exchange Act of
1934 for non-NASDAQ and nonexchange listed securities. Under this rule,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to the sale of such securities. Securities are exempt from
this rule if the market price is at least $5.00 per unit.

15
<PAGE>

Because our common stock would be characterized as penny stock, the market
liquidity for our securities could be adversely affected. In such an event, the
regulations on penny stocks could limit the ability of broker-dealers to sell
Fan's securities and the ability of purchasers in this offering or other
stockholders to sell their securities in the secondary market.

Our corporate charter includes certain anti-takeover provisions.

Fan's Restated Articles of Incorporation authorize the Board of Directors
to issue up to 5,000,000 shares of preferred stock without stockholder approval
and to set the rights, preferences and other designations, including voting
rights, of those shares as the Board of Directors may determine. These
provisions, together with the matters described in "Risk Factors--Control by
Existing Stockholders," may discourage transactions involving actual or
potential changes of control of Fan, including transactions that otherwise could
involve payment of a premium over prevailing market prices to holders of common
stock. We have no plans, arrangements, commitments or understandings relating to
potential issuance of preferred stock. Fan also is subject to provisions of the
Nevada General Corporation Law that may make some business combinations more
difficult. See "Description of Capital Stock--Certain Provisions of the Fan's
Charter and Bylaws," and "--Nevada Law Provisions."

Fan's corporate charter makes certain limitations on director liability.

Fan's Restated Articles of Incorporation provide, as permitted by Nevada
law, that a director of Fan shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, with certain exceptions. These provisions may discourage stockholders
from bringing suit against a director for breach of fiduciary duty and may
reduce the likelihood of derivative litigation brought by stockholders on behalf
of Fan against directors. In addition, our Restated Articles of Incorporation
and bylaws provide for mandatory indemnification of directors and officers to
the fullest extent permitted by Nevada law.

16
<PAGE>

USE OF PROCEEDS

Our estimated net proceeds from sale of the units, after deduction of the
estimated expenses of this offering, will be approximately $285,000 if all units
offered are sold and $25,000 if only the minimum offering is completed. Fan
anticipates that the proceeds will be applied and allocated over the next 12
months following this offering in approximately the amounts set forth below:

<TABLE>
<CAPTION>
Minimum Maximum
Units Sold Units Sold
---------- ----------
<S> <C> <C>
General and Administrative Expenses
(Officer and employee compensation facilities,
equipment, and professional expenses) .......................................... $ -- $ 10,000
Oil and natural gas development, drilling and completion expenses(1) ............ 45,000 275,000
-------- --------
Total ................................................................... $ 45,000 $ 285,000
======== ========
</TABLE>
- - ------------------

(1) We will use the proceeds of this offering only to conduct development
drilling and for completion of wells which we believe to be commercially
successful wells. We do not intend to use any proceeds of the offering for
exploratory drilling.

Pending their use for the foregoing purposes, Fan may invest the proceeds
in whole or in part in short term government or higher rated investment grade
securities.

The foregoing represents our best estimate of our use of the net proceeds
of this offering based on present planning and business conditions. We may
change our use of the proceeds as unanticipated events or occurrences, such as
increased expenses, successful or unsuccessful drill targets or acquisition
opportunities, may cause us to redirect our priorities and reallocate the use of
proceeds.

Any funds we receive upon exercise of warrants will be added to working
capital.

17
<PAGE>

COMPARATIVE DATA

As of March 31, 2000, Fan had a net tangible book value of approximately
$315,000 or $0.0333 per share. If all units offered by Fan are sold, after
deducting our expected offering expenses, our pro forma net tangible book value
would be approximately $600,000 or $0.0482 per share of common stock, which
represents an immediate increase of approximately $0.0149 per share to our
present stockholders and an immediate dilution of approximately $0.0518 (52%)
per share to the investors in this offering. If only the minimum offering is
sold, after deducting commissions and other offering expenses, the pro forma net
tangible book value as of March 31, 2000, would be approximately $315,000 or
$0.0345 per share, which represents an immediate increase of approximately
$0.0012 per share to present stockholders and an immediate dilution of
approximately $0.0655 per share (66%) to the persons purchasing units pursuant
to the offering being made hereby.

The following data illustrates the per share dilution to the investors
purchasing the units being offered hereby, assuming the purchase price for the
units is allocated to the share of common stock included in the unit:

<TABLE>
<CAPTION>
Minimum Maximum
Offering Sold Offering Sold
------------- -------------
<S> <C> <C>
Offering price ............................................ $ 0.10 $ 0.10
Net tangible book value:
Before offering ....................................... 0.0333 0.0333
After offering ........................................ 0.0345 0.0482
Increase attributable to payment by investors ............ 0.0012 0.0149
Dilution to investors(1)................................... 0.0655 0.0518
</TABLE>
- - -----------------

(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the amount paid per share by investors in
this offering. Dilution will be increased by the amount of our operating
losses for the period from March 31, 2000 to the completion of the
offering.

The following tables compare the respective investments of current
stockholders and of investors in this offering assuming the maximum and minimum
units offered are sold:
<TABLE>
<CAPTION>

Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Minimum Offering Shares common stock common stock Consideration
- - ---------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
New investors............................... 400,000 4% $ 0.10 $ 40,000
Existing stockholders....................... 9,451,492 96% 0.19 1,943,000(1)
----------- --- ----------
9,851,492 100% $ 1,983,000
=========== === ==========
<CAPTION>
Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Maximum Offering Shares common stock common stock Consideration
- - ---------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
New investors............................... 3,000,000 24% $ 0.10 $ 300,000
Existing stockholders....................... 9,451,492 76% 0.19 1,943,000(1)
----------- --- ----------
12,451,492 100% $ 2,243,000
=========== === ==========
</TABLE>
- - --------------------

18
<PAGE>

(1) Includes shares valued at $300,000, the net cost incurred by Mr. Fancher in
connection with acquisition and exploration of our California properties in
excess of our cash payment to Mr. Fancher for his interest in the
properties. See "Certain Transactions." Does not include the value of
services for which 250,000 shares were issued in 1997 and 215,000 shares
were issued in 1998. Also, does not include consideration paid to Fan's
predecessor prior to 1996 for 135,004 shares now held by approximately 500
stockholders.

The dilution figures and other comparative data contained herein do not
take into account the possible exercise of outstanding warrants or options,
including the warrants included in the units being offered.

DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS

Our common stock is not presently traded on any public market. It is
anticipated that the common stock may be listed on the NASD's OTC Bulletin Board
Market following the completion of the offering.

Dividend Policy. We have never declared nor paid any dividends on our
common stock. We do not anticipate that dividends will be paid on our common
stock in the foreseeable future. We presently intend to follow a policy of
retaining any earnings to expand our oil and natural gas business. Any future
decision to pay dividends on our common stock will depend on our results of
operations, financial condition and capital requirements. We can give no
assurance that any holder of common stock will ever receive dividends in respect
of the holder's shares of common stock.

Stockholders. As of the date hereof, Fan had 522 holders of record of
common stock

19
<PAGE>

MANAGEMENT'S PLAN OF OPERATION

In the following discussion we are providing an analysis of our financial
condition and the Plan of Operation during the next quarter and the balance of
our fiscal year. This discussion should be read in conjunction with our
financial statements and the notes thereto. Certain matters discussed below are
based on potential future circumstances and developments, which we anticipate or
expect, but which cannot be assured. Such forward-looking statements include,
but are not limited to, our plans to conduct drilling operations, trends in the
results of our operations, anticipated rates of production, natural gas and oil
prices, operating expenses and our anticipated capital requirements and capital
resources. The actual results which we achieve in our operations could differ
materially from the matters discussed in the forward-looking statements.

We generated our first revenue during the first quarter of 1999 from a
successful exploratory natural gas well in one of our prospects in the
Sacramento Basin in central California. The well has generated approximately
$142,000 at an average price of $2.08 per MCF during 1999, net to our interest.
During the three months ended December 31, 1999, the production from this well
was sold at an average price of $2.34. We generated $41,370 of revenue in the
first quarter of 2000 compared to $ 20,662 in the first quarter of 1999. The
revenues during the first quarter of 2000 and 1999 was from our interest in the
Molluca Well in the Sacramento Basin of central California. Our revenue during
the first quarter of 2000 was from our interest in 103,797 mcf produced at an
average price of $2.15 per mcf. Our revenue during the first quarter of 1999 was
from our interest in 67,612 mcf produced and sold at an average price of $1.65
per mcf.

We anticipate production and gas prices on the well during 2000 to be
somewhat comparable to the production and prices received for 1999. This
producing well and our interest in the surrounding unexplored acreage is being
held for sale. Pending any sale of those properties, we will continue to receive
revenue from the producing well.

In late 1998 we participated in drilling a successful oil well in the
Horsethief Canyon prospect, in which we hold a 16% revenue interest (20% working
interest). The well was not produced until the second quarter of 1999. During
all of the balance of 1999, the well produced 613 barrels of oil, net to our
interest, which was sold at an average price of $18 per barrel. We realized
approximately $9,500 after taxes and fees from the well during the 1999. We
anticipate that this well, which was shut-in over the winter of 1999-2000, will
produce a comparable quantity of oil during 2000 and we expect that the selling
price for oil produced will reflect the general worldwide increase in the price
of this commodity.

We decided to farm out as much of our interest as was required to carry our
remaining interest to the casing point in the next wells drilled in our
Hoursethief Canyon Prospect. We therefore sold a portion of the working interest
in the spacing unit in the next well for an amount which was sufficient to fund
the remaining 7.8125% working interest which we hold in the second well. After
the well was drilled we paid our proportionate unit of completion costs. After
testing, it appears that this well will be a marginally productive natural gas
well which will not be produced until natural gas gathering facilities are
extended into the area of this well. We also have agreed to be subject to the
balance of the farm-out agreement relating to the portion of our interest which
we sold to other participants in the prospect.

Because we decided to discontinue further exploration of our prospects in
the Sacramento Basin, we took a non-cash impairment charge totaling
approximately $1.25 million at the end of 1998. As a result of this charge, the
book value of our oil and gas properties at December 31, 1998 was reduced to the
approximate amount of the present value of the oil and natural gas reserves on
these properties at year end 1998. Based primarily on the fact the present value
of the proved oil and natural gas reserves decreased more than we produced in
1999, we again recorded an impairment charge, totaling $300,000, at the end of
1999. We depleted our California natural gas well approximately $119,000 and our
Wyoming properties $6,100 totaling $125,100 during 1999. These charges, although
significant, did not affect the results of our operations for 1999.

20
<PAGE>

We had general and administrative expenses totaling $129,700 during 1999,
compared to $198,900 in the prior year. The decrease was due primarily to our
lower lever of operations in 1999. We had reimbursements and fees for services
provided by our three officers totaling approximately $69,000 in 1999 consisting
primarily of reimbursement for rent and administrative services and
approximately $22,000 in services provided by our secretary. Mr. Fancher, our
chairman, agreed to write-off $22,000 in reimbursements owed to his affiliate.
The other amounts were satisfied by Fan issuing a total of 199,788 shares of our
common stock, at a deemed value of $0.225 per share. We had general and
administrative expenses of $15,501 in the first quarter, compared to $41,399 in
the prior year. We decided not to pay management fees and reimbursement for
office space to Fancher Oil Company and Arizona Corporate Management during 2000
until we are able to reasonably afford their services. Our expenses were
significantly less during the first three months of 2000 as payments were made
to consultants on an as- needed basis only.

In 1999 we had cash expenditures of approximately $5,400 for geophysical
and lease extension costs which were capitalized. Other capital costs associated
with participating and acquiring, exploring and drilling of the Horsethief
Canyon and nearby prospects were approximately $82,000 in 1999. Our unit of
those expenses during 2000 are expected to be in the range of $40,000 to
$80,000, depending on such factors as the success of initial drilling efforts,
decisions by the operator to conduct other exploratory activities, weather and
related factors.

At December 31, 1999 we had approximately $57,000 in cash and receivables
and at March 31, 2000, we had approximately $30,000 in cash compared to around
$16,000 in cash at December 31, 1998. We anticipate that our revenue from the
production of the one producing natural gas well on our California property will
be approximately $11,000 to $13,000 monthly during 2000, depending upon the
rates of production and applicable natural gas prices. We also anticipate that
we would net around $1,000 each full month during which the Horsethief Canyon
properties are operated, again depending upon rates of production and applicable
oil and natural gas prices.

During the second quarter of 1999 we obtained a $150,000 line of credit
which was secured by the personal guarantee of our chairman. The principal
balance owed at December 31, 1999 was $20,000 and was repaid in full by February
29, 2000. In March 1999 our president advanced us $20,500, which was used to
repay amounts owed Fancher Oil LLC and to satisfy other obligations. This
advance to Fan, which is unsecured and for which we are not charged interest, is
still outstanding. We will require additional capital resources if we decide to
participate in any additional drilling of exploratory wells or to acquire
interests in other properties in 2000. We presently believe that the relatively
small amount of monthly revenue which we receive from production will satisfy
our ongoing operating expenses given our relatively low level of planned
activities during 2000.

In May 1998 we commenced a public offering in which we offered up to a
maximum of 3,000,000 common units at $ 1.00 per unit. No shares were sold and
expenses incurred in connection with the offering during 1998 were expensed at
year-end. We attempted to recommence the offering during 1999 but we did not
proceed after it became apparent there was little interest for small public
companies engaged in the oil and gas business. Expenses we incurred in this
connection in 1999 were written off at year end. We decided to again revise the
offering and recommence it at a reduced offering price during 2000. During 1999
warrants to purchase up to 1,180,000 shares of common stock, due to expire, were
extended through October 31, 2000, and the exercise price for those warrants was
reduced to $0.15 per share. If all those warrants are exercised, of which there
is no assurance, we would receive approximately $177,000 by the end of October
2000. Also, if the offering described in this prospectus is completed, there
will be a minimum of 400,000 and a maximum of 3,000,000 warrants outstanding,
exercisable at any time for three years following the date of this prospectus.
The proceeds which we would receive, if most of the warrants are exercised,
would enable us to pay our share of drilling expenses in development wells in
our Horsethief Canyon prospect. We can make no assurances as to whether any of
the warrants will be exercised or whether we will be able to successfully raise
any other capital.

21
<PAGE>

Unless we raise additional capital in this offering or our outstanding
warrants are exercised, or we raise capital from other sources, we do not
believe that our limited cash flow will be sufficient to pay anticipated
operating expenses and permit us to participate in drilling additional wells
over the next 12 months. As a result we may be unable to participate in drilling
any additional exploratory or development wells on the Horsethief Canyon
prospect or other nearby prospects, unless we are able to successfully farm-out
a portion of our interests to others. If we are able to raise additional capital
we will use the proceeds to pay participate in additional development drilling.
To fund the anticipated near term capital shortfall, we may accept loans from
management or other affiliates. Assuming sufficient capital at $0.15 per share
resources become available, we will continue to seek to acquire interest in
other oil or natural gas properties. Also, we may consider other business
opportunities which are offered to us outside the oil and gas business under
circumstances which we believe afford us the opportunity to increase the value
of our Company for our shareholders.

We do not have any employees and instead we use consultants for matters
pertaining to drilling, property evaluations and administration. We do not
presently contemplate hiring employees during the next 12 months.

Year 2000 Considerations. We considered the impact of Year 2000 issues on
our computer system and applications and developed a remediation plan. Because
we are a small company and use computer systems and applications owned by our
consultants, we do not anticipate that we will incur any material costs in
remediating potential Year 2000 problems. We did not incur any expenses for such
purposes. Our consultants have confirmed to us that Year 2000 issues on their
systems were detected and remediated.

22
<PAGE>

BUSINESS AND PROPERTIES

General

Our business is presently to acquire and develop oil and natural gas
properties. Fan intends to develop oil and natural gas properties in regions
with known producing horizons, significant available undeveloped acreage and
considerable opportunities to increase reserves, production and ultimate
recoveries through exploratory and development drilling and acquisition of
producing properties. Our present activities are focused in the Green River
Basin in Wyoming and the Sacramento Basin in central California where our
exploration and development prospects are located.

Fan holds an undivided net interest equal to approximately 20% [in a 5,760
acre] prospect located in Sweetwater County, Wyoming. Two exploratory wells have
been drilled on the prospect, with the first well completed as an apparent oil
producer and the second as a marginally productive natural gas well. Both wells
were shut-in for the winter months of 1999 and early 2000 because of the
weather. As of the date of this report, both wells were still shut-in. The
Operator of the well, Fancher Oil LLC expects additional wells to be drilling on
this prospect in 2000 and thereafter. Because of our limited financial
resources, it is likely that we will farm-out all or a portion of our interest
in these properties for development by others, with the expectation that we
would receive a reduced interest in future wells, with most of our share of
drilling and development expenses being paid for by other participants. We also
have the right to participate with a minority working interest in other
prospects which the Operator intends to explore in the vicinity of this prospect
and which could result in the drilling of other exploratory wells in 2000 or
thereafter. Again, we expect to determine whether or not to participate in any
given well based on our financial condition and other factors at the time that
the well is commenced. We may choose to forfeit any interest in these nearby
prospects due to our limited financial resources.

We also hold an undivided 25% working interest in two exploratory prospects
located in the Sacramento Basin near Sacramento, California which has been held
for sale since late 1999. The prospects now total approximately 25,520 gross
acres. In 1998, we participated in drilling five exploratory wells on the
property, one of which was completed as a producer. In 1998 the operator of the
prospects, a nonaffiliated independent oil and gas company, and Fan together
completed a three dimensional seismic ("3-D Seismic") survey and identified
several potential drilling sites. The initial three exploratory wells on one of
the prospects and the first exploratory well on the other prospect, in which we
had a 6.25% working interest, were plugged and abandoned as dry holes in 1998.
The fifth well, on the second prospect, was placed on production early in 1999.
Our principal revenue is derived from its unit of production from this well. Fan
is seeking to sell its interest in these two exploratory prospects and the
producing well in the Sacramento Basin.

We intend to use our present cash assets, any proceeds we receive from sale
of the Sacramento Basin prospects and from this offering, and any proceeds from
the exercise of outstanding stock purchase warrants to meet our capital
requirements for exploration and development of our current properties and to
acquire similar types of interests in other oil and natural gas properties in
the United States and Canada.

We presently have only limited reserves of oil and natural gas, limited
production and relatively limited cash flow. When the two shut-in wells in
Sweetwater County, Wyoming are again placed on production, we anticipate
relatively little additional cash flow from those operations. We do not serve as
the operator in our two present projects. Because we are not the operator, we
are not generally in a position to make determinations with respect to where and
when exploratory or other wells will be drilled, the timing of the drilling, the

23
<PAGE>

conduct of day-to-day activities and related management of the exploitation of
the properties. However, in the Sacramento Basin prospects, Fan, or any other
owner of an undivided working interest, is authorized to propose certain
exploration activities and to become the operator for that activity if the
Operator declines to act.

Business Strategy

Our intended strategy is to develop and increase oil and natural gas
reserves, production and revenue for Fan and includes the following key
elements.

o Utilize State-of-the-Art Technologies. Certain of our officers, directors
and consultants have experience in utilizing 3-D Seismic data and related
"state-of-the-art" technologies for analyzing oil and natural gas drilling
and development opportunities. We intend to continue to analyze and review
oil and natural gas prospects which we hold or acquire based on analysis of
3-D Seismic data and related technologies, including "amplitude versus
offset" or "AVO" seismic analysis. Our efforts will be focused on improving
drilling success rates and accelerating the development of oil and natural
gas reserves.

o Other Business Opportunities. We will also consider other business
opportunities which become available, including opportunities outside the
oil and gas business.

Fan will also consider other business opportunities which become available,
including opportunities outside the oil and gas business.

Principal Properties

We hold interests in three wells and exploratory prospects in two
geographical areas.

Green River Basin. The Horsethief Canyon Prospect is a Frontier sandstone
natural gas exploration prospect on the eastern flank of the Rock Springs Uplift
of the Green River Basin in southwestern Wyoming. There are a number of gas
fields that produce from the Frontier formation in the vicinity of this
prospect. The Marianne Field, located 4 miles to the south, provided the analogy

24
<PAGE>

for the Horsethief Canyon Prospect. The average well in the Marianne Field had
an initial production rate of 1640 MCFD with an ultimate recovery of 2.47
billion cubic feet of gas.

The primary formations of interest in the Horsethief Canyon Prospect are
the Second and Third Frontier sands at a depth of approximately 5500 feet. The
Second Frontier in the prospect area has two zones which are present over a
significant portion of the leasehold which are referred to as the "2D" and "2E"
zones. These sands are present in four nonproducing wells drilled on the
leasehold acreage in the 1970s and early 1980s. Based on log calculations of
these wells and production tests on one of these wells, the Company believes
this formation will yield commercial quantities of gas, using modern completion
and production techniques. The Third Frontier formation is also considered to be
potentially productive in the prospect area based on log and formation tests of
these wells.

In October 1998, we entered into an agreement with Fancher Oil LLC, in
which we acquired a twenty percent (20%) working interest in approximately 3,525
acres including seismic options, farmins and trades, hereinafter referred to as
the Horsethief Canyon Prospect. Subsequently, a 5,760 acre Federal Exploratory
Unit was formed and a 3D Seismic exploration program was completed. We then
participated in the drilling of a well centrally located in the prospect
acreage. The well was completed as an apparent oil and natural gas producer in
two zones of the Second Frontier formation. The drilling confirmed the results
of the 3-D Seismic and analysis of older wells in the area. Production in this
initial well commenced in the summer of 1999 and the well produced approximately
613 barrels of oil, net the Company's interest, until the well was shut-in for
the winter in late 1999. A second well was drilled and completed in late summer
1999 and has not yet been commercially produced, although it is expected to be a
marginal natural gas well. A reserve study prepared by an independent petroleum
engineer projected that these wells will produce approximately 14.6 MMCF of
natural gas and 3,000 barrels of oil over their lifetime, net to Fan's
interests.

Presently, there are two proposed development locations to the west of the
discovery well which are expected to find similar sands in a structurally higher
position as encountered in the initial wells, based on subsurface geology and
the 3-D Seismic survey. This location was classified as "probable" in the
reserve study and no reserves were included in the Company's estimates. Drilling
of those additional development locations may be commenced in 2000 or
thereafter. Fancher Oil LLC is the operator of this project. Our working
interest in future wells will range from about 7% to 20%, depending on the
location of the well, and what portion of our interest we transfer to others in
advance of drilling. Fan also has the right, but not the obligation, to
participate for up to 20% of the operator's working interest in any additional
acreage or farmins that the operator may acquire in the area of mutual interest
(AMI) established for this prospect.

Sacramento Basin. The Sacramento Basin is an asymmetrical trough roughly
160 miles long, 50 miles wide and up to 30,000 feet deep. Sacramento, California
is located in the southern portion of the basin. The majority of the reserves in
the basin are natural gas which occurs in sandstone reservoirs of Late
Cretaceous, Paleocene and Eocene geologic ages. The productive sands are very
porous and permeable, ranging in depth from 2000 to 8000 feet. It is generally
assumed that the gas was generated from deeply buried Cretaceous shales during
the early to mid Tertiary period when such shales reached depths of 12,000' or
greater. Over time the gas migrated upward along geologic structures through
faults and continuous sands where porosity and permeability allowed such
migration. Most reservoirs appear to be water driven and are capable of
producing at relatively high rates until the water production becomes excessive,
resulting in termination of production of natural gas.

25
<PAGE>

The primary formations of interest in our prospects include the Winters
formation, the deepest and least explored, which ranges in depth from 6,000 to
8,000 feet. The Starkey formation is immediately above the Winters formation at
depths ranging from 4,000 to 6,000 feet. The Mokelumme formation at a depth of
3,000 to 4,000 feet and the Domengine formation from 2,000 to 3,000 feet are the
other areas of interest.

In August 1997, we entered into an agreement with George H. Fancher Jr.
pursuant to which we agreed to acquire Mr. Fancher's undivided 25% working
interest in two exploratory gas prospects in the Sacramento Basin of central
California. We completed this transaction in early November 1997 at which time
Mr. Fancher assigned his interest in two Participation Agreements with Slawson
Exploration Company, Inc., an unaffiliated independent oil and gas producing
company, operator of the project. See "Certain Relationships and Related Party
Transactions." Mr. Fancher reserved a 0.625% net overriding royalty interest in
the properties conveyed to Fan. The operator has a 11.5% working interest in
both prospects and also holds a 3.5% overriding royalty interest in any
properties acquired in the AMI (as described below). Four nonaffiliated
independent oil and natural gas producing entities hold the balance of the
working interest in the two prospects.

Under the Participation Agreements, we are entitled to receive a 25% net
working interest (approximately a 18.75% net revenue interest) in oil and
natural gas leases and other property interests obtained by the operator in two
prospects included in an area of mutual interest defined in each Participation
Agreement ("AMI"). The two AMIs total approximately 70 square miles and the
operator obtained oil and gas leases or lease options totaling approximately
30,000 net acres on the two prospects. Subsequently, leases and options covering
all but approximately 14,900 acres were surrendered. The operator is authorized
to continue to acquire additional lease acreage in the AMI. We paid 33.75% of
leasehold acquisition costs, oil and gas lease rentals and renewals, and costs
incurred in connection with acquisition of 3-D Seismic data within the two AMI's
surrounding the two prospects, for our 25% working interest in the prospects.
Each of the other four working interest owners (other than the operator) also is
required to pay a portion of expenses larger than its working interest. Through
December 31, 1999 the operator had incurred approximately [$3.7] million for
land acquisition and 3-D Seismic data expenses, of which we had paid
approximately [$1.25] million.

The operator holds title to all leasehold agreements, including oil and gas
leases, farmin agreements or other leasehold acquisitions, beneficially for us
and other participants in the prospects until such time as production is
established. Therefore we do not anticipate that we will be a record holder of
most of the acreage in which we hold an undivided beneficial interest. The
operator is also entitled to an additional fee of $2,500 from other
participants. We are entitled, at our sole election, to decline to participate
in any particular well proposed to be drilled by the operator. If we elect not
to participate in a proposed well, we forfeit all of our interest in the
leasehold and any agreements relating to the lands within in the revenue sharing
unit for the proposed well. Once the land acquisition and 3-D Seismic
acquisition is completed, the operator will operate the exploration, development
and exploitation activities under the terms of a standard Operating Agreement.
We will generally be obligated to pay its portion of the expenditures incurred
by the operator in operating activities, including drilling expenses and similar
expenditures and we will be entitled to receive approximately 18.75% (the net
revenue interest) of any production from the prospects.

The one successful well in which Fan holds an interest in this project
commenced production in early 1999. In the reserve study, the independent
petroleum engineer estimated that the existing well would produce approximately
182.3 MMCF and one proved future development well would ultimately produce
approximately 129.0 MMCF, net to Fan's interest, through approximately 2005.

26
<PAGE>

Fan does not presently expect to participate in any additional exploratory
drilling activities on these prospects and we are holding our interest for sale
to others, although no potential purchaser has indicated a willingness to
purchase these properties on terms which we consider reasonable.

Title to Properties

Fan has the right to acquire from the Operator satisfactory title to all
interest in the two prospects where it holds an interest in accordance with
standards generally accepted in the oil and natural gas industry. Our properties
are subject to customary royalty interests, liens incident to operating
agreements, liens for current taxes and other burdens which we believe do not
materially interfere with the use of or affect the value of our properties. The
remaining acreage is held by lease rentals and similar provisions and requires
production in paying quantities prior to expiration of various time periods to
avoid lease termination.

Current Operations

We plan to continue to monitor development activities in the vicinity of
the Horsethief Canyon Prospect located in Sweetwater County, Wyoming. We
participated in two exploratory wells, one of which is primarily an oil well
producer and one which is expected to produce low volumes of natural gas. Both
wells were shut-in over the winter of 1999-2000. Until a natural gas pipeline is
extended into the area of these wells, it is likely that additional drilling
activity will be curtailed. Fan will consider transferring a portion or all of
its interest in this prospect to others in return for a carried interest in the
wells.

Fan intends to concentrate its activities to the drilling and acquisition
of gas reserves primarily in the Green River Basin of southwestern Wyoming. We
will actively seek opportunities that can provide long term, good quality
reserves using technology to lower the risk and improve the recovery. There are
no plans to participate in drilling any additional wells in the California
prospects.

Acreage

The following table sets forth, as of December 31, 1999, the gross and net
acres of oil and natural gas leases which we beneficially hold or have the right
to acquire.
<TABLE>
<CAPTION>

Prospect Area Developed Undeveloped
- - ------------- ----------------- -----------------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Green River Basin:
Horsethief Prospect ................. -- -- 3,525 705
Sacramento Basin:
Bali Prospect ....................... 2,721 1,437.25 2,580 2,116
----- -------- ------ -----
Total ......................... 2,721 1,437.25 6,105 2,821
</TABLE>

27
<PAGE>

Reserves

As of December 31, 1999, we had interests in three productive wells (.41
net wells) in two areas. The wells are operated by others under arrangements
standard in the industry. The following is information about the reserves
attributable to our properties at December 31, 1999, as estimated by an
independent petroleum engineer.

Discounted
Net Gas Net Oil Present Value
Prospect (MMCF) (MBO) ($M)(1)
- - -------- ------- ------- -------------
Sacramento Basin .................. 311.3(2) - 402.1
Green River Basin ................. 14.6(3) .3 6.1
----- --- ---
Total .................... 325.9 .3 408.2
- - ----------------

(1) Present value of future net revenue, discounted at 10% before any related
income taxes. Assumed product prices used were prices in effect in the
areas at December 31, 1999 without escalation, net of heat content
adjustments, gathering costs and compression charges, or $2.06 per mcf in
the Sacramento Basin, $1.00 per mcf in the Green River Basin and $24.75 per
barrel for oil in Wyoming. All prices were assumed to remain flat over the
productive lives of the wells. Operating costs utilized were estimated
costs for the wells at a flat rate ($1,525 per well per month in California
and $5,200 per well per month in the Wyoming properties) without
escalation.

(2) Includes one well which commenced production in January 1999 and one proved
undeveloped (undrilled) well.

(3) Includes two proved nonproducing wells. Does not include one potential well
assumed to be "probable" of future successful development.

Drilling Activity

The following table summarizes the Company's oil and gas drilling
activities for 1999.

<TABLE>
<CAPTION>
Productive Nonproductive
------------------------- --------------------------
Exploratory Wells Drilled Gross Wells Net Well Gross Wells Net Well
- - ------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Sacramento Basin, California............ - - - -
Green River Basin, Wyoming.............. 1.0 .0775 - -
</TABLE>

Acquisitions of Other Properties

We do not presently intend to operate oil and gas properties, but instead
Fan will focus upon acquiring and holding properties which management of the
Company believes, utilizing 3-D Seismic and other state-of-the-art technologies,
have a good potential to develop significant oil or natural gas production and
reserves. We presently have not identified any such properties for acquisition
and it is not likely that additional properties will be acquired until we have
attained additional capitalization, either with the proceeds of this Offering,
the exercise of outstanding warrants or from other sources.

28
<PAGE>

We may evaluate and pursue acquisitions of interests in producing,
exploratory or development oil and gas properties that meet our selection
criteria, including persons or entities with whom members of our management may
have an affiliation or other relationship. The successful acquisition of such
properties would require an assessment of potential reserves of oil or natural
gas, future oil and natural gas prices, operating costs, potential environmental
and other liabilities and other factors beyond our control. Such an assessment
is necessarily inexact and its accuracy would be inherently uncertain. We intend
that upon any such acquisition, management will perform a review of the subject
properties generally consistent with industry practices. Such a review, however,
would not reveal all existing or potential problems, nor would it permit a buyer
to become sufficiently familiar with the properties to assess fully their
deficiencies or potential value. Inspections of the properties may not be
performed and problems with existing properties may not be observable even in
those cases where an inspection is undertaken. We may assume existing
liabilities, including environmental liabilities, upon any such acquisition and
would likely acquire interests in such properties on an "as is" basis.

Our chairman, George H. Fancher Jr., who has substantial experience as an
operator of exploration and development of oil and gas properties for his own
account, owns the entity which is the operator of our Wyoming prospect and may
be the operator of other properties in which we acquire an interest. In such
event, charges to Fan for such services will not exceed usual and customary
charges to unaffiliated persons and will be at a rate no higher than operating
charges made to any other participant in a given project.

Marketing of Production

The price we receive for any oil and natural gas we produce will depend
upon numerous factors beyond our control, including:

o seasonality,
o condition of the national and international economies,
o availability of foreign imports,
o political conditions in other oil and natural gas producing countries,
o domestic governmental regulations, and
o legislation and policies.

Decreases in the prices of oil or natural gas could have an adverse affect
on the value of any reserves we establish and our cash flow from production. In
March 2000, the price paid by natural gas purchasers in the Sacramento Basin of
central California was approximately $2.10 per mcf and in the Green River Basin
of southeastern Wyoming the price paid for oil produced in that area was
approximately $25 per barrel and for natural gas approximately $2.00 per mcf.
Such prices could be higher or lower at the time that our production is
available for sale, depending upon the above factors and other unforseen
circumstances.

Competition

Fan operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies, many
of which have substantially larger financial resources, operations, staffs and
facilities. Fan faces intense competition from both major and independent oil
and natural gas companies when it seeks to acquire desirable producing
properties or production. Fan expects that the inventory of unproved drilling
locations in the two prospects in which Fan has an interest will be the primary
source of new reserves, production and cash flow during the next year. There can

29
<PAGE>

be no assurance that either will yield substantial economic returns. Failure of
the two prospects to yield significant quantities of economically attractive
reserves in production could have a material adverse impact on Fan's future
financial condition and could result in a writeoff of a significant portion of
its investment in the oil and gas properties.

Fan's competitors include major integrated oil and natural gas companies
and numerous independent oil and natural gas companies, individuals and drilling
and income programs. Most of our competitors are larger, well established
companies with substantially larger operating staffs and greater capital
resources than Fan's and which, in many instances, have been engaged in the
energy business for a much longer time. Such competitors may be able to pay more
for productive oil and natural gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit. Fan's ability to acquire
additional properties and to discover reserves in the future will be dependent
upon our ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.

Regulation

Regulation of Oil and Natural Gas Production. Fan's oil and natural gas
exploration, production and related operations are subject to extensive rules
and regulations promulgated by federal, state and local authorities and
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases our cost of doing business and affects our profitability. Although we
believe Fan is in substantial compliance with all applicable laws and
regulations, because such rules and regulations are frequently amended or
reinterpreted, we are unable to predict the future cost or impact of complying
with such laws.

The states of California and Wyoming and many other states require permits
for drilling operations, drilling bonds and reports concerning operations and
impose other requirements relating to the exploration and production of oil and
natural gas. Such states also have statues or regulations addressing
conservation matters, including provisions for the unitization or pooling of oil
and natural gas properties, the establishment of maximum rates of production
from wells, and the regulation of spacing, plugging and abandonment of such
wells.

Federal Regulation of Natural Gas. The Federal Energy Regulatory Commission
("FERC") regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by Fan, as well
as the revenues which may be received by Fan for sale of such production. Since
the mid-1980's, FERC has issued a series of orders that have significantly
altered the marketing and transportation of natural gas. These orders mandate a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sale,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders was to increase competition within all phases of the natural gas
industry. Certain aspects of these orders may be modified as a result of various
appeals and related proceedings and it is difficult to predict the ultimate
impact of the orders on Fan and others. Generally, the orders eliminate or
substantially reduce the interstate pipelines' traditional role as wholesalers
of natural gas in favor of providing only storage and transportation service,
and has substantially increased competition and volatility in natural gas
markets.

The price which Fan may receive for the sale of oil and natural gas liquids
would be affected by the cost of transporting products to markets. FERC has
implemented regulations establishing an indexing system for transportation rates
for oil pipelines, which, generally, would index such rates to inflation,

30
<PAGE>

subject to certain conditions and limitations. Fan is not able to predict with
certainty the effect, if any, of these regulations on any future operations.
However, the regulations may increase transportation costs or reduce well head
prices for oil and natural gas liquids.

Environmental Matters. Fan's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may:

o Require the acquisition of a permit or other authorization before
construction or drilling commences and for certain other activities;
o Limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness and other protected areas; and
o Impose substantial liabilities for pollution resulting from
operations.

The permits required for various of Fan's operations are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce their regulations, and violations are
subject to fines or injunctions, or both. In the opinion of management, Fan is
in substantial compliance with current applicable environmental laws and
regulations, and Fan has no material commitments for capital expenditures to
comply with existing environmental requirements. Nevertheless, changes in
existing environmental laws and regulations or in interpretations thereof could
have a significant impact on Fan, as well as the oil and natural gas industry in
general.

Fan may agree to indemnify sellers of properties purchased by Fan against
certain liabilities for environmental claims associated with such properties. No
assurance can be given that existing environmental laws or regulations, as
currently interpreted or reinterpreted in the future, or future laws or
regulations will not materially adversely affect Fan's results of operations and
financial condition or that material indemnity claims will not arise against Fan
with respect to properties acquired by Fan.

The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sites. It is
not uncommon for the neighboring land owners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize the imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting
Fan's operations impose clean-up liability relating to petroleum and petroleum
related products. In addition, although RCRA classifies certain oil field wastes
as "non-hazardous," such exploration and production wastes could be reclassified
as hazardous wastes thereby making such wastes subject to more stringent
handling and disposal requirements.

Fan has acquired leasehold interests in numerous properties that for many
years have produced oil and natural gas. Although the previous owners of these
interests may have used operating and disposal practices that were standard in
the industry at the time, hydrocarbons or other wastes may have been disposed of
or released on or under the properties. In addition, some of Fan's properties

31
<PAGE>

may be operated in the future by third parties over whom Fan has no control.
Notwithstanding Fan's lack of control over properties operated by others, the
failure of the operator to comply with applicable environmental regulations may,
in certain circumstances, adversely impact Fan.

NEPA. The National Environmental Policy Act ("NEPA") is applicable to many
of Fan's planned activities and operations. NEPA is a broad procedural statute
intended to ensure that federal agencies consider the environmental impact of
their actions by requiring such agencies to prepare environmental impact
statements ("EIS") in connection with all federal activities that significantly
affect the environment. NEPA is a procedural statute only applicable to the
federal government, and none of Fan's Sacramento Basin acreage is located on
federal land. The Bureau of Land Management's issuance of drilling permits and
the Secretary of the Interior's approval of plans of operation and lease
agreements all constitute federal action within the scope of NEPA. Consequently,
unless the responsible agency determines that Fan's drilling activities will not
materially impact the environment, the responsible agency will be required to
prepare an EIS in conjunction with the issuance of any permit or approval.

ESA. The Endangered Species Act ("ESA") seeks to ensure that activities do
not jeopardize endangered or threatened animal, fish and plant species, nor
destroy or modify the critical habitat of such species. Under ESA, exploration
and production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA provide for
criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to Fan's
operations include, but are not necessarily limited to, the Fish and Wildlife
Coordination Act, the Fishery Conservation and Management Act, the Migratory
Bird Treaty Act and the National Historic Preservation Act. Although Fan
believes that its operations are in substantial compliance with such statutes,
any change in these statutes or any reclassification of a species as endangered
could subject Fan to significant expense to modify its operations or could force
Fan to discontinue certain operations altogether.

Office Facilities

Fan currently uses approximately 750 square feet of office space in
Scottsdale Arizona which it shares with Arizona Corporate Management, Inc., a
company owned by William E. Grafham, President, and shares offices with its
Chairman, George H. Fancher Jr. in Denver, Colorado. Mr. Grafham and Mr. Fancher
both have agreed to provide office space and related services to Fan without
charge commencing in 2000. See "Certain Transactions."

Employees

As of the date of this Prospectus, Fan had no employees. Fan's three
directors and four part time consultants provide management and other services.

32
<PAGE>

MANAGEMENT

The following table sets forth the names and ages of the current directors
and executive officers of Fan and the principal offices and positions held by
each person. Each director and officer has served since 1997. Each director
serves until the next annual meeting of stockholders.

Names of Executive
Officers and Directors Age Position
- - ---------------------- --- --------

George H. Fancher Jr. ............. 60 Chairman of the Board, Chief
Operating Officer and Director
William E. Grafham................. 62 President, Chief Executive Officer and
Director
Jeffrey J. Scott................... 37 Vice President and Director
Albert A. Golusin.................. 45 Secretary

George H. Fancher Jr. Mr. Fancher has been a self employed independent oil
producer, operator and consultant in the Rocky Mountain Area since 1969, and has
conducted business as Fancher Oil Company since 1980. He was employed by Chevron
as a Petroleum Engineer, in Casper, Wyoming, and Denver, Colorado from 1962
until 1966. In 1966, he joined Ball Brothers Research Corporation in Boulder,
Colorado, followed by two years with an independent oil company before forming
Smith-Fancher, independent producers in the Rocky Mountain and Mid-Continent
regions. In 1980, he formed Fancher Oil Company and has operated as a sole
proprietor since that time.

George Fancher has been a director of the Independent Petroleum Association
of America (IPAA), the Independent Petroleum Association of Mountain States
(IPAMS) and the Rocky Mountain Oil and Gas Association (RMOGA). He is a
registered Petroleum Engineer and a member of the Society of Petroleum
Engineers. He has served on the Crude Oil Policy Committee, Improved Oil
Recovery Task Force Committee, and Public Lands Committee of the IPAA. He is
also a member of the Liaison Committee of Cooperating Oil and Gas Associations,
and currently is the past Chairman of the Rocky Mountain Producers Advisory
Group and until 1998 was on the Board of Directors of the Petroleum Technology
Transfer Council (PTTC).

William E. Grafham. Mr. Grafham has an investment banking background having
worked for two major national Canadian Brokerage houses from 1963 until 1977. In
1977 he established operating companies representing West German partnerships
investing in natural resources. Offices were set up in Calgary, Alberta; Denver,
Colorado; and Vancouver, BC. The Calgary and Vancouver operating companies were
eventually merged into larger entities; while the main assets of the Denver
operation were sold in 1988.

Since 1988 Mr. Grafham, a private investor, has participated in the
formation of a number of businesses investing in technology, oil and gas,
precious metals and mining, and real estate. Most of these investments have
resulted in the companies going public, with involvements in a number of
countries. Mr. Grafham has been active as a director in various companies during
the last five years. He is currently a director or officer of the following
publicly-traded companies which trade on Canadian exchanges:

33
<PAGE>

Company Public Exchange Type of Business

Jerez Energy International, Inc. Alberta Stock Exchange Oil and gas
Walking Bear Resources Inc. Alberta Stock Exchange Oil and gas
Tellis Gold Mining Company Inc. Vancouver Stock Exchange Technology

Jeffrey J. Scott. Mr. Scott is currently President and Chief Operating
Officer and a director of Calgary-based Jerez Energy International Inc. Jerez
is a public Canadian international oil and gas exploration and development
company focused in West Africa. He has held this position since May 1995. Mr.
Scott is also Vice President of Operations of Postell Energy Co. Ltd., a
privately held Canadian oil and gas company. He has held this position since
1986. Mr. Scott is a graduate of the University of Calgary and has been active
in the oil and gas industry since 1979 and has experience in the areas of
production, operations and management. He is also a director of Petro Well
Energy Services, Inc., a public company which owns oil service rigs.

Albert A. Golusin. Mr. Golusin has been a Certified Public Accountant since
1981. From 1985 to 1992, Mr. Golusin was the Controller of a public company
called N-W Group, Inc. which later became Glenayre Electronics. He was
responsible for assisting in the public reporting to regulatory agencies in the
United States and Canada for the company. From 1993 to the present, Mr. Golusin
has consulted to companies in the process of becoming publicly traded. Until
early 2000, he shared an office with Arizona Corporate Management, Inc. in
Scottsdale, Arizona.

Consultant

Adrian H. Goodisman. Mr. Goodisman has 13 years of exploration and
production experience primarily in the U.S. and Western Canada, as well as
international experience in the UK, Egypt, Australia and Japan. He is a
petroleum engineer and has gained technical excellence in field exploitation,
acquisition/divestment's, reserve determinations and economic evaluations. He
has a Bachelor of Science (honors) degree in mathematics from the University of
Salford, UK and a Master of Science degree in petroleum engineering from the
University of Texas at Austin. Mr. Goodisman is also actively involved with the
Society of Petroleum Engineers (SPE) and is presently on the SPE National
Membership Committee, and a director of the Gulf Coast (Houston) Section. For
the 1995/96 year, he served as Chairman of the Board of Directors for the SPE
Canadian Section.

EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the
compensation paid by Fan for services rendered in all capacities for the two
fiscal years ended December 31, 1998 and 1999 of the chief executive officer at
December 31, 1999 and all officers and directors, as a group.

34
<PAGE>

Summary Compensation Table

Long Term
Annual Compensation Compensation
-------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Positions at 12/31/98 Salary Bonus Compensation Options Compensation
- - --------------------- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
William E. Grafham, President
1998 .......................... - 0 - - 0 - $10,000(1) -- None
1999 .......................... - 0 - - 0 - $22,452(2) None

All officers and directors,
as a group (five persons)
1998 ..........................$ 30,000(3) - 0 - $43,000(4) 100,000 None
1999 ..........................$ 7,500(3) - 0 - $44,953(5) -0- None
</TABLE>
- - ------------------

(1) Includes 50,000 shares of common stock, valued at $10,000, issued for
services as an officer and director.
(2) Includes 99,788 shares of common stock issued at a deemed value of $0.225
per share in satisfaction of $22,452 owed to en entity owned by Mr. Grafham
for rent and reimbursement expenses.
(3) Paid to Albert A. Golusin, Secretary, for services as a consultant.
(4) Includes 215,000 shares of common stock, valued at $43,000, issued to five
persons for services as officers, directors and representatives of Fan.
Subsequently, one person surrendered 50,000 of the shares for cancellation.
(5) Includes 199,788 shares issued at a deemed value of $0.225 per shares to
two officers, one of whom is a director, in satisfaction of $44,952 in
compensation or reimbursements owed to them.

Fan has an agreement to pay Albert A. Golusin as a consultant, for part
time accounting, financial reporting and corporate secretarial services. $7,500
in cash and $22,500 in stock (100,000 shares) was paid to Mr. Golusin in 1999.
Mr. Golusin received 15,000 shares of common stock on July 1, 1998 for services
he provided to Fan through June 30, 1998.

Value of Options at December 31, 1999
<TABLE>
<CAPTION>

Aggregate Fiscal Year End Option Values

Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End
Exercisable/Unexercisable Exercisable/Unexercisable(1)
--------------------------- ---------------------------
<S> <C> <C>
William E. Grafham............... 200,000/ -- $ -- / --
All officers and directors
as a group...................... 900,000/ -- $ -- / --
</TABLE>
- - ----------------------

(1) Because there is no trading market, the estimated value is based on $0.20
per share, the last price paid for common stock of Fan, less the exercise
price of the options.

35
<PAGE>

Option Grants in the Last Two Fiscal Years

Fan granted options during 1998 and 1999 to the following officers and
directors:
<TABLE>
<CAPTION>

Percent of Total
Number of shares Options Granted Exercise Price Expiration
Name Underlying Options During Year ($/sh) Date
- - ---- ------------------ ---------------- -------------- ----------
<S> <C> <C> <C> <C>
1998:
George A. Cloudy ............... 100,000(1) 100% $0.50 04/30/08
1999: None None None None
</TABLE>
- - ----------------------

(1) These options became exercisable in full April 9, 1999. All outstanding
options are presently exercisable. Mr. Cloudy resigned as a director in
April 2000.

(2) The options are nonstatutory ("nonqualified") options. All other
outstanding options are intended to be incentive stock options under
Section 422A of the Internal Revenue Code of 1986.

Stock Option Plan

Fan has adopted its 1997 Statutory and Non-Statutory Incentive Stock Option
Plan ("Plan") which authorizes Fan to grant incentive stock options within the
meaning of Section 422A of the Internal Revenue Code of 1986, as amended, and to
grant nonstatutory stock options. The Plan relates to a total of 1,000,000
shares of common stock. Options relating to 910,000 shares have been issued and
are outstanding and all are presently exercisable. The options are exercisable
at $0.20 per share for 30,000 shares, $0.22 per share for 100,000 shares, $0.35
per share for 680,000 shares and $0.50 per share for options to purchase 100,000
shares. The outstanding options must be exercised within 10 years from the date
of grant and no later than three months after termination of employment or
service as a director, except that any optionee who is unable to continue
employment or service as a director due to total and permanent disability may
exercise such options within one year of termination and the options of an
optionee who is employed or disabled and who dies must be exercised within one
year after the date of death.

The Plan requires that the exercise prices of options granted must be at
least equal to the fair market value of a share of common stock on the date of
grant, provided that for incentive options if an employee owns more than 10% of
Fan's outstanding common stock then the exercise price of an incentive option
must be at least 110% of the fair market value of a share of Fan's common stock
on the date of grant, and the maximum term of such option may be no longer than
five years. The aggregate fair market value of common stock, determined at the
time the option is granted, for which incentive stock options become exercisable
by an employee during any calendar year is limited to $100,000.

The Plan is to be administered by Fan's Board of Directors or a committee
thereof which determines the terms of options granted, including the exercise
price, the number of shares of common stock subject to the option, and the terms
and conditions of exercise. No option granted under the Plan is transferrable by
the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by such
optionee.

36
<PAGE>

Compensation of Directors

Fan does not pay cash compensation to directors. Three of the directors of
Fan were issued 50,000 shares of restricted common stock of Fan on July 1, 1998
as compensation for services furnished to Fan as an officer or director through
June 30, 1999. Fan has granted each of the directors options to purchase shares
of common stock at exercise prices of $0.35 per share for four director for
700,000 shares and at $0.50 per share to one director for 100,000 shares. The
options were granted under the Plan and must be exercised within 10 years from
the date of grant.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth, as of April 30, 2000, and as adjusted to
reflect the sale of the shares of common stock offered pursuant to this
prospectus, certain information with respect to the beneficial ownership of our
common stock by:

o each director and officer of Fan,
o all of the directors and executive officers as a group,
o each person known to us to be the beneficial owner of 5% or more of
the outstanding shares of common stock, with such person's address,
and
o each selling stockholder whose shares have been registered for resale
in the registration statement of which this prospectus is a part (the
"Selling Stockholders").

Unless otherwise indicated, the person or entity listed in the table is the
beneficial owner of the shares and has sole voting and investment power with
respect to the shares indicated.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of April 30, 2000 are deemed
outstanding. Percentage of beneficial ownership is based upon shares of common
stock outstanding prior to this offering and shares of common stock expected to
be outstanding after this offering. To our knowledge, except as set forth in the
footnotes to this table and subject to applicable community property laws, each
persons named in the table has sole voting and investment power with respect to
the shares set forth opposite such person's name.

<TABLE>
<CAPTION>
Shares beneficially
owned after offering
--------------------
Percent
Shares beneficially -------------------
owned prior to offering(1) Minimum Maximum
Name of Beneficial Owner ------------------------- Number of Shares Offering Offering
or Name of Officer or Director Number Percent Being Offered Sold Sold
- - ------------------------------ ------ ------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C>
William E. Grafham, Director ............................ 1,043,356(2) 11.0% -- 10.6% 8.4%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI

George H. Fancher Jr., Director ......................... 2,300,000(3) 24.3% -- 23.3% 18.5
1801 Broadway, Suite 720
Denver, Colorado 80202

37
<PAGE>

<CAPTION>
Shares beneficially
owned after offering
--------------------
Percent
Shares beneficially -------------------
owned prior to offering(1) Minimum Maximum
Name of Beneficial Owner ------------------------- Number of Shares Offering Offering
or Name of Officer or Director Number Percent Being Offered Sold Sold
- - ------------------------------ ------ ------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C>
Jeffrey J. Scott, Director .............................. 250,000(4) 2.6% -- 2.5% 2.0%

Albert A. Golusin, Secretary ............................ 315,000(5) 3.3% -- 3.2% 2.5%

All officers and directors as a group (4 persons) ....... 3,908,356(8) 41.4% -- 39.7% 31.4%

David Grafham ........................................... 650,000 1.9% -- 6.6% 5.2%
1307 West 8th Avenue
Vancouver, B.C ..........................................
Canada V5H 3W4

Euro Securities Ltd.(6) ................................. 650,000 6.9% -- 6.6% 5.2%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI

Linda Kemble ............................................ 650,000 6.9% -- 6.6% 5.2%
#59 Temple Hill Dr. N.E .................................
Calgary, Alberta
Canada T1Y 404

Don Stewart(6) .......................................... 738,000(7) 7.8% -- 7.5% 5.9%
P. O. Box 245
Grand Cayman, BWI

Susan Scott ............................................. 415,000(10) 4.3% 100,000 4.2% 3.3%

Alex Whiteside .......................................... 405,000(9) 4.2% 135,000 4.1% 3.2%

Aldridge Holdings, Ltd. ................................. 300,000(10) 3.1% 100,000 3.0% 2.4%

Bank Lips, Ltd. ......................................... 372,000(11) 3.9% 100,000 3.7% 2.9%

Colony Investments Limited .............................. 320,000(12) 3.4% 100,000 3.2% 2.5%

EMB Management Consultants, Ltd. ........................ 300,000(10) 3.1% 100,000 3.0% 2.4%

Hartford Securities ..................................... 300,000(10) 3.1% 100,000 3.0% 2.4%

Charles Maddin .......................................... 300,000(10) 3.1% 100,000 3.0% 2.4%

Wadeco, Inc. ............................................ 345,000(13) 3.5% 65,000 3.4% 2.8%
</TABLE>
- - ----------------------

(1) All securities are owned directly and beneficially unless otherwise noted.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. shares of common stock subject
to options and warrants currently exercisable or exercisable within 60 days
are deemed outstanding for determing the percentage of the person or entity
holding such securities but are not outstanding for computing the
percentage of any other person or entity.

38
<PAGE>

(2) Includes 300,000 shares of common stock underlying presently exercisable
options and warrants.
(3) Includes 250,000 shares underlying presently exercisable stock purchase
warrants and options.
(4) Includes presently exercisable options to purchase up to 150,000 shares.
(5) Includes 100,000 shares of common stock underlying presently exercisable
options and stock purchase warrants.
(6) Euro Securities Ltd. is controlled by Euro Bank, a bank in Georgetown,
Grand Cayman Island, British West Indies, of which Don Stewart is a
director. Mr. Stewart has no other relationship with, or control over, Euro
Securities Ltd.
(7) Includes 88,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(8) Includes 100,000 shares underlying presently exercisable stock purchase
warrants and 700,000 shares of common stock underlying presently
exercisable options.
(9) Includes 135,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(10) Includes 100,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(11) Includes 172,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(12) Includes 120,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(13) Includes 65,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(14) Includes 100,000 shares underlying presently exercisable stock purchase
warrants and 900,000 shares of common stock underlying presently
exercisable options

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

On October 31, 1997 Fan sold 2,000,000 shares for $1,000,000 and paid
finder's fees and related offering costs of $47,894 and issued warrants to
purchase an additional 1,180,000 shares on or before October 31, 1997 to 11
non-United States persons or entities pursuant to Regulation S adopted under the
Securities Act. William E. Grafham, Fan's President, a citizen of Canada and a
resident of Grand Cayman, BWI, purchased 200,000 shares and 100,000 warrants for
$100,000. The shares are restricted from transfer except in accordance with
applicable United States' laws and the purchasers each agreed to resell the
securities to a "U.S. Person" as defined in Regulation S, only in accordance
with applicable laws. All of the common stock and the shares underlying the
warrants, other than the shares and warrants held by Mr. Grafham, have been
registered for resale by the holders. Fan reduced the exercise price for the
warrants to $0.30 per share ($354,000 upon exercise of all warrants) and
extended the expiration to July 31, 1999.

On November 11, 1997 Fan completed the acquisition of a 25% working
interest in two natural gas exploration and development prospects in California
from George H. Fancher Jr., subject to a net .625% overriding royalty interest
retained by Mr. Fancher. The prospects together totaled over 30,000 acres and
are located in the southern part of the Sacramento Basin. See
"Business--Principal Properties." Fan paid $907,951 in cash and issued 2,250,000

39
<PAGE>

shares at a deemed value of $300,000 for the property. Mr. Fancher acquired the
interests in the properties early in 1997 and had incurred approximately
$1,208,000 for acquisition of his interest in the properties and payment of his
portion of exploration and leasehold costs and expenses before transfer to Fan.
Fan also paid $6,247 to Mr. Fancher representing interest on a portion of Mr.
Fancher's cost between the time that the agreement to acquire the properties was
made and the date of completion of the transaction As additional consideration,
Fan agreed to issue 500,000 additional restricted shares to Mr. Fancher if the
gross revenue received by Fan from the prospects is at least equal to all direct
costs of Fan associated with acquiring the interest in the prospects and
exploration, drilling and other related expenses by December 31, 1999. At
December 31, 1997 Fan had incurred direct costs of approximately $1,275,000,
including the payments to Mr. Fancher. Prior to the acquisition, Mr. Grafham and
consultants retained by Fan reviewed the available geologic data on the
properties and negotiated the purchase price based on the perceived value of the
properties as assembled by the Operator, the acquisition and exploration
expenditures on the properties and the lack of a public market for Fan's shares.

40
<PAGE>

Mr. Fancher agreed to become a director of Fan following completion
of the transaction. At the end of 1999 Mr. Fancher surrendered 750,000 shares of
common stock to Fan for cancellation. Surrender was required under terms of the
acquisition because Fan did not participate in drilling at least 10 successful
natural gas wells on the two prospects.

Fan paid $8,000 in 1997, $24,000 in 1998 and $22,452 in 1999 to Arizona
Corporate Management, Inc., a corporation owned by William E. Grafham, as
reimbursement for office and related expenses and for rent. The 1999 amount was
paid by issuing 99,788 shares for our common stock at an agreed value of $0.225
per share. Fan has a month-to-month agreement to pay $2,000 per month to the
corporation for office space, use of certain office equipment and for limited
administrative services. Fan also has an arrangement with George H. Fancher Jr.,
pursuant to which Fancher Oil LLC was paid $2,000 in 1997, and $24,000 in 1998
for office facilities, use of certain office equipment and limited
administrative and technical support in 1999. Mr. Fancher canceled an obligation
of Fan to pay $22,000 to Fancher Oil LLC.

On July 1, 1998, Fan issued 215,000 shares to five officers, directors and
consultants for services rendered through June 30, 1998. One director
surrendered 50,000 shares for cancellation at the end of 1999.

On an agreement dated October 1, 1998, the Board of Directors, with Mr.
Fancher abstaining, approved a transaction in which Fan acquired an undivided
20% working interest (16% net revenue interest) in Fancher Oil LLC's
approximately 3,525 acre Horsethief exploration prospect located in Sweetwater
County, in the Green River Basin of southwestern Wyoming. Fan agreed to pay 24%
of all costs incurred in acquiring the initial well and in acquiring, processing
and interpreting the 3-D Seismic data and drilling of the initial well through
the casing point for a 20% working interest, which was equivalent to the rate
paid by the nonaffiliated participate in the project. Under the agreement Fan
reimbursed Fancher Oil LLC $131,000 as acreage acquisition and seismic survey
expenses and approximately $104,000 as Fan's share of drilling and completion
costs in the initial exploratory well. Fancher Oil LLC holds a 55% working
interest in the prospect and earns operating fees, standard in the area, from
the other working interest owners. Fan also has the right to participate on an
equivalent basis in four other exploratory oil and natural gas prospects being
assembled by the operator in the area near the Horsethief prospect.

PLAN OF DISTRIBUTION

Shares of Common Stock Offered by Fan

The offering of unit of common stock and warrants is being conducted on a
400,000 share minimum (the "minimum offering"), 3,000,000 share maximum (the
"maximum offering") direct participation basis at an offering price of $0.10 per
unit. The four persons who are Fan's officers and directors will offer the units
on behalf of Fan. They will not be compensated, directly or indirectly, in
connection with participation in the sale of the units. No broker-dealer or
other person has made any commitment to purchase or sell any or all of the units
offered by Fan. The officers and directors will use their best efforts to
identify purchasers for the units during the offering period. Fan will agree to
indemnify each officer and director against certain liabilities, including
certain liabilities or claims under the Securities Act or to contribute to any
payments the personmay be required to make for any liabilities incurred.

All proceeds from subscriptions for units offered and sold by Fan will be
deposited promptly with The Bank of Denver, Denver, Colorado, as Escrow Agent,
pursuant to an Escrow Agreement between Fan and the Escrow Agent. Funds received
from subscriptions will be transmitted to the Escrow Agent no later than noon of
the business day following receipt by Fan. Unless Fan has completed at least the
minimum offering and deposited the proceeds with the Escrow Agent within 120

41
<PAGE>

days from the date of this Prospectus (which date may be extended for up to an
additional 60 days without notice by Fan), subscriptions will be refunded
promptly to subscribers in full without deduction therefrom or interest thereon.
During the 120-day offering period and any extension, no subscriber will be
entitled to a refund of any subscription.

We may sell shares of common stock to interested subscribers if they reside
in a state in which the shares may be sold and in which Fan is permitted to sell
the shares. Fan is not obligated to sell any shares to any person. Additionally,
our officers, directors and present stockholders and affiliates or persons
associated with such persons may purchase all or any portion of the 400,000
share minimum offering, including making purchases of amounts necessary to
complete the minimum offering within the offering period. Such persons would
purchase the units on the same terms as purchases by the public provided that
units purchased by officers or directors or their affiliates would be taken for
investment and would not be resold except in compliance with applicable
securities laws. The proceeds from this offering will not be utilized, directly
or indirectly, to enable anyone to purchase our units in this offering. To the
extent that our officers, directors, current stockholders and their affiliates
or associates purchase units offered, the number of units in the minimum
offering required to be purchased by the general public will be reduced by a
like amount and under such circumstances control of Fan by the present
stockholders would be increased. Our officers and directors may be deemed to be
"underwriters" as such term is defined under the Securities Act.

Sale of Shares by Selling Stockholders

Once we have completed or discontinued the primary offering, the Selling
Stockholders may commence a secondary offering of shares they receive if they
exercise outstanding warrants they hold. There will be no concurrent offerings.
The Selling Stockholders described in the table on page 39 above hold a total
warrants entitling them to purchase up to 900,000 additional shares. The shares
to be issued upon exercise of the warrants will be restricted securities as
defined in Rule 144 adopted under the Securities Act while held by the Selling
Stockholders.

Each of the Selling Stockholders has agreed not to sell or otherwise
transfer his or her shares for at least 120 days from the date of this
prospectus and until Fan has concluded our offering (the "Lockup Period").
Thereafter, the Selling Stockholders (or their pledgees, donees, transferees, or
other successors in interest) from time to time may sell all or a portion of the
shares "at the market" to or through a market maker or into an existing trading
market, if a market then exists, in private sales, including direct sales to
purchasers, or otherwise at prevailing market prices or at negotiated or fixed
prices. The Selling Stockholders may offer and sell shares following the Lockup
Period regardless of the outcome of the offering by Fan. By way of example, and
not by way of limitation, the shares may be sold by one or more of the following
methods:

o A block trade in which a broker or dealer so engaged will attempt to
sell the shares as agent but may purchase and resell a portion of the
block as principal to facilitate the transaction;
o Purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus;
o An exchange distribution in accordance with the rules of such
exchange; and
o Ordinary brokerage transactions and transactions in which the broker
solicits purchasers.

42
<PAGE>

In effecting sales, brokers or dealers engaged by the seller may arrange
for other brokers or dealers to participate. Brokers or dealers will receive
commissions or discounts from the seller in amounts to be negotiated with the
Selling Stockholder immediately prior to the sale. It is anticipated that the
per share selling price for the shares sold when a public market exists will be
at or between the "bid" and "asked" prices of our common stock, if any, as
quoted in the over-the-counter market immediately preceding the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act, in connection
with such sales. A copy of this prospectus will be delivered by the Selling
Stockholder to each purchaser or as otherwise required at the time of sale.
Expenses of any such sale will be borne by the parties as they may agree.

In addition, any securities covered by the prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than pursuant to the prospectus.

Certain Provisions of the Articles of Incorporation, Bylaws and Nevada Law

Fan has the authority to issue shares of new classes of preferred stock and
to determine the rights, preferences, privileges, designations and limitations
of preferred stock. For instance, Fan may determine the dividend rights,
dividend rate, conversion rights, voting rights, terms of redemption and other
terms or conditions of newly issued preferred stock. This authority could make
it more difficult for another person to propose an acquisition of Fan or a
change in control transaction without the cooperation of the Board of Directors.

Our Restated Articles of Incorporation contain a provision, authorized
under Nevada law, which limits the liability of our directors or officers for
monetary damages for breach of fiduciary duty as an officer or director other
than for intentional misconduct, fraud or a knowing violation of law or for
payment of a dividend in violation of Nevada law. Such provision limits recourse
for money damages which might otherwise be available to Fan or stockholders for
negligence by individuals while acting as officers or directors. The Restated
Articles of Incorporation do not provide for any limitation on the personal
liability of directors for:

o Any breach of the director's duty of loyalty to Fan or its
stockholders,
o Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o Unlawful corporate distributions, or
o Any transaction from which such director derives an improper personal
benefit.

Although this provision would not prohibit injunctive or similar actions
against directors or officers, the practical effect of such relief would be
limited.

The Articles of Incorporation and Bylaws also contain provisions requiring
Fan to indemnify officers, directors and certain employees for certain
liabilities incurred in connection with actions taken on behalf of Fan,
including expenses incurred in defending against such liabilities. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of Fan pursuant to the
foregoing provisions, or otherwise, Fan has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

43
<PAGE>

Anti-Takeover Statutes

The Nevada General Corporation Law ("Nevada GCL") contains two provisions,
described below as "Combination Provisions" and the "Control share Act," that
may make more difficult the accomplishment of unsolicited or hostile takeover
transactions.

Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Stockholders. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),
except those which are approved by the board of directors before the interested
stockholder first obtained a 10% interest in the corporation's stock. There are
additional exceptions to the prohibition, which apply to combinations if they
occur more than five years after the interested stockholder's date of acquiring
shares. The Combination Provisions apply unless the corporation elects against
their application in its original articles of incorporation or an amendment
thereto, or in its bylaws. Fan's Articles of incorporation and Bylaws do not
currently contain a provision rendering the Combination Provisions inapplicable.

Nevada Control Share Act. Nevada's Control Share Acquisition Act imposes
procedural hurdles on and curtails greenmail practices of corporate raiders. The
Control Share Act temporarily disenfranchises the voting power of "control
shares" of a person or group ("Acquiring Person") purchasing a "controlling
interest" in an "issuing corporation" (as defined in the Nevada GCL) not opting
out of the Control Share Act. In this regard, the Control Share Act will apply
to an "issuing corporation" unless, before an acquisition is made, the articles
of incorporation or bylaws in effect to the 10th day following the acquisition
of a controlling interest provide that it is inapplicable. Fan's Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.

Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of Fan and its
stockholders at the time of the occurrence of a transaction governed by the
Control Share Act (assuming that Fan's Articles of Incorporation or Bylaws have
not theretofore been amended to include opting out provisions) would determine
whether the Control Share Act is applicable.

The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
Interest, " and (2) acquired within 90 days immediately preceding that date. A
"Controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with 1/5)
of all voting power of the corporation. The Acquiring Person may not vote any
control shares without first obtaining approval from the stockholders not
characterized as "interested stockholders" (as defined in the act).

Our Restated Articles of Incorporation and Bylaws do not include provisions
which make the Control Share Act inapplicable.

44
<PAGE>

The Control Share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the 10th day following the acquisition of
a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. Fan's Articles of Incorporation and Bylaws do not address this
matter.

Shares Available for Future Sale

Upon completion of this offering, we will have 9,851,492 shares of common
stock outstanding if the minimum offering is completed and 12,451,492
outstanding if the maximum offering is completed assuming no exercise of (1)
outstanding warrants for the purchase of up to 1,180,000 shares or (2)
outstanding stock options for the purchase of 910,000 shares. All shares
included in the units sold in this offering and 2,623,533 presently outstanding
shares will be freely transferable by persons other than "affiliates" of Fan (as
that term is defined under the Securities Act), without restriction or further
registration under the Securities Act.

The remaining outstanding shares of common stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exception from registration is available, including the exemption contained in
Rule 144. See "Risk Factors-Shares Eligible for Future Sale."

In general, under Rule 144 a person who has beneficially owned shares for
at least one year is entitled to sell into a public market, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of their then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
issuer. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least two years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above.

DESCRIPTION OF SECURITIES

Authorized Stock

The authorized capital stock of Fan consists of 95,000,000 shares of common
stock, $0.001 par value per share, and 5,000,000 shares of preferred stock,
$0.001 par value per share. All of the issued and outstanding capital stock of
Fan is fully paid and nonassessable. The following summary descriptions of Fan's
preferred stock and common stock are qualified in their entirety by reference to
Fan's Restated Articles of Incorporation, which were filed as exhibits to the
Registration Statement of which this Prospectus is a part and which are
available from Fan upon request. See "Additional Information."

Common Stock

There are 9,451,492 shares of common stock outstanding and held by 522
stockholders of record. The holders of common stock are entitled to receive
ratable dividends when and as declared by the Board of Directors from funds
legally available therefor and to one vote for each share held of record on each
matter submitted to a vote of stockholders. In the event of a liquidation,
dissolution or winding-up, holders of common stock are entitled to share ratably

45
<PAGE>

in all assets remaining after payments to creditors and other payments required
by law. Holders of common stock have no preemptive rights and no rights to
convert their common stock into any other securities. The outstanding shares of
common stock are fully paid and nonassessable.

Warrants Included in Units

Each unit we are offering includes one warrant. Each warrant will represent
the right to purchase one share of our common stock at any time after the date
of this prospectus through 5:00 p.m. Mountain Time three years after the date of
this prospectus, at the exercise price of $0.10 per share. If the minimum
offering is sold, 400,000 warrants will be issued and 3,000,000 warrants will be
issued if all units are sold.

The exercise price and the number of shares issuable upon exercise are
subject to adjustment in certain events, including:

o the issuance of common stock as a dividend on our outstanding common
stock;
o subdivisions, combinations and reclassifications of our common stock;
o distribution to all holders of our common stock of evidences of our
indebtedness or assets (other than cash dividends); and
o certain mergers, consolidations or sales of substantially all of our
assets.

Except as stated, the warrants do not include provisions protecting holders
against dilution resulting from the sale of our common stock for less than the
exercise price of the warrants or the current market price.

Holders of warrants will be entitled to notice if: (a) we grant holders of
our common stock rights to purchase any of our securities or any other rights,
or (b) we authorize a reclassification, capital reorganization, consolidation,
merger or sale of substantially all of our assets. The warrants will be
represented by warrant certificates. We may from time to time supplement or
amend the terms of the warrants without the approval of holders of warrants in a
manner which does not adversely affect the warrant holders, including (but not
limited to) extending the expiration date or reducing the exercise price as our
Board of Directors may determine. We may make other amendments to the terms of
the warrants if we receive the consent of the holders of a majority of
outstanding warrants.

We have reserved from our authorized but unissued common stock a sufficient
number of shares for issuance upon exercise of the warrants. Exercise of each
warrant may be effected by delivery of the warrant certificate, duly endorsed
for exercise and accompanied by payment of the exercise price to the warrant
agent. The shares of our common stock issuable upon exercise of the warrants
will be fully paid and nonassessable upon issuance when paid for in the manner
contemplated by the warrant.

Holders of the warrants will have the opportunity to profit from any rise
in the market price for our common stock during the term of the warrants. While
the warrants are outstanding, the terms upon which we might expect to obtain
additional capital in the future is likely to be adversely affected. Holders of
the warrants may exercise them at a time when Fan would, in all likelihood, be
able to obtain needed capital by a new offering of securities on terms more
favorable to Fan than those provided for at that time by exercise of the
warrants.

46
<PAGE>

Preferred Stock

There are no shares of preferred stock outstanding. Fan may issue from time
to time in one or more series with such distinctive designations, rights,
preferences and limitations as the Board of Directors shall determine. The Board
of Directors has the authority to determine the rate of dividend, redemption
features, amounts payable upon liquidation, sinking fund provisions, conversion
features and voting powers.

Outstanding Warrants

General. The following is a brief summary of the material provisions of the
outstanding stock purchase warrants.

As of March 31, 2000, we had outstanding 1,180,000 warrants held by nine
persons. Each outstanding warrant entitles the holder thereof to purchase at any
time in whole or in part over a one year period from the date the warrant was
issued, one share of common stock at an exercise price of $0.15 per share,
subject to adjustment referred to below, which expire October 31, 2000. The
exercise price and number of shares of common stock purchasable upon the
exercise of the warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations and
reclassification of the common stock, or sale by Fan of shares of its common
stock or other securities convertible into common stock at a price below the
then applicable exercise price of the outstanding warrants. Outstanding warrants
are issuable in minimum increments of 1,000 shares and no fractional shares will
be issued upon exercise of the outstanding warrants.

The outstanding warrants are, and shares of common stock of Fan issued upon
exercise of the outstanding warrants shall be, nontransferable without the prior
written consent of Fan and may be transferred only in accordance with the
Securities Act.

Transfer Agent and Warrant Agent

Atlas Stock Transfer Corp., Salt Lake City, Utah, is the transfer agent for
the common stock and will be warrant agent for the warrants included in the
units.

LEGAL MATTERS

The validity of the issuance of the units, the common stock and warrants
included in the units being offered hereby and shares of common stock to be
issued upon exercise of the warrants by Fan have been passed upon for Fan by
Alan W. Peryam, LLC, Denver, Colorado.

EXPERTS

The balance sheet of Fan as of December 31, 1999 and the statements of
operations, stockholders' equity and cash flows for the fiscal years ended
December 31, 1998 and 1999 and cumulative amounts from January 1, 1997 to
December 31, 1999 have been included herein in reliance upon the report of
Wheeler Wasoff, P.C., Denver, Colorado, independent certified public
accountants, given upon the authority of such firm as experts in accounting and
auditing. The Board of Directors of Fan replaced Fan's prior auditor December

47
<PAGE>

24, 1997 due to the relocation of Fan's executive offices to Denver, Colorado.
The report of Mr. Schvaneveldt, the prior auditor for Fan's financial statements
for each of the two fiscal years ending December 31, 1996, was qualified as to
Fan's ability to continue as a going concern. There have been no disagreements
between Fan and the former accountant.

ADDITIONAL INFORMATION

Fan has filed with the SEC a Registration Statement on Form SB-2
("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act") with respect to the Securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the SEC. For further information with respect to Fan
and the securities offered hereby, we refer you to the Registration Statement
and the exhibits and schedules filed with it, which may be examined at the SEC's
offices without charge. Copies of the Registration Statement may be obtained
from the SEC if you pay the prescribed fees. Statements made in this Prospectus
regarding the contents of any contract, agreement or document are not
necessarily complete, and we refer you to the copy of the contract, agreement or
other document filed as an exhibit to the Registration Statement, and each
statement in the Prospectus is qualified in its entirety by this reference. Fan
is a reporting company registered under the Securities Exchange Act of 1934, as
amended ("1934 Act"). Fan therefore files reports and other information with the
SEC. All of such reports and other information may be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at regional offices of the SEC located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. The Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
such site is http:\\www.sec.gov.

48
<PAGE>

INDEX TO FINANCIAL STATEMENTS

(1) Financial Statements:
Independent Auditor's Report ..................................... F-1
Balance Sheet December 31, 1999 .................................. F-2
Statements of Operations Years ended December 31, 1998 and
1999 and Cumulative Amounts from Inception to
December 31, 1999 ........................................... F-3
Statement of Stockholders' Equity Years Ended December 31,
1997, 1998 and 1999 ......................................... F-4
Statements of Cash Flows Years ended December 31, 1998
and 1999 and Cumulative Amounts from Inception to
December 31, 1999 ..................................... F-5 - F-8

Notes to Financial Statements .............................. F-9--F-19

Balance Sheet as of December 31, 1999 and
March 31, 2000 (Unaudited) ................................. FF-1
Statements of Operations for the Three Months Ended
March 31, 1999 and 2000 and cumulative amounts from
inception (Unaudited) ...................................... FF-2
Statement of Stockholders' Equity Three Months Ended
March 31, 2000 (Unaudited) ................................. FF-3
Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 2000 and cumulative amounts
from inception (Unaudited) ................................. FF-4
Notes to Financial Statements ................................... FF-5
(2) Schedules
None

49
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To The Board of Directors and Stockholders FAN ENERGY INC.

We have audited the accompanying balance sheet of Fan Energy Inc. (a development
stage company) as of December 31, 1999 and the related statements of operations,
stockholders' equity and cash flows for the two years then ended and cumulative
amounts from January 1, 1997 to December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fan Energy Inc. as of December
31, 1999 and the results of its operations and its cash flows for the two years
then ended and cumulative amounts from January 1, 1997 to December 31, 1999 in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses from its initial
operations and has not earned significant revenues from its principal operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ Wheeler Wasoff, P.C.
WHEELER WASOFF, P.C.

Denver, Colorado
March 17, 2000

F-1

<PAGE>

<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
BALANCE SHEET
December 31, 1999

ASSETS

<S> <C>
CURRENT ASSET
Cash ..................................................................... $ 11,290
Accounts receivable ...................................................... 46,147
-----------
Total Current Asset .................................................... 57,437

OIL AND GAS PROPERTIES (Note 3) ............................................ 327,589
-----------
$ 385,026
===========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable - trade ................................................. $ 8,397
related party ......................................... 20,500
Note payable - bank ...................................................... 20,000
-----------
Total Current Liabilities .............................................. 48,897
-----------
COMMITMENTS AND CONTINGENCIES (Note 3)

STOCKHOLDERS' EQUITY (Note 5)
Preferred stock, $.01 par value
Authorized - 5,000,000 shares
Issued - none ...................................................... --
Common stock, $.001 par value
Authorized - 95,000,000 shares
Issued and outstanding - 9,451,492 shares .......................... 9,452
Additional paid-in capital ............................................... 2,317,509
Deficit accumulated during the development stage ......................... (2,091,332)
Additional paid-in capital stock options ................................. 100,500
-----------
336,129
-----------
$ 385,026
===========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-2

<PAGE>

<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Years ended December 31, 1998 and 1999

Cumulative
Amounts from
Jan. 1, 1997 to
1998 1999 Dec. 31, 1999
---- ---- ---------------
REVENUES
<S> <C> <C> <C>
Oil and gas sales .......................... $ -- $ 152,832 $ 152,832
------------ ------------ -----------

OPERATING EXPENSES
Lease operating expenses ................... -- 31,631 31,631
General and administrative ................. 198,851 129,673 521,509
Depletion .................................. -- 124,938 124,938
Impairment of oil and gas properties ....... 1,257,702 300,000 1,557,702
Interest (Note 3) .......................... -- 2,137 8,384
------------ ------------ -----------
1,456,553 588,379 2,244,164
------------ ------------ -----------

NET (LOSS) ................................... $ (1,456,553) $ (435,547) $ (2,091,332)
============ ============ ===========

NET (LOSS) PER COMMON SHARE - Basic
and Diluted ............................... $ (.17) $ (.04) $ (.29)
============ ============ ===========

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - Basic and Diluted .... 8,567,537 10,051,567 7,210,131
============ ============ ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-3

<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999

Common Stock Additional
-------------------- Paid-In
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balance, January 1, 1997 .......................................................... 771,704 $ 772 $ 503,876
Reclassification of deficit pursuant to quasi reorganization ...................... -- -- (504,648)
Sale of common stock and warrants pursuant to private placement, at $.20 per unit.. 2,500,000 2,500 497,500
Cost of private placement offering ................................................ -- -- (430)
Issuance of common stock for services, valued at $.20 per share ................... 250,000 250 49,750
Sale of common stock and warrants pursuant to private placement, at $.50 per unit.. 2,000,000 2,000 998,000
Costs of private placement offering ............................................... -- -- (52,439)
Issuance of common stock for property, valued at $.133 per share .................. 2,250,000 2,250 297,750
Issuance of common stock warrants for offering costs .......................... -- -- 4,545
Issuance of stock options ......................................................... -- -- 2,332
Net (Loss) ........................................................................ -- -- --
----------- ----------- -----------
Balance, December 31, 1997 ........................................................ 7,771,704 7,772 1,796,236
Issuance of common stock for services, valued at $.20 per share ............... 215,000 215 42,785
Exercise of common stock warrants for cash, at $.20 per share ................. 2,065,000 2,065 410,935
Net (Loss) ........................................................................ -- -- --
----------- ----------- -----------
Balance, December 31, 1998 ........................................................ 10,051,704 10,052 2,249,956
Conversion of payables to common stock by officers, valued at $.225 per share ..... 199,788 200 44,753
Forgiveness of debt by officer/director ........................................... -- -- 22,000
Return of common stock by officers/directors ...................................... (800,000) (800) 800
Net (Loss) ........................................................................ -- -- --
----------- ----------- -----------
Balance, December 31, 1999 ........................................................ 9,451,492 $ 9,452 $ 2,317,509
=========== =========== ===========
<CAPTION>
Deficit Additional
Accumulated Paid-In
During the Capital
Development Stock
Stage Options
----------- ----------
<S> <C> <C>
Balance, January 1, 1997 .......................................................... $ (504,648) $ --
Reclassification of deficit pursuant to quasi reorganization ...................... 504,648 --
Sale of common stock and warrants pursuant to private placement, at $.20 per unit.. -- --
Cost of private placement offering ................................................ -- --
Issuance of common stock for services, valued at $.20 per share ................... -- --
Sale of common stock and warrants pursuant to private placement, at $.50 per unit.. -- --
Costs of private placement offering ............................................... -- --
Issuance of common stock for property, valued at $.133 per share .................. -- --
Issuance of common stock warrants for offering costs .......................... -- --
Issuance of stock options ......................................................... -- 100,500
Net (Loss) ........................................................................ (199,232) --
----------- -----------
Balance, December 31, 1997 ........................................................ (199,232) 100,500
Issuance of common stock for services, valued at $.20 per share ............... -- --
Exercise of common stock warrants for cash, at $.20 per share ................. -- --
Net (Loss) ........................................................................ (1,456,553) --

----------- ------------
Balance, December 31, 1998 ........................................................ (1,655,785) 100,500
Conversion of payables to common stock by officers, valued at $.225 per share ..... -- --
Forgiveness of debt by officer/director ................................
Return of common stock by officers/directors ...................................... -- --
Net (Loss) ........................................................................ (435,547) --
----------- -----------
Balance, December 31, 1999 ........................................................ $(2,091,332) $ 100,500
=========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-4

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1999
Cumulative
Amounts from
Jan. 1, 1997 to
1998 1999 Dec. 31, 1999
---- ---- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) .................................................. $(1,456,553) $ (435,547) $(2,091,332)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Depletion ................................................... -- 124,938 124,938
Impairment of oil and gas properties ........................ 1,257,702 300,000 1,557,702
Stock options ............................................... -- -- 102,832
Stock for services and payables ............................. 43,000 44,953 137,953
Forgiveness of payables by officer/director ................. -- 22,000 22,000
Changes in assets and liabilities
(Increase) in accounts receivable ........................ -- (46,147) (46,147)
(Decrease) increase in accounts payable .................. (3,579) 27,161 28,897
Other .................................................... 10,383 -- --
----------- ----------- -----------
Net cash (used) provided by operating activities ............ (149,047) 37,358 (163,157)
----------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for oil and gas properties ........................ (672,795) (61,943) (1,710,229)
----------- ----------- -----------
Net cash (used) in investing activities ..................... (672,795) (61,943) (1,710,229)
----------- ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock warrants ............. 413,000 -- 413,000
Proceeds from sale of common stock .......................... -- -- 1,500,000
Cash paid for offering costs ................................ -- -- (48,324)
Proceeds from short-term borrowings ......................... -- 90,000 90,000
Repayments of short-term borrowings ......................... -- (70,000) (70,000)
----------- ----------- -----------
Net cash provided by financing activities ................... 413,000 20,000 1,884,676
----------- ----------- -----------

NET (DECREASE) INCREASE IN CASH ................................ (408,842) (4,585) 11,290

CASH, BEGINNING OF PERIODS ..................................... 424,717 15,875 --
----------- ----------- -----------
CASH, END OF PERIODS ........................................... $ 15,875 $ 11,290 $ 11,290
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-5

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998 and 1999

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

During the years ended December 31, 1997, 1998 and 1999, the Company paid cash
for interest of $6,247, $0 and $2,137, respectively.

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the year ended December 31, 1997, the Company:

o issued 2,250,000 shares of common stock, valued at $300,000 ($.133 per
share), as partial consideration for unproved oil and gas properties.

o issued 680,000 options to purchase common stock to officers, directors and
consultants, valued at $102,832.

o issued 250,000 shares of common stock for services, valued at $50,000 ($.20
per share).

o issued 180,000 warrants to purchase shares of common stock as partial
consideration for finder's fees in conjunction with the private placement
sale of common stock, valued at $4,545.

During the year ended December 31, 1998, the Company issued 215,000 shares of
common stock for services, valued at $43,000 ($.20 per share).

During the year ended December 31, 1999, the Company issued an aggregate 199,788
shares of common stock to officers for accounts payable, valued at $44,953
($.225 per share); and an officer/director forgave $22,000 in accounts payable.

The accompanying notes are an integral part of the financial statements.

F-6

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 1 - ORGANIZATION

Fan Energy Inc. (the "Company") is an independent energy company engaged in
the development, exploration and acquisition of crude oil and natural gas
reserves in the western United States. Originally formed as an Idaho
corporation in the early 1900s, the Company's predecessor was not
successful in the exploration of mining properties. In 1988 the predecessor
was merged into a newly-formed Nevada corporation as Eastern Star Mining,
Inc. and it was inactive thereafter, with no assets or liabilities through
the end of 1996. In early 1997, the corporation was reactivated when the
holder of a majority of the outstanding common stock transferred control of
the inactive corporation. The transferee elected new directors and officers
and caused the Company to effect a 10-into-1 reverse stock split. The name
of the corporation was changed to Fan Energy Inc. in December 1997.

Effective with the change in control and reactivation, the Company
undertook development stage activities as defined by Statement of Financial
Accounting Standards (SFAS) No. 7 and is considered a development stage
company effective January 1, 1997. Its principal activities have been
raising capital through the sale of its securities, acquiring undivided
minority interests in two oil and natural gas exploratory prospects in
California for cash and common stock and one prospect in Wyoming, and
commencing the drilling of exploratory and development wells on these
properties. In 1999, revenue from oil and gas production was received from
two wells.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OIL AND GAS PROPERTIES

The Company follows the full cost method to account for its oil and gas
exploration and development activities. Under the full cost method, all
costs incurred which are directly related to oil and gas exploration and
development are capitalized and subjected to depreciation and depletion.
Depletable costs also include estimates of future development costs of
proved reserves. Costs related to undeveloped oil and gas properties may be
excluded from depletable costs until such properties are evaluated as
either proved or unproved. The net capitalized costs are subject to a
ceiling limitation. Gains or losses upon disposition of oil and gas
properties are treated as adjustments to capitalized costs, unless the
disposition represents a significant portion of the Company's proved
reserves. A separate cost center is maintained for expenditures applicable
to each country in which the Company conducts exploration and/or production
activities.

Depletion and amortization of the full-cost pool is computed using the
units-of-production method based on proved reserves as determined annually
by the Company and independent engineers. An additional depletion provision
in the form of a valuation allowance is made if the costs incurred on oil
and gas properties, or revisions in reserve estimates, cause the total
capitalized costs of oil and gas properties in the cost center to exceed
the capitalization ceiling. The capitalization ceiling is the sum of (1)
the present value of future net revenues from estimated production of
proved oil and gas reserves applicable to the cost center plus (2) the
lower of cost or estimated fair value of the cost center's unproved
properties less (3) applicable income tax effects. The valuation allowance
was $1,557,702 at December 31, 1999.

F-7

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

The Company recognizes oil and gas revenues from its interests in producing
wells as oil and gas is produced and sold from these wells. The Company has
no gas balancing arrangements in place. Oil and gas sold is not
significantly different from the Company's product entitlement.

IMPAIRMENT

The Company has adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" which
requires that long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Oil and gas properties
accounted for using the full cost method of accounting, a method utilized
by the Company, are excluded from this requirement, but will continue to be
subject to the ceiling test limitations.

DEFERRED OFFERING COSTS

Deferred offering costs consist of costs incurred in connection with a
proposed public offering of the Company's common stock. During 1998 and
1999 the Company charged to operations $57,029 and $15,356, respectively,
for costs incurred for uncompleted offerings of the Company's common stock.

INCOME TAXES

The Company has adopted the provisions of SFAS No. 109, "Accounting for
Income Taxes". SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

At December 31, 1999, the Company had a net operating loss carryforward of
approximately $909,000 that may be offset against future taxable income
through 2019.

The Company has fully reserved the tax benefits of these operating losses
because the likelihood of realization of the tax benefits cannot be
determined.

The tax benefit of the loss carryforward has been offset by a valuation
allowance of the same amount. Of the total tax benefit $10,000 is
attributable to 1999.

Temporary differences between the time of reporting certain items for
financial and tax reporting purposes consist primarily of compensation
expense related to the issuance of stock options and exploration and
development costs on oil and gas properties.

F-8

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

The oil and gas industry is subject, by its nature, to environmental
hazards and cleanup costs. At this time, management knows of no substantial
costs from environmental accidents or events for which it may be currently
liable. In addition, the Company's oil and gas business makes it vulnerable
to changes in wellhead prices of crude oil and natural gas. Such prices
have been volatile in the past and can be expected to be volatile in the
future. By definition, proved reserves are based on current oil and gas
prices and estimated reserves. Price declines reduce the estimated quantity
of proved reserves and increase annual amortization expense (which is based
on proved reserves).

(LOSS) PER COMMON SHARE

(Loss) per common share is computed based on the weighted average number of
common shares outstanding during each period. Convertible equity
instruments such as stock warrants and options are not considered in the
calculation of net loss per share, as their inclusion would be
antidilutive.

In February 1997 SFAS No. 128, "Earnings Per Share" was issued effective
for periods ending after December 15, 1997. There is no impact on the
Company's financial statements from adoption of SFAS No. 128.

SHARED BASED COMPENSATION

In October 1995 SFAS No. 123" Accounting for Stock-Based Compensation" was
issued. This standard defines a fair value based method of accounting for
an employee stock option or similar equity instrument. This statement gives
entities a choice of recognizing related compensation expense by adopting
the new fair value method or to continue to measure compensation using the
intrinsic value approach under Accounting Principles Board (APB) Opinion
No. 25. The Company has elected to utilize APB No. 25 for measurement; and
will, pursuant to SFAS No. 123, disclose supplementally the pro forma
effects on net income and earnings per share of using the new measurement
criteria. During the years ended December 31, 1997 and 1998, the Company
issued warrants and/or options to purchase shares of its common stock. No
warrants or options were issued in 1999 (Note 5).

F-9

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH EQUIVALENTS

For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three months
or less at the time of purchase. On occasion, the Company has cash in banks
in excess of federally insured amounts.

BASIS OF ACCOUNTING

The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and extinguishment of liabilities in the normal
course of business.

As previously discussed, the Company is in the development stage and has
not realized significant revenues from its planned operations. As such, the
Company, as of December 31, 1999 has incurred net operating losses since
reactivation as a development stage company of $2,091,332 and does not have
sufficient working capital to fund its planned operations during the next
twelve months. Additional funding will be required to complete the
Company's planned drilling program, put successful wells into production
and finance general and administrative expenses. These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern. In order to meet the Company's continuing financing needs,
management of the Company intends to raise working capital through the sale
of common stock or other securities, or through other financing.

The Company's financial statements do not include any adjustments related
to the realization of the carrying value of assets or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

The ability of the Company to continue operations as a going concern is
dependent upon its success in obtaining capital through sale of common
stock or other securities and ultimately achieving profitable operations.

NEW TECHNICAL PRONOUNCEMENTS

In June 1998 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued for fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 is not expected to have a material impact on
the Company's financial statements.

In October 1998 SFAS No. 134, "Accounting for Mortgage Broker Securities",
was issued for fiscal years beginning after December 15, 1998. Adoption of
SFAS No. 134 does not have an impact on the Company's financial statements.

F-10

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In February 1999 SFAS No. 135, "Rescission of FASB Statement No. 75 and
Technical Corrections" was issued for the fiscal years beginning after
February 15, 1999. Adoption of SFAS No. 135 is not expected to have an
impact on the Company's financial statements.

In June 1999 SFAS No. 136, "Transfers of Assets to a not-For-Profit
Organization or Charitable Trust that Raises or Holds Contributions for
Others" was issued for fiscal years beginning after December 15, 1999.
Adoption of SFAS No. 136 does not have an impact on the Company's financial
statements.

In June 1999 SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statements No.
133" was issued. Adoption of SFAS No. 137 is not expected to have an impact
on the Company's financial statements.

NOTE 3 - OIL AND GAS PROPERTIES

In 1997, the Company acquired a 25% undivided working interest in two
natural gas exploration and development prospects located in the southern
part of the Sacramento Basin in California. The Company paid $907,951 in
cash and issued 2,250,000 shares of common stock, valued at $300,000 ($.133
per share), for the properties. The total value of cash paid and stock
issued approximates the transferor's historical basis in the property of
$1,207,951. As additional consideration, the Company agreed to issue
500,000 additional restricted shares to the transferor if the gross revenue
received by the Company from the prospects is at least equal to all direct
costs of the Company associated with acquiring the interest in the
prospects and drilling and other related expenses by December 31, 1999. The
Company paid to the transferor interest in the amount of $6,247 (8% per
annum) for funds advanced by the transferor on the property from the date
of the acquisition agreement (August 27, 1997) to the closing of the
agreement (November 11, 1997). Concurrently with the closing, the
transferor became a director and officer of the Company.

In 1998 the Company acquired a 20% working interest in certain Wyoming oil
and gas leases held by an entity controlled by the chief operating
officer/director of the Company, for $131,000 which includes seismic costs
incurred to the date of purchase.

The Company may be subject to various possible contingencies, which derive
primarily from interpretations of federal and state laws and regulations
affecting the oil and gas industry. Although management believes it has
complied with the various laws and regulations, new rulings and
interpretations may require the Company to make adjustments.

F-11

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)

Years ended December 31, 1998 and 1999

NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

Capitalized costs associated with oil and gas producing activities as of
December 31, 1999 are as follows:

Proved properties $ 1,080,455
Unproved properties 929,774
-----------

2,010,229

Less: valuation allowance (1,557,702)
accumulated depletion (124,938)
-----------
Net capitalized costs $ 327,589
===========

Information relating to the Company's costs incurred in its oil and gas
operations during the years ended December 31, 1998 and 1999 is summarized
as follows:

1998 1999

Property acquisition - Unproved properties $ 172,919 $ --
Exploration costs 368,699 61,943
Development costs 131,177 --
---------- ---------

$ 672,795 $ 61,943
========== =========

Property acquisition costs include costs incurred to purchase, lease, or
otherwise acquire a property. Exploration costs include the costs of
geological and geophysical activity, dry holes, and drilling and equipping
exploratory wells. Development costs include costs incurred to gain access
to prepare development well locations for drilling and to drill and equip
development wells.

OIL AND GAS RESERVES (UNAUDITED)

The following unaudited reserve estimates presented as of December 31, 1998
and 1999 were prepared by an independent petroleum engineer. All of the
Company's reserves are located in the United States. There are many
uncertainties inherent in estimating proved reserve quantities and in
projecting future production rates and the timing of development
expenditures. In addition, reserve estimates of new discoveries that have
little production history are more imprecise than those of properties with
more production history. Accordingly, these estimates are expected to
change, as future information becomes available.

Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions.

F-12

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

At December 31, 1998 and 1999 proved reserves were as follows:

1998 1998 1999 1999
GAS OIL GAS OIL
(MMCF) (MBBL) (MMCF) (MBBL)

Beginning of year -- -- 567.3 9.5
Revision of previous estimates -- -- (497.9) (8.9)
Proved developed producing 190.0 -- 182.3 --
Production -- -- (69.4) (.6)
Proved developed non-producing 187.3 9.5 14.6 .3
Proved undeveloped 190.0 -- 129.0 --
----- ---- ----- ----

End of year 567.3 9.5 325.9 .3
===== ==== ===== ====

STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)

The standardized measure of discounted future net cash flows is based on
estimated quantities of proved reserves and the future periods in which
they are expected to be produced and on year-end economic conditions.
Estimated future gross revenues are priced on the basis of year-end prices.
Estimated future gross revenues are reduced by estimated future development
and production costs, as well as certain abandonment costs and by estimated
future income tax expense. Future income tax expenses have been computed
considering the tax basis of the oil and gas properties plus available
carryforwards and credits.

The standardized measure of discounted future net cash flows should not be
construed to be an estimate of the fair market value of the Company's
proved reserves. Estimates of fair value would also take into account
anticipated changes in future prices and costs, the reserve recovery
variances from estimated proved reserves and a discount factor more
representative of the time value of money and the inherent risks in
producing oil and gas. Significant changes in estimated reserve volumes or
product prices could have a material effect on the Company's financial
statements.

F-13

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

The following table presents the standardized measure of the discounted
future net cash flows attributable to the Company's proved oil and gas
reserves as of December 31, 1998 and 1999:

<TABLE>
<CAPTION>
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Future cash inflows $1,210 $ 650
Future production costs (224) (72)
Future development costs (101) (85)
Future income tax expense, net -- --
------- ------

Future net cash flows 885 493

10% annual discount for estimated timing of cash flows (206) (91)
------- ------

Standardized measure of discounted future net cash flows $ 679 $ 402
======== ======
</TABLE>

The following table presents the principal sources of the changes in the
standardized measure of discounted future net cash flows for the years
ended December 31, 1998 and 1999:

<TABLE>
<CAPTION>
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Net change in sales price and production costs $ -- $ 108
Changes in estimated future development costs -- (25)
Sales and transfers of oil and gas produced, net of
production costs -- (121)
Net change due to extensions and discoveries 679 --
Net change due to purchases and sales of minerals in place -- --
Net change due to revisions in quantities -- (180)
Net change in income taxes -- --
Accretion of discount -- (68)
Other, principally revisions in estimates of timing of
production -- 9
------- ------
Net changes 679 (277)
Balance, beginning of year -- 679
------- ------

Balance, end of year $ 679 $ 402
======= ======
</TABLE>

Proved reserves were discovered in the fourth quarter of 1998; price
variations were nominal, therefore there is no change in standardized
measure due to price change for 1998.

F-14

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)

The December 31, 1999 weighted average prices utilized for purposes of
estimating the Company's proved reserves and future net revenues were
$24.75 per barrel of oil and $2.06 per Mcf of natural gas. These prices are
significantly above the average annual prices during the past several
years.

NOTE 4 - NOTE PAYABLE - BANK

In 1999 the Company entered into a $150,000 revolving line of credit with a
commercial bank in Denver, Colorado. The loan, guaranteed by an
officer/director of the Company, provides for interest at the bank's
"Reference Rate" (8.5% at December 31, 1999) and matures on May 31, 2000.
At December 31, 1999 the Company had available $130,000 in unused line of
credit. Maximum borrowings under the line of credit for 1999 were $90,000,
at an average interest rate of 8.5%.

NOTE 5 - STOCKHOLDERS' EQUITY

COMMON STOCK

In 1997, the Company completed the sale of common stock and warrants
pursuant to a private placement as follows:

2,500,000 units, at a price of $.20 per unit, consisting of 2,500,000
shares of common stock and warrants to purchase 2,500,000 shares of common
stock at an exercise price of $.20 per share before June 2, 1998. Proceeds
to the Company were $500,000, before costs of the offering of $430.

o 2,000,000 units, at a price of $.50 per unit, consisting of 2,000,000
shares of common stock and warrants to purchase 1,000,000 shares of
common stock at an exercise price of $.60 per share before October 31,
1998 (extended to October 31, 2000 at a reduced exercise price of $.15
per share). Proceeds to the Company were $1,000,000 before costs of
the offering of $52,439.

In 1997 the Company issued shares of common stock for non-cash
consideration, as follows:

o 250,000 shares for services, of which 150,000 shares are to officers
and directors, valued at $50,000 ($.20 per share).

o 2,250,000 shares to an officer/director as partial compensation for
the acquisition of oil and gas prospects, valued at $300,000 ($.133
per share).

In 1998 the Company issued shares of common stock, as follows:

o 215,000 shares for services to officers and directors, valued at
$43,000 ($.20 per share which amount was reduced from $.50 per share
by the Board of Directors).

o 2,065,000 shares for $413,000 cash ($.20 per share) for exercise of
common stock warrants.

F-15

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)

In 1999 the Company issued 199,788 shares of common stock to officers and
directors, for conversion of $44,952 in accounts payable ($.225 per share);
and an officer/director forgave the repayment of $22,000 in accounts
payable due to an entity controlled by him; and two directors/officers
returned an aggregate 800,000 shares of common stock to the Company for no
consideration.

QUASI REORGANIZATION

Effective January 1, 1997, the stockholders of the Company approved a plan
of informal quasi reorganization. Pursuant to the plan, the Company's
accumulated deficit of $504,648 as of the date of reorganization was
eliminated and charged to additional paid-in capital.

WARRANTS

In 1997, the Company issued warrants to purchase 180,000 shares of common
stock at an exercise price of $.50 per share through October 31, 1998 as
partial consideration for a finders fee in conjunction with the private
placement sale of $.50 units described above. The warrants were valued at
$4,545, using the Black-Scholes option pricing model. In 1999, the exercise
price of the warrants was reduced to $.15 per share and the expiration date
was extended to October 31, 2000. There was no financial impact from the
extension of the warrants.

At December 31, 1999 the status of outstanding warrants is as follows:

Issue Shares Exercise Expiration
Date Exercisable Price Date
----- ----------- -------- ----------

October 31, 1997 1,000,000 $.15 October 31, 2000
October 31, 1997 180,000 $.15 October 31, 2000

At December 31, 1999 the per share weighted-average grant date fair value
and per share weighted average exercise price of outstanding warrants
granted during 1997 are $.01 and $.15, respectively.

STOCK OPTION PLAN

In July 1997 the Company adopted its 1997 Statutory and Nonstatutory
Incentive Stock Option Plan (the Plan) allowing for the issuance of
incentive stock options and nonstatutory stock options to purchase an
aggregate 1,000,000 shares of common stock to directors, officers,
employees and consultants of the Company. The Plan is administered by the
Board of Directors.

The Plan provides that incentive stock options be granted at an exercise
price equal to the fair market value of the common shares of the Company on
the date of the grant and must be at least 110% of fair market value when
granted to a 10% or more shareholder. The exercise term of all stock
options granted under the Plan may not exceed ten years, and no later than
three months after termination of employment, except the term of incentive
stock options granted to a 10% or more shareholder which may not exceed
five years.

F-16

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)

The status of outstanding options granted pursuant to the 1997 Plan was as
follows:

<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Fair Exercise
Shares Price Value Price
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Options Outstanding - January 1, 1998
(680,000 exercisable) 810,000 $ .33 $ .20
Granted 100,000 $ .50 -- $ .50
--------
Options Outstanding - December 31, 1998
(860,000 exercisable) 910,000 $ .35 $ .18
Granted -- -- --
--------
Options Outstanding - December 31, 1999
(910,000 exercisable) 910,000 $ .35 $ .18 $.20-$.50
========
</TABLE>

The weighted average remaining contractual life of options outstanding at
December 31, 1999 was 7.7 years.

The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date consistent with the provisions of SFAS
No. 123, the Company's net loss and loss per share for 1998 and 1999 would
have changed as follows:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Net (loss) applicable to common stockholders - as reported $(1,456,553) $(435,547)
========= =======
Net (loss) applicable to common stockholders - pro forma (1,461,206) (435,547)
========= =======

(Loss) per share - as reported (.17) (.04)
=== ===
(Loss) per share - pro forma (.17) (.04)
=== ===
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1997 and 1998: dividend yield of 0%;
expected volatility of 0%; discount rate of 5.25%; and expected life of 10
years.

At December 31, 1999 the number of options exercisable was 910,000 and the
weighted average exercise price of these options was $.35.

In 1997, the Company recognized as compensation expense $100,500 for
670,000 options issued October 30, 1997 to Officers/Directors, pursuant to
APB No. 25, and $2,332 for 10,000 options issued to non-employees, pursuant
to SFAS No. 123. Those options were issued at an exercise price of $.15 per
share less than the then private placement cost of common stock.

F-17

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)

STOCK SPLIT

Effective January 1, 1997 the Company effected a 10-into-1 reverse stock
split. The Company did not change the authorized number of common shares or
par value of the common stock. All information in these notes and the
accompanying financial statements gives retroactive effect to the 10-into-1
reverse stock split.

NOTE 6 - RELATED PARTY TRANSACTIONS

In 1998 and 1999 the Company incurred expenses of an aggregate $48,000 for
each year to entities controlled by Officers/Directors of the Company for
office space and administrative services in Scottsdale, Arizona ($24,000 -
1998 and $24,000 - 1999) and Denver, Colorado ($24,000 - 1998 and $24,000 -
1999), at the rate of $2,000 per month.

In November 1997, the Company entered into a one-year agreement with its
Secretary/Treasurer to provide financial and other services to the Company
for $2,500 per month. During 1998, the Secretary/Treasurer was paid $30,000
under the agreement, which was converted to a month to month basis. During
1999, the Company paid the Secretary/Treasurer $7,500 for services and
issued 100,000 shares of common stock valued at $22,500 ($.225 per share).

In 1998, the Company acquired a 20% working interest in certain undeveloped
oil and gas properties for $131,000 from an entity controlled by the chief
operating officer/director of the Company. (See Note 3)

Effective December 31, 1999, an officer/director forgave $22,000 owed by
the Company to an entity controlled by him, which amount was charged to
additional paid in capital. Additionally in 1999, the Company issued 99,788
shares of common stock (valued at $.225 per share) in settlement of $22,452
owed to an entity controlled by an officer/director. Accounts payable at
December 31, 1999 includes $20,500 due to an officer/director for
non-interest bearing cash advances made to the Company.

An officer/director of the Company personally guaranteed a line of credit
with a commercial bank (see Note 4).

NOTE 7 - SEGMENT REPORTING

In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" was issued, which amends the requirements for a public
enterprise to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in the
pronouncement, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
Company in deciding how to allocate resources and in assessing performance.
The financial information is required to be reported on the basis that is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company has adopted SFAS No. 131 for
the year ended December 31, 1998.

F-18

<PAGE>

FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999

NOTE 7 - SEGMENT REPORTING

The Company has one reportable segment, oil and gas producing activities.
The Company has concentrated its oil and gas exploration and development
activities in the western United States, primarily in California and
Wyoming. All activities in this segment have been with industry partners.

The Company earned revenue from its oil and gas activities of $0 and
$152,832 for the years ended December 31, 1998 and 1999, respectively. The
Company's total assets of $385,026 at December 31, 1999 and operating
expenses of $1,456,553 and $588,379 for the years ended December 31, 1998
and 1999, respectively, are attributable to this segment.

NOTE 8 - FINANCIAL INSTRUMENTS

FAIR VALUE

The fair values of cash, accounts receivable, accounts payable and
short-term debt approximate their carrying values due to the short-term
nature of these financial instruments.

CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash. The Company maintains cash
accounts at one financial institution. The Company periodically evaluates
the credit worthiness of financial institutions, and maintains cash
accounts only in large high quality financial institutions, thereby
minimizing exposure for deposits in excess of federally insured amounts.

F-19

<PAGE>

<TABLE>
<CAPTION>
FAN ENERGY INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS

December 31, March 31,
1999 2000
------------ ---------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash .................................................... $ 11,290 $ 29,877
Accounts receivable ..................................... 46,147 28,301
----------- -----------

Total Current Assets ................................. 57,437 58,178

OIL AND GAS PROPERTIES, net ............................... 327,589 290,739
----------- -----------

$ 385,026 $ 348,917
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable - trade ................................ $ 8,397 $ 13,541
- related .............................. 20,500 20,500
Note payable - bank ..................................... 20,000 --
----------- -----------

Total Current Liabilities ............................ 48,897 34,041
----------- -----------

STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value
Authorized - 5,000,000 shares
Issued - none ........................................ -- --
Common Stock, $.001 par value
Authorized - 95,000,000 shares
Issued and outstanding - 9,451,492 shares ............ 9,452 9,452
Additional paid-in capital ................................ 2,317,509 2,317,509
Deficit accumulated during the developmental stage ........ (2,091,332) (2,112,585)
Additional paid-in capital stock options .................. 100,500 100,500
----------- -----------
336,129 314,876
----------- -----------

$ 385,026 $ 348,917
=========== ===========
</TABLE>

See accompanying notes to financial statements.

FF-1
<PAGE>

<TABLE>
<CAPTION>
FAN ENERGY INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS

Three Months Ended Cumulative
March 31, Amounts from
-------------------- Jan. 1, 1997 to
1999 2000 March 31, 2000
---- ---- ---------------
<S> <C> <C> <C>
REVENUES
Oil and gas production ...................................... $ 20,662 $ 41,370 $ 194,202
----------- ----------- -----------
OPERATING EXPENSES
Lease operating expenses .................................... 1,208 1,650 33,281
Depreciation, depletion and amortization .................... 21,410 45,196 170,134
General and administrative .................................. 41,399 15,501 537,010
Impairment of oil and gas properties ........................ -- -- 1,557,702
Interest .................................................... -- 276 8,660
----------- ----------- -----------

64,017 62,623 2,306,787
----------- ----------- -----------

NET (LOSS) ....................................................... $ (43,355) $ (21,253) $ (2,112,585)
=========== =========== ===========
NET (LOSS) PER COMMON SHARE -
Basic and Diluted ........................................... $ (.004) $ (.002) $ (.28)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
Basic and Diluted ........................................... 10,051,704 9,451,492 7,431,318
=========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

FF-2
<PAGE>
<PAGE>

<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2000

Common Stock Additional
-------------------- Paid-In
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balance, January 1, 2000 .......................................................... 9,451,492 $ 9,452 $ 2,317,509

Net (Loss) ........................................................................ -- -- --
----------- ----------- -----------
Balance, March 31, 2000 ........................................................... $ 9,451,492 $ 9,452 $ 2,317,509
=========== =========== ===========

<CAPTION>
Deficit Additional
Accumulated Paid-In
During the Capital
Development Stock
Stage Options
----------- ----------
<S> <C> <C>
Balance, January 1, 2000 .......................................................... $(2,091,332) $ 100,500

Net (Loss) ........................................................................ (21,253) --
----------- -----------
Balance, March 31, 2000 ........................................................... $(2,112,585) $ 100,500
=========== ===========
</TABLE>

See accompanying notes to financial statements.

FF-3
<PAGE>

FAN ENERGY INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS

Three Months Ended Cumulative
March 31, Amounts from
------------------------- Jan. 1, 1997 to
1999 2000 March 31, 2000
---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATNG ACTIVITIES

Net (loss) ..................................................... $ (43,355) $ (21,253) $(2,112,585)
Adjustments to reconcile net (loss) to net cash
provided (used) by operating activities
Depreciation, depletion and amortization ....................... 21,410 45,196 170,134
Impairment of oil and gas properties ........................... -- -- 1,557,702
Stock options .................................................. -- -- 102,832
Stock for services and payables ................................ -- -- 137,953
Forgiveness of payables by officer/director .................... -- -- 22,000
Changes in assets and liabilities

Increase in accounts payable ................................ 48,673 5,144 34,041
Decrease (increase) in accounts receivable .................. (19,454) 17,846 (28,301)
----------- ----------- -----------

Net Cash Provided (Used) by Operating Activities ............... 7,274 46,933 (116,224)
----------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES

Cash paid for oil and gas properties ........................... -- (8,346) (1,718,575)
----------- ----------- -----------

Net Cash (Used) in Investing Activities ........................ -- (8,346) (1,718,575)
----------- ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of common stock warrants ................ -- -- 413,000
Proceeds from sale of common stock ............................. -- -- 1,500,000
Cash paid for offering costs ................................... -- -- (48,324)
Proceeds from short term borrowings ............................ -- -- 90,000
Repayment of short term borrowings ............................. -- (20,000) (90,000)
----------- ----------- -----------

Net Cash (Used) Provided by Financing Activities ............... -- (20,000) 1,864,676
----------- ----------- -----------

NET (DECREASE) INCREASE IN CASH ..................................... 7,274 18,587 29,877

CASH, BEGINNING OF PERIODS .......................................... 15,875 11,290 --
----------- ----------- -----------

CASH, END OF PERIODS ................................................ $ 23,149 $ 29,877 $ 29,877
=========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

FF-4
<PAGE>

FAN ENERGY INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000

The unaudited financial statements included herein were prepared from the
records of the Company in accordance with Generally Accepted Accounting
Principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's Form 10-KSB filed with the
Securities and Exchange Commission for the year ended December 31, 1999. The
current interim period reported herein should be read in conjunction with the
Company's Form 10-KSB subject to independent audit at the end of the year.

The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.

FF-5
<PAGE>

- - --------------------------------------------------------------------------------

No person has been authorized to give any information or to make any
representation in connection with the offering being made hereby not
contained in this Prospectus, and, if given or made, such information
or representation must not be relied upon as having been authorized.
This Prospectus does not constitute an offer to sell or solicitation of
an offer to buy any of the securities offered hereby in any
jurisdiction in which it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create an implication
that information contained herein is correct as of any time subsequent
to the date hereof.

-------------------------

Until ____________, 2000 (90 days from the date of this Prospectus) all
dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver
a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

FAN ENERGY INC.

A minimum of 400,000
up to a maximum of 3,000,000
Shares of Common Stock

-------------

Prospectus
-------------

_______, 2000

- - --------------------------------------------------------------------------------

<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Article TWELFTH of the Registrant's Restated Articles of Incorporation
provides that no director or officer of the Registrant shall be personally
liable to the Registrant or any of its stockholders for damages for breach of
fiduciary duty as a director or officer, except that such provision will not
eliminate or limit the liability of a director or officer for any act or
omission which involves intentional misconduct, fraud or a knowing violation of
law or for the payment of any dividend in violation of Section 78.300 of the
Nevada Revised Statutes.

Section 78.751 of the Nevada Revised Statutes permits the Registrant to
indemnify its directors, officers, employees and agents if such person acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, has no reasonable cause to believe his conduct was
unlawful.

To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, the
corporation must provide indemnification against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense.

Article TWELFTH of the Registrant's Restated Articles of Incorporation
provides as follows:

TWELFTH: The corporation shall, to the fullest extent permitted
by Nevada law as in effect from time to time, indemnify any person
against all liability and expense (including attorneys' fees) incurred
by reason of the fact that he is or was a director or officer of the
corporation or, while serving as a director or officer of the
corporation, he is or was serving at the request of the corporation as
a director, officer, partner or trustee of, or in any similar
managerial or fiduciary position of, or as an employee or agent of,
another corporation, partnership, joint venture, trust, association,
or other entity. Expenses (including attorneys' fees) incurred in
defending an action, suit or proceeding may be paid by the corporation
in advance of the final disposition of such action, suit or proceeding
to the fullest extent and under the circumstances permitted by Nevada
law. The corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, fiduciary or
agent of the corporation against any liability asserted against and
incurred by such person in any such capacity or arising out of such
person;'s position, whether or not the corporation would have the
power to indemnify against such liability under the provisions of this
Section TWELFTH. The indemnification provided by this Section TWELFTH
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under these Articles of Incorporation, any
bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise, and shall inure to the benefit of their heirs, executors
and administrators. The provisions of this Section TWELFTH shall not

II-1

<PAGE>

be deemed to preclude the corporation from indemnifying other persons
from similar or other expenses and liabilities as the Board of
Directors or the stockholders may determine in a specific instance or
by resolution of general application.

Article VI, Section 1 of the Registrant's Bylaws provides that the
Registrant shall provide indemnification to Registrant's officers, directors and
employees to the fullest extent permitted under the Nevada General Corporation
Law.

Item 25. Other Expenses of Issuance and Distribution.

Expenses (none of which will be paid or reimbursed by the Selling
Stockholders to the Registrant) payable in connection with the issuance and
distribution of the securities being registered hereby are as follows:

Securities and Exchange Commission Registration Fee ...... previously paid
NASD Fees ................................................ none*
Accounting Fees and Expenses ............................. 5,000*
Legal Fees and Expenses .................................. 5,000*
Printing, Freight and Engraving .......................... 1,000*
Escrow Fees .............................................. 2,000*
Miscellaneous ............................................ 2,000*
------
Total .................................................. $15,000*

- - ---------------------

*Estimated.

Item 26. Recent Sales of Unregistered Securities.

The following is information with respect to all unregistered securities
sold by the Registrant within the past three years.:

(a) On December 15, 1996 the Registrant issued 636,700 shares of common
stock, valued at $6,367 to an officer and director of the Registrant in
satisfaction of an obligation owed by the Registrant to the officer for expenses
of $6,367 advanced on behalf of the Registrant by such person. The issuance of
the shares was exempt from registration under Section 4(2) of the Securities
Act, as the person to whom the shares were issued, the President and a director

II-2

<PAGE>

of the Registrant, had full knowledge of the business and affairs of the
Registrant, certificates representing the shares were marked with a restrictive
legend and the shares were taken for investment.

(b) On June 2, 1997 the Registrant issued 2,500,000 shares of its common
stock and 2,500,000 stock purchase warrants to eight non-U.S. citizens for
$500,000 in a private transaction. Each of the warrants entitles the holder to
purchase one additional share of common stock of the Registrant at an exercise
price of $0.20 per share on or before June 2, 1998. No underwriter was involved
in the transaction and there were no underwriting discounts or commissions. The
issuance of the securities was exempt from registration under Rule 504 adopted
under Regulation D of the Securities Act. Form D was filed by the Registrant.

(c) On August 29, 1997 the Registrant issued 2,250,000 shares of its common
stock to George H. Fancher Jr. in connection with the acquisition by the
Registrant of oil and gas properties. Upon issuance of the shares, certificates
representing the shares were delivered to an escrow agent pending completion of
the acquisition transaction. The acquisition transaction was completed on or
about November 11, 1997 at which time the shares were delivered to Mr. Fancher.
In the transaction, the Registrant received an assignment of Mr. Fancher's
undivided interest in two natural gas exploration and development prospects
located in the southern part of the Sacramento Basin in California. The
Registrant paid $907,951 in cash and issued the 2,250,000 shares of common
stock, valued at $300,000, for the properties. The total of the cash and the
stock is intended to be equal to Mr. Fancher' s cost in acquiring and developing
the property prior to transfer to the Registrant. No underwriter was involved in
the transaction. The issuance of the securities to Mr. Fancher was exempt under
Section 4(2) of the Securities Act. Mr. Fancher acquired the securities for
investment, certificates representing the securities were marked with a
restrictive legend and stop transfer instructions were placed with the
Registrant's stock transfer agent.

(d) On September 15, 1997 the Registrant issued 250,000 shares of its
common stock to six persons for services valued by the Registrant at $50,000. Of
the six persons, one is a Canadian attorney who received 25,000 shares for
service as a director of the Registrant and for preparation of documentation for
the Registrant in connection with the acquisition of oil and gas properties and
advise to the officers concerning certain aspects of the acquisition. A second
person, also a director at the time of issuance of the shares, was also the
Secretary and Treasurer of the Registrant and received 50,000 shares. He
provided financial and accounting services to the Registrant and maintained its
books and records. Two of the persons, each of whom received 50,000 shares, have
substantial experience in the oil and natural gas business and served as
consultants to the Registrant in connection with the acquisition of the natural
gas exploration properties. They reviewed in detail the geologic and related
data available concerning the properties and advised the officers concerning the
advisability of the acquisition. A third consultant also received 50,000 shares,
and agreed in August 1997 to become a director of the Registrant at the time
that the acquisition of the oil and gas properties was completed, he assisted
the Registrant to prepare and document its financing and exploration plan and to
evaluate and budget the plan of development of the natural gas exploration
properties. Of the three consultants, two became directors in November 1997 and
the third agreed to provide ongoing consulting services to the Registrant. The
sixth person, who received 25,000 shares, is an employee of a business owned by
the President of the Registrant and an administrative assistant to the
President. This person provided office, administrative and stenographic services
to the Registrant. Each of the persons to whom the shares were issued had full
knowledge of the business and affairs of the Registrant, each signed a written

II-3

<PAGE>

investment letter which acknowledged thc receipt of information concerning the
Registrant and each agreed to hold the shares issued for investment purposes,
the certificates representing the shares each bear a restrictive legend and stop
transfer instructions were entered with the Registrant's stock transfer agent.
No underwriter was involved in the transactions. Based on the foregoing facts,
the issuance of the securities was exempt from registration pursuant to Section
4(2) of the Securities Act and/or Rule 506 adopted thereunder.

(e) On October 31, 1997 the Registrant issued 2,000,000 shares of its
common stock and warrants to purchase 1,000,000 shares of common stock to 10
non-U.S. citizens for $1,000,000. Each of the warrants entitles the holder to
purchase one additional share of common stock at an exercise price of $0.60 per
share on or before October 31, 1998. The Registrant issued cash finder's fees
totaling $45,000 and issued warrants entitling the holders to purchase up to
180,000 shares of common stock at $0.50 per share to three nonaffiliated,
non-U.S. citizen finders in connection with the transaction. The Registrant's
President, William E. Grafham, participated in the private placement and
purchased 200,000 shares and 100,000 warrants for $100,000. The issuance of the
securities was exempt from registration pursuant to Regulation S adopted under
the Securities Act. Each of the purchasers agreed that no sale of any of the
securities would be made to any U.S. Person, as defined in Regulation S. except
in compliance with the Securities Act.

(f) In September 1998, the Registrant issued 2,065,000 shares of its common
stock to eight persons upon exercise of outstanding warrants originally issued
June 2, 1997 (see Item 26(b) above). The warrants were exercised at $0.20 per
share for total proceeds of $413,000. 435,000 unexercised warrants expired at
the end of August 1998. No underwriter was involved in the transaction and there
were no underwriting discounts or commissions. The issuance of the securities
was exempt from registration under Section 4(2) of the Securities Act. Each of
the persons exercising warrants acquired the securities for investment,
certificates representing the securities were marked with a restrictive legend
and stop transfer instructions were placed with the Registrant's stock transfer
agent.

(g) Effective July 1,1998, the Registrant issued 215,000 shares of its
common stock to four officers and directors of the Registrant in consideration
for services, valued at $43,000, provided to the Registrant through June 30,
1998. No underwriter was involved in the transaction. The issuance of securities
to the individuals were exempt under Section 4(2) of the Securities Act. Mr.
Fancher acquired the securities for investment, certificates representing the
securities were marked with a restrictive legend and stop transfer instructions
were placed with the Registrant's stock transfer agent.

(h) Effective December 31, 1999, the Registrant issued 99,788 shares of its
common stock to William E. Grafham, President, as payment for $22,452 of rent
and administrative services provided to Registrant in 1999. Registrant also
issued 100,000 shares to Albert A. Golusin, Secretary, for $22,500 in consulting
services provided to Registrant in 1999. No underwriter was involved in the two
transactions. Both persons had full information about the business and affairs
of the Registrant as a result of their positions as officers. The issuance of
the securities was exempt from registration under Section 4(2) of the Securities

II-4

<PAGE>

Act. Each of the persons exercising warrants acquired the securities for
investment, certificates representing the securities were marked with a
restrictive legend and stop transfer instructions were placed with the
Registrant's stock transfer agent.

Item 27. Exhibits.

The following is a list of exhibits filed as part of this Registration
Statement.

Exhibit No. Description and Method of Filing
- - ----------- --------------------------------

(3.1) Restated Articles of Incorporation of Eastern Star Mining, Inc.,
as filed with the Nevada Secretary of State February 7, 1997.*

(3.2) Certificate of Amendment of Articles of Incorporation of Eastern
Star Mining, Inc., as filed with the Nevada Secretary of State
May 19, 1997.*

(3.3) Certificate of Amendment of Articles of Incorporation of Eastern
Star Mining, Inc., as filed with the Nevada Secretary of State
May 28, 1997.*

(3.4) Certificate of Amendment of Articles of Incorporation of Eastern
Star Holdings, Inc., as filed with the Nevada Secretary of State
December 10, 1997.*

(3.5) Bylaws of Registrant adopted December 31, 1997.*

(4.1) Form of Amended Fund Escrow Agreement.*

(4.2) Form of Subscription Agreement.*

(5.0) Legality opinion of Alan W. Peryam dated May 18, 2000.

(10.1) Letter Agreement dated August 27, 1997 between Registrant and
George H. Fancher Jr. d/b/a Fancher Oil Company.*

(10.2) Agreement With Arizona Corporate Management, Inc. dated November
1, 1998.*

(10.3) 1997 Incentive and Nonstatutory Stock Option Plan. *

(10.4) Letter regarding conflicts of interest dated March 6, 1998
between Registrant and George H. Fancher Jr.*

II-5

<PAGE>

(10.5) Form of Subscription Agreement for certain officers and
consultants.*

(10.6) Agreement with Albert Golusin.*

(10.7) Form of Lockup Agreement for Selling Securityholders.*

(10.8) Participation Agreement dated October 1, 1998 with Fancher Oil
LLC.(1)

(10.9) Agreement dated May 6, 1999 with George H. Fancher Jr.*

(10.10) Indemnification Agreement with George H. Fancher Jr.(2)

(10.11) Warrant Agency Agreement.(3)

(23) Consent of Wheeler Wasoff, P.C., Independent Certified Public
Accountants.

(23.1) Consent of Alan W. Peryam, LLC.

- - ------------------

*Incorporated by reference to Registration No. 333-47699.
(1) Incorporated by reference to Exhibit 10.7 to Registrant's
Annual Report on Frm 10- KSB for the fiscal year ended
December 31, 1998.
(2) Incorporated by reference to Exhibit 10.8 to Registrant's
Annual Report on Frm 10- KSB for the fiscal year ended
December 31, 1999.

(3) Incorporated by reference to Exhibit 10.11 to Registrant's
Post-Effective Amendment No. 2 to Form SB-2 No. 333-47699,
filed May 8, 2000. Item 28. Undertakings.

The undersigned Registrant hereby undertakes that it will:

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

II-6

<PAGE>

(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its legal counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

II-7

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned, in the
City and County of Denver, State of Colorado on May 18, 2000.

FAN ENERGY INC.

By /s/ George H. Fancher Jr.*
---------------------------------------------------
William E. Grafham, Chief Executive Officer

By /s/ George H. Fancher Jr.
---------------------------------------------------
George H. Fancher Jr., Principal Financial Officer

By /s/ George H. Fancher Jr.*
---------------------------------------------------
Albert A. Golusin, Principal Accounting Officer

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:

Signature Title Date
- - --------- ----- ----

Director May 18, 2000
- - ----------------------------------
William E. Grafham*

/s/ George H. Fancher Jr. Director May 18, 2000
- - ----------------------------------
George H. Fancher Jr.

Director May 18, 2000
- - ----------------------------------
Jeffrey J. Scott*
*By

/s/ George H. Fancher Jr. May 18, 2000
- - ----------------------------------
George H. Fancher Jr.
Attorney-in-Fact

II-7

<PAGE>

As Filed with the Securities and Exchange Commission on May 19, 2000
Registration No. 333-36516

- - --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

Form SB-2

Registration Statement
Under
The Securities Act of 1933

FAN ENERGY INC.

EXHIBITS

- - --------------------------------------------------------------------------------

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT INDEX

Exhibit No. Description and Method of Filing Page No.
- - ----------- -------------------------------- -------

<S> <C> <C>
(3.1) Restated Articles of Incorporation of Eastern Star Mining, Inc., N/A
as filed with the Nevada Secretary of State February 7, 1997.*

(3.2) Certificate of Amendment of Articles of Incorporation of Eastern N/A
Star Mining, Inc., as filed with the Nevada Secretary of State
May 19, 1997.*

(3.3) Certificate of Amendment of Articles of Incorporation of Eastern N/A
Star Mining, Inc., as filed with the Nevada Secretary of State
May 28, 1997.*

(3.4) Certificate of Amendment of Articles of Incorporation of Eastern N/A
Star Holdings, Inc., as filed with the Nevada Secretary of State
December 10, 1997.*

(3.5) Bylaws of Registrant adopted December 31, 1997.* N/A

(4.1) Form of Amended Fund Escrow Agreement.* N/A

(4.2) Form of Subscription Agreement.* N/A

(5.0) Legality opinion of Alan W. Peryam dated May 18, 2000.

(10.1) Letter Agreement dated August 27, 1997 between Registrant and N/A
George H. Fancher Jr. d/b/a Fancher Oil Company.*

(10.2) Agreement With Arizona Corporate Management, Inc. dated November N/A
1, 1998.*

(10.3) 1997 Incentive and Nonstatutory Stock Option Plan. * N/A

(10.4) Letter regarding conflicts of interest dated March 6, 1998 N/A
between Registrant and George H. Fancher Jr.*

(10.5) Form of Subscription Agreement for certain officers and N/A
consultants.*

(10.6) Agreement with Albert Golusin.* N/A

(10.7) Form of Lockup Agreement for Selling Securityholders.* N/A

(10.8) Participation Agreement dated October 1, 1998 with Fancher Oil N/A
LLC.(1)

(10.9) Agreement dated May 6, 1999 with George H. Fancher Jr.* N/A

(10.10) Indemnification Agreement with George H. Fancher Jr.(2) N/A

(10.11) Warrant Agency Agreement(3) N/A

(23) Consent of Wheeler Wasoff, P.C., Independent Certified Public
Accountants.

(23.1) Consent of Alan W. Peryam, LLC.

(24) Power of Attorney.* N/A
</TABLE>
- - ------------------

*Previously filed
(1) Incorporated by reference to Exhibit 10.7 to Registrant's Annual
Report on Frm 10-KSB for the fiscal year ended December 31, 1998.
(2) Incorporated by reference to Exhibit 10.8 to Registrant's Annual
Report on Frm 10-KSB for the fiscal year ended December 31, 1999.
(3) Incorporated by reference to Exhibit 10.11 to Registrant's Post-
Effective Amendment No. 2 to Form SB-2 No. 333-47699, filed May
8, 2000.

ALAN W. PERYAM, LLC
Attorney at Law
1120 Lincoln Street, Suite 1000
Denver, Colorado 80203-2138

Telephone: (303) 866-0900
Facsimile: (303) 866-0999

May 18, 2000

Fan Energy Inc.
1801 Broadway, Suite 720
Denver, Colorado 80202

Gentleman:

We refer to the Amendment No. 1 Registration Statement No. 333-36516 on
Form SB-2 ("Registration Statement") of Fan energy Inc., a Nevada corporation
("Company"), relating to the offer and sale of up to 3,000,000 units, consisting
of 3,000,000 shares of $0.001 par value common stock (the "Common Stock") and
3,000,000 warrants to purchase one additional share of Common Stock, to be
offered by the Company, and 900,000 shares of Common Stock to be offered for
resale by holders of such securities as described therein.

We have reviewed such documents and records as we have deemed necessary to
enable us to express an informed opinion on the matters covered thereby and we
are of the opinion that the units, Common Stock and warrants described in the
Registration Statement will be when issued as described in the Registration
Statement, or, upon exercise of warrants in accordance with their terms, legally
issued, fully paid and nonassessable.

Sincerely,

ALAN W. PERYAM, LLC

By /s/ Alan W. Peryam
-------------------------------
Alan W. Peryam

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT

We consent to the incorporation by reference in the Amendment No. 1 Registration
Statement on Form SB-2 of Fan Energy Inc. of our report dated March 17, 2000 on
our audit of the financial statements of Fan Energy Inc. as of December 31,
1999.

/s/ Wheeler Wasoff, P.C.
WHEELER WASOFF, P.C.

Denver, Colorado
May 18, 2000

CONSENT OF ATTORNEY

Reference is made to the Amendment No. 1 Registration Statement No.
333-36516 on Form SB-2 pursuant to which Registrant proposes to sell a maximum
of 3,000,000 units, each consisting of one share of the $0.001 par value common
stock ("Common Stock") of the Company and one warrant entitling holders to
purchase one additional share of Common Stock. Reference is also made to the
opinion dated May 18, 2000 included as Exhibit (5.0) to the Registration
Statement relating to the legality of the securities proposed to be issued and
to be sold.

I hereby consent to the filing of the opinion dated May 18, 2000, as an
exhibit to the Registrant's Registration Statement on Form SB-2 and reference
to the undersigned in the Registration Statement under the caption "Legal
Matters."

/s/ Alan W. Peryam
-----------------------------------
Alan W. Peryam, LLC

Denver, Colorado
Dated: May 18, 2000