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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1999.
/ / Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to _____________.
COMMISSION FILE NUMBER: 0-9474
POTOMAC ENERGY CORPORATION
(FORMERLY MIDWESTERN RESOURCES, INC.)
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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OKLAHOMA 73-1088064
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2601 NORTHWEST EXPRESSWAY, SUITE 1100W
OKLAHOMA CITY, OKLAHOMA 73112-7293
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (405) 840-1427
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days. Yes No X
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
As of September 1, 1999, 7,984,270 shares of issuer's Common Stock, $.01 par
value per share, were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
Yes No X
--- ---
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TABLE OF CONTENTS
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PAGE
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, June 30, 1999 and December 31, 1998 ....................................... 3
Consolidated Statements of Operations and Accumulated Deficit for the
Period from Inception (April 7, 1997) to June 30, 1999 and
the Six Month Periods Ended June 30, 1999 and June 30, 1998...................................... 4
Consolidated Statements of Cash Flows for the Period from Inception
(April 7, 1997) to June 30, 1999 and the Six Month Periods Ended
June 30, 1999 and June 30, 1998.................................................................. 5
Notes to Consolidated Condensed Financial Statements ................................................... 6
Item 2. Management's Discussion and Analysis or Plan of Operations...............................................8
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................21
Item 2. Changes in Securities and Use of Proceeds...............................................................21
Item 3. Submission of Matters to a Vote of Security Holders.....................................................23
Item 4. Other Information.......................................................................................24
Item 5. Exhibits and Reports on Form 8-K........................................................................24
Signatures.......................................................................................................24
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CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
Certain statements in this Report and the documents referenced herein
constitute "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Certain, but not necessarily all,
of such forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategies that involve risks and
uncertainties. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, levels of
activity, performance or achievements of Potomac Energy Corporation, or industry
results, to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. As a result of the foregoing and other factors, no assurance can be
given as to future results, levels of activity and achievements and neither
Potomac Energy Corporation nor any other person assumes responsibility for the
accuracy and completeness of these statements.
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Part I
Item 1. Financial Statements
POTOMAC ENERGY CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
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12/31/98 6/30/99
(UNAUDITED)
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ASSETS
CURRENT ASSETS:
Cash $ 218,788 $ 39,992
Accounts Receivable $ 1,615 $ 2,065
Marketable Securities $ -- $ --
----------- -----------
Total Current Assets $ 220,403 $ 42,057
PROPERTY & EQUIPMENT
Furniture & Equipment $ 27,818 $ 28,199
Office Equipment, capital leases $ 46,379 $ 46,379
Leasehold improvements $ 6,912 $ 6,912
Oil and Gas Interests, non-producing , Full Cost Method $ 472,331 $ 536,857
Coal interest, non-producing $ 20,909 $ 20,590
----------- -----------
$ 574,349 $ 638,938
Less Accumulated Depreciation $ (6,287) $ (13,297)
----------- -----------
$ 568,062 $ 625,641
OTHER ASSETS
Organization Costs $ -- $ --
Deposits $ 4,061 $ 4,061
----------- -----------
TOTAL ASSETS $ 792,526 $ 671,759
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 120,248 $ 178,496
Accured Taxes, other than income $ 17,953 $ 2,511
Other Current Liabilities $ -- $ 10,000
Current portion of capital
Lease obligations $ 17,384 $ 19,229
----------- -----------
Total Liabilities $ 155,585 $ 210,236
----------- -----------
Long-Term Portion of Capital
Lease Obligations $ 21,923 $ 10,524
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.01 Par Value, 50,000,000 shares Authorized and
7,869,270 and 7,974,270 Issued and Outstanding, Respectively $ 78,693 $ 79,843
Additional Paid-In Capital $ 2,035,886 $ 2,194,736
Deficit Accumulated During Development Stage $(1,499,561) $(1,823,580)
----------- -----------
Total Stockholders' Equity $ 615,018 $ 450,999
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 792,526 $ 671,759
=========== ===========
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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POTOMAC ENERGY CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED (UNAUDITED)
(Period from Inception)
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7-APR-97 THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
TO ENDED ENDED ENDED ENDED
30-JUN-99 30-JUN-99 30-JUN-99 30-JUN-98 30-JUN-98
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REVENUES
Other Income $ 1,000 $ 1,000 $ 1,000 $ -- $ --
Income-(loss) Guaduas Partnership (966) (966) (966) -- --
Foreign Currency-gains 830 -- -- -- --
Interest Income 10,575 411 1,385 3,015 4,022
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES $ 11,439 $ 444 $ 1,419 $ 3,015 $ 4,022
=========== =========== =========== =========== ===========
EXPENSES
Advertising 9,374 1,722 3,332 -- --
Auto 4,703 1,032 3,031 -- --
Bank charges 2,296 217 369 475 890
Computer Expense 3,000 -- -- -- --
Consulting 470,247 3,559 35,420 530,806 778,684
Stock-Based Non-Employee Compensation Expense 92,159 -- -- -- --
Contributions 250 -- -- -- --
Depreciation 13,297 3,505 7,010 -- --
Dues & Subscriptions 6,186 -- 136 -- --
Employee Benefit Program 14,024 4,189 4,615 -- --
Insurance 14,073 6,498 13,655 -- --
Interest 7,383 1,987 4,599 -- --
Meal & Entertainment 33,678 9,062 16,236 -- --
Miscellaneous 21,130 3,906 7,187 -- --
Office Expense 3,653 582 1,109 98 487
Office Supplies 6,103 -- 75 -- --
Payroll Tax 23,109 6,730 11,929 -- --
Professional fees 132,812 16,238 28,753 -- --
Rent & Lease 44,331 12,394 22,462 4,061 4,061
Salaries 218,790 56,713 117,453 -- --
Stock-Based Employee Compensation Expense 606,250 -- -- -- --
SEC Related Expense 23,931 3,612 6,828 -- --
Taxes 7,639 -- -- -- --
Telephone 22,907 5,654 12,053 333 333
Travel 53,694 18,102 29,186 -- --
TOTAL EXPENSES $ 1,835,019 $ 155,702 $ 325,438 $ 535,773 $ 784,455
----------- ----------- ----------- ----------- -----------
NET LOSS - DEFICIT
ACCUMULATED DURING DEVELOPMENT STAGE $(1,823,580) $ (155,258) $ (324,019) $ (532,758) $ (780,433)
=========== =========== =========== =========== ===========
Net Loss Per Share $ (0.23) $ (0.02) $ (0.04) $ (0.07) $ (0.11)
=========== =========== =========== =========== ===========
Weighted Average Number
of Common Shares Outstanding 7,984,270 7,970,047 7,984,270 7,394,417 7,394,417
=========== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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POTOMAC ENERGY CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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PERIOD FROM THREE MONTHS SIX MONTHS SIX MONTHS
INCEPTION ENDED ENDED ENDED
(APRIL 7, 1997)
TO
30-JUN-99 30-JUN-99 30-JUN-99 30-JUN-98
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Cash Flows from Operating Activities:
Net Loss $(1,823,579) $ (170,257) $ (324,018) $ (780,433)
Adjustment to Reconcile Net Loss to Net Cash
Provided (used) by Operations:
Stock Compensation:
Compensation Expense 606,250 - - 1,007,341
Consulting Expense: 92,159 - - -
Depreciation 13,297 3,505 7,010 -
(Increase) Decrease:
Accounts Receivable (2,065) 2,019 (450) -
Increase (Decrease):
Accounts Payable 199,718 40,696 58,248 (15,536)
Accrued taxes 2,511 (17,382) (15,442)
Other Current Liabilities 10,000 10,000 10,000 -
Deposits (4,061) - - -
----------- ----------- ----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (905,770) (131,419) (264,652) 211,372
=========== =========== =========== ===========
Cash Flows from Investing Activities:
Exploration of Oil and Gas Properties: (286,857) (19,767) (64,526) (21,222)
Exploration of Coal Properties: (20,590) (1,500) 319 -
Exp Purchase of Poperty & Equipment (35,112) (277) (381) -
Purchase of Investment (37,777) - - (1,121)
Sale of Investments 37,777 - - -
Stock Issued During reorganziation 5,793 - - -
Organization Costs (21,222) - - -
----------- ----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (357,988) (21,544) (64,588) (22,343)
=========== =========== =========== ===========
Cash Flows from Financing Activities:
Sale of Stock 1,320,377 175,000 160,000 612,000
Paid in Capital - - - -
Payments on Long-Term Debt: (16,627) (4,454) (9,556) -
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,303,750 170,546 150,444 612,000
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 39,992 17,583 (178,796) 119,734
Cash at Beginning of Period - 22,409 218,788 12,000
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 39,992 $ 39,992 $ 39,992 $ 131,734
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE A--BASIS OF PRESENTATION-
The consolidated condensed interim financial statements included herein have
been prepared by the company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principals have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1998. The Company follows the same
accounting policies in preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
NOTE B--NATURE OF OPERATIONS-
NATURE OF OPERATIONS: Potomac Energy Corporation (Potomac), an Oklahoma
corporation, is involved in identifying, investigating, exploring, and, where
determined advantageous, developing, mining, refining, and marketing oil and gas
and coal deposits. Potomac is currently a public company registered on the
NASDAQ.
DEVELOPMENT STAGE ENTERPRISE: Potomac is a development stage enterprise and has
yet to generate any revenue from oil and gas or coal sales and has no assurance
of future revenues from such sales. Both oil and gas and coal exploration and
development are speculative in nature and, as such, involves a high degree of
risk. The Company plans to spend significant amounts on the acquisition and
exploration of properties. These costs may require the Company to raise
additional capital through debt or equity financing. Such additional financing
may require the encumbrance of Company assets or agreements with other parties
where some of the costs of exploration are paid by others in exchange for an
interest in the property. The Company has acquired interests in properties
internationally. Such plans have additional risks because, in some cases, the
country where the acquisition occurs may be considered politically and/or
economically unstable.
RISKS AND UNCERTAINTIES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates include depreciation, depletion, and amortization of
proved oil and gas and coal reserves. Oil and gas and coal reserve estimates
used as the basis for depletion are inherently imprecise and are expected to
change as future information becomes available.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company; its wholly-owned subsidiary, Potomac Exploration
Acquisition Corporation (PEAC), an Oklahoma corporation, and PEAC's wholly-owned
subsidiary, Potomac Energy (BVI), Ltd., a British Virgin Islands corporation;
and the Company's predecessor, Potomac Energy (Bermuda), Ltd., a Bermuda
corporation. The Company's other predecessor, Midwestern-Oklahoma Energy
Resources Corporation, an Oklahoma corporation, had no activity prior to the
reorganization. Magdalena Energia, LLC, a Texas limited liability company, a
wholly owned subsidiary, did not have any recordable transactions during 1998.
All material intercompany accounts and transactions have been
eliminated.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS--CONTINUED
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
JUNE 30, 1999
NOTE C--STOCK OPTIONS
On April 18, 1998, the Company's predecessor, Potomac (Bermuda), granted stock
options to purchase 950,000 shares of common stock during various periods, which
expire April, 1999 through December, 2003, at an exercise price of $1.00 except
for 50,000 shares which have an exercise price of $.50. On October 14, 1998, the
Company granted options to purchase 125,000 shares of common stock, which expire
December, 2003, at an exercise price of $1.00. The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under APB 25, no compensation expense is recognized when
the exercise price of stock options equals the market price of the underlying
stock on the date of the grant.
PEC established the Potomac Energy Corporation Non-Qualified Stock Option Plan
(the "Option Plan" or "Plan") on January 28, 1999. The Option Plan provides for
the grant of non-qualified stock options ("Options"), with stock appreciation
rights ("SARs") to employees, directors, independent contractors and consultants
of the Company. The total number of shares of Common Stock authorized and
reserved for issuance under the Option Plan is 550,000.
As of March 31, 1999 there were 1,275,000 outstanding options, however, as of
June 30, 1999 the total number of out standing options was reduce to 1,175,000
due to 100,000 options which expired April 30, 1999. Additionally, subsequent to
June 30, 1999, an additional 100,000 Options were forfeited as a result of the
resignation by Mr. Frank Mahan as an Officer and Director of the Company.
Therefore, as of the date of this report, the total number of outstanding
options is 1,075,000 all expiring in December 2003, at exercise prices of $.50
to $1.25 per share, with a weighted average exercise price of $.1.00 per share.
. The Company has in reserves an additional 425,000 shares of Common Stock for
issuance of stock options, pursuant to the Company's Stock Option Plan.
NOTE D--WARRANTS
Pursuant to its Certificate of Incorporation, the Company authorized up to
50,000,000 shares of Common Stock, $.001 par value. As of the date of this
report, the issued and outstanding capital stock of the Company consists of
7,974,270. On April 1, 1999 the Company offered an additional 2,160,000 shares
of Common Stock and Redeemable Warrants. As of June 30, 1999 70,000 shares have
been purchased from this offering.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Statements in this Quarterly Report on form 10-Q concerning the Company's
outlook or future economic performance; anticipated profitability, gross
billings, commissions and fees, expense or other financial items; and statements
concerning assumptions made or exceptions to any future events, conditions,
performanc3e or other matter are "forward looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties, and other factors, which would cause actual
results to differ materially from those stated in such statements. Such risks,
and uncertainties and factors include, but are not limited to (I) risks
associated with acquisitions, (ii) competition, (iii) the Company's quarterly
operating results have fluctuated in the past and are expected to fluctuate in
the future, (iv) the Company's business experiences seasonality, (v) the loss of
services of certain key individuals could have a material adverse effect on the
Company's business, financial condition or operating results.
BACKGROUND
Potomac Energy Corporation ("PEC" or the "Company") (formerly
Midwestern Resources, Inc.) was formed in 1980 under the laws of the State of
Oklahoma and became inactive and its corporate charter was suspended in 1983. In
March 1998, the Company was reincorporated under the name "Midwestern-Oklahoma
Energy Resources Corporation." Effective June 17, 1998, Potomac Energy (Bermuda)
Ltd., a Bermuda corporation ("Potomac (Bermuda)"), merged with and into Potomac
Exploration Acquisition Corporation, a wholly-owned subsidiary of the Company
("Potomac Acquisition"), pursuant to a Plan of Reorganization and Agreement of
Merger dated June 12, 1998 (the "Merger"). As a condition of the Merger, on June
17, 1998, the outstanding Common Stock of the Company was reverse split on the
basis of one share for each 41.40846 outstanding shares, which resulted in
578,261 shares of Common Stock being outstanding immediately prior to the Merger
(the "Reverse Stock Split"). In consummation of the Merger, the Company issued
7,050,000 shares of its Common Stock to the former shareholders of Potomac
(Bermuda) and the Company's name was changed to "Potomac Energy Corporation."
The Merger was accounted for as a reverse acquisition of the Company by Potomac
(Bermuda). Potomac (Bermuda) was formed on April 7, 1997. Immediately prior to
the Merger, the Company did not have any assets or liabilities. All references
to the "Company" includes Potomac Energy Corporation and its subsidiaries,
unless the context indicates otherwise
The Company is a development stage company engaged in the exploration
and development of oil, gas and coal properties outside of North America. The
Company, through its subsidiaries, owns interests in prospective areas located
in Colombia, South America, which are in the initial stages of exploration and
development. Prior to the Merger, Potomac (Bermuda) had not conducted any
operations other than the acquisition of the interests in the Rosablanca
Association Contract and the Montecristo Association Contract for exploration
and development of the Rosablanca and Montecristo Blocks within the Middle
Magdalena Valley Basin, Colombia, South America. The Rosablanca and Montecristo
Blocks are in the initial stages of exploration. In May 1998, the Company
acquired an interest in the Guaduas Association Contract for the exploration,
development and mining of coal. See Item 2. Description of Property "--Middle
Magdalena Valley Basin" and "--Rosablanca and Montecristo Association
Contracts" and "--Guaduas Association contracts." The Company also may seek to
acquire additional oil, gas and coal exploration opportunities in Colombia which
management believes may have large reserve potential; however, there is no
assurance that additional interests will be acquired or if acquired will be
capable of commercial development and production.
EXPLORATION STRATEGY
The Company's oil, gas and coal exploration and development operations
are currently focused entirely on its activities in Colombia, South America. The
oil and gas exploration and development operations are conducted through the
Colombian branch of Potomac Energy (BVI) Ltd., a wholly-owned British Virgin
Islands subsidiary corporation ("Potomac (BVI)"). The coal and electrical power
exploration and development
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operations are conducted through Carbones de Guaduas, Ltd. a Colombian
corporation which is 100 percent jointly owned by Magdalena Energia, LLC, a
wholly-owned Texas subsidiary limited liability company ("Magdalena
Energia"), and Grupo Energia, LLC, a Texas subsidiary limited liability
company wholly-owned by Arena Power, L.P a Houston based U.S. corporation
(Grupo Energia). The dependence on the activities in Columbia is likely to be
reflected in both the short-term performance and the Company's long-term
financial results. The Company may serve as operator with respect to those
properties acquired pursuant to association contracts in which the Company
obtains a controlling interest or holds the largest ownership interest;
however, it is anticipated that the Company will also participate in the
development of properties operated by third parties and in some cases may
delegate operations to a third party. The Company also intends to pursue oil,
gas and electrical power opportunities domestically within the United States.
The Company's business strategy includes:
- - Establishing production, cash flow and reserve value by exploring for
and developing and purchasing producing oil and gas properties, both in
South America and within the United States;
- - Establishing and/or purchasing gas storage facilities and generators
within the United States;
- - Building the Company's base of operations by initially concentrating
its development activities within Colombia and within the United States
in Oklahoma, Kansas and Texas;
- - Acquiring additional properties with potential for development drilling
to establish and maintain a significant inventory of undeveloped
prospects and to establish and enhance the Company's foundation for
future growth;
- - Serving as operator of its wells, mines and power generation facilities
to ensure technical performance and reduce costs;
- - Establish relationships with other energy companies to access their
undeveloped properties, geological data and financial resources;
- - Managing financial risk and mitigating technical risk by drilling in
known productive trends with multi-geologic potential, diversifying
investment over the interests in the Company's primary operating areas,
developing properties that provide a balance between short and long
term reserves, and establishing and maintaining a balance among the
company's oil, gas, coal and electrical generation activities; and
- - Maintaining low general and administrative expenses.
Oil, gas and coal exploration and development is a speculative business
and involves a high degree of risk. The Company is subject to all the risks
normally incident to drilling for and producing oil and gas, as well as mining
of coal, including hazards such as high-pressured formations, blowouts,
cratering, fires, spills, cave-ins, or other hazards or conditions, any of which
could result in damage to or loss of life or property. In accordance with
industry practice, the Company is not fully insured against these risks nor are
all such risks insurable. Payment of such potential liabilities would reduce the
funds available for exploration, drilling and production and could have a
material adverse effect on the Company.
The Company has expended and plans to continue to expend significant
amounts of capital on the acquisition and exploration of its oil, gas and coal
interests. Even if the results of such activities are favorable, subsequent
drilling and mining at significant costs must be conducted on a property to
determine if commercial development of the property is feasible. Oil and gas
drilling, as well as coal mining, may involve unprofitable efforts, not only
from dry holes but from wells and mines that are productive but do not produce
sufficient net revenues to return a profit after operating and other costs. It
is difficult to project the costs of implementing an exploratory drilling and
mining program due to the inherent uncertainties of drilling and mining in
unknown
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formations, the costs associated with encountering various conditions, such as
high-pressured zones and tools lost in the hole, and changes in drilling and
mining plans and locations as a result of prior exploratory wells, mines or
additional seismic data and interpretations thereof. The marketability of oil,
gas and coal which may be acquired or discovered by the Company will be affected
by the quality of the production and by numerous factors beyond its control,
including market fluctuations, the proximity and capacity of oil and gas
pipelines and processing equipment, government regulations, including
regulations relating to prices, taxes, royalties, land tenure, importing and
exporting of oil and gas and environmental protection. There can be no assurance
the Company will be able to discover, develop and produce sufficient reserves in
Colombia or elsewhere to recover the costs and expenses incurred in connection
with the acquisition, exploration and development thereof and achieve
profitability.
COLOMBIA--OVERVIEW
The Company's success currently depends entirely on its drilling
and mining exploration activities in Colombia. This dependence is likely to be
reflected in both the short-term performance and the Company's long-term
financial results.
One of the Company's principal asset is a 25 percent interest in
the Association Contracts that relate to Rosablanca and Montecristo Blocks
located in the Middle Magdalena Valley Basin three miles Northwest of Bogota,
Colombia, South America (the "Rosablanca and Montecristo Association
Contracts"). As of the date of this report, a well has not been drilled by the
Company on either of the Rosablanca and Montecristo Blocks. The Rosablanca and
Montecristo Association Contracts were issued by Empresa Colombiana de Petroleos
("Ecopetrol"), the state-owned Colombian oil company, in November 1997, and
provide generally for a six-year exploration phase followed by a 22-year
production period, with partial relinquishments of acreage, excluding commercial
fields, required commencing at the end of the sixth year of the Rosablanca and
Montecristo Association Contracts. The Company currently intends to participate
in the drilling of the initial exploratory well on the Magdalena Valley Basin
before the end of 1999. See Item 2. Description of Property "--Rosablanca and
Montecristo Association Contracts." The Rosablanca and Montecristo Association
Contracts entitle the Company to engage in exploration, development and
production activities on approximately 695,000 acres (173,750 net acres) located
in the Middle Magdalena Valley Basin, before any relinquishment to Ecopetrol.
The second potentially significant asset is the Company's 50
percent interest in the Guaduas Association Contract. The Guaduas Association
Contract entitles the Company and its partner to engage in exploration,
development and production activities on approximately 6,000 acres (3,000 net
acres) located in the Middle Magdalena Valley Basin, before any relinquishment
to Eco-Carbon. As of the date of this Report, coal mining has not begun on the
Guaduas Block. However, the Company is currently in the process of conducting
coring operations to specifically identify potential coal reserves. The Guaduas
Association Contract was acquired from a third party in May 1998, and provides
generally for a two-year exploration phase followed by a 10 year production
period with no relinquishments. See Item 2. Description of Property "--Guaduas
Association Contract."
Colombia is the fourth largest country in South America, with a
total land area of more than 1,038,700 square kilometers, with a population of
35.9 million people (1993 census). The official language is Spanish and the
official currency is the Colombian peso. Colombia has a democratic form of
government. While Colombia experiences insurgency and national political
protests, the Colombian economy has been among the best performers in Latin
America during the past 20 years. According to publicly available information,
Colombia's Gross Domestic Product ("GDP") has grown by an average of four
percent annually in the last 10 years, approximately twice the average for Latin
America. Colombia is the only country in South America that did not have a
single year of negative GDP or declining per capita income growth in the 1980s
and the 1990s. Colombia recently introduced legislation to attract foreign
investment in energy projects. The measures include the exemption of new oil
operations from the $1 per barrel tax that was levied in 1992 to finance
protection of oil operations.
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According to publicly available information, the United States is
Colombia's largest trading partner, accounting for more than 43 percent of that
country's total imports and 38 percent of its total exports. The United States
is also the top provider of eight of Colombia's 15 largest imports. United State
oil companies now account for 11 of the 18 largest foreign oil concerns
operating in Colombia. Colombia is Latin America's third leading crude exporter
to the United States, after Venezuela and Mexico. Colombia is also Latin
America's leading coal exporter to the United States and Europe.
Colombia is the only country in South America that has seaports on
both the Pacific and Atlantic Oceans, which provide access to major oil markets.
The country has three main crude oil export pipelines leading to the port of
Covenas in Colombia. The pipeline from Cano Limon has a maximum capacity of
200,000 barrels of oil per day ("BOPD"), and two pipelines from Vasconia with
300,000 and 500,000 BOPD capacities. In 1997, Colombia exported over 30 million
short tons of coal and expects to double coal production to at least 60 million
short tons by 2005.
Columbia is currently investing in the expansion of its
electric generating capacity (currently about 11GigaWatts), with plans to add
over four additional GW by the year 2000 and an additional six GW by the year
2010. Investments by the private sector, combined with ongoing privatization of
public utilities, will reduce the public ownership share of generating capacity
to less than one-third of the total. By the end of 1997, foreign investors owned
over 40% of the country's generating capacity, worth about $4 billion.
Columbia's plans for the power sector favor investment in thermoelectric
generating capacity (primarily natural gas) at the expense of hydroelectricity.
Coal-fired capacity (currently about seven percent of the total ) will also
increase. The diversification of electric generating capacity reflects concern
over the impact of droughts on hydroelectric generation, which has periodically
forced the country to ration electricity.
About 20% of the power generated in Columbia is traded on the
country's electricity exchange, with the balance sold under term contracts. As
of February 1998, 120 energy companies (including generators, transporters,
distributors, and marketers) were listed on the exchange. In addition to
domestic supply, Colombia imports some electricity from Venezuela. Per an
interconnection established in July 1998 Colombia exports electricity to
neighboring Ecuador, which is experiencing significant electricity shortages.
The geology of Colombia has been studied since the mid-1800s and has
continued to the present, amassing some detail of the tectonic framework and
related stratigraphy. During the evolution of the geological knowledge of
Colombia, oil and natural gas exploration has been pursued in the Llanos,
Putumayo and Magdalena basins. Exploration in the Magdalena Valley Basin began
in 1918 with the drilling of the Guataqui wells in the Girardot subbasin,
followed in 1951 by the Ortega discovery. Since the mid-1980's the oil industry
has been the single largest component of economic growth, with total Colombian
oil reserves currently estimated to be approximately 3.7 billion barrels of
recoverable oil. As of December 1993, 210 exploratory wells had been drilled,
resulting in the discovery of 30 fields.
Two major physiographic features dominate the geography of Colombia. To
the west lie the Andes mountains, which, north of the Ecuador border, bifurcate
into three ranges, the Western, Central and Eastern Cordillera, extending toward
the Caribbean coast. These ranges are separated by the Cauca and Magdalena
valleys, respectively. To the east lies the Llanos, a savanna within the bounds
of the Orinoco Basin, which extends over the remainder of the country.
Association contracts acquired from either Empresa Colombiana de
Petroleos, the Colombian national oil company ("Ecopetrol") or Empresa
Colombiana de Carbones, the Colombian national coal company ("Ecocarbon"), after
being approved by all proper Colombian governmental authorities as well as the
board of Ecopetrol or Ecocarbon, are mutually executed by the parties and
subsequently recorded as a public deed in Colombia. Therefore, ownership of an
association contract is public record and protected by Colombian law. The
Rosablanca, Montecristo and Guaduas Association Contracts are on file and
available for public inspection at each respective agency.
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RISKS INHERENT IN FOREIGN OPERATIONS
There are risks inherent in the fact that the Company has
acquired and intends to continue to acquire interests in oil, gas and coal
properties located outside of North America in some cases in countries which may
be considered politically and economically unstable.
Foreign properties, operations or investments may be adversely affected
by local political and economic developments, exchange controls, currency
fluctuations, royalty and tax increases, retroactive tax claims, renegotiations
of contracts with governmental entities, expropriation, import and export
regulations and other foreign laws or policies governing operations of
foreign-based companies, as well as by laws and policies of the United States
affecting foreign trade, taxation and investment. In addition, as the Company's
operations are governed by foreign laws, in the event of a dispute, the Company
may be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons to the jurisdiction of courts in the
United States. The Company may also be hindered or prevented from enforcing its
rights with respect to a governmental instrumentality because of the doctrine of
sovereign immunity.
The Company's business is subject to political risks inherent in all
foreign operations. While Colombia has no history of nationalizing its business
nor expropriation of foreign assets, the Company's oil, gas and coal operations
are subject to certain risks, including (i) loss of revenue, property, and
equipment as a result of unforeseen events such as expropriation,
nationalization, war and insurrection, (ii) risks of increases in taxes and
governmental royalties, (iii) renegotiations of contracts with governmental
entities, and (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects in certain areas in Colombia but
has not affected the Company's interest in the Rosablanca and Montecristo
Association Contracts. Guerrilla activity in Colombia has not disrupted coal
operations in any areas in Colombia to date. This may or may not continue in the
future. The Colombian government continues its efforts through negotiation and
legislation to reduce the problems and effects of insurgent groups, including
regulations containing sanctions such as impairment or loss of contract rights
on companies and contractors if found to be giving aid to such groups. The
associate parties will continue to cooperate with the government, and do not
expect that future guerrilla activity will have a material impact on the
exploration and development of the Rosablanca, Montecristo and Guaduas
Association Contracts. However, there can be no assurance that such activity
will not occur or have such an impact and no opinion can be given on what steps
the government may take in response to any such activity. Colombia is among
several nations whose progress in stemming the production and transit of illegal
drugs is subject to annual certification by the President of the United States.
As of the date of this report, Colombia has received such certification. The
consequences of the failure to receive certification generally include the
following: all bilateral aid, except anti-narcotics and humanitarian aid, has
been or will be suspended; the Export-Import Bank of the United States and the
Overseas Private Investment Corporation will not approve financing for new
projects in Colombia; United States representatives at multilateral lending
institutions will be required to vote against all loan requests from Colombia,
although such votes will not constitute vetoes; and the President of the United
States and Congress retain the right to apply future trade sanctions. Each of
these consequences of the failure to receive such certification could result in
adverse economic consequences in Colombia and could further heighten the
political and economic risks associated with the Company's operations in
Colombia.
JOINT VENTURE ARRANGEMENTS
As a means of diversifying exploration risks, the Company has and
expects to continue to enter into joint venture arrangements for the exploration
and development of properties acquired under association contracts initially
obtained by the Company or acquire only partial interests in oil and gas
properties through joint venture agreements with other oil and gas corporations
that may, by the terms of such joint venture agreements, be the operators of
such properties and joint ventures. Although the Company can take certain steps
to determine if the risk of the exploration activities to be conducted by the
designated operator of such joint ventures is appropriately spread over a number
of prospects within a contract area of an association contract, there can be no
assurance that the risk will be so allocated, that the exploration activities
will be
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carried out by the operator in a manner deemed appropriate by the Company or
that the activities will be successful. In addition, the Company's ability to
continue its exploration and development activities may be dependent upon the
decision of its joint venture partner or partners to continue exploration and
development activities and to finance their respective portions of the costs and
expenses of the joint venture exploration activities. If the Company's joint
venture partner does not elect to continue and to finance its obligations to the
joint venture, the Company may be required to accept an assignment of the
partners interest therein and assume its financing obligations of further
development or relinquish the Company's interest in the joint venture or the
association contract.
MARKETS
In the event the Company's exploration and development activities
result in the discovery and production of oil and gas and upon Ecopetrol's
declaration of the commerciality of the Company's discovery, oil produced from
the Rosablanca and Montecristo Blocks may be sold to Ecopetrol or to third
parties provided that 75 percent of the purchase price is paid in United States
currency and the remainder in Colombian pesos. In the event the production is
required to satisfy internal demand for oil in Colombia, the Company may be
required to sell some or all of its production to Ecopetrol at prevailing market
prices. It is anticipated that any oil and gas production of the Company from
its Colombian operations will be sold to Ecopetrol under contracts that provide
for cancellation by either party with notice. In the event of cancellation by
Ecopetrol, the Company would be required to arrange for the export and sale of
its production.
In the event the Company's exploration and development activities
result in the discovery and production of coal, Ecocarbon has agreed to a waiver
of its declaration of the commerciality of the Company's discovery, for a
minimum period of ten years. After such time the company would be able to apply
for another waiver of commericality. Should this waiver not be granted, then the
coal produced from the Guaduas Blocks may be sold to Ecocarbon or to third
parties provided that 75 percent of the purchase price is paid in United States
currency and the remainder in Colombian pesos. In the event the production is
required to satisfy internal demand for coal in Colombia, the Company may be
required to sell some or all of its production to Ecocarbon at prevailing market
prices. It is anticipated that any coal production of the Company from its
Colombian operations will be sold to third parties under contracts that provide
for cancellation by either party with notice.
Since the early 1970's the market price for crude oil has been
significantly affected by policies adopted by the member nations of the
Organization of Petroleum Exporting Countries ("OPEC"). Members of OPEC
establish prices and production quotas among themselves for petroleum products
from time to time with the intent of controlling the current global supply and
consequently price levels. The Company is unable to predict the effect, if any,
which OPEC policy or price changes would have on any decision of Ecopetrol to
continue or cancel production purchase contracts with the Company or the effect
such policies and price changes might have on the ability of the Company to
otherwise profitability export and market the Company's production from Colombia
in the event Ecopetrol should elect to cancel productions purchase contracts
which may be entered into for the purchase of the Company's production.
Changes in natural gas, crude oil, coal and electrical prices
significantly affect the revenues and cash flows of the Company attributable to
production and the value of its properties. Declines in the prices of the
Company's products could have a material adverse effect on the business and
financial condition of the Company. The Company is unable to predict whether the
prices of crude oil, natural gas, coal and electrical power will rise, stabilize
or decline in the future.
REGULATION
The Company's operations are subject to regulations imposed by the
local regulatory authorities including, without limitation, currency regulation,
import and export regulation, taxation and environmental controls. The
regulations also generally specify, among other things, the extent to which
properties may be
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acquired or relinquished, permits necessary for spacing and drilling of
wells, mining of coal, measures required for preventing waste of oil, gas and
coal resources and, in some cases, rates of production and sales prices to be
charged to purchasers. Specifically, Colombian operations are governed by a
number of ministries and agencies including Ecopetrol, the Ministry of Mines
and Energy, and the Ministry of the Environment. It is possible that the
administration and enforcement of current environmental laws and regulations
or the passage of new environmental laws or regulations in Colombia could
result in substantial costs and liabilities in the future or in delays in
obtaining the necessary permits to conduct and expand the Company's Colombian
operations. The Company has experienced and may continue to experience delays
in obtaining the necessary environmental permits to expand its Colombian
operations.
EMPLOYEES
The Company's operations are managed from its offices in Oklahoma City,
with a staff of four employees, and use professional consulting services as
needed. Mr. Frank Mahan resigned as an officer and Director of the Company
subsequent to the second quarter ending on July 30, 1999. The Company's
employees are not represented by a labor organization. The Company and its
subsidiaries consider the relations with its employees and consultants to be
good.
STOCK OPTION PLAN
PEC established the Potomac Energy Corporation Non-Qualified Stock
Option Plan (the "Option Plan" or "Plan") on January 28, 1999. The Option Plan
provides for the grant of non-qualified stock options ("Options"), with stock
appreciation rights ("SARs") to employees, directors, independent contractors
and consultants of the Company. The total number of shares of Common Stock
authorized and reserved for issuance under the Option Plan is 525,000. As of the
date of this Report, no Options have been granted under the Option Plan.
The Board of Directors (the "Board") administers the Plan and the
authority to interpret and construe the Plan, and determine all questions
arising under the Plan and any agreement made pursuant to the Plan. Options
under the Option Plan may be granted only to persons ("Eligible Persons") who at
the time of grant are directors, executive officers, employees and independent
contractors and consultants of the Company and its subsidiaries.
Options may be granted by the Board on terms and conditions determined
solely by the Board. No Option shall be exercisable more than 10 years after the
date of grant. The maximum number of shares of stock for which an Eligible
Person may be granted Options in any calendar year may not exceed 25 percent of
the aggregate number of shares of stock with respect to which Options may be
granted under the Option Plan. The exercise prices of Options are determined by
the Board, but in no event may such price be less than 85 percent of the fair
market value of the stock on the date of grant. Options granted are not
transferable except by will or by the laws of descent and distribution or with
the consent of the Company. No Option under the Plan may be granted after
December 31, 2008.
Options may be exercisable only by the Option holder ("Participant")
while serving as a director of the Company or a subsidiary or while actively
employed as an employee, an independent contractor or a consultant by the
Company or a subsidiary, except that (i) any such Option granted and which is
otherwise exercisable, may be exercised by the personal representative of a
deceased Participant within 12 months after the death of such Participant (but
not beyond the exercise period of such Option), (ii) if a Participant is
terminated as a director, an employee, an independent contractor or a consultant
of the Company or a subsidiary on account of (A) retirement, such Participant
may exercise any Option which is otherwise exercisable at any time within three
months of such date of termination, or (B) a disability, such Participant may
exercise any Option which is otherwise exercisable at any time within 12 months
of such date of termination. If a Participant dies during the applicable
three-month or 12-month period following the date of such Participant's
retirement or termination on account of disability, the rights of the personal
representative of such deceased Participant as such relate to any Options
granted to such deceased Participant shall have similar rights to exercise the
Options and during the remainder of the three-month or 12-month period.
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The Board, in its sole discretion, may permit a Participant who is
terminated as a non-employee director, an employee, an independent contractor or
a consultant due to retirement or disability, or upon the occurrence of special
circumstances (as determined by the Board), or the personal representative of a
deceased Participant to exercise and purchase (within three years of such
termination) all or any part of the shares subject to Option on the date of
termination.
DESCRIPTION OF PROPERTY:
MIDDLE MAGDALENA VALLEY BASIN
The Company has identified and completed the preliminary investigation
of the potential for oil, gas and coal deposits existing in the Middle Magdalena
Valley Basin three miles northwest of Bogota, Colombia. The Company has acquired
a 25 percent interest in the Rosablanca and Montecristo Association Contracts on
a joint-venture basis granting rights to explore for and develop oil and gas in
certain specified properties known as the Rosablanca and the Montecristo Blocks
(sometimes referred to as the Rosablanca II Block) located in the Middle
Magdalena Valley Basin. The Rosablanca Block covers approximately 326,000 acres
and the Montecristo Block covers approximately 369,000 acres. The Company has
also acquired a 50 percent interest in the Guaduas Association Contracts on a
joint-venture basis granting rights to develop coal in certain specified
properties known as the Guaduas Block located in the Middle Magdalena Valley
Basin. The Guaduas Block covers approximately 6,000 acres.
Oil, gas and coal reserves have been investigated and explored in the
Magdalena Valley Basin since as early as 1940. The first commercial oil and gas
field was established by Trocco Oil in 1951 with proven recoverable reserves in
excess of 800 million barrels. Through the use of advanced technologies and
exploration techniques such as seismic, gravimetric and magneto metric surveys,
combined with now historically proven data and exploratory drilling, additional
potentially large reserves have been identified and recovered throughout the
Middle Magdalena Valley Basin. Several independent oil companies such as Trident
Energy, Harken Oil and Gas, and Seven Seas along with major oil and gas
producers such as Exxon, Inc. and Texaco, Inc. have made important recent
discoveries that have drawn international attention to all of Central and South
America. Exxon is currently the single largest exporter of coal from Colombia.
As of December 31, 1998, approximately 1,642 kilometers of 2-D seismic
data had been acquired and reprocessed on the Rosablanca Block and the
Montecristo Block. Interpretation of the seismic data on the Montecristo Block
is in process. Additionally, interpretation of the seismic data on the LaLuna
and Rosablanca formations and at the Basal Cretaceous formations are being
generated. The LaLuna and Rosablanca formations have tested over 10,000 barrels
of oil per day each on the adjacent Bolivar Association Contract. Based on
analysis and processing of such data, it is estimated that the combined
potential for recoverable oil reserves from the Rosablanca and Montecristo
Blocks could exceed one billion barrels. Exploration is first being concentrated
in the area of the Texaco Las Lajas well located on the Montecristo Block. The
original Texaco exploratory well had oil and gas shows in which the La Luna
formation but was not drilled deep enough to test the Rosablanca formation. This
well is located on what appears to be a sizable structural feature.
Pursuant to an agreement dated February 27, 1997 (the "GHK Agreement"),
Potomac (Bermuda) and GHK Company, L.L.C., an Oklahoma limited liability company
("GHK"), agreed to jointly acquire and develop any association contracts related
to the Rosablanca Block and the Montecristo Block acquired by Potomac (Bermuda)
or GHK. Under the GHK Agreement, the applications to acquire the association
contract was assigned to GHK for the purpose of allowing the association
contracts on the specified blocks to be acquired by GHK. With respect to any
association contract obtained, GHK agreed to assign a 25 percent interest in
such association contract to Potomac Energy (BVI) Ltd., a British Virgin Islands
wholly-owned subsidiary corporation of the Company ("Potomac (BVI)). GHK is
designated as operator under the association contracts obtained. The GHK
Agreement further provided that (i) upon issuance of the association contracts,
GHK will to pay Potomac (Bermuda) $150,000, (ii) GHK will provide any initial
guarantee for the
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performance of exploratory activity under the association contracts as required
by Ecopetrol, (iii) following issuance of each such association contract,
Potomac Energy Corporation had three months to (A) qualify Potomac (BVI) to do
business in Colombia, (B) reimburse GHK 25 percent of any initial guarantees
required by Ecopetrol, and (C) demonstrate financial capability to pay 25
percent of the costs to perform the first year obligations of the association
contract, and (iv) cause Potomac (BVI) to enter into an International Operating
Agreement with accounting procedure for each contract area naming GHK's branch
company as operator. Pursuant to the Merger, Potomac Acquisition acquired and
assumed all obligations of Potomac (Bermuda) under the agreement with GHK.
Following execution the GHK Agreement was assigned and transferred by GHK to
Seven Seas Petroleum, Inc. ("Seven Seas") and by Omnipresent Exploration to
Potomac (BVI). As of the date of this Report, Potomac (BVI) is qualified to do
business in Colombia. As of June 30, 1999, the Company was in full compliance
with the terms of the GHK Agreement.
As of December 31, 1998, the Company had completed 10 surface
scraping on the Guaduas Block which showed approximately 31 coal seams two to
ten meters thick ranging from the surface to a depth of 72 feet. Early analysis
of the quality of the coal is estimated at 14,000 BTU, .07 percent sulfur and 5
percent ash. These shows indicated the need for further review and analysis by
the Company. As a result, the Company began coring operations to further
identify specific coal seams, thickness, and a real extent. As of June 30, 1999
coring operation were still in progress on a three to six well program started
in April of 1999. Two core holes have been completed with marginal coal deposits
found. The Company postponed drilling additional holes until geological review
of the areas and the structures could be better evaluated with the results of
first two cores. The geological review is not yet complete and drilling has not
yet resumed as of the date of this report
Pursuant to agreement dated August 8, 1998 (the "Erasmos Agreement"),
the Company agreed to acquire from Erasmo Alfredo Almanza Latorre, a Colombian
citizen, the Association Contract for Small Carbon Exploration and Exploitation
on the Guaduas Block issued to him by Ecocarbon. Under the Erasmos Agreement,
the association contract was assigned to PEC. On December 2, 1998, the Company
agreed to sell a 50 percent interest in the Association Contract related to the
Guaduas Block to Arena Power, L.P., a Houston based U.S. corporation (the "Arena
Agreement"). The Arena Agreement provides for the establishment of a Colombian
corporation, Carbones de Guaduas, Ltd., of which the Company and Arena will
jointly own on an equal basis through their respective wholly owned
subsidiaries, Magdalena Energia, LLC and Grupo Energia, LLC. The Company
transferred the Guaduas Association Contract to Carbones de Guaduas on January
28, 1999. Carbones de Guaduas is designated as operator under the association
contracts. The Arena Agreement further provides that (i) upon establishment of
the Colombia corporation, Arena will match the Company's initial developmental
costs, (ii) Arena and the Company will then share equally all future
developmental costs, and (iii) Arena and the Company will equally provide any
initial guarantee for the performance of exploratory activity under the
association contracts as required by Ecocarbon.
ROSABLANCA AND MONTECRISTO ASSOCIATION CONTRACTS
On November 19, 1997, the Association Contracts related to the
Rosablanca Block and Montecristo Block (the " Rosablanca and Montecristo
Association Contracts") were awarded to the Colombian branch of Seven Seas and
the Company became entitled to receive a 25 percent interest in the Association
Contracts, subject to the GHK Agreement. In connection with obtaining the
Rosablanca and Montecristo Association Contracts, Seven Seas was not required to
provide any form of financial guarantee of performance for the Rosablanca and
Montecristo Association Contracts.
The Rosablanca and Montecristo Association Contracts provide generally
for a three-to-six year exploration phase followed by a 22-year production
period, with partial relinquishments of acreage, excluding commercial fields,
required commencing at the end of the sixth year of each contract. Under the
terms of each contract, Seven Seas and the Company are required over a
three-to-six-year period to undertake and complete certain work commitments
involving exploration and development of the Rosablanca Block and the
Montecristo Block. Seven Seas and the Company are required during the first two
years of the contracts to
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reprocess existing seismic data (300 kilometers on the Rosablanca Block and 500
kilometers on the Montecristo Block), acquire and interpret landstat images and
perform surface geological and geochemical work, and shoot and evaluate 100
kilometers of new two dimensional seismic and, at the election of the Company
and Seven Seas, during the third year to drill one exploratory well. In the
event after the first two years, the Company and Seven Seas elect to drill an
exploratory well, they will be required to relinquish and reduce their interest
in the block to not more than 247,100 acres (100,000 hectares). The contract
will terminate at the end of the third year, unless an extension is granted by
Ecopetrol pursuant to application or a commercial field has been discovered. The
exploration period may be further extended beyond the third year upon annual
application to and approval by Ecopetrol for up to three years. During each year
of this extension, Seven Seas and the Company will be required to drill one
additional exploratory well that penetrates a hydrocarbon producing formation.
In the event such work commitments are not completed as required, the contract
rights will be forfeited. Furthermore, if a commercial field is discovered
during the initial three-year period of the contract or any extension thereof,
the block or contract area will be reduced 50 percent, two years thereafter will
be reduced 50 percent of the remaining block or contract area and two years
thereafter will be further reduced to the commercial fields that are producing
or under development plus a reserve belt 2.5 kilometers wide surrounding each
Commercial Field within the block or contract area. Upon application to and
approval by Ecopetrol, the period for retention of the block or contract area
may be extended for up to four years.
Under the terms of the contracts, Ecopetrol will receive a royalty
equal to 20 percent of production (after pipeline tariffs are deducted) on
behalf of the Colombian government and, in the event a commercially feasible
discovery is made, Ecopetrol will acquire a 50 percent interest in the remaining
production, bear 50 percent of the development costs, and reimburse Seven Seas,
the Company and other joint venture partners, from Ecopetrol's share of future
production, for 50 percent of the costs of certain exploration activities. Upon
acceptance of a field as commercial, Ecopetrol will acquire a 50 percent
interest therein and the interests of the other parties to the contract,
including the Company, will be reduced by 50 percent; all decisions regarding
the development of a commercial field will be made by an Executive Committee
consisting of representatives of the parties to the contract who will vote in
proportion to their respective interests in such contract. Decisions of the
Executive Committee will be made by the affirmative vote of the holders of over
50 percent of the interests in the contract.
If any commercial field in the respective contract areas produces in
excess of 60 million barrels, Ecopetrol's interest in production and costs for
such contract area increases from 50 percent to 75 percent as the ratio of the
accumulated income attributable to Seven Seas, the Company or any other joint
venture partner other than Ecopetrol to the accumulated development, exploration
and operating costs of such parties (less any expenses reimbursed by Ecopetrol)
increases from one to one to three to one.
Under the terms of the Association Contracts, in the event a discovery
is made and is not deemed to be commercially feasible by Ecopetrol, Seven Seas
and the Company may expend up to $2 million over a one-year period to further
develop the field, 50 percent of which will be reimbursed if Ecopetrol
subsequently accepts the commercial feasibility thereof. If Ecopetrol does not
declare the field commercial, the joint venture may continue to develop the
field at its own expense. In such event, Ecopetrol will have the right to
acquire a 50 percent interest therein upon payment of 50 percent of Direct
Exploration Costs and 200 percent of the Additional Exploration Costs expended
by the joint venture, which payment may be made out of Ecopetrol's share of
future production.
GUADUAS ASSOCIATION CONTRACTS
On August 8, 1998, the Association Contract related to the Guaduas
Block was acquired by the Company and on January 28, 1999 was transferred to
Carbones de Guaduas, Ltd. The Company has a 50 percent interest in the
Association Contract, subject to the Erasmos and Arena Agreements. In connection
with obtaining the Guaduas Association Contract, neither the Company nor Arena
were required to provide any form of financial guarantee of performance of the
Guaduas Association Contract.
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The Guaduas Association Contract provides generally for a two-year
exploration phase followed by a 10-year production period, with no
relinquishments of acreage or commerciality of field required until the end of
the 10-year production period. Under the terms of the contracts, Carbones de
Guaduas is required over a two-year period to undertake and complete certain
work commitments involving exploration of the Guaduas Block. Carbones de Guaduas
is required during the first two years of the contracts to complete a
professional engineering study which includes developing and completing
topography of the 6,000 acres, analyzing and evaluating potential coal reserves,
conducting coring of three or more locations to a depth of 100 feet on at least
1,000 acres, and completing and submitting a detailed mining plan for the
extraction and exploitation of coal reserves. After the first two years, in the
event the Company and Arena Power through Carbones de Guaduas elect to mine
coal, they will be required to have a plan for using the coal or exporting the
coal, including storage and transportation. The contract will terminate at the
end of the second year, unless the Company and Arena Power through Carbones de
Guaduas elect to move to the production phase. The exploration period may be
further extended beyond the second year upon annual application to and approval
by Ecocarbon for up to three years. The production period may be further
extended beyond the ten years upon annual application to and approval by
Ecocarbon for up to 25 years. In the event such work commitments are not
completed as required, the contract rights will be forfeited.
Under the terms of the contracts, Ecocarbon will not receive a royalty
until the end of the first 10-year production period. After the first ten-year
production period, Ecocarbon will receive a royalty equal to 20 percent of
production (after export tariffs are deducted) on behalf of the Colombian
government.
The Company's net income, as defined under Colombian law, from
Colombian sources is subject to Colombian corporate income tax at a rate of 35
percent. An additional remittance tax is imposed upon remittance of profits
abroad at a rate of seven percent.
PLAN OF DEVELOPMENT
ROSABLANCA AND MONTECRISTO BLOCKS
Seven Seas and the Company have established a 24-month plan of
exploration and development of the Rosablanca and Montecristo Blocks. Under this
plan, established in November of 1997, in addition to the minimum work
commitments under the Rosablanca and Montecristo Association Contracts (the cost
of which is estimated to be approximately $750,000), Seven Seas and the Company
propose to (i) the obtain and process new two-dimensional seismic (75 kilometers
on the Montecristo Block and 50 kilometers on the Rosablanca Block) at an
estimated cost of $550,000, (ii) identify and drill one exploratory well on the
Rosablanca Block at an estimated cost of $500,000, (iii) drill one horizontal
well on the Rosablanca Block at an estimated cost of $1,750,000, (iv) drill
three additional horizontal wells on the Rosablanca Block at an estimated cost
of $3,750,000, and (v) reenter and deepen an existing well on the Montecristo
Block at an estimated cost of $500,000. As of June 30, 1999, Seven Seas had
requested environmental approval for the shooting of additional two-dimensional
seismic (75 kilometers on the Montecristo Block and 50 kilometers on the
Rosablanca Block). Currently, this shooting is anticipated to begin in the
fourth quarter of 1999. Additionally, Seven Seas has agreed to begin the
environmental approval process to reenter and deepen the existing well on the
Montecristo Block, however, no specific time frame for this well has been
determined. The timing and undertakings under this development plan as it
continues to be achieved will depend upon a number of factors, most of which
will not be within the control of the Company, including availability of capital
resources of the Company and its joint venture partners, the results of
geological and geophysical surveys and analysis, the expected or actual results
of each development undertaking or operation which in large part may be affected
by the anticipated or current cost of such operations and the prices of crude
oil and natural gas, general domestic and international economic conditions
within and without the oil and gas industry, and Colombian legal and regulatory
compliance. Therefore, there can be no assurance that such plan of exploration
and development will be successful or will be completed as anticipated as of the
date of this report.
GUADUAS BLOCK-
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The Company has established a 12-month plan of development of the
Guaduas Block. Under this plan, established in December 1998, the Company and
Arena Power propose, in addition to the work commitments outlined in the
Association Contract, to (i) drill at least five core holes at an estimated cost
of $100,000, (ii) identify, analyze and evaluate based on the core data obtained
a preliminary estimate of coal reserves with the assistance of third-party
accredited and licensed mining engineering firm at an estimated cost of $25,000,
(iii) begin full mining operations should reserves warrant as the first phase of
a three phase mining and electrical power generation project with an estimated
cost to be $8,000,000 ($1,000,000 as equity capital by the Company and
$7,000,000 as debt financing). As of the date of this report, this plan is
temporarily on hold pending the results of the geological review of the coring
results.
UNCERTAINTY OF FUTURE ESTIMATES OF OIL AND NATURAL GAS RESERVES
As of the date of this report, the Company does not have any proved
oil, gas or coal reserves. However, it is anticipated that through development
of the Company's interest in the Middle Magdalena Valley Basin and other
properties acquired and developed, the Company will obtain and provide to the
shareholders of the Company, through annual reports or other means, estimates of
the Company's reserves. Estimates of the Company's proved oil, gas and coal
reserves and projected future net revenues will be based on reserve reports
prepared by independent engineers. The estimation of reserves requires
substantial judgment on the part of the petroleum and mining engineers,
resulting in imprecise determinations, particularly with respect to new
discoveries. Different reserve engineers may make different estimates of reserve
quantities and revenues attributable thereto based on the same data. Estimates
of proved undeveloped reserves, which in the future may comprise a substantial
portion of the Company's reserves, are by their nature less than certain are.
The accuracy of any reserve estimate depends on the quality of the available
data as well as engineering and geological interpretation and judgment. Results
of drilling, mining, testing and production and changes in the assumptions
regarding decline and production rates, crude oil prices, coal prices,
electrical prices, revenues, taxes, capital expenditures, operating expenses,
geologic success and quantities of recoverable crude oil may vary substantially
from those assumed in the estimates, may result in revisions to such estimates
and could materially affect the estimated quantities and related value of
reserves set forth herein. The estimates of future net revenues will reflect
oil, gas and coal prices as of the date of estimation, without escalation. There
can be no assurance, however, that such prices will be realized or that the
estimated production volumes will be produced during the periods indicated.
Future performance that deviates significantly from the reserve reports could
have a material adverse effect on the Company. Therefore, this can be no
assurance that such plan of development will be successful or will be completed
as anticipated as of the date of this Report.
RESULTS OF DEVELOPMENT STAGE OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
Potomac (Bermuda) was formed on April 7, 1997. Prior to the Merger, PEC
was inactive and did not have any assets or liabilities. Effective June 17,
1998, Potomac (Bermuda) merged with and into Potomac Acquisition and became a
wholly owned subsidiary of PEC. The Merger was accounted for as a reverse
acquisition of PEC by Potomac (Bermuda) under the purchase method of accounting.
Therefore, the following discussion and analysis of results of operations
discussed below are only those of to Potomac (Bermuda) prior to the Merger. See
"--Background."
The Company is a development stage company that during the three month
period ending June 30, 1999, did not have any revenue and incurred a net loss of
$170,257. There is no assurance that the Company will have revenues from oil,
gas or coal sales in the future. The only revenue received by Potomac during the
three months ended June 30, 1999 was from interest income of $411 earned or
accrued on cash and cash equivalents and other income of $1,000. During the
three months ended June 30, 1999 Potomac continued to fulfill it's work
commitments on the Rosablanca, Montecristo and Guaduas Association Contracts and
in connection therewith incurred $19,797 in professional fees and consulting
expenses and incurred miscellaneous expenses of $135,905. Other than the
activities associated with fulfilling the required work commitments of the
Rosablanca, Montecristo
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and Guaduas Association Contracts, Potomac did not conduct any operating
activities during the three months ending June 30, 1999.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
The Company's computer systems are year 2000 compliant. The Company's
computer systems which employed two digit year date format rather than four
digit date format have been programmed to comply with year 2000 requirements on
a system-by-system basis. Currently, the Company utilizes a WindowsNT operating
system which operates off of a Dell manufactured server.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires disclosures related to
trading and holding of derivative instruments and the conduct of hedging
activities. This statement is effective for financial statements of the Company
for the year beginning after June 15, 1999. Management of the Company believes
that adoption of SFAS No. 133 will not have a material effect on the Company's
financial statements.
EFFECTS OF RELATED ENERGY (OIL, GAS AND COAL) PRICE FLUCTUATIONS
In the event the Company's exploration activities result in significant
production of crude oil, natural gas or coal the Company's operations and the
value of its assets, including producing and non-producing assets, will be
subject to the effects of fluctuations in crude oil, natural gas and coal
prices. As a result of the instability and volatility of prices and the surplus
of crude oil and natural gas, and current market conditions within the oil and
gas industry, financial institutions have become more selective in the energy
lending area and have reduced the percentage of existing reserves that may
qualify for the borrowing base to support energy loans.
In the future, the Company anticipates that its principal source of
cash flows, if any, will be from the production and sale of crude oil, natural
gas and coal reserves that are depleting assets. Cash flows from production
sales depends upon the quantity of production and the price obtained for such
production. Generally, an increase in prices allows a company to finance its
operations to a greater extent with internally generated funds, may allow a
company to obtain equity financing more easily or on better terms and lessens
the difficulty of attracting financing alternatives available to a company from
industry partners and non-industry investors. However, price increases heighten
the competition for energy association contracts, leases and other contractual
arrangement, increase the costs of exploration and development activities, and
because of potential price declines, increase the risks associated with the
purchase of producing properties while prices are at higher levels.
A decline in oil, gas and coal prices (i) reduces internally generated
cash flows which in turn reduces the funds available for exploration for and
replacement of reserves, (ii) increases the difficulty of obtaining equity
financing and worsens the terms on which such financing may be obtained, (iii)
reduces the number of available oil, gas and coal properties on reasonable
economic terms, (iv) may result in the expiration of oil, gas and coal
contractual interests based upon the potential reserves in relation to
exploration and development costs, (v) results in marginally productive oil, gas
and coal mines being abandoned as non-commercial, and (vi) increases the
difficulty of attracting financing alternatives available from industry partners
and non-industry investors. However, price declines reduce the competition for
oil, gas and coal interests and, correspondingly, reduce the prices paid for
such interests or result in obtaining such interests on more favorable terms.
Furthermore, exploration and production costs generally decline, although the
decline may not be at the same rate of decline of energy prices.
SEASONALITY
It is anticipated that the results of operations of the Company will be
somewhat seasonal due to seasonal
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fluctuations in the price for crude oil, natural gas, coal and electrical
kilowatts. Historically, crude oil prices have been generally higher in the
third and fourth quarters and natural gas prices have been generally higher in
the fourth quarter. Electrical kilowatts tend to be higher in the third quarter.
Due to these seasonal price fluctuations, it is anticipated that results of
operations for individual quarterly periods may not be indicative of results
that may be realized on an annual basis.
INFLATION AND CHANGES IN PRICES
Inflation principally affects the costs required to drill, complete and
operate oil and gas wells as well as mine coal. In recent years inflation has
had a minimal effect on such costs. However, increases and decreases in drilling
or mining activities, which generally a linked to crude oil, natural gas and
coal price increases and decreases, have resulted in the increase and decrease
of exploration, development and exploitation costs on an industry-wide basis.
LIQUIDITY AND CAPITAL RESOURCES
Potomac has financed its development state activities through the
sale of equity securities and does not have any borrowing facilities or
arrangements in place to fund its capital commitments. During the twelve months
ended December 31, 1998, net cash used by operating activities totaled $392,020
cash provided by financing activities totaled $741,036. For the six months
ending June 30, 1999, net cash used by operating activities total $ 264,652 net
cash provided by financing activities totaled $150,444. As of June 30, 1999,
Potomac had working capital of $ (168,179) compared to working capital of
$116,198 at June 30, 1998.
Under the terms of the Rosablanca and Montecristo Association
Contracts, the Company has certain minimum work commitments on a joint venture
basis with Seven Seas, the Company's share of such costs is estimated to be
approximately $750,000. In addition to the minimum work commitments, the Company
has established a 24-month plan of development of the Rosablanca and Montecristo
Blocks at an estimated cost of $3,496,984. Under the terms of the Guaduas
Association Contract, the Company has certain minimum work commitments on a
joint venture basis with Arena Power, the Company's share of such costs is
estimated to be approximately $387,500. In addition to the minimum work
commitments, the Company has established a 24-month plan of development of the
Guaduas Blocks at an estimated cost of $1,000,000. The Company anticipates that
the costs of development of the Rosablanca, Montecristo and Guaduas Blocks will
be funded with proceeds from the sale of equity and debt securities and,
although unlikely, borrowings. There is no assurance that such funding will be
available or on terms acceptable to the Company, in which event the Company may
forfeit its interests in the Blocks.
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective June 17, 1998, Potomac Energy (Bermuda) Ltd., a Bermuda
corporation ("Potomac (Bermuda)"), merged with and into Potomac Exploration
Acquisition Corporation, a wholly-owned subsidiary of the Company ("Potomac
Acquisition"), pursuant to a Plan of Reorganization and Agreement of Merger
dated June 12, 1998 (the "Merger"). As a condition of the Merger, on June 17,
1998, the outstanding Common Stock of the Company was reverse split on the basis
of one share for each 41.40846 outstanding shares, which resulted in 579,270
shares of Common Stock being outstanding immediately prior to the Merger. In
consummation of the Merger, the Company issued 7,050,000 shares of its Common
Stock to the former shareholders of Potomac (Bermuda) and the Company's name was
changed to "Potomac Energy Corporation."
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Pursuant to its Certificate of Incorporation, the Company authorized up
to 50,000,000 shares of Common Stock, $.001 par value. As of the date of this
report, the issued and outstanding capital stock of the Company consists of
7,974,270. On April 1, 1999 the Company offered an additional 2,160,000 shares
of Common Stock and Redeemable Warrants. As of June 30, 1999 70,000 shares have
been purchased from this offering. The following is a description of the
Company's capital stock and the warrants that were attached to the Company's
offering. This is only a summary of certain matters relating to the capital
stock of the Company and is qualified in its entirety by the provisions of the
Company's Certificate of Incorporation, Bylaws and the Redeemable Warrant
Agreement between the Company and UMB Bank, NA (the "Warrant Agent").
The Common Stock and Warrants sold will be not be registered under the
Securities Act of 1933, as amended (the "1933 Act") or under any state
securities laws, will constitute "restricted securities" within the meaning of
Rule 144 under the 1933 Act ("Rule 144"), and will not be freely tradable in the
United States. Therefore, purchasers of the Common Stock and Warrants are
required to bear the economic risk of their investment in the Common Stock and
Warrants, and should consider their purchase of Units as an illiquid investment.
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available at such times and in such
amounts as the Board of Directors may, from time to time, determine, and upon
liquidation and dissolution are entitled to receive all assets available for
distribution to the shareholders. Holders of Common Stock are entitled to one
vote per share on matters voted upon by the shareholders. The Common Stock has
no preemptive rights and no subscription, redemption or conversion privileges.
The Common Stock does not have cumulative voting rights, which means that
holders of a majority of shares voting for the election of directors can elect
all members of the Board of Directors subject to election. In general, a
majority vote of shares represented at a meeting of shareholders at which a
quorum is present is sufficient for all actions that require the vote or
concurrence of shareholders. It is anticipated by management of the Company that
upon issuance of the Common Stock pursuant to this offering all of the
outstanding shares of Common Stock will be fully paid and nonassessable.
REDEEMABLE WARRANTS
EXERCISE OF REDEEMABLE WARRANTS. The Redeemable Warrants (the
"Warrants") entitles the holders (the "Warrant Holders"), upon payment of the
exercise price of $4.00 per share, to purchase one share of Common Stock per
Warrant. Unless previously redeemed, the Warrants are exercisable during the
three-year period ending June 30, 2002 (the "Expiration Date"). A Warrant Holder
will only be permitted to exercise the Warrants held in the event the shares of
Common Stock issuable upon exercise of the Warrants are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the Warrant Holder resides.
REDEMPTION. The Warrants are subject to redemption by the Company, on
not less than 30 nor more than 60 days' written notice, at a price of $.01 per
Warrant (the "Redemption Price"), at any time that the average closing price per
share of the Common Stock is at least $8.00 per share for 10 or more consecutive
trading days. Warrant Holders will automatically forfeit their rights to
purchase the shares of Common Stock issuable upon exercise of such Warrants
unless the Warrants are exercised before the close of business on the business
day immediately prior to the date set for redemption (the "Redemption Date").
All of the outstanding Warrants must be redeemed if any are redeemed. A notice
of redemption will be mailed to each of the registered Warrant Holders by first
class, postage prepaid, within five business days after the date set for
redemption, but no earlier than the 30th nor later than the 60th day before the
date fixed for redemption. The notice of redemption shall specify the redemption
price, the date fixed for redemption, the place where the Warrant certificates
shall be delivered and the redemption price to be paid, and that the right to
exercise the Redeemable Warrants shall terminate at 5:00 p.m. New York City time
on the business day immediately preceding the Redemption Date.
WITHDRAWAL RIGHTS. The Redeemable Warrants tendered for exercise may
not be withdrawn and will be irrevocable.
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VALIDITY OF EXERCISE. All questions with respect to the validity, form,
eligibility (including time of receipt) and acceptance for exercise of the
Warrants will be determined by the Company, in its sole discretion, which
determination will be final and binding upon the Warrant Holder and the Company.
The Company reserves the absolute right to reject any and all tenders of
Warrants which it determines not to be in proper form, or the acceptance or
exercise of which would, in the opinion of the Company's counsel, be unlawful.
The Company also reserves the absolute right to waive any defect or irregularity
in the exercise of the Warrants. The Company, Warrant Agent, or any other person
will not be under any duty to give notification of any defects or irregularities
in exercise, nor will they incur any liability for failure to give such
notification. Exercise of the Warrants will not be deemed to have been properly
made until any irregularities have been waived by, or cured to the satisfaction
of, the Company.
ACCEPTANCE OF REDEEMABLE WARRANTS; DELIVERY OF SHARES. Warrants
properly tendered will be promptly accepted for exercise. The Company will be
deemed to have accepted for exercise properly tendered Warrants when, as and if
the Company has given oral or written notice thereof to the Warrant Agent.
Certificates for Common Stock will be issued as promptly as practicable after
the Warrants are accepted for exercise. Any Warrants not exercised before the
Expiration Date will expire or, if applicable, the day preceding the Redemption
Date will be redeemed.
In certain cases, the sale of the Common Stock by the Company upon
exercise of Warrants could violate the securities laws of certain states or
other jurisdictions. , the Company has agreed to file (Within one year following
completion of this offering) a registration statement to cause registration the
Common Stock underlying the Warrants under the 1933 Act and has agreed to use
its best efforts to register or qualify of the Common Stock for sale in all
states in which the Warrant Holders reside; however, there is no assurance that
such registration will become effective in such states. In addition, the Company
may undertake registration of the Common Stock in such other states as
determined in the sole discretion of the Company. Those Warrant Holders residing
in states in which the Common Stock has not been registered or otherwise
qualified for sale in such state, will not be permitted to exercise their
Warrants.
Prior to tendering of Redeemable Warrants for exercise, a Warrant
Holder should either contact the Company or the Warrant Agent to determine
whether the Common Stock has been registered or qualified in the state of such
Warrant Holder's residence. The Company will use its best efforts to cause a
registration statement to be declared effective under the 1933 Act and the laws
of various states as may be required to cause the sale of the Common Stock upon
exercise of Warrants to be lawful. However, the Company is not required to
accept the exercise of the Warrants, if, in the opinion of counsel, the sale of
the Common Stock upon such exercise would be unlawful. In such cases, the
Warrant Holder may sell the Warrants or continue to hold the Warrants.
The Warrant Agent will act as agent for the tendering Warrant Holders
of the Warrants for the purposes of receiving from the Company the Common Stock
and transmitting such securities to the Warrant Holders. Tendered Warrants not
accepted for exercise by the Company will be returned to the Warrant Holder.
In the event the Company is delayed in its acceptance for exercise or
is unable to accept for exercise any Warrants for any reason, in such event,
without prejudice to the Company's right hereunder, the Warrant Agent, at the
request of the Company, may nevertheless retain Warrants tendered for exercise
together with any cash or check and any other required documents, subject to
delivery of the shares of Common Stock, until notified otherwise by the Company.
See "--Withdrawal Rights," above.
TRANSFER TAXES. The Company will pay when due all federal and state
documentary stamp and other original issue taxes which may be payable in respect
of the original issuance of the Warrant certificates, or any shares of Common
Stock or other securities upon the exercise of Warrants. The Company is not,
however, required (i) to pay any tax which may be payable in respect of any
transfer involved in the transfer and delivery of Warrant certificates or the
issuance or delivery of certificates for Common Stock or other securities in a
name other than that of the registered holder of the Warrant certificate
surrendered for exercise or (ii) to issue or deliver any certificate for shares
of Common Stock or other securities upon the exercise of any Warrant until any
such tax shall have been paid, all such tax being payable by the holder of such
Warrant at the time of surrender for exercise or otherwise.
ANTI-DILUTION PROVISIONS. The Warrants contain provisions that protect
the Warrant Holder against dilution by adjustment of the number of shares of
Common Stock or other securities of the Company purchasable upon exercise
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of the Warrants in certain events, such as stock dividends, stock splits,
mergers, sale of substantially all of the Company's assets, and for other
extraordinary events.
ELIMINATION OF FRACTIONAL SHARE. The Company is not required to issue
fractional shares of Common Stock, and, in lieu thereof, will make a cash
payment based upon the current market value of such shares. The Warrant Holders
will not possess any rights as shareholders of the Company unless and until the
Warrant Holders exercise the Warrants and then only as holders of the Common
Stock.
RIGHT TO REDUCE EXERCISE PRICE AND EXTEND EXPIRATION DATE. Although the
Warrants have a fixed exercise price and have a fixed expiration date, it is
possible that in the future the Company may wish to reduce the exercise price or
extend the exercise period. The Company has no plans to and will not, in any
way, prior to this offering, reduce such price or extend the exercise period of
the Warrants.
OUTSTANDING WARRANTS
As of the date of this Report, the Company has issued 310,000 warrants
to purchase equal amounts of shares of Common Stock Warrants can be exercised at
any time prior to the expiration date. The exercise price for all warrants is
$4.00 per share.
OUTSTANDING STOCK OPTIONS
As of the date of this Report, the Company has granted stock options to
purchase 1,075,000 shares of Common Stock during various periods, all expiring
in December 2003, at exercise prices of $.50 to $1.25 per share, with a weighted
average exercise price of $.1.00 per share. In addition, the Company has
reserved an additional 425,000 shares of Common Stock for issuance of stock
options, pursuant to the Company's Stock Option Plan.
TRANSFER AND WARRANT AGENT
UMB Bank, NA serves as transfer agent and registrar of the Common Stock of
the Company and serves as Warrant Agent for the Warrants. The address of UMB
Bank, NA is 928 Grand Boulevard, Kansas City, Missouri 64106, and its mailing
address is Post Office Box 410064, Kansas City, Kansas 64141-0064.
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4. OTHER INFORMATION
Not applicable.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
Not applicable.
(b) REPORTS ON FORM 8-K.
Not applicable.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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POTOMAC ENERGY CORPORATION
(Formerly Midwestern Resources, Inc.)
(Registrant)
By: /S/ JAMES E. FRAZIER
----------------------------------------------
James E. Frazier, Chief Financial Officer
Date: September 15, 1999
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