<PAGE> 1
As filed with the Securities and Exchange Commission on November 7, 1997
Registration No. 0-22497
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
AMENDMENT NO. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
UPLAND ENERGY CORPORATION
(Name of Small Business Issuer in its Charter)
Utah 87-0430780
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 South Main Street, Suite 1423, Salt Lake City, Utah 84111
- --------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (913) 841-6661
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
N/A N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $0.001 per share
- ----------------------------------------
(Title of Class)
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UPLAND ENERGY CORPORATION
FORM 10-SB
Amendment No.3
TABLE OF CONTENTS
PART 1 Page
Item 1. Description of Business ..................................... 3
Item 2. Management's Discussion and Analysis or Plan of Operation ... 9
Item 3. Description of Property...................................... 12
Item 4. Security Ownership of Certain Beneficial Owners
and Management.............................................. 15
Item 5. Directors, Executive Officers, Promoters
and Control Persons......................................... 16
Item 6. Executive Compensation....................................... 17
Item 7. Certain Relationships and Related Transactions............... 19
Item 8. Description of Securities.................................... 19
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters................. 22
Item 2. Legal Proceedings............................................ 23
Item 3. Changes in and Disagreements with Accountants................ 23
Item 4. Recent Sales of Unregistered Securities...................... 23
Item 5. Indemnification of Directors and Officers.................... 24
PART F/S
Financial Statements......................................... 26
PART III
Item 1. Index to Exhibits............................................ 61
Signatures................................................... 62
PAGE
<PAGE> 3
PART I
Item 1. Description of Business
Corporate History
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Upland Energy Corporation, a Utah corporation (the "Company") was
originally organized in Utah on January 30, 1986, under the name Upland
Investment Corporation, to engage in the acquisition and/or development of
assets, properties or businesses of any kind. The Company remained inactive
other than raising some capital through the sale of its shares of Common Stock
until 1991. (See Item 1: "Issuance of Shares").
During the 1991 fiscal year, the Company conducted negotiations with
respect to the acquisition of a Florida corporation involved in the
development of a fluid level monitoring system for underground fuel storage
tanks. The acquisition was not completed; however, during the course of
negotiations, the Company loaned such company $25,000 pursuant to the terms of
a promissory note. The note has not been repaid despite demand by the Company
and the Company has concluded that the note is uncollectible.
In November 1993, the Company acquired G.S. & C., Inc., a Nevada
corporation ("GSC") in a stock for stock transaction. GSC was organized under
the laws of Nevada on September 1, 1993. Prior to the acquisition, the
Company effected a 1-for-2 reverse split in its issued and outstanding shares
of Common Stock reducing the number of shares outstanding immediately prior to
the acquisition of GSC from 13,990,000 to 6,995,000. The Company then issued
25,297,500 post-split shares of its Common Stock to the shareholders of GSC in
exchange for all issued and outstanding shares of GSC. In connection with the
transaction, the name of the Company was changed from Upland Investment
Corporation to Upland Energy Corporation to better reflect the Company's
business activities. For financial statement purposes, the transaction has
been accounted for as a "reverse acquisition" as if GSC had acquired the
Company. As a result, the financial statements included herewith present the
operations of GSC from inception and include Upland's operations only from the
date of the acquisition. (See Item 1: "Issuance of Shares").
Operations
The Company is engaged through the activities of its wholly-owned
subsidiary, GSC, in the business of exploring for and developing oil and gas
reserves. Unless otherwise indicated, GSC and Upland are collectively
referred to herein as the "Company."
On or about November 17, 1993, GSC entered into an operating agreement
(the "Operating Agreement") with KLM Exploration, Inc. and Kenneth L. Mason
(collectively "KLM") pursuant to which KLM transferred to GSC certain rights
and obligations of KLM under a farmout agreement (the "Farmout Agreement"),
dated August 28, 1993, entered into between KLM and Williams Natural Gas
Company ("Williams") with respect to certain property located in the state of
Kansas commonly referred to as the McLouth Natural Gas Storage Field ("McLouth
Field"). The Operating Agreement was approved by Williams and the Farmout
Agreement was amended to make certain changes agreed to by the parties. GSC
paid KLM $100,000 pursuant to the terms of an earlier agreement in principle
as consideration for KLM entering into the Operating Agreement. Through these
agreements, GSC has turned over much of the daily control of these fields to
KLM and its operators. The McLouth Field was originally acquired by Williams
who entered into the Farmout Agreement with KLM. The Farmout Agreement
<PAGE> 4
provided KLM the right and obligation to develop the McLouth Field. KLM then
entered into the agreements with GS&C who paid an initial fee of $100,000 as
consideration for entering into the Operating Agreement and Amended Farmout
Agreement. Under the provisions of the agreements, KLM has performed the
exploration, drilling and operation on the McLouth Field with the Company
providing limited financial support. A summary of certain of the more
significant provisions of the Operating Agreement is set forth below. The
summary is materially complete; however, because the Operating Agreement is a
complex document which must be interpreted in accordance with practices and
terminology prevailing in the oil and gas industry, such summary is qualified
by reference to the Operating Agreement, the Farmout Agreement, and the
amendment to the Farmout Agreement.
The Operating Agreement generally provides as follows:
1. The Company had to submit a proposal to KLM and Williams with respect
to the drilling of 8 wells on the Property prior to December 31, 1993. All 8
wells were drilled prior to December 31, 1993, and the Company and KLM
determined to complete 7 of the 8 wells.
2. All wells, including their location, depth, casing and cementing
program, equipment, drilling mud, and other items must be approved in advance
by Williams. KLM shall be the operator of wells drilled on the Property and
shall conduct or have full control over all operations of the wells drilled on
the Property. KLM shall also be responsible for obtaining all operating bonds
and permits and to maintain insurance coverage. For acting as operator, the
Company shall pay KLM $1,000 per well, over and above the invoice costs
incurred from contractors in connection with the drilling and completion of
each well, and shall pay KLM $100 per month for the first well completed and
$95 per month for each additional well completed which payments continue with
respect to all completed wells until such time as they are plugged and
abandoned. Notwithstanding the terms of the Operating Agreement, the Company
has provided a $10,000 standby letter of credit as partial security for the
performance of the obligations of KLM and the Company in connection with
drilling activities on the Property.
3. KLM grants the Company a first right of refusal to perform all
drilling on the Property, except with respect to approximately 6,000 acres
reserved to KLM as a result of its currently producing wells, pursuant to
which KLM must provide the Company with 30 days' advance notice of any third
party's drilling proposal and give the Company 30 days to match such
proposal. To date, KLM has not presented the Company with any competing
drilling proposals.
4. On the spud-in date, the date drilling is commenced, of any wells
drilled pursuant to the Operating Agreement, KLM will convey or assign to the
Company all leases to be secured by such drilling. KLM also granted the Company
the first right of refusal to acquire KLM's interests in the Property in the
event it should desire to sell such interests to a third party and, in any
event, the Company reserved the right of first refusal to perform all drilling
on 5,000 acres within the Property by completing its initial 8 well drilling
program.
5. The Company has the sole right to determine to whom it will sell the
production from wells drilled on the Property.
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6. Unless otherwise provided in the Farmout Agreement, all costs and
liabilities incurred in operations shall be borne and paid and all equipment
acquired in the operations on the Property shall be owned during the term of
the Operating Agreement as follows:
Interest Holder Type of Interest Interest
- --------------- ---------------- --------
The Company Working 75%
KLM Working, Carried through Tanks 25%
Williams Overriding Royalty 1/16 of 8/8
Existing Lease Holder Overriding Royalty 1/8 of 8/8
Land Man Overriding Royalty 1/100 of 8/8
Based on the above "types of interest," the cost of the oil exploration
and production are borne by the parties with working interest, the Company and
KLM. The overriding royalty interest have no obligation to bear any cost of
exploration, drilling or operating but receive their percentage of the profits
from the production on the leases. The overriding royalty interest will
continue as long as the underlying leases remain operative.
In November 1993, GSC granted an aggregate of 2 1/4% overriding royalty
interest in the McLouth Field against its working interest to T. Kent Rainey,
Stefanie Gillen and Tony Cox, who at the time were directors of GSC, as
compensation for services rendered to GSC. The services performed by the
individuals related to negotiating the Farmout Agreement on the McLouth
Field. The 2 1/4% overriding royalty will reduce the Company's percentage set
forth in the above table by the amount of the overriding royalty but will not
reduce the Company's obligation to pay 75% of the cost of developing the
McLouth Field.
During 1995 and 1996, the Company focused on the McLouth Field. However,
under the direction of the Company's current management, Felix Ascanio and
John Hobbs, the Company has changed its principal focus from the McLouth Field
to the Hittle Field in central Kansas. Management refocused the Company's
efforts towards the Hittle Field which, based on geological test and initial
drilling results, appears more promising than the McLouth Field.
Additionally, with limited resources, the Company wanted to focus on the
Hittle Field until a resolution on certain disputes regarding the Operating
Agreement on the McLouth Field are achieved. (See Part II, "Item 2, Legal
Proceedings.")
The Hittle Field originally consisted of approximately 560 acres and was
acquired for $6,000 in cash and a 15.6% royalty interest in the leases. The
Company subsequently expanded its lease holdings on the Hittle Field through
the acquisition of an additional 920 acres at a cost of $3,800 with a 16.01%
royalty interest remaining with the lessors. Through the end of June 1997,
the Company had expanded its lease holding on the Hittle Field to 1840 acres.
The Company is seeking to expand its lease holdings on the Hittle Field
through the acquisition of additional acreage. There can be no assurance the
Company will be successful in its efforts to acquire additional acreage.
Failure to acquire additional acreage will affect future earnings potential of
the Company.
The Company has drilled two initial wells, the Lewis H-1 (the "LH-1") and
the Hittle H-1 (the "HH-1"), in the Hittle Field. Both wells have shown
promising results but have not been completed for production. The Company has
received approval from the Kansas Corporation Commission, which must approve
the completion of the wells to complete the LH-1 well with two laterals. The
wells should be completed in the in 1997 based on the availability of
completion rigs and the open hole testing already performed. Although initial
shows from the wells appear promising until the wells are complete there<PAGE>
<PAGE> 6
remains substantial uncertainty and risk as to the wells economic viability
and that of the Hittle Field.
Issuance of Shares
In connection with its organization, the Company sold 3,340,000 shares of
restricted common stock, par value $0.001 per share (the "Common Stock") to
its original officers and directors and other founding shareholders for
$12,500. In September, 1986, the Company completed an unregistered offering
of 10,000,000 shares of common stock at a price of $0.0125 per share which
resulted in net proceeds to the Company of approximately $98,897 after
deducting sales commissions and other expenses of the offering. The offering
was conducted pursuant to the exemption from the registration requirements of
the Securities Act of 1933 provided by Rule 504 of Regulation D promulgated
thereunder.
In October 1987, the Company granted options to John W. Hobbs, then a new
director of the Company, entitling him to purchase up to 250,000 pre-split
shares of Common Stock at a price of $0.004 per share. The options were
exercised with respect to all 250,000 shares. In December, 1992, the Company
granted John W. Hobbs and Milo L. Carlston, officers and directors of the
Company, stock options entitling them to purchase a total of 400,000 shares of
Common Stock at an exercise price equal to the book value of such shares on
the date of exercise. Such options were exercised with respect to all 400,000
shares in October 1993, at an exercise price of $0.0046 per share.
Prior to the Company's acquisition of GSC in November 1993, GSC had made
the following issuance of its Common Stock: (i) 3,000,000 shares to its
officers, directors and founding shareholders for $3,000; (ii) 365,834 shares
to two officers and directors and one other person providing finders' services
in connection with the acquisition of certain oil and gas properties in the
state of Kansas; and (iii) 5,066,671 shares in a private placement to 20
investors for $304,000. As a result, immediately prior to its acquisition by
the Company, GSC had 8,432,505 shares of Common Stock outstanding which were
exchanged for 25,297,500 shares of the Company's Common Stock on the basis of
approximately three shares of the Company for each share of GSC.
During 1994, the Company sold 7,490,000 shares of restricted Common Stock
in a private placement at a price of $0.05 per share. The Company realized
net proceeds from the offering of approximately $344,516 after deducting
offering costs in the amount of $29,984.
In January 1995, the Company issued a total of 2,425,000 shares of
restricted stock to officers, consultants and third party contractors as
compensation for services provided to the Company. John W. Hobbs and T. Kent
Rainey, officers of the Company, received 250,000 and 950,000 shares Common
Stock, respectively.
On March 20, 1995, the Company effected a 1-for-20 reverse split in its
issued and outstanding shares of Common Stock which reduced the number of
issued and outstanding shares from 42,207,501 to approximately 2,110,375
shares. The share and per share data set forth herein and the accompanying
financial statements give effect to such reverse stock split. During the
third quarter of 1996, the Company engaged in a private placement raising
$350,000 through the sale of 500,000 units consisting of one share of Common
Stock and one common stock purchase warrant (the "Warrants"). Each Warrant
had an exercise price of $1.50 and was exercisable for a period of five
years. In February 1997, 500,000 warrants were exercised raising gross
proceeds of $750,000. (See: Item 4. "Recent Sales of Unregistered
Securities.")
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Drilling and Exploration Activities
The Company depends greatly on the expertise and experience of its
president, Felix Ascanio, who is the companies only inside source for
expertise on oil and gas exploration and drilling. As a result of the limited
human resources of the Company, and its limited financial resources, the
Company will only explore the Hittle Field for the immediate future. If the
Hittle Field should prove to contain quantities of oil to make it economically
feasible to operate and a significant cash flow is generated from the field,
the Company will hire additional personnel to assist Mr. Ascanio and will seek
other oil and gas leases and fields, initially in the Kansas area where Mr.
Ascanio has been studying the geology and oil and gas potential.
In the Company's exploration and drilling efforts the Company has relied
extensively on seismic data and computer modeling to identify sites it feels
posses the most potential of producing economic oil and gas wells. Even with
these scientific data, there is still substantial risk that wells will be dry
or oil will not be found in significant quantities to be economical to
produce.
Competition and Markets
The Company competes with numerous other firms and individuals in its oil
and gas activities. The Company's competitors include major oil companies and
other independent operators, many of which have financial resources, staffs,
and facilities substantially greater than those of the Company. In the area
the Company is presently drilling, in addition to the major oil companies, two
relatively smaller companies, Range Oil and Bolinger Oil Company, are
exploring and drilling for oil and gas. Additionally, the Company faces
intense competition in obtaining risk capital for test drilling and may be at
a competitive disadvantage as compared with companies with proven records of
successful operations.
The Company also faces competitive pressures as it tries to acquire
additional oil and gas leases on the Hittle Field and surrounding area. The
Company believes if its initial wells prove successful that lease speculators,
independent oil firms, and major oil companies, many of which may have larger
financial and other resources than the Company will attempt to acquire
leases. This may have the effect of driving the prices of leases up
substantially and make it difficult for the Company to obtain additional
leases. The ability to acquire leases is often determined by the amount of
cash paid to acquire the lease, the royalty or other interest retained by the
transferor, and the nature of any commitment to drill on the lease acreage.
In the case of a drilling commitment, the ability to acquire leases is also
determined by the perception of the lease holder of the Company's ability to
perform such commitment.
The Company believes there are several sources which will buy any oil or
gas it produces. The prices obtained for production of oil depends on a
number of factors beyond the Company's control, the effects of which cannot be
accurately predicted. Such factors include the extent of domestic production
and imports of oil; the competitive position of oil and gas as a source of
energy compared to alternative sources such as coal, atomic energy,
hydroelectric power, and other energy forms; the refining capacity of
prospective purchasers; transportation costs; the availability and capacity of
pipelines and other means of transportation; and the effect of federal and
state regulation on production, transportation, and sale of oil and gas.
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<PAGE> 8
Government Regulation
In conducting exploration, drilling and completion activities, the
Company will be subject to a number of state and federal regulations with
respect to well spacing, drilling depths, completion and plugging procedures
and other items. The Company intends to comply with such regulations and does
not anticipate any adverse effect on its planned activities as a result of
such regulations. The Company must seek approval from the Kansas Corporation
Commission on any wells drilled and placed in operation in Kansas. In the
past, the Company has not had problems receiving approval from the Kansas
Corporation Commission although no assurance can be given on future
applications.
Operations of the Company are subject to numerous laws and regulations
governing the discharge of materials into the environment, the remediation of
environmental impacts, and other matters relating to environmental protection,
which affect the Company's operations and costs. It is probable that state
and federal environmental laws and regulations will become more stringent in
the future. There can be no assurance that such measures to further regulate
the production and even the disposable of oil waste will not have a
significant impact on the operating costs of the Company and the oil and gas
industry in general, resulting in the potential that certain wells may become
uneconomical.
Operational Hazards and Insurance
The Company's operations are subject to the normal hazards incident to
the drilling for and the production of oil, such as blowouts, cratering,
explosions, uncontrollable flows of oil or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These
hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage, and
suspension of operations.
The Company maintains insurance of various types to cover its operation
including one million in general liability insurance. The Company's insurance
does not cover every potential problem and may not be enough to cover any
particular incident. In particular, the Company does not have insurance on
certain types of environmental hazards. The occurrence of a significant
adverse event, the risks of which are not fully covered by insurance, could
have a materially adverse effect on the Company. Moreover, no assurance can
be given that adequate insurance will be available at reasonable rates or that
the Company or the operators of wells in which the Company owns an interest
will elect to maintain certain types or amounts of insurance.
Employees
The Company has 2 employees consisting of its president, Felix Ascanio,
and its secretary, John Hobbs who are both directors of the Company. (See
"Directors and Executive Officers.")
Offices
The Company's principal executive offices are located at 175 South Main,
Suite 1423, Salt Lake City, Utah 84111. These offices are rented on a month
to month basis with monthly rent of $121. Additionally, the Company rents
offices in Lawrence, Kansas at a monthly rental of $500. The Company
believes that the above facilities are adequate for the foreseeable needs of
the Company; however, as the Company expands its employee base, it anticipates
adding additional office space.
<PAGE> 9
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
The Company had no significant operation until the acquisition of GSC in
November 1993. Through the acquisition of GSC, the Company moved into the oil
and gas industry. From 1994 though the first part of 1996, the Company's
focus was primarily on the McLouth Field in Kansas and its development. In
mid 1996, the Company's focus changed under the direction of its new
president, Felix Ascanio, who felt other fields in Kansas offered greater
potential, particularly given the perceived problems with the Operating
Agreement between GS&C and KLM on the McLouth Field. (See Part I, Item 1,
"Description of Business-Overview" and Part II, Item 2, "Legal Proceedings.")
In 1996, the Company acquired an initial 560 acres in the Hittle Field in
Kansas and began an exploration process on the field which led to a well, the
LH-1, being drilled at the end of 1996. With initial test results seeming
promising on this well, the Company is seeking to acquire additional acreage
in the Hittle Field, having increased its lease holdings on the Hittle Field
to ______ acres, and intends to complete the LH-1 well with one lateral. The
Company has drilled the HH-1 well in the Hittle Field which has promising
initial test results and based on the availability of completion rigs and
approval from the Kansas Corporation Commission should be completed in 1997.
Due to the unknowns in completing any well, no assurance can be given that the
wells will actually produce and if they produce, that sufficient quantities of
oil will be produced to make the wells economical.
The Company anticipates focusing on the development of the Hittle Field
in 1997 and reducing its focus on the McLouth Field unless the litigation is
resolved in a timely and successful manner. If sufficient revenues are derived
from the Hittle Field, the Company would seek other oil and gas properties
which management felt were promising, but currently time and financing
constraints have prevented the Company from analyzing any other potential
projects.
The McLouth Field, which had been the Company's prior focus, has not
produced the results management wanted. Without the ability, due to
contractual restrictions, to operate the McLouth Field, oil production has
been sporadic and unprofitable. The McLouth Field is currently the subject of
litigation wherein the Company is trying to obtain some control over the
fields operation. If the litigation should prove unsuccessful, the Company
anticipates continued poor performance from the McLouth Field; however, some
revenue should still be derived from the field. This revenue, on its own,
will not offset the Company's overhead expenses. (See Part II, Item 2, Legal
Proceedings.)
Plan of Operation
The Company intends to place the LH-1 and HH-1 wells on line in 1997,
pending availability of completion rigs and weather conditions staying dry.
Once the wells are completed, the Company has selected another site where it
intends to drill its third well in the Hittle Field. Due to the man power
limitations of the Company, it is expected that, at present time, each new
site for a well will take approximately two months of study before selecting.
Accordingly, based on scientific and engineering time, drilling rig
availability and expected weather delays, the Company intends to drill new
wells every two to three months in the Hittle Field over the next several
<PAGE> 10
years. If the first two wells, the LH-1 and HH-1 produces oil in economic
quantities, the Company anticipates hiring an additional petroleum engineer to
assist in the analysis of future well sites and the operations of existing
wells. These drilling schedules assume the Hittle Field proves to contain oil
in profitable amounts which will be an uncertainty until further geological
and engineering studies are performed as additional oil wells are drilled.
Future drilling will be dependent on the revenue derived from operation
and potentially on the Company's ability to raise additional funds.
Presently, with the completion of the Company's private placement in 1997, the
Company has approximately $400,000 in available funds. It is anticipated that
the completion of the LH-1 will cost approximately $100,000 to $120,000 and
each additional well will cost $100,000 and may go as high as $150,000 if
laterals are used in the completion process. The HH-1 will be completed for
less than $100,000 as no laterals were required. As the HH-1 well is pumped
and tested there is the potential laterals will be added in the future
The Company is working to resolve its disputes on the McLouth Field this
year by taking an aggressive litigation position and may seek a buyer for the
field if the litigation proves successful. If the Company ends up keeping the
McLouth field, the Company's goal will be for the McLouth Field to provide
sufficient revenue for it to support its operation and potential offset some
of the Company's other expenses. The Company does not anticipate that the
McLouth Field will be a significant revenue producer in the foreseeable future
if the litigation proves unsuccessful.
As the Company has limited revenue at this point, which is insufficient
to cover its overhead and ongoing exploration activities, the Company will be
heavily dependent on the success of the LH-1 and the HH-1 well and future
wells. At this point, there can be no assurance of any success from these
wells or any future wells. The Company's future success may, therefore, be
dependent on its ability to raise additional capital to fund further drilling
and exploration.
Liquidity and Capital Resources
At December 31, 1996, the Company had working capital of $204,196 with
$978,754 in total assets and $14,536 in total liabilities. The assets of the
Company included $77,737 in a deferred tax asset and $26,776 in prepaid assets
which were classified as current assets. Accordingly, at the end of 1996, the
Company had only $114,217 in current assets which could be used for the
payment of expenses. In the first quarter of 1997, the Company completed a
private placement raising gross proceeds of $750,000 through the exercise of
500,000 warrants held by existing shareholders of the Company. As a result of
the completion of the Company's private placement, at March 31, 1997, the
Company had total assets of $1,691,498, with $764,554 in current assets, the
majority of which, $758,786 consists of cash. The Company's liabilities were
$119,157, giving the Company working capital of $645,629.
The Company has hired Sperry Sun, a Division of Dresser Industries to
complete the LH-1 well in the Hittle Field at a cost of up to $120,000.
Presently, the Company has completed one lateral on the well and is in the
process of performing open hole testing prior to final completion efforts.
Until the LH-1 well is completed, there can be no assurance that it will
produce oil in economical quantities to prove successful. With the cash the
Company has on hand, if the cost of drilling and completing additional wells
<PAGE> 11
are similar to the LH-1 well, the Company estimates it can finish the LH-1
well and drill three to four new wells, in the Hittle Field. The cost to
drill and complete the HH-1 are estimated to be under $100,000 based on cost
incurred to date as laterals are presently not necessary. As the Company has
very little revenue from existing wells, if these new wells are not
successful, or if the price of oil should fall, the Company would have to seek
outside sources of funding to continue its exploration activities. There can
be no assurance that any outside sources of funding could be found.
Results of Operations
Quarter Ended March 31, 1997
During the quarter ended March 31, 1997, the Company raised $750,000
through the exercise of warrants previously issued in a private placement in
August 1996. The money raised in the private placement has been, and will be,
used to fund the Company's exploration and drilling activities on the Hittle
Field and to pay on going expenses of the Company.
Operating revenue in the first quarter of 1997, continued to be nominal
as the Company continued its dispute with the operator of the Company's
primary operating field, the McClouth Field. As a result the Company had
revenue for the first three months of 1997 of only $20,051, which was down
from $42,648 for the quarter ended March 31, 1996. Expenses also jumped do to
an increase in general and administrative expenses. General and
administrative expenses for the quarter ended March 31, 1997 increased to
$173,667 from $14,057 the prior year. The majority of this increase was the
result of approximately $118,000 in tax obligations arising from the exercise
of stock options by two of the Company's officers. As a result of the
increase in general and administrative expenses, the Company has total
expenses of $200,071 for the quarter ended March 31, 1997, resulting in a loss
for the quarter of $174,140, compared to a profit of $12,023 for the same
period in 1996.
1996
The Company entered 1996 in need of cash to continue its operation and
with the officers of the Company either foregoing being paid or taking reduced
salaries. In an effort to continue operations, the Company engaged in a
private placement of its securities raising $350,000. The cash received from
the private placement allowed the Company to continue in operation and
commence new drilling activities on the Hittle Field.
Operating revenue in 1996 continued to stay fairly constant with revenues
of $177,315. This revenue was not sufficient to offset expenses which
increased due to exploration cost of $80,510 related to an unsuccessful
attempt to bring three existing wells back into production, additional
professional fees related to the private placement and litigation of $29,719
and general and administrative expenses which increased to $349,454. The
general and administrative expenses showed the largest increase from 1995 with
it increasing $207,894. Although general and administrative expenses
increased substantially, the majority of the expenses were non cash. General
and administrative expenses included $210,100 in non cash items related to the
receipt of options by officers of the Company. These options were granted at
a below market price to help compensate the officers for what the Company
perceived as salaries which were substantially less then they could receive
elsewhere and for deferring some salary when the Company was in a cash
crunch. Both officers exercised their options in 1997.
<PAGE> 12
As a result of the increase in expenses, the Company had a net loss of
$384,234 for the year ended December 31, 1996. The Company is hopeful that
the exploration cost incurred in 1996 will result in profitable well
operations in 1997 although there can be no assurance of profitability. The
Company does feel that it will be able to continue its current level of
exploration and drilling through 1997 with the funds received through the
exercise of the Company's outstanding Warrants. It will be necessary,
however, for the Company to start producing oil revenue in quantities
sufficient to offset expenses by the end of the year or future exploration
will be jeopardized. During 1996, the Company's drilling activities included
the drilling of only one well for which the Company is still working on
completing. The Company also attempted to bring three existing wells back
into production. The attempt was unsuccessful and the Company incurred
expenses of $80,510.
1995
During the year ended December 31, 1995, the Company had revenue of
$177,316 with expenses of $258,311. The major expenses were in production
cost of $73,731 and general and administrative of $141,560. Although
production expense remained fairly constant from 1994 when it was $78,051, the
general and administrative expenses jumped from $14,337 in 1994. This
increased included $48,500 in non-cash expenses related to options granted to
officers of the Company. Additionally, the Company began paying a salary to
Mr. Hobbs and hired Mr. Ascanio.
These additional expenses resulted in the Company losing $80,995 from
operations as opposed to the small amount of income from operations of $12,002
in 1994. As a result of this loss and additional expenses the Company's cash
reserves were reduced to $17,619 from $47,995 in 1994. As of December 31,
1995, the Company had completed drilling a total of 18 wells all of which are
located in a single oil field in Kansas; 15 wells are part of the Company's
three producing tank batteries and the other three wells were dryholes. Two
dryholes were written-off to expense during 1994 and the third dryhole was
assigned to another company and accounted for as an addition to leasehold
acquisition costs during 1994.
Item 3. Description of Property
Oil and Gas Properties
The Company's oil and gas properties are located in Kansas. The
properties consist of two fields, the McLouth and Hittle Fields. The Hittle
Field has only recently had exploration activities on it by the Company with
only one well drilled to date which is pending completion. The McLouth Field
has 13 producing shallow oil wells located on approximately 197 acres. The
McLouth field is subject to a farmout agreement with the Company maintaining a
75% working interest of which 2½% has been transferred to former officers
of the Company. (See: Part I, Item 1. "Description of Business").
In the oil and gas industry and as used herein, the word "gross" well or
acre is a well or acre in which a working interest is owned; the number of
gross wells is the total number of wells in which a working interest is
owned. A "net" well or acre is deemed to exist when the sum of fractional
ownership working interests in gross wells or acres equals one. The number of
net wells or acres is the sum of the fractional working interests owned in
gross wells or acres.
<PAGE> 13
The information presented in this section is in accordance with SEC
guidelines on oil and gas disclosure and in particular those found in Rule
4-10 of regulation S-X.
Wells and Acreage
Shown below are tabulations of the productive oil (including casinghead
gas) wells and developed and undeveloped acreage owned by the Company as of
December 31, 1996.
Gross Acreage
-------------------------------
Productive Oil Wells Developed Undeveloped
- -------------------- --------- -----------
Gross Net(1) Gross Net(2) Gross Net(3)
----- ------ ----- ------ ----- ------
19 15.25 190 152.50 567 555.25
- -------------------
(1) Based on a 75% ownership working interest on the McLouth Field and a
100% ownership working interest on the Hittle Field.
(2) Calculated on 15 wells with a 75% ownership interest on the McLouth
Field and four wells with a 100% ownership interest on the Hittle Field.
(3) Corresponds to 47 undeveloped acres in the McLouth Field with a 75%
ownership interest and 520 undeveloped acres in the Hittle Field with 100 %
ownership interest.
Fifteen of the above oil wells are all located on the McLouth Field,
which as noted above, does not figure prominently in the Company's future
exploration or development program. See notes 3 and the supplemental
information to the Company's December 31, 1996 and 1995, financial statements
for additional information regarding the Company's oil and gas properties and
producing activities and oil and gas reserves. Such information is based on a
report prepared by Felix Ascanio who is the Company's president, and
therefore, should not be considered independent.
PAGE
<PAGE> 14
Drilling Activities
Set forth below is a tabulation of wells completed in the period
indicated in which the Company have participated and the results thereof for
the three most recent years ended December 31, 1996.
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Exploratory:
Dry -0- -0- -0- -0- -0- -0-
Oil -0- -0- -0- -0- -0- -0-
Gas -0- -0- -0- -0- -0- -0-
Totals -0- -0- -0- -0- -0- -0-
Development:
Dry 1 0.75 -0- -0- -0- -0-
Oil 15 11.25 3 3 1 1
Gas -0- -0- -0- -0- -0- -0-
Totals 16 12 3 3 1 1
Average Prices and Costs
The average sales prices of oil and gas for the current fiscal year and
the three previous fiscal years are as follows:
Average Sales Price
-------------------
Year Ended Oil Gas
December 31 (per BBL) (per MCF)
----------- --------- ---------
1994 $14.10 NA
1995 $14.50 NA
1996 $20.33 NA
Production costs for such wells per equivalent barrel, which includes lifting
costs (electricity, fuel, water disposal, repairs and maintenance, pumper,
transportation, etc.), and production taxes, was $4.70, $3.76, and $3.61, for
the years ended December 31, 1996, 1995, and 1994, respectively. As noted all
of these figures are for the McLouth Field and may not accurately reflect the
cost for the wells on the Hittle Field from which there is currently no
information.
Production and Sale of Oil and Gas
The oil from the McLouth Field is sold to one unaffiliated purchaser.
The sale of oil and gas is subject to price adjustments, production
curtailments, and similar provision in oil and gas purchase contracts, and the
sale of both oil and gas is subject to general economic and political
conditions affecting the production and price of crude oil and natural gas.
For the years ended December 31, 1996, and 1995, the Company produced
approximately 15,000 and 12,000 barrels of oil.
PAGE
<PAGE> 15
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of the Company's
Common Stock, par value $0.001, held by each person who is believed to be the
beneficial owner of 5% or more of the 3,695,378 shares of the Company's common
stock outstanding at October 31, 1997, based on the Company's transfer agent's
list, representations and affidavits from shareholders and beneficial
shareholder lists provided by the Depository Trust and securities broker
dealers, and the names and number of shares held by each of the Company's
officers and directors and by all officers and directors as a group.
Title of Name and Address Amount and Nature of Percent
Class Of Beneficial Owner Beneficial Ownership of Class
- -------- ------------------- --------------------- --------
Common Lee Jackson (1) 438,350 11.86
712 Arrowhead Lane
Murray, Utah 84107
Common Felix Ascanio 287,500 7.78
1422 Stone Meadows
Lawrence, Kansas 66049
Common The Depository Trust
(Cede & Co.) 1,583,308 42.85
P.O. Box 222
New York, New York 10274
Common Ervin Brown (2) 200,000 5.41
2594 West Pine Meadow Place
Salt Lake City, Utah 94118
Officers, Directors and Nominees
Common Felix A. Ascanio, President
and Director ---------See Above---------
Common Lee Jackson, Director ---------See Above---------
Common John W. Hobbs (3) 177,900 4.81
Secretary/Treasurer, Director
All Officers, Directors, and
Nominees as a Group (3 Persons) 903,750 24.46
- --------------------------------
(1) Mr. Jackson owns 343,350 shares in his own name and 100,000 shares in Lee
Jackson Investments. Mr. Jackson also owns 25,000 warrants and 25,000 options
to purchase a like number of shares of Common Stock at an exercise price of
$2.00 per share.
(2) Mr. Brown also owns 50,000 warrants and 25,000 options to purchase a like
number of shares of Common Stock at an exercise price of $2.00 per share.
(3) Mr. Hobbs has 152,500 shares which he holds jointly with his wife.
Additionally, Mr. Hobbs minor daughter has 8,000 shares and two adult
daughters that live in his home own 16,000 shares.
<PAGE>
<PAGE> 16
Item 5. Directors, Executive Officers, Promoters and Control Persons
The names of the Company's executive officers and directors and the
positions held by each of them are set forth below:
Name Position
- ---- --------
Felix A. Ascanio President and Director
John W. Hobbs Secretary, Treasurer and Director
Lee Jackson Director
The term of office of each director is one year and until his successor
is elected at the Company's annual shareholders' meeting and is qualified,
subject to removal by the shareholders. The term of office for each officer
is for one year and until a successor is elected at the annual meeting of the
board of directors and is qualified, subject to removal by the board of
directors.
Biographical Information
Set forth below is certain biographical information with respect to each
of the Company's officers and directors.
Felix A. Ascanio, age 41, was appointed the president and a director of
the Company in May 1995. Mr. Ascanio has worked in the oil and gas industry
since 1979 as a petroleum engineer and oil field supervisor. Prior to joining
the Company, Mr. Ascanio worked as the general manager of exploration and
production for KLM Exploration, Co. in Kansas in 1994 and as a planning and
economics evaluation engineer in Caracas, Venezuela for Maraven, S.A. in
1993. From 1990 to 1992, Mr. Ascanio was completing advanced studies at the
University of Kansas. Mr. Ascanio has a B.S. Degree in Petroleum Engineering
from University of Louisiana in 1979 and a masters degree in petroleum
management from University of Kansas in 1992. Mr. Ascanio was the
Distinguished 1992 Graduate Business Scholar at the University of Kansas. Mr.
Ascanio is a native of Venezuela. Mr. Ascanio's previous business experience
as a petroleum engineer and supervisor were for the Venezuela government.
John W. Hobbs, age 52, is and has since October 1987 been an officer and
a director of the Company. From 1988 to the present, Mr. Hobbs has been
involved in the development of recreational real estate properties in Idaho.
From 1978 through 1988, he was the owner/operator of Hobbs and Staples, a
wholesale distributor of costume jewelry. From 1972 through 1978, he worked
for Movitz Company as a sales representative in the costume jewelry business.
Mr. Hobbs attended Utah State University from 1962 through 1967.
Lee Jackson, age 71, has been retired since 1993 and spends his time
focusing on real estate management and investments. Prior to retiring, Mr.
Jackson owned Jackson Insurance Agency which he later sold to his son. Prior
to establishing his own insurance agency, Mr. Jackson was a real estate agent
and broker. Mr. Jackson was employed by Allstate Insurance for 17 years where
he was an agent, a commercial sales supervisor and sales manager. Mr. Jackson
received his bachelor of science degree in business from the University of
Utah in 1951.
<PAGE> 17
ITEM 6. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning the
compensation paid or accrued for each of the Company's last three completed
fiscal years to the Company's or its principal subsidiaries chief executive
officer and each of its other executive officers that received compensation in
excess of $100,000 during such period (as determined at December 31, 1996, the
end of the Company's last completed fiscal year):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options
LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs
Payout Compensation
- ------------------ ---- ------ -------- ------------ ------ -------
- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C>
Felix A. Ascanio 1996 $60,000 -0- -0- -0- 325,000(1)
- -0- -0-
President and CEO 1995 $45,000 -0- -0- -0- -0-
- -0- -0-
T. Kent Rainey, 1994 -0- -0- -0- 950,000(2) -0-
- -0- -0-
</TABLE>
(1) Mr. Ascanio received 300,000 options at $0.20 and 25,000 options at $2.00
during 1996.
(2) The 950,000 shares are prior to the 20 to 1 reverse split
Options/SAR Grants in Last Fiscal Year
The Following table sets forth information respecting all individual grants of
options and stock appreciation rights ("SARs") made during the fiscal year
ended December 31, 1996, to the named executive officer of the Company.
<TABLE>
<CAPTION>
% of Total
# of Securities Options/SARS
Underlying Granted to Market
Price
Options/SARs Employees in Exercise or Base on Date of
Name Granted Fiscal Year Price ($/Share)
Grant Expiration Date
- ---- --------------- ------------ ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Felix Ascanio 300,000 49% $0.20
$0.75 Sept. 1, 2001
25,000 4% $2.00
$1.625 Dec. 15, 2001
</TABLE>
PAGE
<PAGE> 18
Bonuses and Deferred Compensation
None
Compensation Pursuant to Plans
All options received are pursuant to the Company's 1996 Stock Option Plan
which has reserved 650,000 shares for issuance under the plan. Options are
issued under the plan at the discretion of the Company's board of directors.
Pension Table
Not Applicable
Other Compensation
None
Compensation of Directors
Directors of the Company receive only $100 per directors meeting
attended. Each director received 25,000 option under the Company's 1996 Stock
Option Plan in 1996. The options have an exercise price of $2.00, vest
immediately and may be exercised at any time within five years of the date of
their grant.
Termination of Employment and Change of Control Arrangement
Mr. Ascanio has a clause in his employment contract calling for the
severance payment of $60,000 if he is terminated without cause during the term
of his employment agreement. Accordingly, any termination except in the case
of gross negligence or the like will trigger the payment of the severance to
Mr. Ascanio.
Officer and Director Remuneration
Felix Ascanio entered into an employment contract with the Company on May
1, 1995, which was revised in November 1996 (the "Ascanio Agreement").
Pursuant to the terms of the Ascanio Agreement, Mr. Ascanio is employed as the
president of the Company with an annual salary of $60,000 per year for a
period of three years. In addition to Mr. Ascanio annual salary, he will
receive additional compensation of $1.50 per barrel of oil shipped over 2,000
barrels in any given month based on the Company's working interest.
Additionally, under the terms of the Ascanio Agreement, Mr. Ascanio received
300,000 options to purchase a like number of shares of the Company's common
stock, at an exercise price of $0.20 per share, all of which have been
exercised. The Company may terminate Mr. Ascanio's employment, with or
without cause; however, if there is no cause for the termination, the Company
must pay Mr. Ascanio a severance of $60,000.
<PAGE> 19
Jack Hobbs entered into an employment agreement with the Company on May
1, 1995, which was revised in November 1996 (the "Hobb's Agreement"). The
Hobb's Agreement is for a term of two years with an annul salary of $24,000
the first year and $36,000 the second year. Additionally, pursuant to the
terms of the Hobb's Agreement, Mr. Hobbs received 150,000 options to purchase
a like number of shares of Common Stock, at exercise prices of $0.20 and $0.70
per share, all of which have been exercised. The Company may terminate Mr.
Hobb's employment, with or without cause; however, if there is no cause for
the termination, the Company must pay Mr. Hobbs a severance of $30,000.
In December 1996, all directors of the Company received 25,000 options
each with an exercise price of $2.00. Except for the foregoing, the Company
is not currently paying any direct or indirect compensation to its officers or
directors except for $100 provided each director per director meeting. The
Company's officers and directors are also reimbursed for their actual
out-of-pocket expenses for travel, telephone charges and miscellaneous items
incurred on behalf of the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1997, Felix Ascanio, the Company's president, and John Hobbs,
the Company's secretary, exercised options in the Company delivering
promissory notes in the amount of $55,000 and $80,000, respectively, to the
Company for their exercise price. The promissory notes are due January 17,
2001, with interest at eight and one half percent (8½%). In April 1997,
the Company loaned Mr. Ascanio $84,376 and Mr. Hobbs $29,449 to pay taxes due
on the options exercised. Due to Messrs. Ascanio's and Hobbs' relationships
to the Company, these transactions should not be considered arms length.
During 1996, a shareholder and an officer of the Company advanced the
Company $3,600. Of the $3,600 that was advanced, the Company paid $3,000 back
during the year leaving a balance of $600. The advances are non-interest
bearing.
During December, 1995, the Company entered into a loan agreement with an
entity related to a shareholder and director of the Company. The unsecured
loan consisted of a short term note payable for $10,000 with an interest rate
of 12% per annum. The note provides for four monthly payments commencing
January 25, 1996, and ending April 25, 1996. The $10,000 plus interest was
paid in full during 1996.
The Company issued 121,250 shares of restricted common stock valued at
$48,500 ($0.40 per share) in February, 1995, to officers, directors and others
as compensation for services rendered.
Item 8. Description of Securities
Description of Securities
General
The Company is authorized to issue fifty million shares of capital stock,
par value $0.001 per share designated as Common Stock. There are 3,695,378
fully paid and non assessable shares of Common Stock currently
<PAGE>
<PAGE> 20
issued and outstanding as of April 14, 1997. Additionally, the Company has
300,000 common stock purchase warrants (the "Warrants") outstanding to
purchase a like number of shares of Common Stock at an exercise price of $1.50
and $2.00 per share for 50,000 and 250,000 Warrants, respectively.
Common Stock
The holders of Common Stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of shareholders. Shares of Common
Stock do not carry cumulative voting rights and, therefore, a majority of the
shares of outstanding Common Stock will be able to elect the entire board of
directors and, if they do so, minority shareholders would not be able to elect
any persons to the board of directors. The Company's bylaws provide that a
majority of the issued and outstanding shares of the Company constitutes a
quorum for shareholders' meetings, except with respect to certain matters for
which a greater percentage quorum is required by statute or the bylaws.
Shareholders of the Company have no preemptive rights to acquire
additional shares of Common Stock or other securities. The Common Stock is
not subject to redemption and carries no subscription or conversion rights.
In the event of liquidation of the Company, the shares of Common Stock are
entitled to share equally in corporate assets after satisfaction of all
liabilities.
Holders of Common Stock are entitled to receive such dividends as the
board of directors may from time to time declare out of funds legally
available for the payment of dividends. The Company seeks growth and
expansion of its business through the reinvestment of profits, if any, and
does not anticipate that it will pay dividends in the foreseeable future
Warrants
The Company has 300,000 Warrants outstanding with exercise prices of
$1.50 and $2.00 on 50,000 and 250,000 Warrants, respectively. Except for the
exercise price and duration of the Warrants, the terms and conditions of the
Warrants are identical. The 50,000 Warrants with an exercise price of $1.50
are exercisable for a five year period beginning in July of 1996. The 250,000
Warrants are exercisable for five years commencing in February 1997. No
trading market currently exist for the Warrants, and it is unlikely one will
ever develop. The following statements are subject to the detailed provisions
of the Warrant, which are attached hereto as an exhibit.
Each Warrant entitles the holder thereof to purchase one share of the
Company's Common Stock, at an exercise price of either $1.50 and $2.00 per
share, depending on the Warrant, at any time within five years from the date
of issuance of the Warrant (the "Warrant Exercise Period"). The holder of a
Warrant will not posses any rights as a shareholder of the Company until
exercise of the Warrant and full payment of the exercise price.
Shares of Common Stock issueable on exercise of the Warrants will be
"restricted securities" as that term is defined under the Securities Act, and
consequently, will be subject to the restrictions on transfer set forth in the
Securities Act and, applicable regulations unless an effective registration
statement is in effect at the time of exercise of the Warrants. Further
restrictions on transfer may be imposed by state securities statues.
<PAGE> 21
Therefore, the securities would have to be held indefinitely, unless
subsequently registered or qualified under applicable federal and state
securities laws or sold in a transaction exempt from such registration and
qualification requirements.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the number of shares of Common Stock purchasable on
exercise of the Warrants in certain events. In the event the number of shares
Common Stock purchasable is increased through the operation of the
antidilution provisions, the exercise price will be reduced proportionately.
Conversely, if the number of shares of Common Stock purchasable is decreased,
the exercise price will be increased proportionately.
The Warrants contain registration provisions providing that shares of
Common Stock issuable on exercise of the Warrants must be included in any
registration statement that the Company files during the exercise period. The
cost of registration will be borne by the Company.
PAGE
<PAGE> 22
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters
The Company's Common Stock is quoted on the National Association of
Securities Dealers Electronic Bulletin Board under the symbol "UPLC." Set
forth below are the high and low bid prices for the Company's Common Stock for
the last three years. Although the Common Stock is quoted on the Electronic
Bulletin Board it has traded sporadically with low volume. Consequently, the
information provided below may not be indicative of the Common Stock price
under different conditions. All prices listed herein reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not represent
actual transactions.
Quarter Ended High Bid Low Bid
- ------------- -------- -------
March 1995 $2.125 $1.875
June 1995 $2.50 $1.375
September 1995 $1.625 $1.25
December 1995 $1.375 $1.00
March 1996 $1.25 $0.625
June 1996 $1.31 $1.00
September 1996 $1.875 $1.00
December 1996 $3.125 $0.625
March 1997 $3.875 $2.31
June 1997 $5.625 $2.50
September 1997 $6.25 $4.25
At October 31, 1997, the high and low bid and asked price for the Common
Stock was $6.38 and $5.88, respectively.
Since its inception, the Company has not paid any dividends on its Common
Stock, and the Company does not anticipate that it will pay dividends in the
foreseeable future.
As of October 31, 1997, there were 3,695,378 shares of common stock
outstanding held by approximately 138 active holders of record, including
broker-dealers and clearing corporations holding shares on behalf of their
customers, as reported by the Company's transfer agent.
PAGE
<PAGE> 23
Item 2. Legal Proceedings
The Company's subsidiary GSC filed a lawsuit on October 19, 1996, against
KLM Exploration Company, Inc. in the District Court of Jefferson County,
Kansas. The lawsuit entitled G.S.&C., Inc. vs. KLM Exploration Company, Inc.,
et al., case no. 96C-92, seeks to remove KLM as operator of GSC's oil leases
in the McLouth Field, and for damages in excess of $500,000 for breach of
contract, and for an accounting. KLM has filed its answer denying GSC's
allegations, and counterclaimed for alleged unpaid operating expenses of
$5,963.02, plus damages in excess of $500,000 for breach of contract.
Williams Natural Gas has answered, and crossclaimed against KLM and
counterclaimed against GSC for attorneys fees. All counterclaims and
crossclaims have been answered and the parties are still in the discovery
stage of the litigation. There are no pending motions and the parties are
still in the discovery stage of the litigation. The Court will call a
scheduling conference in the near future to set a timetable for discovery. As
the case is in its early stages, the Company cannot say with any degree of
certainty what the outcome will be or the potential cost of the lawsuit.
The Company's subsidiary GSC had a lawsuit filed against it on September
11, 1995, by the landowner of certain property in Kansas where the Company has
been drilling. The lawsuit, entitled Herbert N. Edmonds and Eelsa D. Edmonds
vs. G.S. & C., Inc., in the District Court of Jefferson County, Kansas, case
no. 95-C-67, seeks cancellation of the lease to GSC from the plaintiff and
quieting of title, plus cost, attorneys' fees and expenses. On February 8,
1996, the court granted plaintiffs leave to amend their petition to add
additional parties. GSC has answered the lawsuit denying plaintiffs' claims
and asserting a counterclaim and affirmative defenses. GSC filed a motion for
summary judgment and the plaintiffs countered with their own motion for
summary judgment both of which were heard by the court on July 30, 1997. On
October 10, 1997, the court filed an order denying GSC's motion for summary
judgment and granted Edmonds' motion for summary judgment and ordered
termination of the Edmonds B lease. The Company intends to appeal this
decision. There can be no assurance of any success of the appeal.
Item 3. Changes in and Disagreements with Accountants
The Company has not changed nor had any disagreements with its independent
certified accountants.
Item 4. Recent Sales of Unregistered Securities
During the past three years the Company has engaged in three private
placements under regulation D, rule 506 of the rules and regulations
promulgated under the Securities Act.
During March and April of 1994, the Company sold 7,490,000 shares of
restricted common stock in a private placement at a price of $0.05 per share.
The Company realized net proceeds from the offering of approximately $344,516
after deducting offering costs in the amount of $29,984. The offering was
conducted with the assistance of Alpine Securities Corporation, a
broker-dealer located in Salt Lake City, Utah. The offering was designed to
meet federal and state non-public offering rules and accordingly, no form of
general solicitation was used, and offers were made to only limited
<PAGE>
<PAGE> 24
individuals who were either accredited investors as that term is defined in
rule 501 of the rules and regulations promulgated by the Commission under the
Securities Act or due to their investment experience where deemed
sophisticated investors. Of the 24 investors in the offering, 15 were
accredited investors and 9 were sophisticated investors based on their past
investment experience.
In July and August of 1996, the Company sold 500,000 units at an offering
price of $0.70 per Unit in a private placement designed to be exempt from the
registration provisions of the Securities Act under regulation D, rule 506 of
the rules and regulations promulgated under the Securities Act. Each unit
consisted of one share or restricted common stock of the Company and one
common stock purchase warrant to purchase one share of Common Stock at an
exercise price of $1.50 per share at any time up to five years from the date
of the warrant. The offering was also conducted through the assistance of
Alpine Securities Corporation who received a commission of 50,000 units for
their efforts. The offering was limited to only a select group of
individuals, most of whom had existing relationships with the Company, with
all 11 investors being accredited investors as that term is defined in Rule
501 as promulgated by the Commission under the provisions of the Securities
Act. The Company filed a form D with the Commission covering the offering.
In February and March of 1997, the Company needed additional financing
and sought to have its warrant holders exercise their Warrants received in the
1996 offering. To encourage the warrant holders to exercise their warrants,
the Company offered to all warrant holders the right to receive one new
warrant for every two warrants exercised. The new warrant received would have
a $2.00 exercise price. The Company had 500,000 warrants exercised and issued
250,000 new warrants. The offering was structured to be exempt from the
registration provisions of the Securities Act under regulation D, rule 506 of
the rules and regulations promulgated under the Securities Act. There were a
total of 17 investors in the offering 15 of whom were accredited investors as
that term is defined in rule 501 promulgated by the Commission under the
provisions of the Securities Act. All investors received a private placement
memorandum describing the Company, the risks of investing in the Company and
the offering. The Company filed a form D with the Commission covering the
offering.
Item 5. Indemnification of Directors and Officers
The Company's articles of incorporation and bylaws provide for
indemnification of directors and officers by the Company. The articles of
incorporation of the Company limit or eliminate the personal liability of
directors for damages for breaches of their fiduciary duty, unless the
director has engaged in intentional misconduct, fraud, or a knowing violation
of law, or paid a dividend in violation of the Utah Revised Business
Corporation Act.
The bylaws of the Company provide for indemnification for directors and
officers to the full extent provided by the Utah Revised business corporation
act Section 16-10a-901 et. seq. The following is a brief summary of certain
indemnification provisions of the Company's certificate of incorporation and
the Utah Revised Business Corporation Act. This summary is qualified in its
entirety by reference to the text thereof.
<PAGE> 25
Section 16-10a-901 through 909 of the Utah Revised Business Corporation
Act, as amended ("Corporation Act") permits a Utah corporation to indemnify
its directors and officers for certain of their acts. More specifically,
Section 16-10a-902 and 16-10a-907 grants authority to any corporation to
indemnify directors and officers against any judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees, by reason of
his having been such a corporate director or officer. Such provision is
limited to instances where the director or officer acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests
of the corporation, or, in criminal proceedings, he had no reasonable cause to
believe his conduct was unlawful. Such section confers on the director or
officer an absolute right to indemnification for expenses, including
attorney's fees, actually and reasonably incurred by him to the extent he is
successful on the merits or otherwise in defense of any claim, issue, or
matter.
The corporation may not indemnify a director if the director is adjudged
liable to the corporation or deemed to have derived an improper personal
benefit in an action in which the director is adjudged liable. Section 16
10a-906 of the Corporation Act expressly makes indemnification contingent upon
a determination that indemnification is proper in the circumstances. Such
determination must be made by the board of directors acting through a quorum
of disinterested directors, or by the board of directors acting on the advice
of independent legal counsel, or by the shareholders. Further, Section 16
10a-904 of the Corporation Act permits a corporation to pay attorneys' fees
and other litigation expenses on behalf of a director or officer in advance of
the final disposition of the action upon receipt of an undertaking by or on
behalf of such director or officer to repay such expenses to the corporation
if it is ultimately determined that he is not entitled to be indemnified by
the corporation or to the extent the expenses so advanced by the corporation
exceed the indemnification to which he is entitled. Such indemnification
provisions do not exclude other indemnification rights to which a director or
officer may be entitled under the certificate of incorporation, bylaws, an
agreement, a vote of shareholders, or otherwise. The corporation may also
purchase and maintain insurance to provide indemnification.
The foregoing discussion of indemnification merely summarizes certain
aspects of indemnification provisions and is limited by reference to the above
discussed sections of the Corporation Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to members of the board of directors, officers,
employees, or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
(The rest of this page intentionally left blank.)
PAGE
<PAGE> 26
PART F/S
Financial Statements and Supplementary Data
CONTENTS
PAGE
_ Independent Auditors' Report 27
_ Consolidated Balance Sheets, December 31, 1996
and 1995 28
_ Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994 29
_ Consolidated Statement of Stockholders' Equity,
from inception on September 1, 1993 through
December 31, 1996 30
_ Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 32
_ Notes to Consolidated Financial Statements 34
_ Supplemental Information - Unaudited 45
_ Accountant's Disclaimer of Opinion 51
_ Unaudited Condensed Consolidated Balance, March 31,
1997 and March 31, 1996 52
_ Unaudited Condensed Consolidated Statements of
Operations for the three months ended
March 31, 1997 and March 31, 1996 53
_ Unaudited Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 54
_ Notes to Unaudited Condensed Consolidated
Financial Statements 55
PAGE
<PAGE> 27
PRITCHETT, SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
430 East 400 South
Salt Lake City, Utah 84111
INDEPENDENT AUDITORS' REPORT
Board of Directors
UPLAND ENERGY CORPORATION AND SUBSIDIARY
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of
Upland Energy Corporation and Subsidiary at December 31, 1996 and
1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December
31, 1996, 1995 and 1994. These consolidated 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 audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by
us present fairly, in all material respects, the consolidated
financial position of Upland Energy Corporation and Subsidiary as
of December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for the years ended December
31, 1996, 1995 and 1994.
As discussed in Note 3, the ultimate realization of the company's
investment in oil and gas properties is dependent upon the
Company being able to economically recover and sell its oil and
gas reserves. The estimates of oil and gas reserves were
produced internally by management and others who were not
independent with respect to the Company. The financial
statements do not include any adjustments related to the
uncertainty that the Company might not recover its estimated
reserves.
/s/PRITCHETT, SILER & HARDY, P.C.
February 17, 1997
Salt Lake City, Utah
<PAGE> 28
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
_____________________________
1996 1995
_____________ _____________
CURRENT ASSETS:
Cash $ 105,472 $ 17,619
Oil revenue receivable 8,745 12,556
Interest receivable - 29
Prepaid assets 26,778 6,444
Short term deferred tax asset 77,737 -
_____________ _____________
Total Current Assets 218,732 36,648
PROPERTY AND EQUIPMENT, net 3,888 4,536
OIL AND GAS PROPERTIES, net 746,134 663,243
RESTRICTED CASH 10,000 -
_____________ _____________
$ 978,754 $ 704,427
_____________ _____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term notes payable -
related party $ 800 $ 10,000
Accounts payable 13,636 13,633
Accrued liabilities 100 179
_____________ _____________
Total Current Liabilities 14,536 23,812
LONG TERM DEFERRED TAX LIABILITY 77,737 -
_____________ _____________
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value,
50,000,000 shares authorized,
2,710,378 and 2,110,378 shares
issued and outstanding
at 1996 and 1995, respectively 2,710 2,110
Capital in excess of par value 1,358,320 768,820
Retained earnings (deficit) (474,549) (90,315)
_____________ _____________
Total Stockholders' Equity 886,481 680,615
_____________ _____________
$ 978,754 $ 704,427
_____________ _____________
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 29
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
________________________________________________
1996 1995 1994
___________ ___________ ___________
REVENUE:
Oil sales $177,315 $177,316 $ 186,135
___________ ___________ ___________
Total Revenue 177,315 177,316 186,135
___________ ___________ ___________
EXPENSES:
Production expense 70,515 73,731 78,051
Depreciation, depletion and
amortization 11,028 14,002 32,251
Dryhole, unsuccessful
recompletions and
exploration costs 80,510 - 24,571
General and administrative
costs 349,454 141,560 14,337
Professional fees 29,719 14,538 15,391
Travel expense 23,880 14,480 9,532
___________ ___________ ___________
Total Expenses 565,106 258,311 174,133
___________ ___________ ___________
INCOME (LOSS) FROM
OPERATIONS (387,791) (80,995) 12,002
OTHER INCOME (EXPENSE):
Interest Income 3,951 1,126 1,453
Interest expense (394) (79) -
___________ ___________ ___________
INCOME (LOSS) BEFORE
INCOME TAXES (384,234) (79,948) 13,455
CURRENT TAX EXPENSE - - -
DEFERRED TAX EXPENSE - - -
___________ ___________ ___________
NET INCOME (LOSS) $(384,234) $(79,948) $ 13,455
___________ ___________ ___________
EARNING (LOSS) PER COMMON
SHARE $ (.16) $ (.04) $ .01
___________ ___________ ___________
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,342,072 2,099,748 1,770,581
____________ ___________ ___________
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 30
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION OF SUBSIDIARY ON SEPTEMBER 1, 1993 THROUGH
DECEMBER 31, 1996
[RESTATED]
<TABLE>
<CAPTION>
Common Stock Capital
in Retained
_________________ Excess
of Earnings
Shares Amount Par
Value (Deficit)
_____________________________________________
<S> <C> <C> <C>
<C>
BALANCE, September 1, 1993
- $ - $
- - $ -
Stock issued for cash to members of the
Board of Directors at $.0066 per share,
Directors at $.0066 per share,
September, 1993 450,000 450
2,550 -
Stock issued for non-cash consideration
finders fees, September, 1993, at
$.40 per share 54,875 55
21,895 -
Stock issued pursuant to private placement
at $.38 per share, October, 1993 760,000 760
286,519 -
Recapitalization in a manner similar to a
reverse purchase, November 12, 1993 349,750 350
65,336 -
Net loss for the period ended
December 31, 1993 - -
- - (23,822)
________________________________________________
BALANCE, December 31, 1993 1,614,625 1,615
376,300 (23,822)
Stock issued pursuant to private
placement at $1.00 per share,
February through August, 1994, net
of stock offering costs of $29,985 374,500 374
344,141 -
Net income for the year ended
December 31, 1994 - -
- - 13,455
_________________________________________________
BALANCE, December 31, 1994 1,989,125 1,989
720,441 (10,367)
Stock issued for services at $.40
per share, February, 1995 121,250 121
48,379 -
Fractional share adjustment in
connection with one for twenty
reverse stock split, March, 1995 3 -
- - -
Net loss for the year ended
December 31, 1995 - -
- - (79,948)
_______________________________________________
BALANCE, December 31, 1995 2,110,378 2,110
768,820 (90,315)
</TABLE>
[Table Continued on Next Page]
PAGE
<PAGE> 31
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION OF SUBSIDIARY ON SEPTEMBER 1, 1993 THROUGH
DECEMBER 31, 1996
[RESTATED]
[CONTINUED]
<TABLE>
<CAPTION>
Common Stock Capital
in Retained
_________________ Excess
of Earnings
Shares Amount Par
Value (Deficit)
_____________________________________________
<S> <C> <C> <C>
<C>
Stock issued pursuant to private placement
at $.70 per share, August 1996, net of
non-cash offering costs of $35,000 500,000 500
314,500 -
Stock issued pursuant to private placement
as commissions, valued at $35,000 50,000 50
34,950 -
Director/officer options exercised at
$.10 per share, November 1996 including
additional compensation expense of $26,251
or $.52 per share recorded in accordance
with APB Opinion No. 25) 50,000 50
31,201 -
Compensation recorded, in accordance with
APB Option No. 25, upon grant of options
to directors/officers where the exercise
price was less than the market price
average of $.51 per share - -
183,849 -
Options granted for legal services to be
rendered and accounted for as a
charge to additional paid-in capital
valued at $25,000 - -
25,000 -
Net loss for the year ended December 31,
1996 - -
- - (384,234)
_______________________________________________
BALANCE, December 31, 1996 2,710,378 $2,710 $1,358,320
$(474,549)
_______________________________________________
</TABLE>
The accompanying notes are an integral part of this consolidated
financial statement.
<PAGE> 32
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
________________________________________________
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss) $(384,234) $(79,948) $ 13,455
___________ ___________ ___________
Adjustments to reconcile
net loss to net cash used
by operating activities:
Depreciation 11,029 14,002 32,251
Non-cash expenses 25,000 48,500 -
Additional compensation
expense recorded in
accordance with APB
Opinion No. 25 210,100 - -
Change in assets and
liabilities:
(Increase) decrease in
receivables 3,840 1,373 (13,958)
(Increase) decrease in
prepaid assets (20,334) 5,514 (11,958)
Increase (decrease) in
notes payable (9,200) 10,000 -
Increase (decrease) in
accounts payable 3 6,696 (5,126)
Increase (decrease) in
accrued liabilities (79) 79 -
___________ ___________ ___________
Total Adjustments 220,359 86,164 1,209
___________ ___________ ___________
Net Cash Provided
(Used) by Operating
Activities (163,875) 6,216 14,664
___________ ___________ ___________
Cash Flows from Investing
Activities:
Purchase of property and
equipment (500) (4,536) (579)
Purchase of oil and gas
properties (92,772) (32,056) (408,267)
Purchase of certificate of
deposit (10,000) - -
___________ ___________ ___________
Net Cash (Used) by
Investing Activities (103,272) (36,592) (408,846)
___________ ___________ ___________
Cash Flows from Financing
Activities:
Issuance of common stock 355,000 - 374,500
Stock offering costs - - (29,985)
___________ ___________ ___________
Net Cash Provided by
Financing Activities 355,000 - 344,515
___________ ___________ ___________
Net Increase (Decrease) in
Cash 87,853 (30,376) (49,667)
Cash at Beginning of Period 17,619 47,995 97,662
___________ ___________ ___________
Cash at End of Period $ 105,472 $ 17,619 $ 47,995
___________ ___________ ___________
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the year for
Interest $ 394 $ - $ -
Income taxes $ - $ - $ -
[Continued]
</TABLE>
<PAGE> 33
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
Supplemental Disclosure of Non-cash Investing and Financing
Activities:
For the year ended December 31, 1996
The Company issued 50,000 shares of common stock valued at
$.70 per share ($35,000) for commissions in connection with
the private placement offering.
The Company granted 50,000 options t o purchase common stock
under employment agreements with officers and recorded
compensation of $26,251 in accordance with APB No. 25.
The Company granted 425,000 options to purchase common stock
under employment agreements with officers.
The Company granted 60,000 options to legal counsel for
services to be performed in the amount of $25,000. The cost
of the service is a prepaid asset and a charge to additional
paid-in capital.
For the year ended December 31, 1995
The Company issued 121,250 shares of common stock valued at
$.40 per share for services rendered.
For the year ended December 31, 1994
None
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 34
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Upland Energy Corporation ["PARENT"], was
incorporated under the laws of the State of Utah on January
30, 1986 as Upland Investment Corporation. Parent changed its
name to Upland Energy Corporation during November, 1993. G. S.
& C., Inc. ["SUBSIDIARY"], was incorporated under the laws of
the State of Nevada on September 1, 1993 and is engaged in the
development, production and selling of oil and gas in the
State of Kansas.
During November, 1993 PARENT acquired SUBSIDIARY in a
transaction accounted for as a recapitalization of subsidiary
in a manner similar to a reverse purchase. Accordingly,
Subsidiary is treated as the purchaser entity in the
transaction.
Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its wholly-
owned subsidiary. All significant intercompany transactions
have been eliminated in consolidation.
Accounting Estimates - The preparation of the 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, the disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Property and Equipment - Property and equipment are recorded
at cost which is depreciated over the estimated useful lives
of the related assets. Depreciation is computed using the
straight-line method for financial reporting purposes, with
accelerated methods used for income tax purposes. The
estimated useful lives of property and equipment for purposes
of financial reporting range from three to seven years.
Oil and Gas Properties - The Company uses the successful
efforts method of accounting for oil and gas producing
activities. Under that method, costs are accounted for as
follows:
a. Geological and geophysical costs and costs of carrying
and retaining undeveloped properties are charged to
expense as incurred.
b. Costs of drilling exploratory wells and exploratory-type
stratigraphic test wells that do not find proved reserves
are charged to expense when the wells do not find proved
reserves.
PAGE
<PAGE> 35
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
c. Costs of acquiring properties, costs of drilling
development wells and development-type stratigraphic test
wells, and costs of drilling successful exploratory wells
and exploratory-type stratigraphic test wells are
capitalized.
d. The capitalized costs of wells and related equipment are
amortized over the life of proved developed reserves that
can be produced from assets represented by those
capitalized costs. Mineral acquisition costs (leasehold)
are amortized as the proved reserves are produced.
e. Costs of unproved properties are assessed periodically,
and a loss is recognized if the properties are impaired.
Revenue Recognition - The Company's revenue is generated
primarily by the production and sale of oil and gas from
properties currently producing. Revenue from oil and gas
sales is recognized when the product is transferred to the
purchaser.
Earnings (Loss) Per Share - The computation of earnings (loss)
per share of common stock is based on the weighted average
number of shares outstanding during the periods presented.
Fully diluted earnings (loss) per share is not presented as
its effect is anti-dilutive.
Cash Flow Statement - For purposes of the statements of cash
flows, the Company considers all highly liquid debt
investments purchased with a maturity of three months or less
to be cash equivalents.
Restatement of Financial Statements - The financial statements
for all periods presented have been restated to reflect a one
for twenty reverse stock split by Parent during March, 1995
and for a one for two reverse stock split by Parent during
November, 1993.
Reclassification of Financial Statements - The financial
statements for periods prior to December 31, 1995 have been
reclassified to conform to the titles and headings used in the
December 31, 1996 financial statements.
Accounting Estimates - 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 property and equipment, software development cost and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of
revenues and expenses during the reported period. Actual results
could differ from those estimated.
<PAGE> 36
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment - at
cost, less accumulated depreciation as of December 31:
1996 1995
______________________
Furniture and office equipment 6,373 5,873
Less: accumulated depreciation (2,485) (1,337)
______________________
Total $ 3,888 $ 4,536
______________________
Depreciation expense charged to operations was $1,148, $1,136
and $176 for the periods ended December 31, 1996, 1995 and
1994.
NOTE 3 - OIL AND GAS PROPERTIES
Upon placing oil and gas properties and productive equipment
in use, the unit-of-production method, based upon estimates of
proven developed and undeveloped reserves, is used in the
computation of depreciation and depletion. For the year ended
December 31, 1996 and 1995, the Company recorded depletion of
$9,880 and $12,866, respectively.
The estimates of oil and gas reserves used by the Company were
produced internally by management and others who were not
independent with respect to the Company. The ultimate
realization of the Company's investment in oil and gas
properties is dependent upon the Company being able to
economically recover a minimum quantity of its reserves. The
financial statements do not include any adjustments related to
the uncertainty that the Company might not recover its
estimated reserves.
During 1996, the Company's drilling activities included the
drilling of one well for which the Company is still obtaining
permits. The Company also attempted to bring three existing
wells back into production. The attempt was unsuccessful and
the Company incurred expenses of $80,510.
During the year ended December 31, 1995, the Company included
$12,532 in oil and gas properties for an initial investment in
a new oil lease. The lease agreement provides for the Company
to lease the property for a term of two years for the
production of oil in return for a cash payment of $6,000 and a
15.6% royalty interest in the lease. In January, 1996, the
company finalized the lease agreement. For the years ended
December 31, 1996 and 1995, no depletion was recorded for the
lease because proved reserves were uncertain and production
on the lease had not yet begun.
PAGE
<PAGE> 37
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - OIL AND GAS PROPERTIES [Continued]
During September, 1993 the Company entered into a "farm-out" agreement
with Kenneth L. Mason, individually and KLM Exploration, Inc., a
Kansas corporation (collectively referred to as "KLM"), wherein the Company
will perform drilling and production operations on leases currently
"farmed-out" to KLM from another company. The agreement provided that KLM
would assign its interests in the properties to the Company in return for a
cash payment of $100,000 and a 25% working interest in the location,
carried through the tanks resulting in a net royalty interest, after taking
all other interest holders into account, of 58.5%. KLM would operate the
wells for a fee of $75-$100 per well. The operating contract has no
termination date. KLM's farm-out agreement with the other company terminates
when production activities cease. As of December 31, 1995, the Company
had completed drilling a total of 18 wells all of which are located in a
single oil field in Kansas; 15 wells are part of the Company's three
producing tank batteries and the other three wells were
dryholes. Two dryholes were written-off to expense during 1994 and the third
dryhole was assigned to another company and accounted for as an addition to
leasehold acquisition costs during 1994.
NOTE 4 - RELATED PARTY TRANSACTIONS
During 1996 a shareholder and an officer of the Company
advanced the Company $3,600. Of the $3,600 that was advanced
the Company paid $3,000 during the year leaving a balance of
$600. The advances are non-interest bearing.
During December, 1995 the Company entered into a loan
agreement with an entity related to a shareholder and director
of the Company. The unsecured loan consists of a short term
note payable for $10,000 with an interest rate of 12% per
annum. The note provides for four monthly payments commencing
January 25, 1996 and ending April 25, 1996. The $10,000 plus
interest was paid in full during 1996.
The Company issued 121,250 shares of restricted common stock
valued at $48,500 ($.40 per share) in February, 1995, to
officers, directors and others as compensation for services
rendered.
NOTE 5 - INCOME TAXES
The Company adopted Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes [FASB 109]
during Fiscal 1993. FASB 109 requires the Company to provide
a net deferred tax asset or liability equal to the expected
future tax benefit or expense of temporary reporting
differences between book and tax accounting and any available
operating loss or tax credit carryforwards. At December 31,
1996 and 1995, the total of all deferred tax assets was
$392,956 and $197,164 and the total of the deferred tax
liabilities was $189,772 and $146,585. The amount of and
ultimate realization of the benefits from the deferred tax
assets for income tax purposes is dependent, in part, upon
the tax laws in effect, the Company's future earnings, and
other future events, the effects of which cannot be
<PAGE> 38
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INCOME TAXES [Continued]
determined. Because of the uncertainty surrounding the
realization of the deferred tax assets, the Company has
established a valuation allowance of $203,184 and $50,580 as
of December 31, 1996 and 1995, which has been offset against
the deferred tax assets. The net change (increase) in the
valuation allowance during the years ended December 31, 1996
and 1995, was $(152,604) and $(25,716), respectively.
The Company has available at December 31, 1996, unused tax
operating loss carryforwards of approximately $852,000, which
may be applied against future taxable income and which expire
in various years through 2010.
The components of income tax expense from continuing
operations for the years ended December 31, 1996, 1995 and
1994 consist of the following:
December 31,
_______________________________
1996 1995 1994
_______________________________
Current income tax expense:
Federal $ - $ - $ -
State - - -
_______________________________
Net current tax expense - - -
_______________________________
Deferred tax expense (benefit) arising from:
Excess of tax over financial
accounting depreciation $43,187 $16,863 $80,193
Net operating loss carryforwards (118,017) (42,579) (75,218)
Contribution carryover (37) - -
Excess of financial accounting
over tax compensation - APB 25 (77,737) - -
Valuation allowance 152,604 25,716 (4,975)
______________________________
Net deferred tax expense $ - $ - $ -
______________________________
Deferred income tax expense results primarily from the
reversal of temporary timing differences between tax and
financial statement income.
PAGE
<PAGE> 39
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES [Continued]
A reconciliation of income tax expense at the federal
statutory rate to income tax expense at the Company's
effective rate is as follows:
December 31,
_______________________________
1996 1995 1994
_______________________________
Computed tax at the expected federal
statutory rate $(130,639) $(27,183) $ 4,575
Excess of tax over financial
accounting depreciation (78) 82 (4)
Excess of financial accounting over
tax compensation - APB 25 (10,115) - -
State income taxes, net of federal
income tax benefits (11,527) (2,398) 404
Net operation loss carry forward 4,612 3,783 -
Valuations allowance 147,747 25,716 (4,975)
______________________________
Computed tax at the effective income
tax rates $ - $ - $ -
______________________________
The temporary differences gave rise to the following deferred
tax asset (liability) at December 31, 1996 and 1995:
Year Ended December 31,
_____________________________
1996 1995
________________________
Excess of tax over book accounting
depreciation (189,772) (146,585)
Excess of financial accounting over
tax compensation - APB 25 77,737 -
Contribution carryover 37 -
NOL carryforwards 315,182 197,164
The deferred taxes are reflected in the consolidated balance
sheet as follows:
Year Ended December 31,
_____________________________
1996 1995
________________________
Short term asset (liability) $ 77,737 $ -
Long term asset (liability) $(77,737) $ -
PAGE
<PAGE> 40
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMON STOCK TRANSACTIONS
During August 1996, the Company issued 500,000 units, for cash
at $.70 per unit, which consisted of one share of common stock
and one common stock purchase warrant in a private placement
offering. The purchase warrant is to purchase another share
of common stock at an exercise price of $1.50. Total proceeds
amounted to $350,000. The Company issued 50,000 shares of
common stock for commissions of $35,000 in connection with the
private placement offering.
The Company's officers exercised options of 50,000 shares of
common stock previously granted for $.10 per share. Total
proceeds amounted to $5,000.
On October 1, 1996, the Board of Directors resolved that
120,000 (initial shares) and 155,000 (restricted shares)
unissued shares of common stock be granted upon exercise of
options granted to an officer of the Company under the term of
his employment agreement with the Company. The 120,000
(initial shares) and 155,000 (restricted shares) options have
an exercise price of $.20, vest on September 1, 1996 and
expire on August 31, 1998 [See Note 8].
During November, 1996 the Board of Directors resolved that
150,000 unissued shares of common stock be granted upon
exercise of options, under a stock option plan, be granted to
an officer of the Company under the terms of his employment
agreement with the Company. Of the 150,000 options granted,
50,000 options have an exercise price of $.20, vest on
November 12, 1996 and expire on August 31, 1998. The
remaining 100,000 options have an exercise price of $.70, vest
on November 12, 1996 and expire on August 31, 1998 [See Note
8].
On December 15, 1996 the Board of Directors resolved that
100,000 shares of common stock be reserved for issuance upon
exercise of options granted to four officers of the Company.
The exercise price for the options is $2.00, vest on December
15, 1996 and expire on December 15, 2001.
On December 16, 1996 the Board of Directors resolved that
60,000 shares of common stock be reserved for issuance upon
exercise of options granted to legal counsel for services to
be performed in the amount of $25,000. The exercise price for
the options is $2.00, vest on December 16, 1996, and expire on
December 16, 2001. The cost of the services has been
accounted for as an addition to prepaid expenses and a charge
to additional paid-in capital.
With the new employment agreement the common stock reserved in
May, 1995 for issuance upon exercise of options granted to
certain officers of the Company under their employment
agreements were canceled. During 1996, 50,000 shares of
common stock were issued upon exercise of the options granted
to certain officers from the previous employment agreement.
<PAGE> 41
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- COMMON STOCK TRANSACTIONS [Continued]
The Company issued 121,250 shares of common stock during
February, 1995 to officers, directors and others for services
rendered, valued at $48,500 ($.40 per share).
On March 20, 1995 The company initiated a reverse split of its
outstanding common stock on the basis of one new share issued
for each twenty shares previously issued. Immediately prior
to the reverse split there were 40,097,123 shares outstanding
and 2,110,378 shares were outstanding immediately after. The
$.001 common stock par value was not changed with the reverse
stock split. The financial statements for all periods
presented have been restated to reflect the reverse stock
split. In connection with the acquisition of subsidiary, the
Company previously reverse split its stock during November,
1993 on the basis of one share for each two shares then
outstanding.
During 1994, a total of 374,500 shares of common stock were
issued pursuant to a private placement at $1.00 per share.
Total proceeds amounted to $374,500 and offering costs of
$29,985 were recorded as an offset to capital in excess of par
value.
Stock Options - The Company applies APB Option No. 25 in
accounting for its options granted under the employment
agreements. Compensation of $210,100 and $0 was recorded in 1996
and 1995 respectively. The Corporation has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
The effect on net income from the adoption of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock
Based Compensation" would be the same.
The fair value of each option granted is estimated on the date
granted using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants during
the period ended December 31, 1996 and 1995 risk-free interest
rates of 5.9% and 6.0% expected dividend yields of zero,
expected life of 2 and 3 years, and expected volatility 59%
and 75%.PAGE
<PAGE> 42
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMON STOCK TRANSACTIONS [Continued]
A summary of the status of the options granted under the
Company's stock option plan at December 31, 1996, and 1995,
and changes during the periods then ended is presented in the
table below:
Year Ended Period Ended
December 31, 1996 December 31, 1995
____________________________________________________
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
__________________________ _________________________
Outstanding
at beginning
of period 375,000 $ .19 - $ -
Granted 525,000 .64 375,000 .19
Exercised (50,000) .10 - -
Forfeited - - - -
Canceled (325,000) .20 - -
__________________________ __________________________
Outstanding
at end of
Period 525,000 .64 375,000 .19
__________________________ __________________________
Weighted
average
fair value
of options
granted 525,000 $ .35 375,000 $ 1.30
_________________________ ____________________________
A summary of the status of the options outstanding under the
Company's stock option plan at December 31, 1996 is presented
below:
Options Outstanding Options Exercisable
______________________________________________________________________
Weighted-
Average Weighted Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
______________________________________________________________________
.20 325,000 2 years .20 325,000 .20
.70 100,000 2 years .70 100,000 .70
2.00 100,000 5 years 2.00 100,000 2.00
______________________________________________________________________
525,000 525,000
PAGE
<PAGE> 43
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - CONTINGENCIES
During 1996, the Company filed a lawsuit against an operator of the
wells in the McLouth Field. The Company claims the operator has failed to
service, maintain and operate the wells in a reasonable manner. The
Company is asking for damages in excess of $500,000. The operator has
answered the suit and has asserted a counterclaim for breach of contract and
is also asking for damages in excess of $500,000. There is no guarantee that
the Company will prevail in the suit. Management and their counsel believe
there is a likelihood of a favorable outcome. Consequently, no adjustments
or accruals were made to the financial statements with regards to this
lawsuit.
During 1995, a lawsuit was filed against the Company by the
landowners of one of the Company's three developed oil leases,
generally referred to as the "B" lease. The "B" lease
contains two of the Company's fifteen productive wells.
During the year ended 1995 the Company chose not to produce or
further develop on the "B"
lease until resolution of the lawsuit with the landowners.
The Company has answered the suit, denied the plaintiffs'
claims, and asserted a counterclaim and affirmative defenses.
The Company disputes the plaintiffs' claims and will defend
the case vigorously to protect its interest in the lease.
While there is no guarantee that the Company will prevail in
the suit, management and their counsel believe there is a
likelihood of a favorable outcome. Consequently, no
adjustments or accruals were made to the financial statements
with regards to this lawsuit.
Management is not aware of any pending or threatened claims
against the Company for environmental clean up or
environmental related contingencies and believe there are no
material liabilities that are required to be accrued or
disclosed in connection with the clean up of environmental
hazards related to the Company's operations.
NOTE 8 - COMMITMENTS AND AGREEMENTS
Employment Agreements - During October, 1996 the Company
entered into employment agreements with two of its officers.
The agreement with the president of the Company has a two year
term and provides for a minimum salary of $60,000 per year
during the term of the agreement. The agreement also provides
for commissions of $1.50 per barrel of oil shipped in any
month in excess of 2,000 barrels. Lastly, the agreement
provides for stock options to purchase up to 275,000 shares of
common stock. The options may be exercised at any time after
September 1, 1996. [See Note 6]. The agreement with the
secretary/treasurer of the Company has a two year term and
provides for a minimum salary of $36,000. The
secretary/treasurer also received options to purchase up to
150,000 shares of common stock which may be exercised at any
time after November 12, 1996. [See Note 6].
PAGE
<PAGE> 44
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND AGREEMENTS [Continued]
Rental Agreements - The Company has entered into various
office space and equipment rental agreements in the normal
course of its business. The agreements are on a month to
month basis and, accordingly, are accounted for on a monthly
basis. The minimum amounts presently being paid on those
agreements is approximately $2,400 per month.
NOTE 9 - RESTRICTED CASH
The Company has a $10,000 certificate of deposit with an
interest rate of 4.60% annually. The certificate of deposit
is renewed annually and is pledged as collateral for a
performance bond related to the Company's oil and gas
operations.
NOTE 10 - SIGNIFICANT CUSTOMERS
The Company sells substantially all of its oil production to
one purchaser because it is able to negotiate more favorable
terms with the purchaser. If the purchaser stopped buying
products from the Company, the Company would be forced to
contract with other purchasers available in the areas where
the oil is produced. The effect of a purchaser pulling out
would at least put a temporary downward pressure on prices in
the area but it is not currently possible for the Company to
estimate how the Company would be affected. Management
believes that it's oil is a commodity that is readily
marketable and that the marketing method it follows is typical
of similar companies in the industry.
NOTE 11 - SUBSEQUENT EVENTS
During the first quarter of 1997 the Company purchased a lease
consisting of 580 acres on the Hittle field.
During January 1997, the president and the secretary/treasurer
of the Company exercised 425,000 options in connection with
their employment agreements. The two officers gave notes to
the Company in the amount of $55,000 and $80,000.
Subsequent to year end the Company made an offering to the
holders of the Company's currently outstanding common stock
purchase warrants who exercised their existing warrants by
February 21, 1997, to receive one half of a new common stock
purchase warrant for every existing warrant exercised. The
offering was exempt from registration with the Securities and
Exchange Commission under Rule 506 of Regulation D as
promulgated under the Securities Act of 1933, as amended. The
existing warrants were exercisable into one share of common
stock at an exercise price of $1.50 per share. Each new
warrant is exercisable into one share of common stock at an
exercise price of $2.00 per share. Of the 500,000 warrants
exercised, two holders of the common stock purchase warrants
did not exercise 50,000 warrants. The Company received total
proceeds of $750,000.
<PAGE> 45
UPLAND ENERGY CORPORATION AND SUBSIDIARY
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES
Generally Accepted Accounting Principles require disclosure, on
an unaudited basis, of reserve and production quantities and
changes of the quantities on an annual basis as well as
calculation of possible impairment and other costs of the
properties. This disclosure was not included in the financial
statements as of December 31, 1993 since all wells were in
progress at December 31, 1993, there was no production during
1993 and reserve information was uncertain at that time.
Oil and Gas Reserves - Users of this information should be aware
that the process of estimating oil and gas reserves is very
complex, requiring significant subjective decisions in the
evaluation of available geological, engineering, and economic
data for each reservoir. The data for a given reservoir may
change substantially over time as a result of, among other
things, additional development activity, production history and
viability of production under varying economic conditions;
consequently, material revisions to existing reserve estimates
may occur in the future. Although every reasonable effort is
made to ensure that the reserve estimates reported represent the
most accurate assessment possible, the significance of the
subjective decisions required, and variances in available data
for various reservoirs make these estimates generally less
precise than other estimates presented in connection with
financial statement disclosure.
Proved reserves are estimated quantities of natural gas, crude
oil and condensate, and natural gas liquids which geological and
engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved developed reserves are proved reserves that can be
expected to be recovered through existing wells with existing
equipment and operating methods.
The oil and gas reserve information presented in the following
tables as of December 31, 1995, is based upon reports of
petroleum engineers and management's estimate. The engineers and
others who assisted and produced the reserve reports were not
independent with respect to the Company. All reserves presented
are proved reserves, all of which are located within the United
States, and are defined as estimated quantities which geological
and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Such reserves are estimates
only and should not be construed as exact amounts. The Company
does not have proved reserves applicable to long term supply
agreements with foreign governments.
PAGE
<PAGE> 46
UPLAND ENERGY CORPORATION AND SUBSIDIARY
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Changes in Net Proved Reserves
[Volumes in Thousands]
1996 1995
______________________________
Oil Gas Oil Gas
(MBbls) (MMcf)(MBbls)(MMcf)
_____________________________
Estimated quantity at beginning
of period 563 - 356 -
Revisions of previous estimates (3) - 219 -
Discoveries and extensions - - - -
Purchase of reserves in place - - - -
Production (15) - (12) -
Sale/disposal of reserves in place - - - -
____________________________
Estimated quantity at end of
period 545 - 563 -
_____________________________
Proved developed reserves:
Beginning of period 563 - 253 -
End of period 545 - 563 -
_____________________________
Company's proportional interest
in reserves of investees accounted
for by the equity method - end
of year - - - -
______________________________
The production and sale of a significant portion of the proved reserves is not
guaranteed and is subject to unpredictable economic factors and the Company
being able to maintain a contracted operator to operate the wells and maintain
purchase agreements with the end purchasers of the production. The Company
could also forfeit its rights to some of its reserves if minimum production is
not maintained.
PAGE
<PAGE> 47
UPLAND ENERGY CORPORATION AND SUBSIDIARY
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Costs Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities
December 31,
_____________________
1996 1995
_________________
[In Thousand of Dollars]
Acquisition of properties:
Undevelopment leases $ 93 $ 13
Proved producing leases - -
Exploration costs - -
Development costs - 19
_______ _______
Total Additions to Oil and Gas
Properties $ 93 $ 32
_______ _______
Company's share of equity method
investees' costs of property
acquisition, exploration and
development costs $ - $ -
_______ _______
Capitalized Costs Relating to Oil and Gas Producing Activities
Capitalized costs as of the end of the
period: [In thousands of dollars]
Proved properties $ 801 $ 708
Unproved properties - -
_______ _______
Total Capitalized Costs 801 708
Less: accumulated depreciation and
depletion (55) (45)
_______ _______
Net Capitalized Costs $ 746 $ 663
_______ _______
Company's share of equity method
investees' net capitalized costs $ - $ -
_______ _______
PAGE
<PAGE> 48
UPLAND ENERGY CORPORATION AND SUBSIDIARY
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Results of Operations for Producing Activities
December 31,
_____________________
1996 1995
________________
[In Thousand of Dollars]
Oil and gas sales $ 177 $ 177
Production costs (71) (74)
Exploration costs - -
Depreciation and depletion (10) (13)
_______ _______
Income (loss) from operations 96 90
Income tax benefit (expense) (33) (31)
_______ _______
Results of Operations from Producing
Activities [Excluding Corporate Overhead
and Interest Costs] 63 59
_______ _______
Company's share of equity method investees'
results of operations for producing activities - -
_______ _______
Standard Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
The information that follows has been developed pursuant to
procedures prescribed by SFAS No. 69, and utilizes reserve and
production data estimated by management and independent petroleum
engineers. The information may be useful for certain comparison
purposes, but should not be solely relied upon in evaluating the
Company or its performance. Moreover, the projections should not
be construed as realistic estimates of future cash flows, nor
should the standardized measure be viewed as representing current
value.
The future cash flows are based on sales, prices, costs, and
statutory income tax rates in existence at the dates of the
projections. Material revisions to reserve estimates may occur in
the future, development and production of the oil and gas reserves
may not occur in the periods assumed, and actual prices realized
and actual costs incurred are expected to vary significantly from
those used. Management does not rely upon the information that
follows in making investment and operating decisions; rather,
those decisions are based upon a wide range of factors, including
estimates of probable reserves as well as proved reserves, and
different price and cost assumptions than those reflected herein.
PAGE
<PAGE> 49
UPLAND ENERGY CORPORATION AND SUBSIDIARY
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Standard Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
The following tables set forth the standardized measure of
discounted future net cash flows from projected production of the
Company's proved oil and gas reserves:
December 31,
_____________________
1996 1995
________________
[In Thousand of Dollars]
Future reserves $8,248 $4,915
Future production and development
costs 553 641
Future income tax expenses 2,537 1,363
_______ _______
Future net cash flows 5,158 2,911
Discount to present value at 10 percent 2,578 1,196
_______ _______
Standardized measure of discounted
future net cash flows $2,580 $1,715
_______ _______
Company's share of equity method
investees' standardized measure of
discounted future net cash flows $ - $ -
_______ _______
* Future net cash flows were computed using year-end prices and
cost and year-end statutory tax rates that relate to existing
proved oil and gas reserves in which the Company has general
interests. The Company has no long-term supply contracts with
governments for which the Company serves as the producer of the
reserves.
PAGE
<PAGE> 50
UPLAND ENERGY CORPORATION AND SUBSIDIARY
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Standard Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
The following table sets forth the changes in standardized
measure of discounted future net cash flows:
December 31,
_____________________
1996 1995
________________
[In Thousand of Dollars]
Balance at beginning of period $ 1,715 $ 1,819
Sales of oil and gas net of production
costs (106) (103)
Changes in prices and costs - -
Revision of previous quantity estimates 2,145 21
Acquisition of reserves in place - -
Extensions, discoveries and improved
recoveries, less related costs - -
Development costs incurred
during the period - -
Net change in income taxes (1,174) (22)
Accretion of discount - -
Other - -
_______ _______
Balance at End of Period $ 2,580 $ 1,715
_______ _______
The increase in previous quantity estimates was a result of management
adjusting their estimates of recoverable reserves due to economic factors and
potential development projects. The increase in future income tax expense is
a result of a reduction in Management's estimate of total future development
costs which was a tax deduction in prior year estimates and also the increase
in estimated future revenues projected in the current estimates.
PAGE
<PAGE> 51
ACCOUNTANT'S DISCLAIMER OF OPINION
Board of Directors
UPLAND ENERGY CORPORATION AND SUBSIDIARY
Salt Lake City, Utah
The accompanying condensed consolidated balance sheet of Upland Energy
Corporation and Subsidiary as of March 31, 1997, the related statements of
operations for the three months ended March 31, 1997 and 1996 and the related
statements of cash flows for the three months ended March 31, 1997 and 1996
were not audited by us and, accordingly, we do not express an opinion on them.
June 20, 1997
Salt Lake City, Utah
PAGE
<PAGE> 52
UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1997 1996
_____________ _____________
CURRENT ASSETS:
Cash $ 758,786 $ 105,472
Oil revenue receivable 2,855 8,745
Interest receivable 1,913 -
Prepaid assets 1,000 26,778
Short term deferred tax asset - 77,737
_____________ _____________
Total Current Assets 764,554 218,732
PROPERTY AND EQUIPMENT, net 34,069 3,888
OIL AND GAS PROPERTIES, net 747,875 746,134
RESTRICTED CASH 10,000 10,000
_____________ _____________
$1,556,498 $ 978,754
_____________ _____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term notes payable
- related party $ 800 $800
Accounts payable and
accrued liabilities 118,357 13,736
_____________ _____________
Total Current Liabilities 119,157 14,536
LONG TERM DEFERRED TAX LIABILITY - 77,737
_____________ _____________
STOCKHOLDERS' EQUITY:
Common stock 3,635 2,710
Capital in excess of par value 2,217,395 1,358,320
Retained earnings (deficit) (648,689) (474,549)
_____________ _____________
1,572,341 886,481
Less: Note receivable from officers (135,000) -
_____________ _____________
Total Stockholders' Equity $1,437,341 $ 886,481
_____________ _____________
$1,556,498 $ 978,754
_____________ _____________
NOTE: The balance sheet at December 31, 1996 has been taken from the audited
financial statements at that date and condensed.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 53
UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31,
_______________________________
1997 1996
___________ ___________
REVENUE:
Oil sales $ 20,051 $ 42,648
___________ ___________
Total Revenue 20,051 42,648
___________ ___________
EXPENSES:
Production expense 11,273 11,726
Depreciation, depletion and
amortization 2,723 2,847
General and administrative costs 173,667 14,057
Professional fees 9,703 430
Travel expense 2,705 1,378
___________ ___________
Total Expenses 200,071 30,438
___________ ___________
INCOME (LOSS) FROM OPERATIONS (180,020) 12,210
OTHER INCOME (EXPENSE):
Interest Income 5,880 164
Interest expense - (351)
___________ ___________
Total Other Income (Expense) 5,880 (187)
___________ ___________
INCOME (LOSS) BEFORE INCOME TAXES (174,140) 12,023
CURRENT TAX EXPENSE - -
DEFERRED TAX EXPENSE - -
___________ ___________
NET INCOME (LOSS) $(174,140) $ 12,023
___________ ___________
EARNING (LOSS) PER COMMON SHARE $ (.05) $ .01
___________ ___________
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,284,545 2,110,378
____________ ___________
The accompanying notes are an integral part of these consolidated
financial statements.
PAGE
<PAGE> 54
UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31,
_______________________________
1997 1996
___________ ___________
Cash Flows from Operating Activities:
Net income (loss) $(174,140) $ 12,023
___________ ___________
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation, depletion and
amortization 2,723 2,847
Change in assets and liabilities:
(Increase) decrease in receivables 5,890 (5,464)
(Increase) decrease in interest
receivable (1,913) -
(Increase) decrease in prepaid
assets 778 1,167
Increase (decrease) in notes payable - (2,300)
Increase (decrease) in accounts
payable 104,622 (13,633)
Increase (decrease) in accrued
liabilities - (79)
___________ ___________
Total Adjustments 112,100 (17,462)
___________ ___________
Net Cash Provided (Used) by
Operating Activities (62,040) (5,439)
___________ ___________
Cash Flows from Investing Activities:
Purchase of property and equipment (31,496) -
Purchase of oil and gas properties (3,150) (691)
Purchase of certificate of deposit - (10,000)
___________ ___________
Net Cash (Used) by Investing
Activities (34,646) (10,691)
___________ ___________
Cash Flows from Financing Activities:
Issuance of common stock 750,000 -
Stock offering costs - -
___________ ___________
Net Cash Provided by Financing
Activities 750,000 -
___________ ___________
Net Increase (Decrease) in Cash 653,314 (16,130)
Cash at Beginning of Period 105,472 17,619
___________ ___________
Cash at End of Period $758,786 $ 1,489
___________ ___________
Supplemental Disclosure of Cash Flow Information:
Cash paid during the three months ended March 31, 1997 and 1996
Interest $ - $ 351
Income taxes $ - $ -
[Continued]
<PAGE> 55
UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
Supplemental Disclosure of Non-cash Investing and Financing
Activities:
For the three months ended March 31, 1997
The Company granted 425,000 options to purchase common stock
under employment agreements with officers. The officers
exercised the options and gave notes of $55,000 and $80,000
to the Company for consideration.
During 1996, the Company granted 60,000 options to legal
counsel for services to be performed during 1997 in the
amount of $25,000. The cost of the service was accounted
for as a prepaid asset at December, 1996, and was reversed
as a charge to additional paid-in capital during 1997. The
legal services are accounted for as a non-cash offering
expense which is offset against the proceeds from the stock
offering.
For the three months ended March 31, 1996
None
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 56
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair
presentation have been included. It is suggested that these
unaudited condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto
included in the December 31, 1996 audited financial statements
for Upland Energy Corporation. The result of operations for
the periods ended March 31, 1997 and 1996 are not necessarily
indicative of the operating results for the full year.
The condensed consolidated financial statements include the
accounts of Upland Energy Corporation ("Parent") and it's
wholly-owned subsidiary GS&C, Inc. ("Subsidiary").
Recently Enacted Accounting Standards - In February 1997, SFAS
Nos. 128, "Earnings per Share" and 129, "Disclosures of
Information about Capital Structure" were issued. SFAS No.
128 changes the computation, presentation, and disclosure
requirements of earnings per share (EPS) for entities with
publicly held common stock. SFAS No. 129 addresses standards
for disclosing information about an entity's capital
structure. Although such statements are not affective until
December 31, 1997, had such statements been adopted for the
three months ended March 31, 1997, the effect would not be
significant.
NOTE 2 - NOTES RECEIVABLE
During January 1997, the president and the secretary/treasurer
of the Company exercised 425,000 options in connection with
their employment agreements. The two officers gave notes to
the Company in the amount of $55,000 and $80,000. The Company
has accrued interest of $1,913 for the three months ended
March 31, 1997. (See Note 7)
NOTE 3 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment - at
cost, less accumulated depreciation as of December 31:
March 31, December 31,
1997 1996
___________ ___________
Furniture and office equipment 8,591 6,373
Vehicle 29,278 -
Less: accumulated depreciation (3,800) (2,485)
___________ ___________
Total $ 34,069 $ 3,888
___________ ___________
Depreciation expense charged to operations was $1,315 and
$1,148 for the periods ended March 31, 1997 and December 31,
1996. Depreciation expense for the three months ended March
31, 1996 was $284.
<PAGE> 57
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - OIL AND GAS PROPERTIES
Upon placing oil and gas properties and productive equipment
in use, the unit-of-production method, based upon estimates of
proven developed and undeveloped reserves, is used in the
computation of depreciation and depletion. For the period
ended March 31, 1997 and year ended December 31, 1996, the
Company recorded depletion of $1,408 and $9,880, respectively.
Depletion for the three months ended March 31, 1996 was
$2,563.
NOTE 5 - RELATED PARTY TRANSACTIONS
During January 1997, the president and the secretary/treasurer
of the Company exercised 425,000 options in connection with
their employment agreements. The two officers gave notes to
the Company in the amount of $55,000 and $80,000. The Company
has accrued interest of $1,913 for the three months ended
March 31, 1997. (See Note 7)
During 1996 a shareholder and an officer of the Company
advanced the Company $3,600. Of the $3,600 that was advanced
the Company paid $3,000 during the year leaving a balance of
$600. The advances are non-interest bearing.
During December, 1995 the Company entered into a loan
agreement with an entity related to a shareholder and director
of the Company. The unsecured loan consists of a short term
note payable for $10,000 with an interest rate of 12% per
annum. The note provides for four monthly payments commencing
January 25, 1996 and ending April 25, 1996. The $10,000 plus
interest was paid in full during 1996.
NOTE 6 - INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 Accounting
for Income Taxes [FASB 109]. FASB 109 requires the Company to
provide a net deferred tax asset or liability equal to the
expected future tax benefit or expense of temporary reporting
differences between book and tax accounting and any available
operating loss or tax credit carryforwards. At March 31,
1997, net deferred tax assets, before considering the
valuation allowance, totaled approximately $189,000. The
amount of and ultimate realization of the benefits from the
deferred tax assets for income tax purposes is dependent, in
part, upon the tax laws then in effect, the Company's future
earnings, and other future events, the effects of which cannot
presently be determined. Because of the uncertainty
surrounding the realization of the loss carryforwards the
Company has established a valuation allowance for all net
deferred tax assets. Accordingly, because of recurring losses
and the valuation allowance, there is no provision for income
taxes in the accompanying statements of operations. The net
change in the valuation allowance was approximately $14,000
for the three months ended March 31, 1997. The Company has
available at March 31, 1997, unused operating loss
carryforwards of approximately $1,000,000, which may be
applied against future taxable income and which expire in
various years through 2011.
<PAGE> 58
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK TRANSACTIONS
During January 1997, the president of the Company exercised
options for a total of 275,000 shares of common stock at $.20
per share. The options had previously been granted during
1996 in connection with an employment agreement. The Company
received a note receivable as consideration for the exercise
price of the options. The $55,000 note provides for interest
at 8.5% per annum. The note also provides for annual
installments of principal and interest through January, 2001.
During January 1997, the secretary/treasurer of the Company
exercised options for a total of 150,000 shares of common
stock. The first 50,000 shares were exercised at $.20 per
share and the remaining 100,000 shares were exercised at $.70
per share. The options had previously been granted during
1996 in connection with an employment agreement. The Company
received a note receivable as consideration for the exercise
price of the options. The $80,000 note provides for interest
at 8.5% per annum. The note also provides for annual
installments of principal and interest through January, 2001.
During February, 1997, the Company made an offering to the
holders of the Company's currently outstanding common stock
purchase warrants who exercised their existing warrants by
February 21, 1997, to receive one half of a new common stock
purchase warrant for every existing warrant exercised. The
offering was exempt from registration with the Securities and
Exchange Commission under Rule 506 of Regulation D as
promulgated under the Securities Act of 1933, as amended. The
existing warrants were exercisable into one share of common
stock at an exercise price of $1.50 per share. Each new
warrant is exercisable into one share of common stock at an
exercise price of $2.00 per share. Of the 500,000 warrants
exercised, two holders of the common stock purchase warrants
did not exercise 50,000 warrants. The Company received total
proceeds of $750,000 net of offering costs of $25,000.
During August 1996, the Company issued 500,000 units, for cash
at $.70 per unit, which consisted of one share of common stock
and one common stock purchase warrant in a private placement
offering. The purchase warrant is to purchase another share
of common stock at an exercise price of $1.50. Total proceeds
amounted to $350,000. The Company issued 50,000 shares of
common stock for commissions of $35,000 in connection with the
private placement offering.
During November 1996 the Company's officers exercised options
of 50,000 shares of common stock previously granted for $.10
per share. Total proceeds amounted to $5,000. With the new
employment agreement the common stock reserved in May, 1995
for issuance upon exercise of options granted to certain
officers of the Company under their employment agreements were
canceled.
PAGE
<PAGE> 59
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK TRANSACTIONS [Continued]
On December 15, 1996 the Board of Directors resolved that
100,000 shares of common stock be reserved for issuance upon
exercise of options granted to four officers of the Company.
The exercise price for the options is $2.00, vest on December
15, 1996 and expire on December 15, 2001.
On December 16, 1996 the Board of Directors resolved that
60,000 shares of common stock be reserved for issuance upon
exercise of options granted to legal counsel for services to
be performed in the amount of $25,000. The exercise price for
the options is $2.00, vest on December 16, 1996, and expire on
December 16, 2001. The cost of the services has been
accounted for as an addition to prepaid expenses and a charge
to additional paid-in capital. The prepaid expense reversed
during 1997 and was offset against additional paid-in capital
as a stock offering expense.
Stock Options - The Company applies APB Option No. 25 in
accounting for its options granted under the employment
agreements. Compensation of $0 and $210,100 was recorded as
of March 31, 1997 and December 31, 1996. The Corporation has
adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation." The effect on net income from the
adoption of Statement of Financial Accounting Standards No.
123 "Accounting for Stock Based Compensation" would be the
same.
NOTE 8 - CONTINGENCIES
During 1996, the Company filed a lawsuit against an operator of the
wells in the McLouth Field. The Company claims the operator has failed to
service, maintain and operate the wells in a reasonable manner. The
Company is asking for damages in excess of $500,000. The operator has
answered the suit and has asserted a counterclaim for breach of contract and
is also asking for damages in excess of $500,000. There is no guarantee that
the Company will prevail in the suit. Management and their counsel believe
there is a likelihood of a favorable outcome. Consequently, no adjustments
or accruals were made to the financial statements with regards to this
lawsuit.
Consequently, no adjustments or accruals were made to the
financial statements with regards to this lawsuit.
During 1995, a lawsuit was filed against the Company by the
landowners of one of the Company's three developed oil leases,
generally referred to as the "B" lease. The "B" lease
contains two of the Company's fifteen productive wells.
During the year ended 1995 the Company chose not to produce or
further develop on the "B" lease until resolution of the lawsuit
with the landowners.
<PAGE> 60
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company has answered the suit, denied the plaintiffs'
claims, and asserted a counterclaim and affirmative defenses.
The Company disputes the plaintiffs' claims and will defend
the case vigorously to protect its interest in the lease.
While there is no guarantee that the Company will prevail in
the suit, management and their counsel believe there is a
likelihood of a favorable outcome. Consequently, no
adjustments or accruals were made to the financial statements
with regards to this lawsuit.
Management is not aware of any pending or threatened claims
against the Company for environmental clean up or
environmental related contingencies and believe there are no
material liabilities that are required to be accrued or
disclosed in connection with the clean up of environmental
hazards related to the Company's operations.
NOTE 9 - COMMITMENTS AND AGREEMENTS
Employment Agreements - During October, 1996 the Company
entered into employment agreements with two of its officers.
The agreement with the president of the Company has a two year
term and provides for a minimum salary of $60,000 per year
during the term of the agreement. The agreement also provides
for commissions of $1.50 per barrel of oil shipped in any
month in excess of 2,000 barrels. Lastly, the agreement
provides for stock options to purchase up to 275,000 shares of
common stock. The options may be exercised at any time after
September 1, 1996. [See Note 7]. The agreement with the
secretary/treasurer of the Company has a two year term and
provides for a minimum salary of $36,000. The
secretary/treasurer also received options to purchase up to
150,000 shares of common stock which may be exercised at any
time after November 12, 1996. [See Note 7].
Rental Agreements - The Company has entered into various
office space and equipment rental agreements in the normal
course of its business. The agreements are on a month to
month basis and, accordingly, are accounted for on a monthly
basis. The minimum amounts presently being paid on those
agreements is approximately $2,400 per month.
NOTE 10 - RESTRICTED CASH
The Company has a $10,000 certificate of deposit with an
interest rate of 4.60% annually. The certificate of deposit
is renewed annually and is pledged as collateral for a
performance bond related to the Company's oil and gas
operations.
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to March 31, 1997 the Company agreed to advance
funds to cover the payroll taxes related to the exercise of
options by officers of the Company. The officers will execute
notes payable to the Company for the advances which will be
accounted for as receivables from officers.
<PAGE> 61
PART III
ITEM 1. INDEX TO EXHIBITS
Copies of the following documents are included as exhibits to this Form
10-SB pursuant to item 601 of regulation S-B.
SEC
Exhibit Reference
No. No. Title of Document
- ------- --------- -----------------
1 2 Exchange Agreement by and between GSC and the Company
2 3 Articles of Incorporation of the Company and related
Amendments
3 3 Bylaws of the Company
4 4 Specimen Stock Certificate
5 4 Article IV of the Articles of Incorporation (See Exhibit
No. 3)
6 4 Form of Warrant Agreement ($1.50 Exercise Price)
7 4 Form of Warrant Agreement ($2.00 Exercise Price)
8 10 Farmout Agreement between Williams Natural Gas Company
And KLM Exploration, Inc., dated August 28, 1992
9 10 Amendment to Farmout Agreement between Williams Natural
Gas Company and KLM Exploration, Inc.
10 10 Operating Agreement between Kenneth L. Mason, KLM
Exploration, Inc. and GSC, dated November 10, 1993
11 10 Employment and Option Agreements between the Company and
Felix Ascanio, dated October 1, and September 1, 1996,
respectively
12 10 Employment Agreement between the Company and John Hobbs,
Dated November 1, 1996
13 10 Option Agreement between the Company and John Hobbs, dated
November 1, 1996
14 10 1996 Stock Option Plan and related amendments
15 10 Form of Directors Stock Option
16 10 Promissory Notes related to exercise of options
17 22 Schedule of Subsidiary of the Registrant
18 17 Financial Data Schedule
19 10 Addendum to Stock Option Agreement between the Company
and
Felix Ascanio, effective May 27, 1997
PAGE
<PAGE> 62
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunder duly authorized.
UPLAND ENERGY CORPORATION
By:/s/ Felix Ascanio, President
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be signed on its behalf by
the undersigned in the capacities and on the dates stated.
Signature Title Date
- --------- ----- ----
/s/Felix Ascanio President, Director November 4,
1997
/s/John W. Hobbs Secretary/Treasurer, Director November 4,
1997
/s/Lee Jackson Director November 4, 1997