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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.
-22-
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 n