SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3 to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Trinity Energy Resources, Inc.
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(Name of Small Business Issuer in its charter)
Nevada 87-0431497
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11757 Katy Freeway, Suite 1430, Houston, Texas 77079
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (281) 589-7675
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
________________________________ ____________________________________
________________________________ ____________________________________
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $.001
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(Title of class)
Preferred Stock, Par Value $.001
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(Title of class)
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TABLE OF CONTENTS
PART I PAGE
<S> <C> <C>
Item 1 Description of Business 3
Item 2 Management's Discussion and Analysis or Plan of Operation 9
Item 3 Description of Property 15
Item 4 Security Ownership of Certain Beneficial
Owners and Management 21
Item 5 Directors, Executive Officers, Promoters and Control Persons 22
Item 6 Executive Compensation 24
Item 7 Certain Relationships and Related Transactions 26
Item 8 Description of Securities 27
PART II
Item 1 Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters 29
Item 2 Legal Proceedings 29
Item 3 Changes in and Disagreements with Accountants
An Accounting and Financial Disclosure 33
Item 4 Recent Sales of Unregistered Securities 34
Item 5 Indemnification of Directors and Officers 36
</TABLE>
FINANCIAL STATEMENTS
See attached Financial Statements for the fiscal years ended December 31, 1999
and 1998
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PART I
Item 1. Description of Business
Organization / Historical Background
-------------------------------------
The Company was originally incorporated in Utah in 1986 as Celebrity Limousines
Ltd. In 1990 it was redomiciled in Nevada as Limousines Limited but in November
1990 it ceased operations. The Company was dormant until July 9, 1993. On that
date Sidney W. Sers exchanged certain oil and gas assets from his wholly-owned
Texas corporation for 18,275,036 shares and control of Limousines Limited. He
then changed the name of the Company to Trinity Gas Corporation. The Company
then developed the assets (with investor contributions) and has since conducted
oil and gas operations. During the period from July, 1993 to January 1998, Mr.
Sers served as Chairman of the Board, President and CEO. On March 17, 1999 the
shareholders approved a change in the name of the Company to "Trinity Energy
Resources, Inc."
In June, 1997 the Company retained the accounting firm of Samson Robbins &
Associates, P.L.L.C. to prepare audited financial statements for the fiscal year
ended December 31, 1996. The Company's purpose in obtaining the audit was to
qualify the Company as a reporting company under the Securities Exchange Act of
1934.
On October 6, 1997 Samson Robbins resigned, citing:
- that the Company's financial statements for the years 1993, 1994
and 1995 contained material misrepresentations
- that Mr. Sers had misused the Company's funds
- that the Company had disseminated highly inflated oil and gas
reserve data
- that significant amounts of the Company's stock had been issued
and sold using questionable exemptions.
The resignation of Samson Robbins motivated one of the Company's directors,
William W. Ruth, and its recently fired Vice-President of Investor Relations,
Richard E. Guillemin, to seek the advice of outside counsel. In turn, that led
to an investigation of the Company and Mr. Sers by the Securities and Exchange
Commission. On November 6, 1997 the SEC stopped trading in the Company's stock.
As a result of the stop in trading, it became necessary for the Company to
provide new, up-dated information to its marketmakers before trading could
resume. The filing of this Form 10-SB is intended to fulfill that obligation in
order to permit trading to recommence. (See Part II, Item 1, page 25 for
further discussion and disclosure.) On December 8, 1997 the SEC filed an
enforcement action against the Company, Mr. Sers and others in the U.S. District
Court. As a result of the SEC's action, the Court froze certain liquid assets
held by a Sers related group.
On December 9, 1997 Messrs. Ruth and Guillemin filed a shareholders' derivative
action against Mr. Sers and others. On December 23, 1997, apparently in
response to the SEC enforcement action and to the shareholders' derivative
action, Mr. Sers caused the Company to file a Chapter 11 petition. The Chapter
11 proceeding was docketed to Case No. 697-60425-JCA-11 in the United States
Bankruptcy Court for the Northern District of Texas, San Angelo Division.
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On January 12, 1998 Mr. Sers resigned as a director of the Company. On January
16, 1998 the Judge in the SEC enforcement action ordered the arrest of Mr. Sers
for violation of the Court's freeze order.
On January 9, 1998 the Bankruptcy Court appointed a Chapter 11 Trustee who
effectively took control of the Company. On February 5, 1998 the Bankruptcy
Court appointed the Official Committee of Equityholders of Trinity Gas
Corporation. Mr. Dennis Hedke, now one of the Company's directors and its
Executive Vice-President and Chief Operating Officer (Interim President & Chief
Executive Officer), was appointed Chairman of the Committee.
During 1998 the Committee recruited new management and with that management
developed a Plan of Reorganization. The Plan, as amended, was confirmed by the
Bankruptcy Court on October 26, 1998, and the Company emerged from Chapter 11
and began to implement the Plan. Upon confirmation of the Plan, the Board of
Directors engaged T.C. O'Dell to become the new Chief Executive Officer and
Chairman of the Board and Michael L. Wallace to become the new President and
Chief Operating Officer of Trinity Gas Corporation. Although both men have since
resigned, the Company is continuing to pursue numerous opportunities. (See
"Compensation of Management-Employment Agreements"). Interested investors may
obtain a more detailed description in the Disclosure Statement for the Third
Amended Plan of Reorganization filed in the United States Bankruptcy Court for
the Northern District of Texas, San Angelo Division on July 27, 1998. That
document appears as Exhibit 2.1 to this Filing.
Business
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The Company is involved in various energy industry projects which relate
primarily to oil and gas exploration and development in both the United States
as well as international markets. The Company is also reviewing the potential
for involvement in energy product marketing and throughput management. The
Company currently operates oil and gas wells in Texas, Colorado and Wyoming and
has an interest in an international concession in the African Republic of Chad.
It is also reviewing potential involvement in various global exploratory and
development projects related to energy resources.
We currently operate one oil and gas well in Ward County, Texas. We also
operate 24 wells in Elbert County (Colorado) and three in Crook and Campbell
Counties (Wyoming). The Colorado and Wyoming properties became a part of the
Company's inventory through a transaction with Nova Energy, Inc. The
transaction was initiated by Sers, but never fully consummated, although Sers
transferred Trinity funds to Nova. The bankruptcy court, based on the transfer
of funds into Nova, recognized and approved the acquisition of Nova assets into
Trinity in the confirmation of the Plan of Reorganization in October, 1998.
Trinity finalized the transaction in January, 2000 by dissolving Nova Energy,
Inc. Certain wells in the Company's inventory are currently non-productive. A
comprehensive listing of the Company's well inventory and individual well status
is given in Item 3 below. Due to low oil prices during late 1998 and continuing
through first quarter 1999, and limited capital resources, virtually no
maintenance was accomplished at any of these production facilities during 1998
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or 1999. Geological and engineering evaluations have been underway to determine
where capital resources should be focused to re-establish fundamental production
levels and enhance production where feasible to do so. A workover program has
been implemented to rejuvenate many formerly non-productive wells. We will
continue to closely monitor production results and wells that fail to meet
minimum internal rate of return of approximately 15% will either be converted to
service wells or plugged and abandoned according to state specifications.
If market conditions are favorable, the Company may sell certain of its
properties if it is believed we can transfer such interests profitably and in
such a way as to bring appropriate short, medium or long term benefit to
shareholders. Current workover activities and subsequent well performance
evaluations will guide our decision as to which properties, if any, would be
appropriate for marketing as saleable properties.
Historically, the Company had additional producing property interests in a 15
well oil and gas production facility in Brown County, Texas, which included the
properties known as the Smith, Smith 'A' and Smith 'C' leases. The internal
rate of return on these properties was not consistent with Company objectives
and the asset has been transferred to an entity that assumed operations as of
January 28, 2000. The asset, which had nominal book value, was transferred in
exchange for the assumption of plugging liability, estimated at $18,000, by the
receiving party.
The Company also had an interest in a gas processing and sales facility in
Coleman County, Texas. Oil and gas leases related to this facility were the
Jamison and Skelton leases. A total of 19 wells used to produce at this
facility. That facility has been partly disassembled, some assets were
disposed of through a sale in 1998, and the property is subject to final
plugging and abandonment by Trinity. We expect plugging costs associated with
this facility will be approximately $22,800. Final action regarding this
property, including plugging of all wells, is expected to occur in the second
quarter 2000.
We also owned an interest in a Colombia, South America concession negotiated and
acquired by Sers through a foreign wholly-owned subsidiary, Trinity Gas
Colombia, Ltd. ("Trinity-Colombia"). Four exploratory wells were ultimately
drilled in the concession and none were successful. Operations ceased when the
concession was terminated by the government of Colombia due to non-performance.
Sers had contested ownership of Trinity-Colombia, and instead of pursuing court
proceedings in Colombia, the Company obtained a $3.1 million judgment against
Trinity-Colombia in the United States on May 27, 1999. We are still attempting
collection of this judgment. It appears, however, that Trinity-Colombia may
have no assets and collection of the judgment is unlikely.
We acquired an interest as operator in an international concession in Chad,
Africa on November 15, 1998, covering 108 million acres of unproved potential
reserves in three separate areas of the country. This acreage is considered
valuable because proved reserves are to be extracted by Exxon and others on
adjacent acreage, pending planned pipeline construction. On December 27, 1999,
we assigned this interest as a farmout to Cliveden Petroleum Company, Ltd.,
("Cliveden") because we lacked the substantial resources needed to maintain and
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develop the concession. Under the Cliveden farmout, we are entitled to sunk
cost recovery of $1.5 million from the net proceeds received by Cliveden, as it
recovers its own costs to market and develop the prospect, and we may also, if
economic conditions warrant, continue to participate with up to a 5% working
interest ownership after Cliveden recovers its exploratory and exploitation
expenditures. Costs associated with this activity may exceed $26 million in the
first 5 years of project activity.
The Company will continue to pursue opportunities both domestically and
internationally where it can find appropriate rates of return for the
shareholders. The Company believes it can compete in both arenas,
notwithstanding the fact that international operations carry certain risks that
do not apply to domestic properties.
The Company is in the process of evaluating opportunities related to the
accumulation of interests in oil and gas leases and concessions in various
domestic and international projects. Upon the conclusion of any such
acquisitions, the Company will engage itself in either the participation with
other operators in the drilling of exploratory and development wells, or in the
marketing of such interests to interested parties, with the ultimate intent of
drilling exploratory and development wells. It is also possible that certain
projects under review may involve other market opportunities where our staff or
designated independent contractors or consultants have qualified expertise, such
as natural gas futures trading. Careful risk analysis and comprehensive market
research will be conducted internally and will precede commitments to any such
endeavor.
At the present time the Company has 4 full time employees and draws upon from 2
to 5 consultants and independent contractors to assist on temporary project
needs. As recently as the third quarter 1999, the Company had as many as 8 full
time employees and was served by a group of as many as 11 consultants and
independent contractors. Staff reductions occurred to reduce overhead,
especially as the financial burden associated with the Chad project was phased
out.
Competition
The energy business is highly competitive. The Company competes with companies
which in many cases have larger staffs and financial resources than those
currently available to the Company. Nonetheless, the Company believes that due
to its ability to focus attention on relevant and achievable objectives, it will
be successful in pursuing carefully selected opportunities fit for an
organization of our present size and structure. The purchase of existing
production, involving properties where monthly revenues exceed operating costs
by a significant margin, to increase our cash flow and the participation in
drilling ventures are examples of such objectives. Our selection criteria will
be based on the projected minimum internal rate of return and other internal
review processes, including, for example, 3-dimensional seismic data analysis.
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Marketability
Crude Oil - The marketability of the Company's crude oil, natural gas and
natural gas liquids (NGL's) or condensate has not been a problem historically.
The current Colorado and Wyoming oil production is purchased and trucked by
Equiva Trading. Contract terms call for pricing according to the basis for
geographic area, adjustment for crude oil quality and then applying a bonus to
the prevailing field posted price at the time of field pickup. On December 9,
1999, the adjusted price paid for our Colorado crude oil was $23.00 per barrel;
the $1.10 bonus appropriate to our contract yielded a net sales price of $24.10
per barrel sold on that day.
The Company's Ward County, Texas crude oil production is purchased and trucked
by Sunoco, Inc and sold at the prevailing field price for West Texas
Intermediate, whereby our property type was designated as "active full rate",
subject to a "temporary marketing adjustment" deduction of $1.60 per barrel.
The present contract with Sunoco was initiated November 1, 1999 and extends
month to month, unless written notice of 30 days is given by either party to
terminate the agreement. An example of recent sales activity at the Hartwich
lease on November 23, 1999, showed a purchase price of $25.35 per barrel.
Existing contracts for crude oil purchased by Equiva Trading and Sunoco are
provided as Exhibits 10.14 and 10.15.
Oil prices are volatile and subject to significant day-to-day variations. This
volatility is beyond the Company's control and includes the following factors:
political turmoil, domestic and foreign production levels, the Organization of
Petroleum Exporting Companies (OPEC)'s ability to adhere to production quotas,
and possible governmental control or regulation. As the Company's daily
production volume increases it may also become desirable to enter into futures
contracts for purposes of hedging which can provide longer term stability for
the sales of our produced hydrocarbons.
Natural gas B The Company's natural gas production in Colorado is transported by
pipeline and purchased by North American Resources Company (NARCO). The
Company's natural gas production in Ward County, Texas is purchased by Dynegy
Midstream Services, Limited Partnership ("Dynegy").
Natural Gas Liquids B The Company's condensate production in Colorado is
gathered and purchased by NARCO. Condensate production at the Hartwich lease in
Ward County, Texas is gathered and purchased by Dynegy.
Contracts related to the sales of natural gas and natural gas liquids in
Colorado are currently under review and are expected to be renegotiated pending
these reviews. Existing contracts with NARCO are provided as Exhibits 10.16 and
10.17. Contract terms with Dynegy are also under review and are expected to be
renegotiated. The existing contract with Dynegy appears as Exhibit 10.18.
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Business Risks
Oil and gas exploration and development drilling involves significant risk.
Exploration drilling involves the high risk drilling of wells in regions not
known to be commercially productive. Oil and gas development drilling involves
less risk, but still has a significant level of uncertainty associated with
drilling and completing oil or gas wells. Development drilling involves the
drilling of wells in areas believed to be in a high probability of petroleum
reservoir accumulation. The Company expects to employ methods, such as
three-dimensional seismic data coverage, and gravity and magnetic data
evaluation within the Company's acreage positions, to reduce risk in both
exploratory and development drilling situations.
There are other risks associated with the drilling, completion, and producing of
oil and gas reservoirs. Unusual or unexpected subsurface formations or
excessive reservoir pressure are among issues that may occur during exploration
and development activities. When operating in remote locations it is also
possible that a shortage of drilling rigs, supporting materials such as casing,
drilling mud and other services necessary in the drilling and completion of oil
and gas wells may become temporarily unavailable. In contracting for such
services the Company will make every effort to mitigate or eliminate such risks,
but no assurance can be given that the Company can avoid such circumstances.
Governmental regulation is a significant business risk of an oil and gas
company. Both domestically and internationally, new regulations promulgated
subsequent to the startup of operations in any given area may substantially
impact the economics of a project. The Company attempts to quantify these risks
to the best of its ability, but political climates and regulatory bodies are
difficult to predict. Domestically, the Company is subject to local, state and
federal laws which have an increasingly larger impact on the conduct of
business. Some of the federal laws that the Company is subject to include the
Clean Air Act, the Clean Water Act and the Endangered Species Act.
The Company may incur losses due to environmental hazards against which it
cannot insure or which it elects not to insure against because of high premium
costs or other reasons. Consequently, substantial uninsured liabilities to
third parties may arise, the payment of which could result in significant loss
to the Company. We are not currently aware of any unrecorded environmental
remediation liabilities at this time.
Environmental regulation and taxes imposed by state governments also impose
significant burdens on operations. These burdens can render uneconomic certain
properties which could have continued producing hydrocarbons had the regulations
not been imposed. The Company is vigilant in its assessment of these burdens
and the impact such regulations and taxes have on its internal rate of return.
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Item 2. Management's Discussion and Analysis
Results of Operations
We entered bankruptcy on December 23, 1997. Our Plan of Reorganization was
approved October 26, 1998, at which time we emerged from Chapter 11. We expect
to close the bankruptcy proceeding in June, 2000. After the Plan became
effective, we were under Court supervision with most of our cash held by the
Court or various trustees for payment of bankruptcy-related legal and other
costs. Only limited cash was available to us for operations.
We claim that Sers stole millions in assets from us during 1993 through January
1998. Court proceedings resulted in our recovering $4.3 million in cash, and an
additional judgment against Sers for $4.8 million is pending execution.
However, the bankruptcy cost us $2.3 million out-of-pocket legal and other costs
during 1998 and 1999, and preoccupied management. The producing wells were
allowed to languish and management spent most of its time preoccupied with
bankruptcy matters.
Operating losses, net of revenues and before bankruptcy costs, were $2,795,389
and $696,549 in 1999 and 1998, respectively. Significant changes are described
in the following paragraphs.
Lease operating costs declined from $150,083 in 1998 to $108,663 in 1999. The
decline was due to the bankruptcy trustee (who ran the Company during almost all
of 1998) continuing field personnel wages early in 1998 before laying them off
in March 1998 ($30,372) and other field costs ($11,048).
Interest expense increased from $0 in 1998 to $81,235 in 1999, because of 1999
short-term borrowing. The Company had no interest bearing debt in 1998.
General and administrative expense increased from $227,828 in 1998 to $2,605,902
in 1999 due to the following:
- $160,390 in auditing expense in 1999, vs $0 in 1998. This audit was
begun to qualify for trading our stock in the public marketplace.
- $29,898 in website creation and maintenance in $1999, vs $0 in 1998.
- $185,913 in fees paid for obtaining debt financing in 1999, vs $0 in
1998.
- $1,829,866 in consulting fees, contract services and wages paid in 1999,
vs $144,212 in 1998. We opened our Houston office in late 1998, and
hired several people full-time, plus consultants, to negotiate and
operate new oil and gas ventures, such as the Chad project.
- $87,556 in nonbankruptcy-related legal fees in 1999, vs $0 in 1998.
These 1999 fees related mostly to preparing for pending SEC registration
and the Chad Concession negotiation.
- $143,577 in non-affiliate rent in 1999 vs $40,000 in 1998
- a remaining $150,547 in various other administrative costs, vs. a
remaining $25,461 in various other 1998 administrative costs.
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Rent paid to affiliates increased from $30,000 in 1998 to $59,500 in 1999,
because the office lease was initiated in September 1998 and was terminated in
August 1999.
We had little in the way of operations in 1998, but a bankruptcy court trustee
managed to expend over $600,000 in a very short period of time, primarily in
legal fees. Our bankruptcy counsel assisted us in preparing for our Disclosure
Statement and Third Amended Plan of Reorganization. Only minimal well operating
and maintenance expenses were paid in 1998, and Company replacement management
didn't begin revival efforts until November, 1998. Our Brownwood, Texas
corporate office was shut down and moved to Houston, where recent and current
management resides. All non-productive company equipment existing at the
bankruptcy filing was sold for $51,455 in total during 1999 and 1998.
We utilized three methods in 1999 to raise capital for our operations, all of
which were approved by the bankruptcy court. We issued short term notes payable
with maturities of mainly 6 months, with 15% interest, netting $1,057,721. In
a private placement to accredited investors under Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1993, we issued redeemable preferred stock
with maturity of 1 year, with a 12% dividend, netting $1,267,500. Pursuant to
our Third Amended Plan of Reorganization and Section 1145 of the Bankruptcy
Code, we sold 1,705,391 shares of our common stock to our existing shareholders,
and netted $370,628, after $54,015 in issuance costs.
These monies funded net operating activities in 1999 of $1,818,848, Chad
acquisition and development costs of $341,765, the purchase of office furniture
and equipment for $156,816, and $48,747 investigating an electricity generation
and marketing project in Costa Rica. The balance of cash raised by the issuance
of stock and notes payable during 1999 was used to pay various
bankruptcy-related costs not paid by the trustee or our bankruptcy law firm from
cash collected from Sers during 1998 and 1999.
Collections from Sers have been segregated and kept from our use until January
14, 2000, when we received a wire transfer for $2,570,184 from our bankruptcy
law firm, who is still reserving $499,668 to pay accumulated but unpaid legal
and other bankruptcy-related costs incurred in 1998 and 1999.
Bankruptcy reorganization-related income and expenses have been segregated on
our income statement for both 1999 and 1998. Expense for 1999 is down $438,242
or 32%, because the bankruptcy court issues were mostly decided in mid-1999.
Our plan was confirmed in October 1998, and the court spent early 1999 ruling on
various collateral issues. Costs for both years were mostly lawyer fees, with
non-lawyer accounting and other charges segregated into the "other costs"
category. Interest income increased because the bulk of the monies seized from
Sers were obtained during 1998, so it accumulated interest for all of 1999,
versus only a portion of 1998.
1998 bankruptcy costs included a $43,001 asset impairment writedown, which
represented the difference between the net book values and sale price of assets
sold by the bankruptcy trustee and management in 1998 and 1999.
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Liquidity and Capital Resources
There are several factors that will impact our liquidity during this fiscal
year. Redeemable Preferred Stock of $1,550,047, notes payable of $707,721,
pre-petition allowed claims, current accounts payable and accrued expenses of
$1,372,290 are all due and payable. We expect to meet these remaining
liabilities with our current cash position, funds held by the trustees, cash
from oil and gas production, new ventures yet to be announced and, if necessary,
through temporary financing. We expect that some of the redeemable Preferred
Stock will be converted to equity, thereby relieving to some extent the debt
redemption requirement. We also hold open the option for a public offering as we
proceed forward with conclusion of our public filings with the SEC and NASDAQ.
We owe the Internal Revenue Service $213,564 in unpaid payroll and income taxes
and related penalties for failure to file returns covering these taxes from 1993
to 1996. We believe we may still get this judgment voided, but if we have to pay
all of this amount, only $35,594 is due in 2000, with the balance due in 5
remaining annual installments. The $35,594 was included in the prior listing of
currently-due accounts payable and accrued expenses. We owe $38,045 to 1
employee and $129,000 to 2 consultants during 2000 according to contracts we
signed in 1999. These items are included in the prior listing of
currently-due accounts payable and accrued expenses. In addition, we are still
liable for $91,038 in office rent during 2000. We are currently trying to
renegotiate several of these obligations.
We have several pending or threatened lawsuits against us. Ron Lemon, a former
employee, sued us for breach of an alleged employment contract. Linda Bryant, a
former employee, sued us for breach of contract. Rudy Olschewski threatened a
lawsuit related to an alleged promise to reimburse his prior cost on the Costa
Rica project. We have a possible dispute concerning a $500,000 contingent
sunk cost reimbursement, originally agreed to be owed to Carlton Energy Group,
LLC, subject to Trinity's review and approval of such costs. Carlton Energy
Group LLC's chairman, our former CEO, T.C. O'Dell, promised to forgive this
obligation prior to the Chad farmout to Cliveden. The document relating this
agreement has not yet been received in writing from O'Dell. This obligation is
not shown as a liability on the balance sheet, because we feel the likelihood of
payment is remote. We might have to pay something to settle these claims, but we
feel we owe nothing on them.
The above obligations are substantial and daunting. However, we have a number
of opportunities available to us in 2000 to enable us to meet these obligations
and more.
We have 18 wells, most of which had been in need of varying amounts of downhole
equipment replacement and reservoir stimulation investment in order to return to
profitability. We have already accomplished much of the workover (equipment
replacement / stimulation) activity as specified in the Third Amended Plan of
Reorganization with positive results. See an expanded discussion of this
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activity in Item 3, Description of Property. In addition, certain of our oil
and gas leases are indicated to have potential for additional development
drilling. We have spent considerable time studying these in-house opportunities
and currently estimate our workover and development drilling investment could be
up to $1,436,000 in 2000. If made immediately, and if our estimated recovery
occurs, we should more than recover our costs. However, key assumptions in this
analysis are still being assessed, and we don't yet know how much of this
investment we will make. Various third parties have also expressed interest in
participating in some of these wells.
We are also seeking immediate cash flow generating opportunities with manageable
risk in both domestic and international oil and gas exploration and development
markets. Joint ventures with other companies engaged in oil and gas exploration
and development and the purchase of producing properties whose current net
proceeds are likely to significantly exceed current and projected future
expenses are examples of such opportunities.
We are actively engaged in additional fundraising efforts to increase our
working capital for 2000. These efforts can include additional stock and debt.
If we are successful in these efforts, we will proceed with the commitment of
funding those projects which our internal evaluations have verified to be
consistent with our internal rate of return objectives. If we are not
successful in these efforts, we will take steps in the immediate future to
carefully manage existing capital. These steps would include further staff
reductions and other strategic decisions which might include attempts to sell
some of our existing assets. Based on the current status of discussions with
financial entities who have expressed an interest in providing us capital
support in the near term, we expect to be successful in our attempts to raise
capital funding. Subsequent to these anticipated outcomes, we are confident
that we can finish the year 2000 with a healthier balance sheet, all of the
bankruptcy claims forever behind us, and an active trading stock.
1997, 1998, 1999 Domestic Oil, Gas and Condensate Production Statistics:
Oil and gas production at various Company properties in the states of Texas,
Colorado and Wyoming is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
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<S> <C> <C> <C>
Average Sales Price per Barrel of Oil $ 16.81 $10.82 $17.86
Average Sales Price per MCF of Gas $ 1.795 $1.378 $1.418
Average Production (Lifting) Cost
per Barrel Oil Equivalent $14.53# $10.22 $ 9.14
</TABLE>
# The excessive unit lifting costs for 1999 are primarily related to an event in
the attempt to restore production at one of the Nova Wyoming properties. This
event occurred prior to Trinity's taking effective control of Nova operations.
The Company's target for lifting costs in these properties is to be below $5.00
per barrel by yearend 2000. Excepting this singular event in, lifting costs for
1999 would have been $7.11 per barrel. Lifting costs in 1998 were largely
impaired by the then controlling Trustee who expended significant capital toward
virtually non-productive Texas assets. Exclusive of this activity, lifting
costs would have been $8.70 per barrel.
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Productive Wells* Oil Gas
--- ---
Gross 19 16
Net 16.62 14
* Not all wells that can produce are currently producing. See Item 3.
All but three wells in the inventory produce both oil and gas.
Developed and Undeveloped Acreage:
Developed Acreage Gross 3720 acres
Net 3173 acres
Undeveloped Acreage Gross 640 acres
Net 338 acres
Drilling Activity 1999: None
Present Activity:
Numerous wells in the Colorado inventory have recently undergone workover
activity. The Hartwich #1 is under staged workover, beginning November 1999.
Pending final results of this workover, the potential exists for drilling of at
least one or more locations which would further develop this reservoir. Other
leases in the Company's inventory also have potential for development drilling.
See Item 3.
A workover rig was active on the Hartwich #1 for parts of March and April, 2000.
Progress was made in an effort to clean the wellbore to a total depth of about
10,850 feet. Currently, the Hartwich well is undergoing production testing and
is the subject of study for a next stage of workover activity. Current
production is still impeded by borehole debris, but we are producing oil, gas
and water in highly variable amounts. The well is on an alternating day
production schedule, making approximately 30 barrels fluid every other day, with
oil content varying from about 10% to as much as 80%. Gas is fed to a flowline
periodically as pressure builds to about 250 pounds per square inch (psi),
yielding nominal amounts of gas monthly.
Texas Property B Quito Field, Hartwich lease, Ward County
(Unaudited)
1999 1998 1997
---- ---- ----
Oil Production (BBLS) 0 0 841
Gas Production (MCF) 0 0 1,833
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Colorado Property B Comanche Creek / Deadeye Fields, Elbert County
1999 1998 1997
---- ---- ----
Oil Production (BBLS) 1,942 6,279 7,657
Gas Production (MCF) 6,382 24,537 32,907
Wyoming Property 1 - Davis Federal Lease, Campbell County
1999 1998 1997
---- ---- ----
Oil Production (BBLS) 1,059 0 1,471
Wyoming Property 2 B Carey Federal Lease, Crook County
1999 1998 1997
---- ---- ----
Oil Production (BBLS) 0 941 783
Wyoming Property 3 B Wood Field, Crook County
1999 1998 1997
---- ---- ----
Oil Production (BBLS) 1,688 1,826 1,963
Total Gross Oil Production(BBLS) 4,689 9,046 12,715
Total Gross Gas Production(MCF) 5,993 24,537 34,740
Total Net Oil Production (BBLS) 4,098 7,906 11,113
Total Net Gas Production (MCF) 5,238 21,445 30,362
Overall Field Operations B Domestic:
(Consolidated Trinity & Nova)
1999 1998 1997
---- ---- ----
Revenues from Oil and Gas Production $78,382 $82,786 $326,316
Lease Operating Costs 108,663 150,083 169,254
Federal, State And Local Taxes 7,283 15,265 29,316
Depletion 11,985 27,367 38,839
Total Cost of Field Operations 127,931 192,715 237,409
Net Income (Loss) from Field Operations
(49,549) (111,977) 88,907
14
<PAGE>
Item 3. Description of Property
The Company owns an interest in various oil and gas wells in Colorado, Wyoming
and Texas. Some wells in the Company's inventory are currently non-productive
due to lack of maintenance and capital resources over the course of the past two
years. The following table summarizes all proven developed producing (PDP) and
proven developed shut-in (PDSI) properties in the Company's inventory, as of
March 27, 2000:
<TABLE>
<CAPTION>
Lease/Well Name Field / State Status Working Net Revenue
Interest Interest
<S> <C> <C> <C> <C>
Hartwich 1 Quito /TX PDP 1.000 .750
Wood 14-1 Wood/WY PDP 1.000 .8550
Davis Federal 24-33 Heath / WY PDP 1.000 .902624
Carey Federal 2 Gas Draw/WY PDSI 1.000 .9570
Amoco 'E' 469-1 Comanche Creek/CO PDP 1.000 .8200
Amoco 'E' 469-2 Comanche Creek PDP 1.000 .8200
Amoco 'E' 469-4 Comanche Creek PDP 1.000 .8200
Whitehead 4-11 Deadeye/CO PDP 0.706015 .616697
Whitehead 4-13 Deadeye PDP 1.000 .873934
Whitehead 8-15 Deadeye PDP 1.000 .8747
Whitehead 12-7 Deadeye PDP 1.000 .8750
Whitehead 12-16 Deadeye PDP 1.000 .8750
Whitehead 18-04 Deadeye PDP 1.000 .8739
Miller 6-11 Comanche Creek PDP 1.000 .8500
Miller 6-15 Comanche Creek PDSI 1.000 .8500
Morris 13-4 Comanche Creek PDP 1.000 .8744
Morris 24-4 Comanche Creek PDP 1.000 .8744
Sarti 24-2 Comanche Creek PDP 1.000 .8739
Sarti 24-10 Comanche Creek PDP 1.000 .8739
</TABLE>
Existing Domestic Production Interests
The Company is addressing opportunities for workover and/or development
drilling on the Hartwich lease in Ward County, where both oil and gas can be
produced and sold to a local gathering system. Engineering and geologic due
diligence reviews are underway to determine the most appropriate options for our
long term interests in this property. A detailed description of objectives in
this lease appears below.
In addition to the above, Trinity entered into an agreement in 1996 where
Trinity would effectively absorb the assets of a Casper, Wyoming based company
named 'Nova Energy, Inc.' The properties are located in Campbell and Crook
Counties, Wyoming and Elbert County, Colorado and are more fully described in a
section below.
15
<PAGE>
Texas Property
The Company has divested itself of a non-producing asset, consisting of property
located in Brown County, Texas, by virtue of assignment of its "Smith" leases
within the Brown County Regular Field to H & W Marketing Company, Abilene,
Texas, an unrelated company. The transaction became effective on January 28,
2000. The transaction includes the assumption by H&W Marketing Company of the
plugging liability of 15 wells which at one time produced, and which still may
produce from the Cross-Cut Sand at approximately 1200 feet below ground surface.
The Company is in the process of closing down operations on a non-producing
property in Coleman County, Texas where at one time natural gas was produced in
conjunction with the operation of a nitrex plant. Trinity will be plugging 19
wellbores in the "Jamison" and "Skelton" lease areas within the Coleman County
Regular and Jamison South Fields. We expect to spend approximately $22,800
plugging these wells during the second quarter 2000.
Delaware Basin of Greater Permian Basin Ward County,Texas
Quito Field
Hartwich No. 1
640 acres gross, 320 acres net on 40-acre checkerboard
75% Net Revenue Interest/100% Working Interest
A well originally drilled in 1972 and completed by Pennzoil in January, 1973,
has potential value as a workover candidate. Original total depth (TD) for the
well was 17,500 feet, with original completion accomplished in the 'Fusselman'
zone, flowing approximately 2.08 Billion cubic feet gas (BCFG), with no reported
water production, in about one and a half years before abandonment for unknown
reasons. Downhole complications or rapid water encroachment are suspected.
Pennzoil then moved uphole in 1975 to produce from the 'Delaware' at about 4850
feet, eventually producing about 7,500 barrels oil (BO), prior to abandonment of
that zone in 1977. At the time of abandonment, the well was producing 5 barrels
oil per day (BOPD), 11 thousand cubic feet gas per day (MCFGD) and 7.5 barrels
water per day (BWPD). This zone is considered as potential and inexpensive
re-entry candidate. Based on other nearby Delaware producing wells, the zone
could yield a minimum of 20,000 barrels (BBLS) additional primary production.
It is conservatively estimated that payout of such a workover would range from
three to six months.
In 1978 Pennzoil closed off Delaware perforations to move back downhole to
address what were then termed 'Wolfcamp' sand zones. Production was established
over a depth range of 10,605 to 10,786 feet. Recompletion of this zone involved
a small and, by today's standards, probably inadequate hydraulic fracture (frac)
stimulation which included the placement of 40,000 lbs sand acting as fracture
proppant (opening) material into hydraulically created fractures in the
16
<PAGE>
producing formation. Initial production flowing from the zone was 22 BOPD, 66
MCFGD and 16 BWPD, from what we now know to be the 'Bone Spring' zone. The well
was eventually shut-in from about 1987-1990. Trinity (then Jubilee) attempted
to re-establish production, but has never had economic production from the zone.
We are currently underway with preliminary production testing to determine our
future involvement in this lease.
Nearby and in the recent past, operators such as Enron, Pioneer Resources and
others have been successful in applying new technologies to better address the
relatively low natural permeability of the Bone Spring sands. Initial
production rates as high as 800 BOPD have been reported, with rates of 250 BOPD
not uncommon in wells placed in geologically appropriate locations. These new
generation fracs are designed to pump up to 200,000 lbs sand into as many as
five separate sand bodies. Recent estimates for the typical stimulation
procedure, including workover rig and all service company facilities are about
$125,000- $150,000.
Depending on initial production rates, the Company anticipates the procedure
should payout in from one to three months. Some nearby wells in the trend have
yielded cumulative production of over 200,000 BO (and over 0.25 BCFG) in less
than 2 years. Wireline log calculations and all pertinent geological indicators
are favorable for this re-entry. If successful, the drilling of additional
proved undeveloped locations would be warranted.
Colorado Properties
Denver Basin Elbert County, Colorado
Comanche Creek & Deadeye Fields
Acreage Block: 3,560 acres
Working Interest / Net Revenue Interest: 100% to 70.6%/87.5% to 61.66%
Total wells currently producing: 15
Producing zone @ Depth: 'D' & 'J' Sands,
Cretaceous Muddy @ 7500-7800 ft
Current Daily Production: 60 BOPD + 250 MCFGD
The daily production indicated above is the result of the judicious application
of workover funding fieldwide. Immediately prior to the workover activities,
daily oil production had declined to about 2.5 BOPD and about 10 MCFGD. We do
anticipate that daily production levels listed above will decline in the near
future as the formerly built up pressures and oil and gas volumes in the
immediate vicinity of the wellbores decrease. We do not know how long it will
take for the reservoir to settle back to a consistent production level. If the
production rates above occurred consistently over a one year period, production
revenue exclusive of operating costs would be approximately $480,420 assuming an
average oil price of $22/bbl.
17
<PAGE>
Operating expenses will increase with these reconditioned facilities, but the
property will be profitable. Production characteristics will be monitored
carefully to insure that profit margins meet or exceed our internal
requirements.
Secondary Recovery Potential
Consideration is being given to the feasibility of either a secondary recovery
effort which could involve either a waterflood or a carbon dioxide (CO2) flood
to recover additional reserves from this reservoir. To the extent of our
current knowledge, no part of the Comanche Creek / Deadeye complex has been the
subject of any type of secondary recovery pilot. The nature of sand body
distribution, porosity, permeability and other factors lead us to conclude that
the matter deserves further attention. Given that the reservoir has largely
been gas-depletion driven throughout it's history, it would seem more amenable
to CO2 flooding; however, this method may be cost prohibitive due to
transportation costs and other factors which have not been fully examined.
--------------------------------------------------------------------------------
Wyoming Properties B Powder River Basin
Crook County, Wyoming Wood 14-1
Net acreage: 40 acres
Working Interest / Net Revenue Interest 100% / 85.5%
Wells producing: 1
Producing Zone @ Depth Cretaceous Dakota @ 5580 ft
Current Daily Production / Potential 5.5 BOPD / 5.5 BOPD
Development Potential: None indicated at this time.
Crook County, Wyoming 2 Carey Federal
Net Acreage: 80 acres
Working Interest / Net Revenue Interest: 100% / 95.7%, Production level
dependent
Wells producing: 1 (currently shut-in)
Producing Zone @ Depth: Cretaceous Muddy @ 7300 ft
Current Daily Production / Potential: 0 BOPD / 3.0 BOPD (down for
repairs)
Development Potential: Subsurface mapping supports the drilling of one
additional well, a direct offset east of the currently shut-in well. Such a
well should encounter structurally and stratigraphically advantageous conditions
compared to 2 Carey Federal. Reserves associated with this location should
exceed 85,000 BO. Feasibility studies relating to this potential are underway.
Campbell County, Wyoming Davis Federal 24-33
Net Acreage: 40 acres
18
<PAGE>
Working Interest/Net Revenue Interest: 100% / 90.2%, variable, production
level dependent
Wells producing: 1
Current Daily Production: 7.0 BOPD
Development Potential: None indicated at this time.
Domestic Oil and Gas Property Reserves
The future income related to the current oil and gas producing property
inventory is summarized
in the following table:
Net Reserves Net Revenues
Category Oil Gas Total NPV @10%
(Barrels) (MCF) Discount
Proved Developed 94,930 281,000 $1,135,300 $877,100
Proved Undeveloped 84,216 0 $1,234,600 $796,100
Total Proven Reserves 179,146 281,000 $2,369,900 $1,673,200
Regarding the table above, the following definitions apply:
Proved Oil and Gas Reserves: Proved oil and gas reserves are the estimated
--------------------------------
quantities of crude oil, 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, i.e. prices and costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based on future conditions.
Proved Developed Oil and Gas reserves: Proved developed oil and gas reserves are
-------------------------------------
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods.
Proved Undeveloped Reserves: Proved undeveloped oil and gas reserves are
-----------------------------
reserves that are expected to be recovered from new wells on undrilled acreage,
or from existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably certain of production when
drilled.
19
<PAGE>
International Initiatives
Republic of Chad:
Trinity entered into an agreement with Oriental Energy Resources, Ltd. and
Carlton Energy Group in November 1998 wherein Trinity would become 100% working
interest owner and Operator of a 108 million acre concession in the Republic of
Chad. The Chadian Ministry of Petroleum approved a Convention Agreement in
February 1999 which specified work obligations and commitments into the future.
While the project was attractive for a number of reasons, it was, from its
inception, agreed that outside party assistance would be required in order to
satisfy all ongoing obligations associated with the project. Substantial
efforts were applied by Trinity toward the goal of establishing industry
partnerships to advance the project. Eventually, a Farmout Option Agreement was
entered into between Trinity and Cliveden Petroleum Company, Ltd. ("Cliveden")
on May 5, 1999.
Our ability to market the project was significantly linked to the
expectation of the Chad Export Pipeline being approved by the World Bank as
early as September, 1999. As of the date of this report the World Bank approval
has still not been rendered. In mid-November 1999, Royal Dutch Shell's Chad
affiliate and Elf Aquitaine's Chad affiliate, both partners with a
Consortium-leading Exxon Chad affiliate, withdrew their position in the project.
This condition was publicly disclosed in an announcement made by the Chad
government. Confirmation and explanation of this withdrawal have yet to be
announced. Nonetheless, the current makeup of the Exxon-led Consortium has now
been modified to include U.S. based Chevron and the Malaysian Petroleum company
Petronas. Given the uncertainty in the pipeline issue and economic factors,
Trinity redefined its goals as to its future position in the project.
Trinity entered into a Farmout Agreement with Cliveden, a British Virgin
Islands corporation, whereby Cliveden will be responsible for funding all
ongoing operations, including all exploration, drilling and completion
expenditures. The Agreement was dated December 27, 1999 and appears as Exhibit
10.12 to this filing. This obligation includes the maintenance and operation of
the N'Djamena, Chad office opened by Trinity in June, 1999. In exchange for
this assumption of our funding and management obligations, we anticipate
receiving payment of $1.5 million pro rata with Cliveden's recovery of its
prospect marketing costs, and an opportunity to participate for up to a 5%
working interest in the project after payout of exploratory costs. Exploratory
costs associated with the project over the initial five years may approach $26
million. Production proceeds, if any, will need to exceed these costs prior to
Trinity's back-in privilege becoming effective. "Back-in" privilege means that
Trinity has the option, but not the obligation to participate as a working
interest partner in the project at such time as Cliveden recovers its
exploration costs. The farmout agreement and the assignment of the acreage has
been approved by the Chadian Ministry of Mines and Petroleum. A final review by
the government is underway, which is expected to result in the entering of a
decree by the President of Chad outlining and accepting the terms and conditions
of the farmout. Trinity has no way of predicting the timing of such decree
action.
20
<PAGE>
Potential Involvement in Angola Offshore Block 6
By virtue of its relationship with Carlton Energy Group, LLC.("Carlton"),
Trinity was invited to participate for a variable interest of up to 35% in an
offshore Production Sharing Agreement, wherein Carlton Energy was charged with
assembling a Consortium for exploration of said Block. As of the date of this
document, Carlton has not been successful in presenting its plan for Consortium
action to Sonangol, the State Oil Company of Angola. By virtue of continuing
agreement clauses with Carlton, Trinity believes it has preferential rights
which may result in an ultimate position in the project. Trinity's Board was
awaiting additional information from Carlton when an agreement between the
parties expired on December 31, 1999. However, such termination date shall be
extended indefinitely as long as actual negotiations on Block 6 between the
Government of Angola (Sonangol) and Carlton Energy Group, LLC are continuing.
Carlton has disputed any continuing right or interest on the part of Trinity in
this agreement.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of January 19, 2000, information regarding
the beneficial ownership of shares of Common Stock by each person known by us to
own five percent or more of the outstanding shares of Common Stock, by each of
our Officers, by each of our Directors, and by our Officers and Directors as a
group. On December 31, 1999 there were 63,430,454 shares issued and outstanding
of record.
Shares of Percentage
Name & Address of Common As of
Beneficial Owners Stock December 31, 1999(1)
------------------ ----- -----------------
Dennis E. Hedke 95,000(2)(3) .1%
2002 S. Mason Road., Apt 1311
Katy, TX 77450
Arthur C. Teichgraeber 875,000(3) 1.3%
3650 Piping Rock
Houston, TX 77027
---------------------------
(1) Based upon 63,430,454 shares issued and outstanding on December 31, 1999
without giving effect to the possible conversion of the 161,750 shares of
Preferred Stock issued and outstanding which if fully converted would result in
the issuance of 6,470,000 additional shares of Common Stock
(2) Mr. Hedke disclaims any beneficial interest in the shares owned by his
father (10,000 shares) or by his brothers (6,000 shares and 4,000 shares,
respectively) or his two children (100 shares each).
(3) Does not include options to purchase an additional 65,000 shares at $.75 per
share, being issued for services as a director.
21
<PAGE>
Bruce A. Reichert 65,0003 .1%
2703 McKeever Road
Rosharon, TX 77583
John W. Mahoney 0 0
15030 Cypress Falls Drive
Cypress, TX 77429
James E. Gallien, Jr. 0 0
4403 Adonis
Spring, TX 77373
All Executive Officers and Directors
as a group (5 persons)
1,031,000 1.6%
Item 5. Directors, Executive Officers, Promoters and Control Persons
Name Age Position
---- --- --------
Dennis E. Hedke 47 Exec. Vice-President, COO, Director
(Interim President, CEO)
Arthur C. Teichgraeber 43 Director
Bruce A. Reichert 42 Director
John W. Mahoney 45 Vice-President, Secretary, General
Counsel
James E. Gallien, Jr. 52 Exec. Vice-President, CFO,
Director
The terms of office for the current members of the Board of Directors, excepting
James E. Gallien, Jr. commenced on October 27, 1998, upon confirmation by the
Bankruptcy Court of the Plan of Reorganization. Their terms are for a period of
one year or until their successors are duly elected and qualified. James E.
Gallien, Jr. was elected to the Board on October 27, 1999. Messrs. Hedke,
Teichgraeber and Reichert were re-elected on October 27, 1999.
At present, the Board of Directors has an Audit Committee, an Executive
Compensation Committee and a Strategic Planning Committee. The Audit Committee
consists of Messrs. Gallien, Teichgraeber and Reichert (Chairman). The
Executive Compensation Committee consists of Messrs. Teichgraeber (Chairman)
Reichert and Hedke. The Strategic Planning Committee consists of Messrs.
Teichgraeber (Chairman) and Hedke. The Executive Committee consists of Messrs.
Hedke (Chairman), Gallien and Mahoney.
Biographies for the directors and significant employees are:
22
<PAGE>
Dennis E. Hedke has, since 1986, served as an oil and gas exploration consultant
to a variety of firms engaged in domestic and foreign exploration and
development. He has had extensive domestic assignments in the Mid-Continent,
Rocky Mountains, Texas and Gulf Coast. His international assignments have
included projects in the Middle East, the former Soviet Union, West Coast
Africa, and Colombia, South America. His responsibilities have covered deal
structuring and negotiation, technical data assessment, economic assessment and
operations control. Mr. Hedke was graduated in 1976 with a B.S. in Geophysics,
from Kansas State University and then received an M.S. in Materials Science from
the University of Virginia in 1979.
A.C. Teichgraeber received a degree in Production Management Engineering
Technology from Kansas State University in 1978. Since July 1, 1999 he has been
President and Chief Executive Officer of Oil Quip, Inc., Houston, Texas.
Immediately prior to his present involvement, from April 17, 1997 to July 1,
1999, he had been President and Chief Operating Officer of the Drilling
Equipment Division of IRI International Corporation, with responsibility for
worldwide sales and manufacturing activities. From 1989 to 1997 he was
President and Chief Executive Officer of Cardwell International, Ltd., in charge
of purchasing technology and licenses to manufacture the line of Cardwell
drilling, workover and well servicing rigs.
Bruce A. Reichert has been Vice President of Engineering for Input/Output, Inc.,
a manufacturer of equipment used in the seismic exploration for oil and gas,
where he is responsible for the development of new products while improving
existing products, since January, 1998. Before that he was an Associate
Professor of Mechanical Engineering at Kansas State University from October,
1994 to January, 1998. From May, 1989 to October, 1994 Dr. Reichert was a
Research Engineer at the NASA Lewis Research Center. Dr. Reichert was graduated
from the U.S. Naval Academy in May, 1979 with a B.S. in Mechanical Engineering.
He also holds both a Masters Degree (1987) and a PhD (1991) in Mechanical
Engineering from Iowa State University.
John W. Mahoney was associated with the law firm of Williams, Birnberg &
Andersen LLP in Houston, Texas from January, 1996 to July, 1999. Before that he
was associated with the Houston law firm of Hofheinz, Mahoney & Jones from 1993
to December, 1995. Mr. Mahoney is a 1976 graduate of Central Missouri State
University and received his J.D. from the College of Law of the University of
Tulsa in May, 1979.
James E. Gallien, Jr. is a Certified Public Accountant since 1975. After he was
graduated by Louisiana State University in 1970 with a B.S. in Finance, Jim was
in the armed forces until 1972 and then held accounting positions until 1980.
In 1980 he opened his own accounting practice which he continued until 1998. He
was CFO of Winn Fuel Systems, Inc. from January,1998 until June 30, 1999, when
he joined us.
23
<PAGE>
Item 6. Executive Compensation
Compensation of Management - Employment Agreements
-------------------------------------------------------
The Plan of Reorganization as approved by the Bankruptcy Court authorized the
execution of three-year employment agreements with Messrs. O'Dell and Wallace,
with terms consistent with those set forth in the Plan. Both employment
relationships have been terminated. Mr. Wallace resigned as President on August
24, 1999, after disagreements regarding philosophy and management style
developed between Mr. Wallace, President and Chief Operating Officer and T.C.
O'Dell, Chairman of the Board and Chief Executive Officer. Accordingly, it was
mutually agreed that Mr. Wallacee's employment relationship should be
terminated, with the Company receiving the benefit of continuity of his advice
as a Consultant. His Employment Agreement, which contained certain severance
provisions, was replaced and the severance provisions were superceded by a one
year consulting agreement calling for monthly payments of $10,000 and providing
for 3,000,000 stock options each exercisable for five years after vesting to
purchase one share of our Common Stock per option, which vest and have exercise
prices as follows:
(i) one third after the nine month anniversary of the confirmation
of the Plan of Reorganization at an exercise price of $ .25 per
share; and
(ii) one third after the fifteen month anniversary of the
confirmation of the Plan of Reorganization at an exercise price of
$ .25 per share; and
(iii) one third upon the termination of the consulting agreement at
an exercise price of $1.50 per share.
Mr. O'Dell resigned on January 25, 2000. After careful consideration and
discussion, the Board of Directors and Mr. O'Dell decided that Mr. O'Dell would
resign as President, Chief Executive Officer and Board member because of
philosophical differences about the direction of the Company. As part of the
settlement reached with the Company, which superceded the severance provisions
of his employment contract, he received 3,250,000 stock options, exercisable for
two years from the date of resignation to purchase one share of our Common Stock
per option at a price of $ .25 per share.
On July 1, 1999 we entered into an Employment Agreement with Mr. Mahoney. The
term of the Agreement is for two years, the salary due is $10,000 per month,
there are fringe benefits including a $667.00 per month car allowance, a monthly
health insurance provision of $239 to cover a pre-existing policy, and Mr.
Mahoney received 999,000 stock options, each exercisable for a term of five
years after vesting to purchase one share of our Common Stock per option, which
vest and have exercise prices as follows:
(i) one third after the first anniversary of employment at $ .25
per share; and
(ii) one third after the second anniversary of employment at a price
per share of 30% under the average of the last five trading days
prior to the second anniversary; and
(iii) one third after the second anniversary of the confirmation of
the Plan of Reorganization at a price per share of 30% under the
average of the last five trading days prior to such second
anniversary.
On September 1, 1999 we entered into an Employment Agreement with Mr. Hedke.
The term of the Agreement is for three years, the salary due is $10,000 per
month, there is a $750 per month car allowance, and there is an agreement to pay
Mr. Hedke's relocation expenses from Kansas, including temporary storage of his
personal effects until he establishes a permanent residence. The total amount
paid for these expenses in 1999 was $9,691. There is a $300 per month provision
for medical benefits allowance, which has not been taken as of 12/31/99. Mr.
Hedke received 1,000,000 stock options, each exercisable for a term of five
years after vesting to purchase one share of our Common Stock, which vest and
have exercise prices as follows:
24
<PAGE>
(i) one third after the first anniversary of employment at $ .25
per share; and
(ii) one third after the eighteen month anniversary of employment at
a price per share of 30% under the average of the last five trading
days prior to such anniversary; and
(iii) one third after the second anniversary of employment at a price
per share of 30% under the average of the last five trading days
prior to such second anniversary.
Also on September 1, 1999 we entered into an Employment Agreement with Mr.
Gallien. The term of the Agreement is for three years, the salary due is
$10,000 per month, there is a car allowance of $750 per month, and $300 per
month allowance for medical benefits, which has not been taken as of 12/31/99.
Mr.Gallien received 1,000,000 stock options, each exercisable for a term of five
years after vesting to purchase one share of our Common Stock, which vest and
have exercise prices as follows:
(i) one third after the first anniversary of employment at $ .25 per
share; and
(ii) one third after the eighteen month anniversary of employment at a
price per share of 30% under the average of the last five trading
days prior to such anniversary; and
(iii) one third after the second anniversary of employment at a price
per share of 30% under the average of the last five trading days prior
to such second anniversary.
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Name and Principal Car
Position at 3/31/00 Year Salary Bonus Allowance
Dennis E. Hedke 1999 $120,000 None $ 9,000
Executive Vice-President 2000 $96,000* None None*
(Interim President & CEO)
James E.Gallien, Jr. 1999 $120,000 None $ 9,000
Executive Vice-President and 2000 $96,000* None None*
Chief Financial Officer
John W. Mahoney 1999 $120,000 None $ 8,004
Vice-President and General 2000 $96,000* None None*
Counsel
</TABLE>
* Effective current rates as of April 1, 2000. Members of the Executive
Committee have all agreed to accrue 20% of their salary allotments and 100% of
Car Allowances until such time as the Company has confirmed capital funding
support currently being formulated. Similar cuts have been instituted across the
board to include consultants and independent contractors.
A provision for a $250,000 death benefit for all above employees was included in
original contracts with these individuals. However, all have waived that
provision until the Company can afford such a policy.
25
<PAGE>
No salaried compensation was provided for the above individuals prior to 1999.
Option Grants in the Last Fiscal Year
Set forth below is information relating to grants of stock options pursuant to
the Company's Stock Option Plans during the fiscal year ended December 31, 1999.
Individual Grants
% of Total Options
Granted to Employees
Exercise or
Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date
T.C. O'Dell 3,250,000 61.908% $0.25 1/25/2002
Michael L. Wallace 1,000,000 19.048% $0.25 6/26/2004
Dennis E. Hedke* 333,333 6.349% $0.25 9/01/2004
James E. Gallien, Jr.* 333,333 6.349% $0.25 9/01/2004
John W. Mahoney* 333,000 6.342% $0.25 7/01/2004
*Options not vested until one year anniversary of employment contracts.
Item 7. Certain Relationships and Related Transactions
Following his retirement from Conoco Overseas Oil Company, Thomas C. O'Dell
organized Carlton Energy Group, LLC., of which he is the Chairman and Managing
Director, to pursue energy sector investments worldwide. He was approached by
members of the Shareholders' Committee in the Chapter 11 proceeding and agreed
to assume a management role in the Company. Until his resignation on January
25, 2000, he was Chairman, President and Chief Executive Officer of the Company.
On behalf of Carlton Energy Group, LLC. he has been seeking out and negotiating
oil and gas exploration, development and production contracts. Under his
employment agreement, now terminated, he had agreed to assign such contracts to
us, or to permit us to participate in consortiums which are pursuing or
exploiting such contracts. The Chad Concession contracts were the result of such
arrangement.
Mr. O'Dell loaned up to $400,000 to the Company for operating capital during
1999, with interest ranging from 8.75% - 12% and collateralized by the Texas
Hartwich lease. As of March 31, 2000, the unpaid balance is $0.
The Company leased office space from O'Dell's company, Carlton Energy Group,
Inc. at $7,500 per month through August 1999, totaling $59,500 in 1999 and
$30,000 in 1998.
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Item 8. Description of Securities
-------------------------------------
At a Special Meeting of our Stockholders held on March 17, 1999, our capital
structure was changed. Our new capital structure consists of shares of
Preferred Stock and Common Stock, both having a par value of $.001 per share.
The authorized classes, and the amount or number of each which are authorized
and outstanding as of January 18, 2000, are as follows:
Authorized Outstanding
---------- -----------
Preferred Stock 50,000,000 Only 1999 Series Designated
1999 Series 1,600,000 161,750
Common Stock 300,000,000 63,430,454
Preferred Stock
----------------
The 50,000,000 shares of Preferred Stock authorized are undesignated as to
preferences, privileges and restrictions. As the shares are issued, the Board
of Directors must establish a "series" of the shares to be issued and designate
the preferences, privileges and restrictions applicable to that series. To
date, the Board of Directors has designated only one series: the 1999 Series of
Convertible Redeemable Preferred Stock, consisting of 1,600,000 shares with the
following characteristics:
Stated Capital - the stated capital is $10.00 per share, which is the price paid
by the investors in the 1999 series.
Relative Seniority - The 1999 Series is senior to the Common Stock and will be
senior to all other series of the Preferred Stock which, when issued, are
designated as junior.
Voting - The 1999 Series votes as a class with the Common Stock and each share
has 40 votes.
"Put" for Repurchase - After a holding period of 12 months, a holder may put his
shares back to us for repurchase. The repurchase price is $10 (the stated
capital) plus a premium calculated as 12% per annum of the stated capital from
the date of issuance, less any dividends declared and paid.
Redemption - We have the right, exercisable after June 30, 1999, to redeem the
shares of the 1999 Series. The redemption price is $10 (the stated capital) plus
a premium calculated as 12% per annum of the stated capital, less any dividends
declared and paid.
Conversion - Each share converts into 40 shares of our Common Stock, at the
discretion of the holder, at any time after June 30, 1999.
Liquidation Preference - The holders of the 1999 Series shall receive a
preferential liquidation distribution of $10 per share, plus any dividends
declared but unpaid, before any distribution is made with respect to any junior
class or series of stock.
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Preemptive Rights - The 1999 Series does not carry preemptive rights to
subscribe to future stock issuances.
Common Stock
-------------
The authorized common equity of the Company consists of 300,000,000 shares of
Common Stock, with a $.001 par value, of which 63,430,454 shares of Common Stock
are issued and outstanding as of January 18, 2000. Shareholders (i) have
general ratable rights to dividends from funds legally available therefor, when,
as and if declared by the Board of Directors; (ii) are entitled to share ratably
in all assets of the Company available for distribution to shareholders upon
liquidation, dissolution or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription or conversion rights, nor are there any
redemption or sinking fund provisions applicable thereto; and (iv) are entitled
to one vote per share on all matters on which shareholders may vote at all
shareholder meetings.
The Common Stock does not have cumulative voting rights, which means that the
holders of more than fifty percent of the Common Stock voting for election of
directors can elect one hundred percent of the directors of the Company if they
choose to do so. The Company, which has had no earnings, has not paid any
dividends on its Common Stock and it is not anticipated that any dividends will
be paid in the foreseeable future. Dividends upon Preferred shares must have
been paid in full for all past dividend periods before distribution can be made
to the holders of Common Stock. In the event of a voluntary or involuntary
liquidation, all assets and funds of the Company remaining after payments first
to any creditors of the Company, and secondly to the holders of Preferred Stock,
will then be divided and distributed among the holders of Common Stock according
to their respective shares.
Upon re-commencement of public trading, our Company's Common Stock will be
subject to the penny stock rules. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on NASDAQ provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system) or to other than established
customers or accredited investors. (In general, "accredited investors" are
defined as institutions with assets in excess of $5,000,000 or individuals with
net worths in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 with their spouses.) The penny stock rules require a broker-dealer,
before a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in connection
with the transaction, and monthly account statements showing the market value of
each penny stock held in the customer's account. In addition, the penny stock
rules generally require that before a transaction in a penny stock, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. As a result of these rules and
their impact on trading, our stockholders may find it more difficult to sell
their securities.
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Dividend Policy
----------------
We have not had any dividends for our Common Stock. Our proposed operations are
capital intensive and we need working capital. Therefore we will be required to
re-invest any future earnings in the Company's operations. Our Board of
Directors has no present intention of declaring any cash dividends, as we expect
to re-invest all profits in the business for additional working capital for
continuity and growth. The declaration and payment of dividends in the future
will be determined by our Board of Directors considering the conditions then
existing, including the Company's earnings, financial condition, capital
requirements, and other factors.
PART II
-------
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
In October, 1997 the Securities and Exchange Commission began an investigation
into the market activity of our Common Stock, which was then traded on the OTC
Bulletin Board. On November 6, 1997 the SEC ordered a ten (10) day suspension
in trading of our stock. Following such a suspension, a company would be
required to provide new, up-dated information to its marketmakers before trading
could be resumed. That was not done, as on December 8, 1997 the SEC filed a
complaint against us, the then current President, Sidney W. Sers, and certain
nominal defendants (See Item 2, Legal Proceedings, following) and Mr. Sers
subsequently caused us to file a petition pursuant to Chapter 11 of the United
States Bankruptcy Code with the United States Bankruptcy Court for the Northern
District of Texas, San Angelo Division. Mr. Sers then resigned on January 12,
1998. Thereafter, we were under the operational control of the Chapter 11
Trustee. To date, there has been no re-filing of the data required to permit
the marketmakers to resume a trading market, as we have preferred to rely upon
the filing of this Form 10-SB to recommence trading. Accordingly, although
there have been sporadic transactions in our Common Stock there has been no
regular trading market.
We have never had any earnings or profits and we have never paid a dividend on
our Common Stock. (See Part I, Item 8, "Dividend Policy")
Item 2. Legal Proceedings
Except as described below we are not engaged in any pending legal proceedings.
We are not aware of any legal proceedings pending, threatened or contemplated,
against any of our officers and directors, respectively, in their capacities as
such.
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We were a defendant in the SEC's enforcement action (See Part I, Item 1
"Description of Business - Organization/Historical Background"). The action,
filed December 8, 1997 in the U.S. District Court, Northern District of Texas,
Fort Worth Division, Case No. 4-97CV-1018Y, is captioned Securities and Exchange
Commission v. Trinity Gas Corporation, Sidney W. Sers, et al. The SEC alleged
numerous violations of the Securities Act of 1933 and the Securities Act of 1934
by Sers and the Company, including (i) fraud in connection with the purchase and
sale of securities, (ii) fraud in the offer and sale of unregistered securities
and (iii) the unauthorized selling of unregistered securities. The SEC's
enforcement action has been settled with respect to us, by the entry of a
Consent Decree, although it is proceeding against Mr. Sers and the other
defendants. As our part of the settlement, we agreed not to violate the
securities laws and consented to the entry of an injunction against our
violation of the securities laws.
On December 9, 1997, Messrs. Ruth and Guillemin, former officers and in the case
of Mr. Ruth, a former director of the Company filed a stockholders' derivative
action. The action, filed in the United States District Court, Northern
District of Texas, Fort Worth Division is captioned Trinity Gas Corporation by
Richard E. Guillemin and William W. Ruth v. Sidney W. Sers, et al and docketed
as Civil Action No. 4-97-CV-1020Y. On February 11, 1998 the Company's Trustee
in the Chapter 11 proceeding substituted himself as the plaintiff. Neither Mr.
Sers nor the other defendants filed an answer to the complaint. On May 25, 1999
the District Court entered a final judgment against Mr. Sers in the amount of
$4,803,522 together with post-judgment interest. On May 27, 1999 the District
Court entered a default judgment against Trinity Gas Colombia, Ltd. awarding
damages to us in the amount of $3,130,000 together with post-judgment interest.
On December 23, 1997 the Company filed a Chapter 11 Petition for Reorganization,
docketed to Case No. 697-60425-JCA-11 in the United States Bankruptcy Court for
the Northern District of Texas, San Angelo Division. An official Equity
Committee was appointed by the United States Trustee to represent the
shareholders interest in the case. During 1998 the Equity Committee recruited
new management and with that management developed a Plan of Reorganization. The
Plan, as amended (Third Amended Plan of Reorganization dated July 27, 1998), was
confirmed by the Bankruptcy Court on October 26, 1998. We are entering the final
stages of closing the case and expect to file a motion to that effect before
June 30, 2000.
On March 31, 1999 the City Bank & Trust Company of Natchitoches (Louisiana)
filed an action against certain defendants, including us, in the Louisiana state
courts. On July 9, 1999 Trinity intervened to preserve its rights regarding the
real property which is the subject of the action and removed the case to the
United States District Court for the Western District of Louisiana, Alexandria
Division, where it was docketed to Civil Action No. 99-1239 . In this action
the plaintiff bank seeks to foreclose its lien and extinguish all other claims
to the property known as the Natchitoches Hotel, and also seeks to recover
approximately $2,000 from us for ancillary discovery proceedings. Our interest
in the hotel, which has been vacant for several years and reportedly is
contaminated with asbestos, arises because Mr. Sers used corporate funds and/or
stockholder funds to acquire the hotel. As Intervenor, Trinity filed
counter-claims seeking affirmative relief. On October 5, 1999 we assigned our
rights in this litigation to William W. Ruth, Trinity's former counsel, in
consideration of the services rendered by Mr. Ruth during certain litigation
during the bankruptcy court proceedings. Under the terms of the assignment, Mr.
Ruth will bear all expenses and costs of the litigation and will retain any real
property rights recovered as well as receive 95% of all gross proceeds received
in the litigation up to $100,000; we will receive 5% of all gross proceeds up to
$100,000 and all gross proceeds over $100,000. We do not expect to receive any
proceeds from this litigation.
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<PAGE>
On June 21, 1999, within the main bankruptcy proceedings, we filed an action,
docketed to Adversary No. 699-6012, against the Internal Revenue Service, Sidney
W. Sers, Patricia Sers and Amanda Sers seeking recovery of approximately
$1,000,000. Our claim is that these funds can be directly traced to the
issuance of shares of our Common Stock, without consideration, to his daughter,
Amanda Sers. After Amanda Sers sold the stock, Mr. Sers allegedly used the
proceeds to pay his personal income tax liability for 1997. The Internal
Revenue Service contends that the funds were never the Company's property and
that the funds were transferred more than one year before the filing of the
Chapter 11 petition (thus precluding recovery). In addition to the claim for
the $1,000,000 we also claim an offset against the $213,564 tax liability
currently owed by us to the Internal Revenue Service. On January 6, 2000 the
Bankruptcy Court granted summary judgment in favor of the Internal Revenue
Service both with respect to the claim to the funds and the claim for an offset.
We have appealed this decision to the U.S. District Court.
On June 30, 1999, also within the main bankruptcy court proceedings, we filed an
objection to the claimed interest of Crystal Coral, Ltd. and certain affiliates.
We sought to cancel 2,000,000 shares of our Common Stock which were issued to
Crystal Coral, Ltd. The reason for our objection and effort to cancel the
shares is that Crystal Coral, Ltd. did not pay the fair market value for the
shares, but that Mr. Sers issued the shares to Crystal Coral, Ltd., whose
principal is Dr. Robert Milton, a former business associate of Mr. Sers, without
consideration. A settlement has been reached whereby 1,100,000 shares will be
returned to us and canceled and along with an obligation of one of the
defendants to us, amounting to a $40,000 payment of a note, which is
collateralized by 750,000 shares of our Common Stock, which shall be paid by
July 1, 2000.
On December 23, 1999, also within the main bankruptcy court proceedings, we
filed a complaint against Rockcrest Capital Corporation, Rockcrest Securities,
LLC, D.W. Mitchell, Max Chapman, Jim Harris, Julie Chambers and the City of
Natchitoches, Louisiana alleging fraudulent transfers of funds to these persons
based on improper acquisition and sale of our Common Stock, and, with respect to
Mr. Chapman, breach of contract for having misrepresented his ability to perform
accounting services and for overcharging us. Our damages are substantially
unliquidated, but we anticipate showing that several hundred thousand dollars
were fraudulently transferred.
On March 2, 2000, the Court severed defendants Rockcrest Securities, Mitchell,
Chapman, Harris, Chambers and the City of Natchitoches from No. 99-6031,
leaving Rockcrest Capital Corporation as the sole defendant in that case, and
ordered the Company to proceed against each of the above named defendants
individually in separate proceedings. Separate suits were filed against each of
the above-named defendants. On June 7, 2000, a default judgment was obtained
against Max Chapman for $30,000.00. Trinity has determined that, with the
exception of the City of Natchitoches, it will dismiss its cases against each of
the remaining defendants because the likelihood of obtaining and collecting
judgments is outweighed by the time and resources such actions would consume and
the advantage to the Company of finally concluding the bankruptcy matter. The
case involving the City of Natchitoches remains active since Trinity has
assigned its rights in that case, including the cost of such litigation to
William Ruth.
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<PAGE>
We will preserve our claims and causes of action against our former securities
counsel, Sheinfeld, Maley & Kay ("Sheinfeld") and Robert Yeager ("Yeager")
should we determine to assert such claims. Our claims against Sheinfeld and/or
Yeager include, but are not limited to, claims for legal malpractice arising in
connection with Sheinfeld and/or Yeager's representation of us with respect to
securities issues. Specifically, Sheinfeld and/or Yeager may have failed to
provide proper legal advice concerning Samson Robbins' October 6, 1997
resignation letter and the adverse effects of failing to release that letter
into the public domain. Sheinfeld and/or Yeager may have also failed to
properly advise us regarding the use of unlicensed brokers to sell securities in
violation of federal and state securities laws and regulations.
On December 30, 1999 Ron Lemon filed suit, docketed to No. 1999-64074 in the
133rd Judicial District Court of Harris County, Texas alleging breach of
contract and common law fraud arising out of a purported employment contract to
be our Vice President - Trading and Transactions. It is our position that prior
to the execution of the contract signed by Mr. Lemon, he was informed by our
then-Chief Executive Officer and Chairman of the Board, Mr. O'Dell, that the
proposed contract terms were unacceptable to us and that other contract terms
would have to be agreed upon in order for Mr. Lemon to become employed by the
Company. In any event, the contract signed by Mr. Lemon and the then-President
Michael L. Wallace, was never approved by the Board of Directors as required by
our bylaws. We have been served and have filed our answer to the suit.
During 1999 the Oil and Gas Conservation Commission of the Colorado Department
of Natural Resources undertook field inspections of our various wells in that
State. As a result, a number of "Notices of Alleged Violations" ("NOAVs") were
issued. Initially, our field staff did not notify us of these NOAVs and
attempted to resolve the problems, which included the failure to remove oil from
production pits, location of production pits in sensitive areas, and oil
spills. When the four initial NOAVs were not resolved the Commission instituted
proceedings, which ultimately called Management's attention to the problem.
Negotiation and settlement resulted in the filing of Administrative Orders By
Consent ("AOCs"). The proceedings were docketed to Nos. 9812-OV-17, 9812-OV-18,
0002-OV-05 AND 0002-OV-06 at the Commission. Those four AOCs were heard at the
COGCCs February 14-15, 2000 meeting. The settlements resulted in the imposition
of fines totaling $14,000 in addition to the future remediation of the problems
cited. The remaining NOAVs are being resolved by Management, in the field, and
we do not expect any further proceedings to be instituted. The $14,000 in fines
have been paid. Environmental remediation activities are underway at two sites
associated with the AOC's and we estimate costs associated with remediation
efforts will not exceed $35,000.
On September 20, 1999 the United States Environmental Protection Agency filed an
administrative complaint against Nova Energy, Inc., a Wyoming corporation,
Docket No. CWA-8-99-10, alleging that, on September 24, 1997, Nova failed to
prepare and implement a Spill Prevention Control and Countermeasure plan for its
Wood "B" Tank Battery facility in Crook County, Wyoming, as required by the
Clean Water Act. An answer to the complaint has been filed. We believe that we
will not have to pay any civil penalty should it be found that a violation
occurred because we did not exercise any financial or managerial control or
authority over Nova during the time in question. We only learned of the
complaint during the first quarter 2000.
We have instructed our Country Manager in Chad to institute civil legal
proceedings against Mohammed Alhaji Indimi, the Managing Director of Oriental
Energy Resources, Ltd., the originator of the Chad-Carlton-Trinity consortium.
In May, 1999 we paid $350,000 to Oriental which was intended to be used for
payment of the Chad Consortium's acreage rental for 1999. Oriental did not make
the payment and the funds were allegedly converted by Mr. Indimi.
32
<PAGE>
Rudy Olschewski threatened a lawsuit related to an alleged promise to reimburse
his prior cost on the Costa Rica project. No lawsuit has been filed nor has any
other communication regarding this matter been sent to Trinity by Olschewski.
We have a possible dispute concerning a $500,000.00 contingent sunk cost
reimbursement, originally agreed to be owed to Carlton Energy Group, LLC,
subject to Trinity's review and approval of such costs. Carlton Energy Group's
chairman, T. C. O'Dell, who is also our former chairman and CEO, promised to
forgive this obligation prior to the Chad farmout to Cliveden. The document
relating to this agreement has not yet been received in writing from O'Dell and
no further demand has been made by O'Dell.
On May 3, 2000, Linda S. Bryant filed a lawsuit, docketed as case No. 2000-22780
in the 270th Judicial District of Harris County, Texas, alleging a breach of
contract arising out of the termination of her contract with us. It is our
position that the contract is void and that Ms. Bryant's termination was
justified. We have only recently been served and will timely file an answer to
the suit. We might have to pay something to settle these claims, but we feel we
owe nothing to any of these parties.
Item 3. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In July 1999 we had engaged the firm of Samson, Robbins & Associates, PLLC
("S&R") to audit our financial statements for the year ended 1998 and the period
ended July 1999. We received repeated assurances that the audit was almost
complete, but by late November, despite the payment of over $120,000 in audit
fees, we were still unable to get any commitment that the audit would, in fact
be completed in a timely manner for the filing of this Form 10-SB. During late
November and early December, 1999 representatives of our Board of Directors met
on several occasions with S&R. Following a second meeting, on December 11,
1999, the Board of Directors unanimously determined to terminate the engagement
of S&R and to engage the firm of Malone & Bailey, PLLC, 5444 Westheimer, Suite
2080, Houston, Texas 77056.
At the second meeting in December 1999, S&R first indicated, indirectly, that
they might be required to indicate that there was a "scope limitation" on their
audit because they had not received documentation form Oriental Energy Resources
Limited ("Oriental") substantiating the deemed sunk costs for the Chad project.
See note 4 to the financial statements. The agreement called for possible
reimbursement by Trinity to Oriental of deemed sunk costs, in an amount up to
$1.5 million upon receipt of proper documentation of the expenses incurred. No
documentation was received and accordingly, no payments were made. However,
Oriental did divert $350,000 from funds designated for other purposes. In
connection with this arrangement. S&R requested an audit confirmation letter
from Oriental, which, of course, was never returned. Based upon this failure of
Oriental to return the audit confirmation letter, S&R concluded that this
constituted a "scope limitation" on their audit.
A secondary matter for S&R related to concerns that our then Chief Executive
Officer, T.C. O'Dell was making major management decisions without the knowledge
or approval of the Board of Directors. We agreed that this had been a problem,
and were working to resolve it. In January 2000 Mr. O'Dell resigned because of
disagreements with the Board over multiple issues.
33
<PAGE>
Although neither of these matters was resolved to S&R's satisfaction prior to
their termination, the Board felt that the O'Dell /Board communications matter
was not significant as it related to the audit and that the failure of Oriental
to return an audit confirmation letter was not a reason for a "scope
limitation", since no payments of the contingent liability were due unless
proper documentation was submitted. Our new auditors concurred; however, we
did not request any answer from Malone & Bailey PLLC regarding application of
accounting principles or audit opinion type prior to engaging them to replace
S&R.
S&R at no time informed us that:
(1) internal controls necessary to develop reliable financial statements did
not exist, or
(2) information came to their attention which made them unwilling to rely on
management's representations, or unwilling to be associated with the
financial statements prepared by management; or
(3) their audit scope should be expanded significantly. (There were no
previously issued audit reports).
Item 4. Recent Sales of Unregistered Securities
During 1997, the prior Management issued 37,619,267 shares in various
transactions claiming various exemptions from the registration provisions of the
Securities Act of 1933. These issuances were among the reasons for the
Securities and Exchange Commission's enforcement action, brought on November 6,
1997 (See Part I, Item 1, Description of the Business - Background). We have
already secured the cancellation or forfeiture of shares and we are currently
pursuing additional litigation (See Part II, Item 2, "Legal Proceedings"). At
the end of 1997 we had 94,733,211 shares of Common Stock issued and outstanding.
We have secured the cancellation or forfeiture of 32,762,433 shares as more
fully described in the section below.
During 1998, the Bankruptcy Court issued various orders with respect to our
shares of Common Stock. First, 30,542,433 shares held by the Sers family and
affiliates were ordered canceled. Second, on November 18, 1999 we issued 30,000
shares for a claim of $7,500. We also issued 50,000 shares for a claim of
$12,500. These issuances were considered exempt from registration under Section
4(2) of the Securities Act. Third, as provided in the Third Amended Plan of
Reorganization as of October 27, 1998, we issued 65,000 shares of our Common
Stock to each of three of our Directors (Messrs. Hedke, Teichgraeber and
Reichert) and to each of the three members of the Advisory Board of Directors as
compensation for their services. These issuances were considered exempt from
registration under Section 4(2) of the Securities Act. Fourth, 540,000 shares,
out of a total holding of 2,040,000 shares, were ordered canceled as settlement
of bankruptcy claims against the holder, leaving him with 1,500,000 shares. As
a result of these various Bankruptcy Court orders, we had 64,120,778 shares
issued and outstanding at the end of 1998.
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<PAGE>
Under the Third Amended Plan of Reorganization, the Bankruptcy Court authorized
two alternatives to existing shareholders who were treated as claim holders in
order to resolve all liabilities relating to the actions of prior management:
(1) a so-called "Equity Option" whereby their allowed interests
permitted an exchange of their shares of Common Stock for (a) an equal
amount of shares of New Common Stock and (b) rights to purchase an equal
number of shares of New Common Stock at a price of $ .25 per share;
or
(2) a so-called "Cash Out Option" whereby their allowed interests would
liquidated by the distribution of a value to be calculated.
In addition, the Bankruptcy Court authorized an offering, in a private
placement, of up to approximately 64,000,000 shares at an offering price of $
.25 per share.
Shareholders holding a total of 569,011 shares elected the Cash Out Option. The
balance of the shareholders elected or were deemed to have elected the Equity
Option. The issuance of the New Common Stock and Rights was considered exempt
from registration by reason of Section 1145 of the Bankruptcy Code.
Shareholders holding a total of 1,705,391 Rights exercised those Rights. The
issuance of the 1,705,391 shares of New Common Stock upon exercise of those
Rights was also considered exempt under Section 1145 of the Bankruptcy Code.
During 1999 we issued 603,296 shares in full or partial payment for services
rendered to us. Of these, 87,476 shares were issued on 2/29/2000 to four
consultants on the Chad project, 94,720 shares were issued on 1/3/2000 to a
media consultant for work on our website and our internet stockholder voting
program, and 421,100 shares were issued on 2/29/2000 and 3/28/2000 to three
business and financial consultants. In addition, a final billing for serviced
provided in 1999, but for which no invoice had been received until after January
31, 2000, equating to issuance of 38,110 shares of stock, is under process for
distribution at this time. The services were valued on the basis of the value of
the services rendered and taking our shares at a value of $ .25 per share.
These issuances were considered exempt from registration under Section 4(2) of
the Securities Act.
During 1999 the Bankruptcy Court ordered the cancellation of an additional
1,680,000 shares, including 1,100,000 shares in the Crystal Coral, Ltd./Robert
Milton litigation (See Part II, Item 2, "Legal Proceedings"). In addition, we
are holding 750,000 shares under that same litigation as collateral for the
payment of the $40,000 obligation of one of the defendants.
At December 31, 1999 we had a total of 63,430,454 shares of Common Stock issued
and outstanding.
In addition during 1999 we made an offering of our 1999 Series of Convertible
Redeemable Preferred Stock under Rule 506 of Regulation D promulgated under the
Securities Act of 1933. We issued 126,750 shares to eleven accredited
investors. We received gross proceeds of $1,267,500 and paid finders fees and
issuance costs of $120,450 for net proceeds of $1,147,050. These issuances were
considered exempt under Rule 506 and Section 4(2) of the Securities Act of 1933.
35
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Item 5. Indemnification of Directors and Officers
The following areas of indemnification apply to our Company:
Nevada Corporation Law
Section 78.7502 of the Nevada General Corporation Law contains provisions
authorizing indemnification by the Company of directors, officers, employees or
agents against certain liabilities and expenses which they may incur as
directors, officers, employees or agents of the Company or of certain other
entities. Section 78.7502(3) provides for mandatory indemnification, including
attorney's fees, if the director, officer, employee or agent has been successful
on the merits or otherwise in defense of any action, suit or proceeding or in
defense of any claim, issue or matter therein. Section 78.751 provides that
such indemnification may include payment by the Company of expenses incurred in
defending a civil or criminal action or proceeding in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by the
person indemnified to repay such payment if he shall be ultimately found not to
be entitled to indemnification under the Section. Indemnification may be
provided even though the person to be indemnified is no longer a director,
officer, employee or agent of the Company or such other entities. Section
78.752 authorizes the Company to obtain insurance on behalf of any such
director, officer employee or agent against liabilities, whether or not the
Company would have the power to indemnify such person against such liabilities
under the provisions of the Section 78.7502.
Under Section 78.751(e) the indemnification and advancement of expenses provided
pursuant to Sections 78.7502 and 78.751 are not exclusive, and subject to
certain conditions, the Company may make other or further indemnification or
advancement of expenses of any of its directors, officers, employees or agents.
Because neither the Articles of Incorporation, as amended, or By-laws of our
Company otherwise provide, notwithstanding the failure of the Company to provide
indemnification and despite a contrary determination by the Board of Directors
or its shareholders in a specific case, a director, officer, employee or agent
of the Company who is or was a party to a proceeding may apply to a court of
competent jurisdiction for indemnification or advancement of expenses or both,
and the court may order indemnification and advancement of expenses, including
expenses incurred in seeking court-ordered indemnification or advancement of
expenses if it determines that the petitioner is entitled to mandatory
indemnification pursuant to Section 78.7502(3) because he has been successful on
the merits, or because the Company has the power to indemnify on a discretionary
basis pursuant to Section 78.7502 or because the court determines that the
petitioner is fairly and reasonably entitled to indemnification or advancement
of expenses or both in view of all the relevant circumstances.
36
<PAGE>
Articles of Incorporation and By-Laws
Our Articles of Incorporation and By-laws empower us to indemnify current or
former directors, officers, employees or agents of the Company or persons
serving by request of the Company in such capacities in any other enterprise or
persons who have served by the request of the Company in such capacities in any
other enterprise to the full extent permitted by the laws of the State of
Nevada.
Indemnity Agreements
To induce and encourage highly experienced and capable persons to serve as
directors and officers, our Company has entered into an Indemnity Agreement with
each director and officer presently serving the Company and will provide the
same agreement to future directors and officers as well as certain agents and
employees. The Agreement provides that we shall indemnify the director and/or
officer, or other person, when he or she is a party to, or threatened to be made
a party to, a proceeding by, or in the name of, the Company. Expenses incurred
by the indemnified person in any proceeding are to be paid to the fullest extent
permitted by applicable law. The Agreement may at some time require the Company
to pay out funds which might otherwise be utilized to further the Company's
business objectives, thereby reducing our ability to carry out our projected
business plans.
SEC Position on Indemnification for Securities Act Liability
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company 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 of 1933, as amended, and is, therefore, unenforceable. If a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company 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 Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy expressed in the Securities Act
of 1933, as amended, and will be governed by the final adjudication of such
issue.
Officers and Directors Liability Insurance
At present, we do not maintain Officers and Directors Liability Insurance and,
because of the anticipated cost of such insurance, we have no present plans to
obtain such insurance.
37
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRINITY ENERGY RESOURCES, INC.
Date:______________________ By:________________________________
________________________________
Principal Executive Officer
________________________________
Principal Financial Officer
38
<PAGE>
FINANCIAL STATEMENTS
Part III
Item 1.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
PART I PAGE
-------- ---------------------------------------------------------------------
<S> <C>
2.1* Third Amended Plan of Reorganization and Disclosure Statement
3.1* Articles of Incorporation, 1986, Utah, Celebrity Limousines, Ltd.
3.2* Articles of Incorporation, 12/1/1989, Nevada, Limousines, Ltd.
3.3* Articles of Merger, 1/31/1999, Utah, Celebrity Limousines, Ltd. and
Nevada Limousines, Limited - Nevada Corporation Limous
3.4* Articles of Amendment 7/9/1993, name change from Limousines, Limited to Trinity Gas Corporation.
3.5* By-Laws of Trinity Gas Corporation.
3.6* Articles of Amendment, 3/29/1999, Nevada, to change name of corporation to
Trinity Energy Resources, Inc., authorize undes
3.7* Certificate of Authority to Transact Business in Texas, 10/06/1999.
3.8* Assumed Name Certificate in Texas, 10/12/1999
3.9* Amended Certificate of Designation, Powers,
Preferences and Rights of the 1999 Series of Convertible Preferred Stock 1/25/
10.1* Mr. John W. Mahoney - Employment Agreement
10.2* Mr. Dennis E. Hedke - Employment Agreement
10.3* Mr. James E. Gallien, Jr. - Employment Agreement
39
<PAGE>
10.4* Mr. Michael L. Wallace - Independent Contractor Agreement
10.5* Letter Agreement between Carlton Energy Group, Oriental Petroleum
Resources, Ltd., and Trinity Gas Corporation
10.6* Chad Convention, French Translation
10.7* Chad Convention, English Translation
10.8* Cliveden Agreement, 5/5/1999
10.9* Cliveden Agreement, 11/29/1999
10.10* Purchase and Sale Agreement between Carlton Energy, Trinity Gas,
Ian Nordstrom and Rudy Olschewski
10.11* Aker Maritime Sublease
10.12* Cliveden Agreement, 12/27/99
10.13* Assignment to Cliveden Petroleum Co., Ltd., 1/14/2000
10.14** Crude Oil Purchasing Contract-Equiva Trading Company
10.15** Crude Oil Purchasing Contract - Sunoco, Inc.
10.16** Natural Gas Purchasing Contract-North American Resources Company #281
10.17** Natural Gas Purchasing Contract-North American Resources Company #282
10.18** Natural Gas Purchasing Contract-Dynegy Midstream Services, Limited
Partnership
27.0 Financial Data Schedule
</TABLE>
40
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
Trinity Energy Resources, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Trinity Energy
Resources, Inc. (formerly Trinity Gas Corporation) as of December 31, 1999 and
1998, and the related statements of consolidated income, stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides 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 Trinity Energy Resources, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule in footnote 15 is presented
as supplementary information not a part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required in relation to the basic
financial statements taken as a whole.
Malone & Bailey, PLLC
Houston, Texas
January 26, 2000
<TABLE>
<CAPTION>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
---------------- ---------------
<S> <C> <C>
Current Assets
Cash $ 138,910 105,047
Cash held by trustees 3,069,852 3,733,890
Other 36,616 20,111
---------------- ---------------
Total Current Assets 3,245,378 3,859,048
---------------- ---------------
Oil and gas properties, using successful efforts method
of accounting
Proved properties 339,770 339,770
Unproved property - Chad concession 366,654
Less accumulated depreciation and depletion (71,629) (63,533)
---------------- ---------------
Net oil and gas properties 634,795 276,237
---------------- ---------------
Other assets
Office furniture and equipment, net of accumulated
depreciation of $8,511 148,305
Deposits and equipment held for sale 65,225 116,980
---------------- ---------------
TOTAL ASSETS $ 4,093,703 4,252,265
================ ===============
LIABILITIES
Current Liabilities
Notes payable $ 707,721
Accounts payable 776,816 $ 306,861
Liabilities subject to compromise 132,862 98,036
Due to Sers family 78,310
Accrued expenses 462,612 96,197
---------------- ---------------
Total Current Liabilities 2,080,011 579,404
Long-term portion of liabilities subject to compromise 177,970 213,564
---------------- ---------------
Total Liabilities 2,257,981 792,968
---------------- ---------------
Mandatory Redeemable Preferred Stock,
$.001 par, due in 2000, 50,000,000 shares authorized,
161,750 and 0 shares issued and outstanding, respectively 1,550,047
STOCKHOLDERS EQUITY
Common stock, $.001 par, 300,000,000 shares authorized,
63,430,454 and 64,120,778 issued and outstanding,
respectively 63,430 64,121
Paid in capital 12,550,889 11,994,202
Retained (deficit) (12,328,644) ( 8,599,026)
---------------- ---------------
Total Stockholders Equity 285,675 3,459,297
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 4,093,703 $ 4,252,265
================ ===============
</TABLE>
See summary of accounting policies and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
(Debtor-in-Possession)
CONSOLIDATED INCOME STATEMENTS
Years Ended December 31, 1999 and 1998
1999 1998
--------------- ---------------
<S> <C> <C>
Revenue - oil and gas sales $ 78,382 $ 82,786
Expenses
Lease operating 108,663 150,083
Production taxes 7,283 15,265
Exploration expenses 0 0
Depreciation, depletion, and amortization 16,607 27,367
Interest expense 81,235 0
General and administrative 2,605,902 227,828
Rent paid to affiliates 59,500 30,000
Asset impairment loss 331,383
Interest income (5,419) (2,591)
--------------- ---------------
Total expenses 2,873,771 779,335
--------------- ---------------
(Loss) before reorganization items and income tax benefit (2,795,389) (696,549)
--------------- ---------------
Reorganization items:
Impairment loss on assets held for sale (43,001)
Professional fees (1,039,192) (1,291,541)
Other costs (37,951) (158,613)
Interest earned on accumulated cash resulting from
Chapter 11 proceeding 142,914 120,684
--------------- ---------------
(934,229) (1,372,471)
--------------- ---------------
(Loss) before income tax benefit (3,729,618) (2,069,020)
Income tax benefit 4,657
--------------- ---------------
Net (loss) $ (3,729,618) $ (2,064,363)
=============== ===============
Net (loss) per common share $ (.06) $ (.03)
Weighted average common shares outstanding 62,083,720 61,056,767
</TABLE>
See summary of accounting policies and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
(Debtor-in-Possession)
STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 1999 and 1998
- - Common Stock - - Paid In
Shares $ Capital
-------------- ----------- --------------
<S> <C> <C> <C>
Balances, December 31, 1997 94,733,211 $ 94,733 $ 11,886,010
Forfeitures by Sers family (30,542,433) (30,542) 30,542
Shares issued to settle claims 80,000 80 20,000
Shares canceled by bankruptcy court (540,000) (540) 540
Stock issued to directors for services 390,000 390 97,110
Net (loss)
Balances, December 31, 1998 64,120,778 64,121 12,034,202
Stock issued for
- cash 1,705,391 1,705 424,643
- less costs of equity fundraising (54,015)
- services 603,296 603 150,221
Shares repurchased, pursuant to bankruptcy
cash out offer (569,011) (569) (34,045)
Shares canceled by bankruptcy court (1,680,000) (1,680) 1,680
Milton shares posted as collateral by
the bankruptcy court for $40,000
share purchase price not paid (750,000) (750) (39,250)
Discount on preferred stock issuance 114,513
Accretion of differences between carrying value
and redemption value of preferred stock (47,060)
Net (loss)
Balances, December 31, 1999 63,430,454 $ 63,430 $ 12,550,889
============== =========== ==============
</TABLE>
See summary of accounting policies and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
(Debtor-in-Possession)
STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 1999 and 1998
Stock
Subscription Retained
Receivable (Deficit) Totals
-------------- -------------- ----------
<S> <C> <C> <C>
Balances, December 31, 1997 $ (40,000) $(6,534,663) $5,406,080
Forfeitures by Sers family
Shares issued to settle claims 20,080
Shares canceled by bankruptcy court
Stock issued to directors for services 97,500
Net (loss) (2,064,363) (2,064,363)
-------------- -------------- ----------
Balances, December 31, 1998 (40,000) ( 8,599,026) 3,459,297
Stock issued for
- cash 426,348
- less costs of equity fundraising (54,015)
- services 150,824
Shares repurchased, pursuant to bankruptcy
cash out offer (34,614)
Shares canceled by bankruptcy court
Milton shares posted as collateral by
the bankruptcy court for $40,000
share purchase price not paid 40,000
Discount to fair value of preferred stock 114,513
Accretion of differences between carrying value
and redemption value of preferred stock (47,060)
Net (loss) (3,729,618) (3,729,618)
-------------- -------------- ----------
Balances, December 31, 1999 $ 0 $ (12,328,644) $ 285,675
============== ============== ==========
</TABLE>
See summary of accounting policies and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
(Debtor-in-Possession)
CONSOLIDATED CASH FLOW STATEMENTS
Years Ended December 31, 1999 and 1998
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows provided (used) by operating activities
Cash received from customers $ 74,603 $ 136,192
Interest received 5,419 2,591
Interest paid (18,776)
Cash paid to suppliers and employees (1,928,841) (10,242)
---------------- ---------------
Net cash provided (used) by operating activities
before reorganization items (1,867,595) 128,541
---------------- ---------------
Operating cash flows provided (used) by Chapter 11 reorganization:
Interest received on cash accumulated by trustees 142,914 120,684
Collections from former officer Sid Sers 4,280,921
Professional fees paid for related services rendered (1,039,191) (1,291,541)
Other bankruptcy costs (37,952) (158,614)
Net proceeds from sale of assets due to Chapter 11 proceeding 47,455 4,000
(Increase) refund of deposits made by trustee 4,300 (4,300)
---------------- ---------------
Net cash provided (used) by Chapter 11 reorganization (882,474) 2,951,150
---------------- ---------------
Net cash provided (used) by operating activities (2,750,069) 3,079,691
---------------- ---------------
Cash flows used in investing activities
Chad property acquisition and development costs (341,765)
Purchase of office furniture and equipment (156,816)
----------------
Net cash used in investing activities (498,581)
----------------
Cash flows from financing activities
Net borrowings from shareholders (post petition) and others
Redeemable preferred stock payable 1,267,500
Notes payable 1,057,721
Common stock issued, net of $54,015 issuance cost 372,333
Payment to Sers family to settle litigation (78,310)
Principal payments on prepetition debt authorized by court (769) (13,000)
---------------- ---------------
Net cash flows provided by financing activities 2,618,475 (13,000)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (630,175) 3,066,691
Cash and cash equivalents
- at beginning of year 3,838,937 772,246
---------------- ---------------
- at end of year $ 3,208,762 $ 3,838,937
================ ===============
</TABLE>
See summary of accounting policies and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
(Debtor-in-Possession)
CONSOLIDATED CASH FLOW STATEMENTS
Years Ended December 31, 1999 and 1998
1999 1998
--------------- ---------------
<S> <C> <C>
Reconciliation of net loss to net cash provided by
operating activities
Net (loss) $ (3,729,618) $ (2,064,363)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities
Depletion and depreciation 16,607 27,367
Proceeds from sale of assets under court supervision 47,455 4,000
Asset impairment losses 374,384
Stock issued for services 150,824 97,500
Changes in
Other current assets (16,505) 71,337
Receivable from former officer Sid Sers 4,280,921
Deposits made by trustee 4,300 (4,300)
Accounts payable 435,342 300,361
Accrued expenses 341,526 (7,516)
--------------- ---------------
Net cash provided (used) by operating activities $ (2,750,069) $ 3,079,691
=============== ===============
Supplemental information
Non-cash transactions:
During bankruptcy court pendency:
Reclassification to accounts payable for shareholders
electing cash out option $ 34,614
Prepetition creditors agreeing to payment in stock $ 20,080
Accrued interest capitalized on unproved property development 24,888
</TABLE>
See summary of accounting policies and notes to financial statements.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of business. Celebrity Limousines, Ltd. was incorporated in Utah in
--------------------
1986. The name and state of incorporation were changed to Limousines Limited
and Nevada, respectively in 1989. Limousines Limited ceased operations shortly
thereafter and remained dormant until July 9, 1993. On that date Sidney W. Sers
contributed certain oil and gas assets he owned in exchange for 18,275,036
shares and control (93.48% ownership) of Limousines Limited. He changed the
corporate name to Trinity Gas Corporation and operated it until early 1998, when
he abruptly resigned and fled the country in the wake of accusations of fraud,
misrepresentation and other charges. New management changed the name to Trinity
Energy Resources, Inc. (Company) in Nevada on March 17, 1999. In Texas, the
Company operates under the name Trinity (Texas) Energy Resources, Inc. See Note
2 for further information.
Since 1993, the Company has been and is still engaged primarily in the
acquisition, development, production, exploration for, and the sale of, oil, gas
and natural gas liquids. The Company is the operator of one property in Texas,
and of several properties in Colorado and Wyoming. In 1999, the Company
acquired an interest as operator in an unproved exploratory concession in Chad,
Africa.
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation. The consolidated financial statements include the
----------------------------
accounts of the Company and its wholly-owned subsidiary Nova Energy, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Other current assets includes minor amounts of trade accounts receivable from
----------------------
the sales of oil and gas and an inventory of crude oil stored on location.
Revenues are recognized when oil and gas are delivered. Inventories are stated
at the lower of cost or market.
Oil and gas properties are accounted for using the successful efforts method of
-----------------------
accounting. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells that find proved reserves, and to drill and
equip development wells are capitalized. Costs to drill exploratory wells that
do not find proved reserves, geological and geophysical costs, and costs of
carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Capitalized costs of
producing oil and gas properties, after considering estimated abandonment costs
and salvage values, are depreciated and depleted by the units-of-production
method.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (continued)
On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation and depletion are eliminated from the property
accounts, and the resultant gain or loss is recognized. On the retirement or
sale of a partial unit of proved property, the cost is charged to accumulated
depreciation and depletion with a resulting gain or loss recognized in income.
On the sale of an entire interest in an unproved property for cash, gain or loss
on the sale is recognized, taking into consideration the amount of any recorded
impairment if the property had been assessed individually. If a partial
interest in an unproved property is sold, the amount received is treated as a
reduction of the cost of the interest retained.
Capitalized interest. The Company capitalizes interest on expenditures for
---------------------
significant exploration and development projects while activities are in
progress to bring the assets to their intended use. Total interest incurred in
1999 was $124,030, of which $24,888 was capitalized as a development cost of the
Chad concession. There was no interest incurred in 1998.
Cash and cash equivalents includes cash in banks and cash held by the bankruptcy
-------------------------
court and Company law firm trustees. Certificates of deposit for $65,000 held
by the states of Colorado and Wyoming as security for eventual producing well
plugging and site cleanup are included in deposits in other assets.
Long-lived assets are reviewed for impairment whenever events or changes in
------------------
circumstances indicate that the related carrying amount may not be recoverable.
When required, impairment losses on assets to be held and used are recognized
based on the fair value of the asset and long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.
Income tax expense includes taxes payable or refundable for the current year and
----------
deferred taxes on temporary differences between the amount of taxable income and
pretax financial income and between the tax bases of assets and liabilities and
their reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in FASB
Statement No. 109, Accounting for Income Taxes. As changes in tax laws or rate
are enacted, deferred tax assets and liabilities are adjusted through income tax
expense.
Interest income is recorded when the amounts are assured of collection.
----------------
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 2 - PETITION FOR RELIEF UNDER CHAPTER 11
On December 23, 1997, the Company (Debtor) filed a petition for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Northern District of Texas (Court). Generally under Chapter 11, certain
claims against the Debtor in existence prior to the filing of the petitions for
relief under the federal bankruptcy laws are stayed while the Debtor continues
business operations as Debtor-in-possession. These claims are reflected in the
December 31, 1999 and 1998, balance sheets as liabilities subject to
compromise. Additional claims (liabilities subject to compromise) might arise
but probably cannot be sustained subsequent to January 23, 2000, the date of the
auditors report, because the Court
issued its Confirmation Order on October 27, 1998, and all known claims against
the Company that existed as of December 23, 1997, have been adjudicated. The
Confirmation Order confirmed the reorganization plan as previously submitted and
amended by the Company. All provisions of this plan have been incorporated into
these financial statements.
A summary of the terms of the October 27, 1998, Confirmation Order are as
follows:
Cancellation of all Sers family stock ownership in the Company, or
30,542,433 shares, or about 32% of total shares outstanding when the
bankruptcy was filed.
Other stock certificates for 2,220,000 shares were canceled. These shares
were transferred improperly by Sers to third parties for less than
fair value, or for consideration not received by the Company, as
determined by the Court.
Two creditor claims were converted into 80,000 shares of stock.
Another 750,000 shares were specified as collateral for a $40,000
subscription price receivable from a sale of stock made by the
Company in 1997. These shares are shown as a reduction in
shareholders equity until such payment is received, and are valued at
the $40,000 face value of the note receivable. There is no separate
asset recorded for this amount, and it is recorded as a debit or
reduction of stockholders equity, because the Company believes that
the 750,000 shares of our stock will instead be forfeited. The note
states that it bears interest at 10% annually, but none is recorded,
as the Company believes collection is doubtful. Up to 3 years
interest, or $12,000, is due when the note matures July 1, 2000.
The Company received an exemption from security laws restrictions to sell
Additional stock at $.25 per share during pendency of the filing.
1,705,391 shares were sold, yielding $372,333 after paying $54,015
in costs of the stock sales.
Issuance of 390,000 shares to 6 directors for services rendered in 1998 was
approved.
Stockholders were allowed to elect to either keep their shares or cash out
for the net book value of cash proceeds from Sers asset seizures.
Holders of 569,011 shares elected to receive their share of these
proceeds, or $34,614, and this amount has been reclassified to
accounts payable.
Secured, allowed claim creditors were allowed to repossess their
collateral.
Non-productive Company equipment was sold for $51,455, mostly in 1999. The
$43,001 difference between the proceeds and the net book value was
shown as a 1998 asset impairment writedown.
Small allowed, unsecured creditors (< $500 apiece) are to be paid in their
entirety.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 2 - PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
All other allowed, unsecured claims are to be paid in full within 2 years
in 4 semi-annual principal payments, plus accrued interest at 7.5%
per year. The first installment was paid in July 1999. All
remaining installments are due before December 31, 2000.
By agreement, the Internal Revenue Service claim was reduced to $213,564,
which the Company is still contesting. The to-be-settled amount
is due in 6 annual installments, the first of which is included as
short-term as of December 31, 1999, and the remainder shown as
long-term.
Sers had managed the Company from his purchase of the Limousines Limited shares
in 1993 until early 1998. In 1997, he began the documentation process required
to take the Company public. The Company's independent auditors found evidence
of improprieties and resigned in October 1997. In December 1997, Sers put the
Company into bankruptcy. Facing accusations of fraud, misappropriation and
misrepresentation, Sers fled the country shortly afterward. In early 1998, the
Court ordered seizure and subsequent sale of all Sers family assets to satisfy
the Company claim against Sers. Sers' wife and children asserted their claims
to certain of these properties and settled with the Company in 1998 whereby Mrs.
Sers was allowed to keep the family residence in Brownwood, Texas and the Court
returned possession of several vehicles and $78,310 in cash, all in 1999. In
exchange, the family dropped all claims against the Company. During 1998, the
Company received $4,280,921 from seizure and court-ordered sale of Sers personal
assets. In 1999, the Company received a judgment against Sers for an additional
$4,803,522, none of which has yet been received The Company also received a
judgment for $3,130,000 from a former foreign subsidiary, Trinity Gas Colombia,
Ltd. The Colombian courts have not ruled on who now owns Trinity Gas Colombia,
Ltd., and no collections on this amount have been received. The Company also
has various claims against certain other entities involved in the improprieties
and is still pursuing these claims. All of these claims for unpaid amounts from
Sers and other entities are valued at $0 after deducting a 100% allowance for
uncertain collection.
Liabilities subject to compromise consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current portion
Trade payables, incurred prior to bankruptcy filing $ 97,268 $ 98,036
Federal income and payroll taxes, and penalties,
also incurred prior to bankruptcy filing 35,594
--------
$132,862 $ 98,036
======== ========
Long-term portion - federal income and payroll taxes
and penalties $177,970 $213,564
======== ========
</TABLE>
The Company emerged from bankruptcy by final Court plan confirmation on October
27, 1998, and expects to close the bankruptcy case during May 2000.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 3 - CASH HELD BY TRUSTEES
The Court trustee managed the cash of the Company from January 9 through
December 12, 1998. By Court order, the Company's bankruptcy law firm, Andrews &
Kurth, kept as custodian Company monies collected from the Sers seizures (see
Note 2) beginning December 1998 through January 14, 2000. On that date,
$2,570,184 was transferred to a Company bank account. The difference between
that amount and the $3,069,852 shown on the balance sheet as of December 31,
1999, is $499,668, which is being retained by the law firm to pay certain legal
and other bankruptcy-related costs included in accounts payable as of December
31, 1999.
NOTE 4 - UNPROVED PROPERTY - CHAD CONCESSION
On May 7, 1998, Carlton Energy Group, LLC (Carlton), an entity majority-owned by
T. C. ODell, the former chief executive officer of the Company, entered into an
agreement with Oriental Energy Resources Limited (Oriental), a Nigerian
corporation, to jointly pursue acquisition of a minerals interest in Chad,
Africa, and then seek a farmout to a third party capable of acting as operator.
On July 31, 1998, Carlton and Oriental entered into a Memorandum of
Understanding with the Chad Ministry of Petroleum conveying a 5-year minerals
lease on 160 million acres of undeveloped land with unproved reserves in Chad.
On November 15, 1998, the Company entered into an agreement with Carlton and
Oriental assigning their rights to the Company in exchange for royalties
totaling 7.5% to Carlton and Oriental and up to $500,000 and $1.5 million in
prior costs reimbursement to Carlton and Oriental, respectively. The agreement
with Chad was formalized on February 23, 1999, and the initial lease bonus
payment of $341,765 was paid by the Company on June 17, 1999.
In late 1999, Carlton and O'Dell orally promised to forgive the contingent
$500,000 due under the November 15, 1998, agreement as partial consideration for
the Cliveden farmout negotiation. They have refused to sign a written
acknowledgment and as of January 26, 2000, this dispute has not been resolved.
Management feels the likelihood of any payment due under this arrangement is
remote, and no provision has been recorded in the financial statements.
On December 27, 1999, the Company assigned its Chad working interest to Cliveden
Petroleum Co. Ltd. of Switzerland. Under this agreement, Cliveden assumes
operator status and all related obligations under the Chad agreement, subject to
final Chad government approval. In exchange, the Company retains a 5% working
interest, and will receive its share of revenues from production beginning after
payout of all development costs to be incurred by Cliveden. The 5% working
interest becomes effective after payout of exploratory costs which are estimated
by management to be up to $26 million. Trinity will also receive reimbursement
of up to $1.5 million in deemed sunk costs on a basis pro rata with Cliveden's
total cost recovery from revenues to be received. In addition, Cliveden agreed
to conversion of $350,000 loaned to the Company on May 7, 1999, to Company
redeemable convertible preferred stock (see Note 6), with cash redemption at the
option of Cliveden to occur on December 27, 2000.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 4 - UNPROVED PROPERTY - CHAD CONCESSION (continued)
Also, on May 7, 1999, $350,000 was advanced to Oriental to pay the initial lease
bonus payment, but this money was not paid to the Chad government. Instead, it
was kept by Oriental as a partial reimbursement of the $2 million as agreed in
the November 15, 1998, Chad lease assignment from Oriental and Carlton to the
Company. The Company disputes this, and claims that required documentation
supporting the $2 million in law-abiding actual costs was never received and
because this documentation was a pre-condition of payment, then the $350,000 was
improperly kept by Orientals owner, Alhaji Indimi. The Company has begun legal
proceedings in Chad to recover this money, which has been expensed as a
development cost of an unproved property. No part of the $1.5 million claimed
by Oriental is accrued as a Company liability because Oriental has refused to
provide documentation as required in the contract, and because all potential
liability for this debt has been assumed by Cliveden.
The required Chad government approval of the farmout assignment to Cliveden has
not been obtained as of January 26, 2000, but such approval is expected by
management. Total costs invested in the Chad property to date are $1,173,771,
and total capitalized are $366,654 which include the actual lease bonus paid of
$341,765 and $24,888 in capitalized interest.
NOTE 5 - ACQUISITION OF NOVA ENERGY, INC.
Nova Energy, Inc. (Nova) was acquired on August 22, 1996, from Nova stockholder
Don Brause and Nova major creditor Tom Getter, for 2,220,000 in Company stock
and $180,000 cash. The cash was paid in monthly installments to Getter in late
1996 and 1997. The Company contested Brause's ownership in the bankruptcy case,
and the Court reduced Brause's ownership from 2,040,000 of the initial total
shares to 1,500,000. The Nova purchase price, as restated, is 1,680,000 shares
and $180,000 cash, or $600,000. This price was allocated to the various assets
and liabilities of Nova as of 1996, and $500,832 was assigned to the producing
oil and gas properties that Nova owned.
NOTE 6 - MANDATORY REDEEMABLE PREFERRED STOCK PAYABLE
In March and October 1999, the Company solicited investments in Company
redeemable convertible preferred stock from investors at $10 per share. Each
share is convertible to 40 shares of Company common stock, or is redeemable at
each holders option after a 12-month holding period with a 12% premium, less any
dividends paid. Cash dividends at 7% are paid quarterly and included in
interest expense. Holders have 40 common shares vote with each preferred share
held. The Company may redeem shares issued under the March offering anytime
after December 31, 1999, and may redeem shares issued under the October offering
anytime after June 30, 2000. Redemption is expected to occur on dates ranging
from April 2000 through December 2000 and the amount due at redemption, based
upon the 5% unpaid portion of the premium, will be $1,698,375. The carrying
value of the preferred stock as of December 31, 1999 is $1,550,047, which is
discounted at 8%, in addition to the 12% dividends, with resulting accretion
from inception through December 31, 1999 added back of $47,060.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 7 - NOTES PAYABLE
The Company borrowed various amounts from individuals during 1999. The loans
bear interest mostly at 15% APR, and are collateralized by the Texas Hartwich
oil lease, carried on the balance sheet at cost of $70,594, but the present
value of net revenues from proven reserves is valued at $1,340,000. Most are
due 6 months after making, and all are due during 2000.
NOTE 8 - INCOME TAXES
The Internal Revenue Service (IRS) filed a claim with the Court in excess of $2
million for income and payroll taxes due for the periods 1993 through 1996, plus
penalties and interest. In the spirit of cooperation, the IRS prepared a 1997
federal income tax return for the Company showing a $8,784,675 net loss after a
$9,004,496 embezzlement loss deduction was allowed. After carryback of this
loss to prior years, the IRS reduced their net claim to $213,564. The Company
is obligated to pay this in six equal annual installments, beginning 2000. The
$213,564 is carried as a liability in the caption Liabilities subject to
compromise, with the first installment shown as current portion, and the
remainder as long-term portion.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999,
are as follows:
Deferred tax asset:
Net operating loss carryforward $ 2,714,743
Less: valuation allowance (2,714,743)
------------
Net current deferred tax asset $ 0
============
The difference between the Company's expected tax (benefit), as computed by
applying the U.S. federal corporate tax rate of 34% to net pre-tax (loss) is
reconciled in the following chart:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Net (loss) $(3,729,619) $ (2,064,363)
============ =============
Expected tax benefit at 34% $(1,268,070) $ (701,883)
Refund from carryback of net operating loss 4,657
Change in valuation allowance 1,268,070 701,883
------------ -------------
Income tax (provision) or benefit $ 0 $ 4,657
============ =============
</TABLE>
The Company has net operating loss carryforwards of about $9.0 million, which
expire in 2018 and 2019.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 9 - CONTINGENT LIABILITIES
The Company has several postpetition threatened or pending lawsuits relating to
the disputed value of services allegedly provided to the Company that the
Company has contested. Management believes the ultimate liability of the
Company in connection with its legal proceedings will not have a material
adverse effect on the Company's financial position or the results of operations
in any future period.
In addition, $14,000 in fines were levied, and remediation action was ordered by
the Oil and Gas Conservation Commission of the Colorado Department of Natural
Resources in a 1999 inspection. The fines payable and $30,375 in estimated
remediation costs have been accrued as of December 31, 1999.
NOTE 10 - CAPITAL STOCK
The Company distributed rights to purchase its common stock to existing
stockholders under Court supervision. These rights entitled the holder of each
share to purchase one additional share of Company stock at $.25. During 1999,
stockholders exercised rights to purchase 1,705,391 shares, for gross proceeds
of $426,348. These rights expired on December 27, 1999.
The Court also ordered that 750,000 shares previously issued be reserved as
collateral to enforce repayment of a $40,000 subscription receivable from Robert
Milton in 1997. As collection of this amount is considered very unlikely, the
750,000 shares are deducted from total shares outstanding until this amount is
received.
NOTE 11 - EMPLOYMENT AGREEMENTS
To entice new management and consultants, the Company signed employment and
consulting contracts in 1999 still effective as of January 26, 2000, with
several individuals as follows:
Totals 2000 2001 2002
---------- -------- -------- --------
Annual Compensation
Employees $1,032,179 $463,177 $397,002 $172,000
Contractors 104,000 104,000
---------- -------- -------- --------
Totals $1,136,179 $567,177 $397,002 $172,000
========== ======== ======== ========
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 12 - STOCK OPTIONS
Beginning at inception, the Company adopted the disclosure requirements of FASB
Statement 123, Accounting for Stock Based Compensation Plans. The Company
grants non-qualified options from time to time to employees and consultants of
the Company, pursuant to its Stock Option Plan as approved by the Court. Stock
option issuances are administered by the Board of Directors of the Company, who
have substantial discretion to determine which persons, amounts, time, price,
exercise terms, and restrictions, if any. All options are non-transferable.
The Company uses the intrinsic value method of calculating compensation expense,
as described and recommended by APB Opinion 25, and allowed by FASB Statement
123. Vesting occurs on the various anniversary dates of issuance in accordance
with the plan, and the measurement date for all options is either the grant date
for fixed-price options (since the only significant requirement for vesting is
that the employee remain with the Company during that period) or the vesting
date for options priced at 30% below the then-market price. Compensation
expense for options exercisable at 30% below market will be recognized at the
30% discount amount in the years the options become exercisable.
During the years ended December 31, 1999 and 1998, no compensation expense was
recognized for the issuance of these options and warrants, because either no
option prices were below market prices at the date of grant (fixed-price
options), or no options priced at 30% below market vested in 1999 or 1998. No
options were granted during 1998 and none granted in 1999 have been exercised.
Total options outstanding at December 31, 1999, are 10,341,666, with a weighted
average share exercise price of $.40. Additional disclosures as of December 31,
1999, are:
Options at
Options Options at Market
at $.25 $.75 - $1.50 less 30%
------------ ------------ ------------
Total options
Number of shares 5,641,666 2,000,000 2,699,999
Remaining life 4 years 5 years 5 years
Currently exercisable options
Number of shares 4,450,000 0 0
The Company's stock has not traded on a public market since the Securities and
Exchange Commission suspended trading in November 1997. Accordingly, the
Minimum Value method as defined by FASB Statement 123 is used. Here, if the
stock is valued at $.25 per share, then none of the options at fixed prices of
$.25 - $1.50 per share have any Minimum Value.
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the Minimum Value method suggested by FASB Statement 123,
the Company's net losses and loss per share would have been increased to the pro
forma amount indicated below:
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 12 - STOCK OPTIONS (continued)
(in thousands) 1999 1998
----------- ------------
Net loss - As reported $ (3,730) $ (2,064)
- Pro forma (4,090) (2,064)
Net loss per share - As reported $ (0.06) $ (0.03)
- Pro forma (0.07) (0.03)
Variables used in the Minimum Value calculation include a risk-free interest
rate of 7% and zero expected future dividends. Expected option life is the
actual remaining life of the options as of each year end.
NOTE 13 - OPERATING LEASE
On July 1, 1999, the Company signed an office space sublease agreement with Aker
Engineering, Inc. to rent 9,842 square feet at $15,173 per month. This
agreement is for 60 months ending June 2004. Total annual rent expense under
this agreement before any operating expense escalations is $91,038 for 1999,
$182,076 for each of 2000, 2001, 2002, and 2003, and $91,038 for 2004.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company's former CEO, T. C. O'Dell, loaned up to $400,000 to the Company for
operating capital during 1999, with interest ranging from 8.75% - 12% and
collateralized by the Texas Hartwich oil lease. As of December 31, 1999, the
unpaid balance is $75,000 and is included in short-term notes payable.
The Company leased office space from Odell's company, Carlton Energy Group,
Inc., at $7,500 per month through August 1999, totaling $59,500 in 1999 and
$30,000 in 1998.
NOTE 15 - ASSET IMPAIRMENT AND DISPOSALS
In January 2000, the Company sold 3 leases in Brown County, Texas, in exchange
for the assumption of future costs. In addition, 19 wells in Coleman County,
Texas, are to be plugged and abandoned in 2000. The Company carried all leases
and wells in both Brown and Coleman Counties at $0 value, and had no significant
revenues or expenses directly associated with these properties in 1999 or 1998.
Related costs of plugging and abandoning are accrued. There was no loss
recorded from the disposition of these properties in 1999 or 1998, because
carrying value was reduced to $0 and related costs were recorded in 1997.
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 15 - ASSET IMPAIRMENT AND DISPOSALS (continued)
In addition, the Company acquired a concession in Colombia, South America, in
1995, and attempted development in 1996 and 1997. All acquisition, development
and exploration costs were written off prior to 1998.
The Company experienced historically low oil prices in late 1998, as did most
other oil and gas producers during that time. Writedowns of the carrying costs
of producing properties of $331,383 were made because the net book value of
proved properties and related equipment was higher than the discounted present
value of estimated reserves, by field, as of December 31, 1998, using a $9 per
barrel market price.
NOTE 16 - DEPOSITS AND EQUIPMENT HELD FOR SALE
Deposits were $65,225 and $69,525 in 1999 and 1998, respectively. Equipment
held for sale was $0 and $47,455 in 1999 and 1998, respectively, and included
various lease and well equipment and office equipment held in Texas in 1997 and
seized by the bankruptcy court in 1998. This equipment, including the gas
processing and sales facility located in Coleman County, was sold to unrelated
parties for the best available price during 1999 and 1998. All such equipment
was recorded as of December 31, 1998, at the actual sale prices received in 1999
and 1998, resulting in an asset impairment loss of $43,001 in 1998.
NOTE 17 - SUPPLEMENTAL OIL AND GAS INFORMATION (unaudited)
Costs Capitalized Relating to Oil and Gas Producing Activities at
December 31, 1999, using the Successful Efforts Method of Accounting
Unproved oil and gas property (Chad, Africa) $ 366,654
Proved oil and gas properties 599,537
Support equipment and facilities 99,726
-----------
1,065,917
Less accumulated depreciation, depletion,
and amortization ( 103,629)
-----------
Net capitalized costs $ 962,288
===========
<PAGE>
TRINITY ENERGY RESOURCES, INC.
(formerly Trinity Gas Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 17 - SUPPLEMENTAL OIL AND GAS INFORMATION (unaudited) (continued)
Costs Incurred in Oil and Gas Producing Activities for the
Year Ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Property acquisition costs
Proved $ 0
Unproved 366,654
Exploration costs 0
Development costs 0
Results of Operations for Oil and Gas Producing Activities for the
Year Ended December 31, 1999
Oil and gas sales $ 78,382
Production costs 115,946
Exploration expenses 0
Depreciation, depletion and amortization 20,496
----------
( 58,060)
Income tax expense 0
Results of operations for oil and gas producing activities
(excluding corporate overhead and financing costs) $( 58,060)
==========
</TABLE>
Reserve Information
The following estimates of proved and proved developed reserve quantities and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values or fair market values of the
Companys reserves. The Company emphasizes that reserve estimates are inherently
imprecise. Accordingly, these estimates are expected to change as future
information becomes available. All of the Companys reserves are located in the
United States.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates) to be incurred on pretax net cash flows less tax basis of the
properties and available credits, and assuming continuation of existing economic
conditions. The estimated
<PAGE>
NOTE 15 - OIL AND GAS RESERVE INFORMATION (unaudited) (continued)
future net cash flows are then discounted using a rate of 10 percent a year to
reflect the estimated timing of the future cash flows.
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
Oil Gas Oil Gas
<S> <C> <C> <C> <C>
(M Bbls) (MMcf) (M Bbls) (MMcf)
-------- ------ ------ -------
Proved developed and undeveloped reserves
Beginning of year 268 287 277 311
Production (5) (6) (9) (24)
-------- ------ ------ -------
End of year 263 281 268 287
======== ====== ====== =======
Proved developed reserves
Beginning of year 184 287 193 311
End of year 179 281 184 287
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Standardized Measure of Discounted Future
Net Cash Flows at December 31, 1999 (000's)
---------
Future cash inflows $ 4,188
Future production costs 1,400
Future development costs 418
Future income tax expenses 0
---------
$2,370
Future net cash flows
10% annual discount for estimated timing of cash flows ( 697)
---------
Standardized measures of discounted future net cash flows
relating to proved oil and gas reserves $ 1,673
=========
Income tax expense shown above is calculated by including the Companys net operating loss
carryforward and properties tax bases.
The following reconciles the change in the standardized measure of discounted future net cash
flow during 1999
Beginning of year $ 891
Sales of oil and gas produced, net of production costs 78
Net changes in prices 860
---------
End of year $ 1,673
=========
</TABLE>
<PAGE>
