SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K12(g)3
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: August 1, 2000
U.S. CRUDE, LTD.
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(Exact name of registrant as specified in its charter)
Cypress Capital, Inc.
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(Prior name of corporation pre-merger)
Nevada 000-28567 84-1521101
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.
incorporation pre-merger)
pre-merger)
Nevada 000-28567 84-1521101
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.
incorporation post-merger)
post-merger)
673 Cooley Drive, So., Ste 121, Colton, California 92324
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(NEW ADDRESS)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (888) 872-7833
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ITEM 1. CHANGES IN CONTROL OF REGISTRANT
The Company is a successor registrant pursuant to Section 12(g) 3 of the
Securities Exchange Act of 1934, by virtue of a statutory merger of the Parent,
U.S. Crude, Ltd., a California corporation, and its wholly owned subsidiary,
Cypress Capital, Inc., a Nevada corporation, with Cypress Capital, Inc. being
the survivor, but changing its name to U.S. Crude, Ltd.
On May 3, 2000, U.S. Crude, Ltd. entered into a Share Purchase Agreement
with shareholders of Cypress Capital, Inc. in which U.S. Crude, Ltd. acquired
18,675,000 shares outstanding (100%) of the Registrant for purpose of
accomplishing a Merger of U.S. Crude, Ltd. and Cypress Capital, Inc.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
None.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
None.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
None.
ITEM 5. OTHER EVENTS
GENERAL CORPORATE HISTORY
U.S. Crude, Ltd. (the "Company") is an independent oil and gas company
engaged in: (1) the acquisition, development and production of oil and gas in
the United States; and (2) the development and utilization of thermal gas and
steam technologies to in the levels of production from marginally producing oil
wells. The Company was incorporated in 1996, under the laws of the State of
California with the objective of exploring for, developing, producing and
managing oil and gas reserves. Since its inception, the Company has focused
primarily on the acquisition of oil and gas properties in California, Kansas,
Oklahoma. The Company's acquisitions of these oil and gas properties has
increased the Company's asset base.
The Company currently owns and operates producing oil and gas
properties, which are located in the states of Kansas, and Oklahoma. In
addition, the Company owns a non producing property in California. Daily average
production from 60 wells operated by the Company in these states currently
averages approximately 40 Bbls of oil and 25 Mcf of gas. Total daily production
from operated wells, net to the Company's interest, currently averages
approximately 40 Bbls of oil and 25 Mcf of gas from a total of 60 net wells.
In seeking to acquire additional oil and gas properties, the Company
focuses primarily on properties with producing oil and gas reserves which it
believes have potential for additional exploitation through additional
development and enhanced recovery via lateral completions and improved operating
techniques rather than highly speculative exploration efforts. The Company
intends to focus its acquisition program on producing properties in which the
Company will become the operator following acquisition, allowing the Company to
maintain a low cost operating structure. The Company will also seek properties
that are underdeveloped, overly burdened with expenses or owned by financially
troubled companies. Management intends to focus on oil and gas properties
located in the mid-continent region of the United States where Company personnel
are best able to draw on their prior oil and gas experience. The Company intends
to acquire properties using internally generated cash flow, bank borrowings and,
when appropriate, common stock of the Company.
The Company's principal offices are located at 673 Cooley Drive, So.,
Ste 121, Colton, California 92324 and its telephone number is (888) 872-7833.
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CAUTIONARY STATEMENT AND RISK FACTORS
Cautionary Statement Regarding Forward-Looking Statements. In the interest
of providing the Company's shareholders and potential investors with certain
information regarding the Company, including management's assessment of the
Company's future plans and operations, certain statements set forth in this
filing contain or are based on the Company's projections or estimates of
revenue, income, earnings per share and other financial items or relate to
management's future plans and objectives or to the Company's future economic and
financial performance. All such statements, other than statements of historical
fact, contained in this filing, generally are accompanied by words such as
"anticipate," "believe," "intend," "estimate," "project" or "expect" or similar
statements. Such statements are "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are made pursuant to and in
reliance on the safe harbor provisions of such sections.
Although any forward-looking statements contained in this filing or
otherwise expressed by or on behalf of the Company are, to the knowledge and in
the judgment of the officers and directors of the Company, reasonable and
expected to prove true, management is not able to predict the future with
certainty and no assurance can be given that such statements will prove correct.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things: general economic and
business conditions; oil and gas industry conditions and trends; volatility of
oil and gas prices; product supply and demand; market competition; risks
inherent in the Company's oil and gas operations; imprecision of reserve
estimates; the Company's ability to replace and expand oil and gas reserves; the
Company's ability to generate sufficient cash flow from operations to meet its
current and future obligations; the Company's ability to access and terms of
external sources of debt and equity capital; and such other risks and
uncertainties described from time to time in the Company's periodic reports and
filings with the Securities and Exchange Commission. These and other risks are
described elsewhere in this 8-K and will be described from time to time in the
Company's future filings with the Securities and Exchange Commission.
Accordingly, shareholders and potential investors are cautioned that certain
events or circumstances could cause actual results to differ materially from
those projected, estimated or predicted. In addition, forward-looking statements
are based on management's knowledge and judgment as of the date of this 8-K, and
the Company does not intend to update any forward-looking statements to reflect
events occurring or circumstances existing hereafter.
HISTORY OF LOSSES; ACCUMULATED DEFICIT. For the fiscal years ended
December 31, 1996 and 1997, the Company incurred net losses of $31,736 and
$256,998, respectively. At December 31, 1998, the Company had an accumulated
deficit of $305,487 and its working capital deficit was $664,266. For the period
ending March 31, 2000, the Company incurred a net loss of $663,323. It is
expected that the Company will continue to experience losses in the near term.
The Company's ability to achieve profitability and generate cash flow will be
dependent upon obtaining additional debt or equity capital and acquiring or
developing additional oil and gas properties. There can be no assurance that the
Company will be able to do so.
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LIMITED AVAILABLE CAPITAL; NEED FOR ADDITIONAL FINANCING. Without
raising additional capital, the Company will be unable to acquire additional
producing oil and gas properties and its ability to develop its existing oil and
gas properties will be limited to the extent of available cash flow.
Accordingly, in order for the Company to achieve its business objective and
achieve profitable operations, it will be necessary to generate additional cash
flow from operations, raise additional capital or enter into joint oil and gas
development arrangements. Management intends to fund future acquisitions and
develop its oil and gas reserves using cash flow from operations as well as
borrowings, public and private sales of debt and equity securities and joint oil
and gas development arrangements, among other possible sources. The Company has
no present arrangements for future borrowings and its cash flow from operations
is not expected to be adequate to provide the funds needed for these purposes.
There can be no assurance the Company will be able to raise additional funds in
sufficient amounts to allow the Company to successfully implement its present
business strategy of additional oil and gas property acquisitions or the
development of its existing oil and gas reserves. No assurance can be given as
to the availability or terms of any additional financing or joint development
arrangements or that such terms as are available may not be dilutive to the
interests of the Company's shareholders.
INDUSTRY CONDITIONS; IMPACT ON COMPANY'S PROFITABILITY. The
profitability and revenues of the Company are dependent, to a significant
extent, upon prevailing market prices for oil and gas. In the past, oil and gas
prices and markets have been volatile. Prices are subject to wide fluctuations
in response to changes in supply of, and demand for, oil and gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. Such factors include world political conditions, weather
conditions, government regulations, the price and availability of alternative
fuels and overall economic conditions. Crude oil and natural gas prices have
increased significantly over the past 12 months. Any decline from current oil or
gas prices would have a material adverse effect on the Company's revenues and
operating income and might, under certain conditions, require a write-down of
the book value of the Company's oil and gas properties.
ACQUISITION STRATEGY. The Company must acquire producing properties or
locate and develop new oil and gas reserves to replace those being depleted by
production. Without acquisition of producing properties or successful drilling
and exploration activities, the Company's reserves and revenues will decline as
reserves are depleted by production from existing properties. Subject to the
availability of sufficient capital, the Company intends to acquire additional
producing oil and gas properties, although no funds are currently available to
the Company for this purpose. Although the Company engages in discussions
regarding the acquisition of additional properties on a regular basis, as of the
date of this filing the Company has no agreements or understandings to acquire
any other properties and there can be no assurance that the Company will be able
to identify and acquire additional producing oil and gas properties that will
prove to be profitable to the Company. The process of integrating acquired
properties into the Company's operations may result in unforeseen difficulties
and may require a disproportionate amount of management's attention and the
Company's resources. In connection with acquisitions, the Company could become
subject to significant contingent liabilities arising from the exploration and
development activities conducted on the acquired properties to the extent the
Company assumes, or an acquired entity becomes liable for, unknown or contingent
liabilities or in the event that such liabilities are imposed on the Company
under theories of successor liability.
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RELIANCE ON ESTIMATES OF PROVED RESERVES; DEPLETION OF RESERVES. There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. The oil
and gas reserve data set forth in this filing represents estimates only. Oil and
gas reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner, and
estimates by other engineers might differ from those included in this filing.
The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. This 8-K
contains estimates of the Company's proved oil and gas reserves and the
projected future net revenue therefrom, which have been prepared by an
independent petroleum engineering firm. Actual future production, oil and gas
prices, revenue, capital expenditures, taxes and operating expenses may vary
substantially from those assumed in making estimates, and the Company's reserves
may be subject to material upward or downward revision. In addition, the
Company's ability to develop its reserves will be dependent upon the timely
availability of capital for this purpose without which the Company's ability to
produce the projected amounts of oil and gas will be adversely affected, thereby
adversely affecting the projected future net revenue.
DEPENDENCE ON OTHER OPERATORS. With respect to wells not operated by the
Company in which it owns an interest, the operators are, in some cases,
privately-held companies which may have limited financial resources. If a third
party operator experiences financial difficulty and fails to pay for materials
and services in a timely manner, the wells operated by such third party
operators could be subject to material and workmen's liens. In such event, the
Company would incur costs in discharging such liens. The Company has no reason
to believe that its current operators are experiencing significant financial
difficulties.
COMPETITION. The oil and gas industry is highly competitive. The Company
competes with major integrated and independent oil and gas companies in
acquiring oil and gas properties. Many competitors have resources substantially
exceeding the resources of the Company.
ACQUISITION AND PRODUCTION RISKS. The successful acquisition and
exploitation of producing oil and gas properties requires an assessment of the
recoverable reserves, future oil and gas prices, operating costs, the existence
of potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact and their accuracy is inherently uncertain.
Although the Company's management will perform a review of the assets of all
proposed acquisitions which management believes to be consistent with standard
industry practices, such reviews are inherently incomplete. The Company intends
to focus its due diligence efforts on the properties that management believes
contain the majority of the value in a proposed acquisition and sample the
balance of included properties. Even an in-depth review of all properties and
records of a proposed acquisition will not necessarily reveal existing or
potential problems or risks nor will it permit the Company to become
sufficiently familiar with the properties to fully assess their deficiencies,
liabilities and capabilities. Inspections are not likely to be performed on each
and every well, and potential environmental problems are not necessarily
observable even when an inspection is undertaken. Although the Company's
management has substantial experience in the oil and gas business, the
particular oil and gas assets that the Company may acquire may be unfamiliar.
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OPERATIONAL AND ENVIRONMENTAL HAZARDS; INSURANCE. The oil and gas industry
involves a number of operating risks, such as the risks of fire, blowouts,
explosions, cratering, pipe failure, casing collapse and abnormally pressured
formations, the occurrence of any of which could materially and adversely affect
the Company. The business is also subject to environmental hazards including oil
and saltwater spills, gas leaks, ruptures and discharges of toxic gases. These
risks could result in substantial losses to the Company due to injury and loss
of life, severe damage to and destruction of property and equipment, pollution
and other environmental damage, and suspension of operations. As the owner of
working interests in its oil and gas properties, the Company bears its
proportionate share of the obligations and liabilities arising out of the
exploration and development of those properties. Generally, owners of working
interests in oil and gas properties are jointly and severally liable for all
such obligations and liabilities. As a result, there exists a risk that the
Company could become liable for amounts in excess of its proportionate share of
such obligations and liabilities, although generally the Company would have a
right of contribution against the other working interest owners. In accordance
with customary industry practices, the Company maintains insurance against some,
but not all, of such risks and losses. The occurrence of such an event not fully
covered by insurance could have a material adverse effect on the financial
position and operations of the Company. The Company does not carry insurance
covering environmental impairment liabilities. The Company can provide no
assurance that the insurance it carries will be adequate to cover any loss or
exposure to liability, or that such insurance will continue to be available on
terms acceptable to the Company.
GOVERNMENT REGULATION. The Company's business is subject to extensive
federal, state and local laws and regulations relating to the exploration for,
development, production, marketing and transmission of oil and gas, as well as
environmental and safety matters. Such laws and regulations have generally
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Because the requirements
imposed by such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance with such requirements. The
state of Oklahoma has adopted revisions to its production allowable rules under
which they regulate the quantities of natural gas which producers may produce
within their respective borders. Legislation has recently been introduced in the
United States Congress to restrict the ability of states to regulate the
production of natural gas. It is impossible at this time to determine the
effect, if any, these developments may have on the natural gas industry as a
whole. However, the Company does not believe these developments will materially
affect its operations. There is no assurance that federal, state or local laws
and regulations enacted in the future will not adversely affect the Company's
ability to explore for, produce and market oil and natural gas.
RELIANCE ON KEY PERSONNEL. The Company is dependent upon the services of
Anthony K. Miller, President and Thomas Meeks, its Vice President of
Engineering. The loss of the services of any of these individuals could have a
material adverse effect upon the Company. The Company does not maintain
insurance on the lives of Messrs. Miller or Meeks.
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QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES. There is currently no
trading market for the common stock of the Company. For the Company's Common
Stock to be eligible for initial inclusion on NASDAQ, the Company must, among
other things, maintain at least $4,000,000 in total assets, and have at least
$2,000,000 of capital and surplus. In addition, the bid price of the Common
Stock must be at least $3.00 per share, the market value of the outstanding
common stock must be at least $1,000,000 and there must be at least 300 holders
of the common stock. The Company does not currently meet these requirements and
there can be no assurance that the Company's common stock will meet the
requirements for inclusion on NASDAQ in the future. It is currently anticipated
that trading, if any, in the common stock will be conducted in the
over-the-counter market on the OTC Bulletin Board, a NASD-sponsored inter-dealer
quotation system, or in what are commonly referred to as the "pink sheets." As a
result, a shareholder may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's common stock. In
addition, the Company's common stock is currently subject to a Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors. For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
rule may affect the ability of broker-dealers to sell the Company's common stock
and the ability of shareholders to sell their shares of common stock in the
secondary market.
DIVIDENDS UNLIKELY. The Company has never declared or paid dividends on
its common stock and currently does not intend to pay dividends in the
foreseeable future. The Company currently intends to follow a policy of
retaining all earnings, if any, to finance the expansion and development of its
business. In any event, future dividend policy will depend upon the Company's
earnings, financial condition, working capital requirements, and will be at the
discretion of the Board of Directors.
BUSINESS STRATEGY
The Company's business strategy has been and will continue to be the
acquisition of producing oil and gas properties and exploitation of those
properties to maximize production and ultimate reserve recovery. The Company
also intends to market its technologies to the oil and gas industry focusing on
selling products to major and independent operators. The Company will also focus
on developing joint venture opportunities utilizing its technologies to enhance
oil production in which both venture parties will share in the revenue produced
by the operations. Finally the Company plans to institute a steam service
program whereby the Company will sell steam on a per barrel basis to major and
independent operators to produce revenue. The Company's present business
strategy is to concentrate on expanding its asset base and cash flow primarily
through emphasis on the following activities:
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o Acquiring additional producing oil and gas properties, including
properties with potential for developmental drilling to maintain a significant
inventory of undeveloped prospects and to enhance the Company's foundation for
future growth;
o Increasing production cash flow and asset value by developing the
Company's proven undeveloped reserves;
o Building on the Company's existing base of operations by concentrating
its development activities in its primary operating area of Oklahoma;
o Serving as operator of its wells to ensure technical performance and
reduce costs;
o Developing relationships with major and large independent oil and gas
companies to create joint venture opportunities;
MANAGING FINANCIAL RISK AND MITIGATING TECHNICAL RISK BY:
o Drilling in known productive trends with the utilization of satellite
imaging technology;
o Diversifying investment over a large number of wells in the Company's
primary operating areas;
o Using, where appropriate, the steam and thermal gas injection systems
acquired by the Company from Wave Technology, Inc. to enhance recovery of oil
and gas from producing properties;
o Marketing the steam and thermal gas injection systems acquired by the
Company from Wave Technology, Inc. to other oil producers;
o Participating at industry trade shows to introduce our technology to the
oil and gas industry;
o Providing technology to major and independent operators on a
demonstration basis to stimulate sales of the Companies technologies;
o Maintaining low general and administrative expenses and increasing
economies of scale to reduce per unit Operating Costs and reserve addition
costs.
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ACQUISITION AND EXPLOITATION ACTIVITIES
ACQUISITIONS. Historically, the Company has allocated a substantial
portion of its capital expenditures to the acquisition and development of
producing oil and gas properties. The Company acquired 54 oil wells contained on
960 acres of land during the fiscal year 1997. During fiscal years 1998 and
through the period ended March 31, 2000, the Company acquired an additional 250
oil and gas wells contained on over 7,800 acres of land. These properties
contained a total of 64 million Bbls of crude oil and an un-estimated quantity
of natural gas for total costs of approximately $340,000. These acquisitions
represent that the company has over 67.1 million barrels of proven reserves in
the ground of which 34.4 million barrels is considered as recoverable. These
reserves based on the current market price of crude oil gives the company
approximately $900 million dollars in oil assets. The Company has financed its
acquisitions primarily through cash flow and issuance of common stock.
In January, 1997, Crude Oil Recovery, Inc., a joint venture between the
Company and a third party - in which the Company has a 49% interest - purchased
from unaffiliated third parties four leases in Osage County, Oklahoma, which
Crude Oil Recovery operates. The total purchase price paid for these properties
by Crude Oil Recovery was $160,000. This acquisition was negotiated on behalf of
Crude Oil Recovery, Inc. by the Company's President, Anthony Miller, and the
purchase price was based on a review of the property by an independent certified
petroleum geologist. These four properties contain a combined total of fifty-six
wells, of which nineteen are currently producing oil.
DURING 1998, THE COMPANY MADE THE FOLLOWING ACQUISITIONS:
1. A ninety percent (90%) working interest in an oil and gas lease (the
"Horton lease"), located in Osage County, Oklahoma, from an unaffiliated
seller for a total purchase price of $9,000.00, cash. The other ten percent
(10%) working interest in this property is owned by McCann and Company, an
Oklahoma company with whom the Company contracts to act as its field
supervisor overseeing certain of the Company's properties. This acquisition
was negotiated on behalf of the Company by its officers, and the purchase
price was based on a review of the property by an independent certified
petroleum geologist. The property contains eleven oil wells and five oil
and gas wells. Currently, two oil wells are producing. The Company is
unable at this time to produce any natural gas from this lease since the
main gathering line utilized by the Company on this property to ship the
gas is not working. The main gathering line is owned and operated by Duke
Energy Field Services, Inc. ("Duke Energy"), an unaffiliated third party.
Duke Energy is responsible for repairing the line and has stated that it
should be completed on or about June, 2000. At that time the Company will
be in a position to begin producing and shipping natural gas from the five
oil and gas wells.
2. A ninety percent (90%) working interest in the Cassidy/Mullendore lease,
located in Osage County, Oklahoma, from an unaffiliated seller for a total
purchase price of $4,500.00, cash. The other ten percent (10%) working
interest in this property is owned by McCann and Company, an Oklahoma
company with whom the Company contracts to act as its field supervisor
overseeing certain of the Company's properties. This acquisition was
negotiated on behalf of the Company by its officers, and the purchase price
was based on a review of the property by an independent certified petroleum
geologist. The property contains eleven wells, of which one is currently
producing oil;
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3. A ninety percent (90%) working interest in the Mullendore lease, located in
Osage County, Oklahoma, from an unaffiliated seller for a total purchase
price of $4,500.00, cash. The other ten percent (10%) working interest in
this property is owned by McCann and Company, an Oklahoma company with whom
the Company contracts to act as its field supervisor overseeing certain of
the Company's properties. This acquisition was negotiated on behalf of the
Company by its officers, and the purchase price was based on a review of
the property by an independent certified petroleum geologist. The property
contains nine wells, of which three are currently producing oil;
4. A ninety percent (90%) working interest in the North Hickory lease, located
in Osage County, Oklahoma, from an unaffiliated seller for a total purchase
price of $27,000.00, cash. The otherten percent (10%) working interest in
this property is owned by McCann and Company, an Oklahoma company with whom
the Company contracts to act as its field supervisor overseeing certain of
the Company's properties. This acquisition was negotiated on behalf of the
Company by its officers, and the purchase price was based on a review of
the property by an independent certified petroleum geologist. The property
contains twenty-one wells, of which two are currently producing oil;
5. A ninety percent (90%) working interest in the North Hickory II lease,
located in Osage County, Oklahoma, from an unaffiliated seller for a total
purchase price of $18,000.00, cash. The other ten percent (10%) working
interest in this property is owned by McCann and Company, an Oklahoma
company with whom the Company contracts to act as its field supervisor
overseeing certain of the Company's properties. This acquisition was
negotiated on behalf of the Company by its officers, and the purchase price
was based on a review of the property by an independent certified petroleum
geologist. The property contains two wells, one of which is currently
producing oil;
6. A ninety percent (90%) working interest in the SW Domes oil and gas lease,
located in Osage County, Oklahoma, from an unaffiliated seller for a total
purchase price of $13,500.00, cash. The other ten percent (10%) working
interest in this property is owned by McCann and Company, an Oklahoma
company with whom the Company contracts to act as its field supervisor
overseeing certain of the Company's properties. This acquisition was
negotiated on behalf of the Company by its officers, and the purchase price
was based on a review of the property by an independent certified petroleum
geologist. The property contains nine oil wells and nine oil and gas wells.
Currently, five of the oil wells are producing. The Company is unable at
this time to produce any natural gas from this lease since the main
gathering line utilized by the Company on this property is not working. The
main gathering line is owned and operated by Duke Energy Field Services
("Duke Energy"), an unaffiliated third party. Duke Energy is responsible
for repairing the line and has stated that it should be completed on or
about January, 2000. At that time the Company will be in a position to
begin producing and shipping natural gas from 13 of the oil and gas wells;
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7. A one hundred percent (100%) working interest in the Bales lease, located
in Osage County, Oklahoma, from an unaffiliated seller for a total purchase
price of $4,500.00, cash. This acquisition was negotiated on behalf of the
Company by its officers, and the purchase price was based on a review of
the property by an independent certified petroleum geologist. The property
contains thirteen wells, of which two are currently producing oil;
8. A ninety percent (90%) working interest in the Thunderbolt lease, located
in Osage County, Oklahoma, from an unaffiliated seller for a total purchase
price of $4,500.00, cash. The other ten percent (10%) working interest in
this property is owned by McCann and Company, an Oklahoma company with whom
the Company contracts to act as its field supervisor overseeing certain of
the Company's properties. This acquisition was negotiated on behalf of the
Company by its officers, and the purchase price was based on a review of
the property by an independent certified petroleum geologist. The property
contains two wells, of which one is currently producing oil;
9. In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the Roark Lease, located in Osage
County, Oklahoma. The Company paid $4,000 for this property and expended an
additional $3,000 in capitalized costs through the period ended March 31,
2000. The property contains 3 oil wells, 1 of which is currently in
production.
10. A ninety percent (90%) working interest in the Holcombe oil and gas lease,
located in Osage County, Oklahoma, from an unaffiliated seller for a total
purchase price of $9,000.00, cash. The other ten percent (10%) working
interest in this property is owned by McCann and Company, an Oklahoma
company with whom the Company contracts to act as its field supervisor
overseeing certain of the Company's properties. This acquisition was
negotiated on behalf of the Company by its officers, and the purchase price
was based on a review of the property by an independent certified petroleum
geologist. The property contains eight oil and gas wells, seven of which
are currently in production;
11. A ninety percent (90%) working interest in the Sand Creek lease, located in
Osage County, Oklahoma, from an unaffiliated seller for a total purchase
price of $9,000.00, cash. The other ten percent (10%) working interest in
this property is owned by McCann and Company, an Oklahoma company with whom
the Company contracts to act as its field supervisor overseeing certain of
the Company's properties. This acquisition was negotiated on behalf of the
Company by its officers, and the purchase price was based on a review of
the property by an independent certified petroleum geologist. The property
contains twelve wells, of which three are currently producing oil;
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12. A one-hundred percent (100%) working interest in the Edison lease, located
in Kern County, California from an unaffiliated seller for a total purchase
price of $250,000, of which $16,000 has been paid by the Company. The
remaining balance of $234,000 is to be paid on or before September 2000,
and may be extended by the Company's payment of an extension fee, which
goes towards the balance owing. This acquisition was negotiated on behalf
of the Company by its officers, and the purchase price was based on a
review of the property by an independent certified petroleum geologist. The
property contains twelve wells, none of which are producing at this time;
13. A ninety percent (90%) working interest in the South Sears lease, located
in Chautauqua County, Kansas, from an unaffiliated seller for a total
purchase price of $750.00, cash. The other ten percent (10%) working
interest in this property is owned by McCann and Company, an Oklahoma
company with whom the Company contracts to act as its field supervisor
overseeing certain of the Company's properties. This acquisition was
negotiated on behalf of the Company by its officers, and the purchase price
was based on a review of the property by an independent certified petroleum
geologist. The property contains five wells, none of which are currently
producing oil.
14. A ninety percent (90%) working interest in the McCall, McElroy, Miller,
Moore, Inglefield, Kirchner and Floyd Casement leases (the "Chautaugua
leases"), which are located in Chautaugua, Kansas, and are adjacent to the
South Sears lease. The total purchase price for these leases was
$39,250.00, cash. The other ten percent (10%) working interest in this
property is owned by McCann and Company, an Oklahoma company with whom the
Company contracts to act as its field supervisor overseeing certain of the
Company's properties. This acquisition was negotiated on behalf of the
Company by its officers, and the purchase price was based on a review of
the property by an independent certified petroleum geologist. Of the total
purchase price, $34,000.00 was for the McCall lease, which contains 32 oil
wells. The other Chautaugua leases contain a total of eight oil wells. None
of the wells on the Chautaugua leases are currently in production.
DURING 1999, THE COMPANY MADE THE FOLLOWING ACQUISITIONS:
During 1999, the Company acquired a one hundred percent (100%) working
interest in the Kane, Calvert, Wilson and Kane II leases, located in Washington
County, Kansas, from an unaffiliated seller for a total purchase price of
$20,000.00, cash. This acquisition was negotiated on behalf of the Company by
its officers, and the purchase price was based on a review of the property by an
independent certified petroleum geologist. These properties contain a combined
total of forty wells, none of which are currently producing oil.
12
<PAGE>
IN ADDITION, DURING 1999, THE COMPANY ACQUIRED THE FOLLOWING OPTIONS TO
PURCHASE OIL PROPERTIES IN OSAGE COUNTY, OKLAHOMA:
1. the Bowring Unit oil and gas lease. This property contains 35 wells on 960
acres of land. The Company paid $5,000.00 to the Osage Tribal Council for
the right to produce oil on the property. Pursuant to the terms of the
option, the Company must begin production on the lease by March, 2001. If
the Company fails to begin production by that time, ownership of the
property will revert back to the Osage Tribal Council and the Company will
not have any interest in the property and forfeit its $5,000.00. Before the
Company can begin production on this lease, it may need to post a surety
bond in an amount to be determined by the local Director of the Bureau of
Indian Affairs, in his discretion, in order to cover any possible expenses
relating to the capping of wells after the oil has been depleted. Should
the Company begin production on this lease, within the specified time
frame, ownership of the property will be transferred to the Company;
2. four quarter sections of property, two of which are adjacent to the
Company's North Hickory lease and two are adjacent to the Company's
Mullendore lease. The Company paid the Osage Tribal Council $200.00 per
quarter section for the option to purchase each quarter section for
$5,000.00 each. This option expires on March, 2001; and
3. the Solomon oil lease. This property contains forty wells on 160 acres of
land. The Company paid $500.00 to the Osage Tribal Council for the right to
produce oil on the property. Pursuant to the terms of the option, the
Company must begin production on the lease by March, 2001. If the Company
fails to begin production by that time, ownership of the property will
revert back to the Osage Tribal Council and the Company will not have any
interest in the property and forfeit its $500.00. Before the Company can
begin production on this lease, it may need to post a surety bond in an
amount to be determined by the local Director of the Bureau of Indian
Affairs, in his discretion, in order to cover any possible expenses
relating to the capping of wells after the oil has been depleted. Should
the Company begin production on this lease, within the specified time
frame, ownership of the property will be transferred to the Company.
To the extent that it has the capital resources to do so, the Company
intends to continue to pursue a business strategy that emphasizes reserve
additions through acquisitions. The Company intends to focus its acquisition
program on producing properties which it believes have potential for additional
exploitation through additional development and enhanced recovery via lateral
completions and improved operating techniques. The Company will seek properties
that are underdeveloped, overly burdened with expenses or owned by financially
troubled companies. Management intends to focus on properties located in the
mid-continent region of the United States, primarily in the states of Kansas and
Oklahoma, where Company personnel are best able to draw on their prior oil and
gas experience. It is anticipated that a majority of the potential acquisition
opportunities will be internally generated by Company personnel, although some
opportunities may be brought to the Company by non-employee Directors or
stockholders of the Company. The Company does not currently have any plans to
engage professional firms or consultants that specialize in acquisitions but may
do so in the future. The Company may utilize any one or a combination of lines
of credit with banks, public and private sales of debt and equity securities,
joint oil and gas development arrangements and internally-generated cash flow to
finance its acquisition efforts. No assurance can be given that sufficient
external or internal funds will be available to fund the Company's desired
acquisitions.
13
<PAGE>
The Company consults with a certified petroleum geologist and others in
evaluating some of its major prospective acquisitions. With some acquisitions,
the Company has not retained a certified petroleum geologist to evaluate the
property because management determined that the price of the property would not
justify the retention of such expert. In these cases, the Company utilizes an
acquisitions screening approach using applicable engineering and geological
criteria in the review and evaluation process. This evaluation process helps to
form the basis of the purchase price for a potential acquisition. The Company
generally considers the following in its decision-making process: historical and
current production, reservoir information, satellite imaging technology, and
other potential behind pipe zones or drilling opportunities. The Company will
continue to weigh the comparative value of various methods of reserve
acquisitions and employ the method it believes is most advantageous in any given
transaction. After the acquisition of oil and gas properties, management
generally develops a reservoir depletion plan to maximize production rates,
ultimate reserve recovery and cash flow generation. Such plans consider field
operating procedures, workovers, recompletions, secondary recovery
implementation, additional drilling and such other procedures as the situation
dictates.
The Company does not have a specific budget for the acquisition of oil
and gas properties since the timing and size of acquisitions are difficult to
forecast. However, the Company is constantly reviewing acquisition
possibilities.
DEVELOPMENT ACTIVITIES The Company concentrates its acquisition efforts
on proved producing properties which demonstrate a potential for significant
additional development through workovers, behind-pipe recompletions, secondary
recovery operations, the drilling of development or infill wells, and other
exploitation activities which the Company may find appropriate. The Company has
pursued an active workover and recompletion program on the properties it has
acquired and intends to continue its workover and recompletion program in the
future as properties acquired warrant. In connection with oil and gas property
acquisitions, properties are reviewed and evaluated by the Company with a view
toward taking the appropriate actions to maximize production. Such actions may
include repair or replacement of equipment or more extensive efforts such as
recompletion in a different producing zone or implementation of secondary
recovery operations. The expenditures required for the Company's workover and
recompletion program have historically been financed, and it is expected that
they will continue to be financed, by borrowings and internally generated funds.
Exploratory drilling has been minimal to date. The Company reviews
exploration proposals from other companies and individuals and may from time to
time participate in certain ventures where the risk-reward ratio is sufficiently
high to warrant capital outlays. The Company does not anticipate generating
exploration projects utilizing its own staff at the present time. Consequently,
exploratory drilling within the United States will likely only remain a small
part of the Company's business.
14
<PAGE>
PRODUCTION The Company owns and operates producing oil and gas properties
located in the states of Kansas and Oklahoma. In addition, the Company owns a
non-producing oil property in Kern County, California. The Company continuously
evaluates the profitability of its oil, gas and related activities and has a
policy of divesting itself of unprofitable oil and gas properties or areas of
operation that are not consistent with its operating philosophy.
The Company owns and operates 47 producing wells and owns 232
non-producing wells. Of the foregoing, 19 of the producing and 41 of the
non-producing wells are owned and operated by the Company, pursuant to its joint
venture agreement. Oil and gas sales from the Company's producing oil and gas
properties accounted for substantially all of the Company's revenues for the
years ended December 31, 1997, 1998 and the nine months ended March 31, 2000.
<TABLE>
<CAPTION>
The following summarizes the Company's principal areas of oil and gas
production activity.
<S> <C> <C> <C> <C>
-------------------------------- -------------------------- --------------- ----------------- -----------------
LEASE NAME LOCATION WORKING NET REVENUE NUMBER OF
(COUNTY, STATE) INTEREST INTEREST PRODUCING
WELLS
-------------------------------- -------------------------- --------------- ----------------- -----------------
HORTON/ CASSIDY/MULLENDORE Osage County, OK 90% 79% 3
-------------------------------- -------------------------- --------------- ----------------- -----------------
MULLENDORE Osage County, OK 90% 79% 3
-------------------------------- -------------------------- --------------- ----------------- -----------------
NORTH HICKORY Osage County, OK 90% 66.45% 2
-------------------------------- -------------------------- --------------- ----------------- -----------------
NORTH HICKORY II Osage County, OK 90% 66.45% 1
-------------------------------- -------------------------- --------------- ----------------- -----------------
SW DOMES Osage County, OK 90% 74.50% 5
-------------------------------- -------------------------- --------------- ----------------- -----------------
BALES Osage County, OK 100% 84% 2
-------------------------------- -------------------------- --------------- ----------------- -----------------
THUNDERBOLT Osage County, OK 90% 66.90% 1
-------------------------------- -------------------------- --------------- ----------------- -----------------
ROARK Osage County, OK 90% 75% 1
-------------------------------- -------------------------- --------------- ----------------- -----------------
HOLCOMBE (gas) Osage County, OK 90% 75% 7
-------------------------------- -------------------------- --------------- ----------------- -----------------
SAND CREEK Osage County, OK 90% 73.10% 3
-------------------------------- -------------------------- --------------- ----------------- -----------------
EDISON FIELD Kern County, CA 100% 75% 0
-------------------------------- -------------------------- --------------- ----------------- -----------------
LEONARD (NE-16) Osage County, OK 49% 83.33% 1
-------------------------------- -------------------------- --------------- ----------------- -----------------
LAWSON Osage County, OK 49% 83.33% 8
-------------------------------- -------------------------- --------------- ----------------- -----------------
EBERT Osage County, OK 49% 83.33% 5
-------------------------------- -------------------------- --------------- ----------------- -----------------
LEONARD(SW-15) Osage County, OK 49% 83.33% 5
-------------------------------- -------------------------- --------------- ----------------- -----------------
KANE Washington Co., OK 100% 83.33% 3
-------------------------------- -------------------------- --------------- ----------------- -----------------
CALVERT Washington Co., OK 100% 83.33% 0
-------------------------------- -------------------------- --------------- ----------------- -----------------
WILSON Washington Co., OK 100% 83.33% 0
-------------------------------- -------------------------- --------------- ----------------- -----------------
KANE II Washington Co., OK 100% 83.33% 0
-------------------------------- -------------------------- --------------- ----------------- -----------------
FLOYD CASEMENT Chautauqua, KS 90% 81.25% 1
-------------------------------- -------------------------- --------------- ----------------- -----------------
FULSOM Chautauqua, KS 90% 81.25% 2
-------------------------------- -------------------------- --------------- ----------------- -----------------
KIRCHNER Chautauqua, KS 90% 81.25% 1
-------------------------------- -------------------------- --------------- ----------------- -----------------
McCALL Chautauqua, KS 90% 81.25% 3
-------------------------------- -------------------------- --------------- ----------------- -----------------
McELROY Chautauqua, KS 90% 81.25% 0
-------------------------------- -------------------------- --------------- ----------------- -----------------
MILLER Chautauqua, KS 90% 81.25% 1
-------------------------------- -------------------------- --------------- ----------------- -----------------
MOORE Chautauqua, KS 90% 81.25% 0
-------------------------------- -------------------------- --------------- ----------------- -----------------
SOUTH SEARS Chautauqua, KS 90% 79.50% 3
-------------------------------- -------------------------- --------------- ----------------- -----------------
INGLEFIELD Chautauqua, KS 90% 81.25% 0
-------------------------------- -------------------------- --------------- ----------------- -----------------
</TABLE>
15
<PAGE>
OIL AND GAS JOINT VENTURE
In 1996, the Company entered into a Joint Venture Agreement (the
"Agreement") with a third party for the purposes of acquiring, developing,
producing, marketing and operating oil and gas properties. Pursuant to the
Agreement, the Company owns a forty-nine percent (49%) in Crude Oil Recovery,
Inc., an Oklahoma corporation ("COR"). Pursuant to the Agreement, the Company is
entitled to appoint one member of the board of directors of COR, with the two
remaining seats to be appointed by a third party. To date, COR has acquired and
been producing on four properties in Osage County, Oklahoma. These properties
were purchased for $160,000 cash from an unaffiliated third party by the joint
venture partner and given to COR, pursuant to the Agreement. The properties are
located on Osage tribal land and, as such, are managed by the Bureau of Indian
Affairs. The properties consist of 960 acres with 56 oil wells, of which 19
wells are currently producing oil. To date, these properties have produced a
total of 13,917 barrels of oil in the three years that it has been operated by
COR. Pursuant to the Agreement, the Company is responsible for developing and
operating the properties. To date, the Company has not received any revenues
from the joint venture. Pursuant to the Agreement, all revenues of the joint
venture have been reinvested into the properties for the purposes of making
leasehold improvements, operations and increasing the production levels from
these properties. COR intends to continue to use these revenues to bring the 43
additional oil wells into production. It is anticipated that soon after COR has
fully developed these properties and, if it is generating a profit, that it will
begin making distributions to the joint venture partners. However, the Company
is unable to predict when and if COR will generate profits for distribution to
the Company.
TECHNOLOGIES
Another major focus of the Company is to use the TM-96 Portable Steam
Generator System (the "TM-96") and TM-98 Portable Thermo-Gas Re-Pressurizing
System (the "TM-98") thermal injection technologies to rekindle its marginally
producing oil wells to profitable levels. To date, the Company has acquired and
is currently utilizing one TM-96 and one TM-98 on certain of its oil properties.
The Company also intends on marketing and selling the oil recovery enhancement
technologies to other secondary oil operators, although it has not yet received
any purchase orders from other operators.
Thermal recovery, the process of intentionally introducing heat into a
formation for the purpose of recovering oil, has been used by the oil industry
for over 100 years for secondary recovery purposes. Thermal recovery is
preferred over other recovery methods due to its ability to improve the
displacement and recovery efficiencies. The reduction in crude oil viscosity
that accompanies a temperature increase not only allows the oil to flow more
freely but also results in more favorable mobility ratios. The most common
thermal recovery methods in use today are combustion, hot water, hot oil, hot
gases and steam.
16
<PAGE>
THE TM-96 PORTABLE STEAM GENERATOR
The TM-96 is a self-contained, fully mobile steam generator unit. The unit
is equipped with a water softener system, diesel powered electric generator,
high pressure pump, low emission 5 million BTU per hour burner, computerized
control panel and hot water generator system. The unit is capable of delivering
hot water and steam at temperatures of up to 500(0) F to well depths of 2,500
feet or less. The TM-96 is powered by propane to heat water pumped from a
groundwater aquifer. The system has the ability to deliver variable water
temperature, pressure and volume. The American Society of Mechanical Engineers
("ASME") has certified that the TM-96 is built in full conformity with the
ASME's current standards relating to the production of steam boilers and/or
generators. As a result, the TM-96 is stamped and insured by the Hartford
Company.
The TM-96 is designed to stimulate marginal/stripper oil wells, remediate
paraffin precipitation that creates borehole damage and blockage of perforation
and tubular goods and increase production. The TM-96 directly injects steam down
the casing of the well for a minimum of five to ten hours depending on the
geological conditions of each reservoir. The thermal energy generated by the hot
water and steam emit heat throughout the wellbore area, thereby unclogging the
wellbore of paraffin build-up, which chokes off the production by decreasing the
flow of oil. This complete process is designed to reduce the viscosity of the
clogging hydrocarbons, thus allowing the reservoir oil to flow more readily,
which will enhance the oil production process. In addition, the steam injection
into the wellbore mobilizes precipitated paraffin and provides energy to the
reservoir to move oil toward the well when production begins after stimulation
and a soak period.
The TM-96 system is designed for safety and protection of operating
personnel. The TM-96 is placed approximately 100 feet away from the wellhead of
the well receiving steam/hot water stimulation. Hot water is delivered to the
wellhead from the TM-96 and flashes to steam as it is injected into the
production tubing or casing at the wellhead. The hot water/steam delivered into
the tubular goods at the wellhead and into the oil reservoir elevated the
precipitated paraffin above its pore point. As a result, paraffin-causing
blockage in tubular goods, plugging in perforations, and damage in the reservoir
becomes mobilized. Following stimulation by hot water/steam and remediation of
blockage and reservoir damage, the flow of oil toward the well is enhanced.
Paraffin precipitation in tubular goods, in perforations, and in the reservoir
near the wellbore severely restricts the volume of oil that can be produced.
PATENT APPROVAL
On or about July 19, 1999, the United States Patent Office approved a
patent for the Methods and Apparatus for Viscosity Reduction of Hydrocarbons in
Oil Wells, the TM-96. The patent application (Application No. 08/959,777) had
been pending for three years before it was approved; United States Patent
#5,979,549. The Company is also taking steps to obtain patent protection in 26
additional countries where the technology could be manufactured or utilized to
assist in the recovery of oil from marginally producing oil wells.
The Company's pilot project for the TM-96 involved stimulation of eight
wells on the Company's joint venture leases, located in Osage County, Oklahoma.
Steaming began on September 26, 1997, and was done periodically over a period of
sixty days. The Company intent for the project was to determine the optimum
stimulation parameters for this specific property. The wells on the subject
leases were completed with ordinary oil filed cement around production casing.
As a result, they are incapable of being stimulated with high temperature
(500(Degree) F) steam/hot water without causing damage to the cement or movement
that will also cause damage. Accordingly, the temperature of the steam/hot water
used during the pilot project was injected at a reduced temperature in order to
avoid compromising the integrity of the casing and cement. The pilot project
demonstrated that the technology was capable of elevating oil production above
ten (10) barrels per day throughout the test phase. The Company is currently
utilizing the TM-96 on the joint venture leases. Each well is stimulated every
thirty days to reduce paraffin buildup.
17
<PAGE>
THE TM-98 PORTABLE THERMO-GAS REPRESSURIZING UNIT
The TM-98 is a portable thermal gas injector designed to directly inject
inert flue gas into an oil formation to repressurize the formation and to
decrease the viscosity of the oil, thereby increasing production. The TM-98 is
designed to either work alone or in conjunction with the TM-96 to improve oil
production. The injection of thermal gases into a formation acts much in the
same way as steam to stimulate the recovery of oil, except that gases will not
condense into water. In addition, the carbon dioxide, carbon monoxide, and
nitrogen in the flue gases have properties that also aid in the oil recovery
process. The TM-98 will provide the Company with the ability to service a number
of wells on which steam may not be cost effective, i.e. those formations with a
high clay content or where water is not readily available.
For those formations where steam is effective, the TM-98 will increase
the efficiency of the TM-96, by increasing the gas pressurization in the
formation, thereby assisting the oil flow. Typically, oil reservoirs contain
natural gas. Until the use of natural gas became common throughout the United
States, operators commonly burned natural gas in flares near producing wells or
vented it into the atmosphere. As natural gas is flared or sold for household or
industrial use, the reservoir pressure is depleted. A depletion of the reservoir
pressure results in a decline in oil production as there is decreased
displacement of the oil in place is decreased. In order to stimulate the
production of oil out of these formations, it is necessary to restore the
pressure in the formation through the injection of natural gas, carbon dioxide
and water. The TM-98, however, provides a cost effective and more efficient
manner to repressurize the formation through the injection of inert flue gas. In
addition, flue gas may easily be combined with steam or water injection to
increase oil production and recovery.
The Company has filed an application with the United States Patent Office
seeking patent approval for the TM-98 (Method and Apparatus for Pressure
Injection of Gases into Oil Formation). The patent application has been pending
for 2 years.
The Company obtained the exclusive licensing rights to develop, sell, lease
and utilize the TM-96 from Wave Technology Inc. ("Wave Tech"), a research and
development company that specializes in the creation and development of oil
industry related technologies. Pursuant to the Company's merger with U.S.
Thermo-Tech, Inc. ("Thermo"), the Company acquired the exclusive right to
develop, sell and utilize the patent pending TM-98. Thermo had acquired the
exclusive rights to the TM-98 from Wave Tech. Wave Tech's main focus has been to
develop technology to increase world and domestic oil production by the use of
thermal technology to enhance oil recovery. The TM-96 and TM-98 are the creation
of Mr. Thomas Meeks, President of Wave Tech and a Director of the Company, an
inventor with over twenty years' experience in the oil industry. Mr. Meeks is
noted for patenting the world's first down-hole steam generator, which was
capable of delivering steam at depths of down to 5,000 feet for the harvesting
of heavy oil reserves.
18
<PAGE>
MARKETING
The availability of a market for oil and gas produced or marketed by
the Company is dependent upon a number of factors beyond its control, which
cannot be accurately predicted. These factors include the proximity of wells to,
and the available capacity of, natural gas pipelines, the extent of competitive
domestic production and imports of oil and gas, the availability of other
sources of energy, fluctuations in seasonal supply and demand, and governmental
regulation. In addition, there is always the possibility that new legislation
may be enacted, which would impose price controls or additional taxes upon crude
oil or natural gas, or both. In the event a productive gas well is completed in
an area that is distant from existing gas pipelines, the Company may allow the
well to remain shut-in until a pipeline is extended to the well or until
additional wells are drilled to establish the existence of sufficient producing
reserves to justify the cost of extending existing pipelines to the area. It
appears that the United States is emerging from a period of oversupply of
natural gas which has, and may still, cause delays, restrictions or reductions
of natural gas production and which in the past has adversely affected gas
prices. Oversupplies of natural gas can be expected to recur from time to time
and may result in depressed gas prices and in the gas producing wells of the
Company being shut-in.
Since the early 1970's the supply and market price for crude oil has
been significantly affected by policies adopted by the member nations of OPEC.
Members of OPEC establish among themselves prices and production quotas for
petroleum products from time to time with the intent of manipulating the global
supply and price levels for crude oil. In addition, Canada recently revised its
laws affecting the exportation of natural gas to the United States. Mexico also
continues to fine tune its import/export policies. The oil and gas policies of
the United States, Canada and Mexico are impacted by the Canadian/U.S. Free
Trade Agreement, the General Agreement on Tariffs and Trade, and the North
American Free Trade Agreement. These factors are expected to increase
competition and may adversely affect the price of natural gas in certain areas
of the United States. The Company is unable to predict the effect, if any, which
OPEC, Canadian and Mexican policies, and emerging international trade doctrines
will have on the amount of, or the prices received for, oil and natural gas
produced and sold by the Company.
Changes in oil and natural gas prices significantly affect the revenues
and cash flow of the Company and the value of its oil and gas properties.
Significant declines in the prices of oil and natural gas could have a material
adverse effect on the business and financial condition of the Company. The
Company is unable to predict accurately whether the price of oil and natural gas
will rise, stabilize or decline in the future.
All of the Company's crude oil and condensate production is sold at
posted prices for West Texas Intermediate under short-term contracts, as is
customary in the industry. The only purchaser of the Company's oil production,
to date, is Cooperative Refining, LLC., and its predecessor Farmland Industries,
Inc. Thus, it accounts for all of the Company's oil revenues. The Company has an
ongoing agreement with Cooperative Refining, LLC., through its predecessor,
Farmland Industries, whereby Cooperative Refining, LLC. purchases the Company's
crude oil production at the price of Koch's Oklahoma Sweet Posting plus an
additional $1.40 based on the date of removal. The agreement was entered into in
December, 1998, for an initial term of six months and has been continuously
renewed by the parties. The agreement is subject to a 30-day cancellation notice
by either party. The Company has no reason to believe that this agreement will
be cancelled by either party, although there can be no assurance of such. If the
agreement is cancelled, the Company would sell its oil production at the posted
price.
The Company's gas production is sold primarily on the spot market or
under market sensitive short term agreements with two purchasers, Duke Energy
Field Services, Inc. and Northern Osage Gas Association, LLC.
19
<PAGE>
COMPETITION
Competition in the acquisition of producing oil and gas properties and
in the exploration and production of oil and gas is intense. In seeking to
obtain desirable producing properties, new leases and exploration prospects, the
Company faces competition from both major and independent oil and gas companies
as well as from numerous individuals. Many of these competitors have financial
and other resources substantially in excess of those available to the Company.
Increases in worldwide energy production capability and decreases in
energy consumption as a result of conservation efforts have brought about
substantial surpluses in energy supplies in recent years. This, in turn, has
resulted in substantial competition for markets historically served by domestic
natural gas resources both with alternate sources of energy and among domestic
gas suppliers. As a result, there have been reductions in oil and gas prices,
widespread curtailment of gas production and delays in producing and marketing
gas after it is discovered. Changes in government regulations relating to the
production, transportation and marketing of natural gas have also resulted in
significant changes in the historical marketing patterns of the industry.
Generally, these changes have resulted in the abandonment by many pipelines of
long-term contracts for the purchase of natural gas, the development by gas
producers of their own marketing programs to take advantage of new regulations
requiring pipelines to transport gas for regulated fees, and the emergence of
various types of gas marketing companies and other aggregators of gas supplies.
As a consequence, gas prices, which were once effectively determined
by government regulation, are now largely established by market competition.
Competitors of the Company in this market include other producers, gas
pipelines and their affiliated marketing companies, independent marketers, and
providers of alternate energy supplies.
COMPETITION IN SALE OF TM-96. The Company faces competition from other
companies that manufacture and sell steam generators for use in the oil
industry. This competition consists of some of the following companies, Babcock
and Wilcox and Studders Combustion Engineering. The generators manufactured and
sold by these competing firms are larger (50,000,000 btu's), immobile and much
more costly than the TM-96. These generators are generally purchased only by the
major oil companies due to the initial capital cost (over $1,000,000 per
system), operating cost, pollution control cost (approximately $250,000 per
year), and the recovery cost of steaming. The Company believes that the TM-96
competes favorably against these competing steam generators due to the TM-96's
size, portability and cost. The Company is currently unaware of any competing
seller of small, portable steam generators for use in recovery of secondary oil.
COMPETITION IN SALE OF TM-98. The Company is unaware of any other
entity that is marketing or selling any product that directly injects thermal
gas into oil formations for the purpose of repressurizing the formation.
20
<PAGE>
REGULATION
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies,
both federal and state, have issued rules and regulations applicable to the oil
and gas industry and its individual members, some of which carry substantial
penalties for the failure to comply. The regulatory burden on the oil and gas
industry increases its cost of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
EXPLORATION AND PRODUCTION. Exploration and production operations of
the Company are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilling and
producing, and the plugging and abandoning of wells. The Company's operations
are also subject to various conservation matters. These include the regulation
of the size of drilling and spacing units or the density of wells which may be
drilled, and the unitization or pooling of oil and gas properties or interests.
In this regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas, and impose certain requirements regarding the rate of production. The
effect of these regulations is to limit the amounts of oil and gas the Company
can produce from its wells, and to limit the number of wells or the locations at
which the Company can drill.
The state of Oklahoma has adopted rules under which it regulates the
quantities of natural gas, which may be produced within their borders. The
stated rationale behind such prorationing legislation and rulemaking is the
conservation of natural resources, prevention of waste and protection of the
correlative rights of oil and gas interest owners by limiting production to the
available market. The Company does not believe these rules will materially
affect its operations.
Certain of the Company's oil and gas leases are granted by the federal
government and administered by the Bureau of Indian Affairs (the "BIA"). Such
leases require compliance with detailed federal regulations and orders, which
regulate, among other matters, drilling and operations on these leases and
calculation of royalty payments to the BIA. The Mineral Lands Leasing Act of
1920 places limitations on the number of acres under federal leases that may be
owned in any one state. While the Company does not have a substantial federal
lease acreage position in any state or in the aggregate, the Company does own
interests in federal oil and gas leases which produce amounts of oil and gas
material to the Company. The Mineral Lands Leasing Act of 1920 and related
regulations also may restrict a corporation from holding title to federal
onshore oil and gas leases if stock of such corporation is owned by citizens of
foreign countries which are not deemed reciprocal under such Act. Reciprocity
depends, in large part, on whether the laws of the foreign jurisdiction
discriminate against a United States person's ownership of rights to minerals in
such jurisdiction. The purchase of shares in the Company by citizens of foreign
countries who are not deemed to be reciprocal under such Act could have an
impact on the Company's ownership of federal leases.
21
<PAGE>
The Company's operations are subject to extensive federal, state and
local laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials into the environment.
Permits are required for several of the Company's operations, and these permits
are subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines, injunctions or both. It is
possible that increasingly strict requirements will be imposed by environmental
laws and enforcement policies thereunder. The Company is also subject to laws
and regulations concerning occupational safety and health. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in the aggregate to the Company's overall operations by reason of
environmental or occupational safety and health laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
NATURAL GAS SALES AND TRANSPORTATION. Federal legislation and
regulatory controls have historically affected the price of the gas produced by
the Company and the manner in which such production is marketed. The
transportation and sale for resale of gas in interstate commerce are regulated
pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy
Act of 1978 (the "NGPA") and Federal Energy Regulatory Commission ("FERC")
regulations promulgate thereunder. Since 1978, maximum selling prices of certain
categories of gas, whether sold in interstate or intrastate commerce, have been
regulated pursuant to the NGPA. The NGPA established various categories of gas
and provided for graduated deregulation of price controls of several categories
of gas and the deregulation of sales of certain categories of gas. All price
deregulation contemplated under the NGPA has already taken place.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company performs a
minimal title investigation before acquiring oil and gas properties, which
generally consists of obtaining a title report from legal counsel covering title
to the major properties (for example, properties comprising at least 80% by
value of the acquired properties) and due diligence reviews by independent
landmen of the remaining properties. The Company believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the oil and gas industry. A title opinion is obtained prior to the
commencement of any drilling operations on such properties. The Company's
properties are subject to customary royalty interests, liens incident to
operating agreements, liens for current taxes and other burdens which the
Company believes do not materially interfere with the use of or affect the value
of such properties.
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formations, producing facilities or
other property, or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risk. The
Company carries insurance against certain of these risks but, in accordance with
standard industry practice, the Company is not fully insured for all risks,
either because such insurance is unavailable or because the Company elects not
to obtain insurance coverage because of cost. Although such operational risks
and hazards may to some extent be minimized, no combination of experience,
knowledge and scientific evaluation can eliminate the risk of investment or
assure a profit to any company engaged in oil and gas operations.
22
<PAGE>
EMPLOYEES
The Company employs a total of five full time personnel at its offices in
Colton, California and three full time field employees in the state of Oklahoma.
The Company also engages the services of 17 additional contract field personnel
on an as needed basis. The Company believes its relations with its employees and
contractors are excellent.
RESULTS OF OPERATIONS
The Company follows the "successful efforts" method of accounting for
its oil and gas properties whereby costs of productive wells and productive
leases are capitalized and depleted on a unit-of-production basis over the life
of the remaining proved reserves. Depletion of capitalized costs is provided on
a well-by-well basis. Exploratory expenses, including geological and geophysical
expenses and annual delay rentals, are charged to expense as incurred.
Exploratory drilling costs, including the cost of stratigraphic test wells, are
initially capitalized, but charged to expense if and when the well is determined
to be unsuccessful.
The factors which most significantly affect the Company's results of
operations are (i) the sale prices of crude oil and natural gas, (ii) the level
of oil and gas sales, (iii) the level of lease operating expenses, and (iv) the
level of production activities. Total sales volumes and the level of borrowings
are significantly impacted by the degree of success the Company experiences in
its efforts to acquire oil and gas properties and its ability to maintain or
increase production from existing oil and gas properties through its development
and production enhancement activities. The following table reflects certain
historical operating data for the periods presented.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------- ----------------------------------------------
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
------------------------------------------------------------------------------------- ----------------------------------------------
1998 1999 1999 2000
ITEMS:
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
NET SALES VOLUMES:
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
OIL (BBLS) 3,320 5,436 3,336 3,450
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
NATURAL GAS (MCF) 0 0 0 0
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
OIL EQUIVALENT (BOE) 3,320 5,436 3,336 3,450
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
AVERAGE SALES PRICES: $18.05/bbl $19.00/bbl $19.00/bbl $26.75
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
OIL (PER BBL) $18.05/bbl $19.00/bbl $19.00/bbl $26.75
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
NATURAL GAS (PER MCF) N/A N/A N/A N/A
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
OPERATING EXPENSES PER BOE OF NET
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
SALES: 60,061 105,296 63,384 92,287
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
LEASE OPERATING
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
GENERAL, ADMINISTRATIVE AND OTHER
DEPRECIATION, DEPLETION AND
AMORTIZATION 224,456 392,492 235,495 89,020
--------------------------------------- ----------------------- ---------------------- ---------------------- ----------------------
</TABLE>
23
<PAGE>
Relatively modest changes in either oil or gas prices significantly impact
the Company's results of operations and cash flow and could significantly impact
the Company's borrowing capacity. Prices received by the Company for sales of
oil and natural gas have fluctuated significantly from period to period. The
Company's ability to obtain additional capital on attractive terms is
substantially dependent on oil and gas prices. Domestic spot oil prices have
ranged from a high of approximately $40 per barrel in October 1991to a low of
approximately $10 per barrel in January 1999. The fluctuations in oil prices
during these periods reflect market uncertainty regarding OPEC's ability to
control the production of its member countries, as well as concerns related to
the global supply and demand for crude oil. Following the end of the Gulf War in
early 1991, crude oil prices experienced continued weakness, primarily as a
result of OPEC's inability to maintain disciplined production quotas by member
countries and the uncertainty associated with Iraq's return to the crude oil
export market. During the last 10 months, crude oil prices have begun to rebound
and have steadily risen and reached a closing price of approximately $30 per
barrel in January of 2000.
On March 31, 2000 OPEC and the other oil producing nations met to
re-examine production quotas which were set to reduce the large inventories of
crude oil in the world marketplace. During that meeting they increased world
production of crude oil by 1.5 million barrels per day above current production.
This increase was made to stabilize escalating oil prices and energy cost. Since
that event oil prices have again stabilized at approximately $26.00 per barrel
according to U.S. prices. These factors continue to overhang the market and will
create significant price volatility for the foreseeable future.
Natural gas prices received by the Company fluctuate generally with changes
in the spot market price for gas. Spot market gas prices have generally declined
in recent years because of lower worldwide energy prices as well as excess
deliverability of natural gas in the United States. However, natural gas prices
have rebounded recently and appear to be poised for further strengthening.
Domestic spot natural gas prices have ranged from a low of approximately $0.90
per Mcf in January 1992 to a high of approximately $4.44 per Mcf in December
1996, with a current price of approximately $3.07 per Mcf. Environmental
concerns coupled with recent increases in the use of natural gas to produce
electricity have combined to improve prices. As part of continued deregulation
of natural gas, U.S. pipelines have been made more accessible to both buyers and
sellers of natural gas and, as a result, natural gas will be able to more
effectively compete for market share with other end-use energy forms.
The Company's principal source of cash flow is the production and sale of
its crude oil and natural gas reserves, which are depleting assets. Cash flow
from oil and gas sales depends upon the quantity of production and the price
obtained for such production. An increase in prices permits the Company to
finance its operations to a greater extent with internally generated funds. A
decline in oil and gas prices reduces the cash flow generated by the Company's
operations, which in turn reduces the funds available for further development of
its oil properties, acquiring additional oil and gas properties and exploring
for an developing new oil and gas reserves.
In addition to the foregoing, the results of the Company's operations vary
due to seasonal fluctuations in the sales prices and volumes of natural gas. In
recent years, natural gas prices have been generally higher in the fall and
winter. Due to these seasonal fluctuations, results of operations for individual
annual and quarterly periods may not be indicative of results which may be
realized on an annual basis.
24
<PAGE>
THE FOLLOWING EVENTS HAVE DIRECTLY AFFECTED THE COMPARABILITY OF THE RESULTS OF
OPERATIONS AND FINANCIAL POSITION OF THE COMPANY DURING THE PERIODS PRESENTED:
In November 1996, the Company formed a joint venture with a third-party.
The joint venture formed Crude Oil Recovery, Inc., an Oklahoma corporation, in
which the Company has a 49% interest. In January 1997, Crude Oil Recovery
acquired the producing oil and gas properties known as the Leonard (NE-16),
Lawson, Ebert and Leonard (SW-15) Leases, located in Osage County, Oklahoma. The
Company's joint venture partner paid $160,000 for this property. Crude Oil
Recovery has expended an additional $100,000 in capitalized costs during the
year ended December 31, 1997. Sales of oil and gas from this property have been
retained by Crude Oil Recovery and reinvested into these properties, pursuant to
the joint venture agreement, to further develop these leases. Thus, the Company
has not recognized any revenue from these properties.
In November 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the South Sears Lease, located in
Chautauqua County, Kansas. The Company paid $750 for the property and expended
an additional $3,000 in capitalized costs through the period ended March 31,
2000. The property contains five wells, none of which are currently producing
oil.
In November 1998, the Company acquired a ninety percent (90%) working
interest in oil properties known as the McCall, McElroy, Miller, Moore,
Inglefield, Kirchner and Floyd Casement Leases (the "Chautaugua leases"),
located in Chautaugua, Kansas. The Company paid $39,250 for these properties. Of
the total purchase price, $34,000.00 was for the McCall lease, which contains 32
oil wells. The other Chautaugua Leases contain a total of eight oil wells. None
of the wells on the Chautaugua Leases are currently in production.
In December 1998, the Company acquired a ninety percent (90%) working
interest in an oil and gas property known as the Horton Lease, located in Osage
County, Oklahoma. The Company paid $9,000.00 for this property. The property
contains eleven oil wells and five oil and gas wells. Currently, two oil wells
are producing. The Company is unable at this time to produce any natural gas
from this lease since the main gathering line utilized by the Company on this
property to ship the gas is not working. The main gathering line is owned and
operated by Duke Energy Field Services, Inc. ("Duke Energy"), an unaffiliated
third party. Duke Energy is responsible for repairing the line and has stated
that it should be completed in or about January, 2000. At that time the Company
will be in a position to begin producing and shipping natural gas from the five
oil and gas wells.
25
<PAGE>
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the Cassidy/Mullendore Lease, located in
Osage County, Oklahoma. The Company paid $4,500 for this property and expended
an additional $4,500 in capitalized costs through the period ended March 31,
2000. The property contains eleven wells, of which one is currently producing.
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the Mullendore Lease, located in Osage
County, Oklahoma. The Company paid $4,500 for this property and expended an
additional $3,000 in capitalized costs through the period ended March 31, 2000.
The property contains nine wells, of which three are currently producing oil.
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the North Hickory Lease, located in Osage
County, Oklahoma. The Company paid $27,000.00 for this property and expended an
additional $5,000 in capitalized costs through the period ended March 31, 2000.
The property contains twenty-one wells, of which two are currently producing
oil.
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the North Hickory II Lease, located in
Osage County, Oklahoma. The Company paid $18,000.00 for this property and
expended an additional $3,000 in capitalized costs through the period ended
March 31, 2000. The property contains two wells, one of which is currently
producing oil.
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil and gas property known as the SW Domes Lease, located in
Osage County, Oklahoma. The Company paid $13,500 for the property and expended
an additional $1,000 in capitalized costs through the period ended March 31,
2000. The property contains nine oil wells and nine oil and gas wells.
Currently, five of the oil wells are producing. The Company is unable at this
time to produce any natural gas from this lease since the main gathering line
utilized by the Company on this property is not working. The main gathering line
is owned and operated by Duke Energy Field Services ("Duke Energy"), an
unaffiliated third party. Duke Energy is responsible for repairing the line and
has stated that it should be completed on or about June 2000. At that time the
Company will be in a position to begin producing and shipping natural gas from
3of the oil and gas wells.
In December 1998, the Company acquired a one hundred percent (100%) working
interest in the oil property known as the Bales Lease, located in Osage County,
Oklahoma. The Company paid $4,500 for the property and expended an additional
$5,000 in capitalized costs through the period ended March 31, 2000. The
property contains thirteen wells, of which two are currently producing oil.
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the Thunderbolt Lease, located in Osage
County, Oklahoma. The Company paid $4,500.00 for the property and expended an
additional $2,000 in capitalized costs through the period ended March 31, 2000.
The property contains two wells, of which one is currently producing oil.
26
<PAGE>
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil and gas property known as the Holcombe Lease, located in
Osage County, Oklahoma. The Company paid $9,000 For the property and expended an
additional $80,000 in capitalized costs through the period ended March 31, 2000.
The property contains eight oil and gas wells, seven of which are currently in
production;
In December 1998, the Company acquired a ninety percent (90%) working
interest in the oil property known as the Roark Lease, located in Osage County,
Oklahoma. The company paid $4,500 for this property and expended an additional
$4,000 in capitalized costs through the period ended March 31, 2000. The
property contains 3 oil wells, 1 of which is currently in production.
In December 1998, The Company acquired a ninety percent (90%) working
interest in the oil property known as the Sand Creek Lease, located in Osage
County, Oklahoma. The Company paid $9,000 for the property and expended an
additional $5,000 in capitalized costs through the period ended March 31, 2000.
The property contains twelve wells, of which three are currently producing oil.
In October, 1998, the Company contracted to acquire a one-hundred percent
(100%) working interest in the oil property known as the Edison Lease, located
in Kern County, California. The contract price for the property was $250,000, of
which the Company has paid $16,000, to date. The remaining balance of $234,000
is to be paid on or before September, 2000 and may be extended by the Company's
payment of an extension fee, which goes toward the balance owing. The property
contains twelve wells, none of which are producing at this time.
In April 1999, the Company acquired a one hundred percent (100%) working
interest in the oil properties known as the Kane, Calvert, Wilson and Kane II
Leases, located in Washington County, Kansas. The Company paid $20,000.00 for
these properties and expended an additional $8,000 in capitalized costs through
the period ended December 30, 1999. These properties contain a combined total of
forty wells, 3 of which are currently producing oil.
In March, 1999, the Company acquired the right to produce on and acquire
the oil and gas property known as the Bowring Unit Lease, located in Osage
County, Oklahoma. The Company paid $5,000 for the right to produce on the
property on or before March, 2001. Should the Company begin production on this
lease, within the specified time frame, ownership of the property will be
transferred to the Company. If the Company fails to begin production by March,
2001, ownership of the property will remain in the hands of the Osage Tribal
Council and the Company will not have any interest in the property and will
forfeit its $5,000.00. This property contains 35 wells on 960 acres of land.
In March, 1999, the Company acquired the right to purchase four quarter
sections of property, located in Osage County, Oklahoma. The Company paid the
Osage Tribal Council $200.00 per quarter section for the option to purchase each
quarter section for $5,000.00 each. This option expires in March, 2001.
In March, 1999, the Company acquired the right to produce on and acquire
the oil property known as the Solomon Lease, located in Osage County, Oklahoma.
The Company paid $500 for the right to produce on the property on or before
March, 2001. Should the Company begin production on this lease, within the
specified time frame, ownership of the property will be transferred to the
Company. If the Company fails to begin production by March 2001, ownership of
the property will remain in the hands of the Osage Tribal Council and the
Company will not have any interest in the property and will forfeit its $500.
This property contains forty wells on 160 acres of land.
27
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Total revenues for the year ended December 31, 1997 increased 55.9% TO $0
compared to $0 for the year ended December 31, 1996. Oil and gas revenues
increased from $0 for the year ended December 31, 1996 to $0 for the year ended
December 31, 1997. These increases were attributable to both increases in
production and increases in average prices received during the year. Average
prices received by the Company were $20.85 per Bbl of oil and $0 per Mcf of gas
during fiscal 1996.
Oil and gas production for the year ended December 31, 1997 was 0 Bbls and
0 Mcf higher than production volumes experienced during the prior year. These
production increases were primarily attributable to the production from
producing oil and gas properties purchased in January 1996.
YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 2000.
During the year ended March 31, 2000, the Company had no revenues from
operation. In the period from inception (1996) to March 31, 1999, the Company
had sales of $500,000 for equipment and $73,458 from sales of oil. In the year
ended March 31, 2000, the Company incurred $664,266 in expenses. In the period
from inception (1996) to March 31, 1999, the Company incurred $574,337 in
expenses. In the year ended March 31, 2000, the Company had a net loss of
($664,266). For the period from inception (1996) to March 31, 1999, the Company
had a net loss of ($1,176,538) on operations. The Company expects losses on
operations to continue until such time as cash flowing operations may be
developed.
CAPITAL RESOURCES AND LIQUIDITY
The Company has some cash on hand to fund operations. The Company will need
to either receive payment on its receivables or borrow money or make private
placements of its stock to fund operations. The Company has no assurance that it
will accomplish any of these. The Company has no other capital resources from
which to fund operations.
The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities. In general, because the Company's oil
and gas reserves are depleted by production, the success of its business
strategy is dependent upon a continuous acquisition and exploration and
development program.
The domestic spot price for crude oil has ranged from $10.00 to $40.00
per barrel over the past ten years. To the extent that crude oil prices continue
fluctuating in this manner, the Company expects material fluctuations in
revenues from quarter to quarter which, in turn, could adversely affect the
Company's ability to timely service its debt to its principal banks and fund its
ongoing operations and could, under certain circumstances, require a write-down
of the book value of the Company's oil and gas reserves.
28
<PAGE>
Since the Company is engaged in the business of acquiring producing oil
and gas properties, from time to time it acquires certain non-strategic and
marginal properties in some of its purchases. A portion of the Company's
on-going profitability may be related to the disposition of these non-strategic
properties in the future. In most cases the revenue from these properties will
be insignificant and in many cases not exceed the lease operating expense.
CAPITAL EXPENDITURES. The timing of most of the Company's capital
expenditures is discretionary. Currently there are no material long-term
commitments associated with the Company's capital expenditure plans.
Consequently, the Company has a significant degree of flexibility to adjust the
level of such expenditures as circumstances warrant. The Company primarily uses
internally generated cash flow and proceeds from the sale of oil and gas
properties to fund capital expenditures, other than significant acquisitions,
and to fund its working capital needs. If the Company's internally generated
cash flows should be insufficient to meet its debt service or other obligations,
the Company may reduce the level of discretionary capital expenditures or
increase the sale of non-strategic oil and gas properties in order to meet such
obligations. The level of the Company's capital expenditures will vary in future
periods depending on energy market conditions and other related economic
factors. The Company anticipates that its cash flow will be sufficient to fund
its operations and debt service at their current levels for the next year.
Substantially all of the Company's capital expenditures have been made
to acquire oil and gas properties. During the year ended December 31, 1997, the
Company completed, through a joint venture entity, Crude Oil Recovery, the
acquisition of four oil and gas properties for a cost of approximately $160,000.
Pursuant to the joint venture agreement, the Company has a 49% equity interest
in these four leases and operates them on behalf of Crude Oil Recovery.
During the year ended December 31, 1997, the Company did not acquire
any additional oil and gas properties. During the year ended December 31, 1998,
the Company completed eleven acquisitions, for cash, of oil and gas properties
for a cost of approximately $104,250. The Company acquired another oil and gas
property for a total cost of $250,000. The Company has paid $16,000 cash towards
this acquisition and the remaining $240,000 is payable on or before September
2000. During the period ended March 31, 2000, the Company completed two
acquisitions of oil and gas properties for a cost of $59,250.
In addition, during the period ended March 31, 2000, the Company paid
total consideration of $5,500 for an option to acquire approximately 1,020 acres
of oil and gas properties. In order to exercise the option, and acquire the
property in full, the Company must begin production on these properties by March
2001. The Company paid an additional $800 for the option to purchase, for a
total price of $20,000, four additional properties. The option to purchase these
four additional properties expires on March 2001.
The Company's strategy is to continue to expand its reserve base
principally through acquisitions of producing oil and gas properties. As a
result, it is likely that capital expenditures will exceed cash provided by
operating activities in years where significant growth occurs in the Company's
oil and gas reserve base. In such cases, additional external financing will be
required.
29
<PAGE>
The Company intends to continue its practice of reserve replacement and
growth through the acquisition of producing oil and gas properties, although at
this time it is unable to predict the number and size of such acquisitions, if
any, which will be completed. The Company's ability to finance its oil and gas
acquisitions is determined by its cash flow from operations and available
sources of debt and equity financing.
As of March 31, 2000, the Company had a working capital of $137,000 in
cash. During the year ended March 31, 2000 the Company experienced negative cash
flow of $742,266 primarily as a result of operations costs, equipment purchases,
and contract services for an oil field it has been working over. After March 31,
2000 the Company completed a private placement of shares of its common stock for
total proceeds of $200,000 which the Company used to fund the acquisition of
Cypress Capital, Inc.
SEASONALITY
The results of operations of the Company are somewhat seasonal due to
seasonal fluctuations in the price for crude oil and natural gas. Recently,
crude oil prices have been generally higher in the third calendar quarter and
natural gas prices have been generally higher in the first calendar quarter. Due
to these seasonal fluctuations, results of operations for individual quarterly
periods may not be indicative of results, which may be realized on an annual
basis.
INFLATION AND PRICES
In recent years, inflation has not had a significant impact on the
Company's operations or financial condition. The generally downward pressure on
oil and gas prices during most of such periods has been accompanied by a
corresponding downward pressure on costs incurred to acquire, develop and
operate oil and gas properties as well as the costs of drilling and completing
wells on properties.
30
<PAGE>
OIL AND GAS PROPERTIES
All of the Company's oil and gas properties, reserves and activities
are located onshore in the continental United States in the states of
California, Kansas and Oklahoma. There are no quantities of oil or gas produced
by the Company which are subject to long-term supply or similar agreements with
foreign governmental authorities.
OIL AND GAS RESERVES. Columbia Engineering ("Columbia"), an independent
petroleum engineering consulting firm, has made estimates of certain of the
Company's oil reserves as of August 26, 1999. Columbia's report covers the
estimated present value of future net cash flows before income taxes (discounted
at 10%) attributable to certain of the Company's proved developed reserves, as
well as its proved undeveloped reserves and estimated future net cash flows from
such reserves.
The quantities of the Company's proved reserves of oil presented below
include only those amounts, which the Company reasonably expects to recover in
the future from known oil and gas reservoirs under existing economic and
operating conditions. Proved developed reserves are limited to those quantities
which are recoverable commercially at current prices and costs, under existing
regulatory practices and with existing technology. Accordingly, any changes in
prices, operating and development costs, regulations, technology or other
factors could significantly increase or decrease estimates of the Company's
proved developed reserves. The Company's proved undeveloped reserves include
only those quantities which the Company reasonably expects to recover from the
drilling of new wells based on geological evidence from offsetting wells. The
risks of recovering these reserves are higher from both geological and
mechanical perspectives than the risks of recovering proved developed reserves.
Set forth below are estimates of the Company's net proved reserves and
proved developed reserves and the estimated future net revenues from such
reserves and the present value thereof based upon the standardized measure of
discounted future net cash flows relating to proved oil reserves in accordance
with the provisions of Statement of Financial Accounting Standards No. 69.
"Disclosures about Oil and Gas Producing Activities." Estimated future net cash
flows from proved reserves are determined by using estimated quantities of
proved reserves and the periods in which they are expected to be developed and
produced based on economic conditions at the date of the report. The estimated
future production is priced at current prices at the date of the report. The
resulting estimated future cash inflows are then reduced by estimated future
costs to develop and produce reserves based on cost levels at the date of the
report. No deduction has been made for depletion, depreciation or income taxes
or for indirect costs, such as general corporate overhead.
Present values were computed by discounting future net revenues at 10%
per annum.
31
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth estimates of the proved oil reserves of
the Company as of August 26, 1999, for the following leases, as evaluated by
Columbia:
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS
---------------------------- -------------------------- -------------------------- ----------------------------
DEVELOPED ACREAGE OIL GAS TOTAL
(BBLS) (MCF)
GROSS NET GROSS NET GROSS NET GROSS NET
--------------- ------------ ------------- -------------- ----------- ------------ -------------- -------------
8,700 5,180 76,630,908 32,358,617 0 0 76,630,908 32,358,617
--------------- ------------ ------------- -------------- ----------- ------------ -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Leases/County/State Developed Undeveloped Total Developed Undeveloped Total
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Leonard/Lawson ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Ebert/Leonard II (1) ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Washington County 658,373 0 658,373 2,588,536 2,476,810 5,065,346
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
SW Domes ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Sand Creek ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Holcombe ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
N. Hickory Creek ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Chautaugua County ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Kansas 563,520 1,023,781 1,587,301 1,325,861 918,874 2,244,735
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
------------- 33,010 0 33,010 0 0 0
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
Total ------------- ----------- ---------- ---------- --------- ---------
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
------------- 1,254,903 1,023,781 2,278,684 3,914,397 3,395,684 7,310,081
----------------------------- -------------- ------------------ -------------- --------------- ----------------- ---------------
</TABLE>
32
<PAGE>
The following table sets forth amounts as of August 26, 1999 determined
in accordance with the requirements of the applicable accounting standards, of
the estimated future net cash flows from production and sale of the proved
reserves attributable to the Company's oil properties before income taxes and
the present value thereof. Benchmark prices used in determining the future net
cash flow estimates as of August 26, 1999 were $24.25 per barrel for oil.
AT AUGUST 26, 1999
--------------------------------
(IN THOUSANDS)
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
RESERVES RESERVES RESERVES
--------- ----------- --------
Estimated future net cash
flows from proved
reserves before income
taxes $28,701 $28,360 $57,061
Present value of estimated future net cash flows from proved reserves
before income taxes (discounted at 10%)
$16,947 $19,359 $36,306
The estimation of oil and gas reserves is a complex and subjective
process, which is subject to continued revisions as additional information
becomes available. Reserve estimates prepared by different engineers from the
same data can vary widely. Therefore, the reserve data presented herein should
not be construed as being exact. Any reserve estimate depends in part on the
quality of available data, engineering and geologic interpretation, and thus
represents only an informed professional judgment. Subsequent reservoir
performance may justify upward or downward revision of such estimate.
Estimates of the Company's proved reserves have never been filed or
included in reports to any federal authority or agency.
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see note 16 to
the company's consolidated financial statements - supplementary financial
information about oil and gas producing activities (unaudited).
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. Wells,
which are completed in more than one producing horizon, are counted as one well.
Of the gross wells reported above, nine had multiple completions.
At March 31, 2000, the company held 6,600 undeveloped acres.
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Production, unit prices and costs. The following table set forth
information with respect to production and average unit prices and costs for the
periods indicated.
YEAR ENDED JULY 31,
-----------------------
1999 1998
------- --------
PRODUCTION:
GAS (MCF) 263,123 215,956
OIL (BBLS) 56,871 38,177
AVERAGE SALES
PRICES:
GAS (PER MCF) $ 1.86 $ 1.31
OIL (PER BBL) 20.85 18.34
AVERAGE LEASE
OPERATING
COSTS PER BOE (1) 7.20 6.39
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but generally
include production taxes, lease overhead, maintenance and repair, labor and
utilities.
Drilling activity. Since its inception, the company has not drilled or
participated in the drilling of any exploratory or development wells. To the
extent the company engages in drilling activities in the future, all such
activities will be conducted with independent contractors. The company currently
owns no drilling equipment.
OFFICE FACILITIES
The Company rents approximately 2,500 square feet of office and
warehouse space in Colton, California where its executive offices are located.
The Company rents this space for $1,500.00 a month. The Company believes this
facility is adequate for its present requirements. The Company owns no material
real estate properties other than its oil and gas properties.
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OUTSTANDING STOCK OPTIONS AND RESTRICTED STOCK.
As of March 31, 2000, the Company had issued and outstanding 3,638,000
options to purchase the Company's common stock. The Company's issuances of stock
options are as follows: (a) The material terms of the stock options are
discussed below.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 25,000,000 shares
of common stock, no par value per share ("Common Stock"), and 1,000,000 shares
of Preferred Stock, no par value per share ("Preferred Stock"). As of the date
of this 8-K, the Company had 17,666,460 issued and outstanding shares of common
stock and 1,000,000 issued and outstanding shares of its preferred stock.
The following description of certain matters relating to the capital stock
of the Company is a summary and is qualified in its entirety by the provisions
of the Company's Certificate of Incorporation and Bylaws, copies of which have
been filed with the Securities and Exchange Commission as exhibits to this
Form 8-K2(g)3.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of shareholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the preferential right to receive dividends with
respect to any Preferred Stock that from time to time may be outstanding. In the
event of the dissolution, liquidation or winding up of the Company, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of all liabilities of the Company and subject to the prior distribution
rights of the holders of any Preferred Stock that may be outstanding at that
time. The holders of common stock do not have cumulative voting rights or
preemptive or other rights to acquire or subscribe for additional, unissued or
treasury shares. All outstanding shares of common stock are fully paid and
nonassessable.
PREFERRED STOCK
The Company's articles of incorporation authorize the issuance of up to
5,000,000 shares of Preferred Stock, no par value per share. The Company's Board
of Directors is vested with the authority to divide the Preferred Stock into
series and to fix and determine the relative rights and preferences of the
shares of any such series so established to the full extent permitted by the
laws of the State of California. The Board of Directors may establish, among
other things, (a) the number of shares to constitute such series and the
distinctive designations thereof; (b) the rate and preference of dividends, if
any, the time and payment of dividends, whether dividends are cumulative and the
date from which any dividend shall accrue; (c) whether shares of Preferred Stock
may be redeemed and, if so, the redemption price and the terms and conditions of
redemption; (d) the liquidation preferences payable on the Preferred Stock in
the event of involuntary or voluntary liquidation; (e) sinking fund or other
provisions, if any, for redemption or purchase of Preferred Stock; (f) the terms
and conditions by which Preferred Stock may be converted, if the Preferred Stock
of any series are issued with the privilege of conversion; (g) voting rights, if
any and; (h) any other relative rights and preferences of shares of such series,
including, without limitation, any restriction on an increase in the number of
shares in any series theretofore authorized and any limitation or restriction or
rights or powers to which shares of any future series shall be subject.
As of the date of this 8-K12(g)3, the Company had issued and outstanding
1,000,000 shares of its Preferred Stock. All of the Company's outstanding
Preferred Stock are owned by Wave Technology, Inc., and each share has super
voting rights of 10 votes per each preferred share and are not entitled to
receive any dividends.
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<PAGE>
STOCKHOLDER ACTION
Pursuant to the Company's certificate of incorporation, with respect to any
act or action required of or by the holders of the Company's common stock, the
affirmative vote of the holders of a majority of the issued and outstanding
common stock entitled to vote thereon is sufficient to authorize, affirm, ratify
or consent to such act or action, except as otherwise provided by law.
The bylaws of the Company provides that shareholders may take certain
action without the holding of a meeting by written consent or consents signed by
the holders of a majority of the outstanding shares of the capital stock of the
company entitled to vote thereon. Prompt notice of the taking of any action
without a meeting by less than unanimous consent of the stockholders will be
given to those stockholders who do not consent in writing to the action. The
purposes of this provisions are to facilitate action by stockholders and to
reduce the corporate expense associated with annual and special meetings of
stockholders. Pursuant to rules and regulations of the commission, if
stockholder action is taken by written consent, the Company will be required to
send each stockholder entitled to vote on the matter acted on, but whose consent
was not solicited, an information statement containing information substantially
similar to that which would have been contained in a proxy statement.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The Company's authorized but unissued capital stock consists of 21,691,440
shares of common stock (including 1,081,250 shares held in treasury) and
1,000,000 shares of Preferred Stock. One of the effects of the existence of
authorized but unissued capital stock may be to enable the Board of Directors to
render more difficult or to discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or otherwise, and
thereby to protect the continuity of the Company's management. If in the due
exercise of its fiduciary obligations, for example, the Board of Directors were
to determine that a takeover proposal was not in the Company's best interests,
such shares could be issued by the Board of Directors without stockholder
approval in one or more private offerings or other transactions that might
prevent or render more difficult or costly the completion of the takeover
transaction by diluting the voting or other rights of the proposed acquirer or
insurgent stockholder or stockholder group, by creating a substantial voting
block in institutional or other hands that might undertake to support the
position of the incumbent Board of Directors, by effecting an acquisition that
might complicate or preclude the takeover, or otherwise. In this regard, the
Company's Certificate of Incorporation grants the board of Directors broad power
to establish the rights and preferences of the authorized and unissued shares of
Preferred Stock, one or more series of which could be issued entitling holders
to vote separately as a class on any proposed merger or consolidation, to
convert shares of Preferred Stock into a larger number of shares of common stock
or other securities, to demand redemption at a specified price under prescribed
circumstances related to a change in control, or to exercise other rights
designed to impede a takeover. The issuance of shares of Preferred Stock
pursuant to the Board's authority described above could decrease the amount of
earnings and assets available for distribution to holders of common stock, and
adversely affect the rights and powers, including voting rights, of such holders
and may have the effect of delaying, deferring or preventing a change in control
of the Company. The Board of Directors does not currently intend to seek
stockholder approval prior to any issuance of authorized but unissued stock,
unless otherwise required by law.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Bid and ask quotations for the Company's common stock, no par value per
share, are posted on the over-the-counter bulletin board of the National
Association of Securities Dealers, Inc. From the commencement of trading on
April 1, 1998, the stock traded under the symbol, "USCR."
36
<PAGE>
The Company is aware that there is a possibility that it will become
ineligible for quotation on the Bulletin Board if the Securities and Exchange
Commission has not completed its comments with respect to this 8-K12(g)3. In
that case, the Company believes that a reasonably comparable quotation medium
will be available in the form of the "electronic pink sheets" of the National
Quotation Bureau, until such time as this Form 8-K12(g)3 has been cleared of all
comments by the Commission.
The following table sets forth the range of high ask and low bid prices for
the Company's common stock on a quarterly basis since the commencement of
trading in April 1998, as reported by the National Quotation Bureau (which
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions). The foregoing and
following information should not be taken as an indication of the existence of
an established public trading market for the Company's common stock.
COMMON STOCK
High Ask Low Bid
-------- -------
Quarter ended June 30, 1998 $3.25 $3.00
Quarter ended September 30, 1998 $2.50 $2.45
Quarter ended December 31, 1998 $3.00 $1.40
Quarter ended March 30, 1999 $1.25 $0.80
Quarter ended June 30, 1999 $1.00 $0.50
Quarter ended March 31, 2000 $1.35 $0.85
HOLDERS.
As of March 31, 2000, the approximate number of record holders of the
Company's common stock was 640. This includes brokerage firms and/or clearing
firm holding the Company's stock for their clientele (with each such brokerage
house and/or clearing house being considered as one holder). The Company
believes that the number of beneficial owners exceeds 200, however there can be
no assurance that this is accurate.
37
<PAGE>
ITEM 6. RESIGNATION AND APPOINTMENT OF OFFICERS AND DIRECTORS
The following table sets forth the executive officers and directors of the
Company.
NAME AGE POSITION
---- --- --------
Anthony K. Miller 43 President and Director
Catherine Njie, PhD 52 Secretary and Treasurer
Dr. Thomas E. Hobson 39 Director
Thomas Meeks 69 Director
ANTHONY K. MILLER. Upon the Company's incorporation in May 1996, Mr. Miller
was assigned by Wave Technology, Inc. ("Wave Tech"), where he served as Vice
President, to serve as the Company's President. Since that time, Mr. Miller has
devoted substantially all of his business time to the Company's interests. Mr.
Miller's duties include, overseeing the Company's acquisition of oil properties
by retaining licensed geologists to assist the Company's directors in analyzing
prospective wells for possible acquisition, the negotiation of oil leases with
owners and/or tribal representatives, directing the Company's efforts to
acquire, market and sell the TM-96 and TM-98 to independent and major oil
companies. As Vice-President of Wave-Tech, Mr. Miller's duties included the
development and implementation of a business plan, development and preparation
of project proposals for submission to funding sources, research and preparation
of documents and reports relating to various projects. In addition, Mr. Miller
had responsibility for the day to day management of Wave-Tech's business and its
corporate books, accounting records, banking and purchasing practices. From 1988
through 1991, Mr. Miller served in various positions for Marshall Aluminum
Products, a manufacturer of completed windows with annual revenues of
approximately $10 million. Mr. Miller's positions included asset recovery
controller, inventory planner/buyer and quality control inspector/production
supervisor. In these positions, Mr. Miller was responsible for managing an
inventory with an average value of $100,000 a month, maintaining quality control
and supervising production crews. In 1978, Mr. Miller received his Bachelor of
Arts degree in Business Administration from the California State University at
Long Beach. Mr. Miller obtained a Masters of Business Administration (MBA) from
Columbia State University in 1998 and Harrington University MBA Business Ethics
in 1999.
CATHERINE NJIE, PHD. Ms. Njie has been the Company's secretary/treasurer of
the Company since its inception. Ms. Njie is currently on special assignment
from Mercer University to the Mayor of Macon, Georgia where she serves as the
Executive Director of the Mayor's Youth Violence Prevention Task Force.
DR. THOMAS E. HOBSON. Mr. Hobson has been a director of the Company since
its inception. Mr. Hobson has also served on the Board of Directors for U.S.
Crude, Ltd. since its incorporation in 1996. Currently, Mr. Hobson is the
Director of Consumer Products and Services for Sempra Energy Solutions
("Sempra"), the retail marketing arm of Sempra Energy, a Fortune 500 energy
services holding company with $10 billion in assets. At Sempra, Mr. Hobson has
overall responsibility for all of Sempra's consumer-related in-home products and
services. Previously, as Director of Operations for Sempra, Mr. Hobson oversaw
the development and enhancement of Sempra's retail operations infrastructure and
managed a staff of 25 people and controlled an annual operating budget of $1.2
million. Prior to joining Sempra, Mr. Hobson was with the Southern California
Gas Company ("SCGC") from 1981 to 1996. Mr. Hobson started at the SCGC as an
Energy Sales Engineer and steadily advanced over the years through a series of
progressively responsible assignments including Industrial Market Specialist,
Research Project Engineer, Market Development Project Engineer, Customer Service
Manager and Special Project Manager. As a Special Project Manager, Mr. Hobson
was responsible for identifying and assessing the value and ability of SCGC's
assets and resources to support new products and services in the era of energy
deregulation. In this capacity, Mr. Hobson headed a team whose mission it was to
generate revenue through the leveraging of SCGC's assets and resources. In 1981,
Mr. Hobson received his Bachelor of Science Degree in Civil Engineering from
United States International University and his Juris Doctorate degree in 1995
from the Southwestern University School of Law. In addition, Mr. Hobson attended
University of Michigan's Executive Education Training in April 1996, studying
Business-to-Business Marketing Strategies.
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<PAGE>
THOMAS MEEKS. Mr. Meeks is the inventor of the Company's steam generating
technology and currently serves as a consultant and director of the Company. Mr.
Meeks is an inventor with thirty years' experience inventing oil recovery
technologies. From 1976 to 1983, Mr. Meeks served as Vice-President of
Engineering for M.C.R. Oil Recovery International, Inc. ("MCR"), a company
formed for the purpose of developing a prototype down-hole steam generator. In
January 1980, MCR entered into a joint venture with Sullair Corporation, a
compressor company based in Indiana. From 1980 to 1982, Mr. Meeks served as the
Vice-President of Engineering for Sullair Petrosteam ("Petrosteam"), the entity
formed by the joint venture for the purpose of developing and surface and
down-hole testing of Mr. Meeks' indirect low pressure down-hole steam generator,
a 15,000,000 BTU unit. In November 1980, Petrosteam, under Mr. Meeks' direction,
successfully completed and tested the "world's first" down-hole steam generator.
From 1982 to 1983, Mr. Meeks served as a technical consultant to Petrosteam. In
1983, Mr. Meeks became Vice-President of Engineering for Pharoahs Industries of
Beverly Hills, California, a company formed to research and develop
petrochemical and other energy related technologies. In February 1984, Pharoahs
Industries was acquired by King Solomon Resources of Vancouver, British
Columbia, a publicly-traded Canadian company. Mr. Meeks served as Vice President
of Engineering for King Solomon until 1986, when he formed Wave Technology, Inc.
("Wave-Tech"). Since 1986, Mr. Meeks has served as President and Director of
Engineering for Wave Tech, a research and development company focusing on energy
related technologies for use in the oil industry to assist in the recovery of
heavy oil and tar sands. Mr. Meeks has been awarded over 10 patents in the
United States and in over 108 countries.
The Company's Directors will serve until the next annual meeting of
shareholders and until their successors are elected and qualified. Officers are
elected at the annual meeting of the Board of Directors following the annual
meeting of shareholders and serve at the discretion of the Board. Directors of
the Company do not receive any compensation for serving in their capacity as
directors, but are reimbursed for out-of-pocket expenses incurred in attending
meetings.
Pursuant to the Company's Articles of Incorporation, the Board of
Directors must consist of at least 3 directors, unless changed as provided in
the Company's Bylaws. Under the Bylaws, the number of directors may be changed
by a resolution of the Board or the stockholders. Currently, there are three
directors on the Board.
The following table sets forth the compensation paid, for the years
shown, by the Company to Anthony Miller, Chief Executive Officer and President,
who was the only person compensated as an executive officer during the last two
completed calendar years:
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE OF EXECUTIVES
----------------------------------------
Annual Compensation Awards
<S> <C> <C> <C> <C> <C> <C>
Name and Year Salary Bonus Other Annual Restricted Securities
Principal ($) ($) Compensation Stock Underlying
Position ($) Award(s) Options/
ANTHONY MILLER, 1996 $104,000(3) $-0- $-0- 125,000 $-0-
PRESIDENT 1997 $104,000(4) $-0- $-0- 125,000 $-0-
1998 $104,000 $-0- $-0- $-0-
(1) The compensation for Mr. Miller, the President and Chief Executive Officer,
for the calendar years ending December 31, 1996 and 1997 was a flat salary based
on the stage of development of the Company.
(2) Mr. Miller was granted certain stock options in 1997, which are included in
this table. See also Table entitled "Option Grants in Last Fiscal Year." The
table includes options to purchase (a) 250,000 shares of the Company's Common
Stock for $1.00 per share. These stock grants were granted under federal and
state securities law exemptions under the Company's Stock Option Plan.
(3) Although Mr. Miller was entitled to receive a salary of $104,000, he
actually received only $30,000 in 1996. The remaining $74,000 was deferred.
(4) Although Mr. Miller was entitled to receive a salary of $104,000, he
actually received only $60,000 in 1997. The remaining $44,000 was deferred.
</TABLE>
COMPENSATION ELEMENTS. Mr. Miller's salary shown on the Summary
Compensation Table above was determined pursuant to the Miller Employment
Agreement. It is expected that the Board will establish salaries each fiscal
year at a level intended to be competitive with the average salaries of
executive officers in comparable companies with comparable financial results. At
the end of each year, the Board of Directors will establish a salary and a bonus
range for each executive officer for the following year.
EMPLOYEE BENEFITS. The Company currently does not maintain any medical
plan, dental plan, disability plan, or life insurance for its employees.
However, the Company expects to implement some or all of such employee benefits
plans in the future.
COMPENSATION OF THOMAS MEEKS
Since its inception through the present, the Company has granted Thomas
Meeks options to purchase an aggregate amount of 1,000,000 shares of its Common
Stock at an exercise price of $1.00 per share as consideration for his
consulting services to the Company, provided pursuant to his consulting
agreement (the "Meeks Agreement") with the Company. The Meeks Agreement has a
three year term and provides that on January 1 of each year of the agreement's
term he shall automatically become vested with the right to purchase two hundred
and fifty thousand (250,000) shares of the Company's stock at an exercise price
of $1.00 per share. Mr. Meeks' options vest immediately in the absence any
affirmative action by the Company's Directors as provided for in the agreement.
The agreement will expire, on its own terms on December 31, 1999. Under the
agreement, Mr. Meeks has the opportunity to earn the right to purchase up to
1,000,000 shares of the Company's common stock in 1998, the final year of his
agreement.
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<PAGE>
EMPLOYMENT AGREEMENTS
MILLER EMPLOYMENT AGREEMENT.
IN GENERAL. The Company and Mr. Miller entered into an Employment Agreement
(the "Miller Employment Agreement"), dated effective January 1, 1997 (the
"Effective Date"), pursuant to which Mr. Miller agrees to serve as the President
and Chief Officer of the Company. The term of Mr. Miller's employment under the
Miller Employment Agreement commenced on the Effective Date and will continue
until five years therefrom, unless earlier terminated in accordance with the
terms of the Miller Employment Agreement; provided, however, that the term of
Mr. Miller's employment will be automatically extended without further action of
either party for additional one year periods unless written notice of either
party's intention not to extend has been given to the other party at least six
months prior to the expiration of the then effective term (the "Employment
Term").
Pursuant to the Miller Employment Agreement, Mr. Miller will serve as
President of the Company during the Employment Term. He will perform such
executive-level employment duties as President of the Company as the Board of
Directors shall assign to him from time to time. During the term of the Miller
Employment Agreement, the Company has agreed to pay Mr. Miller a base salary
("Base Salary") at the minimum annual rate of $104,000. Pursuant to the Miller
Employment Agreement, the Company has only paid the following amounts to Mr.
Miller: 1996 - $30,000.00; 1997 - $60,000.00; and through July 31, 1998 -
$34,000. Mr. Miller is also entitled to participate in any annual incentive
compensation plans and/or long-term incentive compensation plans adopted by the
Company's Board of Directors said plans may include stock bonuses, stock
options, and/or restricted stock. Said bonuses shall be granted on a year to
year basis, at the discretion of the Company's Board of Directors, and provide
Mr. Miller with an annual bonus opportunity of not less than 50% of his Base
Salary at minimum and 120% of his Base Salary at a maximum. To date, the Company
has not made any bonus payments to Mr. Miller. In addition, Mr. Miller is
entitled to participate in all employee pension and welfare benefit plans and
programs made available to the Company's senior level executives as a group or
to its employees generally, as such plans or programs may be in effect from time
to time (the "Benefit Coverages"), including, without limitation, pension,
profit sharing, savings and other retirement plans or programs, medical, dental,
hospitalization, short-term and long-term disability and life insurance plans,
accidental death and dismemberment protection and travel accident insurance. Mr.
Miller will also be entitled to obtain reimbursement of expenses related to his
employment by the Company as well as vacation, holidays and other perquisites in
accordance with the Company's normal personnel policies for Company officers.
Pursuant to the Miller Employment Agreement, Mr. Miller is required to
devote substantially all of his business time, attention and energy to his
duties and responsibilities under the Miller Employment Agreement. Mr. Miller is
entitled to participate in additional business endeavors as long as they do not
interfere with the performance of Mr. Miller's duties under the Miller
Employment Agreement.
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<PAGE>
PAYMENTS UPON TERMINATION OF EMPLOYMENT.
A. DEATH AND DISABILITY. Under the Miller Employment Agreement, upon Mr.
Miller's disability, the Company would be permitted to terminate Mr. Miller's
employment upon thirty days written notice to Mr. Miller. In the case of
disability, the date which is thirty days after the date of delivery of such
written notice, or in the case of death, the date of Mr. Miller's death, shall
be referred to in this paragraph as the "Termination Date." Upon the death or
disability (as defined in this in this paragraph) of Mr. Miller during the term
of the Miller Employment Agreement, Mr. Miller will be entitled to: (a) a Pro
Rata Share (as defined below) of any Bonus and Bonus and Annual Bonus for the
year in which the death or, in the case of disability, the Termination Date,
occurs; (b) any portion of his Base Salary, plus other benefits or compensation
listed above, which are accrued and unpaid (with the Base Salary payable in the
case of disability to be reduced by the amount of any disability payments
received by Mr. Miller pursuant to the Benefit Coverages, and the Base Salary
payable in the case of death equal to the installment of his Base Salary for the
month in which Mr. Miller dies); (c) the continued right to exercise any vested
stock options for a period of one year following the Termination Date, and (d)
any other benefits in accordance with the applicable plans and programs of the
Company. If disability insurance is provided by the company, Mr. Miller would be
entitled to elect to continue the disability insurance, at Mr. Miller's expense,
following termination of the Miller Employment Agreement for any reason. In
addition, if Mr. Miller's employment is terminated due to his disability, Mr.
Miller will also be entitled to continue to participate, through the Termination
date, in those Benefit Coverages in which Mr. Miller was participating, to the
extent the Benefit Coverages permit a former employee to participate. The Miller
Employment Agreement defines "disability" to occur when Mr. Miller is unable to
substantially perform his duties and responsibilities under the Miller
Employment Agreement to the full extent required by the Board by reason of
illness, injury or incapacity for 6 months in the aggregate during any 12-month
period. In addition, the Miller Employment Agreement requires that the company
acquire and maintain a policy of life insurance in the face amount equal to 12
months' Base Salary covering the life of Mr. Miller, the proceeds of which would
be payable to Mr. Miller's spouse, or such other person designated by Mr.
Miller, on Mr. Miller's death. For purposes of the Miller Employment Agreement,
"Pro Rata Share" is determined by dividing (1) the total number of days of the
year in which the Termination Date occurs through the Termination Date by (2)
the total number of days in such year.
B. TERMINATION FOR CAUSE. Mr. Miller's employment may be terminated immediately
"for cause" (which is defined as (a) the willful and continued failure of Mr.
Miller to substantially perform his duties with the Company, (b) conviction of a
felony involving dishonesty, theft, misappropriation, or fraud, (c) material
breach of the Miller Employment Agreement, (d) failure to carry out any
reasonable lawful instructions of the company's Board of Directors which are in
the Company's best interests, or (e) engaging in conduct which materially
threatens or impairs the Company's business. If Mr. Miller is terminated "for
cause," he would be entitled to his accrued and unpaid Base Salary but he would
not be entitled to any Bonus or Annual Bonus for the year in which such
termination "for cause" occurs.
C. NO TERMINATION "WITHOUT CAUSE". The Miller Employment Agreement does not
allow the Company to dismiss or terminate or cause the termination of the
services of Mr. Miller for any other reason other than as a result of death or
disability, for cause, or as a result of a failure to satisfy licensing
requirements as set forth in the paragraphs above. The Miller Employment
Agreement provides that in the event of any breach or threatened breach of the
Miller Employment Agreement by the Company, in addition to all other remedies
available at law or in equity, the Company agrees that Mr. Miller will be
entitled to the remedies of the specific performance and injunctive relief,
mandatory or prohibitory, temporary, preliminary or permanent.
42
<PAGE>
D. TERMINATION BY MR. MILLER FOR GOOD REASON. The Miller Employment Agreement
provides that Mr. Miller may terminate his employment with the Company at any
time for "good reason" (as defined below) upon 60 days' written notice, in which
case Mr. Miller would be relieved of all duties and responsibilities to the
Company upon the expiration of such 60 -day period (the "Termination Date") and,
contingent upon the Company's and Mr. Miller's signing the Release, the Company
would be required to pay Mr. Miller the following: (a) Mr. Miller's Base Salary
through the Termination Date; (b) an additional amount equal to 12 months of
Base Salary; (c) a Pro Rata Share of any Bonus and Annual Bonus to which Mr.
Miller would otherwise be entitled for the year in which such termination occurs
(collectively, the "Pro Rata Bonus"); (d) all other benefits and amounts to
which Mr. Miller is entitled or would be entitled under the Miller Employment
Agreement (but for the acceleration of the Termination Date) through the sixth
monthly anniversary date following the Termination Date; and (e) effective as
the Termination Date, the immediate vesting of all of Mr. Miller's stock option
shares. The Miller Employment Agreement requires that the Pro Rata Bonus be paid
no later than 60 days following the close of the Company's fiscal year in which
Mr. Miller's employment was terminated. The Miller Employment Agreement defines
"good reason" as (a) an adverse change in Mr. Miller's authority, duties,
responsibilities or reporting lines as specified in the Miller Employment
Agreement; (b) a reduction by the Company in Mr. Miller's Base Salary then in
effect, or a reduction in Mr. Miller's aggregate annualized compensation and
benefits opportunities; (c) the relocation of Mr. Miller's principal place of
employment to a location away from his principal place of employment; (d) the
failure by the Company to pay Mr. Miller any portion of an installment of
deferred compensation program of the County within 30 days of the date such
compensation is due; (e) the failure of the Company to obtain a satisfactory
agreement from any successor of the Company requiring such successor to assume
and agree to perform the Company's obligations under the Miller Employment
Agreement; and (f) the failure by the Company to comply with any material
provision of the Miller Employment Agreement.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIALS, & EXHIBITS
Financial Statements - (1)Audited through March 31, 2000
(2)Unaudited Pro Forma Consolidated Financial
Statements through March 31, 2000
Exhibits - 2.1 - Articles of Merger
2.2 - Plan of Merger
2.3 - Certificate of Ownership
2.4 - Certificate of Name Change
3.1 - Articles of Incorporation of U.S. Crude, Ltd.
3.2 - Bylaws of U.S. Crude, Ltd.
10.1 - Share Purchase Agreement
43
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 1, 2000 U.S. Crude, Ltd.
By:/s/Anthony Miller
President
44
<PAGE>
U.S. CRUDE, LTD.
(A Development Stage Company)
CERTIFIED FINANCIAL STATEMENTS
May 22, 1996 (inception) through March 31, 2000
Kenneth E. Walsh
Certified Public Accountant
<PAGE>
U.S. CRUDE, LTD. & SUBSIDIARY
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountant F-1
Balance Sheets as of March 31, 2000 and 1999 F-2
Statement of Operations for the period from
May 22, 1996 (inception) through March 31,
2000, and the year ended March 31, 2000 F-3
Statement of Stockholders' Deficit for the
period from May 22, 1996 (inception) through
March 31, 2000 and the year ended March 31, 2000 F-4
Statements of Cash Flows for the period from
May 22, 1996 (inception) through March 31,
2000, and the year ended March 31, 2000 F-5
Notes to Annual Financial Statements F-6-F-9
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors
U.S. Crude LTD. & Subsidiary
I have audited the accompanying Balance Sheets of U.S. Crude LTD. & Subsidiary
(a California corporation in the development stage) as of March 31, 2000 and
1999 and the related Statements of operations, Stockholders' deficit and Cash
Flows for the period from May 22, 1996 (inception) to March 31, 1999, and the
year ended March 31, 2000. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform an 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.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of U.S Crude LTD. & Subsidiary as of
March 31, 2000 and 1999, and the results of their operations and cash flows for
the period from May 22, 1996 (inception) to March 31, 1998 and the year ended
March 31, 2000 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company is a development stage company, with limited capital
resources, and has incurred accumulated losses of $1,226,538 as of March 31,
2000. This raises "substantial doubt" about the Company's ability to continue as
a going concern. Management's plan in regard to this matter is described in Note
2.
/s/Kenneth E. Walsh
Kenneth E. Walsh
Certified Public Accountant
April 27, 2000
Torrance, CA
F-1
<PAGE>
U.S. Crude, Ltd. & Subsidiary
(A Development Stage Company)
BALANCE SHEETS
ASSETS March 31,
2000 1999
CURRENT ASSETS ---------- ---------
Cash (Note 1) $ 114,219 $ 265,675
Accounts Receivable 500,000 500,000
---------- ----------
Total current assets 614,219 765,675
PROPERTY AND EQUIPMENT, at cost: (Note 1)
Machinery and equipment 1,117,323 1,041,757
Truck 37,500 17,600
---------- ----------
1,154,823 1,059,357
Less accumulated depreciation (120,196) (35,196)
---------- ----------
Total Property and Equipment 1,034,627 1,024,161
OTHER ASSETS
License Agreement 416,000 416,000
Prepaid Production costs 1,431,771 933,134
Less depletion allowance (96,801) (23,343)
---------- ----------
Total Other Assets 1,750,970 1,325,791
TOTAL ASSETS $3,399,816 $3,115,627
---------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 450,000 $450,000
Note Payable (Note 7) 0 400,000
---------- ----------
Total current liabilities 450,000 850,000
---------- ----------
LONG TERM LIABILITIES
Note payable - Associates (Note ___) 38,662 0
Note payable - Kern County oil lease (Note ___) 240,000 0
---------- ----------
Total long term liabilities 278,662 0
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000
shares authorized, 1,000,000 shares
issued and outstanding at March 31,
1998 and 1999 100,000 100,000
Common stock, no par value, 20,000,000
shares authorized, 19,568,181 and
11,592,011 shares issued and outstanding
at March 31, 2000 and 1999 respectfully 3,697,692 2,628,842
Deficit accumulated - development stage (1,226,538) (563,215)
---------- -----------
Total Stockholders' Equity 2,571,154 2,165,627
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,399,816 $3,115,627
---------- ----------
See Notes to Financial Statements
F-2
<PAGE>
U.S. CRUDE, LTD. & SUBSIDIARY
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Period from
May 22, 1996
(inception)
Year Ended through
March 31, 2000 March 31, 2000
-------------- --------------
INCOME:
Sales-Equipment $ 0 $500,000
Sales-oil 73,458 23,343
-------------- --------------
Total Income 73,458 523,343
-------------- ---------------
COST OF GOODS SOLD:
Purchases-Equipment 0 450,000
Depletion (Prepaid Production costs) 73,458 23,343
-------------- ---------------
Total Cost of Goods Sold 73,458 473,343
-------------- ---------------
GROSS PROFIT 0 50,000
EXPENSES:
Depreciation 85,000 120,196
General and Administrative 189,849 315,239
Contract Services 246,572 375,604
Promotion & Public Relations 62,101 315,056
Telephone, utilities & rents 63,368 84,768
Travel & Entertainment 9,336 53,371
Taxes and License 8,040 24,369
-------------- ---------------
TOTAL EXPENSES 644,266 1,238,603
-------------- ---------------
LOSS FROM OPERATIONS (664,266) (1,238,603)
OTHER INCOME:
Interest Income 943 12,065
-------------- ---------------
NET LOSS $ (663,323) $(1,226,538)
-------------- ---------------
NET LOSS PER SHARE (.0294) (.1214)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,555,106 4,640,000
See Notes to Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
U.S. CRUDE, LTD. & SUBSIDIARY
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Common Stock Preferred Stock Accumulated
Shares Amounts Shares Amounts (Deficit)
---------- ---------- ---------- --------- -----------
Balance May 22, 1996 0 $ 0 0 $ 0 0
Shares issued for Cash 3,962,260 1,191,806 0 0 0
Shares issued for Licensing Rights 3,160,000 316,000 1,000,000 100,000
Net Loss-Year Ended March 31, 1998 ( 253,178)
-----------------------------------------------------------------------
Balance, March 31, 1998 7,122,260 $1,507,806 1,000,000 $100,000 $( 253,178)
Shares issued for cash 731,751 373,804
Purchase of U.S. Thermo Tech. Inc. 3,738,000 847,232
Net Loss-Year Ended March 31, 1999 ( 310,037)
-----------------------------------------------------------------------
Balance March 31, 1999 11,592,011 2,728,842 1,000,000 $100,000 $( 563,215)
Shares issued for cash 6,976,170 568,850
Shares issued in exchange for lowering debt 1,000,000 400,000
Net loss - Year ended March 31, 2000 ( 663,323)
-----------------------------------------------------------------------
Balance March 31, 2000 19,568,181 $3,697,692 1,000,000 $100,000 $(1,226,538)
See notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. CRUDE, LTD. & SUBSIDIARY
(A Development Stage Company)
STATEMENT OF CASH FLOWS
<S> <C> <C>
Period from
May 22, 1996
Year Ended (inception) through
March 31, 2000 March 31, 2000
----------- ------------
OPERATING ACTIVITIES:
Net Loss $( 663,323) $(1,226,538)
Reconciliation of net loss
to net cash used in
operating activities:
Depreciation 85,000 120,196
Depletion 73,458 96,801
Changes in operating assets and liabilities:
Receivables 0 (500,000)
Prepaid Production costs ( 498,637) (1,431,771)
License Agreements 0 (416,000)
Accounts Payable 0 450,000
----------- -------------
Net cash used in operating activities (1,003,502) (2,907,312)
INVESTING ACTIVITIES:
Acquisition of property and equipment ( 95,466) (1,154,823)
----------- -------------
Net cash used in investing activities ( 95,466) (1,154,823)
FINANCING ACTIVITIES:
Purchase of oil leases by loans 292,000 292,000
Issuance of stock for license agreement 0 416,000
Issuance of stock for cash 1,068,850 3,481,692
Less payments on debt ( 413,338) (13,338)
---------- -------------
Net cash used in financing activities 947,512 4,176,354
---------- -------------
NET INCREASE (DECREASE) IN CASH ( 151,456) 114,219
CASH AT BEGINNING OF PERIOD 265,675 0
---------- -------------
CASH AT END OF PERIOD $ 114,219 $ 114,219
---------- -------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
U.S. CRUDE LTD. & SUBSIDIARY
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT POLICIES:
---------------------------------------------
U.S. CRUDE LTD. & SUBSIDIARY ("The Company), was incorporated in California on
May 22, 1996. It is in the development stage, (as defined by Financial
Accounting Standards Board Statement No. 7). The Company's primary business is
to utilize its proprietary portable steam generator technology to stimulate oil
production in marginally producing wells across America. The Company on July 27,
1998 entered into a merger with U.S. Thermo-Tech, Inc. U.S. Thermo- Tech Inc.
was incorporated on May 8, 1997 and is also in the development stage. U.S.
Thermo-Tech, Inc.'s primary business is to utilize its patent pending thermal
gas injector system (the "TM-98") to rekindle marginally producing oil wells
across America. This merger was accounted for using the pooling of interest
method of accounting. This method combines the income statements from the
beginning of the year of acquisition.
Since inception, the Company's efforts have been devoted to the development of
its product and raising capital. The Company began oil production in January of
1999. Accordingly, the Company is in the development stage and the accompanying
financial statements represent those of a development stage enterprise. As such
the Company as of March 31, 2000 has incurred net operating losses since
inception of $1,226,538 and does not have sufficient working capital to fund its
planned operations during the next twelve months. Although sufficient funds are
available to meet general and administrative expenses, additional funding will
be required to complete the Company's expansion plans. These circumstances raise
substantial doubt about the Company's ability to continue as a going concern. In
order to meet the Company's continued financial needs, management of the Company
intends to raise working capital through the sale of common stock or other
financings.
The Company has also acquired a 49% interest in 54 oil producing properties
encompassing 960 acres in the state of Oklahoma. The wells were acquired through
a joint venture with a company called Crude Oil Recovery, a California
Corporation. All revenue produced through this venture has been returned back
into oil producing property to build up the infrastructure of the property. The
acquired oil property has an estimated 2.7 million barrels of proven reserves.
The Company's stock-tank-barrels (recovered oil) is estimated at 1.6 million
barrels or 60% of the oil in place.
The Company has received exclusive rights to develop, market, sell and utilize
the TM-96, TM-98 as well as three other innovative steam qenerating technologies
from Wave technology Inc. The Company gave Wave technology 3,160,000 shares of
the Company's common stock and 1,000,000 shares of the Company's Preferred stock
in return for the rights.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
F-6
<PAGE>
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost. Maintenance, repairs and minor
renewals are expensed as incurred. When assets are retired, or otherwise
disposed of, the related costs and accumulated depreciation are removed from the
respective accounts and any gain or loss on disposition is reflected in the
statement of operations.
Depreciation is calculated using the straight-line method, for the Machinery and
Equipment and ACRS for the Truck, over the following estimated useful lives;
Machinery and equipment 7 years
Truck 5 years
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March of 1995, the Financial Accounting Standards Board issued standard No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be disposed of". The Company has adopted standard No. 121 as of January 1,
1996. The effect on the financial statements of adopting standard No. 121 was
not material.
In October 1995, the Financial Accounting Standards Board issued standard No.
123, "Accounting for Stock-Based Compensation". The accounting or disclosure
requirements of this statement are effective for the Company's fiscal year-end
1996 financial statements. The Company has adopted standard No. 123 as of
January 1, 1996. The effect on the financial statements of adopting standard No.
123 was not material.
In February 1997 SFAS No 128. "Earnings per share" was issued effective for
periods ending after December 15, 1997. There is no impact on the Company's
financial statements from adoption of SFAS No. 128.
RESEARCH AND DEVELOPMENT OF OIL PROPERTIES
The Company follows the full cost method to acc6unt for its oil and gas research
and Development costs. Under this method, all costs incurred which are directly
related to Research and development of its oil properties are capitalized and
subject to depletion. Depletable costs also include estimates of future
development costs of proven reserves.
NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of shares
outstanding during the periods presented. The Company had stock equivalents at
March 31, 2000 which are listed in note 6. These stock equivalents effect the
earnings per share.
ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION
The presentation 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 the 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.
F-7
<PAGE>
DEPLETION
Because of the difficulty in estimating the Depletable oil reserves in the
ground the Company has adopted the percentage depletion method. This method uses
a flat percentage to deplete the capitalized costs of research, drilling and oil
production. This method is limited to 100% of the taxable income before the
depletion allowance.
REVENUE RECOGNITION
The Company is on an accrual basis: thus all sales are booked when earned and
all expenses are expensed when incurred. The Company only recently began
drilling and selling oil so the majority of the sales came from a one time sale
of a TM-96 machine for $500,000 or interest income.
NOTE 2 - INCOME TAXES:
------------
Deferred taxes relate to differences between the basis of assets and liabilities
for financial and tax reporting purposes. Deferred tax assets and liabilities
represent the future tax consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Deferred taxes also are recognized for net operating losses that are available
to offset future taxable income. Deferred tax assets are reduced by a valuation
allowance if it is more likely than not that some or all of the deferred tax
assets will not be realized.
At March 31, 1999 the Company had net operating loss carryforwards totaling
approximately $1,226,538 that may be offset against future taxable income. The
Company's net operating losses begin to expire in the year 2003. Breakdown of
the Company's deferred taxes is as follows:
MARCH 31, 2000
Accelerated Depreciation $ (10,250)
Deferred Expenses 1,408,428
Net Operating loss Caryforwards 1,226,538
-----------------
2,624,716
Less valuation allowance 2,624,716
-----------------
Net deferred tax asset 0
NOTE 3 - STOCKHOLDERS' EOUITY:
--------------------
The Company is authorized to issue up to 20,000,000 shares of common stock, no
par value. Each holder of common stock is entitled to one vote for each Share
held on all mattes properly submitted to the shareholders for their vote.
Cumulative voting is not authorized. At March 31, 1999 11,592,011 shares of
common stock are outstanding.
The Company is authorized to issue up to 5,000,000 shares of Preferred Stock, no
par value. At March 31, 2000 100,000 shares of preferred shares were owned by
Wave Tech Inc. These Preferred shares have super voting rights of 10 votes per
each share.
As previously discussed in note 1, The Company merged with U.S. Thermo-Tech,
Inc. on July 27, 1998. In this Merger the remaining Company (U.S. Crude Ltd.
issued a half share of its stock for each share of U.S. Thermal-Tech, Inc.
share. The result was that 3,738,000 shares of the company's shock is now owned
by U.S. Thermo-Tech Inc. (now a 100% owned subsidiary).
F-8
<PAGE>
NOTE 4 - STOCK OPTION PLAN:
-----------------
The Company currently has approximately 3,300,000 outstanding option to purchase
the Company's common stock. Of these outstanding shares 2,650,000 are owned by
directors and officers of the company and the remaining 988,000 options were
granted to various individuals for work they did on behalf of the company. The
options owned by the directors and officers were issued on January 01, 1997 and
can be exchanged for one share of common stock at a dollar a share. These
options must be exercised by December 31, 2006. The breakdown of the shares is
as follows:
Anthony Miller-President 750,000 options
Catherine Njie--Secretary 250,000 options
Thomas Meeks-Director 1,000,000 options
Thomas Hobson-Director 650,000 options
Others 988,000 options
NOTE 5 - LEASES:
------
The Company leases office and shop space in Colton, California. The lease term
is one year, with an annual renewal option for one-year periods. The company has
no lease deposit and The current Office rent is $1,000 a month.
The Company currently has 27 different lease contracts outstanding. These leases
cover 8,700 acres of land and 300 oil and natural gas wells. These leases cost
approximately $340,000 to acquire and are almost completely paid for. All of the
leases are perpetual leases (meaning they last until the oil and natural gas
dry's up and the wells are abandoned). The Company has a current certified
geology report that state these leases have approximately 76,630,908 barrel of
proven oil and 34,400,000 which are recoverable. The cost of these leases have
been capitalized under prepaid oil production costs.
NOTE 6 - RELATED PARTY TRANSACTIONS:
--------------------------
In 1999 & 1998 the company paid approximately $1,000,000 to Wave Technologies
Inc. for the purchase of a portable thermos gas injector system (the "TM-98")
and a portable steam generator (the "TM-96). The company entered into an
agreement with Wave Technology Inc. to purchase this equipment along with the
exclusive rights to develop, market, sell and utilize these machines. The
company agreed to pay Wave Technology Inc. $1,000,000 for the Equipment and gave
them another 3,160,000 shares of common stock and 1,000,000 shares of Preferred
stock for the exclusive licensing rights to develop, sell and utilize the
equipment as well as other oil recovery technologies. Wave Technology currently
owns 4,910,000 shares of common stock and 1,000,000 shares of Preferred stock.
This represents approximately 43% of the outstanding Common stock and 100% of
the outstanding Preferred stock of the Company.
Wave Technology Inc. is 100% owned by Tom Meek's wife. He is also a director and
executive officer of U.S. Crude LTD. Other directors and executive officers of
U.S. Crude LTD own approximately 2.3% of the outstanding Common stock of U.S.
Crude LTD. This means that the directors and executive officers of U.S. Crude
LTD. own as a group approximately 45% of the Company.
F-9
<PAGE>
NOTE 7 - NOTE PAYABLE:
------------
In March of 1999 the company received $450,000 from an investor. In return for
this money this investor received 500,000 shares at ten cents a share and an
option to purchase another 1,000,0000 shares. This option was for one year. In
March of 2000 in exchange for relieving this $400,000 Note the company issued
the note holder 1,000,000 shares of common stock. This note included interest at
8%. 11 monthly interest only payments of $3,000 were made on this note during
the year ended March 31, 2000.
NOTE 8 - NOTE PAYABLE-KERN COUNTY OIL LEASE:
----------------------------------
During the prior year the Company purchased an oil lease in Kern County,
California. This lease is a perpetual lease. The cost of the lease was $240,000
and is to be paid off from proceeds from oil production. This note does not bear
any interest. No payments were made on this note as of March 31, 2000. The
Company did not start production of oil on this lease until May of 2000.
NOTE 9 - NOTE PAYABLE ASSOCIATES BANK:
----------------------------
In April of 1999 the Company purchased a large compressor for 84,000.
Approximately $32,000 was paid as a down payment and a 33 month note was taken
out to pay the remaining balance. As of March 31, 2000 $38,662 is still due on
the Note.
F- 10
<PAGE>
U.S. CRUDE LTD./CYPRESS CAPITAL, INC.
Pro Forma Combined - March 31, 2000 (Unaudited)
Pro Forma Combined Balance Sheet PF-1
Pro Forma Combined Statement of Operations PF-2
Pro Forma Combined Statement of Cash Flows PF-3
Pro Forma Combined Statement in Stockholders' Equity PF-4
<PAGE>
<TABLE>
<CAPTION>
U. S. CRUDE LTD. / CYPRESS CAPITAL, INC. PRO FORMA
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED BALANCE SHEET FOR THE YEAR ENDED MARCH 31,
<S> <C> <C>
ASSETS 2000 1999
CURRENT ASSETS
Cash $ 137,019 $ 265,675
Accounts Receivable 500,000 500,000
--------------- -------------
TOTAL CURRENT ASSETS 637,019 765,675
PROPERTY, PLANT & EQUIPMENT
Property, Plant & Equipment 1,117,323 1,041,757
Truck 37,500 17,600
Less Accumulated Depreciation (120,196) (35,196)
--------------- -------------
NET PROPERTY, PLANT & EQUIPMENT 1,034,627 1,024,161
OTHER ASSETS
License Agreement 416,000 416,000
Goodwill 99,200
Prepaid Production costs 1,431,771 933,134
Less depletion allowance (23,343) (23,343)
--------------- -------------
TOTAL OTHER ASSETS 1,923,628 1,325,791
--------------- -------------
TOTAL ASSETS $3,595,274 $3,115,627
=============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable 450,000 $ 450,000
Note Payable (note 7) 400,000
--------------- -------------
TOTAL CURRENT LIABILITIES 450,000 850,000
LONG TERM LIABILITIES
Note Payable - Associates 38,662 -
Note Payable - Kern County Oil lease 240,000 -
--------------- -------------
278,662 -
STOCKHOLDER'S EQUITY
Preferred stock, no par value, 5,000,000 shares authorized,
1,000,000 shares issued and outstanding at March 31, 100,000 100,000
Common stock, no par value; 20,000,000 shares authorized,
19,670,626 and 11,592,011 issued and outstanding respectively
at March 31, 2000 and 1999 4,071,150 2,728,842
Deficit accumulated during the development stage (1,304,538) (563,215)
--------------- -------------
TOTAL STOCKHOLDER'S EQUITY 2,866,612 2,265,627
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $3,595,274 $3,115,627
=============== =============
PF-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U. S. CRUDE LTD. / CYPRESS CAPITAL, INC. PRO FORMA
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED MARCH 31,
<S> <C> <C>
From
22-May-96
2000 through
31-Mar-00
--------------- ---------------
REVENUES
Sales - equipment $ - $ 500,000
Sales - Oil - 23,343
--------------- ---------------
TOTAL REVENUES - 523,343
COST OF GOODS SOLD
Purchases - Equipment 450,000
Depletion (Prepaid Production costs) - 23,343
--------------- ---------------
TOTAL COST OF GOODS SOLD - 473,343
GROSS PROFIT - 50,000
OPERATING COSTS
Amortization & Depreciation 85,000 120,196
General & Administrative 189,849 315,239
Contract Services 324,572 453,604
Promotion & Public Relations 62,101 315,056
Telephone, Utilities & Rents 63,368 84,768
Travel & Entertainment 9,336 53,371
Taxes & Licenses 8,040 24,369
--------------- ---------------
TOTAL OPERATING COSTS 742,266 1,366,603
LOSS FROM OPERATIONS (742,266) (1,316,603)
OTHER INCOME (EXPENSE)
Interest Income 943 12,065
Interest Expense
Other income
--------------- ---------------
TOTAL OTHER INCOME (EXPENSE) 943 12,065
NET INCOME (LOSS) (741,323) (1,304,538)
=============== ===============
Accumulated deficit at beginning of period (563,215) -
--------------- ---------------
Deficit accumulated during the development stage $(1,304,538) $(1,304,538)
=============== ===============
Net Loss per Share (0.07) (0.28)
Weighted Average Common Shares 10,555,106 4,640,000
PF-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U. S. CRUDE LTD. / CYPRESS CAPITAL, INC. PRO FORMA
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31,
<S> <C> <C>
INCEPTION
TO
2000 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (741,323) $(1,304,538)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 85,000 120,196
Depletion - 23,343
(Increase) Decrease in current assets - (500,000)
Increase (Decrease) in current liabilities - 450,000
(Increase) Decrease in other assets (597,837) (1,946,971)
--------------- --------------
NET CASH PROVIDED (USED) BY (1,254,160) (3,157,970)
OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase) Sale of property and equipment (95,466) (1,154,823)
Increase (Decrease) in notes payable (160,000) 240,000
Increase (Decrease) in notes payable - related parties 38,662 38,662
--------------- --------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (216,804) (876,161)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable
Advances from shareholders - -
Repayment of notes payable - -
Stock sold for cash 1,342,308 4,171,150
Payment for cancellation of stock
--------------- --------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 1,342,308 4,171,150
NET INCREASE (DECREASE) IN CASH (128,656) 137,019
CASH AT BEGINNING OF PERIOD 265,675 -
CASH AT END OF PERIOD $ 137,019 $ 137,019
=============== ==============
PF-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U. S. CRUDE LTD. / CYPRESS CAPITAL, INC. PRO FORMA
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 22, 1996) TO MARCH 31, 2000
<S> <C> <C> <C> <C> <C> <C>
Common Common Preferred Preferred Accumulated Stockholder's
No./shares $ Amount No./shares $ Amount Deficit Equity
-------------- ----------- ------------ ----------- ------------- ------------
Shares issued for Cash 3,962,260 1,191,806 - 1,191,806
Shares issued for Licensing Rights 3,160,000 316,000 1,000,000 100,000 416,000
Net (Loss) through March 31, 1998 253,178) (253,178)
------------------------------------------------------------------------------------------
Balance at March 31, 1998 7,122,260 $1,507,806 1,000,000 $100,000 $ (253,178) $1,354,628
Shares issued for Cash 731,751 373,804 373,804
Purchase of U S Thermo Tech Inc 3,738,000 847,232 847,232
Net Loss - Year Ended March 31, 1999 (310,037) (310,037)
------------------------------------------------------------------------------------------
Balance at March 31, 1999 11,592,011 $2,728,842 1,000,000 $100,000 $ (563,215) $2,265,627
Shares issued for Cash 6,976,170 742,308 742,308
Shares issued in exchange for debt 1,000,000 400,000 400,000
May 19, 2000 Shares issued for Cash 102,445 200,000 200,000
Net Loss - Year Ended March 31, 2000 (741,323) (741,323)
------------------------------------------------------------------------------------------
Balance at March 31, 2000 19,670,626 $4,071,150 1,000,000 $100,000 $(1,304,538) $2,866,612
Note: For purposes of this consolidation and proforma the results of a private placement and the acquisition
of Cypress Capital, Inc. are shown as if they had
taken effect as of the end of the fiscal year, or March 31, 2000. The actual transaction occurred in May of 2000.
PF-4
</TABLE>
