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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 September 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)
OKLAHOMA 73-1088064
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 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 February 17, 2000 8,094,270 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, September 30, 1999 and December 31, 1998 .................................. 3
Consolidated Statements of Operations and Accumulated Deficit for the
Period from Inception (April 7, 1997) to September 30, 1999 and
the Nine Month Periods Ended September 30, 1999 and September 30, 1998.............................. 4
Consolidated Statements of Cash Flows for the Period from Inception
(April 7, 1997) to September 30, 1999 and the Nine Month Periods Ended
September 30, 1999 and September 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.....................................................22
Item 4. Other Information.......................................................................................22
Item 5. Exhibits and Reports on Form 8-K........................................................................22
Signatures.......................................................................................................27
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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 9/30/99
(UNAUDITED)
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ASSETS
CURRENT ASSETS:
Cash $ 218,788 106,374
Accounts Receivable $ 1,615 2,153
Marketable Securities $ - -
----------- -----------
Total Current Assets $ 220,403 $ 108,527
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 24,998
----------- -----------
$ 574,349 643,346
Less Accumulated Depreciation $ (6,287) (13,297)
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$ 568,062 630,049
OTHER ASSETS
Organization Costs $ -
Deposits $ 4,061 4,061
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TOTAL ASSETS $ 792,526 $ 742,637
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 120,248 122,043
Accured Taxes, other than income $ 17,953 1,523
Other Current Liabilities $ - 53,469
Current portion of capital
Lease obligations $ 17,384 15,393
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Total Current Liabilities $ 155,585 $ 192,427
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Long-Term Portion of Capital
Long Term Debt $ - 84,526
Lease Obligations $ 21,923 $ 11,818
----------- -----------
Total Long Term Liabilities $ 21,923 $ 96,344
----------- -----------
Total Liabilities $ 177,508 $ 288,771
=========== ===========
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.01 Par Value, 50,000,000 shares Authorized and
7,869,270 and 8,094,270 Issued and Outstanding,
Respectively $ 78,693 80,943
Additional Paid-In Capital $ 2,035,886 2,318,636
Deficit Accumulated During Development Stage $(1,499,561) (1,945,713)
----------- -----------
Total Stockholders' Equity $ 615,018 453,866
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 792,526 $ 742,637
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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)
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(Period from Inception)
7-Apr-97 Three Months Nine Months Three Months Nine Months
to Ended Ended Ended Ended
30-Sep-99 30-Sep-99 30-Sep-99 30-Sep-98 30-Sep-98
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REVENUES
Other Income $ 1,561 $ 561 $ 1,561 $ - $ -
Income-(loss) Guaduas Partnership (966) - (966.30) - -
Foreign Currency-gains 830 - - - -
Interest Income 10,741 166 1,551.31 3,007 7,029
TOTAL REVENUES $ 12,166 $ 727 $ 2,146 $ 3,007 $ 7,029
=============== ============= ============= ============== ================
EXPENSES
Advertising 13,193 3,820 7,151 4,841 4,841
Auto 5,158 456 3,486 421 421
Bank charges 2,391 95 464 155 1,045
Computer Expense 3,000 - - - -
Consulting 483,555 13,308 48,728 - -
Stock-Based Non-Employee Compensation 92,159 - - - -
Contributions 250 - - 75 75
Depreciation 16,802 3,505 10,515 - -
Dues & Subscriptions 6,286 100 236 4,975 4,975
Employee Benefit Program 14,267 243 4,858 363 363
Insurance 18,528 4,455 18,110 3,966 3,966
Interest 7,383 - 4,599 - -
Meal & Entertainment 37,972 4,294 20,530 4,990 4,990
Miscellaneous 22,269 1,139 8,326 14,385 14,347
Office Expense 3,974 321 1,430 4,443 4,443
Office Supplies 6,582 479 553 1,583 2,070
Payroll Tax 26,394 3,285 15,214 15,566 15,566
Professional fees 159,272 26,460 55,213 123,101 901,795
Rent & Lease 56,087 11,756 34,218 12,248 16,309
Salaries 261,694 42,904 160,357 45,173 45,173
Stock-Based Employee Compensation 606,250 - - - -
SEC Related Expense 25,913 1,982 8,810 8,716 8,716
Taxes 8,008 369 369 - -
Telephone 26,263 3,356 15,409 4,683 5,017
Travel 54,227 533 29,719 13,811 13,811
-
TOTAL EXPENSES $ 1,957,878 $ 122,859 $ 448,297 $ 263,495 $ 1,047,923
=============== ============= ============= ============== ================
NET LOSS - DEFICIT
ACCUMULATED DURING DEVELOPMENT STAGE $ (1,945,713) $ (122,132) $ (446,152) $ (260,488) $ (1,040,894)
=============== ============= ============= ============== ================
Net Loss Per Share $ (0.24) $ (0.02) $ (0.05) $ (0.03) $ (0.13)
=============== ============= ============= ============== ================
Weighted Average Number
of Common Shares Outstanding 8,094,270 8,094,270 8,904,270 7,818,809 7,818,809
=============== ============= ============= ============== ================
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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 INCEPTION
(APRIL 7, 1997) THREE MONTHS NINE MONTHS NINE MONTHS
TO ENDED ENDED ENDED
30-SEP-99 30-SEP-99 30-SEP-99 30-SEP-98
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Cash Flows from Operating Activities:
Net Loss $ (1,945,713) $ (122,134) $ (446,152) (1,040,894)
Adjustment to Reconcile Net Loss to Net Cash
Provided (used) by Operations:
Stock Compensation:
Compensation Expense 606,250 - - 407,318
Consulting Expense: 92,159 - - -
Depreciation 16,802 3,505 10,515 -
(Increase) Decrease:
Accounts Receivable (2,065) - - 150,000
Increase (Decrease):
Accounts Payable 177,547 (80,419) (22,171) -
Accrued taxes 1,522 14,453 (989) (95,505)
Other Current Liabilities 10,000 - 10,000 -
Deposits 120,939 125,000 125,000 -
---------------- -------------- -------------- --------------
NET CASH USED BY OPERATING ACTIVITIES (922,559) (59,145) (323,797) (579,081)
================ ============== ============== ==============
Cash Flows from Investing Activities:
Exploration of Oil and Gas Properties: (286,857) - (64,526) (21,222)
Exploration of Coal Properties: (29,271) (9,000) (8,681) -
Purchase of Property & Equipment (38,424) (2,931) (3,312) -
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 (369,981) (11,931) (76,519) (22,343)
================ ============== ============== ==============
Cash Flows from Financing Activities:
Sale of Stock 1,620,377 125,000 300,000 625,000
Paid in Capital - - - -
Payments on Long-Term Debt: (28,725) (2,542) (12,098) -
---------------- -------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,591,652 137,458 287,902 625,000
---------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH 106,374 66,382 (112,414) 244,777
Cash at Beginning of Period - 39,992 218,788 102,782
---------------- -------------- -------------- --------------
CASH AT END OF PERIOD $ 106,374 $ 106,374 $106,374 $347,559
================ ============== ============== ==============
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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)
SEPTEMBER 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)
SEPTEMBER 30, 1999
NOTE C--STOCK OPTIONS
As of the date of this report, the total number of outstanding options is
1,075,000, which is unchanged from June 30, 1999. All Options expire 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
8,094,270. On April 1, 1999 the Company offered an additional 2,160,000
shares of Common Stock at a purchase price of $2.50 with a Redeemable
Warrant attached to each Common Stock purchased. As of June 30, 1999 70,000
shares have been purchased from this offering and 70,000 warrants were
issued. However, in order to be fair to all shareholders who purchased Common
Stock through the Company's Private Placement efforts at $2.50 it was deemed
Fair and Prudent to retroactively credit Warrants to all purchasers of Common
Stock at the $2.50 price. Therefore, 240,000 Warrants were issued by the
Company and extended to all shareholders that purchased stock at the $2.50
price. As a result the total Warrants outstanding for the Company as of
September 30, 1999 is 310,000.
NOTE E- PREFERRED STOCK
Subsequent to September 30, 1999 but prior to the filing of this report, the
Company chose to offer a Preferred Stock for sale on a Private Placement
basis. There were 2,000,000 shares of Preferred Stock offered on October 15,
1999 for the purchase price of $1.00. The Preferred Stock carries a
conversion ratio to the Company's Common Stock of One Preferred to One and
One-Half Common Stock. Details regarding the Preferred Stock Powers and
Designation can be found in Item 5. (Exhibits). There have not been any
purchases of the Company's Preferred Stock as of the filing of this report.
However, on November 23, 1999 the Company exchanged 290,000 shares of
Preferred Stock for a 9% Net Revenue interest in Dolphin Industries, Inc.
Dolphin Industries owns and operates a Jet Fuel Refinery located in Thomas
Oklahoma (See Management Discussion - Plan of Operation - Dolphin Industries
- - Thomas Refinery). The 290,000 shares of Preferred Stock the Company issued
was provided to William B. Haines of Woodward, Oklahoma in exchange for
$290,000 he deposited with Dolphin Industries on behalf of the Company which
allowed Dolphin to secure ownership and operational control of the Jet Fuel
Refinery in Thomas, Oklahoma.
NOTE F- CORPORATE NOTES
During the Third Quarter of this year the Company issued Corporate
Convertible Notes to Directors, Officers and Key Shareholders of the Company
in an effort to acquire capital to meet on going capital needs. At the time
of this report, there are a total of twelve corporate notes outstanding
totaling $250,000 with annual interest due of $25,000. All of these notes are
convertible to the Company's Common Stock at the discretion of the note holder
prior to maturity. In the event the Company is unable to repay the note and
the note interest, then the note would automatically convert to the Company's
Common Stock. The amount of Common Stock received by the note holder would
reflect both the principal balance and the interest due. All the notes issued
are tied to the Company's Common Stock price based on the closing price the
day the note was signed. Therefore, all twelve of the Corporate Notes have
different conversion prices ranging from $0.79 to $0.23. All notes were issued
with a term of six months with renewable six months extensions with the
approval of both the Corporation and the Note Holder. Should the Company be
unable to meet the terms of the Notes and/or should the Note Holder choose to
convert their notes, then the Company would issue, in total, 605,581 shares of
Common Stock. To date, the principal Note holder is Carl W. Swan, Chairman and
CEO of the Company. Mr. Swan holds $170,000 worth of Corporate Notes with a
conversion basis of 402,522 shares of Common Stock.
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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, performance 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 for the majority 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 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
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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 and other
similar opportunities domestically within the United States. The Company's
business strategy remains unchanged and 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 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
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and development thereof and achieve profitability.
COLOMBIA--OVERVIEW
The Company's success currently depends for the majority 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. 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.
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,
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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
sub-basin, 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 physioraphic 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.
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
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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 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
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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 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. 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.
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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
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
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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 September 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 reserves.
To date, two core holes have been completed with marginal coal deposits
found. As of September 30, 1999 coring operation were suspended due to the
Company's limited availability of funds. The Company plans to resume
geological review of the areas as soon is possible.
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. As of the date of this report, the "Erasmos Agreement"
is in questions due to the marginal amounts of coal which has been verified
by the Company on the Guaduas Block. In addition, the Company does not
currently have the financial capability to conduct a full geological review
of the entire region which is needed to determine if there are coal deposits
in or around the Guaduas Block. At this time, there not been any decisions
made as to whether or not to proceed with the exploration of coal on the
Guaduas Block. Should the Company elect not proceed with the exploration of
Coal on the Guaduas block, then the Erasmos Agreement, and any agreements
related to the Guaduas Block specifically with Arena Power or Grupo Energia
would be suspended.
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 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
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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.
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
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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 September 30, 1999, Seven Seas had received 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 in process. Additionally, Seven Seas has received the
environmental approval to reenter and deepen the existing well on the
Montecristo Block, however, no specific time frame for reentering 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-
The Company had established a 12-month plan of development of the
Guaduas Block. Under this plan, established in December 1998, the Company and
Arena Power proposed, 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)
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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.
DOLPHIN INDUSTRIES, INC. - THOMAS REFINERY
On August 11, 1999 the Company entered into discussions with Dolphin
Industries to pursue ownership of the defunct Barrett Refinery located in
Thomas, Oklahoma, approximately 85 miles west of Oklahoma City. The refinery
was originally constructed in 1987 and is still in good working condition. The
refinery was designed to process 10,000 barrels of crude oil per day. The main
products produced by the refinery are jet and diesel fuel. The refinery was
closed in late 1996 when the previous owner declared bankruptcy due to an oil
spill on the Mississippi from one of the owners other refineries. Since then
the refinery has been pickled with diesel fuel and has been maintained by the
original plant manager through the bankruptcy trustee.
Two companies, Dolphin Industries and Geo American Services have been working
to acquire the Thomas refinery since early 1999. Dolphin is a 100% minority
owned business and Geo American Services is a small business. Both of these
companies qualify under the U.S. government regulations for preferred pricing
contracts, which makes operating the refinery very profitable. Initially,
neither Dolphin nor Geo had the necessary capital to purchase the refinery
and asked Potomac if we could assist in acquiring the refinery. After
reviewing the transaction Potomac agreed to assist Geo and Dolphin. Potomac
was able to assist with the negotiations for the refinery and attract a key
individual to provide the necessary funds to obtain ownership and operational
control of the refinery. Potomac originally negotiated for a 40% net revenue
interest in the refinery. Nine (9%) percent would be due at the time of the
initial investment of $290,000 by either Potomac or a key investor on behalf
of Potomac. Potomac's net interest would increase with the deposit of an
additional $500,000 at the time operations began in late November. As of the
date of this report, Potomac's opportunity to earn additional interest is
still available, however, due to the current inability of the Company to fund
its commitment we may not be able to achieve the full 40% net revenue interest
originally negotiated.
Dolphin Industries as the designated operator of the refinery has made
application for several U.S. Government Jet Fuel contracts. As of the date of
this report, Dolphin has not been awarded any contracts, but may in the near
future. Dolphin is currently in negotiation with several commercial Jet Fuel
and Diesel Fuel buyers for the purchase of Dolphin's products. As of the date
of this report, it is unclear as to when, if at all, Dolphin will have any
sales or generate a profit from its ongoing operation.
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. 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
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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 September 30, 1999, did not have any revenue and incurred
a net loss of $122,132. 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 September 30, 1999 was from Interest
income of $166 earned or accrued on cash and cash equivalents and other
income of $561. During the three months ended September 30, 1999 Potomac
continued to fulfill it's work commitments on the Rosablanca, Montecristo and
Guaduas Association Contracts and in connection therewith incurred $39,768 in
professional fees and consulting expenses and incurred miscellaneous expenses
of $83,091. Other than the activities associated with fulfilling the required
work commitments of the Rosablanca, Montecristo, Guaduas Association
Contracts and the Thomas Refinery, Potomac did not conduct any operating
activities during the three months ending September 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
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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 are 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 stage 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; net cash provided by financing activities totaled $741,036. For the
nine months ending September 30, 1999, net cash used by operating activities
total $ 323,797; net cash provided by financing activities totaled $137,458.
As of September 30, 1999, Potomac had working capital of $ (83,900) compared
to working capital of $ 330,036 at September 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. The Company has
currently suspended the work commitments under the Guaduas Association
Contract and therefore has suspended any further financial commitments.
However, should the Company choose to pursue this venture it is anticipated
that the original work commitments would then apply certain minimum work
commitments on a joint venture basis with Arena Power are estimated to be
approximately $387,500. Although the Company currently has no commitments to
provide additional capital to
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Dolphin Industries for the operation of the refinery located at Thomas
Oklahoma, the Company would like to increase its ownership percentage by its
original agreement if possible in the future. Should the Company choose to
further pursue this venture, the Company would be required to commit up to an
additional $500,000 to Dolphin Industries. The Company anticipates that the
costs of development of the Rosablanca, Montecristo and if desired, the
Guaduas Blocks and the refinery at Thomas Oklahoma, 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."
OUTSTANDING COMMON STOCK
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 8,094,270.
OUTSTANDING WARRANTS
On April 1, 1999 the Company offered an additional 2,160,000 shares
of Common Stock and Redeemable Warrants. As of September 30, 1999 310,000
warrants were outstanding.
OUTSTANDING STOCK OPTIONS
On October 15, 1999 the Company offered 2,000,000 shares of
Preferred Stock. As of the date of this report, there are 290,000 shares of
Preferred Stock outstanding. Additionally, pursuant to previously mentioned
Stock Option Plans, the Company currently has 1,075,000 Common Stock Options
outstanding as of the date of this report.
OUTSTANDING CORPORATE NOTES
At the time of this report, there are a total of twelve corporate
notes outstanding totaling $250,000 with annual interest due of $25,000. All
of these notes are convertible to the Company's Common Stock either at the
discretion of the note holder or at maturity should the Company be unable to
repay the note and the note interest. Should the Company be unable to meet
the terms of the Notes and/or should the Note Holder choose to convert their
notes, then the Company would issue, in total, 605,581 shares of Common Stock.
TRANSFER 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.
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ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4. OTHER INFORMATION
CHANGES IN BOARD OF DIRECTORS
Subsequent to the September 30, 1999, but prior to the filing of
this report the Company had two changes to the Board of Directors. On
November 19,1999 Mr. Paul Meadows, the Company's Chairman, passed away in
Denver Colorado. As a result, Mr. Carl W. Swan, the Company's Chief Executive
Officer, assumed temporary Chairman duties until the Board could elect a new
Chairman. Additionally, on November 23, 1999 the Board nominated Mr. Alvaro
Cayzedo Lopez, an Advisor to the Board, to be a full Director and Board
member. Mr. Cayzedo accepted his positions as a Director and Board Member
effective December 1, 1999.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
Following is the complete Powers and Rights Designation of Preferred Stock
approved by the Board of Directors of the Company and subsequently offered by
the Company on a Private Placement basis on October 1, 1999.
CERTIFICATE OF THE POWERS DESIGNATION, RIGHTS AND PREFERENCES RESOLUTION
FOR THE
SERIES A CONVERTIBLE PREFERRED STOCK
OF
POTOMAC ENERGY CORPORATION
Potomac Energy Corporation (the "Corporation"), a corporation
organized and existing under and by virtue of the General Business
Corporation Law of the State of Oklahoma.
DOES HEREBY CERTIFY THAT:
Pursuant to authority vested in the Board of Directors pursuant to Article
IV4(c) and (d) of the Articles of Incorporation, the Board of Directors of
the Corporation, pursuant to a Record and Memorandum of Action, dated October
1, 1999, duly adopted the certain resolutions creating a series of Preferred
Stock, $.001 par value per share, designated as "Series A Convertible
Preferred Stock," as follows:
RESOLVED, that pursuant to the authority expressly granted to
the Board of Directors of the Corporation pursuant to Article IV4(c)
and (d) of the Certificate of Incorporation of the Corporation, the
Board of Directors hereby (I) creates a series of Preferred Stock, par
value $.001 per share, of the Corporation, to consist of 20,000,000
shares, (ii) reserves for issuance the number of shares of the
Corporations common stock, $.001 par value (the "Common Stock")
issuable upon conversion of such Preferred Stock as hereinafter set
forth, and (iii) fixes and determines the powers, preferences and
rights of the shares of such series and the qualifications, limitations
or restrictions thereof in addition to those relating to all series of
Preferred Stock as set forth in Section 4 of the Certificate of
Incorporation of the Corporation, as follows:
(a) DESIGNATION OF SERIES AND NUMBER OF SHARES. There shall be a series
of the Preferred Stock, par value $.001 per share, of the Corporation
which shall consist of 10,000,000 shares having a stated value of $1.00
per share (the "Stated Value"), and shall be designated as the "Series
A Convertible Preferred Stock" (hereinafter
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referred to as this "Series").
(b) DIVIDENDS. No Dividends will be paid out of the surplus or net
profits of the Corporation legally available for dividends, the holder
of this Series will not be entitled to receive any dividends unless as
declared or paid upon or set apart for, or any other distributions
shall be ordered or made in respect of, or any payment shall be made on
account of the purchase of, the Common Stock of the Corporation on the
same basis that the Common Stock of the Corporation, at the rate of
three shares of Common Stock for each share of this Series.
(c) VOTING RIGHTS. The holders of shares of this Series, as a class,
shall be entitled to 30,000,000 votes in the aggregate or 1.5 votes per
share held by them, on any matter which is brought before the holders
of Common Stock of the Corporation; provided, however, so long as any
shares of this Series shall be outstanding, the Corporation shall not,
without the affirmative vote or written consent of the holders of
two-thirds of the number of shares of this Series at the time
outstanding, alter or change the powers, preferences or rights given to
the shares of this Series by the Certificate of Incorporation of the
Corporation or by this Certificate so as to affect the shares of this
Series adversely. The person or persons entitled to vote the shares of
this Series shall be treated for all purposes as the record holder or
holders of such shares on the record date established for such
shareholder vote.
(d) CONVERSION RIGHTS. The holders of shares of this Series shall have
the right, at their option exercisable in whole and not in part, to
convert the shares of this Series into 30,000,000 shares of Common
Stock, in the aggregate, or 1.5 shares of Common Stock per share of
this Series at any time on and subject to the following terms and
conditions:
(i) The shares of this Series shall be convertible at
the office of the Corporation or at the office of any transfer
agent for this Series, and at such other office or offices, if
any, as the Board of Directors may designate, into fully paid
and non-assessable shares of Common Stock of the Corporation.
(ii) In order to convert the shares of this Series into Common
Stock, the holders of this Series shall surrender at any office hereinabove
mentioned the certificate or certificates therefor, duly endorsed in blank or
accompanied by proper instruments of assignment and transfer thereof duly
endorsed in blank, together with any payment required by this paragraph (ii)
and transfer tax stamps or funds therefor, is required pursuant to paragraph
(vii) below, and give written notice to the Corporation at said office that
the holders elect to convert the shares of this Series.
Shares of this Series shall be deemed to have been
converted immediately prior to the close of business on the
day of the surrender of the shares for conversion in
accordance with the foregoing provisions, and the person or
persons entitled to receive the Common Stock issuable upon
such conversion shall be treated for all purposes as the
record holder or holders of such Common Stock at such time;
provided, however, that any such surrender on any date when
the stock transfer books of the Corporation shall be closed
shall constitute the person or persons in whose name or names
the certificates for such shares of Common stock are to be
issued as the record holder or holders thereof for all
purposes immediately prior to the close of business on the
next succeeding day on which such stock transfer books are
opened and such conversion shall be at the conversion ratio in
effect at such time on such succeeding day. As promptly as
practicable after the conversion date, the Corporation shall
issue and shall deliver at said office a certificate or
certificates for the number of shares of Common Stock issuable
upon such conversion to the person or persons entitled to
receive same.
(iii) No fractional shares of Common Stock shall be
issued upon conversion of shares of this
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Series and any fractional shares shall be rounded to the
nearest full share.
(iv) The number of shares of Common Stock to be
issued upon conversion of shares of this Series shall be
adjusted from time to time as follows:
(A) In case the Corporation shall (I)
subdivide its outstanding shares of Common Stock,
(II) combine its outstanding shares of Common Stock
into a smaller number of shares, or (III) issue any
shares by reclassification of its shares of Common
Stock, in such case the number of shares of Common
Stock to be issued upon conversion of shares of this
Series at the time of the effective date of such
subdivision, combination or reclassification shall be
adjusted, effective at the opening of business on the
business day next following such record date or
effective date so that the holder of any shares of
this Series surrendered for conversion after such
record date or effective date shall be entitled to
receive the number of shares of capital stock of the
Corporation which he would have owned or been
entitled to receive had such shares of this Series
been converted immediately prior to such time. If, as
a result of an adjustment made pursuant to this
clause if the holder thereafter surrendered for
conversion shall become entitled to receive shares of
two or more classes of capital stock of the
Corporation, the Board of Directors (whose
determination shall be conclusive) shall determine
the allocations of the adjusted conversion ratio
between or among shares of such classes of capital
stock.
(B) In any case in which this paragraph (iv)
shall require that an adjustment as a result of any
event become effective at the opening of business on
the business day next following a record date, the
Corporation may elect to defer, until after the
occurrence of such event, issuing to the holder of
any shares of this Series converted after such record
date and before the occurrence of such event the
additional shares of Common Stock issuable upon such
conversion and, in lieu of the shares the issuance of
which is so deferred, the corporation shall issue or
cause its transfer agent to issue due bills or other
appropriate evidence of the right to reserve such
shares should such an event occur.
(v) In the event (A) the Corporation shall declare a dividend or any
other distribution on its Common Stock payable otherwise than in cash out of
its retained earnings, (B) the Corporation shall authorize the granting to
the holders of its Common Stock of rights to subscribe for or purchase any
shares of capital stock of any class or of any other rights, (C) of any
reclassification of the capital stock (other than a subdivision or
combination of its outstanding shares of Common Stock), or of any
consolidation or merger to which the Corporation is a party and for which
approval of any shareholders of the Corporation is required, or of the sale
or transfer of all or substantially all of the assets of the Corporation, or
(D) of the voluntary or involuntary dissolution, liquidation or winding up of
the Corporation, then in such event the Corporation shall cause to be mailed
to the transfer agent for this Series, in the event the Corporation is not
acting as its transfer agent for this Series, and to the holders of record of
the outstanding shares of this Series, at least 20 days (or 10 days in any
case specified in (A) or (B) above) prior to the applicable record date
thereinafter specified, a notice stating (I) the date on which a record is to
be taken for the propose of such dividend, distribution or rights, or, if a
record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution or rights are to be
determined, or (II) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable
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upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation, or winding up.
(vi) The Corporation shall at all times reserve and
keep available, free from preemptive rights, out of its
authorized but unissued Common Stock, for the purpose of
effecting the conversion of the shares of this Series, the
full number of shares of Common Stock then deliverable upon
the conversion of all shares of this Series then outstanding,
provided that nothing contained herein shall be construed to
preclude the Corporation from satisfying its obligations in
respect of the conversion of the shares of this Series by
delivery of this Series by delivery of purchased shares of
Common Stock which are held in the treasury of the
Corporation.
(vii) The Corporation shall pay any and all taxes
that may be payable in respect to the issuance or delivery of
shares of Common Stock on conversion of shares of this Series
pursuant hereto. The Corporation shall not, however, be
required to pay any tax which may be payable in respect to any
transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that in which the shares of
this Series so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting
such issue shall have paid to the Corporation the amount of
any such tax or shall have established, to the satisfaction of
the Corporation, that such tax shall have been paid.
(viii) For the purpose of this Section (f), the term
"Common Stock" shall include any stock of any class of the
Corporation which has no preference in respect of dividends or
of amounts in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, and
which is not subject to redemption by the Corporation.
However, except as otherwise provided in paragraph (ix),
shares issuable on conversion of shares of this Series shall
include only shares of the class designated as Common Stock of
the Corporation as of the original date of issue of this
Series or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have
no preference in respect of dividends or of amount payable in
the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and which are not
subject to redemption by the Corporation, provided that if at
any time there shall be more than one such resulting class,
the shares of each such class then so issuable shall be
substantially in the proportion which the total number of
shares of such class resulting from all such reclassifications
bears to the total number of shares of all such classes
resulting from all such reclassifications.
(ix) If either of the following shall occur, namely:
(A) any consolidation or merger to which the Corporation is a
party, other than a consolidation or merger in which
consolidation or merger the Corporation is a continuing
corporation and which does not result in any reclassification
of or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as
a result of a subdivision or combination) in, outstanding
shares of Common Stock, or (B) any sale or conveyance to
another corporation of the property, of the Corporation as an
entirety or substantially as an entirety; then the holder of
each share of this Series then outstanding shall have the
right to convert such share only into the kind and amount of
shares of stock or other securities and property receivable
upon such consolidation, merger, sale or conveyance subject to
adjustments which shall be nearly equivalent as may be
practicable to the adjustments provided for in paragraph (iv)
above. The provisions of this paragraph (ix) shall similarly
apply to successive consolidations, mergers, sales or
conveyances.
(x) Any shares of this Series which shall at any time
have been converted into shares of Common Stock shall, after
such conversion, have the status of authorized but unissued
shares of
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<PAGE>
Preferred Stock, without designation as a series until such
shares are once more designated as part of a particular series
by the Board of Directors.
(e) LIQUIDATION RIGHTS.
(i) Upon the liquidation, dissolution or winding up
of the Corporation, the holders of the shares of this Series shall be
entitled to receive out of the assets of the Corporation available for
distribution to its shareholders, before any payment or distribution
shall be on the Common Stock or any other capital stock of the
Corporation, the amount of $1.00 per share, plus $0.20 liquidation
preference for a total of one hundred and twenty percent of the
original purchase price plus a sum equal to all, if any whereso issued
declared dividends on such shares to the date of final distribution.
(ii) This Series shall be preferred over the Common Stock and
any other capital stock of the Corporation as to assets in the event of
any liquidation, dissolution or winding up of the Corporation, and in
that event the holders of the Series shall be entitled to receive, out
of the assets of the Corporation available for distribution to its
shareholders, an amount determined as provided in this Certificate for
every share of their holdings of the shares of this Series before any
distribution of the assets shall be made to the holders of the Common
Stock and any other capital stock of the Corporation; and, if in the
event of any such liquidation, dissolution or winding up the holders of
this Series shall have received all amounts to which they shall be
entitled as aforesaid, the holders of the Common Stock and other
capital stock of the Corporation shall be entitled, to the exclusion of
the holders of the shares of this Series, to share ratably in all of
the assets of the corporation available for distribution to the
shareholders then remaining according to the number of shares of the
Common Stock and other capital stock of the Corporation held by them
respectively and in accordance with the rights of the holders of the
Common Stock and such capital stock. If upon any liquidation,
dissolution or winding up of the Corporation the amounts payable on or
with respect to the shares of this Series are not paid in full, the
holders of the shares of this Series shall share ratably in any
distribution of assets according to the respective amount which would
be payable in respect of the shares of this Series held by them upon
such distribution if all amounts payable on or with respect to the
shares of this Series were paid in full.
(iii) Neither the sale, lease or exchange (for cash, shares of
stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation nor the merger or
consolidation of the Corporation into or with any other corporation or
the merger or consolidation of any other corporation into or with the
Corporation shall be deemed to be a liquidation, dissolution or winding
up of the Corporation for the purposes of this Section (e).
(f) ELECTION OF BOARD MEMBER. At all times that the shares of this
Series are outstanding, the holders of the shares of this Series, by majority
vote, shall have the right to designate three members of the Board of
Directors and the number of the members of the Board of Directors shall be
increased by that number designated.
(g) RESTRICTIONS ON ISSUANCE OF COMMON STOCK. At all times that the
shares of this Series are outstanding, the Corporation shall not issue any
new Common Stock without the written consent by a majority of the holders of
the shares of this Series, unless the consideration received by the
Corporation for issuance of such Common Stock, on a per share basis, is not
less than the conversion price per share of the shares of this Series into
Common Stock which shall initially be $0.66 per share, subject to any
adjustment specified in clause (iv) of Section (d) above.
IN WITNESS WHEREOF, Potomac Energy Corporation has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
its CEO and attested by its Secretary this 1st day of October, 1999.
POTOMAC ENERGY CORPORATION
-26-
<PAGE>
BY: /s/ Carl W. Swan
--------------------------------
Carl W. Swan, CEO
ATTEST:
/s/ James E. Frazier
- --------------------------------
James E. Frazier, Secretary
(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.
POTOMAC ENERGY CORPORATION
(Formerly Midwestern Resources, Inc.)
(Registrant)
By: /s/ JAMES E. FRAZIER
---------------------------------------
James E. Frazier, Chief Financial Officer
Date: February 17, 2000
-27-
<PAGE>
(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.
POTOMAC ENERGY CORPORATION
(Formerly Midwestern Resources, Inc.)
(Registrant)
By: /s/ JAMES E. FRAZIER
---------------------------------------
James E. Frazier, Chief Financial Officer
Date: February 17, 2000
-28-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999 THIRD
QUARTER REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS OTHER
<FISCAL-YEAR-END> DEC-30-2000 DEC-30-2000 DEC-30-2000
<PERIOD-START> JUL-01-1999 JAN-01-1999 APR-07-1997
<PERIOD-END> SEP-30-1999 SEP-30-1999 SEP-30-1999
<CASH> 112,588 112,588 112,588
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 112,588 112,588 112,588
<PP&E> 643,346 643,346 643,346
<DEPRECIATION> (13,297) (13,297) (13,297)
<TOTAL-ASSETS> 742,637 742,637 742,637
<CURRENT-LIABILITIES> 192,427 192,427 192,427
<BONDS> 96,344 96,344 96,344
0 0 0
290,000 290,000 290,000
<COMMON> 8,094,270 8,094,270 8,094,270
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 742,637 742,637 742,637
<SALES> 0 0 0
<TOTAL-REVENUES> 727 2,146 12,166
<CGS> 0 0 0
<TOTAL-COSTS> 122,859 448,297 1,957,878<F1>
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 0 0 0
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (122,132) (446,152) (1,945,713)
<EPS-BASIC> (.02) (.05) (.24)
<EPS-DILUTED> (.015) (.055) (.24)
<FN>
<F1>INCLUDES $483,55 IN CONSULTING EXPENSES RELATED TO COLOMBIAN PROPERTY.
INCLUDES $606,250 IN STOCK BASED EMPLOYEE COMPENSATION EXPENSES.
</FN>
</TABLE>
