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Securities and Exchange Commission
Washington, D.C. 20549
_________
FORM 10-K
_________
[X] Annual
For the fiscal year ended December 31, 1999
[_] 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--24027
PINNACLE OIL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada 61-1126904
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 750 Phoenix Place, 840-7/th/ Avenue, S.W., Calgary, Alberta, Canada T2P
3G2
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (403) 264-7020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 28, 2000 was approximately $337,396,000 based upon the
closing price per share of the registrant's common stock of $38 on that date.
The number of shares outstanding of the registrant's common stock as of March
28, 1999: 12,870,016 shares
Documents Incorporated By Reference
Information required by Part III (Items 10, 11, 12 and 13) is incorporated into
this annual report by reference to the registrant's definitive proxy statement
to be disseminated in advance of its annual meeting of stockholders to be held
later in 2000.
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Table Of Contents
Page
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Item 1. Business............................................................................................ 1
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Overview............................................................................................ 1
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Our Corporate History............................................................................... 1
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Status Of Our Exploration Efforts................................................................... 2
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Corporate Objective................................................................................. 4
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Theoretical Basis Of SFD Technology................................................................. 5
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Operational Practices In Conducting SFD Surveys..................................................... 6
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Our Business And Geographic Segments................................................................ 11
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Joint Venture Partners.............................................................................. 11
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Competition......................................................................................... 15
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Employees........................................................................................... 15
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Research and Development............................................................................ 16
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Manufacturing Capacity and Suppliers................................................................ 16
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Governmental And Environmental Regulation........................................................... 16
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Operating Hazards................................................................................... 16
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Our SFD Technology License.......................................................................... 17
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We May Be Unable To Protect Our Proprietary Rights To Our SFD Data And The SFD
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Technology.......................................................................................... 20
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Item 2. Properties.......................................................................................... 20
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Leased Premises..................................................................................... 20
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Petroleum Properties................................................................................ 20
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Item 3. Legal Proceedings................................................................................... 22
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Item 4. Submission Of Matters To A Vote Of Securities Holders............................................... 22
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Item 5. Market Price Of And Dividends On Our Common Stock And Related Stockholder Matters................... 22
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Market Information.................................................................................. 22
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Dividend Policy..................................................................................... 23
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Item 6. Selected Consolidated Financial Information......................................................... 23
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Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations............... 25
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Overview............................................................................................ 25
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Capital Requirements................................................................................ 26
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Results Of Consolidated Operations.................................................................. 27
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Liquidity And Capital Resources..................................................................... 30
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Other Matters....................................................................................... 31
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Uncertainties And Risk Factors That May Affect Our Future Results And Financial
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Condition........................................................................................... 32
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk........................................... 42
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Oil And Gas Price Fluctuations...................................................................... 42
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Oil And Gas Price Fluctuations...................................................................... 43
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Currency Fluctuations............................................................................... 43
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Interest Rate Fluctuations.......................................................................... 43
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Item 8. Financial Statements And Supplementary Data......................................................... 44
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Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure................ 44
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Item 10. Our Directors And Executive Officers................................................................ 44
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Item 11. Executive Compensation.............................................................................. 44
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Item 12. Ownership Of Our Securities by Beneficial Owners And Management..................................... 44
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Item 13. Certain Relationships And Related Transactions...................................................... 44
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Item 14. Exhibits, Financial Statements, Schedules And Reports On Form 8--K.................................. 45
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-ii-
The information set forth in Item 1 of this annual report, captioned "Business,"
is current as of April 14, 2000, unless an earlier or later date is indicated in
such section. The information set forth in the sections of this annual report
other than Item 1 is current as of December 31, 1999, unless an earlier or later
date is indicated in those sections.
All references to "dollars" in this prospectus refer to United States, or U.S.,
dollars unless specific reference is made to Canadian, or Cdn., dollars. For
information relative to rates of exchange and currency conversion, see note 2(l)
to our consolidated financial statements.
Part I
Item 1. Business
Overview
Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle") is a
technology-based reconnaissance exploration company which utilizes our
proprietary, quantum physics-based, stress field detection or "SFD"
remote-sensing airborne survey technology, which we refer to as our "SFD Survey
System," to quickly and inexpensively identify and high-grade oil and natural
gas prospects. We are a publicly traded company whose common stock trades
over-the-counter on the NASD Electronic Bulletin Board under the symbol "PSFD."
Our principal executive offices are located at Suite 750, Phoenix Place, 840 7th
Avenue S.W., Calgary, Alberta, Canada T2P 3G2, and our telephone number is (403)
264-7020.
We use our SFD technology to survey or reconnoiter large exploration areas from
our survey aircraft at speeds in excess of 150 mph to identify and "high-grade"
leads for further evaluation and potential drilling. Our SFD technology is a
recently developed technology which we adapted for airborne survey operations,
and field tested for independent geologists and our joint venture partners, in
1996 and 1997. We commenced SFD survey activities on a full commercial basis for
our joint venture partners in early 1998.
Our SFD technology affords us the relatively inexpensive ability to obtain near
real-time analysis and interpretation of potential hydrocarbon accumulations in
a matter of days or weeks, as compared to months and in some cases years in the
case of the seismic methods currently employed by the oil and gas exploration
industry for wide area exploration or reconnaissance. These cost and time
advantages will ultimately enable us to effectuate potentially significant
reductions in oil and gas exploration "finding costs." Finding costs include the
cumulative costs of acquiring seismic, purchasing mineral rights, and drilling
and completing exploration wells. The ability to reduce finding costs is an
extremely important financial factor in the oil and gas industry, insofar as low
finding costs represent a measure of an oil and gas company's ability to
effectively and efficiently find new reserves, as well as generate cash flow.
Our Corporate History
We were initially incorporated in Nevada on September 27, 1994 under the name
"Auric Mining Corporation." In January 1996, we acquired all of the common stock
of Pinnacle Oil Inc., a Nevada corporation, from its stockholders in exchange
for our common stock. As a consequence of this transaction, Pinnacle Oil Inc.,
whom we refer to as "Pinnacle U.S.," became our wholly-owned subsidiary and its
stockholders acquired a 92% controlling interest in our common stock. Prior to
this transaction we were a corporate shell conducting no active business, and
Pinnacle U.S. was a development stage research and development enterprise
holding world-wide rights to use what is now our SFD technology for hydrocarbon
exploration purposes. Immediately after this transaction we changed our name to
"Pinnacle Oil International, Inc."
-1-
Status Of Our Exploration Efforts
We conduct our reconnaissance exploration activities, as well as land
acquisition, drilling, completion and production activities to exploit prospects
identified using our SFD technology, through our two wholly-owned operating
subsidiaries. Our first subsidiary, Pinnacle U.S., focuses on United
States-based exploration. Our second subsidiary, Pinnacle Oil Canada, Inc., whom
we refer to as "Pinnacle Canada," focuses on Canadian-based exploration.
Pinnacle, in turn, concentrates on research and development efforts to improve
the efficacy of our SFD Survey System.
Our United States exploration efforts to date have been focused on the Greater
Green River Basin in Wyoming and the Williston Basin in North Dakota. These
exploration activities have been conducted under a joint exploration and
development agreement with CamWest Exploration LLC, a Colorado-based exploration
company. Under this agreement we conduct aerial surveys to identify prospects in
exploration areas in the United States selected by CamWest.
Our Canadian exploration efforts to date have been focused on southern Alberta,
northeastern British Columbia, southwestern Saskatchewan and Newfoundland. The
majority of these exploration activities have been conducted under an
exploration joint venture agreement with Encal Energy Ltd., a Calgary-based
exploration and production company. Under this agreement we conduct aerial
surveys to identify prospects in exploration areas in Canada selected by Encal.
We have also recently commenced conducting exploration activities in western
Canada for our own account. We anticipate developing these prospects through
a joint venture with either Encal or another Canadian exploration company.
From the inception of our commercial airborne survey activities in mid-1997
through the date of this annual report, we have:
. flown over:
. 60,000 linear survey miles in 20 separate exploration areas in the
United States and Canada for our joint venture partners, and
. 2,500 linear survey miles in an separate exploration area in Canada
for our own account; and
. tendered 81 prospects which we believe to have commercial potential to our
joint venture partners for further geological and geophysical evaluation as
a result of our analysis and interpretation of SFD Data acquired during
these flights.
Of the 81 prospects we have tendered to our joint venture partners:
. 25 prospects have been accepted by our joint venture partners for
acquisition and drilling upon completion of their geological and
geophysical evaluation.
. seven prospects have been designated as "key tracts" by our joint venture
partners for future drilling based upon long-term considerations such as
land availability;
. nine prospects have been rejected by our joint venture partners and have
either reverted to Pinnacle for our own account or will be jointly
exploited by Pinnacle and the joint venture partner pursuant to the terms
of the joint venture agreement; and
. the balance of the tendered prospects remain subject to acceptance pending
completion of geological and geophysical evaluation, land acquisition or
other considerations.
Of the 25 prospects that have been accepted by our joint venture partners:
-2-
. One exploration well spudded in early 1999 by a third-party operator at
Shoal Point, Newfoundland, was drilled directionally to an unknown bottom
hole target, evaluated, and abandoned as being uneconomic. Pinnacle
Canada elected a royalty interest through Encal with respect to this
prospect.
. One exploration well spudded in September 1999 by a third-party operator at
our Leucite Hills South prospect in Wyoming, was drilled, cased and
completed in September 1999 as a natural gas discovery. This well will not
be placed into production by the operator, however, until a sufficient
number of additional wells are drilled on the exploratory block and can be
tied into a gathering system. Pinnacle U.S. elected a combination working
interest and overriding royalty interest with respect to this prospect.
. One exploration well spudded by CamWest in October 1999 at our Poblano
prospect in Wyoming, was drilled, cased and completed in January 2000 as a
natural gas discovery, and production will commence upon completion of a
twelve-mile pipeline that will tie the well into a sales system. CamWest
spudded a step-out exploratory well on this prospect in March 2000, which
is still in the process of being drilled as of the date of this annual
report. Pinnacle U.S. elected a combination working interest and overriding
royalty interest with respect to this prospect.
. One exploration well spudded by a third-party operator in October 1999 at
our Poblano South prospect in Wyoming, was drilled, cased and completed in
January 2000. This well has been shut-in by the operator pending further
evaluation of its completion program. Pinnacle U.S. elected a combination
working interest and overriding royalty interest with respect to this
prospect.
. One exploration well spudded in December 2000 by Encal at our Carbon
prospect in southern Alberta, was drilled, cased and completed in January
2000 as a natural gas discovery. This well is currently suspended pending
further completion activity by the operator. Pinnacle Canada elected an
overriding royalty interest with respect to this prospect.
. One exploration well spudded in March 2000 by Encal at our Monarch prospect
in southern Alberta. This well is currently cased and awaiting completion.
Pinnacle Canada elected a combination working interest and overriding
royalty interest with respect to this prospect.
. Drilling rights for the balance of the prospects have either been acquired
and exploration wells are scheduled for drilling at a future date, or
remain in the process of being acquired. We anticipate that two to four
exploration wells will be spudded on these prospects by our joint venture
partners or third-party operators by June 30, 2000. As of the date of this
annual report, our joint venture partners have acquired drilling rights for
fourteen of those prospects.
The joint venture agreements we have entered into with our joint venture
partners generally entitle us to elect to receive one of the two following
payment streams for each SFD-identified prospect accepted and drilled under the
applicable agreement:
. A capital investment and generally risk-free overriding royalty of 5% to 8%
of oil or natural gas revenues received by the joint venture partner with
respect to the prospect. In any situation where we elect to receive this
royalty, our joint venture partner will be responsible, at its own cost and
risk, to acquire the necessary drilling rights for the prospect if it has
not already done so, and to conduct all drilling, production and marketing
activities necessary to exploit the prospect.
. A working interest of up to 45% of the joint venture partner's net revenues
with respect to the prospect. In any situation where we elect to
participate on a working interest basis, we must bear our share of the
acquisition of mineral and drilling rights (if necessary), drilling and
production costs incurred with respect to the prospect based upon our
working interest percentage. Although we will bear our share of these
costs, our joint venture partner will nevertheless remain responsible for
conducting and managing all drilling, production and marketing activities
to exploit the prospect.
-3-
Our recent practice with our joint venture partners has been to participate in
selected prospects on a combination working interest/overriding royalty interest
basis, typically a 22 1/2% working interest and a 4% overriding royalty.
Our U.S. joint venture partner is also required under the terms of its joint
venture agreement to reimburse us for 100% of the expenses we incur in
conducting aerial surveys for that partner, while our Canadian joint venture
partner is required under the terms of its joint venture agreement to reimburse
us for 50% of the expenses we incur in conducting aerial surveys for that
partner.
Our rights to use our SFD technology arises from an SFD technology license which
we acquired from the owner and licensor of that technology, Momentum Resources
Corporation, pursuant to which we received the exclusive world-wide right to use
the SFD technology for hydrocarbon exploration purposes. We are obligated under
the terms of that license to pay Momentum a fee equal to 1% of any "prospect
profits" which we may receive on or before December 31, 2000, and 5% of any
prospect profits which we may receive after December 31, 2000. Momentum is
controlled and indirectly owned by two of our significant stockholders, both of
whom currently serve as our directors and one of whom currently serves as one of
our executive officers.
Since we have not generated operating revenues to date, we should be considered
a development stage enterprise. Although we have sufficient working capital as
of December 31, 1999 to fund our current level of operations for several years
assuming we make minimal investments in petroleum properties, our ability to
continue as a going concern in the longer term will nevertheless be dependent
upon our ability, either through our joint venture arrangements or for our own
account, to successfully identify hydrocarbon bearing prospects, and to finance,
develop, extract and market oil and natural gas from these prospects for a
profit. We anticipate that we will continue to incur further operating losses
until such time as we receive revenues from our joint venture partners with
respect to prospects currently in the development stage, or through prospects we
identify and exploit for our own account.
Corporate Objective
Our corporate objective is to become an industry leader in technology-driven oil
and gas exploration. Utilizing our unique and exclusive SFD technology, we can
provide to our joint venture partners competitive advantages not seen in the
exploration business. We anticipate that we will attain our corporate objective
through the following evolutionary steps:
. In the short-term we will continue to work with our joint venture partners
to explore the sedimentary basins they request we survey. Our primary
interest at this stage of our development is to focus on drilling results
to prove our SFD technology, while participating in a sufficient number of
exploratory wells on a working interest basis to demonstrate our commitment
to our technology. Budgetary considerations permitting, we will participate
in drilling activities on either a pure working interest basis up to our
permitted 45% where we are willing to accept higher risk in order to earn
higher returns, or a combination working interest/overriding royalty basis
where we desire to participate on a lower percentage basis. In other
circumstances we will not participate, and will instead be paid an
overriding royalty on production revenue. All of these projects will allow
us to not only establish a statistical drilling track record for our SFD
technology, but enable us to build cash flow to further fund our
exploration drilling and research & development programs.
. In the longer term once the value of our SFD technology has been
demonstrated to the oil and gas industry, we will adopt a strategy to
accomplish the following objectives:
. promote the expeditious acquisition and drilling of SFD Prospects;
. maximize the return on our investment while minimizing risk
associated with direct investments in oil and gas drilling projects;
and
. enable us to have a greater degree of control and influence over
strategic project decisions, while at the same time not becoming
bogged down in drilling, production and marketing operational issues.
While we anticipate that we will continue to participate in projects with
third party exploration companies, we anticipate that the economics of
investment or the underlying arrangements will change as follows:
. we will either invest in the same way as we currently invest--i.e.,
on a straight working interest or royalty participation basis or a
combination of the two depending upon capital investment
requirements, potential reserve size, geographic location, risk
levels, project completion times and parties involved--although we
would expect that our working interest and royalty percentages would
be increased; or
. we will engage independent drilling, production and marketing
companies on a contract basis.
We anticipate that we will be able to finance our increased land acquisition
costs and working interest participations through available cash flow or
financings funded, in part, through our anticipated base of proven reserves.
Most importantly, we will endeavor to acquire drilling and land rights in our
name in order to procure maximum leverage in negotiating transactions with
drilling and production partners or contractors on terms most beneficial to our
company.
While we will acquire a land department to acquire drilling rights and manage
our properties, we do not intend to become a manpower- and cost-intensive
drilling and production company, and will instead delegate these matters to our
partners or independent contractors or service providers, although it is
possible that we may establish a separate affiliated entity to manage production
and marketing functions. We anticipate that we will increase our staffing
levels--exclusive of any separate production and marketing entity we may
establish--to approximately 50 employees in this business model, including
additional administrative, research and development and SFD flight, survey and
interpretive staff. Given our relatively modest projected staffing requirements,
we anticipate that our annual operating expenses would be kept to relatively
minimal levels.
You should note that prospects that are confirmed through exploratory drilling
as containing commercial quantities of oil and gas may become immediately
marketable based on the size of their estimated reserves. It is therefore not
necessary to actually place production wells on-line to recognize the value of
these reserves, and we may consider selling the reserves and associated drilling
rights to third parties based upon a discounted cash flow formula derived from
estimated reserves and other production and/or market factors. We also
anticipate that we will have the similar ability, once our SFD technology is
proven, to sell SFD Prospects on the market, even if exploratory wells have not
been drilled. We have, in fact, set up a mechanism under our joint venture
agreements with our joint venture partner to dispose of smaller SFD Prospects
which may have commercial value.
-4-
Theoretical Basis Of SFD Technology
What Is Our SFD Technology
Our SFD technology allows us to measure the variations in energies relating to
`stressed' subsurface structures and hydrocarbon accumulations. By analyzing
these field patterns, we are able to determine the probability of locating
commercially viable deposits. The principal components of our SFD technology,
the SFD sensors, are `stand-alone' devices that incorporate principals of
contemporary quantum theory in their operation.
What Is Quantum (Field) Theory And Its Applications
`Quantum theory' incorporates two bodies of physics--`quantum mechanics,' which
deals with wave-particle duality, superposition principle, uncertainty
principle, wave function and probabilities; and `special relativity' which
examines the effects of space-time geometry and the relativity of motion.
Traditional physics, known as `classical theory,' cannot account for the
structure and behavior of elementary particles, for example, the lattice-
vibration effects that arise from electrons colliding with atoms. In contrast,
quantum theory is successful in dealing with these phenomena. It describes
matter and energy interactions in the universe in terms of single indivisible
units called `quanta,' or in the singular `quantum.'
According to the `standard model' of quantum theory, which summarizes current
understanding of elementary particles and the fundamental forces of nature,
`fields' are the basic make-up of the universe. Therefore, each elementary
particle has an associated field with it. Little ripples in these fields carry
information, energy and momentum from one area or particle to another.
Quantum theory describes matter as both waves and as particles. A direct
consequence of the wave-particle duality is the `uncertainty principle' advanced
by Heisenberg. According to this principle, particles do not have definite
locations, speeds, and paths as usually described by classical physics. Instead,
quantum theory describes positions and other properties of particles in terms of
the incidental events where the property will have a certain value. The way a
quantum object behaves is defined by its 'wave function' developed by
Schrodinger, allowing us to compute the `probability' that certain event will be
observed. Everything in quantum theory is based on probability. This simply
means that one cannot predict an event definitely but can estimate the
probability for the event to occur.
In spite of its success, there are situations where quantum theory is
insufficient to give proper explanation. Under the umbrella of quantum theory,
three fundamental forces--the `electromagnetic,' the `weak,' and the `strong'
forces--are successfully unified. However, it cannot adequately incorporate the
fourth, `gravitation.' None of the branches of quantum theory can account for
the discrepancies in masses of elementary particles. To address this issue,
Higgs proposed a mechanism--known as `massive gauge bosons'--by which particles
acquire mass without breaking the symmetry laws of modern physics. Higgs bosons
have no intrinsic spin or electric charge and can not be distinguished from
empty space or vacuum. It is now proposed by physicists that the all-pervading
Higgs scalar fields homogenize space and give rise to as many particles as there
are many special scalar fields. In support, Peccei-Quinn symmetry and String
theory predict the existence of `composite scalar fields' that are massless at
high energies. Presently, physicists are working on proving the existence of
these complex scalar fields. They forecast a number of individual and composite
Higgs fields and torsion fields, the latter of which relates to the quantum spin
of empty space or vacuum. These issues have ramification in our theoretical
discussions with respect to the operation of our SFD technology and we interpret
the role of Higgs fields as being direct and relevant.
Quantum theory has already been applied in the development of commercially
available instruments and devices. Superconducting Quantum Interference Device
or SQUID is a typical example. It is the most sensitive detector of magnetic
fields known so far. The application of SQUID technology ranges from medical
diagnostics for detecting brain damage to performing special tests in
relativity. Quantum lasers are another example of the successful commercial
application of quantum theory. The major advantage of these lasers is that they
can be tailored to emit light over a wide range of the spectrum--something that
no other laser can do. In fact, anyone who owns a compact-disc player today uses
this technology. By means of Molecular-Beam Epitaxy or MBE, initially developed
at Bell Labs, layers of atoms can be deposited on a heated metal surface. This
technology is essential in the fabrication of advanced semiconductor devices and
integrated circuits including the quantum-well lasers. Nowadays, computer
scientists are moving towards embracing quantum-wire and quantum computers as
the future of computing. Theoretically, quantum computers will perform
calculation orders of magnitude faster than the best computers of today.
What Are Stress Fields And Their Relation To SFD Theory
On a global scale, the earth's crust is under variable stress resulting from
crustal plate (tectonic) movements that produce subsurface mechanical and
hydraulic interactions. Stress is manifest in the macroscopic deformation of
buried sediments and rock strata, the microscopic deformation of their
constituent minerals. It is well known that electrical energy balance in a
crystal lattice is maintained by the alternation of equal and opposite charges.
However, when the crystal lattice of a material, for example quartz, is suddenly
subjected to stress, electromagnetic radiation will be emitted. Under sustained
localized stress conditions, we believe that `scalar energy fields' are also
generated or modified at a quantum level. The word `scalar' in its basic form
means that the field carries no direction only magnitude, unlike vector fields
resulting from conventional electromagnetic fields that carry both magnitude and
direction. The generated or modified scalar energy fields are non-
electromagnetic in nature, and we believe are related to Higgs and torsion
fields.
Our SFD sensors are passive quantum transducers. The operation of these devices
is based on quantum mechanical principles and involves the capture and
interaction, translation and conversion of certain scalar energy fields into
electrical signals. Our SFD sensors have demonstrated the ability to date to
directly detect scalar energy effects generated or modified at depths in excess
of 15,000 ft below the surface, and at altitudes in excess of 10,000 ft. Surface
cultural phenomena, such as large body of water, do not affect the SFD sensors
as long as the change in magnitude is moderate. By generating and maintaining
their own quantum fields, the SFD sensors are able to interact with these energy
fields via quantum particles. The resulting interactions are converted and
"recorded" as electrical signals.
Our SFD sensors are also non-linear `chaotic' devices. Chaos theory
characterizes chaotic devices as behaving in a complex manner, despite the fact
that they can be described quite simply. By definition, these systems exhibit
unpredictable dynamics that are sensitive to their initial conditions. Chaotic
systems are mathematically deterministic--that is, they follow precise laws, but
their irregular behavior can appear random to the casual observer. The response
of our device to a phenomenon may diverge exponentially and much faster than
that of a slower linear system. Once a response to a phenomenon is initiated, it
will proceed until saturation or occurrence of the next phenomenon. Even though,
within the confinement of the inherent restrictions of quantum mechanics, the
number of possibilities of reacting to the same stimulus is deterministic, the
device still behaves irregularly. Nevertheless, by cycling about an optimum
function point, the behavior of a quantum device can achieve some stability in a
way that never quite repeats itself.
Sustained geological stress will lead to the development of new conditions
manifested in scalar energy fields of different origin that are related to Higgs
and torsion fields. We postulate that the fields generated or modified are due
to complex variations in quantum vibrations and vacuum interactions. These
fields carry information, momentum and in some cases, substantial energy.
Although these energy fields appear scalar in nature, they can in effect act as
vector fields under certain conditions.
When scalar energy fields interact with existing anomalies they can create large
vortices with smaller internal vortices over a given subsurface phenomenon. The
vortices may dynamically increase and decrease in magnitude, and when traversed
they significantly affect the quantum interactions in our SFD sensor. Based on
observations we have made from several hundred surveys of known oil and gas
fields, it appears that these vortices are associated with `mechanical' and
`hydraulic' stresses, as explained below, in particular, geologic structures and
hydrocarbon accumulations.
What Is The Practical Application Of Stress Fields to Geology and Hydrocarbon
Exploration
We believe that all regional substrata exhibit their own unique stress fields,
reflecting the sedimentary and burial histories of those substrata and, more
importantly for the purposes of the application of our technology, the
mechanical and in some cases hydraulic stresses or pressures inherent in or
placed upon those substrata. This is important because it is our ability to
identify the changes in subsurface stresses and pressures with our SFD
technology which allows us to either inferentially or directly identify oil and
gas accumulations. Through our continued research and development, a high level
of correlation has been shown between the science of geology and our quantum-
based SFD technology.
What Are Subsurface Mechanical Stresses
Subsurface mechanical stresses are caused by directional tectonic forces that
disrupt the stress and pressure equilibrium in the underlying strata.
Sedimentary basins consisting of relatively undisturbed flat-lying or gently
dipping sediments generally maintain a balanced pressure equilibrium and
therefore exhibit low constant stress. Where tectonic forces have compressed,
folded, faulted, or fractured the sedimentary package, a balanced mechanical
equilibrium is not maintained, and these areas exhibit stresses in one or more
directions depending upon the geology and the geometry of the deformation. In
other areas where the regional strata is characterized by non-uniform geologic
layering, particularly areas containing abrupt major sedimentation changes such
as buried reefs, channels, and erosional edges, these appear to exhibit higher
residual stress than the adjacent regional strata.
-5-
What Are Subsurface Hydraulic Stresses
Hydraulic stresses are caused by the presence of fluids (liquids and gases),
such as water, oil and natural gas, within the strata and, more particularly,
the inherent and directional pressures resulting from the relative buoyancy of
the fluids. A simple illustration of buoyancy is the effect of submerging a
beach ball in a swimming pool. When a beach ball is submerged it attempts to
rise to the top of the pool because the air in the beach ball is less dense than
the surrounding water. This upward pressure, which displaces the water above the
beach ball as it rises to the surface, is called buoyancy. Oil and gas exhibit
the same properties when formed underground--they will percolate upwards through
the strata by way of fractures or permeable strata until they either reach the
surface or are stopped or "trapped" by a non-porous barrier, in which case they
will continue to exert pressure against the trapping barrier.
How Does Our SFD Technology Interact with Subsurface Stress Fields
The principal components of our SFD technology are passive transducers, which we
refer to as the "SFD Sensors," which create and maintain quantum fields. As we
fly our SFD technology over an exploration area, the SFD Sensors interact with
the varying stress fields that are generated by and within the subsurface
strata. Our SFD technology interacts with these dynamic energy patterns and
converts them into electrical digital signals which we record and later
interpret using known geologic phenomena and oil and gas accumulations as
analogies.
Operational Practices In Conducting SFD Surveys
How We Acquire SFD Data
In operational practice, our SFD Survey System is flown over pre-selected
exploration areas at varying altitudes and from different directions. As the
SFD Sensors interact with the fields created by stresses, they register a
multitude of responses that we record in the form of digital signals, which we
refer to as "SFD Signals." Our proprietary data acquisition system acquires and
records these signals and marks their geographic location with global
positioning satellites using "GPS" coordinates. These integrated signals are now
referred to as "SFD Data." Our technical crew aboard the aircraft can also
monitor these signals in real time, which allows them to immediately identify
areas of particular interest for further investigation.
How We Interpret SFD Data
Once SFD Datasets acquired from our airborne survey operations are returned to
our home offices, our geological and geophysical interpretive staff process the
data, plot the flight lines, and produce computer-generated maps. We then
commence the following screening and interpretation process:
. First, we screen the SFD Data for "anomalous" signals on the flight line,
which we refer to as "SFD Anomalies." These SFD Anomalies include signals
from both unknown or non-producing areas that we survey as well as signals
obtained over known oil and gas pool crossings.
. Once we have identified the SFD Anomalies on a given flight line, we then
isolate and distinguish SFD Anomalies which have signal characteristics
indicative of subsurface mechanical conditions, which we refer to as
"structural signals," and subsurface hydraulic conditions, which we refer
to as "hydrocarbon signals." At this point, we will contrast these new
structural and hydrocarbon signals with those signals found over known oil
and gas accumulations in the area. This comparative process, which we
discuss in greater detail below, is very similar to that used in seismic
interpretation.
. Our geological team then puts each identified SFD Anomaly into subsurface
context using our in-house geological database. The SFD Anomaly may then
become a "SFD Lead," if the structural and hydrocarbon signals of the SFD
Anomaly appear to coincide in proper geologic context. In other words we
answer the question, does the anomaly make sense where it appears in the
sedimentary basin? Where we have sufficiently qualified an SFD Lead with
further SFD Data acquired from additional surveys, we reclassify the lead
as a "Recommended SFD Prospect" and tender it to our joint venture partner
for its further geological and geophysical evaluation.
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In reaching its conclusion as to the coincidence of favorable geology and
structural or hydrocarbon signals, our geological team will evaluate the
following factors in the overall context of its understanding of the local
geology:
. "Templating" Signals With Those Of Known Oil And Gas Accumulations
Our geological team compares or "templates" the anomalous structural and
hydrocarbon signals with those of known oil and gas accumulations since oil
and gas exploration is, by its inherent nature, a "comparative" process.
Geologists and geophysicists constantly compare data for exploration areas
to that from known producing regions that are either nearby or exhibit
similar subsurface characteristics. Our process is similar in that we
compare the structural or hydrocarbon signals from our anomalies to those
signals from a nearby producing field or other known fields that exhibit
similar patterns.
-7-
. Signals Characteristics
The most common and reliable SFD signals are structural signals, which
indicate the existence of potentially seismically-identifiable subsurface
mechanical conditions such as structural traps, strata types and other
geologic features and characteristics that commonly trap oil and gas
accumulations ("seismically-identifiable structures"). Our experience is
that our SFD technology recognizes seismically-identifiable structural
traps and other geologic features with a high degree of accuracy.
While the rate of corroboration is fairly high, the mere existence of
seismically-identifiable structures does not mean that oil and gas is
present. Rather, it merely infers that oil and gas may be present, since
these geologic features and characteristics represent common trapping
mechanisms. Industry experience has proven, for example, that the majority
of seismically-identifiable structures do not trap commercial quantities of
oil and gas. This is what makes "wildcat" exploration--where test wells are
drilled in unproven areas distant from existing known pools usually based
upon seismic interpretations or geological mapping--so risky. For example,
the current oil industry rate of success in drilling productive wells in
true wildcat exploration areas, based upon the ability of the well to
produce sufficient hydrocarbons to repay its drilling costs and provide
some return on equity, is only 10% to 20%, or one well out of five to ten
wildcat wells drilled.
The hydrocarbon signals are less common than structural signals. However,
when hydrocarbon signals are present, they are complimentary to, and in
some cases more probative than, our structural signals since:
. Hydrocarbon signals directly indicate oil and gas accumulations, while
the structural signals only infer oil and gas accumulations for the
reasons indicated above;
. The confluence of both structural and hydrocarbon signals, when present,
enhances our comfort level in a commercial trap; and
. The hydrocarbon signal alone lends itself to the potential
identification of an abundant number of oil and gas accumulations that
are "stratigraphically trapped" which are generally less susceptible to
detection by seismic methods.
The major drawback to date of our hydrocarbon signal is its relative
inability on its own to indicate the depth of hydrocarbon accumulations or
the number of oil and gas bearing zones, which we attempt to address
through the templating process described above.
While we believe based upon our experience that our SFD technology is
fairly effective in identifying oil and gas pools, and particularly large
fields, this belief will only be proven by drilling results from a
representative group of stratigraphic pools that do not carry structural
signals.
8
What Happens When We Tender Recommended SFD Prospects To Our Joint Venture
Partners
Once we tender a Recommended SFD Prospect to one of our joint venture partners,
they conduct whatever conventional geological, geophysical and economic
evaluations of the prospect they may deem prudent in making a decision to
proceed with drilling. If the joint venture partner decides to drill a
Recommended SFD Prospect, the prospect is characterized as an "Accepted SFD
Prospect," in which case we can elect to either receive our 5% to 8% overriding
royalty or to participate in the drilling and production of the prospect through
our working interest election.
How Fast Can We Acquire And Interpret SFD Data
We are able to fly our SFD Survey System at 150 to 200 mph, and can survey 600
to 800 linear miles in a four-hour day of recording. For each day of recording,
it takes our staff between one to five days of data processing and
interpretation--including plotting flight routes, screening and analyzing
anomalies, putting the anomalies in geologic context, and ranking the
anomalies--to sufficiently identify and recommend the SFD Prospects from that
flight line. The actual amount of time required is ultimately determined by the
following factors:
. The number and types of SFD Anomalies identified on the flight line;
. The quality of the SFD Data;
. The complexity of the subsurface geology under the flight line;
. The amount of available geological information; and
. The amount of SFD Data available from other SFD survey flights intercapting
the potential prospect.
As a consequence, we are able to record and interpret 800 linear miles of SFD
Data acquired in one SFD survey flight over a period of only a few days at a
cost of $5 to $10 per mile. By way of comparison, traditional land-based seismic
crews record up to five linear miles of 2D seismic per day, depending on
acquisition parameters, at costs of approximately $5,000 to $20,000 per mile.
Two or more weeks are then required to process the data, followed by another
several weeks for interpretation. As a result, it can take a minimum of six
months to record and interpret 1,000 linear miles of new 2D seismic data, at a
total cost of $5 million to $20 million. Greatly adding to these direct seismic
expenses are the obvious opportunity costs of allowing aggressive competitors
with comparable seismic capabilities an equal chance to record data during the
same six month interpretation period. With our SFD technology, opportunity costs
due to time lag are negligible.
We identify approximately twenty SFD Leads on average for each four-hour day of
surveying, and ultimately tender, on average, two or 10% of these leads to our
joint venture partners as Recommended SFD Prospects for further evaluation. The
SFD Prospects which we tender can be pool to field-sized targets that could
require two to ten wells or more to exploit depending upon accumulation. At our
current projected annual rate of six to eight survey days per month per ten
months of airplane annual operational availability, we anticipate we can
identify 120 to 160 Recommended SFD Prospects per year assuming no excessive
downtime. We anticipate that we will increase our monthly flying rate at some
future date as we increase our efficiencies, which would result in a
corresponding increase in the number of Recommended SFD Prospects we identify.
The actual number of these Recommended SFD Prospects that are accepted and
ultimately drilled by our joint venture partners will, however, be dependent
upon any number of competitive, geological and environmental variables.
Longer-Term Issues That Effect The Timing Of SFD Surveys And Interpretation
Before we tender a Recommended SFD Prospect to a joint venture partner, we will
typically interpret two or more SFD Data sets for the prospect, which requires
in turn a corresponding number of SFD survey
-9-
flights to acquire the data. If we are not able to acquire sufficient quality
SFD Data for an SFD Lead from a single survey project, then we will be able in
many instances to evaluate this information and tender the Recommended SFD
Prospect to the joint venture partner in a matter of days following commencement
of the interpretation process. However, in many cases we must perform additional
survey flights over a target zone at a later date due to a number of factors,
including delays attributable to weather, a need to acquire more definitive SFD
Data, and requests by the joint venture partner to further define the Prospect
or its surrounding area. Also, since we acquire SFD Data during our entire
flight rather than limiting the data acquisition process to our targeted zones,
we typically encounter new SFD Leads outside these zones which will require
additional SFD Data for their further evaluation. It may take several weeks or
even months to perform follow-up surveys on these SFD Leads due to impending
survey and interpretation obligations to current joint venture partners, as well
as weather conditions which may impede our ability to fly. We anticipate that
a number of these timing issues will be addressed as we augment our current
operational capacity with additional survey aircraft and interpretation staff.
Longer-Term Issues That Effect The Timing Of Land Acquisition And Drilling
We believe that our joint venture partners will not only be more successful in
their drilling programs as a result of their reliance on our SFD technology, but
also be capable of accessing superior opportunities more quickly than their
competitors. However, the time it may take for a joint venture partner to get to
the drilling stage of an SFD Prospect can still be lengthy depending upon any
number of factors, including the following:
. Regardless of the quality of SFD Data we have to support our recommendation
in tendering a Recommended SFD Prospect, it currently remains necessary for
our joint venture partners to conduct further geological and geophysical
evaluations, including 2D or 3D seismic surveys where warranted, of each
Recommended SFD Prospect. Because our SFD technology is a reconnaissance
instrument, this must be done to determine the optimum drilling location
and potential pay zone depth.
. In some cases our joint venture partners may have the ability to conduct
their geologic and geophysical evaluation relatively quickly, such as in
circumstances where they have or can obtain sufficient quality commercial
or proprietary local seismic data. However, in many cases, particularly
those where we identify promising SFD Prospects outside target survey areas
in which our joint venture partners already own drilling rights, local
seismic data will not be existent or available. Seismic surveying,
especially 3D seismic, requires governmental and environmental permits,
satisfied surface land owners, and competent recording crews, among other
things, and usually takes several months to acquire and process.
. If our joint venture partners do not own mineral and drilling rights to a
specific prospect, they must obtain these rights in order to drill.
Negotiating deals with current mineral owners can be complicated, time
consuming and frustrating, particularly when the prospective mineral rights
lie in a highly competitive exploration area, or are already held by an oil
& gas company. Some of the factors which influence our joint venture
partners' ability to acquire the mineral and drilling rights at all, or the
cost they must pay to acquire these rights, include:
. whether the prospect lies in an active and competitive exploration
area;
. current oil & gas prices and their perceived direction;
. the duration of the remaining term of a mineral lease;
-10-
. the size and configuration of the mineral holdings sought (contiguous
land positions are more valuable and therefore more expensive to
acquire than patchwork holdings); and
. the proximity of oil and gas gathering and processing infrastructure.
Also, our joint venture partners might be required, in the case of a
farm-in, to first participate in the drilling of a location outside of
our prospect in order to earn the right to later drill at the site of the
prospect. This is done occasionally to earn valuable acreage "through the
drill bit."
. When mineral rights are held by the federal or state government, or held by
the Crown (Canada), these lands may be acquired by posting for sale, but
remain subject to the uncertainties of the bidding or auction process, and
may require a considerable lead time before being offered for bid.
Our Business And Geographic Segments
We currently operate in only one business segment, oil and natural gas
exploration, insofar as we intend to develop all oil and natural gas exploration
prospects identified using our proprietary "SFD" remote-sensing airborne survey
technology either directly for our account or indirectly for our account through
working interest or overriding royalty interests through our joint venture
partners. We do not currently sell or market our SFD Data as a separate product
to third parties. For geographical segment information, see note 18 to our
consolidated financial statements included in Item 14 of this annual report.
Joint Venture Partners
Canadian Exploration Joint Venture With Encal Energy Ltd.
Our Canadian joint venture partner is Encal Energy Ltd., located in Calgary,
Alberta, Canada. Encal is an intermediate Canadian exploration company listed on
the Toronto and New York Stock Exchanges. As of December 31, 1999, Encal had
total assets of Cdn. $775 million and 103,567 mboe of total proved reserves. For
1999, Encal averaged 13,862 barrels per day of oil and natural gas liquid
production and 153 million cubic feet per day of natural gas production.
Our current relationship with Encal is governed by the terms of an Exploration
And Joint Venture Agreement entered into in September 1997, and which expires on
September 15, 2000. This agreement replaced two prior joint venture agreements
entered into with Encal during 1996 and 1997. We are currently in negotiations
with Encal relative to extending the term of our current joint venture
agreement, and modifying some of its terms to comport with our current business
practices.
The material terms of the joint venture agreement with Encal/1/ are summarized
as follows:
. We are required to conduct SFD surveys on selected "exploration areas"
identified by Encal of up to 2,400 square miles, and Encal is required to
reimburse us for 50% of all daily aircraft rental, pilot salary, food and
accommodation costs we incur to conduct these surveys. We retain the right
to reject any presented exploration area for any bona fide reason,
including safety or technical concerns.
. When we have completed our survey, screening and interpretation activities
with respect to an exploration area, we are required to present Encal a
written report listing our Recommended SFD Prospects and a summary of our
interpretations for the flight lines within the exploration area, as
_____________________
/1/ The terminology or defined terms we use in this section comports with our
current nomenclature instead of that used in the Encal joint venture
agreement in order to avoid confusion.
-11-
well as a map of flight lines and locations of all SFD Anomalies from the
flight within the exploration area. We are also obligated to give Encal the
opportunity to review the SFD Data in our offices.
. Once we have tendered our report to Encal, it will have 90 days to conduct
conventional geological and geophysical evaluation of each Recommended SFD
Prospect tendered to it in order to determine whether it will accept the
prospect for potential drilling. If Encal accepts the exploratory prospect,
it will become an Accepted SFD Prospect. If Encal rejects the prospect, we
will attempt to agree on a procedure for its joint exploitation. If we
cannot reach agreement with Encal on a mechanism to exploit the prospect,
it will become our exclusive property and we may deal with it in any manner
we deem appropriate, subject to a two year confidentiality restriction if
the prospect is located on specified Encal lands.
. If Encal elects to drill a test well on an Accepted SFD Prospect, we will
have the right, at that time, to elect to either participate in drilling
the prospect on a working interest basis along the lines discussed below,
or receive a sliding scale overriding royalty on Encal's share of
production from the prospect on the lines discussed below. If we elect to
participate on a working interest basis on any Accepted SFD Prospect, we
will later be given a second election, to be exercised after Encal acquires
drilling rights for the prospect but before Encal spuds its first test well
on the prospect, to convert our working interest in the prospect into an
overriding royalty interest.
. Should we elect to participate on a working interest basis, we will be
obligated to bear 45% of Encal's land acquisition, drilling and development
costs for that well (unless it is a farm-in well which is fixed at 40%),
and will be entitled to receive a commensurate percentage of all revenues
received by Encal after the deduction of royalties, severances taxes and
production and marketing costs.
. Should we elect an overriding royalty, we will receive a minimum of 5% and
a maximum 8% of Encal's net revenues for crude oil, depending on the
productivity of the well, and a flat 8% of Encal's net revenues for all
other petroleum substances, including natural gas.
. We are obligated, whenever the number of active Recommended SFD Prospects
is less than fifteen, to devote at least 50% of our worldwide survey
capacity to identify prospects for Encal, until the amount or "inventory"
of active Recommended SFD Prospects reaches eighteen. For purposes of the
foregoing, the following exploration prospects are not included in the
"inventory" of active Recommended SFD Prospects:
. Any Recommended SFD Prospect for which Encal is unable to obtain
drilling rights;
. Any Recommended SFD Prospect on which Encal drills a test well; and
. Any Recommended SFD Prospect rejected by Encal.
. We have also agreed that:
. we will have no more than two additional joint venture partners in
Canada, although there are no restrictions on the number of joint
venture partners we may utilize outside of Canada;
. we will not grant larger or more numerous exploration areas to any
other joint venture partners than those granted to Encal;
. Encal will have the exclusive right for SFD surveys in the Province of
British Columbia, and at least 50% of the aggregate area in selected
regions of the Province of Alberta; and
. Encal will be afforded a first opportunity to participate in any
transaction utilizing our SFD technology to explore for petroleum
substances outside of Canada, where, in our sole judgment, there is an
opportunity for Encal to participate as operator or a participant
provided
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that role is available; and also provided that we believe it is
appropriate for Encal to perform that role.
. Encal will be the operator, and will make all decisions relating to and
control for all prospects developed by the joint venture. In this regard,
Encal will be responsible for
. conventional oil and gas exploration, operation, development and
management of the joint venture and any of its oil and gas properties;
and
. the production and marketing of any petroleum substances which are
produced from the joint venture.
. Should production be processed through Encal's production facilities, we
will pay Encal a reasonable proportional fee for the use of these
facilities. If production is processed through a third-party's production
facilities, we will be charged our portion of the actual costs for services
performed.
It should be noted that as of the date of this annual report our company and
Encal are not strictly following the prospect tendering and prospect evaluation
time periods mandated in the Encal joint venture agreement insofar as we are
currently working on the processes inherent in meeting these periods due to the
evolving nature of the SFD identification and interpretation processes. We are
also using a combination working interest/overriding royalty election in lieu of
that specified in the Encal joint venture agreement.
United States Exploration Joint Venture With CamWest Exploration LLC
Our United States-based joint venture partner is CamWest Exploration LLC, a
privately held oil and gas exploration company located in Denver, Colorado, and
McKinney, Texas. CamWest is principally owned by Stephens Group, Inc., a private
company headquartered in Little Rock, Arkansas, which invests primarily in
energy, media, telecommunications and investment banking companies, and which
has invested $8.5 million in our company through CamWest's affiliates.
Our current relationship with CamWest is governed by the terms of a Joint
Exploration And Development Agreement which we entered into in April 1998, and
which expires in March, 2003. This agreement was originally entered into with an
affiliate of CamWest, CamWest Limited Partnership. However, CamWest Limited
Partnership assigned its rights and obligations under the joint venture
agreement to CamWest on January 29, 1999, in order to establish an entity
dedicated solely to SFD exploration and drilling activities.
The material terms of the joint venture agreement with CamWest/2/ are as
follows:
. We are required to conduct SFD surveys on selected "exploration areas" in
the United States or internationally outside of Canada identified by
CamWest of up to 2,400 square miles, and CamWest is required to reimburse
us for 100% of all daily aircraft rental, pilot salary, food and
accommodation costs we incur to conduct these surveys. We retain the right
to reject any presented exploration area for any bona fide reason,
including safety or technical concerns.
. When we have completed our survey screening and interpretation activities
with respect to an exploration area, we are required to present CamWest a
written report listing our Recommended SFD Prospects and a summary of our
interpretations for the flight lines within the exploration area,
_____________________
/2/ The terminology or defined terms we use in this section comports with our
current nomenclature instead of that used in the Encal joint venture
agreement in order to avoid confusion.
-13-
together with a map of flight lines and locations of all SFD Anomalies from
the flight within the exploration area.
. Once we have tendered our report to CamWest, it will have 90 days, at its
sole cost, to conduct conventional geological and geophysical evaluation of
each Recommended SFD Prospect tendered to it in order to determine whether
it will drill a test well on the prospect. If CamWest decides to drill the
exploratory prospect, it will become an Accepted SFD Prospect. If CamWest
declines to drill, the prospect will be deemed rejected, in which case it
will be tendered to a limited liability company which will be managed by
CamWest, and owned 50% by us and 50% by CamWest, for joint exploitation.
. Once CamWest elects to drill a test well on any Accepted SFD Prospect, we
will be deemed to have a 45% working interest in that well along the lines
discussed below; provided, however, we shall have the right, for a period
of 15 days after CamWest notifies us it intends to drill, or 48 hours after
notice that a drilling rig is located on the test well site if sooner, to
reconsider our election. In this case we may either choose to either retain
our 45% working interest, or reduce our working interest to a percentage
less than 45%, or convert our entire interest to an overriding royalty
along the lines discussed below.
. Should we elect to participate on a working interest basis, we will be
obligated to bear our elected percentage (i.e., 45% or less) of CamWest's
land acquisition, drilling and development costs for that well, and will be
entitled to receive a commensurate percentage of all revenues receives by
CamWest after the deduction of royalties, severances taxes and production
and marketing costs.
. Should we elect an overriding royalty, we will receive a 5% royalty of
CamWest net revenues if production is less than 1,000 barrels of oil or oil
equivalents per month, and an 8% royalty when production equals or exceeds
1,000 barrels of oil or oil equivalents per month.
. We are obligated, whenever the "inventory" of active Recommended SFD
Prospects is less than 31, to commence and continue SFD surveying until
there are again 36 Recommended SFD Prospects in active inventory.
. We have also agreed that:
. whenever the number of active Recommended SFD Prospects in active
inventory for CamWest is below the minimum requirement, we will
dedicate at least 50% of our worldwide SFD survey capacity toward
CamWest's requirements, unless we have obligations under three or more
other joint venture agreements, in which case we must dedicate at
least 25% of our worldwide SFD survey capacity to CamWest; and
. CamWest will have the exclusive rights for SFD surveys in 2,400 square
mile "exclusive areas" selected by CamWest outside of Canada;
provided, however, that these areas are limited to a total of
1,000,000 square miles within the United States and an additional
1,000,000 square miles outside of the United States and Canada.
. CamWest will be the operator, and will make all decisions relating to
management and control of, all Recommended SFD Prospects developed under
the joint venture. In this regard, CamWest will be responsible for
. conventional oil and gas exploration, operation, development and
management of the joint venture and any of its oil and gas properties;
and
. the production and marketing of any petroleum substances which are
produced from the joint venture
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. Should production be processed through CamWest's production facilities, we
will pay CamWest a reasonable proportional fee for the use of these
facilities. If production is processed through a third-party's production
facilities, we will be charged our portion of the actual costs for services
performed.
It should be noted that as of the date of this annual report our company and
CamWest are not strictly following the prospect tendering and prospect
evaluation time periods mandated in the CamWest joint venture agreement insofar
as we are currently working on the processes inherent in meeting these periods
due to the evolving nature of the SFD identification and interpretation
processes. We are also using a combination working interest/overriding royalty
election in lieu of that specified in the CamWest joint venture agreement.
Renaissance Energy Survey Agreements
We had previously entered into several short-term survey agreements with another
Canadian exploration company, Renaissance Energy Ltd., whereby we survey
designated exploration blocks and tendered Recommended SFD Prospects to
Renaissance for drilling with specified timeframes. Although we tendered several
Recommended SFD Prospects to Renaissance, they did not drill exploratory wells
on these prospects principally for economic reasons given low oil and gas prices
at that time, and the last of the agreements lapsed without renewal in December
1999.
Competition
Since we use our SFD technology for wide-area oil and gas reconnaissance
exploration, our "competition" would generally be described as other
technologies used for wide-area oil and gas reconnaissance exploration. The
principal competitive technology in this regard would be seismic, which is well
accepted in the industry and has, in fact, been used since 1919. While there are
numerous industry competitors of all sizes which offer seismic services, the
largest industry competitors to our knowledge are Baker Hughes Inc.,
Schlumberger Limited, Compagnie Generale de Geophysique, S.A, Seitel, Inc.,
Veritas DGC Inc. and Petroleum Geo-Services A.S.A.
There are also a number of other technologies used in the industry for "passive"
wide-area oil and gas reconnaissance exploration, including aeromagnetic,
gravity, ground or surface radar, satellite surveys, telemetrics and spectrum
analyzers, however, we do not believe that any of these technologies have been
accepted in the industry as a highly predictive general exploration tool.
To our knowledge there are no other companies in the oil and gas exploration
industry who employ any quantum physics-based technology similar to our SFD
technology.
While the technologies noted above are competitive to ours in the sense that all
are used for wide-area reconnaissance exploration, you should note that there is
no direct competition in the sense that we do not offer the use of our SFD
technology to the industry on a fee-for-service basis as is ordinarily the case
with respect to the providers of these other technologies. Consequently, we do
not have any customers for our SFD technology other than our two present joint
venture partners.
Employees
As of December 31, 1999, we had fifteen full time employees. None of these
employees are covered by collective bargaining agreements. Of these employees,
five devote their full time and one devotes one-half of his time to SFD survey
operations and SFD Data interpretation, and three devote their full time and one
devotes one-half of his time to research and development. The balance provide
administrative, information management and accounting support for all
operations. We believe we have a favorable relationship with all of our
employees. We have employment contracts with our four senior executives.
-15-
Research and Development
Our research and development activities to date have focused on developing,
improving and testing our SFD Survey System and related components. Our research
and development expenses amounted to $272,489, $57,823 and $103,079 for our
1999, 1998 and 1997 fiscal years, respectively. Our research and development
budget for fiscal 2000 is $400,000.
Manufacturing Capacity and Suppliers
All components of our SFD technology, other than readily available computer
hardware and software, are fabricated at our facilities by either Momentum
Resources Corporation or our company, using readily available materials,
pursuant to Momentum's or our specifications. We are not dependent upon any
third party contract manufacturers or suppliers to satisfy our manufacturing
requirements.
Governmental And Environmental Regulation
SFD Survey Flight Operations
The operation of our business, namely, conducting aerial SFD surveys and
interpreting SFD Data, is not subject to material governmental or environmental
regulation with the exception of flight rules promulgated by the Federal
Aviation Administration and Transport Canada governing the use of private
aircraft, including rules relating to low altitude flights.
Oil And Gas Exploration And Development Projects
The oil and natural gas industry in general is subject to extensive controls and
regulations imposed by various levels of the federal and state governments in
the United States and federal and provincial governments in Canada. In
particular, oil and gas exploration and production is subject to laws and
regulations governing environmental quality and pollution control, limits on
allowable rates of production by well or proration unit, and other similar
regulations. Laws and regulations generally are intended to prevent waste of oil
and natural gas; protect rights to produce oil and natural gas between owners in
a common reservoir, control the amount of oil and natural gas produced by
assigning allowable rates of production; and control contamination of the
environment. Environmental regulations affect our operations on a daily basis.
Public interest in the protection of the environment has increased dramatically
in recent years. Drilling in certain areas has been opposed by environmental
groups and, in certain areas, has been restricted. We believe that the trend of
more expansive and stricter environmental legislation and regulations will
continue.
We do not expect that any of these government controls or regulations will
affect projects in which we participate in a manner materially different than
they would affect project of similar size or scope of operations. All current
legislation is a matter of public record and we are not able to accurately
predict what additional legislation or amendments may be enacted. Governmental
regulations may be changed from time to time in response to economic or
political conditions. Any laws enacted or other governmental action taken which
prohibit or restrict onshore and offshore drilling or impose environmental
protection requirements that result in increased costs to the oil and gas
industry in general would have a material adverse effect on our business,
results of operations and financial position.
Operating Hazards
SFD Survey Flight Operations
The operation of our SFD survey aircraft is subject to the usual hazards
incident to general and low level flight operations. These hazards can cause
personal injury and loss of life, as well as severe damage to and destruction of
property. While we maintain insurance coverage against some, but not all,
operating risks associated with the operation of our aircraft, we cannot predict
the continued availability of insurance coverage or the availability of
insurance at premium levels that justify its purchase, nor can we give any
assurance that any claim would not exceed our policy limits. If we were unable
to procure insurance for our flight operations at an acceptable cost, the
occurrence of significant adverse aircraft accident not fully insured or
indemnified against could have a material, adverse effect on our business,
financial condition
-16-
and operating results. Similarly, a judgment or settlement in excess of our
policy limits could also have a material, adverse effect on our business,
financial condition and operating results.
Oil And Gas Exploration And Development Projects
The oil and gas exploration and development projects in which we participate
through our joint venture partners will also be subject to the usual hazards
incident to the drilling of oil and gas wells, including the risk of fire,
explosions, blow-out, pipe failure, casing collapse, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases. In addition to the foregoing, offshore operations are
subject to the additional hazards of marine operations, such as capsizing,
collision and adverse weather and sea conditions. These hazards can cause
personal or loss of life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations.
The project operator will, in accordance with prevailing industry practice,
maintain insurance against some, but not all, of these risks. The insurance
maintained by the project operator generally would not cover claims relating to
failure of title to oil and gas leases, trespass during survey acquisition or
surface damage attributable to seismic operations, or business interruption, nor
would it protect against loss of revenues due to well failure. There can be no
assurance that any insurance obtained by the project operating covering claims
related to worker's compensation, comprehensive general liability for bodily
injury and property damage, comprehensive automobile liability and pollution,
cleanup, underground blowout and evacuation will be adequate to cover any losses
or liabilities which may be incurred within projects in which we participate. We
also cannot predict the continued availability of insurance coverage or the
availability of insurance at premium levels that justify its purchase.
Since we do not act as operator on any projects in which we may participate, we
are dependent upon our partners to conduct operations in a manner so as to
minimize these operating risks.
In cases where we have direct liability as a result of our participation on a
working interest basis, the failure or inability of the project operator to
procure insurance at an acceptable cost or the occurrence of a significant
adverse event not fully insured or indemnified against could have an direct
material, adverse effect on our business, financial condition and operating
condition. In these cases our exposure will be commensurate with our
participation percentage.
While we would have no direct liability in cases where our participation is
limited to an overriding royalty interest, the failure or inability of the
project operator to procure insurance at an acceptable cost or the occurrence of
a significant adverse event not fully insured or indemnified against could have
an indirect material, adverse effect on our business, financial condition and
operating results to the extent it adversely affects our joint venture partner's
ability to complete current projects or explore for and develop additional
projects.
Our SFD Technology License
We do not own our SFD technology, but instead have an exclusive world-wide
license to use the SFD Data acquired by the SFD Sensor for hydrocarbon
identification and exploration purposes (the "SFD Technology License") which was
granted to us by Momentum Resources Corporation, which is the owner of the SFD
technology. We do, however, own our data acquisition systems used with the SFD
Sensor.
The terms of our license are governed by a Restated Technology Agreement which
was entered into on August 1, 1996 by Pinnacle, Pinnacle U.S. and Momentum, and
subsequently amended on April 3, 1998. Momentum is a Bahamas corporation which
is indirectly owned and controlled by Messrs. George Liszicasz and R. Dirk
Stinson, who were also parties to the SFD Technology License. Mr. Liszicasz, who
is the inventor of the SFD technology, is also our largest stockholder and the
Chief Executive Officer and a director of our company. Mr. Stinson is our second
largest stockholder and one of our directors.
The material terms of the SFD Technology License, as amended, are summarized as
follows:
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. Momentum is obligated to make the SFD Sensor available to our company for
use on our SFD surveys in conjunction with our data acquisition and
interpretation equipment, and must also provide all SFD Data acquired from
each survey to our company for our exclusive use for hydrocarbon
identification and exploration purposes.
. Mr. Liszicasz is obligated to:
. provide at least 500 man-hours per year to generate SFD Data, and
. interpret and analyze all raw SFD Data.
. We will have 180 days after the designation of a "Prospect" to use our best
efforts to commercially and economically exploit the Prospect for its
hydrocarbon potential, subject to specified exceptions.
. We are obligated to pay Momentum certain amounts which will be contingent
on the commercial exploitation of the Prospects by our company,
specifically, 1% of any "prospect profits" we may actually receive on or
before December 31, 2000, and 5% of any "prospect profits" we may actually
receive after December 31, 2000. For purposes of the foregoing:
. the term "prospect profits" means "prospect revenues" less "prospect
expenses;",
. the term "prospect revenues" means as the aggregate of all gross
revenues we may receive with respect to the commercial exploitation of
all Prospects under the SFD Technology License, whether through cash
flows of a joint venture, sale of "leads" for Prospects, or revenues
from our direct ownership and sale of hydrocarbons from Prospects; and
. the term "prospect expenses" being defined as all project expenses
actually paid by our company with respect to the commercial
exploitation of all SFD Prospects.
. In addition to the noted payments, commencing on January 1, 2001, we will
become obligated to grant Momentum warrants to purchase 16,000 shares of
our common stock for each month in which Prospect production exceeds 20,000
barrels of hydrocarbons. The exercise price for these warrants will be the
"fair market value" of our common stock as determined by reference to the
closing price on the last business day of the quarter of the calculation.
. Momentum is prohibited during the term of the SFD Technology License from
engaging in the identification or exploitation of hydrocarbons for its own
account, and cannot grant any license or sublicense to any third party
to use the SFD Sensor or the SFD Data for the identification or
exploitation of hydrocarbons.
. The initial term of the SFD Technology License expires on December 31,
2005, however, it will renew automatically for additional one year terms
unless we give written notice to Momentum, no later than 60 days prior to
the expiration of the pending term, of our election not to automatically
renew the SFD Technology License.
. Momentum, in turn, reserves the right to terminate the SFD Technology
License upon the occurrence of any of the following events:
. Our failure to make any payment required under the SFD Technology
License.
. Our abandonment or discontinuance of the conduct of the oil and gas
exploration business;
. Our dissolution or liquidation;
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. Our assignment of our assets for the benefit of our creditors, or our
filing bankruptcy, or the appointment of a receiver for our business
or property; or
. Our failure to perform any other material covenant, agreement or term
of the SFD Technology License.
. Momentum may also terminate the SFD Technology License upon the occurrence
of a "Change in Control" with respect to our company. For the purposes of
the foregoing, the term "Change in Control" is defined as any of the
following events:
. an acquisition whereby immediately after the acquisition, a person
holds beneficial ownership of more than 50% of the total combined
voting power of our then outstanding voting securities; or
. if in any period of three consecutive years after the date of the SFD
Technology License, our incumbent Board of Directors at the beginning
of that period ceases to constitute a majority of the Board of
Directors for reasons other than:
[_] voluntary resignation,
[_] refusal by one or more Board members to stand for election,
or
[_] removal of one or more Board members for good cause,
provided that:
. if the nomination or election of any new director was
approved by a vote of at least a majority of the
incumbent board, then such new director shall be deemed
a member of the incumbent board, and
. no individual shall be considered a member of the
incumbent board if such individual initially assumed
office as a result of either an actual or threatened
"election contest" (as described in Rule 14a-11
promulgated under the Securities Exchange Act of 1934);
or
. our Board of Directors or stockholders approve:
[_] our merger, consolidation or reorganization;
[_] our complete liquidation or dissolution; or
[_] the agreement for the sale or other disposition of all or
substantially all of our assets;
. provided, however, a Change in Control shall not be deemed to occur in
the event of any of the following:
[_] our redemption of our stock; or
[_] a "non-control transaction" in which our stockholders
immediately before a transaction, directly or indirectly own
immediately after the transaction at least a majority of the
total combined voting power of the outstanding voting
securities of the surviving corporation, in substantially
the same proportion as those stockholders' ownership of our
voting securities immediately before such transaction.
-19-
We May Be Unable To Protect Our Proprietary Rights To Our SFD Data And The SFD
Technology
As noted above, we have the exclusive right to utilize SFD Data for hydrocarbon
exploration pursuant to the terms of our Restated Technology Agreement with
Momentum Resources Corporation. While Momentum claims common law ownership of
the SFD Technology, it has not obtained patent or copyright protection for the
SFD Technology. Based in part on an opinion of patent counsel, Momentum and our
company each believe that the disclosure risks inherent in patent or copyright
registration far outweigh any legal protections which might be afforded by such
registration. In the absence of significant patent or copyright protection, we
may be vulnerable to competitors who attempt to imitate our SFD technology, or
to develop functionally similar technologies.
Although we believe that we have all rights necessary to market our services
without infringing upon any patents or copyrights held by others, we cannot give
you any assurance that conflicting patents or copyrights do not exist. We rely
upon trade secret protection and confidentiality and non-disclosure agreements
with our employees, consultants, joint venture partners and others to protect
our proprietary rights. Furthermore, we do not believe, were Momentum to apply
for and receive patent protection, that patent protection would necessarily
protect Momentum or our company from competition. Momentum and our company
therefore anticipate continued reliance upon contractual rights and on common
law to protect our trade secrets. The steps taken by our company and Momentum to
protect our respective rights may not be adequate to deter misappropriation, or
to preclude an independent third party from developing functionally similar
technology.
We cannot give you any assurance that others will not independently develop
substantially equivalent proprietary information and techniques, or otherwise
gain access to the Momentum's or our trade secrets, or otherwise disclose
aspects of the SFD technology, or that we will be able to meaningfully protect
our trade secrets. We also cannot give you any assurance that Momentum or our
company will not be required to defend against litigation or to enforce or
defend intellectual property rights relating to our SFD technology. Legal and
accounting costs relating to prosecuting or defending intellectual property
rights may be substantial.
Item 2. Properties
Leased Premises
Our principal executive office space consists of 13,325 square feet located at
Suite 750, Phoenix Place, 840 7th Avenue S.W., Calgary, Alberta, T2P 3G2, which
we have leased for a five-year term extending through January 31, 2003. Our
combined obligations for base lease payments and building operating cost and
other pass-through items under this lease as of the date of this annual report
is Cdn. $21,862 per month, which translates into U.S. $15,015 per month based
upon the closing conversion rate as of December 31, 1999. We have the option
under our lease, at the expiration of the five year term, to renew the lease if
we have had no defaults under the lease. We believe that these facilities are
adequate for our needs for the near future. We also maintain hangar facilities
for our survey aircraft which we rent on a monthly basis, as well as executive
office facilities in Las Vegas, Nevada, for United States operational
requirements which we rent on a quarterly basis.
Petroleum Properties
We have no producing properties or oil and gas revenues or proven reserves for
any of our most recent three fiscal years ended December 31, 1999.
Summarized below is information relating to the exploratory wells in which we
have or had either a working interest or an overriding royalty interest in the
United States or Canada that have been spudded, drilled or completed as of
December 31, 1999 and as of the date of this annual report:
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. Exploratory Wells Drilled In The United States
. Leucite Hills South Prospect
In September 1999, we elected through Pinnacle U.S. to participate on
a working interest basis with CamWest in drilling an exploration well
on a ten square mile prospect in the Green River Basin in Sublette
County, Wyoming. As a consequence of that election, we acquired a
combination 11.25% overall working interest and a 1.6% overall net
overriding royalty interest in the original earning section, which we
refer to as our "Leucite Hills South" prospect.
This exploratory well, which was spudded in September 1999, was
drilled by a third-party operator, and cased and completed as a
natural gas discovery in September 1999. This well will not, however,
be placed into production by the operator until a sufficient number of
additional wells are drilled on the exploratory block and can be tied
into a gathering system. No additional step-out wells have been
scheduled for drilling as of the date of this annual report. The
potential estimated or proven reserves of the reservoir has not been
ascertained.
. Poblano Prospect
In October 1999, we elected through Pinnacle U.S. to participate on a
working interest basis with CamWest in drilling an exploration well on
a ten square mile prospect in the Green River Basin in Sublette
County, Wyoming. As a consequence of that election, we acquired a
combination 16.875% overall working interest and a 2.49% overall net
overriding royalty interest on the exploration block, which we refer
to as our "Poblano" prospect.
The exploratory well, which was spudded in October 1999, was drilled,
cased and completed in January 2000 as a natural gas discovery.
Production from this well will commence pending completion of a twelve
mile pipeline which will tie the well into an existing sales system.
The potential estimated or proven reserves of the reservoir has not
been ascertained.
Based upon the results of the first exploratory well, CamWest spudded
a second step-out exploration well on the Poblano exploration block in
March 2000, and drilling continues as of the date of this annual
report. Our working interest and overriding royalty on this
exploration well is identical to that which we hold with respect to
the initial exploration well.
. Poblano South Prospect
In October 1999, we elected through Pinnacle U.S. to participate on a
working interest basis with CamWest in drilling an exploration well on
a ten square mile prospect in the Green River Basin in Sublette
County, Wyoming. This exploratory block adjoins our Poblano
exploratory block. As a consequence of that election, we acquired a
combination 5.625% overall working interest and a 0.8% overall net
overriding royalty interest on the exploration block, which we refer
to as our "Poblano South" prospect.
The exploratory well, which was spudded in October 1999, was drilled,
cased and completed in January 2000. This well has been shut-in by the
operator pending further evaluation of its completion program. The
potential estimated or proven reserves of the reservoir has not been
ascertained.
. Exploratory Wells Drilled In Canada
. Shoal Point Prospect
One exploration well spudded in early 1999 by a third-party operator
at Shoal Point, Newfoundland, was drilled, evaluated and determined to
be a dry hole. Pinnacle Canada
-21-
elected a royalty interest through Encal with respect to this
prospect. Due to the expiration of the underlying mineral lease, we do
not believe that Encal has any current working interest in this
prospect at this date.
. Carbon Prospect
In December 1999, we elected through Pinnacle Canada, to accept an
overriding royalty interest from Encal with respect to an exploration
well it would drill in southern Alberta. As a consequence of this
election, we acquired a 2.5% overall overriding royalty interest on
the exploration block, which we refer to as our "Carbon" prospect.
The exploratory well, which was spudded in December 1999, was drilled,
cased and completed in January 2000 as a natural gas discovery. This
well is currently suspended pending further completion activity by the
operator. The potential estimated or proven reserves of the reservoir
has not been ascertained.
. Monarch Prospect
In November 1999, we elected through Pinnacle Canada, to participate
on a working interest basis with Encal in drilling an exploration well
on an SFD Prospect in southern Alberta. As a consequence of that
election, we acquired a combination 22.5% overall working interest and
a 3.1% overall net overriding royalty interest on lands Encal acquired
in the exploration block, which we refer to as our "Monarch" prospect.
The exploratory well was spudded in March 2000, and is currently cased
and awaiting completion.
Item 3. Legal Proceedings
As of the date of this annual report, there are no material legal proceedings
pending or, to the knowledge of our management, contemplated or threatened, to
which to our company or properties are or may become a party. As of the date of
this annual report, there are, to the knowledge of our management, no material
proceedings to which any director, officer of affiliate of our company is a
party adverse to our company or has a material interest adverse to our company.
Item 4. Submission Of Matters To A Vote Of Securities Holders
There were no matters submitted to a vote of our security holders during our
fourth quarter ended December 31, 1999.
Part II
-------
Item 5. Market Price Of And Dividends On Our Common Stock And Related
Stockholder Matters
Market Information
Our common stock trades over-the-counter on the NASD OTC Bulletin Board under
the trading symbol "PSFD." The following table lists, by calendar quarter, the
volume of trading and the high and low sales prices of our common stock on the
NASD OTC Bulletin Board for our three most recent fiscal years ended December
31, 1999.
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Sales Price
------------------------
Period Volume High Low
------------------------ -------- ------- -------
1999:
Fourth Quarter.......... 715,500 $ 29.000 $13.063
Third Quarter........... 358,700 14.688 10.500
Second Quarter.......... 754,800 20.000 11.375
First Quarter........... 506,100 19.000 10.000
1998:
Fourth Quarter.......... 2,361,600 $ 19.375 $ 3.500
Third Quarter........... 1,194,700 14.625 6.500
Second Quarter.......... 2,236,472 15.250 9.125
First Quarter........... 4,770,148 14.375 7.375
1997:
Fourth Quarter.......... 4,667,954 $ 13.250 $ 6.500
Third Quarter........... 4,155,507 15.000 7.688
Second Quarter.......... 3,155,612 9.375 4.375
First Quarter........... 3,896,838 7.438 3.813
The closing price for our common stock as of March 28, 2000 was $38.
On March 29, 2000, the shareholders' list provided by our transfer agent showed
60 registered shareholders and 12,870,016 shares of common stock outstanding.
We estimate, based upon information provided by our stock transfer agents for
our last annual meeting of stockholders held in September 1999, that there are
approximately 1,300 beneficial holders of our common stock.
As of March 29, 2000, there were also outstanding 800,000 shares of our series
"A" convertible preferred stock, held by one stockholder, for which no trading
market presently exists. These shares are each convertible into one share of
common stock. There are also outstanding as of March 29, 2000, options and
warrants entitling the holders to purchase 1,760,800 and 200,000 shares of our
common stock, respectively. These warrants to purchase 200,000 shares of our
common stock were fully exercised and paid on April 3, 2000.
Dividend Policy
We have never paid any cash dividends on shares of our capital stock, and we do
not anticipate that we will pay any dividends in the foreseeable future. Our
current business plan is to retain any future earnings to finance the expansion
of our business. Any future determination to pay cash dividends will be at the
discretion of our Board of Directors, and will be dependent upon our financial
condition, results of operations, capital requirements and other factors as our
Board of Directors may deem relevant at that time.
Item 6. Selected Consolidated Financial Information
The following table presents selected historical consolidated financial data
derived from our consolidated financial statements. The selected statement of
loss data set forth below for our three fiscal periods ended December 31, 1999,
December 31, 1998 and December 31, 1997, and the selected balance sheet data set
forth below as of December 31, 1999 and December 31, 1998, have been audited by
Deloitte & Touche LLP, independent auditors, as indicated in their report
contained in the consolidated financial statements included in Item 14 of this
annual report. The selected statement of loss data set forth below for the
fiscal periods ended December 31, 1996 and December 31, 1995, and the selected
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balance sheet data set forth below at December 31, 1997, December 31, 1996 and
December 31, 1995, are derived from our audited consolidated financial
statements not included in this annual report.
The following selected financial data should be read in conjunction with:
. our consolidated financial statements and the notes to our consolidated
financial statements included in Item 14 of this annual report; and
. Item 7 of this annual report captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Oct. 20, 1995
(Inception) to
Twelve Months Ended December 31, Dec. 31,
------------------------------------------------------
Consolidated Statement of Loss Data: 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- --------------
Operating Revenues............................ $ -- $ -- $ -- $ -- $ --
Operating expenses:
Administrative............................. 1,132,390 979,119 742,438 355,391 53,024
Amortization and depreciation.............. 171,494 71,919 25,474 24,435 672
Research and development................... 272,489 57,823 103,079 -- --
Survey support............................. 287,632 193,759 120,588 101,010 --
Survey operations and data analysis, net
of reimbursements by joint venture
partners ................................ 30,354 30,026 114,686 -- --
Write-down of assets....................... 588 -- 17,074 -- --
----------- ----------- ----------- ----------- --------------
Total operating expenses................ 1,894,947 1,332,646 1,008,653 480,836 53,696
Operating loss................................ (1,894,947) (1,332,646) (1,008,653) (480,836) (53,696)
Other income (expenses):
Interest income............................ 360,434 209,906 47,832 5,258 --
Interest expense on promissory notes....... -- (14,299) (110,000) -- --
Other income............................... -- 19,231 -- -- --
Settlement of damages...................... -- -- 157,500 -- --
----------- ----------- ----------- ----------- --------------
Total other income (expenses)........... 360,434 214,638 95,332 5,258 --
Net loss for the period....................... $(1,534,513) $(1,117,808) $ (913,321) $ (475,578) $ (53,696)
=========== =========== =========== =========== ==============
Other comprehensive loss:
Foreign currency translation adjustments.... (29,403) -- -- -- --
------------ ----------- ----------- ----------- --------------
Comprehensive loss for the period............. $(1,563,916) $(1,117,808) $ (913,321) $ (475,578) $ (53,696)
=========== =========== =========== =========== ==============
Basic and diluted loss per share.............. $ (0.12) $ (0.35) $ (0.08) $ (0.04) $ (0.01)
=========== =========== =========== =========== ==============
Weighted average shares outstanding........... 12,684,289 12,392,011 11,979,385 11,472,992 10,090,675
=========== =========== =========== =========== ==============
As Of December 31,
------------------------------------------------------------------------
Consolidated Balance Sheet Data: 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- --------------
Working capital.............................. $ 8,656,695 $ 4,685,238 $ 680,820 $ 339,118 $ (87,208)
Current assets............................... 9,259,016 4,862,588 969,957 534,156 49,517
Total assets................................. 10,729,926 5,566,205 1,179,862 639,508 88,029
Current liabilities.......................... 602,321 177,350 289,137 195,032 136,725
Total liabilities............................ 602,321 177,350 1,482,165 195,032 136,725
Shareholders' equity (deficit)............... 10,127,605 5,388,855 (296,054) 444,476 (48,696)
-24-
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
The following discussion of our consolidated financial condition and the results
of our operations should be read in conjunction with our consolidated financial
statements and the notes to our consolidated financial statements included in
Item 14 of this annual report.
Overview
We are a technology-based reconnaissance exploration company which utilizes our
proprietary, quantum physics-based, stress field detection or "SFD"
remote-sensing airborne survey technology, which we refer to as our "SFD Survey
System," to quickly and inexpensively identify and high-grade oil and natural
gas prospects. We conduct our reconnaissance exploration activities, as well as
land acquisition, drilling, completion and production activities to exploit
prospects identified using our SFD technology, through our two wholly-owned
operating subsidiaries, Pinnacle U.S. which focuses on United States-based
exploration, and Pinnacle Canada which focuses on Canadian-based exploration.
Pinnacle, in turn, concentrates on research and development efforts to improve
the efficacy of our SFD Survey System.
Our United States exploration efforts to date have been conducted for CamWest
Exploration LLC under a joint venture agreement pursuant to which we conduct
aerial surveys to identify prospects in exploration areas in the United States
selected by CamWest. Our Canadian exploration efforts to date have been
conducted primarily for Encal Energy Ltd. under a joint venture agreement
pursuant to which we conduct aerial surveys to identify prospects in exploration
areas in Canada selected by Encal. We have also commenced conducting exploration
activities in western Canada for our own account.
The joint venture agreements we have entered into with our joint venture
partners generally entitle us to elect to receive one of the two following
payment streams for each SFD-identified prospect accepted and drilled under the
applicable agreement:
. a capital investment and generally risk-free overriding royalty of 5% to 8%
of oil or natural gas revenues received by the joint venture partner with
respect to the prospect. In any situation where we elect to receive this
royalty, our joint venture partner will be responsible, at its own cost and
risk, to acquire the necessary drilling rights for the prospect if it has
not already done so, and to conduct all drilling, production and marketing
activities necessary to exploit the prospect.
. a working interest of up to 45% of the joint venture partner's revenues
with respect to the prospect. In any situation where we elect to
participate on a working interest basis, we must bear our share of the
mineral rights and drilling acquisition (if necessary), drilling and
production costs incurred with respect to the prospect based upon our
working interest percentage. Although we will bear our share of these
costs, our joint venture partner will nevertheless remain responsible for
conducting and managing all drilling, production and marketing activities
to exploit the prospect.
Our U.S. joint venture partner is also required under the terms of its joint
venture agreement to reimburse us for 100% of the expenses we incur in
conducting aerial surveys for that partner, while our Canadian joint venture
partner is required under the terms of its joint venture agreement to reimburse
us for 50% of the expenses we incur in conducting aerial surveys for that
partner.
Our recent practice with our joint venture partners has been to participate in
selected prospects on a combination working interest/overriding royalty interest
basis, typically a 22 1/2% working interest and a 4% overriding royalty.
Our rights to use our SFD technology arises from an SFD technology license which
we acquired from the owner and licensor of that technology, Momentum Resources
Corporation, pursuant to which we received the exclusive world-wide right to use
the SFD technology for hydrocarbon exploration purposes. We are obligated under
the terms of that license to pay Momentum Resources Corporation a fee equal to
1% of
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any "prospect profits" (as that term is defined in the license) which we may
receive on or before December 31, 2000, and 5% of any prospect profits which we
may receive after December 31, 2000.
As of December 31, 1999 and the date of this annual report:
. One exploration well spudded in early 1999 by a third-party operator at
Shoal Point, Newfoundland, was drilled, evaluated and determined to be a
dry hole. Pinnacle Canada elected a royalty interest through Encal with
respect to this prospect.
. One exploration well in September 1999 by at third-party operator at our
Leucite Hills South prospect in Wyoming, was drilled, cased and completed
in September 1999 as a natural gas discovery. This well will not be placed
into production by the operator, however, until a sufficient number of
additional wells are drilled on the exploratory block and can be tied into
a gathering system. Pinnacle U.S. elected a combination working interest
and overriding royalty interest with respect to this prospect.
. One exploration well spudded by CamWest in October 1999 at our Poblano
prospect in Wyoming, was drilled, cased and completed in January 2000 as a
natural gas discovery, and production will commence upon completion of a
twelve-mile pipeline that will tie the well into a sales system. CamWest
spudded a step-out exploratory well on this prospect in March 2000, which
is still in the process of being drilled as of the date of this annual
report. Pinnacle U.S. elected a combination working interest and overriding
royalty interest with respect to this prospect.
. One exploration well spudded by at third-party operator in October 1999 at
our Poblano South prospect in Wyoming, was drilled, cased and completed in
January 2000. This well has been shut-in by the operator pending further
evaluation of its completion program. Pinnacle U.S. elected a combination
working interest and overriding royalty interest with respect to this
prospect.
. One exploration well spudded in December 1999 in southern Alberta by Encal
at our Carbon prospect in southern Alberta, was drilled, cased and
completed in January 2000 as a natural gas discovery. This well is
currently suspended pending further completion activity by the operator.
Pinnacle Canada elected an overriding royalty interest with respect to this
prospect.
. One exploration well spudded in March 2000 by Encal at our Monarch prospect
in southern Alberta. This well is currently cased and is awaiting
completion. Pinnacle Canada elected a combination working interest and
overriding royalty interest with respect to this prospect.
We anticipate that two to four exploration wells will be spudded on other
prospects by our joint venture partners or third-party operators by June 30,
2000.
Since we have not generated operating revenues to date, we should be considered
a development stage enterprise.
Capital Requirements
We have not generated operating revenues to date, although we have one completed
well at our Poblano Prospect which we anticipate will commence production as
soon as a twelve-mile pipeline is completed which will connect the prospect to a
sales system. We anticipate the pipeline will be laid upon completion of our
first step-out exploratory well on our Poblano Prospect. Assuming no unforseen
delays or changes in production plans, production will commence by our third
quarter in fiscal 2000. We are also drilling several additional exploratory
wells in fiscal 1999, including the noted step-out exploratory well on the
Poblano Prospect, which should add to any revenues we generate.
Absent revenues, our sole source of cash to fund our operational and capital
investment needs are monies we have raised through the private placement of our
securities and exercise of employee options.
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For further information regarding these transactions, see "--Liquidity And
Capital Resources--Sources Of Cash" below.
We have budgeted the following level of expenditures over the twelve-month
period ended December 31, 2000:
. Approximately $2,500,000 for continuing operations including SFD research
and development activities; and
. Up to $3,500,000 in capital expenditures to acquire and outfit an
additional survey aircraft and invest in working interests with our joint
venture partners or acquire drilling interests for our own account,
although the overall amount of these capital expenditures may be
significantly reduced or increased depending upon the success of our joint
venture partners' drilling efforts over the next six to twelve months.
After taking into consideration the $8,656,695 in working capital we had
available as of December 31, 1999, and an additional $1,500,000 in working
capital we raised subsequent to December 31, 1999 as a consequence of the
exercise of warrants previously sold in August 1998, we have sufficient working
capital on hand to fund our current level of operations, including research and
development but excluding capital investments in working interests beyond that
amount budgeted for the next twelve months as described above, through mid 2002.
Our ability in the longer term to continue as a going concern will be dependent
upon our ability to either:
. raise additional capital through private or public placements of our
securities, or
. our receipt of meaningful amounts of revenues from our joint venture
partners or through our own exploration efforts, which, in either case,
will be dependent upon successful exploration and production activities.
Results Of Consolidated Operations
Operating Revenues
We had no oil and gas working interest or royalty revenues for our twelve-month
fiscal periods ended December 31, 1999, December 31, 1998 and December 31, 1997
("fiscal 1999," fiscal 1998," and "fiscal 1997," respectively).
Operating Loss
We incurred an operating loss of $894,947 for fiscal 1999, as compared to
$1,323,646 and $1,008,653 for fiscal 1998 and fiscal 1997, respectively.
. Fiscal 1999 Compared to Fiscal 1998
The 42.2% increase in our operating loss for fiscal 1999 over fiscal 1998
was primarily attributable to the following changes in expense:
. a $214,666, or 371.2%, increase in research and development expense
from $57,823 to $272,489;
. a $153,271 or 15.7%, increase in administrative expense from $979,119
to $1,132,390;
. a $99,575, or 138.5%, increase in amortization and depreciation from
$71,919 to $171,494; and
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. a $93,873, or 48.4%, increase in survey support expense from $193,759
to $287,632.
. Fiscal 1998 Compared to Fiscal 1997
The 32.1% increase in our operating loss for fiscal 1998 over fiscal 1997
was primarily attributable to the following changes in expense:
. a $236,681, or 31.9%, increase in administrative expenses from
$742,438 to $979,119;
. a $73,171, or 60.7%, increase in survey support expense from
$120,588 to $193,759; and
. a $46,445, or 132.3%, increase in amortization and depreciation from
$25,474 to $71,919; and
. a $30,026 increase in net survey and data analysis expense from $0 to
$30,026; and
partially offset by:
. a $45,256, or 43.9%, decrease in research and development expense from
$103,079 to $57,823.
. Relative Changes In Administrative Expense
The $153,271 increase in administrative expense for fiscal 1999 was
primarily attributable to across-the-board net increases in costs to
support our increased level of business activities in fiscal 1999, the most
significant of which were increases of $166,395 in wages and benefits;
partially offset by a $111,739 decrease in legal expense. The $236,681
increase in administrative expense for fiscal 1998 was primarily
attributable to across-the-board net increases in costs to support our
increased level of business activities in fiscal 1998, the most significant
of which were increases of $134,321 in wages and benefits, $57,823 in rent
expense as the result of our moving into permanent premises necessary to
support our increased level of operations, $54,218 in consulting fees and
$44,064 in shareholder communication costs; partially offset by a decline
of $213,742 in legal fees paid.
. Relative Changes In Research and Development Expense
Research and development expense generally relates to the cost--including
allocable salaries--to develop, improve and test our SFD Survey System and
related components. The $214,666 increase in research and development
expense for fiscal 1999 was principally attributable to salaries associated
with additional research and development staffing as we focused increased
efforts to improve the operation and efficacy of our SFD Survey System. The
$45,256 decrease in research and development expense for fiscal 1998 was
principally attributable to our completion of significant research and
development projects in 1997, including the adaptation of our SFD
technology to an airborne platform incorporating a global positioning
system.
. Relative Changes In Amortization and Depreciation
The $99,575 increase in amortization and depreciation for fiscal 1999 was
primarily attributable to $57,139 in additional depreciation arising as the
result of our purchase of our survey aircraft in late 1998 and $49,083 in
additional depreciation and amortization arising in connection with our
acquisition of additional computer equipment and software, partially offset
by reduced depreciation occurring as the result of the disposition of a
vehicle. The $46,445 increase in amortization and depreciation for fiscal
1998 was primarily attributable to $19,968 in additional depreciation and
amortization arising in connection with our acquisition of additional
computer equipment and software, $16,471 in additional depreciation arising
as the result of our purchase of our survey aircraft in late 1998, $16,188
in additional depreciation arising as the result of our investment in
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leasehold improvements in 1998, and $15,488 in additional depreciation
arising as the result of our purchase of a vehicle in 1998.
. Relative Changes In Survey Support Expense
Survey support expense generally relates to the cost--including allocable
salaries--to:
. conduct field evaluations designed by our joint venture partners to
evaluate our SFD technology (after netting any costs which our joint
venture partners are required to reimburse us for); and
. develop, organize, staff and train our survey and interpretation
operational functions.
The $93,873 increase in survey support expense for fiscal 1999 was
primarily attributable to across-the-board net increases in costs to
support our increased level of survey operations, the most significant of
which were increases of $97,014 in salaries associated with additional
support staffing and $42,947 in additional aircraft improvement expenses,
partially offset in the elimination of airplane charter costs of $70,498 as
a result of the purchase of our aircraft. The $73,171 increase in survey
support expense for fiscal 1998 was primarily attributable to our
commencement of full commercial SFD survey activities in early 1998.
. Relative Changes In Survey And Data Analysis Expense
Survey and data analysis expenditures consist primarily of any costs we
incur conducting commercial SFD survey activities. These costs can be
generally broken down into the following two components:
. aircraft operating costs, travel expenses and allocable salaries of
our personnel while on survey assignment (after netting any costs our
joint venture partners are required to reimburse us for); and
. allocable salaries incurred by our personnel interpreting SFD Data.
Our total survey and data analysis expense, before taking any joint venture
partner reimbursement into account, was $151,806 is fiscal 1999, as
compared to $174,422 and $0 in fiscal 1998 and fiscal 1997, respectively.
The decline in total survey and data analysis expense was primarily
attributable to our reduction in charter costs as the result of our
acquisition of our own aircraft in late 1998, as opposed to a reduction in
the overall level of survey activities.
Our net survey and data analysis expense--after taking into consideration
joint venture partner reimbursements of $121,452, $144,396 and $0 in fiscal
1999, fiscal 1998 and fiscal 1997, respectively--was $30,534 in fiscal 1999
as compared to $30,026 and $0 in fiscal 1998 and fiscal 1997, respectively.
The reduction in reimbursable amounts for fiscal 1999 as compared to fiscal
1998 was principally attributable to new methods of calculating
reimbursable costs as a result of the acquisition of our aircraft. The
increase in reimbursable amount for fiscal 1998 as compared to fiscal 1997
was principally attributable to our commencement of full commercial SFD
survey activities in early 1998.
. Expectations Relative To Future Expense Levels
We effectively doubled our company staff during fiscal 1999 through the
hiring of key professionals, including executive, geological, geophysical,
scientific, information technology and aviation
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personnel, and we anticipate that we will continue to hire similar
personnel over the next year. We anticipate that our total operating
expenses will continue to significantly increase on a quarterly basis
through the end of fiscal 2000 as a result of the additional wages and
employee benefits to be paid to any additional personnel we may hire as
well as an increased level of operations which will be facilitated by
recent and anticipated hirings.
Other Income And Expense
. Interest Income
We earned $360,434 in interest income for fiscal 1999, as compared to
$209,906 and $47,832 for fiscal 1998 and fiscal 1997, respectively. The
increase in interest income for fiscal 1999 was attributable to higher cash
balances in our accounts as a result of a $6,000,000 private placement
of our common stock in May 1999, while the increase for fiscal 1998 was
attributable to higher cash balances as a result of a $6,000,000 private
placement of our series "A" preferred stock and warrants in April 1998.
. Interest Expense
We incurred $14,299 in interest expense in fiscal 1998, as compared to
$110,000 in fiscal 1997. The noted expense primarily represents interest
accrued on $1 million in loans made to our company in January of 1997 by
Messrs. R. Dirk Stinson and George Liszicasz. These loans were converted
into our common stock on February 1, 1998. Interest expense for fiscal 1998
was lower than the amount incurred for fiscal 1997 insofar as the loan
balances were carried for only one month in fiscal 1998, as compared to
eleven months in fiscal 1997.
Liquidity And Capital Resources
. Sources of Cash
Our cash flow requirements from our inception as Pinnacle U.S. (October 20,
1995) through December 31, 1999 were funded principally from:
. a private placement in May 1996 of 975,000 shares of our common stock
for total gross proceeds of $975,000,
. loans to our company by Messrs. Liszicasz and Stinson in the amount of
$1,000,000 in January 1997, and the subsequent conversion of the
outstanding balance of principal and accrued interest of these loans
in the amount of $1,120,000 into 411,764 shares of our common stock in
February 1998;
. a private placement in April 1998 of 800,000 shares of our convertible
series "A" preferred stock and 200,000 common stock purchase warrants
for total gross proceeds of $6,000,000; and
. a private placement in May 1999 of 400,000 shares of our common stock
for total gross proceeds of $6,000,000.
Subsequent to December 31, 1999, the holder of warrants to purchase 200,000
shares of our common stock at an exercise price of $7.10 per share exercised
those warrants on April 3, 2000, resulting in gross proceeds to our company of
$1,500,000.
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. Cash Position and Sources And Uses Of Cash
Our cash position as of December 31, 1999 was $9,068,723, as compared to
$4,713,822 and $848,339 as of December 31, 1998 and 1997, respectively. The
bulk of our cash is maintained in a United States government and
government-backed securities money-market account.
The $4,354,901 increase in our cash position for fiscal 1999 was
attributable to $6,302,631 in cash raised through financing activities,
partially offset by $885,973 in cash used in operating activities,
$1,032,354 in cash used in investing activities, and a $29,403
comprehensive loss due to the effect of exchange rate changes. The
$3,865,483 increase in our cash position for fiscal 1998 was attributable
to $5,542,447 in cash raised through financing activities, partially offset
by $1,050,059 in cash used in operating activities and $626,905 in cash
used in investing activities.
Our operating activities required cash in the amount of $885,973 for fiscal
1999, as compared to cash requirements of $1,050,059 for fiscal 1998. The
$885,973 in cash used in operating activities for fiscal 1999 reflected our
net loss of $1,534,513 for that period, as decreased for non-cash
deductions and a net increase in non-cash working capital balances. The
$1,050,059 in cash used in operating activities for fiscal 1998 reflected
our net loss of $1,117,808 for that period, as decreased for non-cash
deductions and a net increase in non-cash working capital balances.
We raised $6,302,631 in cash from financing activities for fiscal 1999, as
compared to $5,542,447 in cash raised from financing activities in fiscal
1998. The $6,302,631 in cash raised through financing activities in fiscal
1999 was principally comprised of $6,000,0000 in gross proceeds from the
private placement of our common stock and $303,979 in gross proceeds from
the exercise of employee stock options. The $5,542,447 in cash raised
through financing activities in fiscal 1998 was comprised of $6,000,0000 in
gross proceeds from the private placement of our series "A" convertible
preferred stock and common stock purchase warrants.
We used cash in the amount of $1,032,354 for investing activities in fiscal
1999, as compared to $626,905 in cash used for investing activities in
fiscal 1998. The principal use of cash in fiscal 1999 was to acquire
drilling rights in exploratory blocks pursuant to working interest
elections ($775,159) and to acquire property, equipment and computer
software ($258,058), while the principal use of cash in fiscal 1998 was to
acquire property, equipment and computer software ($591,492).
Other Matters
Foreign Exchange
We recorded a $29,403 foreign currency translation loss in fiscal 1999 as a
comprehensive loss item on our statements of loss and stockholders' equity
(deficit) in consolidating our books for financial reporting purposes as a
result of the fluctuation in United States--Canadian currency exchange rates
during that period. We anticipate that our exposure to significant foreign
currency gains or losses on our books will increase as we invest a greater
portion of our United States-dollar denominated cash reserves into our Canadian
operations and properties through intercompany advancements. We cannot give you
any assurance that our future operating results will not be similarly adversely
affected by currency exchange rate fluctuations. See Item 7A of this annual
report captioned "Quantitative and Qualitative Disclosure About Market Risk,"
for a description of other aspects of our company that may be potentially
affected by foreign exchange fluctuations.
Effect Of Inflation
We do not believe that our operating results have been adversely affected at any
time over the last three fiscal periods by inflation or changing prices.
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Year 2000 Compliance
During fiscal 1999 we reviewed our internal computer systems and software
products for Year 2000 problems, and found them to be generally Year 2000
compliant, and have had no Year 2000 complications as of the date of this annual
report.
Uncertainties And Risk Factors That May Affect Our Future Results And Financial
Condition
We have described below a number of uncertainties and risks which, in addition
to uncertainties and risks presented elsewhere in this annual report, may affect
our future results of operations or financial condition. The uncertainties and
risks enumerated below as well as those presented elsewhere in this annual
report should be considered carefully in evaluating our company and our business
and the value of our securities.
Uncertainties and Risk Factors Generally Relating To Our Company And Our
Business
. We Are A Development Stage Enterprise Which Has Accumulated Losses Since
Our Inception, And We Anticipate That We Will Continue To Incur Operating
Losses For The Near Future
We are a developmental stage enterprise since we have not received any oil
or gas revenues to date, and have, as a consequence of our lack of
revenues, incurred a net loss in the amount of $4,094,916 from our
inception in October 1995 through December 31, 1999. Our ability to
generate revenues and profits will depend primarily upon the successful
implementation of our business plan, which is dependent at this point in
time upon one or more of our joint venture partners successfully drilling
and producing commercially viable quantities of oil or natural gas from SFD
Prospects we identify. We do not anticipate that we will receive any oil or
gas revenues until the third quarter of fiscal 2000, at the earliest,
assuming our current contemplated drilling program is successful and there
are no complications in drilling or completing the wells or tying them into
a sales or gathering system. We anticipate that we will continue to incur
significant losses on a month-to-month basis for at least twelve to
eighteen months going forward from the date of this annual report,
notwithstanding our receipt of oil and gas revenues based upon our internal
projections, due to our significant monthly operating and research and
development costs.
. Our Limited Operating History Could Adversely Affect Our Business
We are a recently organized development stage enterprise with an unproven
technology and a limited operating history. Our activities through the date
of this annual report have encompassed:
. developing our business plan;
. obtaining license rights to our SFD technologies;
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. establishing administrative offices and laboratory facilities, and
engaging executive, administrative, scientific, geological, geophysical,
scientific, information technology and aviation personnel;
. developing our SFD technology to a commercial stage;
. acquiring joint venture partners;
. conducting commercial SFD surveys on behalf of our joint venture
partners; and
. successfully drilling oil and gas wells identified through our SFD
technology.
We are subject to all the risks and issues inherent in the establishment
and expansion of a new business enterprise including, among others,
problems of using new and unproven technologies, hiring and training
personnel, acquiring reliable facilities and equipment, and implementing
operational controls. In general, startup businesses are subject to risks
and or levels of risk that are often greater than those encountered by
companies with established operations and relationships. Startups often
require significant capital from sources other than operations. The
management and employees of startup businesses shoulder the burdens of the
business operations and a workload associated with company growth and
capitalization that is disproportionately greater than that for an
established business. Our limited operating history makes it difficult, if
not impossible, to predict future operating results. We cannot give you any
assurance that we will successfully address these risks. Our failure to
successfully address these risks could have a material, adverse effect on
our business, financial condition and operating results.
. Our Future Success Is Dependent Upon Our Ability, Through Utilization Of
Our SFD Technology, To Locate Commercially Viable Hydrocarbon Accumulations
For Development By Our Joint Venture Partners.
Our future success is dependent upon our ability, through utilization of
our SFD technology, to locate commercially viable hydrocarbon accumulations
for development by our joint venture partners. Based on our business plan,
we will be dependent on:
. the efficacy of our SFD technology in locating SFD Prospects; and
. the cooperation of, and capital investment by, our joint venture
partners in exploiting these prospects.
Although the results of our SFD technology as a geologic structural
identification tool have been satisfactorily tested by our joint venture
partners, we cannot give you any assurances that our SFD technology will be
able to consistently locate hydrocarbons or oil and gas prospects, or that
these prospects will be commercially exploitable. We also cannot give you
any assurances that we will be able to discover commercial quantities of
oil and gas, or that our joint venture partners will successfully acquire
and drill properties at low finding costs.
. We Are Reliant Upon Our Joint Venture Partners For Opportunities To
Participate In Exploration Prospects
We will be reliant, at least in the near-term, upon our joint venture
partners for opportunities to participate in exploration prospects, through
overriding royalties or equity participation on a working interest basis
from producing SFD Prospects. We exclusively focus on exploration and the
review and identification of viable prospects through our SFD technology,
and rely upon our joint venture partners to provide and complete all other
project operations and responsibilities, including land acquisition,
drilling, marketing and project administration. As a result, we have only a
limited ability to exercise control over the selection of prospects for
development, drilling or production operations, or the associated costs of
such operations. The success of each project will be dependent upon a
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number of factors which are outside our control, or controlled by our joint
venture partners as the project operator, in accordance with the applicable
agreements between our company and the joint venture partners. These
factors include:
. the selection and approval of prospects for lease/acquisition and
exploratory drilling;
. obtaining favorable leases and required permitting for projects;
. the availability of capital resources of the joint venture partner for
land acquisition and drilling expenditures;
. the timing of drilling activity, and the economic conditions at such
time, including then prevailing prices for oil and gas; and
. the timing and amount of distributions from the production.
Our reliance on our joint venture partners, and our limited ability to
directly control project operations, costs and distributions could have a
material adverse effect on the realization of return from our interest in
projects, and on our overall financial condition.
. Our Revenues And Cash Flow Will Be Principally Dependent Upon The Success
Of Drilling And Production From Prospects In Which We Participate Through
Agreements With Our Joint venture partners
Pursuant to our business plan, our revenues and cash flow will, at least in
the near-term, be principally dependent upon the success of drilling and
production from prospects in which we participate through agreements with
our joint venture partners in the form of an overriding royalty or a
working interest or other participation right. The success of these
prospects will be determined by the location, development and production of
commercial quantities of hydrocarbons. Exploratory drilling is subject to
numerous risks, including the risk that no commercially productive oil and
gas reservoirs will be encountered. The cost to our joint venture partners
to drill, complete and operate wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety
of factors including unexpected formation and drilling conditions, pressure
or other irregularities in formations, equipment failures or accidents, as
well as weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment. Our partners' inability
to successfully locate and drill wells that produce commercial quantities
of oil and gas would have a material adverse effect on our business,
financial position and results of operations.
. Our Future Operating Results May In The Future Fluctuate Significantly
Our operating results may in the future fluctuate significantly depending
upon a number of factors including industry conditions, prices of oil and
gas, rate of drilling success, rates of production from completed wells and
the timing of capital expenditures. This variability could have a material
adverse effect on our business, financial condition and results of
operations. In addition, any failure or delay in the realization of
expected cash flows from initial operating activities could limit our
future ability to continue exploration and to participate in economically
attractive projects.
. Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse
Effect On Our Business
It is impossible to predict future oil and natural gas price movements with
any certainty, as they have historically been subject to wide fluctuations
in response to a variety of market conditions, including:
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. relatively minor changes in the supply and demand for oil and natural
gas,
. economic, political and regulatory developments, and
. competition from other sources of energy.
Any extended or substantial decline in oil and gas prices would have a
material adverse effect on:
. our ability to negotiate favorable joint ventures with viable industry
participants;
. the volume of oil and gas that could be economically produced by the
joint ventures in which we participate;
. our cash flow; and
. our access to capital.
We do not currently intend to engage in hedging activities, and may be more
adversely affected by fluctuations in oil and gas prices than other
industry participants that do engage in such activities. Our business,
results of operations and financial condition would be materially and
adversely affected by adverse changes in prevailing oil and gas prices. See
Item 7A, captioned "Quantitative And Qualitative Disclosures About Market
Risk," for additional discussion of market risks relating to oil and gas
price fluctuations.
. The Intense Competition That Is Prevalent In The Oil And Gas Industry Could
Have A Material Adverse Effect On Our Business
We compete directly with independent, technology-driven oil and gas
exploration service companies, and indirectly (through our joint venture
partnerships) with major and independent oil and gas companies in our
exploration for and development of commercial oil and gas properties. We
will experience competition from numerous oil and gas exploration
competitors offering a wide variety of geological and geophysical services.
Many of these competitors have substantially greater financial, technical,
sales, marketing and other resources than we do, and may be able to devote
greater resources to the development, promotion and sales of their services
than our company. We cannot give you any assurance that our competitors
will not develop exploration services that are superior to our SFD
technology, or that these technologies will not achieve greater market
acceptance than our SFD technology. Increased competition could impair our
ability to attract viable industry participants, and to negotiate favorable
participations and joint ventures with such parties, which could materially
and adversely affect our business, operating results and financial
condition.
The oil and gas industry is highly competitive. Many companies and
individuals are engaged in the business of acquiring interests in and
developing oil and gas properties in the United States and Canada, and the
industry is not dominated by any single competitor or a small number of
competitors. Our joint venture partners will compete with numerous industry
participants for the acquisition of land and rights to prospects, and for
the equipment and labor required to operate and develop such prospects.
Many of these competitors have financial, technical and other resources
substantially in excess of those available to us or our joint venture
partners. These competitive disadvantages could adversely affect our or our
joint venture partners' ability to participate in projects with favorable
rates of return.
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. There Is Limited Market Acceptance For Our SFD Technology, And It Must
Compete With Established Geological And Geophysical Technologies Which Have
Already Achieved Market Acceptance.
There is limited market acceptance for our SFD technology, and it must
compete with established geological and geophysical technologies which have
already achieved market acceptance. As is typical in the case of any new
technology, demand and market acceptance for our SFD technology is subject
to a high level of uncertainty and risk. Because the market for exploration
services using our SFD technology is new and evolving, it is difficult to
predict the future growth rate, and the size of the potential market. We
cannot give you any assurance that a market for our exploration services
will develop, or be sustainable. If the market fails to develop, or if our
exploration services do not achieve or sustain market acceptance, our
business, results of operations and financial condition would be materially
and adversely affected.
. Technological Advancements In The Oil And Gas Industry Could Have A
Material Adverse Effect On Our Business
The oil and gas industry is characterized by rapid technological
advancements and the frequent introduction of new products, services and
technologies. As new technologies develop, we may be placed at a
competitive disadvantage, and competitive pressures may force us to improve
or complement our SFD technology, or to implement additional technologies
at substantial cost. In addition, other oil and gas exploration companies
may implement new technologies before us, and these companies may be able
to provide enhanced capabilities and superior quality. We cannot give you
any assurance that we will be able to respond to these competitive
pressures and implement or enhance our SFD technology on a timely basis, or
at an acceptable cost. In such case, our business, financial condition and
results of operations could be materially adversely affected.
. Our Inability To Retain Our Key Managerial, Geological and Geophysical, and
Research and Development Personnel Could Have A Material Adverse Effect On
Our Business
Our success depends to a significant extent on the continued efforts of our
senior management team, which currently is composed of a small number of
individuals, including Mr. George Liszicasz, the inventor of our SFD
technology who is our Chief Executive Officer and who is responsible for
the continuing development of our SFD technology and the interpretation of
SFD Data, and Messrs. Daniel C. Topolinsky and James R. Ehrets, our
President/Chief Operations Officer and our Executive Vice President of
Operations, respectively.
The loss of Mr. Liszicasz's services would be extremely difficult to
replace since he is the inventor of, and has intimate knowledge of, the
theoretical basis of the SFD technology, and has also developed the
methodologies used to interpret SFD Data, and the loss of his services
would likely have a material adverse effect on our business, results of
operations and financial condition. While we are presently training
personnel to operate our SFD technology and to interpret SFD Data, we
cannot give you any assurance that these personnel could fully replace Mr.
Liszicasz with respect to these functions, at least in the short-term.
Moreover, we do not know if we would be able to successfully replicate the
SFD technology in the event of the loss of Mr. Liszicasz.
The loss of Messrs. Topolinsky's and Ehret's services would also be
extremely difficult to replace due to their management skills and their
core knowledge of our SFD technology and business as a result of their
association with our company over the past several years, and their loss
would also likely have a material adverse effect on our business, results
of operations and financial condition.
While we have entered into employment agreements with our senior management
team, Mr. Liszicasz is not obligated--and as a result of his relationships
with Momentum Resources Corporation may in the future be unable--to devote
his entire undivided time and effort to or for our
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benefit. While we currently carry a key person life insurance on Mr.
Liszicasz, we do not carry any key person life insurance policies on any of
our other executive officers.
Our success also depends, to a lesser extent, on the continued efforts of
our geological interpretive and research and development teams, which are
composed of a small number of individuals. While there are professionals
who could replace these individuals, none of these professionals have any
theoretical or working knowledge of how to interpret SFD Data or how our
SFD technology operates, and it would take a significant period of time to
train any replacement personnel. Until such time as we have a fully trained
complement of geological interpretive and research and development teams,
the loss of any members of these teams could adversely affect the pace at
which we interpret SFD Data or effect improvements to our SFD technology,
which could adversely impact our business and results of operations and
financial condition.
. We May Be Unable To Attract The Qualified Managerial, Geological and
Geophysical, and Research and Development Personnel Required To Implement
Our Longer-Term Growth Strategies
Our ability to implement our longer-term growth strategies depends upon our
continuing ability to attract and retain highly qualified geological,
technical, scientific, information management and administrative personnel.
Competition for these types of personnel is intense and we cannot give you
any assurance that we will be able to retain our key managerial,
professional and/or technical employees, or that we will be able to attract
and retain additional highly qualified managerial, professional and/or
technical personnel in the future. Our inability to attract and retain the
necessary personnel could impede our growth.
. We May Be Unable To Effectively Manage Our Expected Growth
Our success will depend upon the rapid expansion of our business. Expansion
will place a significant strain on our financial, management and other
resources, and will require us, among other things, to:
. change, expand and improve our operating, managerial and financial
systems and controls; and
. improve coordination between our various corporate functions.
We cannot give you any assurance that we will be able to manage the
expansion of our business effectively. Our inability to effectively manage
our growth, including the failure of any new personnel we hire to achieve
anticipated performance levels, would have a material adverse effect on our
business, results of operations and financial position.
. Our Business May Be Adversely Affected By Currency Fluctuation, Regulatory,
Political And Other Risks Associated with International Transactions
We currently operate within the United States and Canada and anticipate we
will also operate outside of these countries in the foreseeable future.
These operations will subject us to several potential risks, including
risks associated with:
. fluctuating exchange rates,
. the regulation by the governments of the United States and Canada as
well as foreign governments of fund transfers and export and import
duties and tariffs; and
. political instability.
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We cannot give you any assurance that any of these risks will not have a
material adverse effect upon our business. We do not currently engage in
activities to mitigate the effects of foreign currency fluctuations. If
earnings from international operations increase, our exposure to
fluctuations in foreign currencies may increase, and we may utilize forward
exchange rate contracts or engage in other efforts to mitigate foreign
currency risks. We can give you no assurance as to the effectiveness of
these efforts in limiting any adverse effects of foreign currency
fluctuations on our international operations and our overall results of
operations.
. Our Statements About Anticipated Events Or Future Trends May Prove To Be
Inaccurate
In this annual report we have made a number of statements, which we refer
to as "forward-looking statements," generally relating to our expectations
or speculations as to future events and our observations as to trends and
factors that may impact our future operating results. You can generally
identify any forward-looking statements contained in this annual report
through words such as "anticipate," "believe," "estimate," "expect,"
"budget" "project" and similar expressions. Forward-looking statements that
may be contained in this annual report would, for example, include
statements relating to:
. the timing of our SFD survey activities and the amount of SFD Data we
may acquire including, by way of example and not limitation, those
statements contained in that section in Item of this annual report
captioned "Business--Operational Practices In Conducting SFD Surveys--
How Fast Can We Acquire And Interpret SFD Data?;"
. the timing and likelihood of success of our SFD Data interpretation
activities including, by way of example and not limitation, those
statements contained in that section in Item 1 of this annual report
captioned "Business--Operational Practices In Conducting SFD Surveys--
How We Interpret SFD Data?;"
. the timing and likelihood of success of our drilling and production
plans including, by way of example and not limitation, those
statements contained in that section in Item 1 of this annual report
captioned "Business--Status Of Our Exploration Efforts" and Item 2 of
this annual report captioned "Properties--Petroleum Properties?;"
. the amount and character of future oil and gas revenues we may
receive, the timing of receipt of revenues, and the timing of break-
even, including, by way of example and not limitation, those
statements contained in that section in Item 1 of this annual report
captioned "Business--Status Of Our Exploration Efforts;" Item 2 of
this annual report captioned "Properties--Petroleum Properties?;" Item
7 of this annual report captioned "Management's Discussion And
Analysis of Financial Condition And Results Of Operations--Overview;"
and Item 7 of this annual report captioned "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations--Capital
Requirements;"
. the amount and character of expenses we may incur, and the timing of
these expenditures including, by way of example and not limitation,
those statements contained in those sections in Item 7 of this annual
report captioned "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Capital Requirements" and
"Management's Discussion And Analysis Of Financial Condition And
Results Of Operations--Results Of Consolidated Operations--
Expectations Relative To Future Expense Levels;"
. the amount and composition of our capital expense budget, and the
timing of these capital outlays including, by way of example and not
limitation, those statements contained in those sections in Item 7 of
this annual report captioned "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Capital Requirements"
and
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"Management's Discussion And Analysis Of Financial Condition And
Results Of Operations--Results Of Consolidated Operations--
Expectations Relative To Future Expense Levels;" and
. our corporate objectives and growth strategies including, by way of
example and not limitation, those statements contained in that section
in Item 1 of this Annual Report captioned "Business--Corporate
Objective."
Whenever you read any forward looking statement contained in this annual
report, you should be aware of and take into consideration that:
. the forward-looking statement merely reflects the current expectations
and speculation of our management as to anticipated events or
observations relating to future trends based, in part, upon currently
available information and our current business plan, and
. actual results from these future events may differ materially from the
results expected or speculated or trends observed as expressed in, or
implied by, the forward-looking statement, as a result of changes in
circumstances and events and other uncertainties and risks, including:
[_] changes in our business plan and corporate strategies or
that of our joint venture partners;
[_] delays in our ability to conduct and complete SFD surveys or
interpret SFD Data,
[_] delays on the part of our joint venture partners in planning
SFD survey activities, in conducting geologic and
geophysical evaluations of recommended anomalies, in
acquiring drilling rights, in conducting exploratory
drilling activities and completing wells, and in connecting
producing wells to pipelines and other production
infrastructure; or
[_] the occurrence of the various types of uncertainties and
risk factors described above in this section as well as
those described in Item 7A of this annual report captioned
"Quantitative and Qualitative Disclosure About Market Risk;"
and
. the forward-looking statement must, in any event, be considered in
context with the various disclosures made by our company in this
annual report about our business.
We are not obligated to update or revise any forward looking statement
contained in this annual report to reflect new events or circumstances. You
are also cautioned that we intend for all forward-looking statements
contained in this annual report to be construed as "forward-looking
statements" within the meaning Section 21E of the United States Securities
Exchange Act of 1934, which establishes a safe-harbor from private actions
for forward-looking statements as defined in that statute.
. The Observations, Beliefs And Opinions Expressed In This Annual Report
Relating To The Scientific Basis And Principles Of Our SFD Technology
Represent Those Of Pinnacle Alone
The observations, beliefs and opinions we express in this annual report
relating to the scientific basis and principles of our SFD technology, and
the ability of our SFD Technology to detect subsurface hydraulic and
mechanical conditions, represent those of our company and our management
alone, and should not be construed as representing those of any third
party, including our joint venture partners and any professional geologists
and engineers we may engage, except to the extent expressly stated in this
annual report. We maintain the scientific and operating principles and
mechanics of our SFD technology in strict confidence. While our joint
venture partners and any professional geologists and engineers we may
engage from time-to-time have observed the operations of our SFD technology
while on survey assignment, and are given access to the results
-39-
of selected interpreted SFD Leads in connection with our recommendations,
they have not been given any information relating to the scientific and
operating principles and mechanics of our SFD technology other than general
information consistent with the general observations, beliefs and opinions
we express in this annual report. Our joint venture partners and any
professional geologists and engineers we may engage do not hold themselves
out as being experts in or otherwise having specific knowledge as to our
SFD technology and its scientific basis and principles.
Matters Relating To Our Common Stock
. There Is Only A Limited Public Market For Our Common Stock
There is only a limited public market for our common stock on the NASD OTC
Electronic Bulletin, and we cannot give you any assurance that a broader or
more active public trading market for our common stock will develop or be
sustained. We are under no obligation to take any action to improve the
public market for our securities including, without limitation, filing an
application to list our common stock on any stock exchange or any other
over the other counter market.
. Our Stock Price Is Extremely Volatile
The market price for our common stock is extremely volatile and subject to
significant price and volume fluctuations in response to a variety of
external and internal factors. This is especially true with respect to
emerging companies such as ours. Examples of external factors, which can
generally be described as factors that are unrelated to the operating
performance or financial condition of any particular company, include
changes in interest rates and worldwide economic and market conditions, as
well as changes in industry conditions, such as changes in oil and gas
prices, oil and gas inventory levels, regulatory and environment rules, and
announcements of technology innovations or new products by other companies.
Examples of internal factors, which can generally be described as factors
that are directly related to our operating performance or financial
condition, would include release of reports by securities analysts and
announcements we may make from time-to-time relative to our operating
performance, drilling results, advances in technology or other business
developments.
Because we are a development stage enterprise with a limited operating
history and no revenues or profits, the market price for our common stock
will be more volatile than that of a seasoned issuer. Changes in the market
price of our common stock may have no connection with our operating results
or prospects. No predictions or projections can be made as to what the
prevailing market price for our common stock will be at any time.
. You May Become Subject To The Penny Stock Rules If Our Stock Price Declines
To Less Than $5
Since our common stock is not listed on a national stock exchange or quoted
on the Nasdaq Market, it will become subject, in the event the market price
for these shares declines to less than $5 per share, to a number of
regulations known as the "penny stock rules." The penny stock rules require
a broker-dealer to deliver a standardized risk disclosure document prepared
by the Securities and Exchange Commission, to provide the customer with
additional information including current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in
the transaction, monthly account statements showing the market value of
each penny stock held in the customer's account, and to make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
To the extent these requirements may be applicable they will reduce the
level of trading activity in the secondary market for our common stock and
may severely and adversely affect the ability of broker-dealers to sell our
common stock.
-40-
. Our Common Stockholders Should Not Expect To Receive A Liquidation
Distribution
If we were to wind-up or dissolve our company and liquidate and distribute
our assets, the holders of our common stock would share ratably in our
assets only after we satisfy any amounts we would owe to our creditors and
any amounts we would owe to our series "A" preferred stockholders as a
liquidation preference ($7.50 per share, or $6,000,000 in the aggregate).
If our liquidation or dissolution were attributable to our inability to
profitably operate our business, then it is likely that we would have
material liabilities at the time of liquidation or dissolution.
Accordingly, we cannot give you any assurance that sufficient assets will
remain available after the payment of our creditors and preferred
stockholders to enable you to receive any liquidation distribution with
respect to any shares of our common stock you may hold.
. Two Of Our Principal Stockholders Control Our Company
Messrs. George Liszicasz and R. Dirk Stinson, our two principal
stockholders and two of our directors, beneficially own over two-thirds of
our common stock, and will therefore have the power, as a group, to elect a
majority of our Board of Directors. Our Board, in turn, has the power to
appoint our officers and to determine, in accordance with their fiduciary
duties and the business judgment rule, our direction, objectives and
policies, such as:
. our business expansion or acquisition policies;
. whether we should raise additional capital through financing or equity
sources, and in what amounts;
. whether we should retain our cash reserves for future product
development, or distribute them as a dividend, and in what amounts;
. whether we should sell all or a substantial portion of our assets, or
should merge or consolidate with another corporation; and
. transactions which may cause or prevent a change in control or the
winding up and dissolution of our company.
An investment in our common stock will entail entrusting these and similar
decisions to our present management subject, of course, to their fiduciary
duties and the business judgment rule.
. There Is An Inherent Conflict In Interest Arising As a Result Of the
Relationship Between Our Two Principal Stockholders And The Licensor Of Our
SFD Technology
Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control
both our company and Momentum Resources Corporation, which has granted us
an exclusive license to identifying oil and natural gas prospects using
SFD Data while reserving the exclusive right to use the SFD technology for
purposes other than oil and natural gas exploration. Although Mr. Liszicasz
has entered into an employment agreement with us he is not obligated, and
as a result of his relationship with Momentum may in the future not be
able, to devote his entire undivided time and effort to or for our benefit.
As a result of the foregoing relationships, certain conflicts of interests
between our company and one or more of Momentum and Messrs. Liszicasz and
Stinson may directly or indirectly arise, including the following:
. Mr. Liszicasz's potential inability to devote his undivided time and
attention to our affairs; and
. the proper exercise by Messrs. Liszicasz or Stinson of their fiduciary
duties on our behalf as directors and controlling stockholders of our
company in connection with any matters concerning Momentum such as, by
way of example and not limitation:
-41-
[_] disputes regarding the validity, scope or duration of the SFD
Technology License;
[_] the exploitation of corporate opportunities;
[_] rights to proprietary property and information;
[_] maintenance of confidential information as between entities; and
[_] potential competition between our company and Momentum.
While Messrs. Liszicasz and Stinson and our company have each executed
certain disclosures and consents relating to these conflicts, these
disclosures and consents will not remediate these conflicts, but will
merely release Messrs. Liszicasz and Stinson from liability as a result of
the conflicts so long as they use reasonable efforts to minimize the
conflicts. In the event any of these conflicts prove to be irreconcilable,
Messrs. Liszicasz and Stinson may be forced to resign their positions with
our company.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
Oil And Gas Price Fluctuations
Our primary market risks will be related to market changes in oil and gas
prices. Since our prospective royalty revenues will be tied to the price at
which our joint venture partners sell oil and gas on the world market, any
fluctuations in these prices will directly and proportionately impact our
royalty income base. For example, a 1% increase or decrease in oil or gas prices
would result in a corresponding 1% increase or decrease in our oil or gas
royalties. Should we elect a working interest in lieu of a royalty interest, our
working interest revenue base would be similarly affected, except that this
affect would not necessarily be proportional since production and marketing
costs would most likely remain the same. For example, in the case of a decline
in oil and gas prices where production and marketing costs are unaffected, the
decline in our working interest revenues would most likely be greater, in
percentage terms, than the decline in oil and gas prices.
We do not anticipate that any decline in world oil and gas prices would
adversely affect our operations--such as forcing our company or our joint
venture partners to slow down or cut-back SFD survey or interpretation
operations or staffing levels--insofar as a primary benefit of the SFD
technology is to reduce finding costs, which benefit becomes more important as
oil and gas prices decline. A decline in oil and gas prices could, however,
force our joint venture partners to curtail exploration drilling operations
since these operations are ordinarily funded out of available cash flow which,
in turn, is dependent upon oil and gas prices. This eventuality would adversely
affect our future cash flows since these prospects would not be drilled until
our joint venture partner obtained sufficient capital. Even if exploration
activities are curtailed, however, a decline in oil and gas prices raises
opportunities to acquire and "bank" SFD-qualified prospects at lower acquisition
prices, which can then be drilled when oil and gas prices increase.
A decline in oil and gas prices could also lead our joint venture partners to
"shut-in" an existing producing well, which would likely be a "marginal
producing well," on the basis that the decline in price no longer makes the well
economic to operate. In such an event we would no longer receive royalty or
working interest revenues from the shut-in well.
For further information on market risks, see Item 7, captioned "Management's
Discussion And Analysis Of Financial Condition And Results Of
Operations--Uncertainties And Other Factors That May Affect Our Future Results
And Financial Condition--Uncertainties And Risk Factors Generally Relating To
Our Company And Our Business--Volatility Of Oil And Natural Gas Prices."
-42-
Oil And Gas Price Fluctuations
Our primary market risks will be related to market changes in oil and gas prices
(See Item 7, captioned "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Uncertainties And Other Factors That May
Affect Our Future Results And Financial Condition--Risks Relating To The Company
And Its Business--Volatility Of Oil And Natural Gas Prices"). Since our
prospective royalty revenues will be tied to the price at which our joint
venture partners sell oil and gas on the world market, any fluctuations in these
prices will directly and proportionately impact our royalty income base (i.e., a
1% increase or decrease in oil or gas prices would result in a corresponding 1%
increase or decrease in our oil or gas royalties). Should we elect a working
interest in lieu of a royalty interest, our working interest revenue base would
be similarly affected, except that this affect would not necessarily be
proportional since production and marketing costs would most likely remain the
same. For example, in the case of a decline in oil and gas prices where
production and marketing costs are unaffected, the decline in our working
interest revenues would most likely be greater, in percentage terms, than the
decline in oil and gas prices.
We do not anticipate that any decline in world oil and gas prices would
adversely affect our operations (i.e., force our company or our joint venture
partners to slow down or cut-back SFD survey or interpretation operations or our
staff) insofar as a primary benefit of the SFD technology is to reduce finding
costs, which benefit becomes more important as oil and gas prices decline. A
decline in oil and gas prices could, however, force our joint venture partners
to curtail exploration drilling operations since these operations are ordinarily
funded out of available cash flow which, in turn, is dependent upon oil and gas
prices. This eventuality would adversely affect our future cash flows since
these prospects would not be drilled until the joint venture partner obtained
sufficient capital. (Even if exploration activities are curtailed, however, a
decline in oil and gas prices raises opportunities to acquire and "bank"
SFD-qualified prospects at lower acquisition prices, which can then be drilled
when oil and gas prices increase).
A decline in oil and gas prices could also lead our joint venture partners to
"shut-in" an existing producing well (primarily "marginal producing wells") on
the basis that the decline in price no longer makes the well economic to
operate. In such an event we would no longer receive royalty or working interest
revenues from the shut-in well.
Currency Fluctuations
An additional significant market risk relates to foreign currency fluctuations
between American and Canadian dollars. Since our royalty or working interest
revenues generated by our Canadian-based joint venture partners will be
denominated in Canadian currency, our financial position could be adversely
affected by American-Canadian currency fluctuations. We have not previously
engaged in activities to mitigate the effects of foreign currency fluctuations
due to the absence of Canadian revenues to date, and we anticipate that the
exchange rate between the American and Canadian dollar will remain fairly
stable.
If earnings from our Canadian operations increase, our exposure to fluctuations
in the American-Canadian exchange rate will increase, and we may utilize forward
exchange rate contracts or engage in other efforts to mitigate these foreign
currency risks. We cannot give you any assurance that the use of exchange rate
contracts or other mitigation efforts would effectively limit any adverse
effects of foreign currency fluctuations on our Company's international
operations and our overall results of operations.
Interest Rate Fluctuations
We currently maintain the bulk of our available cash in money-market accounts in
U.S. dollars. Our interest income from these short-term investments could be
adversely affected by any material changes in interest rates within the United
States.
-43-
Item 8. Financial Statements And Supplementary Data
Financial Statements and the Report of Independent Auditors are filed with this
annual report on Form 10-K in a separate section following Part IV, as shown on
the index under Item 14(a) of this annual report.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
Not applicable.
Part III
Item 10. Our Directors And Executive Officers
Information relating to our directors and executive officers required by this
item will be contained in our definitive proxy statement to be distributed later
this year pursuant to the rules of the Securities and Exchange Commission in
advance of our Annual Meeting of Stockholders. Pursuant to the rules of the
Securities and Exchange Commission, the information relating to our directors
and executive officers contained in our definitive proxy statement to be
distributed later this year in advance of our Annual Meeting of Stockholders is
hereby incorporated into this annual report by reference.
Item 11. Executive Compensation
Information relating to executive compensation required by this item will be
contained in our definitive proxy statement to be distributed later this year
pursuant to the rules of the Securities and Exchange Commission in advance of
our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and
Exchange Commission, the information relating to executive compensation
contained in our definitive proxy statement to be distributed later this year in
advance of our Annual Meeting of Stockholders is hereby incorporated into this
annual report by reference.
Item 12. Ownership Of Our Securities by Beneficial Owners And Management
Information relating to the ownership of our securities by beneficial owners and
our management required by this item will be contained in our definitive proxy
statement to be distributed later this year pursuant to the rules of the
Securities and Exchange Commission in advance of our Annual Meeting of
Stockholders. Pursuant to the rules of the Securities and Exchange Commission,
the information relating to the ownership of our securities by beneficial owners
and our management contained in our definitive proxy statement to be distributed
later this year in advance of our Annual Meeting of Stockholders is hereby
incorporated into this annual report by reference.
Item 13. Certain Relationships And Related Transactions
Information relating to certain relationships and related transactions involving
our beneficial owners, management and agents required by this item will be
contained in our definitive proxy statement to be distributed later this year
pursuant to the rules of the Securities and Exchange Commission in advance of
our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and
Exchange Commission, the information relating to certain relationships and
related transactions involving our beneficial owners, management and agents
contained in our definitive proxy statement to be distributed later this year in
advance of our Annual Meeting of Stockholders is hereby incorporated into this
annual report by reference.
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Part IV
Item 14. Exhibits, Financial Statements, Schedules And Reports On Form 8--K
(a)(1) Financial Statements:
Report of Independent Auditors (Deloitte & Touche LLP)............................................. F-1
Consolidated Balance Sheets at December 31, 1999 and 1998.......................................... F-2
Consolidated Statements of Loss and Comprehensive Loss for the twelve-month periods ended
December 31, 1999, 1998 and 1997................................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) from inception (October 20, 1995)
through December 31, 1999.......................................................................... F-4
Consolidated Statements of Cash Flows for the twelve-month periods ended December 31, 1999, 1998
and 1997........................................................................................... F-6
Notes to Consolidated Financial Statements......................................................... F-7
(a)(2) Schedules required by Regulation S--X are filed as an exhibit to this
report:
Independent Auditors' Report on Schedules and Consent
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements notes thereto
(b) Exhibits
2.1 Reorganization Plan dated September 28, 1994 between Mega-Mart,
Inc. and Auric Mining Corporation (1)
2.2 Reorganization Plan dated December 31, 1995 between Auric Mining
Corporation and Fiero Mining Corporation (1)
2.3 Reorganization Plan dated January 20, 1996 between Auric Mining
Corporation and Pinnacle Oil Inc. (1)
3.1 Articles of Incorporation for Auric Mining Corporation (1)
3.2 Amended Bylaws for Pinnacle Oil International, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation of
Pinnacle Oil International, Inc. (1)
4.1 Specimen Common Stock certificate (1)
1.2 Specimen Series A Preferred Stock certificate (1)
1.3 Form of Non-Qualified Stock Option Agreement for grants to
directors (1)
1.4 1997 Pinnacle Oil International, Inc. Stock Plan (1)
1.5 Form of Incentive Stock Option Certificate for grants to
employees (3)
1.6 Warrant certificate for 200,000 Common Shares issued to SFD
Investment LLC (1)
9.1 Stockholder Agreement dated April 3, 1998 among Pinnacle Oil
International, Inc., R. Dirk Stinson, George Liszicasz and SFD
Investment LLC (1)
10.1 Partnership Agreement of Messrs. Liszicasz and Stinson dated
September 1, 1995 (1)
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10.2 Agreement between Pinnacle Oil Inc. and Mr. Liszicasz dated
January 1, 1996 (1)
10.3 Momentum Transfer Agreement dated June 18, 1996 (1)
10.4 Restated Technology Agreement dated August 1, 1996 (1)
10.5 Amendment to Restated Technology Agreement dated April 3, 1998
(1)
10.6 Letter Agreement with Encal Energy Ltd. dated December 13,
1996 (1)
10.7 Exploration Joint Venture Agreement with Encal Energy Ltd.
dated February 19, 1997 (1)
10.8 Exploration Joint Venture Agreement with Encal Energy Ltd.
dated September 15, 1997 (1)
10.9 Letter Agreement with Renaissance Energy Ltd. dated April 16,
1997 (1)
10.10 SFD Survey Agreement with Renaissance Energy Ltd. dated
November 1, 1997 (1)
10.11 SFD Survey Agreement with Renaissance Energy Ltd. dated
February 1, 1998 (Prospect Lands #1) (1)
10.12 SFD Survey Agreement with Renaissance Energy Ltd. dated
February 1, 1998 (Prospect Lands #2) (1)
10.13 Joint Exploration and Development Agreement with CamWest
Limited Partnership dated April 3, 1998 (1)
10.14 Assignment of Joint Exploration and Development Agreement with
CamWest Exploration LLC dated January 29, 1999 (3)
10.15 Canadian Data License Agreement with Pinnacle Oil Canada Inc.
dated April 1, 1997 (1)
10.16 American Data License Agreement with Pinnacle Oil Inc. dated
April 1, 1997 (1)
10.17 Cost Recovery Agreement with Pinnacle Oil Canada Inc. dated
April 1, 1997 (1)
10.18 Assignment Agreement with Pinnacle Oil Canada Inc. dated
September 15, 1997 (1)
10.19 Assignment Agreement with Pinnacle Oil Canada Inc. dated April
1, 1997 (1)
10.20 Assignment Agreement with Pinnacle Oil Canada Inc. dated
November 1, 1997 (1)
10.21 Employment Agreement dated April 1, 1997 with Mr. Dirk Stinson
(1)
10.22 Employment Agreement dated April 1, 1997 with Mr. George
Liszicasz (1)
10.23 Unsecured Convertible Promissory Note ($500,000) in favor of
Mr. Liszicasz (1)
10.24 Unsecured Convertible Promissory Note ($500,000) in favor of
Mr. Stinson (1)
10.25 Promissory Notes of Pinnacle Oil Inc. in favor of Messrs.
Liszicasz and Stinson dated October 21, 1995 (1)
10.26 Registration and Participation Rights Agreement dated April 3,
1998 between Pinnacle Oil International, Inc. and SFD
Investment LLC (1)
10.27 Form of Indemnification Agreement between Pinnacle Oil
International, Inc. and each Director (1)
10.28 Lease Agreement between Phoenix Place Ltd. and Pinnacle Oil
International, Inc. dated November 25, 1997 (1)
10.29 Employment Agreement dated July 9, 1998 with John M. Woodbury,
Jr. (2)
10.30 Assignment of Joint Exploration and Development Agreement
between CamWest Limited Partnership and CamWest Exploration
LLC dated January 29, 1999
10.31 Settlement Agreement dated April 27, 1999
10.32 Employment Agreement dated May 1, 1999 with Daniel C.
Topolinsky.
10.33 Employment Agreement dated July 1, 1999 with James R. Ehrets.
21. List of significant subsidiaries
23. Consent of Independent Auditors--Deloitte & Touche LLP
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24. Powers of Attorney
27. Financial Data Schedules
99.1 Report captioned "Evaluation of Stress Field Detector
Technology--Implications for Oil and Gas Exploration in
Western Canada" dated September 30, 1996 prepared by Rod
Morris, P. geologist, A.P.E.G.G.A. (1)
99.2 Report regarding "Stress Field Detector Technology" dated May
22, 1998 prepared by Encal Energy Ltd. (1)
99.3 Report captioned "SFD Data Summary" dated August 26, 1998
prepared by CamWest, Inc. (2)
99.4 Report captioned "Pinnacle Oil International Inc.--Stress
Field Detector Documentation of Certain Exploration and
Evaluation Activities" dated February 27, 1998 prepared by
Gilbert Laustsen Jung Associates Ltd. (1)
(1) Previously filed by our company as part of our Registration
Statement on Form 10 filed on June 29, 1998 (SEC File No. 0-
24027)
(2) Previously filed by our company as part of our Amendment No. 1
to Registration Statement on Form 10 filed on August 31, 1998
(3) Previously filed by our company as part of our Annual Report
on Form 10-K filed on March 31, 1999
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on April 14, 2000.
Calgary, Alberta, Canada
PINNACLE OIL INTERNATIONAL, INC.
By: /s/ George Liszicasz
----------------------------------------------
George Liszicasz
Chief Executive Officer
(principal executive officer)
By: /s/ Daniel C. Topolinsky
----------------------------------------------
Daniel C. Topolinsky,
President and Chief Operating Officer
(principal executive officer)
By: /s/ John M. Woodbury, Jr.
---------------------------------------------
John M. Woodbury, Jr.
Chief Financial Officer
(principal accounting and financial
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant on April 14, 2000, and in the capacities indicated.
/s/ George Liszicasz Chief Executive Officer and Chairman
- --------------------------------
George Liszicasz
/s/ Daniel C. Topolinsky President and Chief Operating Officer
- --------------------------------
Daniel C. Topolinsky and Director
/s/ John M. Woodbury, Jr. Chief Financial Officer (principal
- --------------------------------
John M. Woodbury, Jr. accounting and financial officer) and
Secretary
/s/ R. Dirk Stinson* Director
- --------------------------------
R. Dirk Stinson
/s/ Lorne W. Carson* Director
- --------------------------------
Lorne W. Carson
/s/ Jon E.M. Jacoby * Director
- --------------------------------
Jon E.M. Jacoby
/s/ K. Rick Turner * Director
- --------------------------------
K. Rick Turner
/s/ Dennis R. Hunter * Director
- --------------------------------
Dennis R. Hunter
/s/ John A. Thomson * Director
- --------------------------------
John A. Thomson
*/s/ Daniel C. Topolinsky
- --------------------------------
Daniel C. Topolinsky
(Attorney in Fact)
-48-
Consolidated Financial Statements
Pinnacle Oil International, Inc.
(A Development Stage Enterprise)
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and Shareholders of
Pinnacle Oil International, Inc.
We have audited the accompanying Consolidated Balance Sheets of Pinnacle Oil
International, Inc. (a development stage enterprise) as of December 31, 1999 and
1998, and the related Consolidated Statements Of Loss And Comprehensive Loss,
Shareholders' Equity (Deficit) and Cash Flows for each of the three years in the
period ended December 31, 1999, and for the period from October 20, 1995 (date
of inception) to December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The Company's consolidated financial statements for the period October
20, 1995 (date of inception) through December 31, 1996, were audited by other
auditors whose report, dated March 15, 1997, expressed an unqualified opinion on
those statements, and included an explanatory paragraph describing matters that
raised a substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements for the period October 20, 1995
(date of inception) through December 31, 1996 reflect a net loss of $529,274 of
the related total. The other auditors' report has been furnished to us, and our
opinion, insofar as it relates to the amounts involved for such prior period, is
based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards required that we plan and perform an audit
to obtain reasonable assurance whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of another auditor, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 1999 and 1998, in the
period and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, and for the
period from October 20, 1995 (date of inception) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Deloitte & Touche LLP
Chartered Accountants
Calgary, Alberta, Canada
February 18, 2000, except for
note 17 which is dated
April 4, 2000
F-1
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
At December 31,
---------------------------------
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 9,068,723 $ 4,713,822
Accounts receivable.......................................................... 101,731 120,100
Due from officers and employees.............................................. 3,219 1,335
Prepaid expenses and other................................................... 85,343 27,331
----------- -----------
Total current assets....................................................... 9,259,016 4,862,588
Note receivable from officer [note 4]........................................... 34,550 35,413
Deferred costs [note 5]......................................................... -- 93,014
Unproved oil and natural gas properties [notes 2(g) and 6]...................... 775,159 --
Unproven petroleum properties, net of accumulated
depletion of $0 [note 2(g)].................................................. 661,412 --
Other property and equipment, net of accumulated depreciation and
amortization of $292,363 and $90,664, respectively [notes 2(h) and 7]........ 661,201 575,190
----------- ------------
Total assets............................................................ $10,729,926 $ 5,566,205
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables............................................................... $ 32,716 $ 141,426
Wages and employee benefits payable.......................................... 132,685 17,290
Accrued oil and natural gas property costs................................... 382,386 --
Other accrued liabilities.................................................... 54,534 18,634
----------- ------------
Total current liabilities.................................................. 602,321 177,350
Shareholders' equity:
Series "A" convertible preferred stock; par value $0.001 per share,
liquidation preference $7.50 per share:
800,000 shares authorized and 800,000 shares issued as of
December 31, 1999 and December 31, 1998 [note 9].......................... 800 800
Common stock, par value $0.001 per share:
50,000,000 shares authorized;
12,856,816 shares issued as of December 31, 1999;
12,421,983 shares issued as of December 31, 1998 [note 8].................. 12,857 12,427
Warrants [notes 9 and 10]................................................... 1,132,000 1,132,000
Additional paid-in capital................................................... 16,330,692 10,040,031
Accumulated deficit during the development stage............................. (7,319,341) (5,796,403)
Accumulated other comprehensive loss......................................... (29,403) --
----------- ------------
Total shareholders' equity................................................. 10,127,605 5,388,855
----------- ------------
Total liabilities and shareholders' equity.............................. $10,729,926 $ 5,566,205
=========== ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets
F-2
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Loss and Comprehensive Loss
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
October 20,
1995
(inception) to
Twelve Months Ended December 31, 1999
--------------------------------------------------
1999 1998 1997 (cumulative)
------------ ------------ ----------- ---------------
Operating expenses:
Administrative.................................. $ 1,132,390 $ 969,119 $ 742,438 $ 3,262,362
Amortization and depreciation [note 2(h)]....... 171,494 71,919 25,474 293,994
Research & development [note 2(i)].............. 272,489 57,823 103,079 534,401
Survey support.................................. 287,632 193,759 120,588 601,979
Survey operations and data analysis, net of
amounts reimbursable by joint venture
partners of $121,453 and $144,396 and $0
respectively [note 2(j)]...................... 30,354 30,206 -- 60,380
Write-down of assets............................ 588 -- 17,074 17,662
------------ ------------ ----------- -------------
Total operating expenses..................... 1,894,947 1,332,646 1,008,653 4,770,778
Operating loss..................................... (1,894,947) (1,332,646) (1,008,653) (4,770,778)
Other income (expenses):
Interest income................................. 360,434 209,906 47,832 623,430
Interest expense on promissory notes............ -- (14,299) (110,000) (124,299)
Other income.................................... -- 19,231 -- 19,231
Settlement of damages........................... -- -- 157,500 157,500
------------ ------------ ----------- -------------
Total other income (expenses)................ 360,434 214,838 95,147 675,862
Net loss for the period............................ $ (1,534,513) $ (1,117,808) $ (913,321) $ (4,094,916)
Other comprehensive loss:
Foreign currency translation adjustments........ (29,403) -- -- (29,403)
============ ============ =========== =============
Comprehensive loss for the period.................. $ (1,563,916) $ (1,117,808) $ (913,321) $ (4,124,319)
============ ============ =========== =============
Basic and diluted loss per share [note 2(m)]....... $ (0.12) $ (0.35)/(1)/ $ (0.08)
============ ============ ===========
Weighted average shares outstanding................ 12,684,289 12,392,011 11,979,385
============ ============ ===========
(1) Basic and diluted loss per share for the twelve-month period ended December
31, 1998 includes an adjustment for a deemed distribution attributable to a
beneficial conversion feature for series "A" preferred stock. See notes
2(m) and 9.
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of loss
F-3
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
Accumulated Series "A"
Other Convertible
Compre- Common Stock Preferred Stock
hensive ------------------- -----------------
Income Shares Amount Shares Amount
----------- --------- ------- ------ ------
1995:
Issued at inception for cash at $0.001 per share
on October 20, 1995............................. -- 5,000,000 $ 5,000 -- $ --
Net loss for fiscal 1995........................... -- -- -- -- --
Net other comprehensive loss for fiscal 1995....... -- -- -- -- --
----------- --------- ------- ------ -----
Balance -- December 31, 1995.................. -- 5,000,000 5,000 -- --
1996:
Issued on reverse acquisition on January 30, 1996.. -- 5,968,281 5,968 -- --
Issued for cash at $1 per share on May 29, 1996.... -- 975,000 975 -- --
Net loss for fiscal 1996........................... -- -- -- -- --
Net other comprehensive loss for fiscal 1996....... -- -- -- -- --
----------- --------- ------- ------ -----
Balance -- December 31, 1996.................. 11,943,281 11,943 -- --
1997:
Issued for services at $2.31 1/2 per share on
July 1, 1997..................................... -- 71,938 72 -- --
Net loss for fiscal 1997........................... -- -- -- -- --
Net other comprehensive loss for fiscal 1997....... -- -- -- -- --
----------- --------- ------- ------ -----
Balance -- December 31, 1997.................. 12,015,219 12,015 -- --
Deficit
Common Stock Accumulated
Warrants Additional During the
-------------------- Paid-in Development
Number Amount Capital Stage
------ ------- --------- -----------
1995:
Issued at inception for cash at $0.001 per share
on October 20, 1995............................. -- $ -- $ -- $ --
Net loss for fiscal 1995........................... -- -- -- --
Net other comprehensive loss for fiscal 1995....... -- -- -- (53,696)
------- --------- ---------- ---------
Balance -- December 31, 1995.................. -- -- -- (53,696)
1996:
Issued on reverse acquisition on January 30, 1996.. -- -- (5,968) --
Issued for cash at $1 per share on May 29, 1996.... -- -- 967,775 --
Net loss for fiscal 1996........................... -- -- -- --
Net other comprehensive loss for fiscal 1996....... -- -- -- (475,579)
------- --------- ---------- ---------
Balance -- December 31, 1996.................. -- -- 961,807 (529,274)
1997:
Issued for services at $2.31 1/2 per share on -- -- 166,469 --
July 1, 1997.....................................
Net loss for fiscal 1997........................... -- -- -- --
Net other comprehensive loss for fiscal 1997....... -- -- -- (913,521)
------- --------- ---------- ---------
Balance -- December 31, 1997.................. -- -- 1,128,276 (1,442,595)
[continued on next page]
F-4
PINNACLE OIL, INTERNATIONAL, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Expresses in U.S. Dollars)
- --------------------------------------------------------------------------------
1998:
Issued on conversion of promissory notes at $2.72
per share on February 1, 1998 (1), net of
offering costs.................................. -- 411,764 412 -- -- --
Issued for cash at $7.50 per share on April 3, 1998 -- -- -- 800,000 800 --
Issued with series "A" preferred stock on April 3,
1998............................................ -- -- -- -- -- 200,000
Net loss for fiscal 1998........................... -- -- -- -- -- --
Net other comprehensive loss for fiscal 1998....... -- -- -- -- -- --
---------- ---------- ------- ------- ------ -------
Balance -- December 31, 1998.................. 12,426,983 12,427 800,000 800 200,000
1999:
Issued for cash at $15 per share on May 17, 1999,
net of issuance costs........................... -- 400,000 400 -- -- --
Options exercised for cash at prices between
$8.12 1/2 and $9.50 per share during 1999 -- 35,000 35 -- -- --
Cancelled on October 14, 1999...................... -- (5,167) (5) -- -- --
Net loss for fiscal 1999........................... -- -- -- -- -- --
Net other comprehensive loss for fiscal 1999....... (29,403) -- -- -- -- --
---------- ---------- ------- ------- ------ -------
Balance -- December 31, 1999.................. (29,403) 12,856,816 $12,857 800,000 $ 800 200,000
========== ========== ======= ======= ====== =======
1998:
Issued on conversion of promissory notes at $2.72
per share on February 1, 1998 (1), net of -- 1,119,588 $ --
issuance costs..................................
Issued for cash at $7.50 per share on April 3, 1998 -- 7,792,167 (2,104,000)
Issued with series "A" preferred stock on April 3, 1,132,000 -- (1,132,000)
1998............................................
Net loss for fiscal 1998........................... -- -- (1,117,808)
Net other comprehensive loss for fiscal 1998....... -- -- --
---------- ----------- ----------
Balance -- December 31, 1998.................. 1,132,000 10,040,031 (5,796,403)
1999:
Issued for cash at $15 per share on May 17, 1999,
net of issuance costs........................... -- 5,998,252 --
Options exercised for cash at prices between
$8.12 1/2 and $9.50 per share during 1999 -- 303,979 --
Cancelled on October 14, 1999...................... -- (11,570) --
Net loss for fiscal 1999........................... -- -- 11,575
Net other comprehensive loss for fiscal 1999....... -- -- (1,534,513)
---------- ----------- -----------
Balance -- December 31, 1999.................. $1,132,000 $16,330,692 $(7,319,341)
========== =========== ===========
The accompanying notes to consolidated financial
statements are an integral part of these consolidated
statements of shareholders' equity
F-5
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Cash Flows
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
October 20,
1995
(inception)
to
Twelve Months Ended December 31,
December 31, 1999
1999 1998 1997 (cumulative)
------------ ----------------- ----------- -------------
Operating activities:
Net loss for the period................................ $ (1,534,513) $ (1,117,808) $ (913,321) $ (4,094,916)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Amortization of property and equipment............. 171,494 71,919 25,474 293,994
Write-down of property and equipment............... 588 -- 17,074 17,682
Amortization of deferred costs..................... 93,014 61,273 -- 154,267
Changes in non-cash working capital:
Accounts receivable.............................. 24,783 (31,996) (80,044) (95,317)
Due from officers and employees.................. (1,884) (1,335) 4,832 (3,219)
Prepaid expenses................................. (58,012) 6,183 (31,877) (85,343)
Trade payables................................... (108,296) (48,213) (5,393) 32,716
Wages and employee benefits...................... 115,395 (18,716) 36,006 132,685
Accrued oil and natural gas property costs....... 382,386 -- -- 382,386
Accrued liabilities.............................. 35,900 18,634 -- 54,534
Deferred financing through license fee offset.... (6,414) -- -- (6,414)
Deferred financing for insurance premium......... -- -- 7,766 7,766
Consulting costs settled by issuance of common
stock.......................................... -- -- 166,541 166,541
Interest costs settled by issuance of common
stock.......................................... -- 10,000 10,000 120,000
------------ ---------------- ----------- -------------
Net cash used in operating activities......... (885,973) (1,050,059) (662,942) (2,922,638)
Financing activities:
Funds borrowed from affiliates......................... -- -- 1,000,000 1,100,000
Repayment of funds borrowed from affiliates............ -- -- -- (100,000)
Funds raised through the sale of common stock,
net of issuance costs................................ 5,998,652 -- 6,972,402
Funds raised through the sale of preferred stock
and warrants, net of issuance costs.................. -- 5,688,967 -- 5,688,967
Funds raised through the exercise of options........... 303,979 -- -- 303,979
Repayment of deferred financing for insurance premium.. -- (146,520) (146,520)
------------ ----------------- ----------- -------------
Net cash generated by financing activities...... 6,302,631 5,542,447 1,000,000 13,818,828
Investing activities:
Funds invested in property and equipment............... (258,058) (591,492) (8,340) (988,355)
Funds invested in petroleum properties................. (775,159) -- -- (775,159)
Funds borrowed by an employee.......................... -- (35,760) -- (35,760)
Repayment of funds borrowed by an employee............. 863 347 -- 1,210
------------ ----------------- ----------- -------------
Net cash used in investing activities........... (1,032,354) (626,905) (8,340) (1,798,064)
Effect of net other comprehensive loss.................... (29,403) -- -- (29,403)
Net cash inflow........................................... 4,354,901 3,865,483 328,718 9,068,723
Cash position, beginning of period........................ 4,713,822 848,339 519,621 --
------------ ----------------- ----------- -------------
Cash position, end of period.............................. $ 9,068,723 $ 4,713,822 $ 848,339 $ 9,068,723
============ ================= =========== =============
Supplemental Disclosure Of Non-Cash Investing And Financing Activities
On February 1, 1998, Pinnacle satisfied $1,000,000 in principal and $120,000 in
accrued interest with respect to funds borrowed from an affiliate through the
exercise of its right to convert the underlying notes into 411,764 shares of
common stock. See note 8.
The accompanying notes to consolidated
financial statements are an integral part
of these consolidated statements of cash flows
F-6
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
1. Organization And Operations
(a) Our Company
Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle"),
a development stage enterprise, was incorporated under the laws of the
State of Nevada on September 27, 1994, under the name "Auric Mining
Corporation," and subsequently changed its name to Pinnacle Oil
International, Inc. on February 23, 1996. We have two wholly owned
subsidiaries, Pinnacle Oil Inc. ("Pinnacle U.S."), which was
incorporated under the laws of the State of Nevada on October 20,
1995, and Pinnacle Oil Canada, Inc. ("Pinnacle Canada"), which was
incorporated under the federal laws of Canada on April 1, 1997.
(b) Our Business
We are a technology-based reconnaissance exploration company which
utilizes our proprietary stress field detection or "SFD" remote-
sensing airborne survey technology, which we refer to as our "SFD
Survey System," to quickly and inexpensively identify and high-grade
oil and natural gas prospects. We conduct our reconnaissance
exploration activities, as well as land acquisition, drilling,
completion and production activities to exploit prospects identified
using our SFD technology, through our two subsidiaries, Pinnacle Oil
Inc. which focuses on United States-based exploration, and Pinnacle
Oil Canada, Inc. which focuses on Canadian-based exploration.
Pinnacle, in turn, focuses on research and development efforts to
improve the efficacy of our SFD Survey System.
Since we have not generated operating revenues to date, we should be
considered a development stage enterprise. Although we have sufficient
working capital as of December 31, 1999 to fund our current level of
operations for several years assuming we make minimal investments in
petroleum properties, our ability to continue as a going concern in
the longer term will nevertheless be dependent upon our ability,
either through our joint venture arrangements or for our own account,
to successfully identify hydrocarbon bearing prospects, and to
finance, develop, extract and market oil and natural gas from these
prospects for a profit. We anticipate that we will continue to incur
further operating losses until such time as we receive revenues from
our joint venture partners with respect to prospects currently in the
development stage, or through prospects we identify and exploit for
our own account.
2. Significant Accounting Policies
(a) Basis of Presentation
We have prepared these consolidated financial statements in accordance
with accounting principles generally accepted in the United States for
annual financial reporting.
F-7
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
(b) Consolidation
We have consolidated the accounts of our wholly owned subsidiaries
with those of Pinnacle in the course of preparing these consolidated
financial statements. All significant intercompany balances and
transactions amongst Pinnacle and its subsidiaries have been
eliminated as a consequence of the consolidation process, and are
therefore not reflected in these consolidated financial statements.
(c) Reclassifications
We have changed the manner of presentation in these consolidated
financial statements and, as a consequence, have reclassified certain
accounts and amounts reflected in our prior annual consolidated
financial statements to conform to this change in presentation.
(d) Estimates and assumptions
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles in the United
States requires our management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of these consolidated
financial statements and the reported amount of revenues and expenses
during the reporting periods. Actual results may differ from those
estimates.
(e) Cash and Cash Equivalents
For purposes of preparing the consolidated balance sheets and
statements of cash flow contained in these consolidated financial
statements, we consider all investments with original maturities of
ninety days or less to constitute "cash and cash equivalents."
(f) Fair Value of Financial Instruments
Our financial instruments consist of cash, accounts receivable, notes
receivable, accounts payable and accrued liabilities. The fair value
of these financial instruments approximates their carrying values on
our consolidated
F-8
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
financial statements due to their short-term to maturity and
similarity to current market rates. It is the opinion of our
management that we are not exposed to significant interest, currency
or credit risks arising from these financial instruments
(g) Oil and Natural Gas Properties
We follow the full cost method of accounting for oil and natural gas
properties and equipment whereby we capitalize all costs relating to
our acquisition of, exploration for and development of oil and natural
gas reserves. These capitalized costs include land acquisition costs,
geological and geophysical costs, costs of drilling both productive
and non-productive wells, production equipment and related facilities
and various costs associated with evaluating petroleum and natural gas
properties for potential acquisition. Commencing upon production,
these capitalized costs will also include SFD survey and data analysis
costs. See note 2(k). We only capitalize overhead that is directly
identified with acquisition, exploration or development activities.
All costs related to production, general corporate overhead and
similar activities are expensed as incurred.
Under the full cost method of accounting, capitalized costs are
accumulated into cost centers on a country-by-country basis. These
costs, plus a provision for future development costs (including
estimated dismantlement, restoration and abandonment costs) of proved
undeveloped reserves, are then depleted and depreciated using the unit
of-production method, based on estimated proved oil and gas reserves
as determined by independent engineers where significant. For purposes
of the depletion and depreciation calculation, proved oil and gas
reserves are converted to a common unit of measure on the basis of
their approximate relative energy content.
In applying the full cost method of accounting, capital costs in each
cost center less accumulated depletion and depreciation and related
deferred income taxes are restricted from exceeding an amount equal to
the sum of the present value of their related estimated future net
revenues discounted at 10% less estimated future expenditures, and the
lower of cost or estimated fair value of unproved properties included
in the costs being amortized, net of related tax effects. Should this
comparison indicate an excess carrying value, a write-down would be
recorded.
The carrying values of unproved properties, which are excluded from
the depletion calculation, are assessed on a quarterly basis to
ascertain whether any impairment in value has occurred. This
assessment typically includes a determination of the anticipated
future net cash flows based upon reserve potential and independent
appraisal where warranted. Impairment is recorded if this assessment
indicates the future potential net cash flows are less than
capitalized costs.
All recoveries of costs through the sale or other disposition of oil
and gas properties and equipment are accounted for as adjustments to
capitalized costs, with no gain or loss recorded, unless the sale or
disposition involves a significant change in the relationship between
costs and the value of proved reserves or the underlying value of
unproved property, in which case the gain or loss is computed and
recognized.
Our company conducts oil and natural gas exploration, drilling,
development and production activities through our joint venture
partners. These consolidated financial statements reflect only our
proportionate interest in these activities.
(h) Other Property and Equipment
We carry our other capitalized property and equipment at cost. We
depreciate or amortize our other capitalized property and equipment
over their estimated service lives using the declining balance method
as follows:
F-9
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
Airplane................................... 25%
Computer equipment......................... 30%
Computer software.......................... 100%
Equipment.................................. 20%
Furniture and fixtures..................... 20%
Leasehold improvements..................... 20%
Tools...................................... 20%
Vehicles................................... 30%
When we retire or otherwise dispose of our other capitalized property
and equipment, we remove their cost and related accumulated
depreciation or amortization from our accounts, and record any
resulting gain or loss in the results of operations for the period.
Our management periodically reviews the carrying value of our property
and equipment to ensure that any permanent impairment in value is
recognized and reflected in our results of operations.
(i) Research and Development Expenditures
We expense all research and development expenditures we incur to
develop, improve and test our SFD Survey System and related
components, including allocable salaries.
(j) Survey Support Expenditures
We expense all survey support expenditures we incur, after netting
costs which are reimbursable by our joint venture partners. Survey
support expenditures consist primarily of the cost, including
allocable salaries, to:
. conduct field evaluations designed by our joint venture partners
to evaluate the SFD Survey System (after netting costs which are
reimbursable by our joint venture partners); and
. develop, organize, staff and train our survey and interpretation
operational functions.
(k) Survey and Data Analysis Expenditures
We expense all survey and data analysis costs we incur, after netting
costs which are reimbursable by our joint venture partners. Survey and
data analysis expenditures consist primarily of:
. aircraft operating costs, travel expenses and allocable salaries
of our personnel while on survey assignment (after netting costs
which are reimbursable by our joint venture partners); and
. allocable salaries of our personnel while interpreting SFD Data.
Although we currently expense our survey and data analysis costs, we
will, in the future, commencing on the earliest date that any of our
initial exploration wells commence production, capitalize and amortize
these costs using the unit of production method as a component of
petroleum properties in accordance with the full cost method of
accounting for oil and gas.
(l) Foreign Currency Translation
We use the United States dollar as our reporting currency. With
respect to our subsidiaries whose functional currency is in Canadian
dollars, we use the following methodology to convert their Canadian
dollar denominated accounts and transactions into U.S. dollars for
consolidation purposes:
. all asset and liability accounts are translated into U.S.
dollars at the rate of exchange in effect as of the end of the
fiscal year;
. all shareholders' equity accounts are translated into U.S.
dollars using historical exchange rates; and
. all revenue and expense accounts are translated into U.S.
dollars at the average rate of exchange for the fiscal year.
F-10
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
We record the cumulative gain or loss arising from the conversion of
the noted Canadian dollar denominated accounts and transactions into
U.S. dollars as a foreign currency translation adjustment as a
component of accumulated other comprehensive income or loss for that
period.
(m) Basic And Diluted Loss Per Common Share
Our basic loss per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS
No. 128"), by dividing the net loss for the period attributable to
holders of our common stock by the weighted average number of shares
of our common stock outstanding for the period. Our diluted loss per
share is computed, also in accordance with SFAS No. 128, by including
the potential dilution that could occur if holders of our dilutive
securities were to exercise or convert these securities into our
common stock.
In calculating our diluted loss per share, we take into consideration
deemed distributions analogous to the declaration of a dividend
attributable to the beneficial conversion features affording a
discount or benefit to the holders of our securities. See note 9.
(n) Stock-based compensation
In accounting for our employee and director stock options, we have
elected to follow Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees," ("APB 25"), and related interpretations.
Pursuant to APB 25, we have not recorded any compensation expense for
any period in these consolidated financial statements insofar as the
exercise price for all options we have granted to date to our
employees and directors have equaled the market price of the
underlying common shares on the effective date of grant. See note
11.
F-11
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
(o) Recent pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which as subsequently
amended by SFAS No. 137, established accounting and reporting
standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability
measured at its fair value for fiscal quarters of fiscal years
beginning after June 15, 2000. Our management has not had the
opportunity to evaluate the impact of the adoption of SFAS Nos. 133
and 137 on consolidated financial position, results of operations or
cash flows as we do not hold derivatives.
F-12
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
3. Reverse Acquisition
We acquired what is now our wholly-owned subsidiary, Pinnacle U.S., on
January 20, 1996, in a transaction accounted for as a "reverse
acquisition". This acquisition was effected through the issuance of
10,090,675 common shares of our company (then known as Auric Mining
Corporation), constituting approximately 92% of its outstanding shares at
that date, in exchange for all of the outstanding shares of Pinnacle U.S.
As a result of the application of the noted accounting principles governing
Reverse Acquisitions, Pinnacle U.S. (and not Auric Mining Corporation) was
treated as the "acquiring" or "continuing" entity for financial accounting
purposes.
We have accounted for the Pinnacle U.S. acquisition as an issuance of stock
by Pinnacle U.S. in exchange for the tangible net assets of Auric Mining
Corporation, valued at fair value, which approximate historical costs. As a
result, our consolidated statements of loss and shareholders' equity
(deficit) included in these consolidated financial statements are deemed to
be a continuation of Pinnacle U.S.'s financial statements, and therefore
reflect:
. Pinnacle U.S.'s operations from the date of its formation (October 20,
1995) through the effective date of the Reverse Acquisition (January
20, 1996); and
. our consolidated operations after the effective date of the Reverse
Acquisition (January 20, 1996).
4. Note Receivable From Officer
In September 1998, we loaned the sum of Cdn. $54,756 (U.S. $35,760) to one
of our officers in connection with his relocation to Calgary, Alberta.
Pursuant to the terms of an underlying promissory note, the officer is
required to repay the loan on a monthly basis, with a balloon payment due
on October 3, 2003. The amount of the monthly payments is calculated on the
basis of a 300-month amortization rate, principal plus interest, using a
variable interest rate computed at our cost of funds, which we define as
our floating interest rate for liquid investments (presently 5 1/2%).
F-13
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
5. Deferred Costs
On November 20, 1997, we purchased a three-year insurance policy, and
financed the premium pursuant to a loan agreement in the original principal
amount of $150,000, bearing interest at 6.44% per annum. We were obligated
to make monthly payments of principal and interest in the amount of $4,884
to a maturity date of May 22, 1999, however, we elected to pay the
outstanding balance in full in June 1998.
6. Oil And Natural Gas Properties
Summarized below are the oil and natural gas property costs we capitalized
for our fiscal years ended December 31, 1999 and December 31, 1998:
Twelve Months Ended
December 31,
--------------------------
1999 1998
-------- ----------
Acquisition costs.............. $404,585 $ --
Exploration costs.............. 370,574 --
Development costs.............. -- --
Capitalized interest........... -- --
-------- ----------
$775,159 $ --
======== ==========
Since all of our oil and gas properties as of December 31, 1999 were either
not yet producing or still in the drilling stage, we have classified all of
these properties as unproved properties. Consequentially, we did not record
any depletion to date for these properties for the year ended December 31,
1999.
Following the close of our year ended December 31, 1999, our management
performed a property assessment with respect to each of our unproved
properties as of December 31, 1999 to determine if any of these properties
had been subject to any impairment in value, and concluded that no
impairment had occurred. This assessment included a determination of the
future production potential based upon SFD data, seismic data and
exploration results. Our company is currently conducting active exploration
and development programs with respect to each of these unproved oil and gas
properties, and we anticipate that all of these properties will be
evaluated and the associated costs transferred into the amortization base
or impaired over the next five years.
7. Other Property And Equipment
December 31,
------------------------------
1999 1998
--------- ---------
Airplane ............................................................ $ 238,653 $ 220,092
Computer equipment .................................................. 189,586 73,145
Computer software ................................................... 71,174 15,165
Equipment ........................................................... 62,749 41,201
Furniture and fixtures .............................................. 165,274 132,425
Leasehold improvements .............................................. 102,761 72,793
SFD Survey System (including software) .............................. 59,169 47,918
Tools................................................................ 1,704 890
Vehicle ............................................................. 62,494 62,495
--------- ---------
Property and equipment........................................... 953,564 666,124
Less accumulated depreciation and amortization ...................... (292,363) (90,664)
--------- ---------
Net property and equipment ...................................... $ 661,201 $ 575,460
========= =========
8. Common Stock
On January 31, 1997, two of our executive officer-directors at that time
each loaned our company the sum of $500,000, for total loan proceeds of
$1,000,000. These loans were extended by these officer-directors pursuant
to unsecured, convertible promissory notes due January 31, 1998, together
with interest accrued at a rate of 12% per annum. Each promissory note
contained identical conversion provisions pursuant to which:
. each officer-director could elect to convert any or all of the
outstanding balance of his loan into common stock based upon a ratio
of one share per $4.07 in converted principal and interest at any
time; and
. our company could convert any or all of the outstanding balance of
either loan into common stock based upon a ratio of one share per
$2.72 in converted principal and interest should we be unable to repay
that amount by the January 31, 1998 due date.
We exercised our right to convert the notes into 411,764 shares of common
stock on February 1, 1998, in satisfaction of $1,200,000 in aggregate
principal and accrued interest which became due on January 31, 1998.
F-14
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
On May 17, 1999, we raised $6,000,000 in gross proceeds through a private
placement of 400,000 shares of our common stock at $15 per share. Net
proceeds to our company from this offering were $5,998,652, after deducting
$1,348 in offering expenses.
During 1999, we raised $303,979 in gross proceeds through our employees'
exercise of incentive stock options entitling them to purchase 35,000
shares of our common stock at exercise prices between $8.25 and $9.50 per
share.
9. Preferred Stock And Warrants
On April 3, 1998, we completed a series of transactions pursuant to which:
. Pinnacle U.S. entered into a joint venture agreement, and
. we concurrently raised $6,000,000 in gross proceeds from an affiliate
of the joint venture partner through the private placement to that
party of 800,000 shares of our series "A" convertible preferred
stock, and warrants to purchase 200,000 shares of our common stock at
an exercise price of $7.50 per share.
The net proceeds of this private placement were $5,688,867, after deducting
$311,833 in offering expenses, including the cost of becoming a reporting
company with the Securities and Exchange Commission.
Each share of preferred stock is convertible into one common share at the
election of the holder, and carries a $7.50 liquidation preference should
our company wind-up and dissolve. We have reserved the right to redeem the
preferred stock at a price of $7.50 per share if it has not been converted
into common stock by April 3, 2000, and the holder forgoes a final
opportunity to exercise his conversion rights to avoid redemption. The
preferred shares are not entitled to payment of any dividends, although
they are entitled under certain circumstances to participate in dividends
on the same basis as if converted into common shares. Each warrant carries
a $7.50 per share exercise price, and lapses to the extent not exercised by
April 3, 2000.
Insofar as the preferred shares and warrants contained beneficial
conversion features affording a discount or benefit to the purchaser of
these securities, we recorded a deemed distribution analogous to the
declaration of a dividend to that purchaser. This deemed distribution
resulted in:
. an increase in additional paid-in capital of $2,104,000 to record
the intrinsic value of the beneficial conversion feature of the
preferred shares, i.e., the discount in the purchase price of these
securities relative to the public trading price as of the date of
issuance of the underlying common shares into which these preferred
shares could be converted, without adjustment for discounts or
restrictions;
. a newly created warrant capital account to record the fair value of
the warrants in the amount of $1,132,000, including the value of
their beneficial conversion feature, as determined by the Black-
Scholes method of valuation; and
. a counterbalancing charge against our accumulated deficit capital
account in the amount of $3,236,000.
F-15
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
We also made appropriate adjustment for the deemed distribution in
calculating our basic loss per common share. See note 2(m).
10. Performance Warrants
On August 1, 1996, we granted a performance-based contractual right to be
granted warrants to the licensor of our SFD technology, Momentum Resources
Corporation, in connection with the amendment of our exclusive SFD
technology license with Momentum to use the SFD technology for hydrocarbon
exploration. The primary purpose of the amendment was to indefinitely
extend the termination date of the license. Pursuant to this contractual
right, Momentum Resources Corporation is entitled to a separate grant of
warrants entitling it to purchase 16,000 shares of our common stock at the
then current trading price for each month after December 31, 2000 in which
production from SFD-identified prospects during that month exceeds 20,000
barrels of hydrocarbons. Momentum has not earned any warrants under the SFD
technology license as of December 31, 1999.
11. Options
Through December 31, 1999, we have granted options to selected employees
and directors of our company pursuant to the following separate
arrangements or plans (the "Plans"):
. Separate free-standing directors options which we granted to selected
directors as compensation for serving on our Board of Directors;
. The 1997 Pinnacle Oil International, Inc. Stock Plan, pursuant to
which 1,000,000 shares of our common stock were reserved for issuance
to employees, directors and consultants in the form of stock options
or outright stock grants; and
. The 1999 Pinnacle Oil International, Inc. Executive Option Plan,
pursuant to which 1,000,000 shares of our common stock were reserved
for issuance to executive officers in the form of stock options.
F-16
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
F-17
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
We have summarized below all transactions involving option grants under the
Plans, including those option grants described above, for our three fiscal
years ended December 31, 1999:
1999 1998 1997
---------------------- ---------------------- ----------------------
Common Weighted Common Weighted Common Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Options Price Options Price Options Price
-------- --------- --------- --------- ------- --------
Outstanding at beginning of year 500,000 $ 7.47 215,000 $ 6.43 0 $ --
Granted.......................... 1,275,000 14.05 285,000 8.25 215,000 6.43
Exercised........................ (35,000) 8.68 0 0 0 0
Cancelled or lapsed.............. (25,000) 8.25 0 0 0 0
--------- --------- -------
Outstanding at end of year........... 1,715,000 12.33 500,000 7.47 215,000 6.43
========= ========= =======
Exercisable at end of year........... 232,500 150,000 55,000
========= ========= =======
Available for grant at end of year 460,000 710,000 950,000
========= ========= =======
F-18
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
We have summarized below all outstanding options under the Plans as of
December 31, 1999:
December 31, 1999
Grant Exercise ----------------------------
Type of Option Date Price Outstanding Vested
----------------------------------- -------- --------- ----------- -------
Director Non-qualified............. 5-12-97 $ 5.81 75,000 75,000
Director Non-qualified............. 5-20-97 5.25 90,000 90,000
Employee Incentive................. 11-24-97 9.50 37,500 7,500
Director Non-qualified............. 3-10-98 8.31 45,000 30,000
Employee Incentive................. 5-12-98 8.25 40,000 20,000
Employee Incentive................. 8-24-98 8.25 132,500 10,000
Employee Incentive................. 10-1-98 8.12 1/2 20,000 0
Employee Non-qualified............. 5-1-99 14.00 1,016,670 0
Employee Incentive................. 5-1-99 15.00 33,330 0
Employee Incentive................. 5-12-99 17.00 20,000 0
Employee Incentive................. 7-2-99 14.06 20,000 0
Employee Incentive................. 9-21-99 13.62 1/2 100,000 0
Employee Incentive................. 11-16-99 14.12 1/2 85,000 0
--------- -------
1,715,000 232,500
========= =======
The director options outstanding as of December 31, 1999 vest one-third on
date of grant, and an additional one-third each on the first anniversary
and second anniversaries of the grant date, respectively, subject to the
re-election of each such director at each annual meeting of the Company or
of its subsidiary. The employee options outstanding as of December 31, 1999
vest over three to five years from the grant date, depending upon the
recipient, based upon the continued provision of services as an employee.
Both the director and employee options generally lapse, if unexercised,
five years from the date of vesting.
Had we elected to follow the alternative fair value accounting provided for
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123"), we would have recorded additional
compensation costs of approximately $3,253,147, $343,200 and $68,000 for
the twelve-month periods ended December 31, 1999, December 31, 1998 and
December 31, 1997, respectively. These amounts are determined using an
option pricing model using the following assumptions:
. no dividends are paid,
. an average vesting period of four and one-half years,
. a weighted average annualized volatility of our common
share price of 63%; and
. a weighted average annualized risk free interest rate at
6.67%.
The following pro forma financial information presents the net loss for the
period and loss per common share for these twelve-month periods had we
adopted SFAS 123:
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ----------- ----------
Net loss for the period as reported................ $ 1,534,513 $(1,117,808) $ (913,321)
Compensation expense computed under
SFAS No. 123....................................... 3,253,147 (343,200) (68,000)
Deemed distribution to holders of preferred
stock and warrants................................. -- (3,236,000)/(1)/ --
----------- ----------- ----------
Pro forma net loss for the period.................. $ 4,787,660 $(4,697,008) $ (981,321)
----------- ----------- ----------
Pro forma basic and diluted loss per common share.. $ (0.38) $ (0.38) $ (0.08)
=========== =========== ==========
(1) This amount has been included to depict the impact of the valuation expense
related to an adjustment for a deemed distribution attributable to a
beneficial conversion feature for these instruments in the computation of
pro forma loss and loss per common share. See notes 2(m) and 9.
12 Income Taxes
(a) Net Operating Loss Carryforwards
As of December 31, 1999, the following net operating loss
carryforwards were available to reduce our taxable income in future
years:
Country Amount Expiration Date
---------------------------------------------------------- ---------- ---------------
United States............................................. $ 1,762,145 2010--2019
Canada.................................................... $ 2,202,880 2004--2006
F-19
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
(b) Deferred Assets
As of December 31, 1999, our accounts contained the following deferred
assets:
Statutory Tax
Amount Tax Rate Benefit
------------- ---------- --------------
Tax asset related to depreciation............. $ (64,784) 44.62% $ (28,907)
Tax benefit of loss carryforwards............. 3,965,025 44.62% 1,769,194
Valuation reserve............................. (1,740,287)
--------------
$ --
==============
As of December 31, 1998, our accounts contained the following deferred
assets:
Statutory Tax
Amount Tax Rate Benefit
------------- ---------- --------------
Tax asset related to depreciation............. $ 8,500 34% $ 2,900
Tax benefit of loss carryforwards............. 2,500,000 34% 850,000
Valuation reserve............................. (852,900)
--------------
$ --
==============
13. Litigation Settlement
During the year ended December 31, 1997, we received $157,500 in cash in
settlement of a lawsuit pertaining to a breach of contract action.
14. Related Party Transactions
Summarized below is information concerning related party transactions and
balances not disclosed elsewhere in these consolidated financial statements
for our three fiscal years ended December 31, 1999:
December 31,
------------------------------------
1999 1998 1997
--------- -------- --------
Collective legal fees accrued to two law firms in 1999, and
three law firms in 1998 and 1997, with partners who were also
directors of Pinnacle or Pinnacle Canada....................... $ 28,147 $142,131 $322,769
Collective wages, fees and benefits paid to three executive officers
of Pinnacle in 1999, and two executive officers of Pinnacle
in 1998 and 1997, who were also directors of Pinnacle.......... 491,021 240,000 165,101
Accounts payable due to executive officers........................ -- -- 12,167
Accounts receivable due from executive officers................... 1,565 1,335 --
Our rights to use our SFD technology arises from an SFD technology license
which we acquired from the owner and licensor of that technology, Momentum
Resources Corporation, pursuant to which we received the exclusive world-
wide right to use the SFD technology for hydrocarbon exploration purposes.
Momentum is controlled and indirectly owned by two of our
F-20
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
significant stockholders, both of whom currently serve as directors and one
of whom currently serves as one of our executive officers. We are obligated
under the terms of the SFD technology license to pay Momentum a fee equal
to 1% of any "Prospect Profits" (as that term is defined in the license)
which we may receive on or before December 31, 2000, and 5% of any Prospect
Profits which we may receive after December 31, 2000. No Prospect Revenue
has been generated as of December 31, 1999.
15. Commitments
At December 31, 1999, we had entered into joint venture agreements with two
separate oil and gas exploration companies. We are required under these
joint venture agreements to conduct SFD surveys to identify oil and natural
gas prospective prospects on selected exploration areas of up to 2,400
square miles, and our joint venture partners are required to drill each
SFD-identified prospect they accept under their respective agreement. We
may elect each SFD-identified prospect they accept under their respective
agreement. We may elect under each of these joint venture agreements to
receive one of the two following payments streams for each SFD-identified
prospect accepted and drilled by the joint venture partner;
. A capital investment and generally risk-free overriding royalty
of 5% to 8% of oil or natural gas revenues received by the joint
venture partner with respect to the prospect; or
. A working interest of up to 45% of the joint venture partner's
revenues with respect to the prospect.
In any situation where we elect to participate on a working interest basis,
we must bear our share of mineral and drilling right acquisition (if
necessary), drilling, completion and production costs incurred with respect
to the prospect based upon our elected working interest percentage.
Although we will bear our share of these costs, our joint venture partner
will nevertheless remain responsible for conducing and managing all
drilling, production and marketing activities to exploit the prospect.
On November 25, 1997, we entered into a five-year non-cancelable operating
lease for our principal executive offices. This lease, which consisted of
7,244 rentable square feet as of December 31, 1999, expires on January 21,
2003. Our combined obligations for base lease payments and building
operating cost and other pass-through items as of December 31, 1999 was
Cdn. $11,372 per month, which translates into U.S. $7,876 per month based
upon the closing conversion rate as of December 31, 1999.
F-21
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
16. Segmented Information
We currently operate in only one business segment, oil and natural gas
exploration, insofar as we intend to develop all oil and natural gas
exploration prospects identified using our proprietary SFD survey
technology either directly for our account or indirectly for our account
through working interest or overriding royalty interests through our joint
venture partners. We do not currently sell or market our SFD data as a
separate product to third parties.
As we are a development stage enterprise, the majority of our revenues
through December 31, 1999, have been from interest earned on cash and cash
equivalents.
Summarized below is geographic information relating to:
. revenues we have received from our external customers for our last
three fiscal years ended December 31, 1999, allocated amongst the
geographic areas in which the revenue is generated;
. revenues we have received from sources other than our external
customers for our last three fiscal years ended December 31, 1999,
allocated amongst the geographic areas in which the revenue is
generated;
. our operating loss for our last three fiscal years ended December 31,
1999, allocated amongst the geographic areas in which the revenue and
associated expenses are generated; and
. our assets as of the last day of each fiscal year indicated, allocated
amongst the geographic areas in which the assets are physically
located or principally connected.
F-22
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
United States Canada Total
------------- ----------- ------------
1999:
Assets..................................... $ 9,349,409 $ 1,380,517 $ 10,729,926
Revenues from external customers........... -- -- --
Revenues from other sources................ 355,727 4,707 360,434
Operating loss............................. (416,465) (1,118,041) (1,534,513)
1998:
Assets..................................... $ 4,764,653 $ 801,552 $ 5,566,205
Revenues from external customers........... -- -- --
Revenues from other sources................ 215,503 13,634 229,137
Operating loss............................. (347,953) (769,855) (1,117,808)
1997:
Assets..................................... $ 30,001 $ 1,149,860 $ 1,179,861
Revenues from external customers........... -- -- --
Revenues from other sources................ 203,316 2,016 205,332
Operating loss............................. (512,292) (401,029) (913,321)
In preparing the above table, we have eliminated all intersegment revenues,
expenses and assets.
17. Subsequent Events
(a) Preferred Stock and Warrants (see note 9)
On April 3, 2000, the holder of warrants to purchase 200,000 shares of
our common stock at an exercise price of $7.50 per share exercised
these warrants, resulting in gross proceeds to our company of
$1,500,000.
(b) Options (see note 11)
On February 15, 2000, we created the 2000 Pinnacle Oil International,
Inc. Directors' Stock Plan, pursuant to which we reserved 400,000
shares of our common stock for the purpose of granting awards or stock
grants to current or prospective directors. Also on February 15, 2000,
we granted 15,000 non-qualified options under the 2000 Pinnacle Oil
International, Inc. Directors' Stock Plan to our five outside
independent directors as compensation for their services as members of
our Board of Directors for the next three years. The purchase price
for these options were fixed at $28.75 per share, reflecting the
closing trading price of our common stock as of the date of grant.
These options vest in equal increments on the first through third
anniversary dates of the date of grant, respectively, based upon
continued provision of services as a director, and lapse, if
unexercised, five years after the vesting date, unless the optionee's
status as a director is terminated, in which case they lapse two years
from date of vesting.
(c) Commitments (see note 15)
On March 7, 2000, we entered into a lease amendment pursuant to which
we expanded our principal executive offices by an additional 6,081
rentable square feet, bringing the total square footage rented to
13,325 square feet. As a result of this expansion, our base rental
obligation for the balance of the term of our original office lease
has been increased by Cdn. $6,588 per month, which translates into an
additional U.S. $4,564 per month based upon the closing conversion
rate as of December 31, 1999. Also as a result of this expansion, our
building operating cost and other pass-through charges under the lease
were increased by Cdn. $46,824 per year, which translates into an
additional U.S. $32,442 per year based upon the closing conversion
rate as of December 31, 1999.
On March 20, 2000, we entered into an agreement to purchase a Piaggio
P180 Avanti aircraft for a purchase price of $2,790,000, subject to us
obtaining appropriate financing. The closing date for the acquisition
is fixed by the agreement as of April 21, 2000. Under the terms of the
agreement we paid a $30,000 deposit into escrow, which will be
released to the seller of the aircraft if the transaction does not
close due to our failure to procure financing.
F-23