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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ Annual report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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
incorporation or organization) Identification No.)
1100W
2601 N.W. EXPRESSWAY
OKLAHOMA CITY, OKLAHOMA 73112-4605
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (405) 840-1427
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
NONE NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year was $1173.
The aggregate market value of Registrants Common Stock held by non-affiliates
based upon the closing bid price ($1.75 per share) as of June 20, 2000, was
$738,686. The number of outstanding shares of Registrant's Common Stock as of
June 20, 2000, was 18,641,644. This number reflects stock issued as a result
of events subsequent to fiscal year end. See Item 1.- Description of Business
"-Recent Events".
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
Item 1. Description of Business................................................................................2
Item 2. Description of Property...............................................................................10
Item 3. Legal Proceedings.....................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders...................................................15
Part II
Item 5. Market for Common Equity and Related Stockholders Matters.............................................15
Item 6. Management's Discussion and Analysis or Plan of Operation.............................................16
Item 7. Financial Statements..................................................................................19
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................19
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act...............................................................19
Item 10. Executive Compensation................................................................................21
Item 11. Security Ownership of Certain Beneficial Owners and Management........................................24
Item 12. Certain Relationships and Related Transactions........................................................25
Item 13. Exhibits and Reports on Form 8-K......................................................................26
(a) Report on Form 8-K...............................................................................26
(b) Exhibits.........................................................................................26
Item 14. Consolidated Financial Statements.....................................................................28
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CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
Certain statements under the captions "Item 1. Description of
Business," "Item 2. Description of Property," and "Item 6. Plan of
Operation," and elsewhere 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
RECENT EVENTS
Effective May 19, 2000, Potomac Energy Corporation (the "Company")
acquired Butte Coal, Inc., a Utah corporation ("BCI"), by merging with the
Company's wholly-owned subsidiary, Potomac Energy Acquisition Corporation (the
"Merger-Acquisition"). The Merger-Acquisition was completed in accordance with
the Agreement and Plan of Merger dated March 31, 2000 (the "Merger
Agreement"), which amended and restated the Agreement and Plan of Merger dated
March 17, 2000.
In accordance with the terms of the Merger Agreement, the Company
converted its outstanding (i) stock options exercisable for the purchase of
1,175,000 shares of common stock, (ii) common stock purchase warrants
exercisable for the purchase of 320,000 shares of common stock and (iii) certain
corporate notes into shares of common stock. The stock options and warrants
were converted at a 50% discount and resulted in the issuance of 587,500 and
160,000 shares of common stock, respectively. The convertible corporate notes
were converted according to the terms of the notes, which resulted in the
issuance of 605,581 shares of common stock. These conversions increased
overall total outstanding common stock from 8,094,270 to 9,447,351 shares.
Additionally, the Company reverse split its outstanding common stock on a 5 to
1 basis. With the reverse split all fractional shares were rounded up to the
nearest whole share and resulted in the issuance of 400 additional shares.
These actions reduced the total outstanding common stock from 9,447,351 to
1,889,870.
Pursuant to the Merger Agreement, the Company issued and delivered
16,751,774 shares of common stock to the shareholders of BCI, which resulted
in the shareholders of BCI holding voting control of the Company. The shares
of common stock to be issued in connection with the Merger-Acquisition will be
issued without registration pursuant to Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended, and applicable state securities
acts. The total outstanding common stock after giving effect to the Merger was
18,641,644. The Company and BCI are both development stage enterprises. The
Merger-Acquisition was accounted for as a reverse acquisition resulting in the
Company being acquired by BCI under the purchase method of accounting.
As a result of Merger Acquisition, the officers and directors of BCI,
Winfield Moon, Sr., President and Chief Executive Officer and Fred W. Young,
Secretary and Treasurer, became officers and directors of the Company. SunStar
Holdings, Inc. ("SunStar"), the controlling shareholder of BCI, became the
single largest and controlling shareholder of the Company. As a controlling
shareholder, SunStar exercised its right to appoint new directors to the
Company and the previous officers and directors resigned, including Carl W.
Swan, the Chief Executive Officer and James Frazier, the Chief Financial
Officer. Subsequently, Carl W. Swan was asked to become Chairman of the Board
of the Company and upon his acceptance was reinstated as the Company's
Chairman. Fred W. Young was appointed as President and Chief Executive Officer
of the Company and Winfield Moon, Sr. resigned as both an officer and director
of BCI and an officer of the Company.
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BCI is the owner of certain undeveloped coal leases located in
Garfield County, Utah (the "Butte Properties"). The coal leases cover 3,692.68
acres and have an estimated 71,736,000 tons of 12,480 BTU in ground coal
reserves based on independent third party reports dated March 11, 2000. These
reports were based on the purchase agreement between BCI and World Link
Capital LLC dated September 19, 1999. The purchase agreement with World Link
Capital LLC provided for a purchase price of $200,000,000. As of the date of
the reports, this purchase agreement had expired without performance by its
own terms and World Link Capital LLC did not have any continuing obligations
under the purchase agreement. BCI continues to negotiate purchase terms with
World Link Capital LLC. BCI's Chief Executive Officer, Winfield Moon, Sr.
believes positively that purchase terms will be agreed upon with World Link
Capital LLC. The value of the coal reserves as supported by independent third
party reports and the possible income which would result from the sale of the
coal reserves are the two main factors the Company and its Board of Directors
relied on in agreeing to the Merger-Acquisition of BCI.
As a result of the Merger-Acquisition and the change of voting and
management control of the Company, the Company's oil, gas, coal and power
generation assets (substantially all of the assets of the Company) are held
for sale. As mentioned, the Company, through its subsidiary BCI, intends to
sell its coal properties to foreign markets which are in need of the
relatively high BTU coal reserves to meet current clean air standards. In
addition, the Company intends to divest its other energy based assets
including its 25% working interest in the Rosablanca and Montecristo
Association Contracts with Seven Seas Petroleum, Inc., (AMEX: SEV) as well as
its net 9% ownership of Dolphin Industries, Inc. which owns the Thomas jet
and diesel fuel refinery. To this end, the Company has entered into a Stock
and Asset Exchange Agreement with Energas Resources, Inc., an Oklahoma based
Canadian Public company. In exchange for the Company's interests in the
Rosablanca and Montecristo Association Contracts and Dolphin Industries,
Inc., this agreement provides for the issuance of 1,900,000 shares of
restricted Energas Resources, Inc. common stock and common stock purchase
warrants exercisable for the purchase of 2,000,000 shares of Energas
Resources common stock for $1.50 per share during the initial year of the
warrants and for $1.72 per share during the second year of the warrants.
From the sale of its assets, the Company intends to invest the sale
proceeds in emerging growth companies that will ultimately benefit all
shareholders. There is no assurance that the Company will be able to sell its
assets or to invest in emerging growth companies or, if successful, generate
any revenue from the investment in such companies.
As a result of the Merger-Acquisition, the Company's principal
offices will be relocated as of July 1, 2000 to 3168 Bel Air Drive, Las Vegas,
Nevada 89109 and the telephone number is 702-792-9112.
BACKGROUND
Potomac Energy Corporation ("PEC" or the "Company") (formerly
Midwestern Resources, Inc.) was formed in 1980 under the laws of the State of
Oklahoma, 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. Prior to the
Merger-Acquisition the Company's operations focused on 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
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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. Subsequent to the fiscal year end the Company has
discontinued exploration of this property and released the Guaduas Association
Contract. See Item 2. Description of Property "--Middle Magdalena Valley
Basin" and "--Rosablanca and Montecristo Association Contracts" and
"--Guaduas Association contracts." In August 1999, the Company entered into
agreements to acquire 9% ownership of Dolphin Industries, Inc., ("Dolphin") a
private Oklahoma corporation. Dolphin owns the Thomas Oil Refinery, a
10,000-barrel per day jet fuel refinery plant located in Thomas, Oklahoma.
This 9% ownership interest was finalized on November 19, 1999. See Item 2.
Description of Property " -- Thomas Refinery" and "--Dolphin Contracts." The
Company has developed a twelve-month Plan of Operation - See Part II. Item 6.
Management's Discussion and Plan of Operation, to dispose of its assets
describe herein. The Company has identified and entered into an Agreement
with an Oklahoma based Canadian public company to sell its Colombian Assets
and its interest in Dolphin Industries, Inc. Additionally, the Company had
entered into negotiations sell its coal reserves in Utah. This negotiation is
still ongoing. There can be no assurance that these transactions will close as
all are subject to certain due diligence by the prospective acquiring party,
Board, and where required shareholder approval, by both the Company and the
prospective acquiring party, as well as regulatory approval where applicable.
Should these negotiations to dispose of the Company's assets fail, the Company
will be forced to find other interested parties and or modify its Plan of
Operation and Company Direction.
Exploration Strategy
As previously mentioned, the Company intends to sell its
energy-related assets. However, should the Company be unable to sell its
assets as desired, then it is anticipated that the Company will continue to
fulfill its current obligations with respect to its energy-related assets and
continue to pursue its exploration strategy. The Company's oil, gas and coal
exploration and development operations are currently focused mainly 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% 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 Colombia is likely to be
reflected in both the short-term performance and the Company's long-term
financial results. The Company may serve as operator with respect to those
properties acquired pursuant to association contracts in which the Company
obtains a controlling interest or holds the largest ownership interest;
however, it is anticipated that the Company will also participate in the
development of properties operated by third parties and in some cases may
delegate operations to a third party. Should the Company continue to pursue
oil, gas and electrical power opportunities both internationally and
domestically within the United States the following business strategies would
include:
- 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;
- Building the Company's base of operations by initially concentrating
its development activities within Colombia and within the United
States;
- 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;
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- 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 may 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 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 and
development thereof and achieve profitability.
Foreign Assets
One of the Company's principal assets is a 25% interest in the
Association Contracts that relate to the 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"). Since acquisition, a well has not been drilled by the Company on
either of the Rosablanca and Montecristo Blocks. The Rosablanca and
Montecristo Association Contracts were issued by Empresa Colombiana de
Petroleos ("Ecopetrol"), the state-owned Colombian oil company, in November
1997, and provide generally for a six-year exploration phase followed by a
22-year production period, with partial relinquishments of acreage, excluding
commercial fields, required commencing at the end of the sixth year of the
Rosablanca and Montecristo Association Contracts. The 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 significant asset of the Company was a 50% 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.
During the current year, the Company terminated exploration activities on the
Guaduas Block and released all its acreage to Eco-Carbon. The Company
continues to feel that there are sufficient coal reserves in the Guaduas area,
however, more extensive surface geology must be undertaken before conducting
any additional drilling operations. 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
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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 % 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% of that
country's total imports and 38% 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. There are three main crude oil export pipelines leading to the port
of Covenas in Colombia. The pipeline from Cano Limon has a maximum capacity of
200,000 barrels of oil per day ("BOPD"), and two pipelines from Vasconia with
300,000 and 500,000 BOPD capacities. In 1997, Colombia exported over 30
million short tons of coal and expects to double coal production to at least
60 million short tons by 2005.
Colombia is currently investing in the expansion of its electric
generating capacity (currently about 11GigaWatts), with plans to add over four
additional GW by this year 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 7% 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 physiographic features dominate the geography of Colombia.
To the west lie the Andes mountains, which, north of the Ecuador border,
bifurcate into three ranges, the Western, Central and Eastern Cordillera,
extending toward the Caribbean coast. These ranges are separated by the Cauca
and Magdalena valleys, respectively. To the east lies the Llanos, a savanna
within the bounds of the Orinoco Basin, which extends over the remainder of
the country.
Association contracts acquired from either Empresa Colombiana de
Petroleos, the Colombian national oil company ("Ecopetrol") or Empresa
Colombiana de Carbones, the Colombian national coal company ("Ecocarbon"),
after being approved by all proper Colombian governmental authorities as well
as the board of Ecopetrol or Ecocarbon, are mutually executed by the parties
and subsequently recorded as a public deed in Colombia. Therefore, ownership
of an association contract is public record and protected by Colombian law.
The Rosablanca, Montecristo and Guaduas Association Contracts are on file and
available for public inspection at each respective agency.
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Risks Inherent in Foreign Operations
There are risks inherent in the fact that the Company has acquired
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 and furthermore, these risks may continue should the Company retain
its energy assets located outside North America.
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,
renegotiation of contracts with governmental entities, expropriation, import
and export regulations and other foreign laws or policies governing operations
of foreign-based companies, as well as by laws and policies of the United
States affecting foreign trade, taxation and investment. In addition, as the
Company's operations are governed by foreign laws, in the event of a dispute,
the Company may be subject to the exclusive jurisdiction of foreign courts or
may not be successful in subjecting foreign persons to the jurisdiction of
courts in the United States. The Company may also be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality
because of the doctrine of sovereign immunity.
The Company's business is subject to political risks inherent in all
foreign operations. While Colombia has no history of nationalizing its
business nor expropriation of foreign assets, the Company's oil, gas and coal
operations are subject to certain risks, including (i) loss of revenue,
property, and equipment as a result of unforeseen events such as
expropriation, nationalization, war and insurrection, (ii) risks of increases
in taxes and governmental royalties, (iii) renegotiation 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. 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.
Domestic -- Assets
The Company's domestic properties currently include the Thomas
Refinery operated by Dolphin Industries and, subsequent to the fiscal year,
its interest in the coal leases owned by Butte Coal, Inc.
The Company owns 9% of Dolphin Industries, Inc.("Dolphin"), an
Oklahoma corporation. Dolphin owns and operates the Thomas Refinery located in
Thomas, Oklahoma approximately 85 miles west of Oklahoma City. The refinery
was originally constructed in 1980 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 River from one of its 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 had been
working to acquire the Thomas refinery since early 1999. Dolphin is a 100%
minority owned Oklahoma business and Geo American
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Services is an Oklahoma small business. Both companies qualify under the U.S.
government regulations for preferred pricing contracts. Neither Dolphin nor
Geo had the capital resources to purchase the refinery, and merged to combine
strengths. Geo through its long-standing relationship with Carl W. Swan, the
Chairman of the Company, asked Potomac for assistance in acquiring the
refinery. Potomac was able to assist with the negotiations for the refinery
and issued 290,000 shares of its preferred stock for the initial capital to
purchase and begin operating the refinery. Potomac received a 9% ownership
interest in Dolphin in consideration for assistance in acquiring the
refinery. Subsequent to the investment by Potomac, Dolphin and Geo were able
to raise in excess of $800,000 dollars to complete the overhaul of the plant,
hire staff and begin operations.
Dolphin Industries is the designated operator of the refinery.
Dolphin is currently pursuing and has established several government
commercial contracts for jet fuel, diesel fuel and naphtha, the main products
of the refinery. As of May 1, 2000 the turnaround operation for the plant was
complete and Dolphin was preparing to begin fulfilling its contracts. Dolphin
is awaiting inspection by the government before it finalizes its bids for
government contracts. Dolphin Industries fiscal year end is June 30 and
therefore Dolphin has not completed a year end financial statement. There have
been no revenues generated by Dolphin or the Thomas Refinery and therefore
there are no revenues distributed to Potomac for its interest to date. Future
revenues, if any, will then be reflected in subsequent financial reports by
the Company.
Effective May 19, 2000, The Company acquired Butte Coal, Inc., a
private Utah corporation as a wholly owned subsidiary pursuant to the
Merger-Acquisition.
Butte Coal, Inc. holds leases covering 3,692.86 acres located in
Garfield County, Utah with estimated reserves of 71,736,000 tons of coal in
place. These leases will expire in 2007. With diligent mining efforts theses
leases could be perpetualized indefinitely. These leases are in the Henry
Mountain Coal Field. Within this area, the Emery Coal Bed is the principal
zone and has an estimated overburden of seventy (70') feet or less. The
in-place reserves are estimated to be 90% recoverable for a net reserve
estimate of 64,562,400. The sulfur content is considered low, as is the ash
content. The 12,480 BTU high heat content makes Butte's coal attractive for
strip mining and for combining with high sulfur, low BTU coal. Butte Coal
does not have nor does it intend to conduct its own mining operations on the
Butte coal leases. As previously mentioned, the Company's intent is to either
sell the coal reserves in place to a third party which is desirous of the
coal in order to combine the low sulfur and high BTU Butte coal with high
sulfur and low BTU coal, or award mining contracts to a third party who is
currently mining in the same region and is desirous of expanding and
increasing operations.
Joint Venture Arrangements
As a means of achieving its plan of operation, the Company expects
to continue to enter into joint venture arrangements for the acquisition of
interests or partial interests in emerging growth companies. In these joint
venture arrangements, the Company may not be the controlling manager and
therefore, although the Company can take certain steps to determine if the
risk of activities conducted by the designated manager (s) of such joint
ventures is appropriate, there can be no assurance that the risk will be so
allocated, that the activities will be carried out by the manager (s) in a
manner deemed appropriate by the Company or that the activities will be
successful. In addition, the Company's ability to continue its acquisition
and development activities may be dependent upon the decision of its joint
venture partner or partners to continue operations and activities and to
finance their respective portions of the costs and expenses of the joint
venture 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 acquisition.
Markets
In the event the Company's exploration and development activities
result in the production of oil and gas produced from the Rosablanca and
Montecristo Blocks, oil may be sold to Ecopetrol or to third parties provided
that 75% 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 the Company's Colombian oil and gas production will be
sold to Ecopetrol under contracts that provide for cancellation by either
party with notice. In the event of cancellation by Ecopetrol, the Company
would be required to arrange for the export and sale of its production.
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In the event the Company again starts exploration and development
activities for the discovery and production of coal, new contracts will be
required by Ecocarbon. Historically, Ecocarbon has agreed to a waiver of its
declaration of the commerciality of 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
may be sold to Ecocarbon or to third parties provided that 75% 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 should the
Company resume exploring for coal in Colombia 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.
In the event the Company's oil, gas, coal and power generation
operations are productive, changes in natural gas, crude oil, coal and
electrical prices will significantly affect the revenues and cash flows of the
Company, if any, attributable to production as well as the value of its
properties. Declines in the prices of the Company's production 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. The Company has taken steps to diminish the overall reliance on the
decisions of Colombian official regulatory agencies by investing in U.S.
properties such as the Thomas Refinery and Butte Coal, Inc. However, current
world market pricing of crude oil, jet fuel and coal will continue to impact
the earnings of the Company.
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
As of December 31, 1999, the Company's operations were managed from
its offices in Oklahoma City, with a staff of four employees, and use of
professional consulting services as needed. The Company's employees were and
are not currently represented by a labor organization. The Company and its
subsidiaries consider the relations with its employees and consultants to be
good.
As previously mentioned, the Company is under new management as a
result of the Merger-Acquisition of BCI. On the date of this report, the
Company has two employees. Additional staff and resources are expected to be
added on an as needed basis.
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ITEM 2. DESCRIPTION OF PROPERTY.
As a result of the Merger-Acquisition and changes of voting and
management control of the Company, the Company's oil, gas, coal and electrical
power generation assets are held for sale. In the event of sale, all further
operations will be terminated. However, until these sales are completed, the
Company may or will have continuing obligations to conduct the activities
associated with its properties.
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% 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 had also acquired a 50% 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. The Company has released this association contract
and there are currently no plans to further explore for coal in this region at
this time.
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, 1999, 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
and Rosablanca Blocks has been completed. Additionally, interpretation of the
seismic data on the LaLuna and Rosablanca formations and at the Basal
Cretaceous formations have been generated and are completed. 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, however certain environmental
issues may impair the re-entry of this well and an off-set may be required if
possible. The original Texaco exploratory well had oil and gas shows in
the La Ulna 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. Subsequent to the fiscal year end, 100 Kilometers of seismic has
begun to be shot on the Rosablanca Block. The required 100 kilometers of
seismic required to be shot on the Montecristo Block according to the work
commitments was waived by Ecopetrol in exchange for the Company and its joint
venture partner and operator, Seven Seas Petroleum, Inc., electing to drill a
well on the block prior to Feb 1, 2001. No decision has yet been made by
either the Company or its partner regarding drilling a well or identifying a
specific well location due to a number of environmental considerations which
must be addressed and approved by Ecopetrol prior to such decisions. If this
asset is disposed as intended, all future development and exploration would be
the responsibility of the new owners and the Company would cease its
involvement. Due to the fact that Seven Seas is the operator of the
concessions, Seven Seas' prior approval of the transfer is required. Any new
owner and joint venture partner will have to demonstrate to Seven Seas
sufficient financial resources and intent to fulfill its respective portion of
the projects financial commitments.
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
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obtained, GHK agreed to assign a 25% 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% of any initial
guarantees required by Ecopetrol, and (C) demonstrate financial capability to
pay 25% 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 with Potomac
(Bermuda), the Company's subsidiary, Potomac Acquisition acquired and assumed
all obligations of Potomac (Bermuda) under the agreement with GHK. Following
execution the GHK Agreement was assigned and transferred by GHK to Seven Seas
Petroleum, Inc. ("Seven Seas") and by Omnipresent Exploration to Potomac
(BVI). As of the date of this Report, Potomac (BVI) is qualified to do
business in Colombia. As of December 31, 1999, the Company was in full
compliance with the terms of the GHK Agreement.
As of December 31, 1999, 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. This coal
showed to be of good quality estimated at 14,000 BTU, .07% sulfur and 5%
ash. These shows indicated the need for further review and analysis by the
Company. As a result, the Company began coring operations to further
identify specific coal seams, thickness, and a real extent. Three core holes
were drilled with little or no shows of coal. As a result, coring operations
were suspended until a surface geologist could evaluate the disparity between
the surface scrapings and the coring results. A surface geologist was hired
and conducted an extensive study of the region. The results of this study were
that there is coal in the region, however, most of the coal is a result of a
large landslide some 150 years ago and that the majority of coal is thin,
shallow and in small quantities insufficient to be feasible for commercial
mining. Therefore the recommendation was made to suspend operations on the
Guaduas Block until such time as further evaluations could be made and
additional blocks could be secured to better develop the desired coal reserves
required for commercial mining.
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% 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 provided 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 a result
of the Company's suspending operations on the Guaduas Block, the Erasmos
Agreement has been terminated and any payments due have been canceled. The
Company is currently evaluating its joint venture agreement with Arena Power
and both parties are discussing the options for future exploration
possibilities if interested. As of the date of this report, there can be no
assurance that the Company will continue to explore for coal in Colombia or
that such activities will result in reserves or profits for the Company.
The Thomas Refinery is located in Thomas, Oklahoma approximately 85
miles west of Oklahoma City. The refinery was originally constructed in 1980
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. Potomac has been provided with a 9%
interest in the refinery for its consideration and assistance in acquiring
the refinery. See Exhibit 6.0- "Dolphin Investment Compensation Agreement".
Dolphin Industries is the designated operator of the refinery. Dolphin is
currently pursuing several government commercial contracts for jet fuel,
diesel fuel and naphtha, the main products of the refinery. As of May 1, 2000
the turnaround operation for the plant was complete and Dolphin was preparing
to begin fulfilling its commercial contracts. Dolphin is awaiting inspection
by governmental authorities before it is able to finalize its bids for
government contracts.
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The Company, through its wholly-owned subsidiary, Butte Coal Inc.,
holds leases 3,692.86 acres in Garfield County, Utah with estimated reserves
of 71,736,000 tons of coal in place. These leases are in force until 2007 and
may be extended for an additional ten (10) years. These leases are in the
coal field defined as the Henry Mountain Coal Field. Within this area, the
Emery Coal Bed is the principal zone and has an overburden of seventy (70')
feet or less. The in-place reserves are estimated to be 90% recoverable for a
net reserve estimate of 64,562,400. The sulfur content is considered low, as
is the ash content. The coal has 12,480BTU high heat content that makes
Butte's coal attractive for strip mining or combining with high sulfur, low
BTU coal.
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% 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 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%, two years
thereafter will be reduced 50% 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% 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% interest in the remaining production,
bear 50% of the development costs, and reimburse Seven Seas, the Company and
other joint venture partners, from Ecopetrol's share of future production, for
50% of the costs of certain exploration activities. Upon acceptance of a
field as commercial, Ecopetrol will acquire a 50% interest therein and the
interests of the other parties to the contract, including the Company, will be
reduced by 50%; 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% 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% to 75% 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.
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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% 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% interest therein upon payment of 50% of direct exploration
costs and 200% of the additional exploration costs expended by the joint
venture, which payment may be made out of Ecopetrol's share of future
production.
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%. An additional remittance tax is imposed upon remittance of profits abroad
at a rate of 7%.
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 had a 50% interest in the Association
Contract, subject to the Erasmos and Arena Agreements. However, subsequent to
the fiscal year end operations on the Guaduas Block have been suspended and
the Association Contract with Ecocarbon terminated.
Plan of Development
Rosablanca and Montecristo Blocks
Seven Seas and the Company established a 24-month plan of exploration
and development of the Rosablanca and Montecristo Blocks. Under this plan,
established in November of 1997, and revised in November of 1999, 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 proposed to (i) 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 December 31, 1999, Seven Seas had requested
environmental approval for the shooting of additional two-dimensional seismic
(100 kilometers on the Rosablanca Block). This shooting will be completed by
the end of the second quarter of 2000. Additionally, Seven Seas has begun the
environmental approval process to re-enter and deepen the existing well on the
Montecristo Block, and has met with significant obstacles including new
Colombian environmental legislation that prevents oil wells from being drilled
within 300 kilometers of a main water source. The existing well on the
Montecristo Block is approximately 200 kilometers from the Magdalena River, a
main water source. Originally, the river was several 100 kilometers from the
well location and the well location was on much higher ground, however since
the well was originally drilled by Texaco, the river and ground have shifted.
Ecopeterol will require an environmental waiver in order for drilling to
proceed. Considering the recentness of the Colombian legislation, it is
unlikely that a waiver will be granted. Rather Seven Seas is considering
either an off-set location or a secondary location altogether separate from
the original Texaco location. No specific time frame for this well has been
determined. According to the work commitments for both blocks, a well on each
block is required prior to February 1, 2001 or acreage will be required to be
released. Seven Seas and the Company are working to meet this revised plan of
development. The timing and undertakings under this development plan continues
to be dependent 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. Additionally, the Company, as previously mentioned, intends to
dispose of these assets and therefore will likely have little or no impact on
the future development of this asset unless the Company retains ownership. It
is the intent of the Company that any party who acquires this asset will
assume the existing plan of exploration and development for this property as
described, but there
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is no assurance that this is the case. Last, therefore, there can be no
assurance that such plan of exploration and development as developed by Seven
Seas and the Company will be successful or will be completed as anticipated.
Guaduas Block-
The Company had established a 12-month plan of development of the
Guaduas Block, however, this plan has been suspended due to the termination of
operations on this block and the release of the Association Contract.
Thomas Refinery-
The Thomas Refinery is operated by Dolphin Industries, Inc. Dolphin
is currently pursuing several government commercial contracts for jet fuel,
diesel fuel and naphtha, the main products of the refinery. As of May 1, 2000
the turnaround operation for the plant was complete and Dolphin was preparing
to begin fulfilling its commercial contracts. Dolphin is awaiting inspection
by governmental authorities before it is able to finalize its bids for
government contracts. The Company intends to dispose of this asset as
previously described and it is the intent of the Company that any party who
acquires this assets will work to assist Dolphin in their efforts to
successfully operate the Thomas Refinery.
Butte Coal-
Butte Coal does not have nor does it intend to conduct its own
mining operations on the Butte coal leases. The Company's intent is to either
sell the coal reserves in place to a third party which is desirous of the
coal to possibly combine the low sulfur and high BTU Butte coal with the
potential third parties existing high sulfur and low BTU coal, or award
mining contracts to a third party who is currently mining in the same region
and is desirous of expanding and increasing operations.
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 and should the Company sell its energy related
assets will not have any oil, gas or coal reserves in the future. However,
should the Company retain its energy related assets, then 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. Should the company have
reserves, then the estimates of the Company's proved oil, gas and coal
reserves and projected future net revenues would be based on reserve reports
prepared by independent engineers. The estimation of reserves requires
substantial judgment on the part of the petroleum and mining engineers,
resulting in imprecise determinations, particularly with respect to new
discoveries. Different reserve engineers may make different estimates of
reserve quantities and revenues attributable thereto based on the same data.
Estimates of proved undeveloped reserves, which in the future may comprise a
substantial portion of the Company's reserves, are by their nature less than
certain. The accuracy of any reserve estimate depends on the quality of the
available data as well as engineering and geological interpretation and
judgment. Results of drilling, mining, testing and production and changes in
the assumptions regarding decline and production rates, crude oil prices, coal
prices, electrical prices, revenues, taxes, capital expenditures, operating
expenses, geologic success and quantities of recoverable crude oil may vary
substantially from those assumed in the estimates, may result in revisions to
such estimates and could materially affect the estimated quantities and
related value of reserves set forth herein. The estimates of future net
revenues will reflect oil, gas and coal prices as of the date of estimation,
without escalation. There can be no assurance, however, that such prices will
be realized or that the estimated production volumes will be produced during
the periods indicated. Future performance that deviates significantly from the
reserve reports could have a material adverse effect on the Company.
Office Properties
As of the date of this report, the Company maintains its executive
office in approximately 3,400 square feet at Suite 1100W, The Oil Center, 2601
Northwest Expressway, Oklahoma City, Oklahoma 73112-7293. The office premises
are occupied under a lease that expires in July 2004, and requires monthly
rental payments of $4,000. The Company considers such space to be adequate for
its current needs. However, as a result of the Company's acquisition of BCI and
14
<PAGE>
its subsequent reorganization, the Company will be relocating its executive
offices as of July 1, 2000 to 3168 Bel Air Drive, Las Vegas, Nevada 89109 and
will have a new telephone number of 702-792-9112.
ITEM 3. LEGAL PROCEEDINGS.
The Company does not have any pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1999,
the Company did not submit any matters to a vote of its shareholders through
the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
The Company's Common Stock is quoted on the NASDAQ's Over-The-Counter
Bulletin Board (OTC:BB) under the symbol "PEGC". Prior to October 13, 1998, the
Company's Common Stock was inactive, and a public trading market for the
Common Stock did not exist. The following table sets forth, for the periods
presented, the high and low closing bid quotations in the NASDAQ's
Over-The-Counter Bulletin Board (OTC:BB) as quoted. The bid quotations reflect
inter-dealer prices without adjustment for retail markups, markdowns or
commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
CLOSING BID
-----------------
HIGH LOW
------ ------
<S> <C> <C>
1999:
First Quarter Ended March 31................................................ $ 3.81 $ 3.50
Second Quarter Ended June 30............................................... $ 1.25 $ 1.12
Third Quarter Ended September 30............................................ $ .56 $ .56
Fourth Quarter Ended December 31............................................ $ .68 $ .68
1998:
First Quarter Ended March 31................................................ $-- $--
Second Quarter Ended June 30................................................ $-- $--
Third Quarter Ended September 30............................................ $-- $--
Fourth Quarter Ended December 31............................................ $ 3.00 $ 3.00
</TABLE>
On May 19, 2000, there were approximately 1,596 holders of the Common
Stock.
RECENT SALES OF UNREGISTERED SECURITIES
The Company sold and issued the securities described below during
1999 which were not registered under the Securities Act of 1933, as amended:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
PURCHASE OF COMMON
PRICE PER STOCK NET
NAME DATE OF PURCHASE SHARE PURCHASED PROCEEDS(1) CONSIDERATION
----------------------- ---------------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Jerry Novakowski................... January 12, 1999 $ 2.50 15,000 $- Services
Donald R. Wheat.................... January 12, 1999 $ 2.50 15,000 $- Services
William Mitschke................... January 12, 1999 $ 2.50 15,000 $- Services
Integrity Auto Sales............... April 14, 1999 $ 2.50 10,000 $ 25,000
15
<PAGE>
Donald R. Wheat.................... April 14, 1999 $ 2.50 10,000 $ 25,000
Fred & Peggy Thomas................ April 15, 1999 $ 2.50 10,000 $ 25,000
Lee Richard........................ April 16, 1999 $ 2.50 10,000 $ 25,000
Baker Family Trust................. April 19, 1999 $ 2.50 10,000 $ 25,000
Gary Bryant........................ April 22, 1999 $ 2.50 10,000 $ 25,000
Wun C Chiou, Sr.................... April 28, 1999 $ 2.50 10,000 $ 25,000
Global Village, Inc................ July 9, 1999 $ 2.50 10,000 $ 25,000
Carl W. Swan....................... October 7, 1999 $ 1.00 100,000 $100,000
William B. Haines (2).............. Nov. 19, 1999 $ 0.66 435,000 $- Stock
</TABLE>
----------------------------------
(1) No underwriting discounts or commissions were paid with respect to such
sales.
(2) This number reflects Preferred Stock of 290,000 shares on a converted
basis to common. There are no plans at this time for the Preferred
Stock to be converted.
The Common Stock purchased by each of the above-named persons was
issued pursuant to Rule 506 of Regulation D.
Pursuant to a Plan of Reorganization and Agreement of Merger, dated
June 12, 1998, the Company acquired the issued and outstanding capital stock
of Potomac (Bermuda). On June 17, 1998, the Company issued 7,050,000 shares of
its Common Stock to the shareholders of Potomac ( Bermuda) pursuant to Rule
506 of Regulation D.
With respect to each of the foregoing Common Stock sale transactions,
the Company relied on Section 4(2) of the Securities Act of 1933 and
Regulation D for exemption from the registration requirements of such Act.
With respect to purchases of the Common Stock after June 17, 1998, each
purchaser was furnished copies of the relevant information contained in the
Company's most recent Form 10-KSB Annual Report, Form 10-QSB Quarterly report
and other reports filed with the Securities and Exchange Commission during the
year of purchase, and each purchaser had the opportunity to verify the
information provided. Furthermore, the Company obtained an executed
subscription agreement containing representations from each of the purchasers
in connection with the purchase of the Common Stock of his or her intent to
acquire such Common Stock for the purpose of investment only, and not with a
view toward the subsequent distribution thereof. Each of the stock
certificates representing the Common Stock of the Company issued without
registration under the Act has been stamped with a legend restricting transfer
of the Common Stock represented thereby and the Company has issued stop
transfer instructions to UMB Bank, N.A., the registrar and transfer agent for
the Common Stock of the Company, concerning all certificates representing the
Common Stock issued in the above-described transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION.
The following discussion should be read in conjunction with the
audited consolidated financial statements and notes thereto appearing
elsewhere in this Report.
RESULTS OF OPERATIONS
The following discussion and analysis of results of operations
discussed below are for the full fiscal year ending December 31, 1999
including references to the fiscal year ending December 31, 1998. Also See
"Business and Properties-General" and "Certain Transactions."
The Company is a development stage company that during the period
ending December 31, 1999, did not have any revenue and incurred a net loss of
$592,768. In 1998, the net loss was $803,762. In the future, it is
anticipated that the Company will not derive its income from revenues
generated by oil, gas or coal sales, but rather from its investments in and
sales from emerging growth companies which the Company either owns or has an
interest. There is no assurance that the Company will have revenues from oil,
gas or coal sales in the future. The only revenue received by Potomac during
1999 was from interest income of $1,562. In 1998 the same generated $7,747
earned or accrued on cash and cash equivalents and marketable securities.
During 1999, Potomac obtained interests in Dolphin Industries, Inc. and
continued to fulfill it's work commitments on the Rosablanca, Montecristo and
Guaduas Association Contracts and in connection
16
<PAGE>
therewith incurred $105,629 in professional fees and consulting expenses and
incurred miscellaneous expenses of $488,312. This versus 1998 expenses of
$413,488 for professional and consulting fees and $398,851 for miscellaneous
expenses. Other than the activities associated with obtaining the Thomas
Refinery interest and fulfilling the required work commitments of the
Rosablanca, Montecristo and Guaduas Association Contracts, Potomac did not
conduct any operating activities during 1999.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards requiring that every instrument be recorded in the Balance
Sheet as either an asset or liability measured at its fair value. Statement
No. 133 will not impact the Company's disclosures or reporting for the fiscal
year ending December 31, 1999.
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, if the Company is unable to sell its energy related
assets, then the Company anticipates that its principal source of cash flows,
if any, will be from the production and sale of crude oil, natural gas and
coal reserves that are depleting assets. Cash flows from production sales
depends upon the quantity of production and the price obtained for such
production. Generally, an increase in prices allows a company to finance its
operations to a greater extent with internally generated funds, may allow a
company to obtain equity financing more easily or on better terms and lessens
the difficulty of attracting financing alternatives available to a company
from industry partners and non-industry investors. However, price increases
heighten the competition for energy association contracts, leases and other
contractual arrangement, increase the costs of exploration and development
activities, and because of potential price declines, increase the risks
associated with the purchase of producing properties while prices are at
higher levels.
A decline in oil, gas and coal prices (i) reduces internally
generated cash flows which in turn reduces the funds available for exploration
for and replacement of reserves, (ii) increases the difficulty of obtaining
equity financing and worsens the terms on which such financing may be
obtained, (iii) reduces the number of available oil, gas and coal properties
on reasonable economic terms, (iv) may result in the expiration of oil, gas
and coal contractual interests based upon the potential reserves in relation
to exploration and development costs, (v) results in marginally productive
oil, gas and coal mines being abandoned as non-commercial, and (vi) increases
the difficulty of attracting financing alternatives available from industry
partners and non-industry investors. However, price declines reduce the
competition for oil, gas and coal interests and, correspondingly, reduce the
prices paid for such interests or result in obtaining such interests on more
favorable terms. Furthermore, exploration and production costs generally
decline, although the decline may not be at the same rate of decline of energy
prices.
SEASONALITY
It is anticipated that the results of operations of the Company will
be somewhat seasonal due to seasonal fluctuations in the price for crude oil,
natural gas, coal and electrical kilowatts. Historically, crude oil prices
have been generally higher in the third and fourth quarters and natural gas
prices have been generally higher in the fourth quarter. Electrical kilowatts
tend to be higher in the third quarter. Due to these seasonal price
fluctuations, it is anticipated that results of operations for individual
quarterly periods may not be indicative of results that may be realized on an
annual basis.
INFLATION AND CHANGES IN PRICES
Inflation principally affects the costs required to drill, complete
and operate oil and gas wells as well as mine coal. In recent years inflation
has had a minimal effect on such costs. However, increases and decreases in
drilling or mining activities, which generally a linked to crude oil, natural
gas and coal price increases and decreases, have resulted in the increase and
decrease of exploration, development and exploitation costs on an
industry-wide basis.
17
<PAGE>
Liquidity and Capital Resources
Potomac has financed its development state activities through the
sale of equity securities and does not have any borrowing facilities or
arrangements in place to fund its capital commitments. During 1999, net cash
used by operating activities totaled $490,738 versus 1998 which totaled
$392,020, net cash used by investing activities totaled $383,059 versus 1998
which totaled $233,280 and net cash provided by financing activities totaled
$656, 433 versus 1998 which totaled 741,306. As of December 31, 1999, Potomac
had negative working capital of $(361,703) compared to positive working
capital of $64,818 at December 31, 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 had established a 24-month plan of development of the Rosablanca and
Montecristo Blocks at an estimated cost of $3,496,984. See "Description of
Properties--Plan of Development." The negative working capital figure of
$361,703 combined with the Company's share of the Colombian work commitments
required, more than any other single factor, the Board of the Company to take
action to find a suitable merger candidate that would protect the shareholders
investment and provide the possibility of future liquidity. The Company
anticipates that the costs of development of the Rosablanca and Montecristo
Blocks will be funded by a third party that acquires these properties as
disposed by the Company. Additionally, the Company hopes to receive additional
monies from the sale and disposition of its interests in Dolphin Industries,
Inc. and Butte Coal, Inc. The Company may attempt to fund the future cash
requirements of the Company through the offering of either equity and debt
securities and, although unlikely, borrowings. There is no assurance that any
such funding will be available or on terms acceptable to the Company.
Plan of Operation
The Company as a result of the Merger-Acquisition and the change in
voting and management control has developed the following plan of operation to
be followed during the next twelve months.
1. Sale all of its existing energy related assets for either cash,
stock, some combination thereof or some other consideration which
provides greater future value and opportunity to the Company's
shareholders.
2. Evaluate both financially and materially emerging growth
companies, both public and private, and acquire majority ownership
in these companies or enter in to joint venture arrangements with
these companies.
3. Provide on-going management and financial support to the companies
either wholly acquired or acquired an interest in to enable the
same to expand and further develop their operations, markets and
sales to the benefit of the Company.
4. Identify and hire both new executive management and general
administration personnel who will contribute to the focus of the
Company's goals and objectives.
5. Identify, elect and appoint such officers and directors as needed
to meet the Company's goals and objectives.
Future Cash Requirements
As mentioned, the Company hopes to derive monies from the sale and
disposition of its interests in its Colombian assets, Dolphin Industries, Inc.
and Butte Coal, Inc. There is no assurance as of the date of this report that
these sales will be completed or the timing of such transactions. The Company
may attempt to fund the future cash requirements of the Company through the
offering of either equity and debt securities and, although unlikely,
borrowings. SunStar Holdings, Inc. is the single largest shareholder of the
Company after the acquisition of BCI and the reorganization of the Company.
SunStar Holdings, Inc. may elect to fund the Company's cash requirements until
such time that the Company is able to become self sustaining as a result of
its investments and or sale of its assets. However, there is no assurance that
SunStar Holdings, Inc. or its sole shareholder, Mrs. Theolene D. Moon will be
capable of meeting such requirements now or in the future.
The Company does have and it is estimated will continue to have
certain on-going financial commitments that include employee payroll, payroll
tax, office rent, professional, legal and consulting fees as well as general
overhead and administration. Currently, these obligations roughly equal
$30,000 per month. Additionally, going forward, the Company may incur certain
one time charges related to the reorganization. The Company currently does not
have sufficient cash
18
<PAGE>
to meet these obligations without obtaining additional funds from either an
equity and debt offering or the issuance of corporate notes, the like of which
has been recently used to sustain the Company. There is no assurance that any
such funding will be available to the Company.
ITEM 7. FINANCIAL STATEMENTS
The response to this Item is set forth herein in a separate
section of this report, appearing on page F-1 through F-12.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There have been no disagreements of the type required to be
reported under this Item between management of the Company and its independent
accountants during 1999 or in 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
As previously mentioned, the Company has reorganized and
therefore has appointed new officers and directors to the Company. The
information below contains the current officers and directors of the Company
as of the date of this Report.
Set forth below is certain information with respect to each
executive officer and Director of the Company. Directors are generally elected
at the annual shareholders' meeting and hold office until the next annual
shareholders' meeting and until their successors are elected and qualify.
Executive officers are elected by the Board of Directors and serve at its
discretion. The Bylaws of the Company provide that the Board of Directors
shall consist of not less than two and such number as the Board of Directors
may from time to time determine by resolution or election.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Carl W. Swan.................................... 74 Chairman
Of the Board of Directors
Fred W. Young................................... 67 President, Chief Executive Officer, Treasurer,
Secretary and Director
Tim Shelby .............................. 58 Director
Joseph Edward Michaud........................... 69 Director
Charles Kim .................................... 61 Director
Patrick Mc Carrick.............................. 29 Director
</TABLE>
BACKGROUND OF COMPANY EXECUTIVE OFFICERS AND DIRECTORS:
The following is a brief description of the business background of the
executive officers and Directors of the Company:
CARL W. SWAN is Chairman of the Board of Directors of the Company.
Mr. Swan has been actively involved in all facets of the oil and gas industry
since 1951. He co-founded and served as President and Chief Executive Officer
and a Director of Basin Petroleum Corporation, which was a publicly held
company that merged into Reserve Oil and Gas Corporation in 1976. Since 1976,
Mr. Swan has operated Swan Petroleum Corporation, a privately held oil and gas
exploration company involved in oil and gas drilling, exploration and
refining. Mr. Swan has extensive oil and gas drilling and production
experience in several foreign countries. Mr. Swan is a graduate of the
University of New Mexico.
FRED YOUNG, is President and Chief Executive Officer, and Treasurer of
the Company. He has been the
19
<PAGE>
Secretary/Treasurer, Chief Financial Officer and a Director of BCI since 1998.
Mr. Young is a retired banker of 35 years and has significant experience in
Senior Management. He has served as president, CEO, and director of numerous
banks, financial institutions and privately held companies. Additionally, he
has extensive consulting experience in Europe and the United States.
TIM SHELBY is a Director of the Company. Mr. Shelby is currently
President and Chief Executive Officer of Paso Robles Tank, Inc., a private
California corporation. Mr. Shelby has founded several construction companies
in California including San Luis Piping Construction Co., Inc., West Coast
Industrial Coatings, Inc., West Coast Tank, Piping and Construction Co., Inc.
and continues to operates those business in Southern California. Mr. Shelby is
a member of American Petroleum Institute, the American Water Works Association
and Paso Robles Vintners & Growers Association. Mr. Shelby is a graduate of
Fresno State University with a Bachelors of Science degree in Business.
ALVARO LOPEZ CAYZEDO is a Director of the Company. Mr. Cayzedo has
over 30 years experience in the areas of development and infrastructure
projects. He has been an advisor to various international and governmental
agencies both in the United States and abroad. Mr. Cayzedo finished his
doctoral work at the University of Ohio in Cincinnati and did his post
graduate work at Harvard.
JOSEPH EDWARD MICHAUD is a Director of the Company and an independent
analyst of oil and gas properties and an investor in exploratory and
development prospects. Mr. Michaud has in excess of 40 years experience in the
oil and gas business, including extensive training as a petroleum engineer
while employed by James A. Lewis Engineering, a leading consulting firm in
reservoir analysis and property appraisals in the United States and Canada.
CHARLES KIM is a Director of the Company. Mr. Kim has been and
continues to be an active leader in the Asian-American Community in Southern
California. Mr. Kim is a naturalized U.S. citizen originally from Korea. In
Korea, Mr. Kim served with the BLUE HOUSE. Mr. Kim is President of Sunny
Investment Management Company and Founder of E & H Technology, Inc. a U.S.
corporation focused on doing business in Korea.
PATRICK MC CARRICK is a Director of the Company. He Co-founded
Absolute Internet Marketing in 1997 and has served as CIO since inception.
Prior to Absolute Internet, he was QA Coordinator for Memorial Sloan
Kettering Cancer Center MSKCC Dept of Radiology NYC, where he was in charge
of a LAN system and Transcription QA Database Development. Prior to moving to
NYC from Ireland in 1993, Mr. Mc Carrick was a programmer for Abbott
Pharmaceuticals (Ross Laboratories (NYSE: ABT) head office in Ireland, where
he developed Abbotts First RPG Gui Based Debuggers with a team of programmers
from Abbott Plants World Wide. Mr. Mc Carrick has been one of the early
visionaries behind Ivenue.com, a web based commerce solution for the SOHO
(Small Office, Home Office) market. He co-authored the original business plan
and programmed several of the modules behind the system. He later took on the
role of creative direction, helping guide the Ivenue project to where it is
today. Mr. Mc Carrick has extensive Internet experience, both in programming
and business operations. Having designed both large and small web based
applications since 1993. Mr. Mc Carrick holds a BSc (Hons) IT degree from the
University of Glamorgan, Wales, UK
BACKGROUND OF NON-OFFICER, NON-DIRECTOR CONTROL PERSONS:
The following is a brief description of the business background of
individuals who are neither officers nor directors, but thorough their
affiliation as shareholder act as "non-titled control persons" as defined by
the 1934 securities act:
THEOLENE D. MOON, AGE 71, is the sole shareholder of SunStar Holding,
Inc. the single largest shareholder of the Company. Mrs. Moon has been
President of Birmingham Terminal (a "REIT") for over 20 years and was involved
in the day-to-day operations of the business. The Trust manages over 40
properties in Real Estate investments in Alabama, California, Utah and Nevada,
leasing, buying, selling and managing investments. Mrs. Moon is also the
single largest shareholder of World Wide E-Commerce, a Nevada public
corporation (NASDAQ: WEWC.OB). Theolene D. Moon is the wife of Winfield Moon,
Sr.
20
<PAGE>
WINFIELD MOON, SR., AGE 72, is spouse to Theolene D. Moon, the sole
shareholder of SunStar Holding, Inc. the single largest shareholder of the
Company. Mr. Moon started on his way to becoming an entrepreneur at the age
of 19. From 1952 to 1960 he served under Governor James E. Folsom, Sr. in the
Governor's Cabinet of Alabama, also served as the Governor's Campaign
Manager. He served on the Board of Directors of the American National Bank of
Birmingham, Alabama for 10 years. Mr. Moon owned and operated one of the
largest distribution centers in the Southeast, owner of Lanson Industries
Inc., Cullman Alabama, a manufacturer of federal munitions; a 25% ownership
with Coach Paul "Bear" Bryant in Zeigler Meat Packing Co. Inc.; owned and
managed several Coal & Gas corporations in West Virginia including Alpha Coal
Co. Inc., Pocahontas Coal and Gas, Inc. and Central Coal & Gas Co. Inc; and
was President and chairman of the board of several low sulfur coal
corporations located in Utah, including Green River Coal, Factory Butte Coal,
Horse Canyon Coal, Gayland Coal and Butte Coal. Coal production declined in
several major coal-producing states in the east due to the high sulfur
content. During the period of 1978 through 1981 Mr. Moon was active in real
estate investments more specifically the purchase of large farms and ranches
in Central California and re-selling them after obtaining zoning changes to
Industrial and commercial Real estate investments. Today some of those
investments are now known as part of the Silicon Valley, California. In 1985,
Mr. Moon was convicted of Conspiracy to Supercede Indictment, Obstruction of
Justice and Failing to File income tax returns and was sentenced to six years
at a Federal Correctional Camp and fined $50,000. Mr. Moon has paid all taxes
and fines related to these felony charges and all tax liens have been
released.
The Company's Board of Directors for the year ending December 31,
1999 consisted of six members. The executive officers of the Company devoted
such time to the business and affairs of the Company as were required, but
not less than 50% of their time, except for the Company's President, Mr. Gene
Callaway based in Houston, Texas and who worked on a required basis only. For
the period ending December 31, 1999, Mr. Callaway did not contribute 50% or
more of his time to the Company and received no compensation from the Company.
Each executive officer and director has completed an annual questionnaire as
required for the purposes of this report. For the period ending December 31,
1999 there were not any material legal or financial items to disclose.
ITEM 10. EXECUTIVE COMPENSATION
The compensation for new officers and directors has not been
determined as of the date of this Report.
The Company was inactive during 1997 and no executive officer
compensation was paid or accrued during 1997. The following table sets forth
certain information with respect to the total cash compensation, paid or
accrued, of the Chief Executive Officer of Potomac during 1999. With respect
to each of their executive officers, Potomac and its affiliates did not pay or
accrue total compensation in excess of $100,000 during 1999.
Officer Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
All Other
Name and Principal Position Year Salary(1) Bonus(2) Compensation(3)
--------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Carl W. Swan............................................... 1999 $48,000 $- $16,986
Chief Executive Officer 1998 $48,000 $- $11,485
</TABLE>
---------------------------
(1) Dollar value of base salary (both cash and non-cash) earned during the
year.
(2) Dollar value of bonus (both cash and non-cash) earned during the year.
(3) The amounts reflected are for an automobile and telephone expense
reimbursements, health insurance premiums paid by the Company.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1999 AND YEAR-END OPTION VALUES
21
<PAGE>
AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES. The
following table sets forth information related to the number and value of
options held by the named executive officer at the end of 1999. During 1999,
there were no options to purchase the Common Stock exercised by the named
executive officer.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AS OF DECEMBER 31, 1999 OPTIONS AS OF DECEMBER 31, 1999(1)
------------------------ ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Carl W. Swan.............................. 100,000 - $(--) $-
</TABLE>
-----------------
(1) The closing sale price of the Common Stock as quoted on NASDAQ's Over
The Counter Bulletin Board (OTC:BB) on December 31, 1999, was $0.68.
Value is calculated on the basis of the difference between the option
exercise price and $1.00 multiplied by the number of shares of Common
Stock underlying the option.
On January 18, 1999 the Company granted 100,000 stock options priced
at $1.25 expiring on December 31, 2003 to Alain Louriquer, the Region Manger
of Potomac Energy (BVI), Ltd. based in Bogota, Colombia as compensation for
his efforts in obtaining and working with the Guaduas Association Contract.
The Company further granted 100,000 stock options priced at $1.25 expiring on
December 31, 2003 to James Frazier for his continued efforts as Chief
Financial Officer. On July 1, 1999 the Company revoked and canceled 100,000
stock options priced at $1.00 expiring on December 31, 2003 previously granted
to Frank Mahan as a result of his resignation from the Company. On November
11, 1999 the Company granted to Alvaro Lopez Cayzedo 100,000 stock options
priced at $1.00 expiring on December 31, 2003 for his acceptance as Director
to the Company replacing Mr. Mahan.
Subsequent to the end of the fiscal year and in accordance with the
acquisition of Butte Coal, Inc. the Company agreed to convert all outstanding
stock options to common stock at a fifty percent (50%) discount. Prior to
conversion there were 1,175,000 stock options issued and outstanding to
officers and directors as a combined group. After conversion, the officers
and directors received a combined total of 587,500 shares of common stock.
Compensation of Directors
The directors of the Company that are employees are not currently
compensated for attending meetings of directors and committees of the Board of
Directors, but are reimbursed out-of-pocket expenses. The compensation of
non-employee directors has not been determined by the Board of Directors, but
non-employee directors are reimbursed out-of-pocket expenses incurred in
attending meetings of directors and committees on which they serve.
Employment Arrangements of Key Employees and Loss of Key Employees
As of the date of the Merger-Acquisition, the Company had written
employment agreements with its Chief Executive Officer and its Chief Financial
Officer, each of whom received general compensation by the Company, but not
with the Company's President. As a result of the Merger-Acquisition and the
change of control, the Company does not currently have any employment
contracts with any officers.
The Company has a limited operating history and the success of the
Company depends to a large degree upon the efforts of its executive officers,
the loss of whose services could have a material adverse effect on the
Company. The Company does not maintain key man insurance covering the loss of
life or disability of its executive officers.
Officer and Director Liability
As permitted by the provisions of the Oklahoma General Corporation
Act, the Certificate of Incorporation (the "Certificate") eliminates in
certain circumstances the monetary liability of directors of PEC for a breach
of their fiduciary duty as directors. These provisions do not eliminate the
liability of a director for (i) a breach of the director's duty of loyalty to
PEC or its shareholders, (ii) acts or omissions by a director not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) liability arising under Section 1053 of the Oklahoma General Corporation
Act (relating to the declaration of dividends and purchase or redemption of
shares in violation of the Oklahoma General Corporation Act), or (iv) any
transaction from which the director derived an improper personal benefit. In
addition, these provisions do not eliminate liability of a director for
violations of federal securities laws, nor do they limit the rights of PEC or
its
22
<PAGE>
shareholders, in appropriate circumstances, to seek equitable remedies such as
injunctive or other forms of non-monetary relief. Such remedies may not be
effective in all cases.
The Certificate and Bylaws of PEC provide that PEC shall indemnify
all directors and officers of PEC to the full extent permitted by the Oklahoma
General Corporation Act. Under such provisions, any director or officer, who
in his capacity as such, is made or threatened to be made, a party to any suit
or proceeding, may be indemnified if the Board of Directors determines such
director or officer acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of PEC. The Certificate and
Bylaws of PEC and the Oklahoma General Corporation Act further provide that
such indemnification is not exclusive of any other rights to which such
individuals may be entitled under the Certificate, the Bylaws, an agreement,
vote of shareholders or disinterested directors or otherwise. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors and officers of PEC pursuant to the foregoing provisions, or
otherwise, PEC has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
STOCK OPTION PLAN
PEC established the Potomac Energy Corporation Non-Qualified Stock
Option Plan (the "Option Plan" or "Plan") on January 28, 1998. The Option Plan
provides for the grant of non-qualified stock options ("Options"), with stock
appreciation rights ("SARs") to employees, directors, independent contractors
and consultants of the Company. The total number of shares of Common Stock
authorized and reserved for issuance under the Option Plan is 525,000. As of
the date of this Report, 425,000 Options have been granted under the Option
Plan, all of which were canceled by issuance of common stock in connection
with the Merger-Acquisition.
The Board of Directors (the "Board") administers the Plan and the
authority to interpret and construe the Plan, and determine all questions
arising under the Plan and any agreement made pursuant to the Plan. Options
under the Option Plan may be granted only to persons ("Eligible Persons") who
at the time of grant are directors, executive officers, employees and
independent contractors and consultants of the Company and its subsidiaries.
Options may be granted by the Board on terms and conditions
determined solely by the Board. No Option shall be exercisable more than 10
years after the date of grant. The maximum number of shares of stock for which
an Eligible Person may be granted Options in any calendar year may not exceed
25% of the aggregate number of shares of stock with respect to which Options
may be granted under the Option Plan. The exercise prices of Options are
determined by the Board, but in no event may such price be less than 85% of
the fair market value of the stock on the date of grant. Options granted are
not transferable except by will or by the laws of descent and distribution or
with the consent of the Company. No Option under the Plan may be granted after
December 31, 2008.
Options may be exercisable only by the Option holder ("Participant")
while serving as a director of the Company or a subsidiary or while actively
employed as an employee, an independent contractor or a consultant by the
Company or a subsidiary, except that (i) any such Option granted and which is
otherwise exercisable, may be exercised by the personal representative of a
deceased Participant within 12 months after the death of such Participant (but
not beyond the exercise period of such Option), (ii) if a Participant is
terminated as a director, an employee, an independent contractor or a
consultant of the Company or a subsidiary on account of (A) retirement, such
Participant may exercise any Option which is otherwise exercisable at any time
within three months of such date of termination, or (B) a disability, such
Participant may exercise any Option which is otherwise exercisable at any time
within 12 months of such date of termination. If a Participant dies during the
applicable three-month or 12-month period following the date of such
Participant's retirement or termination on account of disability, the rights
of the personal representative of such deceased Participant as such relate to
any Options granted to such deceased Participant shall have similar rights to
exercise the Options and during the remainder of the three-month or 12-month
period.
The Board, in its sole discretion, may permit a Participant who is
terminated as a non-employee director, an employee, an independent contractor
or a consultant due to retirement or disability, or upon the occurrence of
special circumstances (as determined by the Board), or the personal
representative of a deceased Participant to exercise and purchase (within
three years of such termination) all or any part of the shares subject to
Option on the date of termination.
23
<PAGE>
Based on the change of control of the Company, there have been no
determination made as of the date of this report to either terminate or to
continue with the Company's Stock Option Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as of the date of this Report
as to the beneficial ownership of the Company's common stock as adjusted to
give effect to the Merger-Acquisition of (i) each person that beneficially
owns more than five (5%) % thereof, (ii) each one of the Company's executive
officers and directors, and (iii) all executive officers and directors as a
group. All persons listed have sole voting and investment power with respect
to their shares, and there is no family relationship between the executive
officers and directors, except as set forth below.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY BENEFICIALLY
------------------------------------ OWNED OWNED SHARES
------------ -----------
<S> <C> <C>
Sun Star Holdings, Inc.(1)........................................ 11,474,965 61.6%
3168 Bel Air Drive
Las Vegas, Nevada 89109
Theolene D. Moon (1).............................................. 11,474,965 61.6%
3168 Bel Air Drive
Las Vegas, Nevada 89109
Winfield Moon, Sr. (1)............................................ 11,474,965 61.6%
3168 Bel Air Drive
Las Vegas, Nevada 89109
Carl W. Swan(2)................................................... 258,973 1.4%
Fred W. Young(3).................................................. 0 *
Tim Shelby(4)..................................................... 0 *
Joseph Michaud (5)................................................ 22,532 *
Charles Kim (6)................................................... 0 *
Patrick Mc Carrick(7)............................................. 0 *
Executive Officers and Directors
as a Group (Six persons)(8)................................... 281,505 1.5%
</TABLE>
-----------------------------------
* Less than 1%.
(1) The shares beneficially owned and the percentage include 11,474,965 shares
owned by SunStar Holdings, Inc., a Nevada corporation wholly owned by
Theolene D. Moon. Theolene Moon is the wife of Winfield Moon, Sr. the Chief
Executive Officer of Butte Coal, Inc., a wholly owned subsidiary of the
Company.
(2) The shares beneficially owned and the percentage include 80,000 shares owned
by Nona Swan, wife of Carl W. Swan, the Chairman of the Board of the
Company.
(3) Fred W. Young is the President, Chief Executive Officer, Treasurer and
Director of the Company.
(4) Tim Shelby is a Director of the Company.
(5) Joseph Michaud is a Director of the Company.
(6) Charles Kim is a Director of the Company.
(7) Patrick Mc Carrick is a Director of the Company.
(8) The shares beneficially owned and the percentage include the shares
beneficially owned by Messrs Swan, Young, Shelby, Michaud, Kim and
McCarrick, the Company's officers and Directors.
24
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a description of transactions entered into between
PEC or Potomac (Bermuda) and certain of its officers, directors and
shareholders during the last two years. Certain of these transactions will
continue in effect and may result in conflicts of interest between PEC and
such individuals. Although these persons have fiduciary duties to PEC and its
shareholders, there can be no assurance that conflicts of interest will always
be resolved in favor of PEC.
On March 10, 1998, Michael E. Dunn, the former President and Director
of PEC, was issued 300,696 shares of Common Stock, after giving effect to the
reverse stock split, for services rendered in connection with the
reincorporation of PEC.
In connection with the organization and formation of Potomac
(Bermuda), (i) each of Carl W. Swan and Frank H. Mahan contributed all of his
rights under the applications with Ecopetrol related to the Rosablanca and
Montecristo Blocks to Potomac (Bermuda) and in exchange therefor was issued
1,000,000 shares of common stock of Potomac (Bermuda) and (ii) James E.
Frazier was issued 100,000 shares of common stock of Potomac (Bermuda) for
services rendered. The value of the applications with Ecopetrol related to the
Rosablanca and Montecristo Blocks was estimated to be not less than $20,000
which was substantially less than the direct costs that Messrs. Swan and Mahan
in making such applications.
On April 1, 1998, Potomac (Bermuda) (i) granted each of Messrs. Swan
and Mahan stock options exercisable on or before December 31, 2003 for the
purchase of 100,000 shares of common stock of Potomac (Bermuda) for $1.00 per
share, (ii) issued to Gene Callaway and James E. Frazier 400,000 and 100,000
shares of common stock, respectively, for services rendered, and (iii) granted
Mr. Dunn stock options exercisable on before December 31, 2003, to purchase
50,000 shares of common stock for legal services rendered and to be rendered
for $.50 per share. On February 9, 1997, Potomac (Bermuda) granted Marlene S.
Schiff stock options exercisable for the purchase of 100,000 shares of Common
Stock on or before April 30, 1999, for $1.00 per share. In addition, on May 8,
1998, Potomac (Bermuda) granted to each of Paul D. Meadows and Joseph Edward
Michaud stock options exercisable on or before December 31, 2003 for the
purchase of 200,000 shares of common stock of Potomac (Bermuda) for $1.00 per
share. In connection with the Merger, all outstanding stock options of Potomac
(Bermuda) were assumed by the Company and became exercisable for the purchase
of shares of Common Stock of the Company for $1.00 per share. Furthermore, in
September 1998, the Company granted Alvaro Cayzedo stock options exercisable
on or before December 31, 2003, for the purchase of 100,000 shares of Common
Stock for $1.00 per share for services rendered as an advisor to the Board.
On January 18, 1999 the Company granted 100,000 stock options priced
at $1.25 expiring on December 31, 2003 to Alain Louriquer, the Region Manger
of Potomac Energy (BVI), Ltd. based in Bogota, Colombia as compensation for
his efforts in obtaining and working with the Guaduas Association Contract.
The Company further granted 100,000 stock options priced at $1.25 expiring on
December 31, 2003 to James Frazier for his continued efforts as Chief
Financial Officer. On July 1, 1999 the Company revoked and canceled 100,000
stock options priced at $1.00 expiring on December 31, 2003 previously granted
to Frank Mahan as a result of his resignation from the Company. On November
11, 1999 the Company granted to Alvaro Lopez Cayzedo 100,000 stock options
priced at $1.00 expiring on December 31, 2003 for his acceptance as Director
to the Company replacing Frank Mahan.
On November 19, 1999 the Company issued to William B. Haines 290,000
shares of Preferred Stock convertible to 435,000 shares of common stock or 1.5
common shares for each share of preferred stock for his financial contribution
of $290,000 paid to the Company for further credit to Dolphin Industries, Inc.
in benefit of the Thomas Refinery.
Subsequent to the end of the fiscal year and in accordance with the
acquisition of Butte Coal, Inc. the Company agreed to convert all outstanding
stock options and stock warrants to common stock at a fifty percent (50%)
discount. Prior to conversion there were 1,175,000 stock options issued and
outstanding to officers and directors as a combined group. After conversion,
the officers and directors received a combined total of 587,500 shares of
common stock. The Officers and Directors did not own any stock warrants and as
a result did not receive any distribution from the conversion of these
instruments.
25
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) REPORTS ON FORM 8-K:
During 1999 the Company did not file any reports on Form 8-K.
However, subsequent to the fiscal year-end the Company did file Form 8-K
giving effect to the acquisition of Butte Coal, Inc. and effective change in
ownership and control of the Parent.- See 8-K.
(b) EXHIBITS:
2.1 Association Contract between Empresa Colombiana De Petroleos
and Seven Seas Petroleum Colombia, the Rosablanca sector,
dated November 19, 1997, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1997.
2.2 Association Contract between Empresa Colombiana De Petroleos
and Seven Seas Petroleum Colombia, the Montecristo sector,
dated November 19, 1997, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1997.
2.3 Letter of Intent between Potomac Energy Corporation and The
GHK Company L.L.C., dated February 27, 1997, incorporated by
reference to Registrant's Form 10-KSB Annual Report for the
year ended December 31, 1997.
2.4 Basic Contract of Small Carbon Exploration/Exploitation
between Ecocarbon and Erasmo Alfredo Almanza LaTorre, dated
July 10, 1998, incorporated by reference to Registrant's Form
10-KSB Annual Report for the year ended December 31, 1998.
2.5 Agreement of Association between Dr. Erasmo Almanza LaTorre
and Carbones de Guaduas, Ltd., dated April 6, 1998,
incorporated by reference to Registrant's Form 10-KSB Annual
Report for the year ended December 31, 1998.
2.6 Letter Agreement between Arena Power, L.P. and Registrant,
dated December 2, 1998, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1998.
2.7 Potomac Energy Corporations Investment Compensation Agreement
between the Company and Dolphin Industries dated November 19,
1999.
2.8 Potomac Energy Corporations Merger Agreement and Plan of
Reorganization (Amended and Restated) with Butte Coal, Inc.
dated March 31, 2000, incorporated by reference to the
Registrant's Form 8-K.
3.1 Subsidiaries of Registrant, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1998 which remain unchanged to date.
4.1 Potomac Energy Corporation Non-Qualified Stock Option Plan
adopted January 28, 1998, incorporated by reference to
Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1998.
5.0 Potomac Energy Corporation Rights and Powers Designation for
the Preferred Stock dated July 19, 1999, incorporated by
reference to the Registrant's Form 10-QSB for the period
ended September 30, 1999.
6.0 Butte Coal, Inc. & World Link Capital, LLC. Agreement dated
September 9, 1999, now expired.
7.0 Energas Resources, Inc. and Potomac Stock and Asset Exchange
Agreement, dated June 2, 2000.
26
<PAGE>
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,
hereunto duly authorized.
POTOMAC ENERGY CORPORATION
(Formerly Midwestern Resources, Inc.)
(Registrant)
By: /s/ FRED W. YOUNG
----------------------------------------
Fred W. Young, President,
Chief Executive Officer
Date: June 20, 2000
In accordance with the Exchange Act, this Report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ CARL W. SWAN Chairman of the Board Directors June 20, 2000
------------------------------------
Carl W. Swan
/s/ TIM SHELBY
------------------------------------ Director June 20, 2000
Tim Shelby
/s/ CHARLES KIM Director June 20, 2000
------------------------------------
Charles Kim
/s/ PATRICK MCCARRICK Director June 20, 2000
------------------------------------
Patrick McCarrick
------------------------------------
Edward Michuad Director June 20, 2000
</TABLE>
27
<PAGE>
1.1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-6
</TABLE>
28
<PAGE>
Board of Directors
Potomac Energy Corporation
Oklahoma City, Oklahoma
We have audited the accompanying Consolidated Balance Sheets of Potomac Energy
Corporation (an Oklahoma corporation in the development stage) and
Subsidiaries as of December 31, 1999 and 1998, and the related Consolidated
Statements of Operations, Stockholders' Equity, and Cash Flows for the years
then ended and for the period from April 7, 1997 (Inception) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Potomac
Energy Corporation and Subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for the years
then ended and for the period from April 7, 1997 (inception) to December 31,
1999 in conformity with generally accepted accounting principles.
The accompanying statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note O to the financial
statements, the Company has incurred net losses since its inception and has
experienced severe liquidity problems. Those conditions raise substantial
doubt about the Company's ability to continue as a going concern at December
31, 1999. Management's plan in regard to those matters also are described in
Note O. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Smith Carney & Company, PC.
Oklahoma City, Oklahoma
May 9, 2000
(Except for Note P
Dated June 2, 2000)
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 1,424 $ 218,788
Accounts receivable, other 776 1,615
---------- ----------
Total Current Assets 2,200 220,403
---------- ----------
INVESTMENTS 290,000 -
---------- ----------
PROPERTY AND EQUIPMENT
Furniture and equipment 27,818 27,818
Office equipment, capital leases 46,379 46,379
Leasehold improvements 6,912 6,912
Oil and gas properties, non-
producing, full cost method 561,418 472,331
Coal interests, non-producing - 20,909
---------- ----------
642,527 574,349
Less accumulated depreciation (20,303) (6,287)
---------- ----------
622,224 568,062
---------- ----------
OTHER ASSETS
Deposits 4,061 4,061
---------- ----------
$ 918,485 $ 792,526
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Bank overdraft $ 34,589 $ -
Accounts payable 154,273 120,248
Notes payable 148,500 -
Accrued interest 8,136 -
Accrued taxes, other than income 3,497 17,953
Current portion of capital
lease obligations 14,908 17,384
---------- ----------
Total Current Liabilities 363,903 155,585
---------- ----------
LONG-TERM PORTION OF CAPITAL
LEASE OBLIGATIONS 5,832 21,923
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, $.001 par
value; 20,000,000 shares authorized and
290,000 shares issued and outstanding
in 1999, entitled in liquidation to $348,000 290 -
Common stock, $.01 par value; 50,000,000
shares authorized and 8,094,270 and
7,869,270 shares issued and outstanding,in 1999
and 1998 respectively 80,943 78,693
Paid-in capital 2,559,846 2,035,886
Deficit accumulated during
development stage (2,092,329) (1,499,561)
---------- ----------
548,750 615,018
---------- ----------
$ 918,485 $ 792,526
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
FOR THE YEAR (APRIL 7, 1997)
ENDING TO
DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------- ------------- ---------------
<S> <C> <C> <C>
REVENUES
--------
Interest earned $ 1,562 $ 7,747 $ 10,752
Foreign currency gain (loss) (389) 830 441
---------- ----------- -------------
1,173 8,577 11,193
---------- ----------- -------------
EXPENSES
--------
Advertising and marketing 7,939 6,042 13,981
Auto expense 4,181 1,672 5,853
Bank charges 834 1,927 2,761
Computer expense 763 3,000 3,763
Consulting 41,082 237,947 475,909
Stock-based non-employee
compensation expense - 92,159 92,159
Contributions - 250 250
Depreciation 14,016 6,287 20,303
Dues and subscriptions 236 6,050 6,286
Employee benefits 30,928 9,409 40,337
Impairment 24,881 - 24,881
Insurance 780 418 1,198
Interest 16,395 2,784 19,179
Meals and entertainment 24,315 17,442 41,757
Miscellaneous 1,882 13,943 15,825
Office expense 5,312 1,571 7,856
Office supplies 2,208 5,718 8,236
Payroll taxes 19,237 11,180 30,417
Professional fees 64,547 83,382 168,606
Rent 45,934 21,869 67,803
Salaries 203,734 101,337 305,071
Stock-based employee
compensation expense - 131,250 606,250
SEC expenses 14,467 17,103 31,570
Taxes, other than income 8,247 7,639 15,886
Telephone 27,348 10,118 38,202
Travel 34,675 21,842 59,183
---------- ----------- -------------
593,941 812,339 2,103,522
---------- ----------- -------------
Net Loss $ (592,768) $ (803,762) $ (2,092,329)
========== =========== =============
Net Loss Per Share $ (.07) $ (.12)
========== ===========
Weighted Average Number of
Common Shares Outstanding 7,990,106 6,877,649
========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
COMMON PREFERRED
STOCK SERIES A PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
APRIL 7, 1997 - $ - - $ - $ - $ - $ -
-------------
(Inception)
Sale of stock 2,800,000 28,000 - 384,000 - 412,000
Shares issued
for services 1,900,000 19,000 - 456,000 - 475,000
Net loss - - - - (695,799) (695,799)
--------- ------- ------- ------ ---------- ----------- --------
DECEMBER 31,
1997 4,700,000 47,000 - - 840,000 (695,799) 191,201
----
Sale of stock 1,040,000 10,400 - - 737,977 - 748,377
Shares issued
for services 1,550,000 15,500 - - 372,000 - 387,500
Shares issued
during re-
organization
(Note B) 579,270 5,793 - - - - 5,793
Value of stock
options granted
to consultants - - - - 85,909 - 85,909
Net loss - - - - - (803,762) (803,762)
--------- ------- ------- ------ ---------- ----------- --------
DECEMBER 31,
1998 7,869,270 78,693 - - 2,035,886 (1,499,561) 615,018
----
Sale of stock 180,000 1,800 290,000 290 523,960 - 526,050
Shares issued
for services 45,000 450 - - - 450
Net loss - - - - (592,768) (592,768)
--------- ------- ------- ------ ---------- ----------- --------
DECEMBER 31,
1999 8,094,270 $80,943 290,000 $ 290 $2,559,846 $(2,092,329) $548,750
---- ========= ======= ======= ====== ========== =========== ========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
FOR THE YEAR (APRIL 7, 1997)
ENDING TO
DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------ -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net loss $ (592,768) $ (803,762) $ (2,092,329)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Stock compensation:
Compensation expense - 131,250 606,250
Consulting expenses - 92,159 92,159
Depreciation and impairment 38,897 6,287 45,184
(Increase) decrease in
accounts receivable 839 148,385 (776)
Increase (decrease) in:
Bank overdraft 34,589 - 34,589
Accounts payable 34,025 19,769 175,495
Accrued expenses (6,320) 17,953 11,633
Deposits - (4,061) (4,061)
------------ -------------- --------------
Net Cash Used By
Operating Activities (490,738) (392,020) (1,131,856)
------------ -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Exploration of oil and gas
properties (89,087) (221,210) (311,418)
Exploration of coal properties (3,972) (20,909) (24,881)
Purchase of furniture, equip-
ment, and leasehold
improvements - (34,731) (34,731)
Purchase of investments (290,000) - (327,777)
Sale of investments - 37,777 37,777
Stock issued during re-
organization - 5,793 5,793
Organization costs (21,222)
------------ -------------- --------------
Net Cash Used By
Investing Activities (383,059) (233,280) (676,459)
------------ -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Sale of stock 526,500 748,377 1,686,877
Notes issued 148,500 - 148,500
Payments on long-term debt (18,567) (7,071) (25,638)
------------ -------------- --------------
Net Cash Provided By
Financing Activities 656,433 741,306 1,809,739
------------ -------------- --------------
Net Increase (Decrease) In Cash (217,364) 116,006 1,424
CASH AT BEGINNING OF PERIOD 218,788 102,782 -
--------------------------- ------------ -------------- --------------
CASH AT END OF PERIOD $ 1,424 $ 218,788 $ 1,424
--------------------- ============ ============== ==============
</TABLE>
Interest of $16,395 and $2,784 was paid and expensed in 1999 and 1998,
respectively. The gross amount of financed long-term capital lease obligations
was $46,379 in 1998.
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Potomac is currently a public company registered on NASDAQ's Over the
Counter Bulletin Board (OTC:BB).
DEVELOPMENT STAGE ENTERPRISE: Potomac is a development stage enterprise and
has yet to generate any revenue from oil and gas and has no assurance of
future revenues from such sales. Oil and gas exploration and development is
speculative in nature and, as such, involves a high degree of risk. The
company plans to spend significant amounts on the acquisition and exploration
of properties. These costs will require the company to raise additional
capital through debt or equity financing. Such additional financing may
require the encumbrance of company assets or agreements with other parties
where some of the costs of exploration are paid by others in exchange for an
interest in the property. The company has acquired interests in properties
internationally. Such plans have additional risks because, in some cases, the
country where the acquisition occurs may be considered politically and/or
economically unstable.
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 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; Peac's wholly-owned
subsidiary, Potomac Energy (BVI), Ltd., a British Virgin Islands corporation;
and Magdalena Energia, LLC, a Texas limited liability company. All material
intercompany accounts and transactions have been eliminated.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The recorded amounts of cash, accounts
receivable, and accounts payable approximate fair value because of the
short-term maturity of these items.
INVESTMENT SECURITIES: The Company classifies its marketable debt securities
as "held to maturity" if it has the positive intent and ability to hold the
securities to maturity. All other marketable debt securities are classified as
"available for sale". Securities classified as "available for sale" are
carried in the financial statements at fair value. Realized gains and losses,
determined using the specific identification method are included in earnings;
unrealized holding gains and losses are reported as a separate component of
Stockholders' Equity. Securities classified as held to maturity are carried at
amortized cost. There were no investment securities owned by the company as of
the Balance Sheet Date.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
PROPERTY AND EQUIPMENT: Property and equipment is stated on the basis of cost.
maintenance and repairs are charged to expense. Renewals and betterments which
substantially extend the useful life of property are capitalized. Accumulated
allowances for depreciation of furniture, equipment, and leasehold
improvements retired, or otherwise disposed of, are eliminated from the
accounts on disposition. Profits and losses resulting from such disposition
are included in income. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets (seven to ten years).
OIL AND GAS INTERESTS: The company follows the full-cost method of accounting
for oil and natural gas properties. Under this method, all costs incurred in
the exploration, acquisition, and development, including unproductive wells,
are capitalized in separate cost centers for each country. Such capitalized
costs include contract and concessions acquisition, geological, geophysical,
and other exploration work, drilling, completing and equipping oil and gas
wells, constructing production facilities and pipelines, and other related
costs.
The capitalized costs of oil and gas properties in each cost center are
amortized on a composite units of production method based on future gross
revenues from proved reserves. Sales or other dispositions of oil and gas
properties are normally accounted for as adjustments of capitalized costs.
Gain or loss is not recognized in income unless a significant portion of a
cost center's reserves is involved. Capitalized costs associated with
acquisition and evaluation of unproved properties are excluded from
amortization until it is determined whether proved reserves can be assigned to
such properties or until the value of the properties is impaired. If the net
capitalized costs of oil and gas properties in a cost center exceed an amount
equal to the sum of the present value of estimated future net revenues from
proved oil and gas reserves in the cost center and the lower of cost or fair
value of properties not being amortized, both adjusted for income tax effects,
such excess is charged to expense.
Since the company has not produced any oil or gas, a provision for depletion
has not been made.
INCOME TAXES: One of the company's subsidiaries is a foreign corporation and
is subject to the income tax laws of the various countries in which it may
operate. Branch income from interests obtained through the association
agreements in Colombia, South America are subject to colombian corporate
income tax at a rate of 35%, as well as a 7% remittance tax on funds
transferred to the united states.
The Company follows the asset/liability method of accounting for income taxes.
under this method, deferred tax assets and liabilities are recognized for the
future tax consequences of (I) temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
and (II) operating loss and tax credit carryforwards for tax purposes.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
FOREIGN CURRENCY TRANSLATION: The majority of all costs associated with
foreign operations are paid in U.S. dollars as opposed to the local currency
of the operations; therefore, the reporting and functional currency is the
U.S. dollar. Gains and losses from foreign currency transactions are
recognized in current net income.
Monetary items are translated using the exchange rate in effect at the balance
sheet date; non-monetary items are translated using historical exchange rates.
revenues and expenses are translated at the average rates in effect on the
dates they occur. No material gains or losses were incurred during the period
presented.
NET LOSS PER SHARE: Net loss per share is calculated based on the weighted
average number of common, and dilutive, common equivalent shares outstanding.
there were no material differences between primary and fully diluted earnings
per share for the periods presented.
NOTE B--REORGANIZATION
Potomac is the surviving parent corporation as a result of a merger effective
June 17, 1998 between Potomac Energy (Bermuda), Ltd. and Midwestern-Oklahoma
Energy Resources Corporation, a publicly-held corporation. Potomac (Bermuda)
with its wholly-owned subsidiary, Potomac Energy (BVI), Ltd., merged into
Potomac Exploration Acquisition Corporation, a subsidiary of Midwestern.
Potomac (Bermuda) was dissolved. The merger was accounted for as a reverse
acquisition of Midwestern by Potomac (Bermuda). The stockholders of Potomac
(Bermuda) were issued 7,050,000 shares of Midwestern common stock. With the
exception of two management members, the Officers and Directors of Potomac
(Bermuda) became the Officers and Directors of Midwestern. Midwestern then
changed its name to Potomac Energy Corporation.
NOTE C--JOINT INTEREST OPERATIONS
Potomac has entered into a joint venture agreement with Seven Seas Petroleum
Colombia (Seven Seas), a branch of Seven Seas Petroleum, Inc., which is a
publicly traded Canadian corporation. Seven seas has obtained association
contracts for oil and gas reserves identified through preliminary
investigation in the Middle Magdalena Valley Basin in Central Colombia, South
America. Seven Seas has been accepted by Ecopetrol, the state owned oil
company in Colombia, to administer the association contracts covering certain
properties known as the Rosa Blanca and Montecristo Blocks. Seven Seas owns a
75 percent interest and Potomac owns a 25 percent interest. Seven Seas is
designated as the operator. As of December 31, 1999, no proved reserves were
attributable to these contract areas.
In April, 1998, the Company entered into an agreement to undertake a feasibility
study for the mining of coal and generation of electricity in the Guaduas Field
located in Central Colombia, South America. The agreement with Erasmos Almanza
La Torre, in his capacity as General Manager of Global Drilling de Colombia,
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE C-- JOINT INTEREST OPERATIONS --Continued
provided for an interest in coal contracts in the area once the project's
feasibility has been established. Almanza holds association contracts with
Ecocarbone, the state agency of Colombia that oversees the production of coal.
In December, 1998, the Company organized a wholly-owned subsidiary, Magdalena
Energia, LLC, a Texas limited liability company, to manage its coal and
generation of energy interests located in Colombia. As of December 31, 1999,
the Company has terminated its pursuit of this project due to insufficient
coal reserves. All costs incurred to date have been charged to expense.
NOTE D--RELATED PARTY TRANSACTIONS
The Company's predecessor, Potomac Energy (Bermuda), Ltd. was managed by BV
Operating, Ltd., an Oklahoma corporation, in accordance with a consulting
agreement. BV Operating, Ltd. (BV) is owned by common shareholders of Potomac.
Potomac paid a fixed rate of $30,000 per month to BV. BV was responsible for
costs and expenses of all offices, salaries, and wages plus applicable burdens
and expenses except for directly chargeable items. The direct charges include
labor costs and benefits for field employees employed on the joint property in
Colombia, professional contract services, maintenance and repair of equipment,
insurance, travel, and other necessary expenses. The total paid to BV was
$197,500 in 1998. The contract terminated as a result of the reorganization.
Potomac (Bermuda) and Potomac (BVI)'s offices are managed by a Stockholder.
The Company pays a fee to the Stockholder of $1,500 per month, paid quarterly.
The agreement between these parties is cancelable without notice. The total
paid during 1999 and 1998 was $9,000 and $22,500, respectively.
Prior to the reoganization discussed in Note B, the Company issued 1,550,000
shares of common stock at a recorded value of $387,500 for services rendered
in 1998. Of the stock issued in 1998, $250,000 was capitalized as geological
and geophysical costs of oil and gas properties. The stock was valued at the
price of stock being sold during that time.
NOTE E--PREFERRED STOCK
During 1999, the company created a series of preferred stock with a $.001 par
value, designated as Series A Convertible Preferred Stock and reserved for
issuance the number of shares of common stock, $.01 par value issuable upon
conversion of the preferred stock. The preferred stock is not entitled to any
dividends. The holders of the preferred stock are entitled to one and one-half
votes per share on any matter brought before the holders of common stock.
The preferred stockholders have the right to convert their shares into one and
one-half shares of common stock for each of preferred stock. The company may
redeem the preferred stock at a price of 20% preference per share at any time
after eighteen months from the date of issuance.
Upon liquidation, dissolution, or winding up of the Corporation, holders of
preferred stock shall be entitled to receive 120% of the original purchase price
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE E--PREFERRED STOCK--Continued
plus any declared dividends before any distributions are made to common stock
holders.
NOTE F--STOCK OPTIONS
On April 18, 1998, the Company's predecessor, Potomac (Bermuda), granted stock
options to purchase 950,000 shares of common stock during various periods at
an exercise price of $1.00 except for 50,000 shares which have an exercise
price of $.50. Options to purchase 100,000 shares expired in april 1999. The
remaining options expire in December 2003. The company granted options to
purchase 125,000 and 200,000 shares of common stock in 1998 and 1999
respectively at an exercise price of $1.00-$1.25. The company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Under APB 25, no compensation expense is
recognized when the exercise price of stock options equals the market price of
the underlying stock on the date of the grant.
If the Company had elected to recognize compensation based on the fair value
of the options granted at the grant date as prescribed by SFAS 123, net loss
and net loss per share would have increased to the pro forma amounts shown as
follows.
December 31
-----------
1999 1998
--------------------------
Pro Forma Net Loss $(714,621) $(815,543)
Pro Forma Net Loss Per Share $ (.09) $ (.12)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
weighted average risk free interest rate of 5.50 percent; no dividend yield;
volatility of 40%; and expected life less than six years. The Company granted
options prior to public trading on NASDAQ's OTC BB. Consequently, the
underlying common shares had no historic volatility prior to October 13, 1998.
The fair values of the options granted prior to October 13, 1998 were based on
the difference between the present value of the exercise price of the option
and the estimated fair value price of the common share.
The intent of the Black-Scholes option valuation model is to provide estimates
of fair values of traded options that have no vesting restrictions and are
fully transferable. Option valuation models require the use of highly
subjective assumptions including expected stock price volatility. The company
has utilized the Black-Scholes method to produce the pro forma disclosures
required under SFAS 123. In management's opinion, existing valuation models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options because the Company's employee stock options have
significantly different characteristics from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate. The effects of applying SFAS 123 in this pro forma are
not indicative of future amounts.
NOTE G--WARRANTS
In 1999, the Company issued stock under a Private Placement Memorandum. As
part of the subscription, one Redeemable Warrant was issued with each share of
common stock purchased. Each warrant can be exercised for the purchase of one
share of common stock
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE G--WARRANTS - continued
on, or before, June 30, 2002 for $4. As of December 31, 1999, there were
320,000 warrants outstanding.
NOTE H--NOTES PAYABLE
At December 31, 1999, notes payable consist of notes payable to stockholders.
These notes provide interest at 20%, are due within six months of issuance,
and are convertible to common stock. The conversion price is 25% below the
current market price as of the date of the note. As of December 30, 1999,
$50,000 of notes had become due and are to be converted to 69,620 shares of
common stock.
NOTE I--CAPITALIZED LEASES
In 1998, the Company acquired telephone and computer equipment in the amount
of $46,379 that is subject to long-term capital leases. Accumulated
depreciation at 1999 year-end was $13,854.
The future minimum lease payments for these capital leases are as follows:
<TABLE>
<S> <C>
2000 $18,833
2001 6,780
-------
25,613
Less amount representing interest (4,873)
-------
Present Value of Minimum
Lease Payments 20,740
Current portion (14,908)
-------
Long-Term Obligations
Under Capital Leases $ 5,832
=======
</TABLE>
NOTE J--OPERATING LEASES
During 1998, the Company entered into a lease for office space in Oklahoma
City for a term of five years. Minimum lease payments remaining under this
lease are:
<TABLE>
<S> <C>
2000 $47,800
2001 49,674
2002 50,612
2003 25,306
</TABLE>
Rent expense for the year was $45,934.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE K--INCOME TAXES
The geographical sources of tax losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
United States $(503,897) $(103,536)
Foreign (80,958) (459,839)
--------- ---------
$(584,855) $(563,375)
========= =========
</TABLE>
Net deferred income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax asset $ 284,457 $ 286,155
Valuation allowance (284,457) (286,155)
--------- ---------
$ - $ -
========= =========
</TABLE>
The Company has not recorded any deferred income tax provision or benefit. The
Company's provision for income taxes differs from the amount computed by
applying statutory rates, due principally to the valuation allowance recorded
against its deferred tax asset relating primarily to net operating tax loss
carry forwards. Temporary differences included in deferred tax assets relate
primarily to restricted stock issued for compensation. The U.S. net operating
loss carryforward as of December 31, 1999 was approximately $700,000.
NOTE L--ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standard No.133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
Balance Sheet as either an asset or liability measured at its fair value.
Statement No. 133 will not currently impact the Company's disclosures or
reporting.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE M--CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federal insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risk.
NOTE N--INVESTMENTS
In November, 1999, Potomac acquired a 9% interest in Dolphin Industries, Inc.
for $290,000. During 1999, Dolphin acquired an abandoned oil refinery in
western Oklahoma. As of May 9, 2000, the refinery was completing its
renovations and hoped to be in operation by the end of May. Dolphin is also a
development stage enterprise and its existence depends upon the completion of
its renovations, obtaining adequate funding for a reliable supply of crude
oil, and acquisition of sales contracts.
NOTE 0--GOING CONCERN
Potomac has incurred substantial losses since inception and has yet to
establish income-producing operations. At December 31, 1999, current assets
were $2,200 and current liabilities were $363,903.
For the company to continue, it will have to acquire operating capital to meet
its financial obligations and its operating expense for 2000. The Company
hopes to merge with another company that can assume its obligations.
NOTE P--SUBSEQUENT EVENTS
On March 31, 2000, the Company entered into a plan of reorganization and
agreement of merger with Butte Coal, Inc. Potomac will execute a reverse stock
split of 5 to 1 and issue a sufficient number of shares to the stockholders of
Butte to effect a 61% controlling interest of Potomac. Butte owns
coal properties in Utah and is currently inactive.
Potomac's continued existence will depend upon the amount of cash that will
become available in connection with the merger and Potomac's ability to
continue to raise equity.
Subsequent to the end of the year and in accordance with its acquisition of
Butte Coal, Inc., the Company converted all outstanding stock options and
warrants to common stock at a 50% discount. Prior to conversion there were
1,175,000 stock options issued and outstanding and 320,000 warrants issued and
outstanding. The stock options were converted into 587,500 shares of common
stock and the warrants were converted into 160,000 shares of common stock.
Notes payable at December 31, 1999 were also converted into common stock in
accordance with their terms.
On June 2, 2000, the Company entered into an exchange agreement with Energas
Resources, Inc., an Oklahoma based publicly traded Canadian corporation.
Potomac is to exchange its wholly-owned subsidiary, Potomac Energy (BVI), Ltd.
whose
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
POTOMAC ENERGY CORPORATION AND SUBSIDIARIES
(A Development Stage Enterprise)
December 31, 1999
NOTE P--SUBSEQUENT EVENTS-continued
major assets are 25% interests in the Colombian Rosablanca and Montecristo
Association Contracts and its 9% interest in Dolphin Industries, Inc., whose
major asset is the Thomas refinery, for 1,900,000 shares of restricted common
stock of Energas plus 2,000,000 warrants. The two-year warrants are
convertible to 2,000,000 shares of common stock with a strike price for the
first year of $1.50 and for the second year of $1.72.
If the Energas transaction is not consummated, the Company still plans to sell
these assets.
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
Capitalized costs at December 31, 1999 and 1998, respectively, relating to the
Company's oil and gas activities are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Unproved properties, Colombia, net $561,418 $472,331
Costs incurred were as follows:
Exploration costs $ 89,087 $472,331
</TABLE>
F-14
