<PAGE>
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 19934 for the quarterly period ended March 31, 2000.
/ / 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)
OKLAHOMA 73-1088064
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2601 NORTHWEST EXPRESSWAY, SUITE 1100W
OKLAHOMA CITY, OKLAHOMA 73112-7293
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (405) 840-1427
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 X No
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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 June 23, 2000 18,641,644 shares of issuer's Common Stock, $.01 par value
per share, were outstanding. This reflects stock issued as a result of recent
events subsequent to the period ending March 31, 2000. - See Item 2.
Management's Discussion and Analysis or Plan of Operations.
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
Yes No X
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TABLE OF CONTENTS
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Report......................................................................... 3
Consolidated Balance Sheets, March 31, 2000 (Unaudited) and December 31, 1999 (Audited)..................4
Consolidated Statements of Operations and Accumulated Deficit for the
Three Months Ended March 31, 2000 (Unaudited), the Period from Inception (April 7, 1997)
to March 31, 2000, the and the Three Months Ended March 31, 1999 (Unaudited).............................5
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2000 (Unaudited), the Period from Inception (April 7, 1997) to
March 31, 2000, the and the Three Months Ended March 31, 1999
(Unaudited)..............................................................................................6
Notes to Consolidated Financial Statements (March 31, 2000 Information is Unaudited).................... 7
Item 2. Management's Discussion and Analysis or Plan of Operations...............................................9
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................12
Item 2. Changes in Securities and Use of Proceeds...............................................................12
Item 3. Submission of Matters to a Vote of Security Holders.....................................................13
Item 4. Other Information.......................................................................................13
Item 5. Exhibits and Reports on Form 8-K........................................................................13
Signatures.......................................................................................................14
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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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Board of Directors
Potomac Energy Corporation
Oklahoma City, Oklahoma
We have reviewed the accompanying Consolidated Balance Sheets of Potomac Energy
Corporation (an Oklahoma corporation in the development stage) and Subsidiaries
as of March 31, 2000, and the related Consolidated Statements of Operations, and
Cash Flows for the three months period ending March 31, 2000 These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. An review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for the financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted audit standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principals.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated Balance Sheet of Potomac Energy Corporation and
Subsidiaries as of December 31, 1999 and the related Consolidated Statements of
Operations and Accumulated Deficit and Cash Flows for the year then ended (not
presented herein); and in our report dated May 9, 2000 we expressed an
unqualified opinion on those consolidated financial statements.
As discussed in Note C to the financial statements, the Company has incurred
note losses since its inception and has experienced severe liquidity problems.
Those conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/S/ Smith Carney & Company, PC.
Oklahoma City, Oklahoma
June 21, 2000
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PART I. POTOMAC ENERGY CORPORATION
ITEM 1. FINANCIAL STATEMENTS (A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
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3/31/00 12/31/99
(UNAUDITED) (AUDITED)
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ASSETS
CURRENT ASSETS:
Cash $ 528 $ 1,424
Accounts Receivable $ 776 $ 776
Marketable Securities $ - $ -
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Total Current Assets $ 1,304 $ 2,200
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INVESTMENTS $ 290,000 $ 290,000
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PROPERTY & EQUIPMENT
Furniture & Equipment $ 27,818 $ 27,818
Office Equipment, capital leases $ 46,379 $ 46,379
Leasehold improvements $ 6,912 $ 6,912
Oil and Gas Interests, non-producing , Full Cost Method $ 561,418 $ 561,418
$ - $ -
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$ 642,527 $ 642,527
Less Accumulated Depreciation $ (23,803) $ (20,303)
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$618,724.12 $ 622,224
OTHER ASSETS
Organization Costs $ - $ -
Deposits $ 4,061 $ 4,061
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TOTAL ASSETS $ 914,089 $ 918,485
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft $ 22,088 $ 34,589
Accounts Payable $ 79,815 $ 154,273
Notes Payable, Stockholders $ 368,950 $ 148,500
Accrued Interest $ 18,698 $ 8,136
Accured Taxes, other than income $ 4,116 $ 3,497
Current portion of capital
Lease obligations $ 11,394 $ 14,908
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Total Liabilities $ 505,061 $ 363,903
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Long-Term Portion of Capital
Lease Obligations $ 4,502 $ 5,832
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Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, Series A, $.001 par value; 20,000,000 shares of
convertible stock authorized and 290,000 shares issued and outstanding
in 1999, entitled in liquidation to $348,000 $ 290 $ 290
Common Stock, $.01 par value; 50,000,000 shares authorized and
8,094,270 issued and outstanding $ 80,943 $ 80,943
Additional Paid-In Capital $ 2,559,846 $ 2,559,846
Deficit Accumulated During Development Stage $(2,236,553) $(2,092,329)
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Total Stockholders' Equity $ 404,526 $ 548,750
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 914,089 $ 918,485
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SEE ACCOMPANYING NOTES.
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POTOMAC ENERGY CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (UNAUDITED)
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Period from Inception
Three Months Three Months 7-Apr-97
Ended Ended to
31-Mar-00 31-Mar-99 31-Mar-00
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REVENUES
Income - - -
Foreign Currency - - 441
Interest Income - 974 10,752
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TOTAL REVENUES $ - $ 974 $ 11,193
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EXPENSES
Advertising 1,031 1,610 15,012
Auto 121 1,999 5,974
Bank charges 293 152 3,054
Computer Expense - - 3,763
Consulting - 31,861 475,909
Stock-Based Non-Employee Compensation Expense - - 92,159
Contributions 50 - 300
Depreciation 3,500 3,505 23,803
Dues & Subscriptions 55 136 6,341
Employee Benefit Program 5,288 426 45,625
Impairment - - 24,881
Insurance 3,845 7,158 5,043
Interest 12,331 2,612 31,510
Meal & Entertainment 2,814 7,174 44,571
Miscellaneous 5,834 3,281 21,659
Office Expense 392 527 8,248
Office Supplies 659 75 8,895
Payroll Tax 3,242 5,199 33,659
Professional fees 37,714 12,515 206,320
Rent & Lease 11,716 10,068 79,519
Salaries 43,340 60,740 348,411
Stock-Based Employee Compensation Expense - - 606,250
SEC Related Expense 2,447 3,217 34,017
Taxes - - 15,886
Telephone 6,120 6,399 44,322
Travel 3,433 11,083 62,616
TOTAL EXPENSES $ 144,224 $ 169,735 $ 2,247,746
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NET LOSS - DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE $ (144,224) $ (168,761) $(2,236,553)
=========== =========== ===========
Net Loss Per Share $ (0.02) $ (0.11) $ (0.28)
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Weghted Average Number of Common Shares Outstanding 8,094,270 1,589,000 8,094,270
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SEE ACCOMPANYING NOTES
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POTOMAC ENERGY CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS THREE MONTHS PERIOD FROM
ENDED ENDED INCEPTION
(APRIL 7, 1997)
TO
31-MAR-00 31-MAR-99 31-MAR-00
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Cash Flows from Operating Activities:
Net Loss (144,224) (168,761) (2,236,553)
Adjustment to Reconcile Net Loss to Net Cash
Provided (used) by Operations:
Stock Compensation:
Compensation Expense - - 606,250
Consulting Expense: - - 92,159
Depreciation 3,500 3,505 48,684
(Increase) Decrease:
Accounts Receivable - (2,468) (776)
Increase (Decrease):
Bank Overdraft (12,501) 22,088
Accounts Payable (74,458) 17,552 101,037
Accrued taxes 619 - 619
Accrued Expenses 10,562 1,940 22,195
Deposits - - (4,061)
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NET CASH USED BY OPERATING ACTIVITIES $ (216,502) $ (148,232) $(1,348,358)
========== =========== ===========
Cash Flows from Investing Activities:
Exploration of Oil and Gas Properties: - (44,759) (311,418)
Exploration of Coal Properties: - 1,819 (24,881)
Purchase of Poperty & Equipment - (104) (34,731)
Purchase of Investment - - (327,777)
Sale of Investments - - 37,777
Stock Issued During reorganziation - - 5,793
Organization Costs - - (21,222)
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NET CASH USED BY INVESTING ACTIVITIES $ - $ (43,043) $ (676,459)
========== =========== ===========
Cash Flows from Financing Activities:
Sale of Stock - - 1,686,877
Notes Issued 220,450 368,950
Paid in Capital - - -
Payments on Long-Term Debt: (4,844) (5,100) (30,482)
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NET CASH USED BY FINANCING ACTIVITIES 215,606 (5,100) 2,025,345
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH (896) (196,377) 528
Cash at Beginning of Period 1,424 218,786 -
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CASH AT END OF PERIOD $ 528 $ 22,409 $ 528
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SEE ACCOMPANYING NOTES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
March 31, 1999
NOTE A--FINANCIAL STATEMENT 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
foot notes 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 he information contained therein. It is suggested that these
consolidated, condensed interim financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1999. The Company follows
the same accounting policies in preparation of interim reports. Results of
operation for the interim periods are not indicative of annual results.
NOTE B--DEVELOPMENT STAGE ENTERPRISE
Potomac is a development stage enterprise and has yet to generate any revenue
from oil and gas and has no assurance of future revenues from such sales. Oil
and gas exploration and development is 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 will 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.
NOTE C-- GOING CONCERN
Potomac has incurred substantial losses since inception and has yet to establish
income-producing operations. At December 31,1999, current assets were $2,200 and
current liabilities were $363,903.
For the company to continue, it will have to acquire operating capital to meet
its financial obligations and its operating expense for 2000. The Company hopes
to merge with another company that can assume its obligations.
NOTE D-- SUBSEQUENT EVENT
On March 31,2000, the Company entered into a plan of reorganization and
agreement of merger with Butte Coal, Inc. Potomac will execute a reverse stock
split of 5 to 1 and issue a sufficient number of shares to the stockholders of
Butte to effect a 61% controlling interest of Potomac. Butte Coal, Inc. owns
coal properties in Utah and is currently inactive.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
March 31, 1999
NOTE D-- SUBSEQUENT EVENT-continued
Potomac's continued existence will depend upon the amount of cash that will
become available in connection with the merger and Potomac's ability to continue
to raise equity.
Subsequent to December 31, 1999 and in accordance with its acquisition of Butte
Coal, Inc., the Company converted all outstanding stock options and warrants to
common stock at a 50% discount. Prior to conversion there were 1,175,000 stock
options issued and outstanding and 320,000 warrants issued and outstanding. The
stock options were converted into 587,500 shares of common stock, and the
warrants were converted into 160,000 shares of common stock. Notes payable at
December 31, 1999 were also converted into common stock in accordance with their
terms.
On June 2, 2000, the Company entered into a stock and asset exchange agreement
with Energas Resources, Inc., an Oklahoma based publicly traded Canadian
corporation. Potomac is to exchange its wholly-owned subsidiary, Potomac Energy
(BVI), Ltd. whose major assets are 25% interests in the Colombian Rosablanca and
Montecristo Association Contracts, and its 9% interest in Dolphin Industries,
Inc., whose major asset is the Thomas refinery, for 1,900,000 shares of
restricted common stock of Energas plus 2,000,000 warrants. The two-year
warrants are convertible to 2,000,000 shares of common stock with a strike price
for the first year of $1.50 and for the second year of $1.72.
If the Energas transaction is not consummated, the Company still plans to sell
these assets.
NOTE E--COMMITMENTS AND CONTINGENCIES
The Company has been notified that its share of exploration expense relating to
its Colombian oil and gas properties for the First Quarter of 2000 will be in
excess of $300,000. As of the date of this report, however, no invoice had been
received.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto appearing elsewhere in this
Report. The Company filed its Form 10-KSB with the Security and Exchange
Commission on June 20,2000. The Company also filed Form 8-K on June 20,2000
outlining changes in control and ownership of the Company. The following
information should be read in conjunction with of the Company's recently filed
reports.
RECENT EVENTS
Effective May 19, 2000, Potomac Energy Corporation (the "Company")
acquired Butte Coal, Inc., a Utah corporation ("BCI"), by merging with the
Company's wholly owned subsidiary, Potomac Energy Acquisition Corporation (the
"Merger-Acquisition"). The Merger-Acquisition was completed in accordance with
the Agreement and Plan of Merger dated March 31, 2000 (the "Merger Agreement"),
which amended and restated the Agreement and Plan of Merger dated March 17,
2000.
In accordance with the terms of the Merger Agreement, the Company
converted its outstanding (i) stock options exercisable for the purchase of
1,175,000 shares of common stock, (ii) common stock purchase warrants
exercisable for the purchase of 320,000 shares of common stock and (iii)
corporate notes into shares of common stock. The stock options and warrants were
converted at a 50% discount and resulted in the issuance of 587,500 and 160,000
shares of common stock, respectively. The convertible corporate notes were
converted according to the terms of the notes, which resulted in the issuance of
605,581 shares of common stock. These conversions increased overall total
outstanding common stock from 8,094,270 to 9,447,351 shares. Additionally, the
Company reverse split its outstanding common stock on a 5 to 1 basis. With the
reverse split all fractional shares were round up to the nearest whole share and
resulted in the issuance of 400 additional shares. These actions reduced the
total outstanding common stock from 9,447,351 to 1,889,870.
Pursuant to the Merger Agreement, the Company issued and delivered
16,751,774 shares of common stock to the shareholders of BCI, which resulted in
the shareholders of BCI holding voting control of the Company. The shares of
common stock to be issued in connection with the Merger-Acquisition will be
issued without registration pursuant to Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended, and applicable state securities
acts. The total outstanding common stock after giving effect to the Merger was
18,641,644. The Company and BCI are both development stage enterprises. The
Merger-Acquisition was accounted for as a reverse acquisition resulting in the
Company being acquired by BCI under the purchase method of accounting.
As a result of Merger Acquisition, the officers and directors of BCI,
Winfield Moon, Sr., President and Chief Executive Officer and Fred W. Young,
Secretary and Treasurer, became officers and directors of the Company. SunStar
Holdings, Inc. ("SunStar"), the controlling shareholder of BCI, became the
single largest and controlling shareholder of the Company. As a controlling
shareholder, SunStar exercised its right to appoint new directors to the Company
and the previous officers and directors resigned, including Carl W. Swan, the
Chief Executive Officer and James Frazier the Chief Financial Officer.
Subsequently, Carl W. Swan was asked to become Chairman of the Board of the
Company and upon his acceptance was reinstated as the Company's Chairman. Fred
W. Young was appointed as President and Chief Executive Officer of the Company
and Winfield Moon, Sr. resigned as both an officer and director of BCI and an
officer of the Company.
BCI is the owner of certain undeveloped coal leases located in Garfield
County, Utah (the "Butte Properties"). The coal leases cover 3,692.68 acres and
have an estimated 71,736,000 tons of 12,480 BTU in ground coal reserves based on
independent third party reports dated March 11, 2000. These appraisal reports
were based on the purchase agreement between BCI and World Link Capital LLC
dated September 19, 1999. The purchase agreement with World Link Capital LLC
provided for a purchase price of $200,000,000. As of the date of this report,
this purchase agreement had expired without performance by its own terms and
World Link Capital LLC did not have any continuing obligations under the
purchase agreement. BCI continues to negotiate purchase terms with World Link
Capital LLC. BCI's Chief Executive Officer, Winfield Moon, Sr. believes
positively that purchase terms will be agreed upon with World Link Capital LLC.
The value of the coal reserves as supported by independent third party reports
and the possible income which would result from the sale of the coal reserves
are the two main factors the Company and its Board of Directors relied on in
agreeing to the Merger-Acquisition of BCI.
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As a result of the Merger-Acquisition and the change of voting and
management control of the Company, the Company's oil, gas, coal assets
(substantially all of the assets of the Company) are held for sale. As
mentioned, the Company, through its subsidiary BCI, intends to sell its coal
properties to foreign markets which are in need of the relatively high BTU coal
reserves to meet current clean air standards. In addition, the Company intends
to divest its other energy based assets including its 25% working interest in
the Rosablanca and Montecristo Association Contracts with Seven Seas Petroleum,
Inc., (AMEX: SEV) as well as its net 9% ownership of Dolphin Industries, Inc.
which owns the Thomas jet and diesel fuel refinery. To this end, the Company has
entered into a Stock and Asset Exchange Agreement with Energas Resources, Inc.,
an Oklahoma based Canadian Public company. In exchange for the Rosablanca and
Montecristo Association Contracts and the Company's interests in Dolphin
Industries, Inc., this agreement provides for the issuance of 1,900,000 shares
of restricted Energas Resources, Inc. common stock and common stock purchase
warrants exercisable for the purchase of 2,000,000 shares of Energas Resources
common stock for $1.50 per share during the initial year of the warrants and for
$1.72 per share during the second year of the warrants.
From the sale of its assets, the Company intends to invest the sale
proceeds in emerging growth companies that will ultimately benefit all
shareholders. There is no assurance that the Company will be able to sell its
assets or to invest in emerging growth companies or, if successful, generate any
revenue from the investment in such companies.
As a result of the Merger-Acquisition, the Company's principal offices
will be relocated as of July 1, 2000 to 3168 Bel Air Drive, Las Vegas, Nevada
89109 and the telephone number is 702-792-9112.
RESULTS OF OPERATIONS
The following discussion and analysis of results of operations
discussed below are for the period ending March 31, 2000.
The Company is a development stage company that during the period
ending March 31, 2000, did not have any revenue and incurred a net loss of
$144,224. In 1999, for the period ending March 31, the net loss was $168,761. In
the future and as a result of the change of control of the Company, it is
anticipated that the Company will not derive its income from revenues generated
by oil, gas or coal sales, but rather from its investments in and sales from
emerging growth companies which the Company either owns or has an interest.
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 1999 was from
interest income of $1,562. In 1998 the same generated $7,747 earned or accrued
on cash and cash equivalents and marketable securities. For the period ending
March 31, 2000, the Company continued to fulfill it's work commitments on the
Rosablanca and Montecristo Association Contracts and entered a Definitive
Agreement to acquire Butte Coal, Inc., and in connection therewith incurred
$37,714 in professional fees and consulting expenses and incurred miscellaneous
expenses of $106,510. This versus the period ending March 31, 1999 expenses of
$44,376 for professional and consulting fees and $124,385 for miscellaneous
expenses. Other than the activities associated with obtaining the fulfilling the
required work commitments of the Rosablanca and Montecristo Association
Contracts, Potomac only activity was in pursuit of the Merger-Acquisition with
Butte Coal, Inc.
If the Company is unsuccessful in divesting its energy related assets
as currently planned, then the Company will continue to follow its original plan
of exploration and development for oil and gas in accordance with its joint
venture agreements. Should this be the case, the Company will continue to be
subject to certain economic factors beyond its control, specifically: Oil, Gas
and Coal Price Fluctuations, Seasonality and Inflation. The relative impact of
these factors are reviewed below.
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
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<PAGE>
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 %age of existing reserves that may
qualify for the borrowing base to support energy loans.
In the future, the Company anticipates that should it be unable to sell
its energy related assets, then 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 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. For the period ending March 31, 2000,
net cash used by operating activities totaled $216,502 versus the same period in
1999 which totaled $148,232, net cash used by investing activities for the
period ending March 31, 2000 was zero versus 1999 which totaled $43,043 and net
cash provided by financing activities for the period ending March 31, 2000
totaled $215,606 versus 1999 which used (5,100). As of March 31, 2000 the
Company had negative working capital of $ (503,757) compared to negative working
capital of $(149,626) at March 31, 1999.
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
had established a 24-month plan of development of the Rosablanca and Montecristo
Blocks at an estimated cost of $3,496,984. The negative working capital figure
of $491,860 combined with the Company's share of the Colombian work commitments
required, more than any
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other single factor, the Board of the Company to take action to find a
suitable merger candidate that would protect the shareholders investment and
provide the possibility of future liquidity. The Company anticipates that the
costs of development of the Rosablanca and Montecristo Blocks will be funded
by a third party that acquires these properties as disposed by the Company.
Additionally, the Company hopes to receive additional monies from the sale
and disposition of its interests in Dolphin Industries, Inc. and, as of March
31, 2000, Butte Coal, Inc. The Company may attempt to fund the future cash
requirements of the Company through the offering of either equity and debt
securities and, although unlikely, borrowings. There is no assurance that any
such funding will be available or on terms acceptable to the Company.
PLAN OF OPERATION
The Company as a result of the Merger-Acquisition and the change in
voting and management control has developed the following plan of operation
to be followed during the next twelve months.
1. Sell all of its existing energy related assets for either cash,
stock, some combination thereof or some other consideration which
provides greater future value and opportunity to the Company's
shareholders.
2. Evaluate both financially and materially emerging growth
companies, both public and private, and acquire majority ownership
in these companies or enter in to joint venture arrangements with
these companies.
3. Provide on-going management and financial support to the companies
either wholly acquired or acquired an interest in, to enable the
same to expand and further develop their operations, markets and
sales to the benefit of the Company.
4. Identify and hire both new executive management and general
administration personnel who will contribute to the focus of the
Company's goals and objectives.
5. Identify, elect and appoint such officers and directors as needed
to meet the Company's goals and objectives.
FUTURE CASH REQUIREMENTS
As mentioned, the Company hopes to derive monies from the sale and
disposition of its interests in its Colombian assets, Dolphin Industries, Inc.
and Butte Coal, Inc. There is no assurance as of the date of this report that
these sales will be completed or the timing of such transactions. The Company
may attempt to fund the future cash requirements of the Company through the
offering of either equity and debt securities and, although unlikely,
borrowings. SunStar Holdings, Inc. is the single largest shareholder of the
Company after the acquisition of BCI and the reorganization of the Company.
SunStar Holdings, Inc. may elect to fund the Company's cash requirements until
such time that the Company is able to become self sustaining as a result of its
investments and or sale of its assets. However, there is no assurance that
SunStar Holdings, Inc. or its sole shareholder, Mrs. Theolene D. Moon will be
capable of meeting such requirements now or in the future.
The Company does have and it is estimated will continue to have certain
on-going financial commitments that include employee payroll, payroll tax,
office rent, professional, legal and consulting fees as well as general overhead
and administration. Currently, these obligations roughly equal $30,000 per
month. Additionally, going forward, the Company may incur certain one time
charges related to the reorganization. The Company currently does not have
sufficient cash to meet these obligations without obtaining additional funds
from either an equity and debt offering or the issuance of corporate notes, the
like of which has been recently used to sustain the Company. There is no
assurance that any such funding will be available to the Company.
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no material changes in Securities of the Company or use of
Proceeds for the period ending March 31, 2000 other than those related to the
Merger-Acquisition Agreement with Butte Coal, Inc. dated March 17, 2000 and
amended and restated on March 31, 2000. As previously stated this agreement
provided for the Company to convert its
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outstanding (i) stock options exercisable for the purchase of 1,175,000 shares
of common stock, (ii) common stock purchase warrants exercisable for the
purchase of 320,000 shares of common stock and (iii) corporate notes into shares
of common stock. The stock options and warrants were converted at a 50% discount
and resulted in the issuance of 587,500 and 160,000 shares of common stock,
respectively. The convertible corporate notes were converted according to the
terms of the notes, which resulted in the issuance of 605,581 shares of common
stock. These conversions increased overall total outstanding common stock from
8,094,270 to 9,447,351 shares. Additionally, the Company reverse split its
outstanding common stock on a 5 to 1 basis. With the reverse split all
fractional shares were round up to the nearest whole share and resulted in the
issuance of 400 additional shares. These actions reduced the total outstanding
common stock from 9,447,351 to 1,889,870.
Pursuant to the Merger Agreement, the Company issued and delivered
16,751,774 shares of common stock to the shareholders of BCI, which resulted in
the shareholders of BCI holding voting control of the Company. The shares of
common stock to be issued in connection with the Merger-Acquisition will be
issued without registration pursuant to Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended, and applicable state securities
acts. The total outstanding common stock after giving effect to the Merger was
18,641,644. The Company and BCI are both development stage enterprises. The
Merger-Acquisition was accounted for as a reverse acquisition resulting in the
Company being acquired by BCI under the purchase method of accounting.
The merger, and the above actions, were completed subsequent to the
period ending March 31, 2000.
COMMON STOCK
As previously stated, pursuant to the Merger-Acquisition agreement with
Butte Coal, Inc. the Company had reverse split its common stock on a 5 to 1
basis which resulted in total outstanding of common stock as of March 31, 2000
of 1,888,870.
OUTSTANDING STOCK OPTIONS
In conjunction with the Merger-Acquisition, the Company had converted
all outstanding stock options to common stock in accordance with the terms of
the Merger-Acquisition agreement with Butte Coal, Inc. All options were
converted at a 50% discount. (See discussion above)
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:
2.1 Association Contract between Empresa Colombiana De Petroleos
and Seven Seas Petroleum Colombia, the Rosablanca sector,
dated November 19, 1997, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1997.
2.2 Association Contract between Empresa Colombiana De Petroleos
and Seven Seas Petroleum Colombia, the Montecristo sector,
dated November 19, 1997, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1997.
2.3 Letter of Intent between Potomac Energy Corporation and The
GHK Company L.L.C., dated February 27, 1997, incorporated by
reference to Registrant's Form 10-KSB Annual Report for the
year ended December 31, 1997.
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2.4 Basic Contract of Small Carbon Exploration/Exploitation
between Ecocarbon and Erasmo Alfredo Almanza LaTorre, dated
July 10, 1998, incorporated by reference to Registrant's Form
10-KSB Annual Report for the year ended December 31, 1998.
2.5 Agreement of Association between Dr. Erasmo Almanza LaTorre
and Carbones de Guaduas, Ltd., dated April 6, 1998,
incorporated by reference to Registrant's Form 10-KSB Annual
Report for the year ended December 31, 1998.
2.6 Letter Agreement between Arena Power, L.P. and Registrant,
dated December 2, 1998, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1998.
2.7 Potomac Energy Corporations Investment Compensation Agreement
between the Company and Dolphin Industries dated November 19,
1999, incorporated by reference to the Registrant's Form
10-KSB for the year ended December 31, 1999.
2.8 Potomac Energy Corporations Merger Agreement and Plan of
Reorganization (Amended and Restated) with Butte Coal, Inc.
dated March 31, 2000, incorporated by reference to the
Registrant's Form 8-K.
3.1 Subsidiaries of Registrant, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1998 which remain unchanged to date.
4.1 Potomac Energy Corporation Non-Qualified Stock Option Plan
adopted January 28, 1998, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1998.
5.0 Potomac Energy Corporation Rights and Powers Designation for
the Preferred Stock dated July 19, 1999, incorporated by
reference to the Registrant's Form 10-QSB for the period ended
September 30, 1999.
6.0 Butte Coal, Inc. & World Link Capital, LLC. Agreement dated
September 19, 1999, now expired, incorporated by reference to
the Registrant's Form 10-KSB for the year ended December 31,
1999.
7.0 Energas Resources, Inc. and Potomac Stock and Asset Exchange
Agreement, dated June 2, 2000, incorporated by reference to
the Registrant's Form 10-KSB for the year ended December 31,
1999.
(b) REPORTS ON FORM 8-K.
The Company filed a Form 8-K identifying changes in control and
ownership of the registrant on June 20, 2000.
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.
POTOMAC ENERGY CORPORATION
(Formerly Midwestern Resources, Inc.)
(Registrant)
By: /s/ Fred W. Young
----------------------------------------------------
Fred W. Young, President and Chief Executive Officer
Date: June 23, 2000
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