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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
Commission File Number: 0-22497
UPLAND ENERGY CORPORATION
-----------------------------------------------
(Exact name of small business issuer as specified 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)
(801) 537-5010
- -------------------------------
(Issuer telephone number)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ] Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,695,378 shares of its
$0.001 par value common stock as of November 13, 1997.
Transitional Small Business Disclosure Format (check one) Yes [ ] No
[X]
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1997 1996
_____________ _____________
CURRENT ASSETS:
Cash $ 211,173 $ 105,472
Oil revenue receivable 10,111 8,745
Interest receivable 7,650 -
Prepaid assets - 26,778
Short term deferred tax asset - 77,737
_____________ _____________
Total Current Assets 228,934 218,732
PROPERTY AND EQUIPMENT, net 29,376 3,888
OIL AND GAS PROPERTIES, net 1,081,366 746,134
RESTRICTED CASH 10,000 10,000
_____________ _____________
$1,349,676 $ 978,754
_____________ _____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term notes payable
- related party $ 800 $800
Accounts payable and
accrued liabilities 21,681 13,736
_____________ _____________
Total Current Liabilities 22,481 14,536
LONG TERM DEFERRED TAX LIABILITY - 77,737
_____________ _____________
STOCKHOLDERS' EQUITY:
Common stock 3,690 2,710
Capital in excess of par value 2,327,340 1,358,320
Retained earnings (deficit) (758,835) (474,549)
_____________ _____________
1,572,195 886,481
Less: notes receivable
for common stock (245,000) -
_____________ _____________
Total Stockholders' Equity 1,327,195 886,481
_____________ _____________
$1,349,676 $ 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.
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
____________________________ ____________________
1997 1996 1997 1996
__________ ________ __________ _________
REVENUE:
Oil sales $ 31,537 $ 40,619 $80,632 $130,894
__________ _________ _________ _________
Total Revenue 31,537 40,619 80,632 130,894
__________ _________ _________ _________
EXPENSES:
Production expense 23,423 20,588 47,433 60,165
Depreciation, depletion and
amortization 7,129 2,447 16,105 8,612
General and
administrative costs 38,741 67,407 255,868 110,250
Professional fees 6,224 6,365 50,022 21,235
Travel expense 9,754 6,665 18,209 15,714
__________ _________ _________ _________
Total Expenses 85,271 103,472 387,637 215,976
__________ ________ __________ _________
INCOME (LOSS) FROM OPERATIONS (53,734) (62,853) (307,005) (85,082)
OTHER INCOME (EXPENSE):
Interest Income 6,440 576 22,719 1,256
Interest expense - - - (394)
__________ _________ _________ _________
Total Other Income (Expense) 6,440 576 22,719 862
__________ ________ _________ _________
INCOME (LOSS) BEFORE
INCOME TAXES (47,294) (62,277) (284,286) (84,220)
CURRENT TAX EXPENSE - - - -
DEFERRED TAX EXPENSE - - - -
__________ _________ ________ _________
NET INCOME (LOSS) $(47,294) $(62,277) $(284,286) $(84,220)
__________ _________ ________ _________
EARNINGS (LOSS) PER
COMMON SHARE $ (.01) $ (.03) $ (.08) $(.04)
__________ ________ __________ _________
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,685,378 2,463,101 3,553,235 2,195,963
__________ ________ __________ _________
The accompanying notes are an integral part of these consolidated financial
statements.
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
_______________________________
1997 1996
___________ ___________
Cash Flows from Operating Activities:
Net income (loss) $(284,286) $ (84,220)
___________ ___________
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation, depletion and amortization 16,105 8,612
Change in assets and liabilities:
(Increase) decrease in receivables (1,365) (34)
(Increase) decrease in
interest receivable (7,650) -
(Increase) decrease in prepaid assets 26,778 3,500
Increase (decrease) in notes payable - (9,200)
Increase (decrease) in accounts payable 7,946 (13,633)
Increase (decrease) in accrued liabilities - (79)
___________ ___________
Total Adjustments 41,814 (10,834)
___________ ___________
Net Cash Provided (Used) by
Operating Activities (242,472) (95,054)
___________ ___________
Cash Flows from Investing Activities:
Purchase of property and equipment (31,980) -
Additions and improvements to
oil and gas properties (344,847) (47,634)
Purchase of certificate of deposit - (10,000)
___________ ___________
Net Cash (Used) by
Investing Activities (376,827) (57,634)
___________ ___________
Cash Flows from Financing Activities:
Issuance of common stock 725,000 350,001
Stock offering costs - -
___________ ___________
Net Cash Provided by
Financing Activities 725,000 350,001
___________ ___________
Net Increase (Decrease) in Cash 105,701 197,313
Cash at Beginning of Period 105,472 17,619
___________ ___________
Cash at End of Period $211,173 $ 214,932
___________ ___________
[Continued]
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
For the Nine Months Ended
September 30,
_______________________________
1997 1996
___________ ___________
Supplemental Disclosure of Cash Flow Information:
Cash paid during the nine months
ended September 30, 1997 and 1996
Interest $ - $ -
Income taxes $ - $ -
Supplemental Disclosure of Non-cash Investing and Financing
Activities:
For the nine months ended September 30, 1997
The Company granted options to purchase 425,000 shares of
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 options for the purchase of
60,000 shares of common stock to legal counsel for services
to be performed during 1997 in the amount of $25,000. The
cost of the services was accounted for as a prepaid asset at
December, 1996. During 1997, the prepaid asset was reversed
and the legal services were accounted for as a non-cash
offering expense which is offset against the proceeds from
the stock offering. Options for 55,000 shares of common
stock were exercised during the quarter ended September 30,
1997. The Company received notes of $110,000 for
consideration.
For the nine months ended September 30, 1996
None
The accompanying notes are an integral part of these consolidated financial
statements.
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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 September 30, 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
nine months ended September 30, 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 $7,650 on the notes for the nine
months ended September 30, 1997. [See Note 7] The notes have
been accounted for as a reduction to stockholders' equity.
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment - at
cost, less accumulated depreciation as of September 30, 1997
and December 31, 1996:
September 30, December 31,
1997 1996
______________________
Furniture and office equipment 9,076 6,373
Vehicle 29,278 -
Less: accumulated depreciation (8,978) (2,485)
______________________
Total $ 29,376 $ 3,888
______________________
Depreciation expense charged to operations was $6,493 and $852
for the nine month periods ended September 30, 1997 and
September 30, 1996.
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 September 30, 1997 and year ended December 31, 1996, the
Company recorded depletion of $9,612 and $9,880, respectively.
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 $7,650 to the notes for the nine
months ended September 30, 1997. [See Note 7]
During the quarter ended September 30, 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
executed notes payable in the amount of $84,376 at 8% interest
and $29,449 at 8.5% interest to the Company for the advances
which will be accounted for as receivables from officers.
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.
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - RELATED PARTY TRANSACTIONS (Continued)
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 September 30,
1997, net deferred tax assets, before considering the
valuation allowance, totaled approximately $374,000. 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 $171,000
for the nine months ended September 30, 1997. The Company has
available at September 30, 1997, unused operating loss
carryforwards of approximately $1,300,000, which may be
applied against future taxable income and which expire in
various years through 2011.
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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.
The note has been classified as a reduction of stockholders'
equity on the balance sheet.
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.
The note has been classified as a reduction to stockholders'
equity on the balance sheet.
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.
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK TRANSACTIONS (Continued)
During November 1996 the Company's officers exercised options
of 50,000 shares of common stock previously granted for $0.10
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.
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. Options for 55,000 shares of
common stock were exercised during the quarter ended September
30, 1997. The Company received notes receivable as
consideration for the exercise price of the options. The
notes provides for interest at 8.5% per annum. The notes also
provides for annual installments of principal and interest
over a five year period. The notes have been classified as a
reduction to stockholders' equity on the balance sheet
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 September 30, 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.
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 asserted a counterclaim
against the Company for breech of contract alleging 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 these lawsuits.
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 filed a motion for summary judgement. The motion
for summary judgement was denied. The Company presently plans
to appeal the denial for summary judgement. 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.
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UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, which was
subsequently raised to $48,000. 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 September 30, 1997, options to purchase
5,000 shares of common stock were exercised for total
proceeds of $10,000.
During October, 1997, the Court ruled against the Company and ordered the
termination of the Company's Edmond B Oil and Gas Lease. Management believes
the court erred and intends to appeal the decision. Management further
believes there is a likelihood that the Company will prevail on appeal. The
Company intends, regardless of the outcome of any litigation on the Edmond B
Lease, to focus its efforts on the Hittle Field until sufficient capital is
available to focus on both fields. None of the Company's revenue during 1997
or 1996 was derived from the Edmond B Lease. Consequently, no accrual for
loss contingency has been made for the Edmond B lease as management believes
the outcome will not have a material impact on the Company's net worth or
future operating results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
- ---------
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.
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.
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
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<PAGE> 14
provided KLM the right and obligation to develop the McLouth Field. KLM then
entered into the agreements with GSC 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.
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.
The Company has leased approximately 1840 acres on the Hittle Field and
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;
however, at present, the Company has placed only one lateral in the well.
The wells should be completed 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 remains
substantial uncertainty and risk as to the wells economic viability and that
of the Hittle Field.
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.
<PAGE>
<PAGE> 15
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.
Liquidity and Capital Resources
- ---------------------------------------
At September 30, 1997, the Company had assets of $1,349,676 which
represented an increase of $370,922 in assets since December 31, 1996. The
majority of the increase in assets resulted from the Company raising
approximately $750,000 through the exercise of common stock purchase warrants
in February and March of 1997. As a result of the Company raising the
additional capital, at September 30, 1997, the Company had working capital of
$206,453 with only $22,481 in liabilities.
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<PAGE> 16
The Company's working capital is being depleted as the Company continues
its drilling efforts on the Hittle Field. The initial two wells, the LH-1 and
the HH-1, drilled on the Hittle Field still must be completed, although the
major expense associated with the wells, the drilling, has been completed.
Due to weather and equipment availability problems, the Company has been
unable to complete the two wells but does intend to complete both wells based
on initial shows from the wells. Until the wells are complete and additional
geological and scientific study is performed on the Hittle Field, there will
be a substantial amount of uncertainty as to whether the Hittle Field will
ever produce oil in sufficient quantities to be profitable.
Presently, the Company's only producing wells are in the McLouth Field
which is the subject of litigation between the Company and the operator of the
McLouth Field, KLM. Based on the Company's study of the McLouth Fields
geological data and prior showings from the wells on the field, the Company
believes the McLouth Field can produce oil in economic quantities; however,
while the field remains the subject of litigation and disputes between the
Company and KLM, the Company cannot look to the field to produce any
significant revenue for the Company. The Company intends, regardless of the
outcome of any litigation on the McLouth Field, to focus on the Hittle Field
until sufficient capital is available to focus on both fields.
With little revenue presently being produced, the Company will continue
to have to rely on the sale of its securities to fund operations. Based on
the working capital position of the Company, management estimates it can
complete the two wells being drilled on the Hittle Field and potentially drill
two or three other wells, depending on whether laterals which cost more are
used. If at the completion of this drilling, sufficient revenue is not being
produced from the wells to cover overhead and future drilling, the Company
will have to seek additional capital, most likely through the sale of its
securities. Additionally, the Company's drilling and exploration activities
will continue to be delayed until sufficient capital is obtained to hire
additional scientific and engineering personnel.
In October 1997, the Company had an unfavorable ruling on its Edmonds B
lease. Pursuant to a court order, the Company's Edmonds B lease was
terminated. The Company does not feel this lease termination will have a
material affect on future earnings since the Company had already refocused its
operations to the Hittle Field.
Results of Operations
- ---------------------
For the quarter ended September 30, 1997, the Company had revenue of
$31,537 which was down $9,082 from the $40,619 for the same period in 1996.
For the six months ended September 30, 1997, revenue was only $80,632 which
was down $50,262 for the same period in 1996. The decrease in revenue was
partly due to lower oil prices but predominately due to reduce production from
the McLouth Field where all of the revenue was produced. Until a resolution
on the disputes with the operator of the McLouth Field are resolved or the
wells on the Hittle Field are placed on line, it is likely oil revenue will be
decreased.
<PAGE>
<PAGE> 17
Expenses for the quarter ended September 30, 1997, decreased to $85,271
from $103,472 for the same period in 1996. For the quarter ended June 30,
1997, general and administrative expenses decreased to $38,741 from $67,407
for the same period in 1996. The general and administrative expense was
principally composed of salaries for the Company's two officers. The decrease
was due to the Company being hampered in its ability to engage in its drilling
activity due to adverse weather conditions and inability to obtain completion
rigs for its two wells drilled. Travel expenses increased as officers of the
Company attempted to settle certain litigation matters and obtain additional
lease acreage on the Hittle Field. Depreciation, depletion and amortization
all increased due to the increased as the Company attempted to complete its
wells. As a result of the overall decrease in expenses, the Company loss less
money for the quarter than in 1996 losing $53,734 from operations.
For the six months ended September 30, 1997, expenses increased to
$387,637 from $215,976 for the same period in 1996. This increase was
principally due to general and administrative expense which increased to
$255,868 from $110,250 for the same period in 1996. The majority of the
increase in general and administrative expense, approximately $118,000,
related to tax obligations resulting from the exercise of stock options by
officers and directors of the Company.
The Company anticipates continued losses until production is produced on
the Hittle Field. As the wells being drilled on the Hittle Field are not
complete, a substantial amount of uncertainty surrounds the Company's future
revenue producing ability. If wells on the Hittle Field do not produce oil in
economic quantities, the future success of the Company will be questionable.
PART II - OTHER INFORMATION
ITEM 1. 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.
<PAGE>
<PAGE> 18
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. The
Company has not reserved any loss contingencies on this matter due to
management's belief that the Edmonds B lease will have little effect on the
Company's future profitability regardless of the outcome of the lawsuit.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
----------
None
(b) Reports on From 8-K.
--------------------
None
<PAGE>
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UPLAND ENERGY CORPORATION
Dated: January 28, 1997 By:/S/ John W. Hobbs, Principal
Accounting, and Chief Financial
Officer
