<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
----------------
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number 0-22497
----------
Upland Energy Corporation
-----------------------------------
(Exact name of registrant as specified in charter)
Utah 87-0430780
- ------------------------------ -------------------------
State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization
712 Arrowhead Lane, Murray, Utah 84107
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (801) 281-4966
---------------
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
- ------------------ -----------------------------------------
Securities registered pursuant to section 12(g) of the Act:
None
---------------
(Title of class)
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. (1) Yes [ ] No [X] (2) Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ]
<PAGE>
<PAGE> 2
State issuer's revenues for its most recent fiscal year: $163,048
State the aggregate market value of the voting stock held by
nonaffiliates computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of
a specified date within the past 60 days: The Company does not
have an active trading market and it is, therefore, difficult, if
not impossible, to determine the market value of the stock. Based
on the bid price for the Company's Common Stock at April 19, 1999, of $.437
per share, the market value of shares held by nonaffiliates would be
$1,365,119.
As of April 19, 1999, the Registrant had 3,562,192 shares of common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the form 10-KSB (e.g., part I, part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or other information statement; and (3) Any prospectus filed pursuant to
rule 424(b) or (c) under the Securities Act of 1933: NONE
<PAGE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY AND ORGANIZATION
- ------------------------
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 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 performed the
exploration, drilling and operation on the McLouth Field with the Company
providing limited financial support. The Company subsequently became
dissatisfied with the operation of the field by KLM and filed a lawsuit to
remove KLM as operator and for other damages. This lawsuit was subsequently
settled and the Company became the operator of the field.
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.
During 1995 and 1996, the Company focused on the McLouth Field. However,
under the direction of the Company's management, 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. With the settlement of litigation on the McLouth
field, the Company will, if and when funds are available, invest in improving
some of the equipment on the field but does not intend to perform further
exploration on the field until the Hittle Field is further along in its
exploration process.
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. In the
first quarter of 1997, the Company expanded its lease holdings on the Hittle
Field through the acquisition of an additional 880 acres at a cost of $3,800
with a 16.01% royalty interest remaining with the lessors. 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 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 initially showed
promising results; however, the LH-1 well has been shut down due to water
problems and will be reworked and the HH-1 is producing only approximately 30
barrels of oil per day.
In December 1998, the Company hired Pace Exploration to handle all of the
Company's operation and drilling on the Hittle Field. Under the terms of the
Agreement, Pace Exploration received a twenty percent (20%) working interest
in the Hittle Field exclusive of the LH-1 and HH-1 wells.
Under the direction of Pace Exploration, two additional wells were
drilled on the Hittle Field. One of these wells has been completed for
production and is producing approximately 20 barrels of oil per day. The other
well is still being evaluated but may be shut down and used as a disposal well
if production from the well does not improve.
<PAGE> 5
ITEM 2. DESCRIPTION OF PROPERTIES
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 Company
began exploration activities on the Hittle Field in late 1996 and presently
has drilled four wells on the field two of which have been completed for
production, one of which is still in the evaluation faze to see if completion
is warranted, one which was shut down pending a recompletion. The Hittle Field
is subject to a farm out agreement with Pace Exploration who receives a 20%
working interest in the field. The McLouth Field has 13 producing shallow oil
wells located on approximately 197 acres. (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.
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, 1997.
Gross Acreage
-------------------------------
Productive Oil Wells Developed Undeveloped
- -------------------- --------- -----------
Gross Net(1) Gross Net(2) Gross Net(3)
----- ------ ----- ------ ----- ------
16 14.4 190 152.50 1560 1560
- -------------------
(1) Based on a 100% ownership working interest on the McLouth Field and an
80% ownership working interest on the Hittle Field.
(2) Calculated on 13 wells with a 100% ownership working interest on the
McLouth Field and two wells with an 80% ownership interest on the Hittle
Field.
(3) Corresponds to 940 undeveloped acres in the McLouth Field with a 100%
ownership interest and 1560 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
<PAGE> 6
information to the Company's December 31, 1997 and 1996, 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 was the Company's president, and
therefore, should not be considered independent.
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, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1996 1997
---- ---- ----
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
Dry -0- -0- -0- -0- -0- -0- -0- -0-
Oil -0- -0- -0- -0- -0- -0- -0- -0-
Gas -0- -0- -0- -0- -0- -0- -0- -0-
Totals -0- -0- -0- -0- -0- -0- -0- -0-
Development:
Dry 1 0.75 -0- -0- -0- -0- -0- -0-
Oil 15 11.25 3 3 2 (1) 2 (1) 2 2
Gas -0- -0- -0- -0- -0- -0- -0- -0-
Totals 16 12 3 3 2 2 2 2
<FN>
(1) The LH-1 was subsequently shut down do to water problems.
</FN>
</TABLE>
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)
----------- --------- ---------
1995 $12.27 NA
1996 $16.34 NA
1997 $14.45 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 $3.07, $4,70, and $3.76, for
the years ended December 31, 1997, 1996, and 1995, 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.
<PAGE> 7
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, 1997, and 1996, the Company produced
approximately 10.711 and 14.730 barrels of oil.
ITEM 3. LEGAL PROCEEDINGS
The Company on April 21, 1998, filed a lawsuit against Felix Ascanio, the
former president of the Company, seeking repayment of promissory notes and a
declaratory judgment on the issue of whether Mr. Ascanio was terminated for
cause under the terms of his employment contract, and accordingly, entitled to
no severance payments under the terms of his employment agreement. The action
was subsequently settled. Under the terms of the settlement, Mr. Ascanio and
the Company agreed to cancel 141,689 shares of the Company in satisfaction of
Mr. Ascanio's promissory notes owed to the Company and as settlement of any
amounts the Company may owe Mr. Ascanio. Mr. Ascanio also resigned as a
director of the Company and agreed to the cancellation of his remaining
options to purchase shares of the Company. Additionally, Mr. Ascanio entered
into private transactions to sell, in a private transaction, the remainder of
his shares in the Company to existing shareholders of the Company.
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, sought 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. This action was settled in July, 1998.
Pursuant to the terms of the settlement agreement, KLM turned over the
operation and its interest in the McLouth Field to the Company as complete
settlement of any and all claims the parties may have. The Company also agreed
to pay $15,000 per year for three years to the Williams Natural Gas Co.
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, sought cancellation of the lease to GSC from the plaintiff and
quieting of title, plus cost, attorneys' fees and expenses. On October 10,
1997, the court filed an order granting a summary judgment motion for Edmonds'
and ordered termination of the Edmonds B lease. As the Company is no longer
interested in drilling on the lease, management determined that further legal
action on this matter would not be cost effective and accordingly, decided not
to appeal the decision.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
<PAGE>
<PAGE> 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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
- ------------- -------- -------
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
December 1997 $5.25 $3.50
March 1998 $3.875 $2.625
June 1998 $1.438 $1.188
September 1998 $1.188 $0.625
December 1998 $1.340 $0.560
March 1999 $1.375 $0.531
At April 19, 1999, the high and low bid and asked price for the Common
Stock was $.437 and $.375, 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 March 15, 1999, there were 3,562,192 shares of common stock
outstanding held by approximately 126 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Liquidity and Capital Resources
- ---------------------------------------
At December 31, 1997, the Company had assets of $1,533,816. The majority
of these assets, $1,254,925, represented oil and gas properties with only
$236,882 in current assets. During 1997, the Company used the majority of its
current assets and now must rely on loans from major shareholders and oil
revenues to cover its operating expenses.
During 1997, the Company funded its operation and exploration expenses
through the sale of equity interest in the Company raising a total of $760,000
in 1997. The Company anticipates it will have to continue to rely on capital
<PAGE> 9
through equity infusion until its oil revenues increase. With the current oil
prices, the Company does not anticipate that oil revenue will increase to
profitable levels until additional wells are placed on line. The Company
feels that its operating expense is low enough that it can still be profitable
even given the current oil prices if it is able to increase production on its
Hittle Field; however, the Company would not be able to fund further drilling
and exploration levels at the current oil prices and would have to rely on
investors to help fund the further drilling and exploration.
The Company's working capital at December 31, 1997, was $14,001; however,
as stated, the Company used this working capital during 1998 and presently
must rely on revenue from its operation and loans from shareholders to cover
ongoing operating expenses.
In November and December 1998, the Company was able to raise an
additional $240,000 through the sale of promissory notes and warrants to fund
the drilling of two wells on the Hittle Field. The Company does not
anticipate further drilling efforts until the spring of 1999 and at that time
may be required to raise further funds.
During 1997, the Company placed its two wells on the Hittle Field on
line, the LH-1 and the HH-1. These wells both produced promising shows but
have been burdened by water problems. The LH-1 has been shut down until an
evaluation can be made of the best way to relieve the present water problem
with the well. The HH-1 is currently producing approximately 30 barrels of
oil per day.
The Company has drilled two additional wells on the Hittle field in late
1998, early 1999. One of these wells was completed for production and the
other is being evaluated to see if it will produce oil in economic quantities
or be used as a disposal well.
The Company's other producing wells are in the McLouth Field. During
1997 and the first part of 1998, the Company was able to settle the litigation
associated with the McLouth Field and pursuant to the settlement became the
operator of the field. 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,
the Company feels its limited resources are best spent on the Hittle Field and
does not intend to perform any further exploration on the McLouth field until
sufficient oil revenue is being produced from the Hittle Field and oil prices
increase. The Company will continue to maintain the current operating wells
and service the McLouth field. The Company is, however, evaluating whether it
can sell the McLouth field.
With little revenue presently being produced, the Company will continue
to rely on the sale of its securities or loans to fund operations. Based on
the working capital position of the Company, management estimates the Company
will need to obtain additional financing to perform further exploration on the
Hittle Field.
Results of Operations
- ---------------------
For the year ended December 31, 1997, the Company had revenue of $163,048
which was down $14,267 from the $177,315 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. With oil prices continuing to be
down, the Company expects revenues to remain low even with the addition of
another well on the Hittle field.
<PAGE> 10
Expenses for the year ended December 31, 1997, were $540,545 which was
down $24,561 from the year ended December 31, 1996, when expenses were
$565,106. Expenses for the year ended December 31, 1997, were down
principally due to a reduction in general and administrative expenses of
$84,285. General and administrative expenses were higher in 1996 due to the
recognition of compensation expenses for options issued to former officers of
the Company, Felix Ascanio and Jack Hobbs. Additionally, in 1996, the Company
incurred $80,510 in dryhole and exploration cost which it did not incur in
1997. Professional fees were higher in 1997 increasing to $105,333 due to the
Company filing to become a reporting company with the SEC and to cover the
Company's lawsuits on the McClouth Field and related leases.
For the year ended December 31, 1997, the Company continued to suffer
loses from operations with a net loss of $340,616. This loss was down from
the $384,234 loss in 1996 as a result of the reduction in expenses. The
Company anticipates it will continue to have a loss in 1998 as it was unable
due to management problems to aggressively engage in a drilling program and
place new wells on line. The Company is hopeful with the signing of the Pace
Exploration contract that it will be able to place additional wells on line
and maintain reduced general and administrative expenses relying on Pace
Exploration for the operation of the Hittle Field. The Company will in turn
maintain only limited other business operations until revenues justify an
expansion of its corporate staff and other experts.
As the two new 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth immediately
following the signature page to this form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its certified public
accountants with respect to accounting practices or procedures or financial
disclosure.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names of the Company's executive officers and directors and the
positions held by each of them are set forth below:
Name Position
- ---- --------
Lee Jackson President and Director
Michael L. Labertew Secretary, Treasurer and Director
<PAGE>
<PAGE> 11
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. The Company is actively searching for a third director
Biographical Information
Set forth below is certain biographical information with respect to each
of the Company's officers and directors.
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.
Michael Labertew, age 34, was appointed a director and subsequently
secretary and treasure of the Company in 1998. Mr. Labertew is and has been
for the last 9 years an attorney in Salt Lake City, Utah. Mr. Labertew has a
bachelor of science degree from the University of Iowa and a Juris Doctorate
from the University of Utah.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company believes that under the SEC's rules for reporting of
securities transactions by directors and executive officers, all required
reports have been timely filed, except Michael L. Labertew filed his form 3
late and one form 4 late; Felix Ascanio filed his form 3 late and two form 4's
late; Lee Jackson filed two form 4's late; Ervin Brown filed his form 3 late
and one form 4 late; and John Hobbs filed one form 4 late.
<PAGE>
<PAGE> 12
ITEM 10. 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 $100,000 during such period (as determined at December 31, 1998, the
end of the Company's last completed fiscal year):
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
- ------------------ ---- ------ -------- ------------ ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lee Jackson 1998 $38,000 -0- -0- -0- 10,000 -0- -0-
President
Felix A. Ascanio 1997 $60,000 -0- -0- -0- -0- -0- -0-
President and CEO 1996 $60,000 -0- -0- -0- 325,000(1) -0- -0-
1995 $45,000 -0- -0- -0- -0- -0- -0-
<FN>
(1) Mr. Ascanio received 300,000 options at $0.20 and 25,000 options at $2.00 during 1996.
(2) Mr. Jackson received 10,000 options at $0.625 per share in 1998.
</FN>
</TABLE>
Options/SAR Grants in Last Fiscal Year
- --------------------------------------
The Following table sets forth information respecting all individual grants of
options and stock appreciation rights ("SARs") made during the fiscal year
ended December 31, 1997, to the named executive officer of the Company.
<TABLE>
<CAPTION>
% of Total
# of Securities Options/SARS
Underlying Granted to Market Price
Options/SARs Employees in Exercise or Base on Date of
Name Granted Fiscal Year Price ($/Share) Grant Expiration Date
- ---- --------------- ------------ ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Lee Jackson -0- -0- -0- -0- -0-
Felix Ascanio -0- -- -0- -0- ---
</TABLE>
Bonuses and Deferred Compensation:
- ---------------------------------
None
Compensation Pursuant to Plans:
- ------------------------------
<PAGE>
<PAGE> 13
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.
Termination of Employment and Change of Control Arrangement
- -----------------------------------------------------------
With the departure of Mr. Ascanio and Mr. John "Jack" Hobbs, none of the
Company's officers have an employment contract. One employee of the Company
has an employment contract paying him $24,000 per year plus product bonus of
$0.05 per barrel through December 1999.
Officer and Director Remuneration
- ---------------------------------
Mr. Jackson, the Company's current president receives a salary of
$3,166.67 per month and Mr. Labertew receives a salary of $0.00 per month.
ITEM 11. 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 December 22, 1998, 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 The Depository Trust
(Cede & Co.) 1,583,308 42.85
P.O. Box 222
New York, New York 10274
<PAGE> 14
Common Frank Gillen 257,011 6.95
175 South Main, Ste. 1240
Salt Lake City, Utah 84111
Officers, Directors and Nominees
Common Lee Jackson, Director ---------See Above---------
Common Michael Labertew -0- -0-
Secretary/Treasurer, Director
All Officers, Directors, and
Nominees as a Group (2 Persons) 438,350 11.86
- --------------------------------
(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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1997, Felix Ascanio, the Company's president, and John Hobbs,
the Company's secretary, at that time, 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
were due January 17, 2001, with interest at eight and one half percent
(8 1/2%).
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. Under the terms of a settlement agreement with Mr. Ascanio, all of
his debt to the Company was canceled and 141,689 of Mr. Ascanio's shares in
the Company returned to the Company for cancellation. Mr. Hobbs subsequently
paid his promissory notes off.
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 which was paid in 1998. The
advances are non-interest bearing.
During 1998, Lee Jackson, the Company's new president loaned the Company
20,000 receiving a promissory note and for $5,000 at 10% interest due on June
1, 1999 and a promissory note for $15,000 which contains an option to convert
shares of Common Stock at the rate of $0.40 per share.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Upland Energy Corporation
Date: April 19, 1999 By /s/Lee Jackson, President and Director
(Principal Executive Officer)
<PAGE>
<PAGE> 15
CERTIFIED PUBLIC ACCOUNTANT
INDEPENDENT AUDITOR'S REPORT
- ----------------------------
INDEPENDENT AUDITOR'S REPORT
Board of Directors
UPLAND ENERGY CORPORATION AND SUBSIDIARY
Salt Lake City, Utah
We have audited the consolidated balance sheet of Upland Energy Corporation
and Subsidiary as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Upland Energy
Corporation and Subsidiary as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 5, the Company has experienced continuing operating
losses the past few years and has experienced some cash flow shortages. 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 and to be able to fund the maintenance and operations of its
wells. Further, the Company's 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.
The Company has not presented the supplemental oil and gas information that
the Financial Accounting Standards Board has determined is necessary to
supplement, although not required to be part of, the basic financial
statements. The missing supplemental information relates to reserves
quantities, capitalized costs related to oil and gas production activities,
results of operations of oil and gas production activities and a standardized
measure of discounted future net cash flows related to reserves quantities.
/s/Pritchett, Siler & Hardy
September 1, 1998
Salt Lake City, Utah
<PAGE>
<PAGE> 16
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
1997
_____________
CURRENT ASSETS:
Cash $ 37,816
Oil revenue receivable 54,385
Notes receivable related parties 113,825
Advance receivable related party 17,049
Interest receivable related parties 13,807
_____________
Total Current Assets 236,882
PROPERTY AND EQUIPMENT, net 32,009
OIL AND GAS PROPERTIES, net 1,254,925
RESTRICTED CASH 10,000
_____________
$ 1,533,816
_____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Advances - related parties $ 800
Accounts payable related party 13,335
Accounts payable 121,646
Other accrued liabilities 87,100
_____________
Total Current Liabilities 222,881
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 50,000,000
shares authorized, 3,695,378 shares issued
and outstanding at 1997 3,695
Capital in excess of par value 2,337,335
Retained earnings (deficit) (815,165)
_____________
1,525,865
Less: notes receivable for common stock issued (214,930)
_____________
Total Stockholders' Equity 1,310,935
_____________
$ 1,533,816
_____________
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE>
<PAGE> 17
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
______________________________
1997 1996
___________ ___________
REVENUE:
Oil sales $ 163,048 $ 177,315
___________ ___________
Total Revenue 163,048 177,315
___________ ___________
EXPENSES:
Production expense 85,621 70,515
Depreciation, depletion and
amortization 44,650 11,028
Dryhole, unsuccessful recompletions
and exploration costs - 80,510
General and administrative costs 265,169 349,454
Professional fees 105,333 29,719
Travel expense 39,772 23,880
___________ ___________
Total Expenses 540,545 565,106
___________ ___________
INCOME (LOSS) FROM OPERATIONS (377,497) (387,791)
OTHER INCOME (EXPENSE):
Interest Income 36,881 3,951
Interest expense - (394)
___________ ___________
Total Other Income (Expense) 36,881 3,557
___________ ___________
INCOME (LOSS) BEFORE INCOME TAXES (340,616) (384,234)
CURRENT TAX EXPENSE - -
DEFERRED TAX EXPENSE - -
___________ ___________
NET INCOME (LOSS) $ (340,616) $ (384,234)
___________ ___________
EARNINGS (LOSS) PER COMMON SHARE $ (.10) $ (.16)
___________ ___________
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 18
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM DECEMBER 31, 1995 THROUGH
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock Capital in Retained
________________________ Excess of Earnings
Shares Amount Par Value (Deficit)
___________ __________ ___________ _____________
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 2,110,378 $ 2,110 $ 768,820 $ (90,315)
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)
Director/officer options exercised for notes
receivable, January 1997, at $.20 per share 325,000 325 64,675 -
Director/officer options exercised for notes
receivable, January 1997, at $.70 per share 100,000 100 69,900 -
Issuance of 500,000 shares common
stock for cash, February 1997, at $1.50
per share, net of $25,000 of offering costs 500,000 500 724,500 -
Issuance of 55,000 shares common
stock for notes receivable, August 1997,
at $2.00 per share 55,000 55 109,945 -
Issuance of 5,000 shares common
stock for cash, October 1997, at $2.00
per share 5,000 5 9,995 -
Net loss for the year ended
December 31, 1997 - - - (340,616)
___________ __________ ___________ _____________
BALANCE, December 31, 1997 3,695,378 $ 3,695 $ 2,337,335 $ (815,165)
----------- ---------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE>
<PAGE> 19
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
For the Years Ended
December 31,
1997 1996
Cash Flows from Operating Activities: ___________ ___________
Net income (loss) $ (340,616) $ (384,234)
___________ ___________
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation 44,650 11,029
Non-cash expenses 7,145 25,000
Additional compensation expense recorded
in accordance with APB Opinion No. 25 - 210,100
Change in assets and liabilities:
(Increase) decrease in oil revenue receivable (45,640) 3,840
(Increase) in advance receivable
related party (17,049) -
(Increase) decrease in prepaid assets 1,778 (20,334)
(Increase) decrease in deferred tax assets 77,737 (77,737)
(Increase) in interest receivable
related parties (14,417) -
Increase in accounts payable related party 13,335 -
Increase in accounts payable 108,010 3
(Decrease) in other accrued liabilities 87,000 (79)
Increase (decrease) in deferred tax liability (77,737) 77,737
___________ ___________
Total Adjustments 184,812 229,559
___________ ___________
Net Cash (Used) by Operating Activities (155,804) (154,675)
___________ ___________
Cash Flows from Investing Activities:
Purchase of property and equipment (35,233) (500)
Purchase of oil and gas properties (546,329) (92,772)
Receipts on notes receivable 23,535 -
Issuance of notes receivable (113,825) -
Purchase of certificate of deposit - (10,000)
___________ ___________
Net Cash (Used) by Investing Activities (671,852) (103,272)
___________ ___________
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 760,000 355,000
Proceeds from notes payable related parties - 3,800
Payments on notes payable related parties - (13,000)
___________ ___________
Net Cash Provided by Financing Activities 760,000 345,800
___________ ___________
Net Increase (Decrease) in Cash (67,656) 87,853
Cash at Beginning of Year 105,472 17,619
___________ ___________
Cash at End of Year $ 37,816 $ 105,472
___________ ___________
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for
Interest $ - $ 394
Income taxes $ - $ -
[Continued]
<PAGE>
<PAGE> 20
UPLAND ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
[CONTINUED]
Supplemental Disclosure of Noncash Investing and Financing Activities:
For the year ended December 31, 1997:
Legal counsel billed the Company for legal services totaling $7,145, of which
$6,535 was offset against the $20,000 note and $610 was offset against the
corresponding interest accrued on the note.
Legal counsel exercised options to purchase a total of 60,000 shares of common
stock, paid $10,000 cash and gave notes of $20,000 and $90,000 (for a total of
$110,000) to the Company for consideration.
The prepaid asset in the amount of $25,000 was reversed and the legal services
were accounted for as a non-cash offering expense which is offset against
proceeds from the stock offering.
The president and secretary/treasurer exercised options to purchase a total of
425,000 shares of common stock and gave notes of $55,000 and $80,000 (for a
total of $135,000), respectively, to the Company for consideration.
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 to purchase common stock under employment
agreements with officers and recorded compensation of $26,251 in accordance
with APB No. 25.
The Company granted options to purchase 425,000 shares of common stock under
employment agreements with the president and secretary/treasurer.
The Company granted options to purchase 60,000 shares of common stock 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.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 21
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.
Property and Equipment Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized, upon being placed in service.
Expenditures for maintenance and repairs are charged to expense as incurred.
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 five 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.
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.
<PAGE>
<PAGE> 22
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Revenue Recognition The Company's revenue is generated primarily by the
production and sale of oil and gas. Revenue from oil and gas sales is
recognized when the product is transferred to the purchaser.
Stocked Based Compensation The Company accounts for its stock based
compensation in accordance with Statement of financial Accounting Standard 123
"Accounting for Stock-Based Compensation". This statement establishes an
accounting method based on the fair value of equity instruments awarded to
employees as compensation. However, companies are permitted to continue
applying previous accounting standards in the determination of net income with
disclosure in the notes to the financial statements of the differences between
previous accounting measurements and those formulated by the new accounting
standard. The Company has adopted the disclosure only provisions of SFAS No.
123, accordingly, the Company has elected to determine net income using
previous accounting standards.
Earnings (Loss) Per Share Effective for the year ended December 31, 1997 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share," which requires the Company to present basic earnings per
share and dilutive earning per share when the effect is dilutive. The
computation of earnings (loss) per share is based on the weighted average
number of shares outstanding during the period presented. There was no effect
on the financial statements for the change in accounting principle [See Note
13].
Cash and Cash Equivalents 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.
Restricted Cash The Company maintains a certificate of deposit of $10,000
for collateral for a performance bond related to its oil and gas operations.
Income Taxes The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires an asset and liability approach for
accounting for income taxes [See Note 7].
Dividend Policy The Company has not paid any dividends on common stock to
date and does not anticipate paying dividends on common stock in the
foreseeable future.
Reclassification of Financial Statements The financial statements for all
periods prior to December 31, 1997 have been reclassified to conform to the
titles and headings used in the December 31, 1997 financial statements.
<PAGE>
<PAGE> 23
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Recently Enacted Accounting Standards In June 1997, SFAS Nos. 130,
"Reporting Comprehensive Income" and 131, "Disclosures about Segments of an
Enterprise and Related Information" were issued. SFAS No. 130 requires that
all items that are required to be recognized as comprehensive income be
reported in a financial statement that is displayed with the same prominence
as the other financial statements. SFAS No. 131 sets standards for reporting
information about operating segments in the financial statements. SFAS No.
131 also sets standards for the disclosures about products, major customers,
and geographical areas. SFAS No. 132 provides for disclosures about pensions
and other post-retirement benefits. Although such statements are not
effective until fiscal years beginning after December 15, 1997, had such
statements been adopted for the periods presented, their effect on the
financial statements would not have been significant. SFAS No. 133 dictates
the accounting standards for Derivative Instruments and Hedging Activities and
is effective for fiscal years beginning after June 15, 1999. SFAS No. 134
relates to Mortgage Backed Securities and has no applicability to the Company.
Had such SFAS statements been adopted for the periods presented, their effect
on the financial statements would not have been significant.
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.
<PAGE>
<PAGE> 24
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 NOTES RECEIVABLE RELATED PARTIES
Notes receivable, which include related parties [See Note 6], consist of the
following at December 31:
1997
_________
Note receivable from an officer and shareholder of
the Company received as consideration for exercise
of stock options, interest at 8.5% per annum, due on
or before January 17, 2001, unsecured and in default,
unpaid accrued interest of $4,457. Subsequently
settled in full [See Note 14] $ 55,000
Note receivable from an officer and shareholder of
the Company in the original amount of $80,000
received as consideration for exercise of stock
options, interest at 8.5% per annum, due on or
before January 17, 2001, unsecured, unpaid
accrued interest of $13 56,465
Note receivable from legal counsel in the original
amount of $20,000 received as consideration for
exercise of stock options, interest at 8.5% per
annum, due on or before January 17, 2001,
unsecured, unpaid accrued interest of $0 13,465
Note receivable from legal counsel received as
consideration for exercise of stock options, interest
at 8.5% per annum, due on or before January 17,
2001, unsecured, unpaid accrued interest of $2,746 90,000
Note receivable from an officer and shareholder of
the Company, interest at 8% per annum, due
upon demand, unsecured, unpaid accrued interest
of $4,808. Subsequently settled in full [See Note 14] 84,376
Note receivable from an officer and shareholder of
the Company, interest at 8.5% per annum, due
on or before July 8, 1998, unsecured, unpaid
accrued interest of $1,745. Subsequently paid in
full [See Note 14] 29,449
___________
$ 328,755
Less: notes receivable received for common
stock issued (214,930)
___________
$ 113,825
___________
NOTE 3 ADVANCE RECEIVABLE RELATED PARTY
During March 1997, the Company advanced the president of the Company $20,000,
which is non-interest bearing and due upon demand. As of December 31, 1997
the unpaid balance was $15,000. Subsequent to the year ended December 31,
1997, the Company settled the advance [See Note 14].
<PAGE>
<PAGE> 25
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment - at cost, less
accumulated depreciation as of December 31:
1997 1996
___________ ___________
Furniture and office equipment $ 12,328 $ 6,373
Vehicle 29,278 -
Less: accumulated depreciation (9,597) (2,485)
___________ ___________
Total $ 32,009 $ 3,888
___________ ___________
Depreciation expense charged to operations was $7,112 and $1,148 for the years
ended December 31, 1997 and 1996. Subsequent to the year ended December 31,
1997, the Company sold the vehicle to a related party [See Note 14].
NOTE 5 - OIL AND GAS PROPERTIES
Upon placing oil and gas properties and production 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, 1997 and 1996, the Company recorded depletion of
$37,539 and $9,880, 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 (who subsequently are no longer employed by the Company). The
Company has experienced continuing operating losses the past few years and has
experienced some cash flow shortages. Due to the cash shortages management
has not hired an independent reserve engineer to update its reserve
information. Accordingly, the Company has not presented the supplemental oil
and gas information that the Financial Accounting Standards Board has
determined is necessary to supplement, although not required to be part of,
the basic financial statements. The missing supplemental information relates
to reserves quantities, capitalized costs related to oil and gas production
activities, results of operations of oil and gas production activities and a
standardized measure of discounted future net cash flows related to reserves
quantities. Management in the past has also depended on related parties and
others to provide financing plus additional capital through sale of its common
stock. 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 a minimum quantity of its oil and gas reserves and to be able to fund
the maintenance and operations of its wells. The financial statements do not
include any adjustments related to the uncertainty that the Company might not
recover its estimated reserves.
<PAGE>
<PAGE> 26
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - OIL AND GAS PROPERTIES [Continued]
Robinson Project During October through December 1997, the Company entered
into five oil and gas leases for a total of 498.12 acres on the McLouth field,
located in Jefferson County, Kansas. Each lease agreement provides for the
Company to lease the property for a term of ten years ["PRIMARY TERM"] and as
long thereafter as oil, liquid hydrocarbons, gas, or their respective
constituent products, are produced. If operations for drilling are not
commenced on or before one year from the date of each lease, each lease shall
terminate. If however, on or before one year from the date of each lease the
Company pays an additional rental of $5.00 per acre per lease, the Company may
defer commencement of drilling operations for an additional period of 12
months on each lease. In like manner and upon payments of $5.00 per acre per
lease, the commencement of drilling operations may be further deferred
(without cancellation of lease) for additional periods of 12 months each
during the PRIMARY TERM. Upon production, a royalty fee of 12.5% of total
sellable production is payable to the property owner of each producing lease.
As of December 31, 1997, none of the five leases had operations for drilling.
Subsequent to the year ended December 31, 1997, operations on all of these
leases had not commenced and all of these lease agreements expired.
On December 1, 1997, the Company paid $70 and entered into an oil and gas
lease for 70 acres on the McLouth field, located in Jefferson County, Kansas.
The lease agreement provides for the Company to lease the property for a term
of 120 days ["PRIMARY TERM"] and as long thereafter as oil, liquid
hydrocarbons, gas, or their respective constituent products, are produced. If
operations for drilling are not commenced on or before March 31, 1998, the
lease shall terminate. Upon production, a royalty fee of 18.8% of total
sellable production is payable to the property owner. As of December 31,
1997, no operations for drilling had commenced. Subsequent to the year ended
December 31, 1997, no operations for drilling had commenced and the lease
terminated.
Hittle Project During 1997, the Company included $558,861 in oil and gas
properties for the Hittle field. This included initial investments into
several new leases as well as drilling costs. During September 1997, the
Company began producing on the Hittle field. During April 1997, the Company
entered into seven oil and gas leases for a total of 880 acres on the Hittle
field, located in Cowley County, Kansas. The lease agreements provide for the
Company to lease the property for a term of two or three years ["PRIMARY
TERM"] and as long thereafter as oil, liquid hydrocarbons, gas, or their
respective constituent products, are produced. If operations for drilling are
not commenced on or before one year from the date of each lease, each lease
shall terminate. If however, on or before one year from the date of each
lease, the Company pays an additional rental for each lease of $5.00 or $1.00
per acre depending on lease ($4,040 total for renewal of all seven leases),
the Company may defer commencement of drilling operations for an additional
period of 12 months. In like manner and upon payments of $5.00 or $1.00 per
acre depending on lease, the commencement of drilling operations may be
further deferred (without cancellation of lease) for additional periods of 12
months each per lease during the PRIMARY TERM. Upon production, a royalty fee
of 12.5%, 15.6%, or 18.8%, of total sellable production is payable to property
owner. As of December 31, 1997, no operations for drilling had commenced.
Subsequent to the year ended December 31, 1997, operations on all of these
leases had not commenced. The Company paid the $5.00 rental per acre on all
of these leases and deferred commencement of drilling.
<PAGE>
<PAGE> 27
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - OIL AND GAS PROPERTIES [Continued]
During 1996, the Company's drilling activities included the drilling of one
well. 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.
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 would perform
drilling and production operations on leases currently "farmed-out" to KLM
from Williams Natural Gas 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 had no termination date.
KLM's farm-out agreement with the other company terminates when production
activities cease. During 1996, the Company filed a lawsuit against KLM who in
turn filed a counterclaim against the Company. The lawsuits were settled
subsequent to year end [See Notes 9 and 14].
NOTE 6 - RELATED PARTY TRANSACTIONS
Pursuant to the terms of his employment agreement, the president of the
Company paid premiums on behalf of the Company for a health insurance policy.
During 1997, a total of $13,335 was paid. Subsequent to December 31, 1997,
the Company settled in full the amounts owed to the president [See Note 14].
During April 1997, the Company agreed to advance funds to cover the payroll
taxes related to the exercise of options by the president and
secretary/treasurer of the Company (see below). i) The president of the
Company gave a note to the Company in the amount of $84,376 at 8% interest per
annum. The note will be repaid by withholding bonuses that the president is
entitled to, within the employment agreement, or may be due at any time after
ninety days from July 9, 1997, upon written demand by the Company. As of
December 31, 1997, no bonuses have been awarded and the unpaid balance
amounted to $84,376 with accrued interest of $4,808. Subsequent to the year
ended December 31, 1997, the Company terminated the employment of the
president of the Company and called the president's note. The note was
subsequently settled in full [See Note 14]. ii) The secretary/treasurer of
the Company gave a note to the Company in the amount of $29,449 at 8.5%
interest per annum. The note is due in full on or before July 8, 1998. At
December 31, 1997, the unpaid balance on the note amounted to $29,449 with
accrued interest of $1,745. Subsequent to the year ended December 31, 1997,
this note plus corresponding interest was paid in full [See Note 2].
During March 1997, the Company advanced the president of the Company $20,000,
which is non-interest bearing and due upon demand [See Note 2].
<PAGE>
<PAGE> 28
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RELATED PARTY TRANSACTIONS [Continued]
During January 1997, the president and the secretary/treasurer of the Company
exercised stock options for the purchase of a total of 425,000 shares (325,000
shares at $.20 per share and 100,000 shares at $.70 per share) of the
Company's common stock in connection with their employment agreements. i)
The president of the Company gave a note receivable to the Company in the
amount of $55,000 at 8.5% interest per annum. This note was to be repaid in
three equal installments of principle and interest per year and was to be paid
in full on or before January 17, 2001. At December 31, 1997, no amounts had
been paid on this note leaving a balance of $55,000 with accrued interest of
$4,457. The note is currently in default as of December 31, 1997 [See Note
2]. The note has been accounted for as a reduction to stockholders' equity.
Subsequent to the year ended December 31, 1997, the Company terminated the
employment of the president of the Company and settled the $55,000 note [See
Note 14]. ii) The secretary of the Company gave a note to the Company in the
amount of $80,000 at 8.5% interest per annum. This note was to be repaid in
three equal installments of principle and interest per year and was to be paid
in full on or before January 17, 2001. At December 31, 1997, the unpaid
balance on the note amounted to $56,465 with accrued interest of $13 [See Note
2]. The note has been accounted for as a reduction to stockholders' equity.
During 1996 the president of the Company advanced the Company $200. The
advances were non-interest bearing and as of December 31, 1997, the unpaid
balance was $200. Subsequent to the year ended December 31, 1997, the Company
settled the advances from the president of the Company [See Note 14].
During 1996 the secretary/treasurer of the Company advanced the Company a
total of $3,600. The advances were non-interest bearing and as of December
31, 1997, the unpaid balance was $600. Subsequent to the year ended December
31, 1997, the Company paid these advances in full.
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 7 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 December 31, 1997 and 1996, the total of all
deferred tax assets was $717,459 and $392,956 and the total of the deferred
tax liabilities was $358,325 and $189,772. 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 deferred tax assets, the Company has established a
valuation allowance of $359,133 and $203,184 as of December 31, 1997 and 1996,
which has been offset against the deferred tax assets. The net increase in
the valuation allowance during the years ended December 31, 1997 and 1996
amounted to approximately $155,949 and $152,604, respectively.
<PAGE> 29
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 INCOME TAXES [Continued]
As of December 31, 1997 and 1996, the Company has net tax operating loss [NOL]
carryforwards available to offset its future income tax liability. The NOL
carryforwards have been used to offset deferred taxes for financial reporting
purposes. The Company has federal NOL carryforwards of $1,851,978 that expire
in various years between 2001 and 2012.
The components of income tax expense from continuing operations for the years
ended December 31, 1997 and 1996 consist of the following:
December 31,
1997 1996
__________ __________
Current income tax expense:
Federal $ - $ -
State - -
__________ __________
Net current tax expense - -
__________ __________
Deferred tax expense (benefit) arising from:
Excess of tax over financial accounting
depreciation $ 168,554 $ 43,187
Net operating loss carryforwards (370,050) (118,017)
Contribution carryover - (37)
Excess of financial accounting over tax
compensation - APB 25 77,737 (77,737)
Litigation reserve (32,190) -
Valuation allowance 155,949 152,604
__________ __________
Net deferred tax expense $ - $ -
__________ __________
Deferred income tax expense results primarily from the reversal of temporary
timing differences between tax and financial statement income.
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,
1997 1996
__________ __________
Computed tax at the expected federal
statutory rate $ (115,810) $ (130,639)
Other (357) (78)
Excess of financial accounting over tax
compensation - APB 25 (29,563) (10,115)
State income taxes, net of federal income
tax benefits (10,219) (11,527)
Net operation loss carryforwards - 4,612
Valuation allowance 155,949 147,747
__________ __________
Computed tax at the effective income
tax rates $ - $ -
========== ==========
<PAGE>
<PAGE> 30
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 INCOME TAXES [Continued]
The temporary differences and carryforwards gave rise to the following
deferred tax asset (liability) at December 31, 1997 and 1996:
1997 1996
____________ ____________
Excess of tax over book accounting
depreciation (358,325) (189,772)
Excess of financial accounting over
tax compensation - APB 25 - 77,737
Contribution carryover 37 37
NOL carryforwards 685,232 315,182
Litigation reserve 32,190 -
As of December 31, 1997 and 1996, the deferred taxes reflected in the
consolidated balance sheet are as follows:
1997 1996
____________ ____________
Short term asset (liability) $ - $ 77,737
Long term asset (liability) $ - $ (77,737)
NOTE 8 - COMMON STOCK TRANSACTIONS
During August through October 1997, the Company's legal counsel exercised a
total of 60,000 options to purchase 60,000 shares of the Company's common
stock at $2.00 per share. The options had previously been granted during 1996
in connection with services to be performed in 1997. The Company received
cash of $10,000 and two notes receivable totaling $110,000 (a $90,000 note and
a $20,000 note) as consideration for the exercise price of the options. Both
notes provide for interest at 8.5% per annum and are to be repaid in full on
or before January 17, 2001. The note for $90,000 may be paid for by the
cancellation of obligations owed by the Company for legal services. The
Company received total proceeds of $120,000. Both notes have been classified
as a reduction of stockholders' equity on the balance sheet.
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 [See Notes 2 and 6].
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 [See Notes 2
and 6].
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, the options vest on December 16,
1996, and the options expire on December 16, 2001. The cost of the legal
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.
<PAGE> 31
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - 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. Subsequent to the year
ended December 31, 1997, 25,000 of these options were cancelled as part of the
settlement agreement with the president of the Company [See Note 14].
During November 1996 the Company's officers exercised options previously
granted for 50,000 shares of common stock at $0.10 per share. Total proceeds
amounted to $5,000.
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.
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.
Private Offering 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 units
of common stock and warrants for commissions of $35,000 in connection with the
private placement offering. 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 new common stock purchase warrant (exercisable into one share
of common stock at an exercise price of $2.00 per share) for every two
existing warrants 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. During February 1997, 500,000 of the existing warrants
were exercised and the Company received total proceeds of $750,000.
Warrants At December 31, 1997, the Company had 250,000 warrants outstanding
to purchase common stock at $2.00 per share and 50,000 warrants to purchase
common stock at $1.00 per share. The warrants all have a three year life.
<PAGE>
<PAGE> 32
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMON STOCK TRANSACTIONS [Continued]
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 in 1997 and 1996 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, 1997 risk-
free interest rates of 6.33% expected dividend yields of zero, expected life
of 5 years, and expected volatility 78%.
A summary of the status of the options granted under the Company's stock
option plan at December 31, 1997 and 1996, and changes during the periods then
ended is presented in the table below:
Year Ended Year Ended
December 31, 1997 December 31, 1996
_______________________ _____________________
Weighted Average Weighted Average
Exercise Exercise
Shares Price Shares Price
________ ___________ ________ ____________
Outstanding at
beginning of period 525,000 $ .64 375,000 $ .19
Granted 60,000 2.00 525,000 .64
Exercised (485,000) .32 (50,000) .10
Forfeited - - - -
Canceled - - (325,000) .20
________ ___________ ________ ____________
Outstanding at end of Period 100,000 $ 2.00 525,000 .64
________ ___________ ________ ____________
Weighted average fair value
of options granted 60,000 $ .00 525,000 $ .35
-------- ----------- ------- ------------
<PAGE>
<PAGE> 33
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMON STOCK TRANSACTIONS [Continued]
A summary of the status of the options outstanding under the Company's stock
option plan at December 31, 1997 is presented below:
Options Outstanding Options Exercisable
___________________________________ __________________________
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- -------- ------------ ---------------- ----------- ------------ ----------
2.00 100,000 5 years 2.00 100,000 2.00
- -------- ------------ ---------------- ----------- ------------ ----------
100,000 100,000
The Company accounts for options agreements under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Had compensation cost for these options been determined,
based on the fair value at the grant dates for awards under these agreements,
consistent with the method prescribed by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", the Company's
net loss would have been the proforma amounts as indicated below:
For the Years Ended
December 31,
____________________________
1997 1996
___________ ___________
Net Loss applicable to
common stockholders As reported $ (340,616) $ (384,234)
Proforma $ (340,694) $ (384,234)
Earnings per Share As reported $ (.10) $ (.16)
Proforma $ (.10) $ (.16)
NOTE 9 - CONTINGENCIES
Litigation The Company may become or is subject to investigation, claim or
lawsuit ensuring out of the conduct of its business, including those related
to environmental, safety and health, commercial transactions, etc. The
Company is currently not aware of any such items, which it believes could have
a material adverse affect on its financial position.
During 1996, the Company filed a lawsuit against an operator of the wells in
the McLouth field. The Company claims the operator failed to service,
maintain, and operate the wells in a reasonable manner. The Company was
asking for damages in excess of $500,000. The operator asserted a
counterclaim against the Company for breech of contract alleging damages in
excess of $500,000. Subsequent to the year ended December 31, 1997, the
Company negotiated a settlement agreement with the operator wherein the
Company would prepay the plugging costs in the amount of $15,000 in 1998,
$15,000 in 1999 and $15,000 in 2000. All lawsuits and countersuits were
dropped and the Company took over as operator of the wells in the McLouth
field [See Note 14].
<PAGE>
<PAGE> 34
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 CONTINGENCIES [Continued]
During 1995, a lawsuit was filed against the Company by the landowners of one
of the Company's three developed oil leases in the McLouth field, 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 disputed the plaintiffs' claims and defended the case vigorously to
protect its interest in the lease. During October 1997, the district judge
entered an order granting summary judgement in favor of the plaintiffs and
decreed cancellation of the "B Lease". It is management's and their counsel's
opinion that the court's entry of summary judgement for plaintiffs was
erroneous under both the facts and the law. However, management subsequently
determined during 1998 not to appeal the summary judgement. Management
believes the amount of the liability in the case will approximate $87,000.
Consequently, an allowance of $87,000 was made to the financial statements
with regards to this lawsuit and has been included in other accrued
liabilities on the balance sheet. Settlement is expected to occur within the
next year.
Subsequent to the year ended December 31, 1997, the Company became involved in
litigation with the president of the Company [See Note 14].
NOTE 10 - COMMITMENTS AND AGREEMENTS
Employment Agreements During December, 1997 the Company entered into an
employment agreement with the production supervisor. The agreement has a one
year term and provides for a minimum salary of $24,000 per year during the
term of the agreement. The agreement also provides for a production bonus of
five cents per barrel on all oil produced on the company's Hittle Field in
Kansas and any subsequent field developed by the Company during the term of
this agreement. Subsequent to the year ended December 31, 1997, the Company
extended the employment agreement with the production supervisor for another
year.
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 8]. Subsequent to the year ended December 31, 1997, the
Company terminated the employment of the president of the Company [See Note
14]. The agreement with the secretary/treasurer of the Company has a two-year
term and provides for a yearly 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 8]. Subsequent to the year ended December 31, 1997, the
secretary/treasurer terminated his employment with the Company. These
employment agreements amended any prior employment agreements and canceled any
options granted in the prior employment agreements.
<PAGE>
<PAGE> 35
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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. Subsequent to the year ended
December 31, 1997, the Company terminated its office space agreements and
entered into an additional equipment rental agreement with monthly payments of
$1,795 [See Note 14].
NOTE 11 - 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 12 CONCENTRATION OF CREDIT RISKS
The Company sells substantially all of its oil production to two purchasers
because it is able to negotiate more favorable terms with the purchasers. If
the purchasers 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 its oil is a commodity that is readily marketable and
that the marketing method it follows is typical of similar companies in the
industry.
NOTE 13 EARNINGS (LOSS) PER SHARE
The following data show the amounts used in computing earnings (loss) per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock for the years ended December 31, 1997 and
1996:
For The Years Ended
December 31,
__________________________
1997 1996
___________ ___________
Income (loss) from continuing operations applicable
to common stock $ (340,616) $ (384,234)
___________ ___________
Income (loss) available to common stockholders
used in earnings (loss) per share $ (340,616) $ (384,234)
___________ ___________
Weighted average number of common shares used in
earnings (loss) per share outstanding during
the period 3,565,542 2,342,072
___________ __________
Dilutive earnings per share was not presented, as its effect was anti-dilutive
for the years ended December 31, 1997 and 1996.
<PAGE>
<PAGE> 36
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS
Options During August 1998, the Company granted its legal counsel options to
purchase 50,000 shares of the Company's common stock at $1.00 per share.
However, during November 1998, the Company canceled these options and granted
legal counsel options to purchase 50,000 shares of the Company's common stock
at $.625 per share. During August 1998, the Company granted a new director of
the Company options to purchase 10,000 shares of the Company's common stock at
$1.00 per share. However, during November 1998, the Company canceled these
options and granted the shareholder options to purchase 10,000 shares of the
Company's common stock at $.625 per share. Also during November 1998, the
Company granted two officers and shareholders of the Company options to
purchase 20,000 shares (10,000 shares each) of the Company's common stock at
$.625 per share.
Sale of vehicle During April 1998, the Company sold its vehicle to an
officer of the Company. The vehicle was sold with terms equivalent to an arms
length transaction. The vehicle and corresponding accumulated depreciation
will be shown as disposed during 1998.
Office space Subsequent to the year ended December 31, 1997, the Company
terminated its office space leases in Lawrence, Kansas and Salt Lake City,
Utah, and an officer and director of the Company is providing office space, at
his own office in his personal residence, at no cost to the Company.
Change of officers and directors During May 1998, the Company terminated the
employment of the president of the Company and settled the litigation between
the Company's president and the Company. Also during May 1998, the president
of the Company resigned as president and a Board of Director of both the
Company and Subsidiary and the secretary/treasurer of the Company became the
acting president of both the Company and Subsidiary. During August 1998, the
Company elected an additional member to the Board of Directors. During
October 1998, the secretary/treasurer (acting president) cancelled his
employment and resigned as secretary/treasurer (acting president) and a Board
of Director of the Company and Subsidiary. During November, the Company
elected a new president and a new secretary/treasurer of the Company and
Subsidiary. Any reference to the president and secretary/treasurer in the
financial statements refers to the former president and former
secretary/treasurer.
Litigation During May 1998, the Company settled the litigation between the
president of the Company and the Company by purchasing 141,689 shares of the
Company's common stock from the president (to be canceled) for $1.00 per
share. Total proceeds of $141,689 plus $13,535 ($200 advance from the
president and $13,335 paid for insurance by the president) owed to the
president were in payment of: i) The $55,000 note for exercise of options
plus corresponding interest at settlement date of $6,250. ii) The $84,376
note for payroll taxes from exercise of options plus corresponding interest at
settlement date of $7,396. iii) The $20,000 non-interest bearing advance
which amounted to $2,200 at settlement date.
During February 1998, the Company settled litigation with KLM. As settlement
of the litigation, KLM turned over the operation and its interest in the
McLouth field to the Company and the Company agreed to pay $1,500 for certain
equipment. The Company as operator of the McLouth field agreed to pay to
Williams Natural Gas Company the plugging costs of $15,000 in 1998, $15,000 in
1999 and $15,000 in 2000 and negotiate a certificate of deposit.
<PAGE> 37
UPLAND ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS [Continued]
Notes payable During May through September 1998, the secretary/treasurer
paid $29,350 in cash and applied $17,650 in back wages towards his two notes
($80,000 note for exercise of options from his employment agreement and
$29,449 note for the payroll taxes on exercising options from his employment
agreement). The payments were applied first to the note for the payroll
taxes, paying this note in full during July 1998, and the remainder was
applied to the note for exercise of options. During April through August
1998, a shareholder of the Company loaned the Company a total of $13,000.
These loans are non-interest bearing and are payable upon demand. During
April 1998 $3,000 was paid on these loans.
During September through December 1998, an officer and shareholder of the
Company loaned the Company a total of $35,000 (a total of three loans). The
first loan of $15,000 was converted to 37,500 shares of the Company's common
stock at $.40 per share during December 1998. The second loan of $15,000 was
included as part of the promissory note and warrant subscription agreement
during December 1998. The remainder note (the third note) of $5,000 remained
outstanding and is due June 1999. This note bears interest at 10% and is
convertible at the option of the holder into shares of the Company's common
stock at $1.00 per share.
Promissory Notes and Warrants During November through December 1998, the
Company raised an additional $240,000 in financing by issuing convertible
promissory notes with redeemable warrants in units of $5,000 each. Each unit
consisted of a convertible promissory note for $5,000 and 5,000 redeemable
warrants to purchase the Company's common stock at $.0875 per share. The
convertible promissory notes are for one year, bear interest at 12% per annum,
and are secured by the oil production from the Company's Hittle Field in
Central Kansas. The promissory notes are convertible into the Company's
common stock, at the holder's option, at the rate of one share for each $1.50
of principal and accrued but unpaid interest. The warrants are exercisable
for two years from the date of exercising the promissory note. Each warrant
is redeemable at the redemption price of $.10 per warrant on the Company's 30
day written notice to the holders if the closing bid price for the Common
Stock as reported on the National Associations of Securities Dealers
Electronic Bulletin Board is $1.50 per share or more for ten consecutive
trading days or is $1.50 per share or more for 15 trading days in any 30
trading day period.
Operating agreement During December 1998, the Company hired Pace Exploration
to handle all of the Company's operation and drilling on the Hittle Field.
Under the terms of the Agreement, Pace Exploration received a twenty-percent
working interest in the Hittle Field.
New Wells The Company is currently drilling two additional wells on the
Hittle Field. These wells have not yet been completed for production although
initial shows are promising. The Company, however, will have to perform
further evaluations on these wells before completing them for production.
Compressor rental agreement During May 1998, the Company entered into an
equipment rental agreement for the rental of a three-stage natural gas
compressor package on the Edmond's "A" Lease in the McLouth field. The rental
term is for one year and requires monthly payments of $1,795.
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<NAME> UPLAND ENERGY CORPORATION
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