Rule 424(b)(3)
Registration Statement No.333-121398
PROSPECTUS
39,293,657
Common Shares
TIDELANDS OIL & GAS CORPORATION
1862 W. Bitters Rd., San Antonio, TX 78248
The Resale of Shares of Common Stock
The selling price of the shares will be determined by market factors at the time
of their resale.
This prospectus relates to the resale by the selling shareholders of up to
shares of common stock. The selling shareholders may sell the stock from time to
time in the over-the-counter market at the prevailing market price or in
negotiated transactions. With regard to the offered shares,
o up to 7,500,000 shares are issuable upon exercise of
outstanding warrants, at exercise price of $0.335 per share to
Impact International, LLC;
o up to 1,699,980 shares issued and outstanding for sale by
Impact International, LLC;
o up to 10,403,618 shares issued and outstanding for sale by
selling security holders;
o up to 11,111,111 shares are issuable upon conversion of
outstanding 7% Convertible Debentures, which are convertible
pursuant to a formula, provided that the conversion price
shall not be less than $0.45, nor more than $0.76 per share;
o up to 6,578,948 shares are issuable upon exercise of
outstanding warrants at exercise prices ranging between $0.80
and $0.87 per share;
o up to 1,000,000 shares are issuable upon the exercise of
outstanding warrants at an exercise price of $0.50 per share;
and
o up to 1,000,000 shares are issuable upon the exercise of
outstanding warrants at an exercise price of $2.50 per share.
This offering is not being underwritten. The common shares offered under this
prospectus may be sold by the selling shareholders on the public market, in
negotiated transactions with a broker-dealer or market maker as a principal or
agent, or in privately negotiated transactions not involving a broker or dealer.
We will receive no proceeds from the sale of the shares by the selling
shareholders. However, we may receive up to $16,005,912 Dollars of proceeds from
the shares issuable upon the exercise of all the warrants, conversion of the
Debentures and payment of promissory notes secured by certain the stock of
certain selling shareholders. The proceeds from the exercise of the Impact
warrants must be used to offset debt we owe to Impact. The proceeds from the
conversion of the Debentures would be applied to the outstanding balances due on
the Debenture debt.
There is no assurance that all of the warrants will be exercised or the
Debentures converted at any price.
Our common stock is quoted on the over-the-counter Electronic Bulletin Board
under the symbol TIDE. On June 14, 2005, the average of the bid and asked prices
of the common stock on the Bulletin Board was $1.36 per share.
Investing in the common stock involves a high degree of risk. You should not
invest in the common stock unless you can afford to lose your entire investment.
See "Risk Factors" beginning on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Please read this prospectus carefully. It describes our company, finances,
products and services. Federal and state securities laws require us to include
in this prospectus all the important information that you will need to make an
investment decision.
You should rely only on the information contained or incorporated by reference
in this prospectus to make your investment decision. We have not authorized
anyone to provide you with different information. The selling shareholders are
not offering these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the front page of this prospectus.
Brokers or dealers effecting transactions in the Shares should confirm the
registration of the Shares under the securities laws of the states in which such
transactions occur or the existence of an exemption from such registration, or
should cause such registration to occur in connection with any offer or sale of
the Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is June 15, 2005
The following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus.
TABLE OF CONTENTS
Forward-looking
Statements................................................................ 1
Prospectus
Summary................................................................... 2
The Company...................................................... 2
The Offering..................................................... 3
Recent Developments.............................................. 4
Summary Financial Information.................................... 5
Risk Factors..................................................... 5
Use of Proceeds........................................................... 5
Market For Common Equity and Related Shareholder Matters................... 14
Dividends and Dividend Policy............................................. 15
Business.................................................................. 16
Properties................................................................. 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 19
Selling Shareholders...................................................... 24
Plan of Distribution...................................................... 27
Directors and Executive Officers.......................................... 28
Principal Shareholders.................................................... 31
Transactions with Management and Others................................... 35
Legal Proceedings......................................................... 36
Description of Securities................................................. 39
Legal Matters............................................................. 41
Experts................................................................... 41
Where You Can Find More Information....................................... 41
Index to Consolidated Financial Statements................................ F-1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this prospectus we make a number of statements, referred to as
"forward-looking statements", which are intended to convey our expectations or
predictions regarding the occurrence of possible future events or the existence
of trends and factors that may impact our future plans and operating results.
These forward-looking statements are derived, in part, from various assumptions
and analyses we have made in the context of our current business plan and
information currently available to us and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe to be appropriate in the
circumstances. You can generally identify forward-looking statements through
words and phrases such as "seek", "anticipate", "believe", "estimate", "expect",
"intend", "plan", "budget", "project", "may be", "may continue", "may likely
result", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they do
develop, the pace at which they develop;
o our ability to attract the qualified personnel to implement our growth
strategies,
o our ability to develop sales, marketing and distribution capabilities;
o the accuracy of our estimates and projections;
o our ability to fund our short-term and long-term financing needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in the
sections of this prospectus, including those captioned "Risk Factors"
and "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations".
o Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our
company and our business made elsewhere in this prospectus as well as
other pubic reports filed with the United States Securities and
Exchange Commission (the "SEC"). You should not place undue reliance on
any forward-looking statement as a prediction of actual results or
developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new
events or circumstances unless and to the extent required by applicable
law.
1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission (SEC) allows us to "incorporate
by reference" information into this prospectus, which means important
information may be disclosed to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this prospectus, except for any information superseded by information
contained directly in this prospectus. This prospectus incorporates by reference
the documents set forth below that Tidelands Oil & Gas Corporation has
previously filed with the SEC. These documents contain important information
about the issuer, its subsidiaries and their finances.
We incorporate by reference the following documents Tidelands Oil & Gas
Corporation has filed with the SEC pursuant to the Exchange Act:
o our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004 filed on April 15, 2005;
o our Current Reports on Forms 8-K filed on January 7, January
11, March 7, May 13, 2005;
o our Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2005 filed on May 13, 2005; and
o our Current Report on Form 8-K filed on June 16, 2005.
We are also incorporating by reference all other documents that we file with the
SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act on, or
after the date of this prospectus and prior to the termination of the offering
to which this prospectus relates. Those documents will become a part of this
prospectus from the date that the documents are filed with the SEC. We are not,
however, incorporating by reference any documents or portions thereof that are
not deemed "filed" with the SEC, including any such information furnished
pursuant to Form 8 -K.
Upon receipt of written or oral request to: Tidelands Oil & Gas Corporation,
1862 West Bitters Rd., San Antonio, TX 78248, Tel: (210) 764-8642, Fax:
210-764-2808.
We will provide to each person to whom a prospectus is delivered, at no cost to
the requester, a copy of any or all of the information that has been
incorporated by reference in this prospectus but not delivered with this
prospectus.
Statements contained in this document as to the contents of any contract or
other document referred to in such document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed with the SEC, each such statement being qualified in all respects by such
reference.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and should
be read in conjunction with, the more detailed information and the Financial
Statements (including the notes thereto) appearing elsewhere in this Prospectus.
Unless otherwise specifically referenced, all references to dollar amounts refer
to United States dollars.
The Company
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has nine subsidiaries which it
directly and indirectly owns as follows: (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates, L.P., (4) Terranova Energia, S.de R.L. de
C.V. and (5)Sonterra Energy Corporation. We also own a 97% limited partnership
interest in Reef Ventures, L.P.(6). Arrecefe Management LLC owns a 1% general
partner interest in Reef Ventures, L.P. Reef Ventures, L.P. owns 100% of the
member interest in Reef International LLC(8) and Reef Marketing LLC(9). Rio
Bravo Energy, LLC owns 100% of the member interest in Sonora Pipeline LLC. (7)
Reef Ventures, L.P. owns 100% of the member interest in Reef International
LLC(8) and Reef Marketing LLC(9).
2
The Company's products and services are primarily focused on development and
operation of transportation, processing, distribution and storage projects for
natural gas and liquid gas in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the State of Texas.
Unless otherwise noted, the "Company" as used in this Prospectus, will refer to
Tidelands Oil & Gas Corporation as described above.
The Offering
This prospectus relates to the offer and sale by some of our shareholders during
the period in which the registration statement containing this prospectus is
effective up to 39,293,657 common shares consisting of:
o up to 7,500,000 shares are issuable upon exercise of
outstanding warrants, at exercise price of $0.335 per share to
Impact International, LLC;
o up to 1,699,980 shares issued and outstanding for sale by
Impact International, LLC;
o up to 10,403,618 shares issued and outstanding for sale by
selling security holders;
o up to 11,111,111 shares are issuable upon conversion of
outstanding 7% Convertible Debentures, which are convertible
pursuant to a formula, provided that the conversion price
shall not be less than $0.45, nor more than $0.76 per share;
and
o up to 6,578,948 shares are issuable upon exercise of
outstanding warrants at exercise prices ranging between $0.80
and $0.87 per share.
o up to 1,000,000 shares are issuable upon the exercise of
outstanding warrants at an exercise price of $0.50 per share,
o up to 1,000,000 shares are issuable upon the exercise of
outstanding warrants at an exercise price of $2.50 per share.
The common shares offered under this prospectus may be sold by the selling
shareholders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or dealer. Information regarding the selling
shareholders, the common shares they are offering to sell under this prospectus,
and the times and manner in which they may offer and sell those shares is
provided in the sections of this prospectus captioned "Selling Shareholders",
"Registration Rights" and "Plan of Distribution". We will not receive any of the
proceeds from those sales. Should the selling shareholders in their discretion,
exercise any of the common share purchase warrants underlying the common shares
offered under this prospectus, we would, however, receive the exercise price for
those warrants. The registration of common shares pursuant to this prospectus
does not necessarily mean that any of those shares will ultimately be offered or
sold by the selling shareholders.
Information on Outstanding Shares
---------------------------------
The number of shares of our common stock outstanding before and after this
offering is set forth below:
o Common shares issued and outstanding before this offering: 62,363,359
o Common shares issued and outstanding after this Offering: 89,923,898
The number set forth above for the shares of common stock outstanding before
this offering is the number of shares of our common stock outstanding on March
31, 2005. The number of shares issued and outstanding after this Offering
assumes that all of the warrants are exercised and the debentures are converted
at the "Floor Price $0.45" and the underlying shares issued and sold. None of
the warrant or debenture holders are obligated to exercise their warrants or
convert their Debentures. The Debenture conversion price may vary between the
"Floor Price $0.45" and "Ceiling Price $0.76".
3
Recent Developments
Mercator Financing
------------------
On November 18, 2004, we completed a $5 million financing through the sale of 7%
Convertible Debentures ("Debentures"). The financing was completed in a private
placement with the M.A.G. Capital, LLC, formerly known as Mercator Advisory
Group, LLC and its related funds. We received the first $3,250,000 Dollars on
November 19, 2004, and the balance of $1,750,000 Dollars two days following our
initial filing of this registration statement. The Debentures are convertible at
any time into shares of our common stock at 85% of the average of the lowest
three inter-day trading prices of our common stock during the ten consecutive
trading days immediately preceding the conversion date, with a maximum
conversion price of $0.76 per share and a minimum conversion price of $0.45 per
share. If we are unable to have this registration statement declared effective
within the 90 days following its filing with the Securities and Exchange
Commission (SEC) the conversion price of the Debentures will be reduced from 85%
to 75% of the average of the lowest three inter-day trading prices of our common
as specifically outlined above.
As part of this financing, we issued three-year warrants to the Mercator
Advisory Group and its related funds entitling them to purchase an aggregate of
6,578,948 shares of our common stock, half at $0.80 per share and half at $0.87
per share. We also paid to Mercator Advisory Group $200,000 as due diligence
fees and $15,000 as reimbursement of legal expenses.
In connection with the financing, we paid $250,000 to KMR Capital, LLC, as
placement agent. KMR also received 450,000 warrants to purchase our common stock
exercisable 200,000 shares at $0.80, 150,000 shares at $0.84 and 100,000 shares
at $0.87.
Oneok Propane Acquisition
-------------------------
On November 1, 2004, through our subsidiary, Sonterra Energy Corporation, we
entered into an Asset Purchase and Sale Agreement with Oneok Propane
Distribution Company, a division of ONEOK Propane Company, a Delaware
corporation. We purchased the assets of this division for Two Million
($2,000,000). The assets consist of propane distribution systems, including gas
mains, yard lines, meters and storage tanks, serving the following residential
subdivisions in the Austin, Texas area:
Austin's Colony Phase II
Costa Bella
Jacarandas
Lake Pointe
La Ventana
Lakewinds Estates
Northshore on Lake Travis Phase I
Riverbend
Rob Roy Rim
Senna Hills
Sterling Acres
The Point
The Preserve at Barton Creek
The propane distribution system is comprised of approximately 25 miles of gas
main pipe, 75,000 feet of yard lines, 850 meters, storage tanks with a combined
capacity of 156,000 gallons.
On November 1, 2004, Sonterra also acquired assets of BNC Engineering for
$250,000. BNC Engineering constructed residential propane systems. It also
provided operating services for Oneok residential propane systems. The assets
consisted of machinery, vehicles, computer equipment, construction equipment,
meters and an inventory of pipe and fittings for use in the construction of gas
mains, service lines and other storage tanks. We assumed BNC Engineering's lease
obligations for a field office mobile houses and a photocopier lease. Sonterra
employed the field operating personnel associated with the residential propane
operations.
4
ACH Financing Oneok Propane Acquisition
---------------------------------------
On October 13, 2004, we sold Four Million (4,000,000) Tidelands Oil & Gas common
shares to ACH Securities, S.A., a company domiciled in Geneva, Switzerland, for
Two Million ($2,000,000) Dollars. On October 14, 2004, in connection with the
ACH Securities transaction, we issued Margaux Investment Group, S.A. common
stock warrants to purchase One Million (1,000,000) Tidelands Oil & Gas common
shares for Fifty ($0.50) Cents per share. We used the proceeds of the ACH
financing to fund Sonterra's purchase of the Oneok propane distribution
business.
Use of Proceeds
We will not realize any of the proceeds from the sale of the shares offered by
the selling stockholders. See "Use of Proceeds". However, we may receive cash
proceeds from the exercise of common stock warrants in the form of cash or
credit to outstanding financial obligations. Proceeds from the conversion of the
7% Debentures will offset all or a portion of the Debenture obligations.
Proceeds from the Impact International warrants will reduce our promissory note
debt owed to Impact. All other uncommitted proceeds will be used for working
capital.
Summary Financial Information
The following table presents selected historical financial data for the Company
derived from the Company's Financial Statements. The historical financial data
are qualified in their entirety by reference to, and should be read in
conjunction with, the Financial Statements and notes thereto of the Company,
which are incorporated by reference into this Prospectus. The following data
should be read in conjunction with "Plan of Operation" and the Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus.
(Unaudited)
Fiscal Year Ended Three Months Ended
December 31 March 31
2003 2004 2005 2004
----------- ----------- ----------- -----------
Statement of Operations
Data:
Revenue $ 178,856 $ 1,883,838 $ 628,075 -0-
Net income (loss) ($1,348,481) $(6,517,182) $(1,236,692) $(1,534,341)
----------- -----------
Basic and Diluted Net income
(loss) per share $ (0.03) $ (0.12) $ (0.02) (0.03)
----------- -----------
(Unaudited)
Fiscal Year Ended Three Months Ended
December 31 March 31
2003 2004 2005 2004
----------- ----------- ----------- -----------
Balance Sheet Data:
Working Capital ($ 221,011) $ 5,996,228 $ 5,142,377 $ 3,796,131
Total assets $ 1,623,515 $17,222,666 $16,317,998 $ 4,965,541
Total liabilities $ 1,138,905 $12,306,107 $12,256,131 $ 333,811
Stockholder's equity (deficit) $ 484,610 $ 4,916,559 $ 4,061,867 $ 4,631,730
RISK FACTORS
An investment in the Securities offered in this Prospectus involves a high
degree of risk and should only be made by persons who can afford the loss of
their entire investment. Accordingly, prospective investors should consider
carefully the following factors, in addition to the other information concerning
the Company and its business contained in this Prospectus, before purchasing the
5
Securities offered hereby. An investment in the common stock the selling
shareholders are offering to resell is risky. You should be able to bear a
complete loss of your investment. Before purchasing any of the common stock, you
should carefully consider the following risk factors, among others.
OPERATING LOSSES
We have had significant losses ever since starting business and we expect to
continue losing money for some time. To date, we have incurred significant
losses. For the year ended December 31, 2004, we lost $6,517,182 and for the
year ended December 31, 2003, we lost $1,348,481. These losses were caused
primarily by:
o Pre-operating expenses for the development period leading to
commencement of operations of the international pipeline crossing at
Eagle Pass;
o Limited volumes of gas transported through the international pipeline
crossing
o Pre-development and operating expenses associated with the development
of additional pipeline and storage projects in Mexico;
o Idle assets not producing revenue, such as the gas plant and associated
pipeline.
LIMITED OPERATING HISTORY.
We have a limited operating history and our financial health will be subject to
all the risks inherent in the establishment of a new business enterprise. The
likelihood of success of our company must be considered in the light of the
problems, expenses, difficulties, complications, and delays frequently
encountered in connection with the startup and growth of a new business, and the
competitive environment in which we will operate. Our success is dependent upon
the successful financing and development of our business plan. No assurance of
success is offered. Unanticipated problems, expenses, and delays are frequently
encountered in establishing a new business and marketing and developing
products. These include, but are not limited to, competition, the need to
develop customers and market expertise, market conditions, sales, marketing and
governmental regulation. The failure of the Company to meet any of these
conditions would have a materially adverse effect upon the Company and may force
the Company to reduce or curtail operations. No assurance can be given that the
Company can or will ever operate profitably.
WE DEPEND HEAVILY ON THE CONTINUED SERVICE OF OUR CHIEF EXECUTIVE OFFICER.
We place substantial reliance upon the efforts and abilities of Michael Ward,
our chief executive officer. The loss of Mr. Ward's services could have a
serious adverse effect on our business, operations, revenues or prospects. We
maintain key man insurance on his life in the amount of One Million Dollars.
RELIANCE ON MANAGEMENT.
All decisions with respect to the management of our Company will be made by our
Company's directors and officers. Accordingly, no person should purchase any
shares offered by this Prospectus unless the subscriber is willing to entrust
all aspects of management to the Directors and Officers of our Company. The loss
of their services could have a material adverse effect on our Company's business
and prospects.
TRADING IN OUR COMMON STOCK ON THE OTC BULLETIN BOARD MAY BE LIMITED.
Our common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is not
an exchange. Trading of securities on the OTC Bulletin Board is often more
sporadic than the trading of securities listed on an exchange or NASDAQ. You may
have difficulty reselling any of the shares that you purchase from the selling
shareholders.
THERE HAS BEEN AN VOLATILE PUBLIC MARKET FOR OUR COMMON STOCK AND THE PRICE OF
OUR STOCK MAY BE SUBJECT TO FLUCTUATIONS.
We cannot assure you that a liquid transparent trading market for our common
stock will develop or be sustained. You may not be able to resell your shares at
or above the initial offering price. The market price of our common stock is
likely to be volatile and could be subject to fluctuations in response to
factors such as the following, most of which are beyond our control:
6
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
o the operations, regulatory, market and other risks discussed in this
section;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o announcements by third parties of significant claims or proceedings
against us; and
o future sales of our common stock.
In addition, the market for our stock has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION.
Our common stock is subject to regulations of the Securities and Exchange
Commission relating to the market for penny stocks. The Securities Enforcement
and Penny Stock Reform Act of 1990 (the "Reform Act") also requires additional
disclosure in connection with any trades involving a stock defined as a "penny
stock" (generally, according to recent regulations adopted by the Commission,
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. These regulations generally require broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors to deliver a disclosure schedule explaining the penny stock market and
the risks associated with that market. These regulations also impose various
sales practice requirements on broker-dealers. The regulations that apply to
penny stocks may severely affect the market liquidity for our securities and
that could limit your ability to sell your securities in the secondary market.
RISKS RELATING TO LOW-PRICE STOCKS.
Because our stock is quoted on the NASD OTC Electronic Bulletin Board and
subject to the Penny Stock Regulations, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the market value of, our
Company's securities. The regulations governing low-priced or penny stocks could
limit the ability of broker-dealers to sell the Company's securities and thus
the ability of the purchasers of this Offering to sell their securities in the
secondary market.
THE EXERCISE OF WARRANTS AND THE CONVERSION OF THE DEBENTURES COULD DEPRESS OUR
STOCK PRICE AND REDUCE YOUR PERCENTAGE OF OWNERSHIP.
If all of the Warrants are exercised and Debentures converted at the "Floor
Price" and assuming that we issue a total of 28,190,059 will dilute the
percentage ownership of our other shareholders. The "Description of Securities"
section of this prospectus provides you with more information about the Warrants
and Debentures.
WE MAY NOT HAVE ENOUGH FUNDING TO COMPLETE OUR BUSINESS PLAN.
We will need additional financing to fully implement our business plan. We
cannot give any assurance that this additional financing could be obtained of
attractive terms or at all. In addition, our ability to raise additional funds
through a private placement may be restricted by SEC rules which limit a
company's ability to sell securities similar to those being sold in a registered
offering before the time that offering is completed or otherwise terminated.
Additionally, we may not have a sufficient quantity of common stock capital if
all of the warrants are exercised and debentures converted. We would have to
amend our articles of incorporation and increase our authorized common stock
capital. Lack of funding could force us to curtail substantially or cease our
operations.
7
FUTURE CAPITAL NEEDS COULD RESULT IN DILUTION TO INVESTORS; ADDITIONAL FINANCING
COULD BE UNAVAILABLE OR HAVE UNFAVORABLE TERMS.
Our Company's future capital requirements will depend on many factors, including
cash flow from operations, progress in its gas operations, competing market
developments, and the Company's ability to market its proposed products
successfully. Although the Company currently has specific plans and arrangements
for financing its working capital is presently insufficient to fund the
Company's activities. It may be necessary to raise additional funds through
equity or debt financings. Any equity financings could result in dilution to our
Company's then-existing stockholders. Sources of debt financing may result in
higher interest expense. Any financing, if available, may be on terms
unfavorable to the Company. If adequate funds are not obtained, the Company may
be required to reduce or curtail operations. The Company anticipates that its
existing capital resources, together with the net proceeds of this Offering,
will be adequate to satisfy its operating expenses and capital requirements for
at least 6 months after the date of this Prospectus. However, such estimates may
prove to be inaccurate.
SUBSTANTIAL CAPITAL REQUIREMENTS
We may make substantial capital expenditures for the development, acquisition
and production of natural gas pipeline , processing systems and, or storage
facilities. We believe that the Company will have sufficient cash provided by
operating activities and equity financing to fund planned capital expenditures
in the near future. If revenues or the Company's equity financing decrease as a
result of lower natural gas prices, operating difficulties, the Company may have
limited ability to expend the capital necessary to undertake or complete
proposed plans and opportunities. There can be no assurance that additional debt
or equity financing or cash generated by operations will be available to meet
these requirements.
WE CAN GIVE NO ASSURANCE REGARDING THE AMOUNTS OF CASH THAT WE WILL GENERATE.
The actual amounts of cash we generate will depend upon numerous factors
relating to our business which may be beyond our control, including:
o the demand for natural gas;
o profitability of operations;
o required principal and interest payments on any debt we may incur;
o the cost of acquisitions;
o our issuance of equity securities;
o fluctuations in working capital;
o capital expenditures;
o continued development of gas transportation network systems;
o prevailing economic conditions;
o government regulations.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR SOME TIME, IF AT ALL.
No cash dividends have been paid on the Common Stock. We expect that any income
received from operations will be devoted to our future operations and growth. We
do not expect to pay cash dividends in the near future. Payment of dividends
would depend upon our profitability at the time, cash available for those
dividends, and other factors.
COMPETITION
Our Company will be competing with other established businesses that market
similar products. Many of these companies have greater capital, marketing and
other resources than we do. There can be no assurance that these or other
companies will not develop new or enhanced products that have greater market
acceptance than any that may be marketed by the Company. There can be no
assurance that our Company will successfully differentiate itself from its
competitors or that the market will consider our products to be superior or to
or more appealing than those of our competitors. Market entry by any significant
competitor may have an adverse effect on our sales and profitability. See
"Competition."
8
WE OPERATE IN HIGHLY COMPETITIVE MARKETS IN COMPETITION WITH A NUMBER OF
DIFFERENT COMPANIES.
We face strong competition in our geographic areas of operations. Our
competitors include major integrated oil companies, interstate and intrastate
pipelines. We compete with integrated companies that have greater access to raw
natural gas supply and are less susceptible to fluctuations in price or volume,
and some of our competitors that have greater financial resources may have an
advantage in competing for acquisitions or other new business opportunities.
GROWING OUR BUSINESS BY CONSTRUCTING NEW PIPELINES AND PROCESSING FACILITIES
SUBJECTS US TO CONSTRUCTION RISKS AND RISKS THAT RAW NATURAL GAS SUPPLIES WILL
NOT BE AVAILABLE UPON COMPLETION OF THE FACILITIES.
One of the ways we intend to grow our business is through the construction of
additions to our existing gathering systems, modification of our existing gas
processing plant and construction of new processing facilities. The construction
of gathering and processing facilities requires the expenditure of significant
amounts of capital, which may exceed our expectations. Generally, we may have
only limited raw natural gas supplies committed to these facilities prior to
their construction. Moreover, we may construct facilities to capture anticipated
future growth in production in a region in which anticipated production growth
does not materialize. As a result, there is the risk that new facilities may not
be able to attract enough raw natural gas to achieve our expected investment
return, which could adversely affect our results of operations and financial
condition.
A SIGNIFICANT COMPONENT OF OUR GROWTH STRATEGY WILL BE ACQUISITIONS AND WE MAY
NOT BE ABLE TO COMPLETE FUTURE ACQUISITIONS SUCCESSFULLY.
Our business strategy will emphasize growth through strategic acquisitions, but
we cannot assure you that we will be able to identify attractive or willing
acquisition candidates or that we will be able to acquire these candidates on
economically acceptable terms. Competition for acquisition opportunities in our
industry exists and may increase. Any increase in the level of competition for
acquisitions may increase the cost of, or cause us to refrain from, completing
acquisitions.
Our strategy of acquisitions is dependent upon, among other things, our ability
to obtain debt and equity financing and possible regulatory approvals. Our
ability to pursue our growth strategy may be hindered if we are not able to
obtain financing or regulatory approvals, including those under federal and
state antitrust laws. Our ability to grow through acquisitions and manage such
growth will require us to to invest in operational, financial and management
information systems and to attract, retain, motivate and effectively manage our
employees. The inability to manage the integration of acquisitions effectively
could have a material adverse effect on our financial condition, results of
operations and business. Pursuit of our acquisition strategy may cause our
financial position and results of operations to fluctuate significantly from
period to period.
IF WE ARE UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY
ACCEPTABLE TERMS, OUR FUTURE FINANCIAL PERFORMANCE MAY BE LIMITED.
There can be no assurance that:
o we will identify attractive acquisition candidates in the future;
o we will be able to acquire assets on economically acceptable terms;
o any acquisitions will not be dilutive to earnings and operating
surplus; or
o any debt incurred to finance an acquisition will not affect our ability
to make distributions to you.
If we are unable to make acquisitions on economically and operationally
acceptable terms, our future financial performance will be limited to the
performance of our present gas gathering network.
Our acquisition strategy involves many risks, including:
o difficulties inherent in the integration of operations and systems;
o the diversion of management's attention from other business concerns;
and
o the potential loss of key employees of acquired businesses.
9
In addition, future acquisitions may involve significant expenditures. Depending
upon the nature, size and timing of future acquisitions, we may be required to
secure financing. We cannot assure you that additional financing will be
available to us on acceptable terms.
OUR BUSINESS IS DEPENDENT UPON PRICES AND MARKET DEMAND FOR NATURAL GAS AND
PROPANE, WHICH ARE BEYOND OUR CONTROL AND HAVE BEEN EXTREMELY VOLATILE.
We are subject to significant risks due to fluctuations in commodity prices,
primarily with respect to the prices of gas that we may own as a result of our
processing and distribution activities.
The markets and prices for residue gas depend upon factors beyond our control.
These factors include demand for oil, and natural gas, which fluctuate with
changes in market and economic conditions and other factors, including:
o the impact of weather on the demand for oil and natural gas;
o the level of domestic oil and natural gas production;
o the availability of imported oil and natural gas;
o the availability of local, intrastate and interstate transportation
systems;
o the availability and marketing of competitive fuels;
o the impact of energy conservation efforts; and
o the extent of governmental regulation and taxation.
WE GENERALLY DO NOT OWN THE LAND ON WHICH OUR PIPELINES ARE CONSTRUCTED AND WE
ARE SUBJECT TO THE POSSIBILITY OF INCREASED COSTS FOR THE LOSS OF LAND USE.
We generally do not own the land on which our pipelines are constructed.
Instead, we obtain the right to construct and operate the pipelines on other
people's land for a period of time. If we were to lose these rights, our
business could be affected negatively.
RISKS RELATED TO THE RETAIL PROPANE AND ASSOCIATED BUSINESSES
o Decreases in the demand for propane because of warmer weather may
adversely affect our financial condition and results of operations.
o Weather conditions have a significant impact on the demand for propane
for heating purposes. All of our propane customers rely heavily on
propane as a heating fuel. The volume of propane sold is at its highest
during the six-month peak heating season of October through March and
is directly affected by the severity of the winter weather. We estimate
that approximately two-thirds of our annual retail propane volume will
be sold during these months. Actual weather conditions can vary
substantially from quarter to quarter and year to year, significantly
affecting our financial performance. Furthermore, warmer than normal
temperatures in our service area can significantly decrease the total
volume of propane we sell. Consequently, our operating results may vary
significantly due to actual changes in temperature. Weather conditions
in any quarter or year may have a material adverse effect on our
operations.
o Sudden and sharp propane price increases that cannot be passed on to
customers may adversely affect our profits, income, and cash flow.
o Energy efficiency and technology may reduce the demand for propane and
our revenues.
o The national trend toward increased conservation and technological
advances, including installation of improved insulation and the
development of more efficient furnaces and other heating devices, has
adversely affected the demand for propane by retail customers. Future
conservation and efficiency measures or technological advances in
heating, conservation, energy generation, or other devices might reduce
demand for propane and our revenues.
o The propane business is highly regulated. New or stricter
environmental, health, or safety regulations may increase our operating
costs and reduce our net income.
10
o The propane business is subject to a wide range of federal, state, and
local environmental, transportation, health and safety laws and
regulations governing the storage, distribution, and transportation of
propane. We may have increased costs in the future due to new or
stricter safety, health, transportation, and environmental regulations
or liabilities resulting from non-compliance with operating or other
regulatory permits. The increase in any such costs may reduce our net
income.
o We will be subject to all operating hazards and risks normally
associated with handling, storing, transporting, and delivering
combustible liquids such as propane for use by consumers. As a result,
we may be a defendant in various legal proceedings and litigation
arising in the ordinary course of business. Our insurance may not be
adequate to protect us from all material expenses related to potential
future claims for personal injury and property damage or that insurance
will be available in the future at economical prices. In addition, the
occurrence of a serious accident, whether or not we are involved, may
have an adverse effect on the public's desire to use our products.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Our business is regulated by certain local, state and federal laws and
regulations relating to the exploration for, and the development, production,
marketing, pricing, transportation and storage of, natural gas and oil. We are
also subject to extensive and changing environmental and safety laws and
regulations governing plugging and abandonment, the discharge of materials into
the environment or otherwise relating to environmental protection. In addition,
we are subject to changing and extensive tax laws, and the effect of newly
enacted tax laws cannot be predicted. The implementation of new, or the
modification of existing, laws or regulations, including regulations which may
be promulgated under the Oil Pollution Act of 1990, could have a material
adverse effect on the Company.
FEDERAL, STATE OR LOCAL REGULATORY MEASURES COULD ADVERSELY AFFECT OUR BUSINESS.
While the Federal Energy Regulatory Commission, or FERC, does not directly
regulate the major portions of our operations, federal regulation, directly or
indirectly, influences certain aspects of our business and the market for our
products. As a raw natural gas gatherer and not an operator of interstate
transmission pipelines, we generally are exempt from FERC regulation under the
Natural Gas Act of 1938, but FERC regulation still significantly affects our
business. In recent years, FERC has pursued pro-competition policies in its
regulation of interstate natural gas pipelines. However, we cannot assure you
that FERC will continue this approach as it considers proposals by pipelines to
allow negotiated rates not limited by rate ceilings, pipeline rate case
proposals and revisions to rules and policies that may affect rights of access
to natural gas transportation capacity.
While state public utility commissions do not regulate our business, state and
local regulations do affect our business. We are subject to ratable take and
common purchaser statutes in the states where we operate. Ratable take statutes
generally require gatherers to take, without undue discrimination, natural gas
production that may be tendered to the gatherer for handling. Similarly, common
purchaser statutes generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These statutes are designed
to prohibit discrimination in favor of one producer over another producer or one
source of supply over another source of supply. These statutes also have the
effect of restricting our right as an owner of gathering facilities to decide
with whom we contract to purchase or transport natural gas. Federal law leaves
any economic regulation of raw natural gas gathering to the states, and some of
the states in which we operate have adopted complaint-based or other limited
economic regulation of raw natural gas gathering activities. States in which we
operate that have adopted some form of complaint-based regulation, like
Oklahoma, Kansas and Texas, generally allow natural gas producers and shippers
to file complaints with state regulators in an effort to resolve grievances
relating to natural gas gathering access and rate discrimination. The states in
which we conduct operations administer federal pipeline safety standards under
11
the Pipeline Safety Act of 1968, and the "rural gathering exemption" under that
statute that our gathering facilities currently enjoy may be restricted in the
future. The "rural gathering exemption" under the Natural Gas Pipeline Safety
Act of 1968 presently exempts substantial portions of our gathering facilities
from jurisdiction under that statute, including those portions located outside
of cities, towns, or any area designated as residential or commercial, such as a
subdivision or shopping center.
OUR BUSINESS INVOLVES HAZARDOUS SUBSTANCES AND MAY BE ADVERSELY AFFECTED BY
ENVIRONMENTAL REGULATION.
Many of the operations and activities of our gathering systems, plants and other
facilities are subject to significant federal, state and local environmental
laws and regulations. These include, for example, laws and regulations that
impose obligations related to air emissions and discharge of wastes from our
facilities and the cleanup of hazardous substances that may have been released
at properties currently or previously owned or operated by us or locations to
which we have sent wastes for disposal. Various governmental authorities have
the power to enforce compliance with these regulations and the permits issued
under them, and violators are subject to administrative, civil and criminal
penalties, including civil fines, injunctions or both. Liability may be incurred
without regard to fault for the remediation of contaminated areas. Private
parties, including the owners of properties through which our gathering systems
pass, may also have the right to pursue legal actions to enforce compliance as
well as to seek damages for non-compliance with environmental laws and
regulations or for personal injury or property damage.
There is inherent risk of the incurrence of environmental costs and liabilities
in our business due to our handling of natural gas and other petroleum products,
air emissions related to our operations, historical industry operations, waste
disposal practices and the prior use of natural gas flow meters containing
mercury. In addition, the possibility exists that stricter laws, regulations or
enforcement policies could significantly increase our compliance costs and the
cost of any remediation that may become necessary. We cannot assure you that we
will not incur material environmental costs and liabilities. Furthermore, we
cannot assure you that our insurance will provide sufficient coverage in the
event an environmental claim is made against us.
Our business may be adversely affected by increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance with
required operating or other regulatory permits. New environmental regulations
might adversely affect our products and activities, including processing,
storage and transportation, as well as waste management and air emissions.
Federal and state agencies also could impose additional safety requirements, any
of which could affect our profitability.
RISK OF ADDITIONAL COSTS AND LIABILITIES RELATED TO ENVIRONMENTAL AND SAFETY
REGULATIONS AND CLAIMS
Our pipeline operations are subject to various federal, state and local
environmental, safety, health and other laws, which can increase the cost of
planning, designing, installing and operating such facilities. There can be no
assurance that costs and liabilities relating to compliance will not be incurred
in the future. Moreover, it is possible that other developments, such as
increasingly strict environmental and safety laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from our operations, could result in additional costs to and liabilities for us.
GOVERNMENTAL REGULATION OF OUR PIPELINES COULD INCREASE OUR OPERATING COSTS
Currently our operations involving the gathering of natural gas from wells are
exempt from regulation under the Natural Gas Act. Section 1(b) of the Natural
Gas Act provides that the provisions of the Act shall not apply to facilities
used for the production or gathering of natural gas. Our physical dimensions and
operations support the conclusion that our facilities perform primarily a
gathering function. We should not, therefore, be subject to Natural Gas Act
regulation. There, however, can be no assurance that this will remain the case.
The Federal Energy Regulatory Commission's oversight of entities subject to the
Natural Gas Act includes the regulation of rates, entry and exit of service,
acquisition, construction and abandonment of transmission facilities, and
accounting for regulatory purposes. The implementation of new laws or policies
12
that would subject us to regulation by the Federal Energy Regulatory Commission
under the Natural Gas Act could have a material adverse effect on our financial
condition and operations. Similarly, changes in the method or circumstances of
operation, or in the configuration of facilities, could result in changes in our
regulatory status.
Our gas gathering operations are subject to regulation at the state level, which
increases the costs of operating our pipeline facilities. Matters subject to
regulation include rates, service and safety. We have been granted an exemption
from regulation as a public utility in Texas. Presently, our rates are not
regulated in Texas . Changes in state regulations, or our status under these
regulations due to configuration changes in our operating facilities, that
subject us to further regulation could have a material adverse effect on our
financial condition. Litigation or governmental regulation relating to
environmental protection and operational safety may result in substantial costs
and liabilities.
Our operations are subject to federal and state environmental laws under which
owners of natural gas pipelines can be liable for clean-up costs and fines in
connection with any pollution caused by the pipelines. We can also be liable for
clean-up costs resulting from pollution which occurred before our acquisition of
the gathering systems. In addition, we are subject to federal and state safety
laws that dictate the type of pipeline, quality of pipe protection, depth,
methods of welding and other construction-related standards. While we believe
that the gathering systems comply in all material respects with applicable laws,
we cannot assure you that future events will not occur for which we may be
liable. Possible future developments, including stricter laws or enforcement
policies, or claims for personal or property damages resulting from our
operations could result in substantial costs and liabilities to us.
SOVEREIGN RISK
The Company is focusing on the development of infrastructure projects through
its Mexican entity, Terranova Energia S.de R.L. de C.V., in the nation of the
United Mexican States (Mexico). The risk of indirect or regulatory actions by
local, state or federal authorities in Mexico which may inhibit, delay, hinder
or block projects under development in Mexico is very high given the history of
operations conducted by past businesses other than the Company in Mexico. There
is a substantial risk that a set of actions taken by commission or omission by
the various actors in the public, private, nongovernmental and/or social sectors
could negatively impact a project or investment in Mexico. The legal system
employed in Mexico is dramatically different in its structure and method of
operation compared to the common law foundation present in the United States of
America. The level of legal protection afforded investors by the North American
Free Trade Agreement has not materially improved from a foreign investor's
viewpoint.
There can be no assurance that a commercially viable project will be completed
due to the above factors which could result in commercial competitors trying to
circumvent the market system through the exploitation of undocumented,
extraofficial channels of influence that constitute unfair competition. Federal,
state and local authorities are not well coordinated in their legal protections
and improper influence and competition may arise from any level of government to
disrupt or destroy the commercial viability of investments by foreign investors.
While the Company has taken precautions to limit its investments to prudent
levels, there is a continuing risk of adverse activities arising from the above
sources that could impair or result in the entire loss of investment in
otherwise commercially viable projects initiated by the Company in Mexico.
PIPELINE SYSTEM OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND UNFORESEEN
INTERRUPTIONS
The operations of our pipeline systems are subject to hazards and unforeseen
interruptions, including natural disasters, adverse weather, accidents or other
events, beyond our control. A casualty occurrence might result in injury and
extensive property or environmental damage. Although we intend to maintain
customary insurance coverages for gathering systems of similar capacity, we can
offer no assurance that these coverages will be sufficient for any casualty loss
we may incur.
OPERATING RISKS OF NATURAL GAS OPERATIONS
The natural gas business involves certain operating hazards. The availability of
a ready market for our natural gas products also depends on the proximity of
reserves to, and the capacity of, natural gas gathering systems, pipelines and
13
trucking or terminal facilities. As a result, substantial liabilities to third
parties or governmental entities may be incurred, the payment of which could
reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of the Company's properties. In accordance
with customary industry practices, the Company maintains insurance against some,
but not all, of such risks and losses. The Company does not carry business
interruption insurance. The occurrence of such an event not fully covered by
insurance could have a material adverse effect on the financial condition and
results of operations of the Company.
OUR BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL RISKS, SOME OF WHICH MAY NOT
BE COVERED BY INSURANCE.
Our operations are subject to the many hazards inherent in the gathering,
compressing, treating and processing of raw natural gas and NGLs and storage of
residue gas, including ruptures, leaks and fires. These risks could result in
substantial losses due to personal injury and/or loss of life, severe damage to
and destruction of property and equipment and pollution or other environmental
damage and may result in curtailment or suspension of our related operations. We
are not fully insured against all risks incident to our business. If a
significant accident or event occurs that is not fully insured, it could
adversely affect our operations and financial condition.
INSURANCE
Companies engaged in the petroleum products distribution and storage business
may be sued for substantial damages in the event of an actual or alleged
accident or environmental contamination. The Company maintains $2,000,000 of
liability insurance. There can be no assurance that we will be able to continue
to maintain liability insurance at a reasonable cost in the future, or that a
potential liability will not exceed the coverage limits. Nor can there be any
assurance that the amount of insurance carried by us will enable it to satisfy
any claims for which it might be held liable resulting from the conduct of its
business operations.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
shareholders. However, we may receive proceeds from the sale to (1) Impact
International, LLC, (2) the Mercator Group of Funds, and (3) Margaux Investment
Management Group, S.A., and (4) Robinson Reed, Inc. of common stock shares
issuable upon the exercise of warrants. We intend to use the proceeds from the
exercise of warrants by Impact for reduction of the principal balance of our
financial obligation to Impact under the terms of the Promissory Note. If all of
the warrants were exercised, the Debentures converted at the Floor Price and
promissory notes paid in full, we could realize $16,005,912 Dollars.
We will pay all the expenses incident to this registration. We plan to use any
net proceeds received upon the exercise of the warrants for general corporate
purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Electronic Bulletin Board. The following
table sets forth the high and low bid prices of our common stock for each
quarter for the years 2003 and 2004. The quotations set forth below reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Common Stock:
Our common stock trades Over-the-Counter (OTC) on the OTC Bulletin Board under
the symbol TIDE. Table 1. sets forth the high and low bid information for the
past two years. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
These quarterly trade and quote data provided by NASDAQ OTC Bulletin Board.
14
Table 1.
Bid Information
Fiscal Quarter Ended
High Low
March 31, 2005 1.98 1.85
December 31, 2004 1.36 0.60
September 30, 2004 2.18 0.73
June 30, 2004 3.18 1.70
March 31, 2004 4.45 1.72
December 31, 2003 2.57 0.75
September 30, 2003 1.05 0.24
June 30, 2003 0.47 0.20
March 31, 2003 0.40 0.15
On March 31, 2005, the closing bid and ask prices for shares of our common stock
in the over-the-counter market, as reported by NASD OTC BB were $1.98 and $1.85
per share, respectively.
We believe that there are presently 39 market makers for our common stock. When
stock is traded in the public market, characteristics of depth, liquidity and
orderliness of the market may depend upon the existence of market makers as well
as the presence of willing buyers and sellers. We do not know if these or other
market makers will continue to make a market in our common stock. Further, the
trading volume in our common stock has historically been both sporadic and
light.
As of March 31, 2005 we had an aggregate of 86 stockholders of record as
reported by our transfer agent, Signature Stock Transfer Co., Inc. Certain
shares are held in the "street" names of securities broker dealers and we
estimate the number of stockholders which may be represented by such securities
broker dealer accounts may exceed 1,500. On March 31, 2005 we had 62,363,359
shares issued and outstanding.
Dividends and Dividend Policy
There are no restrictions imposed on the Company which limit its ability to
declare or pay dividends on its common stock, except as limited by state
corporation law. During the year ended December 31, 2004, no cash or stock
dividends were declared or paid and none are expected to be paid in the
foreseeable future.
We expect to continue to retain all earnings generated by our future operations
for the development and growth of our business. The Board of Directors will
determine whether or not to pay dividends in the future in light of our
earnings, financial condition, capital requirements and other factors.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plan information as of
December 31, 2004. Information is included for equity compensation plans not
approved by our security holders.
15
Table 1.
Equity Compensation Plan Information
------------------------ ------------------------ ---------------------- ------------------------
Plan Category Number of Securities to Weighted-average Number of Securities
be issued upon exercise Exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants, and rights equity compensation
plans (excluding
securities reflected in
column (a)
------------------------ ------------------------ ---------------------- ------------------------
(a) (b) (c)
------------------------ ------------------------ ---------------------- ------------------------
Equity Compensation
Plans approved by
security holders None None None
------------------------ ------------------------ ---------------------- ------------------------
Equity Compensation
Plans not approved by 500,000 (1) $ 0.125 None
security holders 5,000,000 (2) $ 0.287 210,122
5,000,000 (3) $ 0.87 4,500,000
------------------------ ------------------------ ---------------------- ------------------------
Total 10,500,000 $0.333 4,710,122
------------------------ ------------------------ ---------------------- ------------------------
(1) This plan registered shares issued for legal services rendered on behalf of
the Company and approved by our Board of Directors. These shares were issued in
lieu of cash legal fees for services rendered during 2002.
(2) On May 27, 2003, the Company adopted the 2003 Non-Qualified Stock Grant and
Option Plan. The Plan reserved 5,000,000 shares. The Plan is administered by our
Board of Directors. Directors, officers, employees consultants, attorneys, and
others who provide services to our Company are eligible participants.
Participants are eligible to be granted warrants, options, common stock as
compensation.
(3) On November 2, 2004, the company adopted the 2004 Non-Qualified Stock Grant
and Option Plan. The Plan reserved 5,000,000 shares. The Plan is administered by
our Board of Directors. Directors, officers, employees consultants, attorneys,
and others who provide services to our Company are eligible participants.
Participants are eligible to be granted warrants, options, common stock as
compensation. On November 5, 2004, under the terms of James Smith's employment
agreement, we granted and issued 500,000 common shares to him under this Plan.
BUSINESS
Business Overview
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has nine subsidiaries which it
directly and indirectly owns as follows: (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates, L.P. , (4) Terranova Energia, S.de R.L. de
C.V. and (5) Sonterra Energy Corporation. We also own a 97% limited partnership
interest in Reef Ventures, L.P.(6). Arrecefe Management LLC owns a 1% general
partner interest in Reef Ventures, L.P. Rio Bravo Energy, LLC owns 100% of the
membership interest in Sonora Pipeline LLC. (7) Reef Ventures, L.P. owns 100% of
the member interest in Reef International LLC(8) and Reef Marketing LLC(9).
The Company's products and services are primarily focused on development and
operation of transportation, processing, distribution and storage projects for
natural gas and natural gas liquids in the northeastern states of Mexico
(Chihuahua, Coahuila, Nuevo Leon and Tamaulipas) and the State of Texas.
Reef Ventures International Pipeline
Until September 30, 2004, we derived our revenue from sales of natural gas to
Conagas, the local distribution company in Piedras Negras, Coahuila, through the
pipeline owned by Reef Ventures, L.P. On September 1, 2004, we converted the
revenue source for this pipeline to a transportation fee. As a reseller of
natural gas we were obligated to restrict of use of $1,000,000 of cash in order
to fund a credit facility in favor of the seller of natural gas. We believe that
converting the revenue source to a transportation fee that we will double net
revenues based upon current gas volumes committed for delivery to the customer
in Piedras Negras, Coahuila. Additionally, Management is evaluating an expansion
of the pipeline in Coahuila to serve new markets along the state highway No. 57
corridor to Monclova, Coahuila. The planned Liquid Petroleum Gas ( LPG) line
between Eagle Pass, Texas and Piedras Negras, Coahuila is being re-evaluated in
light of new supply sources emerging in Nuevo Laredo and Reynosa, Tamaulipas. A
decision to proceed, modify or abandon the LPG project at this location is
expected in the future. The above projects were acquired in connection with the
buyout of the Impact general and limited partnership interests in Reef Ventures,
L.P.
16
Tidelands Oil & Gas Storage Enterprise
In December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
to design, build and operate an underground natural gas storage facility in the
vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
at other regions in Mexico. The MOU provides for exclusivity in the development
of the projects and the related transportation and interconnecting pipelines to
and from the storage facilities.
We have completed the initial study of the Burgos facility and expect to
complete final contract negotiations with the Secretary of Energy and PEMEX for
the construction and operation of the facility before the end of 2005. A system
of two interconnecting pipelines is also proposed to enhance the overall
pipeline grid in Mexico and the operational efficiency of the proposed storage
facility. The capital budget for these projects exceeds $700 Million Dollars and
is expected to be funded through issuance of additional equity of the Company,
the addition of joint venture partners and/or debt financing. Marea Associates,
L.P. was formed to own the majority interest in Terranova Energia, S. de R.L. de
C.V., a Mexican company which will conduct all business dealings in Mexico on
behalf of Tidelands. Rio Bravo Energy LLC, an existing wholly owned subsidiary
owns the general partner interest in Marea Associates, L.P. and a minority
interest in Terranova Energia, S. de R.L. de C.V.
Rio Bravo Energy, LLC
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an
oilfield which produced high BTU casinghead gas from which gas processing
operations would yield valuable hydrocarbon components such as propane, butane
and natural gasolines. As the field depleted lower volumes of casinghead gas
were being delivered by Conoco, and other gas producers could not be contracted
with for processing of additional replacement volumes of gas. Therefore, in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume operation of the plant. Management plans to reopen
the plant when adequate volumes of gas from third party producers makes plant
operations economically attractive. The gas plant has the capability to
fractionate natural gas into commercial grade propane and butane. The maximum
intake capacity of gas plant is 10 million cubic feet of gas per day. Presently,
we are evaluating opening the plant for LPG production for our Sonterra Energy
Corporation Austin propane business. The market for the products of plant
operation could include our future propane/butane terminal and pipeline crossing
into Mexico, and/or LPG supply to Sonterra's propane business in Austin, Texas.
Sonora Pipeline, LLC
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline. This pipeline network was
acquired in conjunction with the Chittim Gas Processing Plant acquisition and,
when operational, could generate revenue from transportation fees to be charged
to third party gas producers shipping natural gas to the gas plant owned by Rio
Bravo Energy LLC.
Sonterra Energy Corporation Business
On November 1, 2004, through our subsidiary, Sonterra Energy Corporation
subsidiary, we entered into an Asset Purchase and Sale Agreement with Oneok
Propane Distribution Company, a division of ONEOK Propane Company, a Delaware
corporation. We purchased the assets of this division for Two Million
($2,000,000). The assets consist of propane distribution systems, including gas
mains, yard lines, meters and storage tanks, serving the following residential
13 subdivisions in the Austin, Texas. Additionally, we provide gas to Arbolago
and Hills of Lakeway subdivisions. The 15 subdivisions include:
o Arbolago*
o Austin's Colony Phase II
o Costa Bella
o Hills of Lakeway
17
o Jacarandas
o Lake Pointe
o La Ventana
o Lakewinds Estates
o Northshore on Lake Travis Phase I
o Riverbend
o Rob Roy Rim
o Senna Hills
o Sterling Acres
o The Point
o The Preserve at Barton Creek
These subdivisions contain 1,333 lots. Presently, 850 of lots are metered for
use. There are 483 number of unmetered lots. As new homes are constructed on
these lots our customer base will grow. Presently, 100% of the subdivisions are
metered for propane consumption.
The propane distribution system is comprised of approximately 25 miles of gas
main pipe, 75,000 feet of yard lines, 850 meters, storage tanks with a combined
capacity of 156,000 gallons. Sonterra is the exclusive seller of propane in
these subdivisions and is not considered a regulated utility. Sonterra purchases
propane products from a number of distributors in Austin, Texas.
We financed the purchase of these assets by selling Four Million (4,000,000)
shares to ACH Securities, S.A., a company domiciled in Geneva, Switzerland, for
Two Million ($2,000,000) Dollars. On October 14, 2004, in connection with the
ACH Securities transaction, we issued Margaux Investment Group, S.A. common
stock warrants to purchase One Million (1,000,000) shares for Fifty ($0.50)
Cents per share and One Million (1,000,000) shares at $2.50 per share.
The Texas Railroad Commission regulates all aspects of the production,
transportation and processing of petroleum products, including propane, in the
State of Texas.
Competition
-----------
Reef Ventures, L.P. Eagle Pass Pipeline Crossing
Our Eagle Pass international pipeline crossing competes with a pipeline owned by
West Texas Gas, Inc. pipeline crossing which is located two miles north of Eagle
Pass. We believe that the West Texas Gas crossing will be able to compete with
us only marginally beginning in 2006 due to a very limited transmission
capability and marketing efforts currently being undertaken by Management.
Sonterra Energy Corporation Propane Distribution
Our propane distribution business serving the 15 Austin subdivisions is not
subject to competition within the existing acquired subdivisions because we are
the sole propane supplier. The residential subdivisions are subject to a propane
supply covenant granting us the exclusive supply of propane for each
subdivision. In the future, we will compete in the bidding process for new
propane distribution systems as new residential subdivisions are developed. We
may also be able to acquire additional existing propane distribution systems
from competitors.
Employees
---------
Tidelands has seven full time employees including our corporate officers. Our
Sonterra Energy subsidiary, which operates the Austin propane gas distribution
company, has 9 full-time employees.
PROPERTIES
Reef Ventures, L.P. owns and operates the international natural gas pipeline and
related facilities located in Maverick County, Texas and Coahuila, Mexico.
Tidelands owns a 97% limited partnership interest in this entity. We acquired
this interest from Impact International, LLC. Impact financed our purchase of
this system and we owe Impact $ 6,731,883.
18
Rio Bravo Energy, LLC owns and operates the Chittim Gas Processing Plant which
is located in Maverick, County, Texas. The plant is currently shut down. The gas
plant has the capability to fractionate natural gas into commercial grade
propane and butane. In the near future, we may activate this plant and produce
propane for our Sonterra propane business in Austin, Texas.
Sonora Pipeline, LLC owns the Sonora Pipeline network consisting of
approximately 80 miles of pipeline. No significant encumbrances exist with
respect to the assets of this company. The pipeline is currently inactive and
will be used primarily to transport natural gas from third party producers to
supply feedstock for the Chittim Gas Processing Plant owned by Rio Bravo Energy
LLC.
Sonterra Energy Corporation operates a propane distribution systems providing
propane to 15 residential subdivisions in Austin, Texas. The propane
distribution system is comprised of approximately 25 miles of gas main pipe,
75,000 feet of yard lines, 850 meters and storage tanks with a combined capacity
of 156,000 gallons of LPG.
We lease our San Antonio executive office. We entered into this office lease on
August 1, 2003. The term expires November 30, 2005. Our monthly lease payment is
$3,400. Our rent expense for 2004 was $43,300. This figure includes $2,500 rent
paid on behalf of the Sonterra Energy Corporation operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following analysis of the results of operations and financial condition of
our Company should be read in conjunction with the consolidated financial
statements of Tidelands Oil & Gas Corporation for the three months ending March
31, 2005 and year ended December 31, 2004 and notes thereto contained in the
Report on Form 10-QSB and Form 10-KSB, respectively, of Tidelands Oil & Gas
Corporation as filed with the Securities and Exchange Commission.
BUSINESS OVERVIEW
Our products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects for natural gas
and natural gas liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.
We derive our revenue from sales of natural gas to Conagas, the local
distribution company in Piedras Negras, Coahuila, through the pipeline owned by
Reef Ventures, L.P. and the sale of propane gas to residential customers through
the assets owned by Sonterra Energy Corporation. We also design and construct
residential propane delivery systems for new residential developments in Central
Texas.
With respect to our pipeline system owned by Reef Ventures, L.P., management is
evaluating an expansion of the pipeline in Coahuila to serve new markets along
the state highway No. 57 corridor to Monclova, Coahuila. We currently expect
that this project will not be activated until the fourth quarter of 2005. The
planned natural gas liquid line between Eagle Pass, Texas and Piedras Negras,
Coahuila is being re-evaluated in light of new supply sources emerging in Texas
and Mexico. We are evaluating the utility of the project as either a tolling
business model for existing demand in Coahuila or as a merchant facility in a
direct contract with the propane importation arm of PEMEX. We expect further
development of the project to be announced by the fourth quarter of 2005.
Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the residential propane distribution business on November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin, Texas. Sonterra's existing and future market area includes several
central Texas locations that do not have access to natural gas as a fuel for
home heating and appliance usage. Current expansion of over 400 lots within the
existing subdivisions is possible. Sonterra has also entered into a new
agreement with the developer of Northshore on Lake Travis to expand the
currently serviced lots by an additional 1,000 units. Up to 2,625 additional
lots may be available for installation of residential propane delivery in
developments currently in the planning stages in the nearly central Texas
vicinity. Management is actively seeking new subdivision installation of propane
systems in the Central Texas and has recently identified 4 new subdivisions in
the San Antonio/Austin Hill Country corridor as prospective for system
installation.
19
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an
oilfield which produced high BTU casinghead gas from which gas processing
operations would yield valuable hydrocarbon components such as propane, butane
and natural gasolines. As the field depleted lower volumes of casinghead gas
were being delivered by Conoco and other gas producers could not be contracted
with for processing of additional replacement volumes of gas. Therefore, in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume operation of the plant. We plan to reopen the plant
in 2005 when adequate volumes of LPG feedstock from third parties makes plant
operations economically attractive. We are evaluating the feasibility of opening
the gas plant for LPG production for our Sonterra LPG business in Austin, Texas.
Additionally, the market for the products of the Chittim plant operation could
include our future propane/butane terminal and pipeline crossing into Mexico. As
noted above, Rio Bravo Energy LLC owns a general partner interest in Marea
Associates, L.P. and the minority interest in Terranova Energia, S. de R.L. de
C.V.
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline. Presently, the line is not
in use. The pipeline was acquired in conjunction with the Chittim Gas Processing
Plant acquisition. When operational, it would generate revenue from
transportation fees charged to third party gas producers shipping natural gas to
the Chittim Gas Plant owned by Rio Bravo Energy LLC. Sonora Pipeline LLC will
also own and operate the U.S. (Texas) pipeline segments to be constructed in
connection with the Mexican pipeline, LNG regasification terminal and gas
storage projects which will interconnect to the U.S. via two international
pipeline crossings near McAllen, Texas. The estimated capital cost of these U.S.
segments is approximately $60 million USD. Management expects a filing with the
Federal Energy Regulatory Commission in the second quarter of 2005 for
permission to operate these new pipelines and the granting of presidential
permits for the international crossings near Penitas and Progreso, Texas for
delivery of natural gas into the state of Tamaulipas and the pipelines owned by
our Mexican subsidiary, Terranova Energia S. de R.L. de C.V.
In October 2003, we entered into a confidentiality agreement with Pemex
Exploration and Production ("PEP") to facilitate the exclusive exchange of well
control and seismic data for the purpose of evaluating the feasibility and
design of one or more underground natural gas storage facilities in the Burgos
Basin of Northeast Mexico. In December 2003, we entered into a Memorandum of
Understanding (MOU) with PEMEX to design, build and operate an underground
natural gas storage facility in the vicinity of Reynosa, Tamaulipas, Mexico, in
the Burgos Basin area and eventually at other regions in Mexico. The MOU
provides for exclusivity in the development of the projects and the related
transportation and interconnecting pipelines to and from the storage facilities.
We have completed the initial study of the Burgos facility and expect to
complete final contract negotiations with the Secretary of Energy and PEMEX for
the construction and operation of the facility in the second or third quarter of
2005. A system of two interconnecting pipelines is also proposed to enhance the
overall pipeline grid in Mexico and the operational efficiency of the storage
facility. Permit applications for all these projects will be filed in 2005 with
the Mexican Energy Regulatory Commission. The capital budget for these projects
exceeds $700 Million Dollars. We anticipate funding these projects with
additional equity of the Company, the addition of joint venture partners and/or
debt financing. Marea Associates, L.P. was formed during the fiscal quarter
ended June 30, 2004 to own the majority interest in Terranova Energia, S. de
R.L. de C.V., a Mexican company which will conduct all business dealings in
Mexico on behalf of the Tidelands. Rio Bravo Energy LLC, an existing wholly
owned subsidiary owns the general partner interest in Marea Associates, L.P. and
a minority interest in Terranova Energia, S. de R.L. de C.V.
We are in the preliminary design phase for an LNG regasification terminal to be
located in offshore Mexican waters of the Gulf of Mexico near Matamoros,
Tamaulipas. The Dorado LNG Terminal would provide additional supply for
Northeast Mexico natural gas markets which are currently importing approximately
1.0 BCF per day from the U.S. The capital cost to build the terminal and
interconnecting pipeline to the planned storage facility is expected to be over
$200 million USD. Management estimates a cumulative capital investment of
approximately $1 billion USD for the LNG regasification terminal, the pipelines
in the U.S. and Mexico and the Mexican storage facility. These projects are
targeted to address the critical infrastructure needs for the natural gas and
power markets in Northeast Mexico through the year 2013. A collateral
20
opportunity to import natural gas into the U.S. via the project's route and
facilities is also contemplated. Management is in active negotiations for LNG
supply, U.S. supply and off take gas contracts in Mexico and the U.S. The
projects will be developed and operated with a tolling business model as the
revenue premise, however, joint venture or contractual relationships with third
parties may allow the Company to participate in merchant operations in the
energy supply business for Mexican and U.S. customers.
We have had substantive and ongoing discussions with interested third parties
regarding project financing and will continue these discussions throughout the
year as the projects develop.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2005 AS COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 2004
REVENUES: The Company reported revenues of $ 628,075 for the three months ended
March 31, 2005 as compared with revenues from continuing operations of $ 0 for
the three months ended March 31, 2004. The revenue increase resulted from the
acquisition of an additional 73% interest in Reef Ventures, L.P. which owns and
operates a natural gas pipeline serving the Piedras Negras, Coahuila market and
the acquisition of residential propane delivery pipeline assets from ONEOK
Propane Company in the fourth quarter of 2004 Transportation fees ($
74,211)charged from the Reef Ventures, L.P. operations plus sales of propane by
Sonterra Energy Corporation to its residential customer base ($ 512,738) and
construction service income of $41,126 resulted in Total Revenues of $628,075
for the three months ended March 31, 2005.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $ 1,538,208 for the three months ended March 31, 2004 to $
$1,897,592 for the three months ended March 31, 2005. Cost of Sales increased
from $0 for the three months ended March 31, 2004 to $ 284,679 for the three
months ended March 31, 2005 Operating Expenses increased from $ 0 for the three
months ended March 31, 2004 to $ $66,774 for the three months ended March 31,
2005. Depreciation Expense increased from $ 11,280 for the three months ended
March 31, 2004 to $ 115,441 for the three months ended March 31, 2005. Interest
Expense increased from $ 4,719 for the three months ended March 1, 2004 to $
209,787 for the three months ended March 31, 2005. Each of these increases
resulted primarily from growth related to the acquisition of 98% of the
partnership interest in the Reef Ventures, L.P. international pipeline
operations and the acquisition of the residential propane sales business near
Austin, Texas by Sonterra Energy Corporation. Sales, General and Administrative
Expenses decreased from $ 1,522,209 for the three months ended March 31, 2004 to
$ 1,220,911 for the three months ended March 31, 2005.
COST OF SALES: Total Cost of Sales increased from $0 for the three months ended
March 31, 2004 to $ 284,679 for the three months ended March 31, 2005 due to the
purchase cost of propane and the installation cost of new meter hookups for the
assets owned by Sonterra Energy Corporation.
OPERATING EXPENSES: Operating expenses from continuing operations increased from
$ 0 for the three months ended March 31, 2004 to $ 66,774 for the three months
ended March 31, 2005. This increase was primarily due to the operating expenses
incurred by Sonterra Energy Corporation. Depreciation expense increased by $
104,161 during the three months ended March 31, 2005 due to the acquisition of
the natural gas pipeline owned by Reef Ventures, L.P. and the depreciable assets
acquired by Sonterra Energy Corporation for the operation of the residential
propane distribution systems in Austin, Texas. Interest expense increased by $
205,068 during the three months ended March 31, 2005 when compared to the period
ended March 31, 2004 due to the debt incurred to acquire the natural gas
pipeline owned by Reef Ventures, L.P. and the issuance of convertible debt to
entities associated with the Mercator Advisory Group, LLC, now known as M.A.G.
Capital, LLC.
GENERAL AND ADMINISTRATIVE: General & Administrative Expenses decreased by $
301,298 during the three months ended March 31, 2005 as compared with the period
ended March 31, 2004. Decreased consulting fees were primarily responsible for
the difference between the respective periods.
NET LOSS FROM OPERATIONS: Net loss of ($1,534,341) for the three months ended
March 31, 2004 decreased to ($ 1,236,692) for the three months ended March 31,
2005, a decrease in the amount of loss of $ 297,649. Included in the net loss
from operations is $382,000 of expenses for financing costs, consulting fees,
and legal fees paid by issuance of common stock.
21
LIQUIDITY AND CAPITAL RESOURCES: Direct capital expenditures during the three
months ended March 31, 2005 totaled $ 278,421. The capital expenditures were
composed of increased office furniture, equipment and leasehold costs ($
41,076), pre-construction costs regarding potential international pipeline
crossings and storage facilities in Mexico ($ 168,471), , and additional
machinery, equipment, trucks, autos and trailers for the operation of the
Sonterra Energy Corporation propane systems ($68,878). Total debt decreased from
$ 12,306,107 at December 31, 2004 to $ 12,256,131 at December 31, 2005. The
decrease in total debt is primarily due to payment of accounts payable and
accrued expenses. Net loss for the three months ended March 31, 2005 was ($
1,236,692) a decrease in net loss of 19% from the net loss of ($ 1,534,341) for
the three months ended March 31, 2004. Basic and diluted net loss per common
share decreased 33% to ($0.02). The net loss per share calculation for the three
months ended March 31, 2005 included an increase in actual and equivalent shares
outstanding.
YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO YEAR ENDED DECEMBER 31, 2003
RESULTS OF OPERATIONS
REVENUES: The Company reported revenues of $1,883,838 for the twelve months
ended December 31, 2004 as compared with revenues from continuing operations of
$178,856 for the twelve months ended December 31, 2003. The revenue increase
resulted primarily from the acquisition of an additional 73% interest in Reef
Ventures, L.P. which owns and operates a natural gas pipeline serving the
Piedras Negras, Coahuila market. Natural gas sold ($1,323,459) and
transportation fees ($76,767) charged from these operations totaled $1,400,227
for the twelve months ended December 31, 2004. Sales of propane by Sonterra
Energy Corporation to its residential customer base ($363,413), service call
income for its customers ($34,373), and installation income for new yard lines
and meter sets ($2,850) totaled to $400,636 for the twelve months ended December
31, 2004. A new revenue source from Sonterra Energy Corporation was construction
services related to propane main lines and tank sites for subdivisions under
development, which resulted in $82,975 of revenues for the twelve months ended
December 31, 2004. Other Revenues decreased by $178,856 for the twelve months
ended December 31, 2004 as compared to the twelve months ended December 31,
2003.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $3,061,068 for the twelve months ended December 31, 2003 to
$8,451,280 for the twelve months ended December 31, 2004. Each category of cost
and expense increased significantly due to the rapid growth in assets and
operating expenses experienced by the Company during the twelve months ended
December 31, 2004. Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31, 2004.
Operating Expenses increased from $27,767 for the twelve months ended December
31, 2003 to $99,665 for the twelve months ended December 31, 2004. Depreciation
Expense increased from $43,006 for the twelve months ended December 31, 2003 to
$244,889 for the twelve months ended December 31, 2004. Interest Expense
increased from $53,163 for the twelve months ended December 31, 2003 to $300,566
for the twelve months ended December 31, 2004. Each of these increases resulted
primarily from growth related to the acquisition of 98% of the partnership
interest in the Reef Ventures, L.P. international pipeline operations and the
acquisition of the residential propane sales business near Austin, Texas by
Sonterra Energy Corporation. Officers & Directors Salaries & Fees increased from
$313,000 for the twelve months ended December 31, 2003 to $1,331,848 for the
twelve months ended December 31, 2004. This increase resulted from the addition
of additional directors and officers combined with the increased use of stock
based compensation in the employment agreements of officers. General and
Administrative Expenses increased from $2,624,132 for the twelve months ended
December 31, 2003 to $4,965,421 for the twelve months ended December 31, 2004
due to the results from the startup and initial operation of the additional
business units mentioned above and the expenses for expanded Company operations
associated with the development of new midstream energy projects in the U.S. and
Mexico during that period.
COST OF SALES: Total Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31, 2004.
Cost of sales increased by $1,299,518 for the purchase cost of natural gas
resold thru our international pipeline operated by Reef Ventures, L.P. and by
$209,373 for the purchase cost of propane, meter sets and yard lines sold to
residential customers by Sonterra Energy Corporation.
22
OPERATING EXPENSES: Operating expenses from continuing operations which are
expenses related to the operation of company assets in an active business
segment increased from $27,767 for the twelve months ended December 31, 2003 to
$99,665 for the twelve months ended December 31, 2004 which is a total increase
of $71,898. This increase was due to the operating expenses incurred for the
international pipeline crossing operated by Reef Ventures, L.P. and the
operating expenses incurred by Sonterra Energy Corporation. Depreciation expense
increased by $201,883 during the twelve months ended December 31, 2004 due to
the acquisition of the natural gas pipeline owned by Reef Ventures, L.P. and the
depreciable assets acquired by Sonterra Energy Corporation for the operation of
the residential propane distribution systems in Austin, Texas. Interest expense
increased by $247,403 during the twelve months ended December 31, 2004 due to
the debt incurred to acquire the natural gas pipeline owned by Reef Ventures,
L.P. and the issuance of convertible debt to entities associated with the
Mercator Advisory Group. Officers & Directors Salaries & Fees increased by
$1,018,848 during the twelve months ended December 31, 2004 as a result of the
addition of one director and two officers to the Company combined with the
increased use of stock based compensation in the employment agreements of
officers.
GENERAL AND ADMINISTRATIVE: General & Administrative Expenses increased by
$2,341,289 during the twelve months ended December 31, 2004. Consulting fees,
legal fees, and financing fees increased by $1,822,414 for the twelve months
ended December 31, 2004. The remaining increase in G & A costs of $518,875 for
the twelve months ended December 31, 2004 was from increases in travel costs,
office rent, insurance premiums, entertainment, and payroll plus other expenses
associated with additional employees. The significant expansion of scope in the
business plan for the Company and the need to conserve cash working capital for
certain project pre-development costs required the use of significant issuances
of stock for general and administrative expenses during the twelve months ended
December 31, 2004.
NET LOSS FROM OPERATIONS: Net loss of ($1,348,481) for the twelve months ended
December 31, 2003 increased to ($6,517,732) for the twelve months ended December
31, 2004, an increase in the amount of loss of $5,169,251. Included in the net
loss from operations is $4,603,066 of expenses for financing costs, consulting
fees, legal fees, and employee compensation paid by issuance of common stock.
LIQUIDITY AND CAPITAL RESOURCES: Direct capital expenditures during the twelve
months ended December 31, 2004 totaled $8,727,010 as compared with $134,505 for
the twelve months ended December 31, 2003. The increased capital expenditures
were composed of the acquisition of the assets of Reef Ventures, L.P. natural
gas pipeline ($5,933,442), increased office furniture, equipment and leasehold
costs ($26,550), higher pre-construction costs regarding potential international
pipeline crossings and storage facilities in Mexico ($822,525), pre-construction
costs related to propane distribution systems ($207,415), machinery, equipment,
trucks, autos and trailers from the Sonterra asset acquisition ($120,355),
storage tanks and main lines for propane distribution ($1,596,439) and
additional equipment for our gas processing plant ($20,000).
The Company also paid $1,158,937 for goodwill associated with the acquisition of
the Reef Ventures, L.P. and Sonterra Energy Corporation assets. Total debt
increased from $1,138,905 at December 31, 2003 to $12,306,107 at December 31,
2004. The increase in total debt is primarily due to: (1) the acquisition
indebtedness created in the acquisition of the Reef Ventures, L.P. partnership
interests from Coahuila Pipeline LLC and Impact International LLC as described
in Note 4 5 and Note 14 to the Consolidated Financial Statements for the period
ended December 31, 2004, and (2) the issuance of Convertible Debentures to the
Mercator Advisory Group, LLC funds as described in Note 4 5 of the Consolidated
Financial Statements for the period ended December 31, 2004. Total debt as of
December 31, 2004 and December 31, 2003 expressed as a percentage of the sum of
total debt and shareholders' equity was 71.45% and 70.15% respectively.
Net loss for the twelve months ended December 31, 2004 was ($6,517,182) an
increase in net loss of 483% from the net loss of ($1,348,481) for the twelve
months ended December 31, 2003. Diluted net loss per common share increased 300%
to ($0.09). The net loss per share calculation for the twelve months ended
December 31, 2004 included an increase in actual and equivalent shares
outstanding. In addition, the period ended December 31, 2003 included a one time
gain of partial sale of a subsidiary in the amount of $1,533,731 which
influenced the difference in net income (loss) per share for the periods ending
December 31, 2003 versus December 31, 2004.
23
FORWARD-LOOKING STATEMENTS:
We have included forward-looking statements in this report. For this purpose,
any statements contained in this report that are not statements of historical
fact may be deemed to be forward looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions, demand for the Company's products, competitive factors in the
industries in which we compete or intend to compete, natural gas availability
and cost and timing, impact and other uncertainties of our future acquisition
plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
SELLING SHAREHOLDERS
The following table provides certain information about the selling shareholder's
beneficial ownership of our common stock as of March 31, 2005 and as adjusted to
give effect to the sale of all of the shares being offered by this prospectus.
The number of shares that the Mercator Momentum Fund, LP, Mercator Momentum Fund
III, LP, Monarch Pointe Fund, Ltd., M.A.G. Capital, LLC, formerly, Mercator
Advisory Group, LLC, and Robinson Reed, Inc., will own at any time are subject
to limitation in the governing agreements for the 7% Convertible Debentures and
warrants, respectively, so that the aggregate number of shares of common stock
of which such selling stockholder and all persons affiliated with such selling
stockholder (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of
1934, as amended) does not at any time exceed 9.99% of our then outstanding
common stock. The Mercator group of companies and Robinson Reed have agreed to
restrict their right to convert their debentures into our common stock and
restrict their right to exercise their common stock warrants into our common
stock. They do not have the right to convert debentures to stock or exercise
their common stock warrants, if it would cause their beneficial ownership to
exceed 9.99% of the total issued and outstanding shares of our Company. The
practical effect of these restrictions is that the Mercator group of companies
and Robinson Reed can never be in a position to be deemed a 10% shareholder of
our Company.
The following table identifies the selling stockholders and indicates (i) the
nature of any position, office or other material relationship that each selling
stockholder has had with us during the past three years (or any of our
predecessors or affiliates) and (ii) the number of shares and percentage of our
outstanding shares of common stock owned by the selling stockholder prior to the
offering, the number of shares to be offered for the selling stockholder's
account and the number of shares and percentage of outstanding shares to be
owned by the selling stockholder after completion of the offering.
The percentage interest of each selling stockholder is based on the beneficial
ownership of such selling stockholder divided by the sum of the current
outstanding shares of common stock plus the additional shares, if any, which
would be issued to such selling stockholder (but not any other selling
stockholder) when exercising warrants or other rights in the future. Applicable
percentage of ownership is based on 62,363,359 shares of common stock
outstanding as of March 31, 2005 together with securities exercisable or
convertible into shares of common stock within 60 days of March 31, 2005, for
each stockholder. Beneficial ownership is determined in accordance with the
24
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject to
securities exercisable or convertible into shares of common stock that are
currently exercisable or exercisable within 60 days of March 31, 2005 are deemed
to be beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person. Note that affiliates are subject to Rule 144 and insider trading
regulations and percentage computation is for form purposes only.
Table 1.
Name of Selling Shares Beneficially Percent of Class of Maximum Number of Shares Beneficially Percent of Class of
Shareholder Owned Before Shares Owned Before Shares to be Sold in Owned After the Shares Owned After
Offering the Offering (A) this Offering Offering
Impact International, 9,199,980 14.75% 9,199,980 -0- -0-
LLC(1)
Carl Allers 1,914,729 3.07% 1,914,729 -0- -0-
Etablissemen (2)
Margaux Group(3) 3,988,889 6.396% 3,988,889 -0- -0-
Investment Mgmt.
ACH Securities(4) 4,000,000 6.414% 4,000,000 -0- -0-
Mercator Momentum 3,291,974 5.278% 3,291,974 -0- -0-
Fund, LP (5)
Mercator Momentum 2,268,092 3.636% 2,268,092 -0- -0-
Fund III, LP(6)
Monarch Pointe Fund,
LP (7) 7,400,463 11.866% 7,400,463 -0-
M.A.G. Capital,
LLC(8) 17,690,059 28.37% 17,690,059 -0- -0-
David F. Firestone(9) 17,690,059 28.37% 17,690,059 -0- -0-
Michael Ward (10) 500,000 0.80% 500,000 -0- -0-
Royis Ward (11) 500,000 0.80% 500,000 -0- -0-
James B. Smith (12) 500,000 0.80% 500,000 -0- -0-
Ahmed Karim (13) 500,000 0.80% 500,000 -0- -0-
Samuel Simon (14) 500,000 0.80% 500,000 -0- -0-
Robinson Reed (15) 1,357,820 2.18% 1,357,820 -0- -0-
Total 39,293,657 63.00% 39,293,657 -0- -0-
(A) Based on 62,363,359 of common stock issued and outstanding on March 31,
2005. (B) Assumes that the selling shareholder will sell all of the shares of
the common stock offered by this prospectus. We cannot assure you that the
selling shareholders will sell all or any of these shares.
(1) Represents up to 7,500,000 shares of common stock issuable upon exercise of
common stock warrants and 1,699,980 shares of common stock presently issued and
outstanding. Robert S. May has voting and dispositive power with respect to the
securities owned by Impact International, LLC.
(2) Represents 1,914,729 shares of common stock presently issued and
outstanding. Jens Vesterager has voting and dispositive power with respect to
the securities owned by Carl Allers Establissment.
(3) Represents 1,988,889 shares of common stock presently issued and outstanding
and 2,000,000 shares of common stock issuable upon exercise(a)1,000,000 shares
at $0.50 per share, and 1,000,000 shares at $2.50 per share. Carl Hessel has
voting and dispositive power with respect to the securities owned by Margaux
Investment Management Group.
(4) Represents 4,000,000 shares of common stock issued and outstanding. Peter
Andersson has voting and dispositive power with respect to the securities owned
by ACH Securities.
(5) Represents up to 751,974 shares of common stock issuable upon exercise of
common stock warrants and 2,540,000 shares issuable upon conversion of the 7%
Debenture calculated at the "Floor Price". Mercator Momentum Fund, L.P. is a
private investment limited partnership organized under California law. M.A.G.
Capital, LLC, formerly Mercator Advisory Group, LLC is the general partner of
the Momentum Fund. David F. Firestone, is the managing member of M.A.G. Capital,
25
LLC. Mr. Firestone has voting and investment control over the shares held by the
Mercator Momentum Fund, L.P. The selling stockholder has agreed not to convert
the Debentures or to exercise warrants to the extent such stockholder's
beneficial ownership of our common stock would exceed 9.99% of our common stock
then outstanding.
(6) Represents up to 518,092 shares of common stock issuable upon exercise of
common stock warrants and 1,750,000 shares issuable upon conversion of the 7%
Debenture calculated at the "Floor Price". M.A.G. Capital, LLC, formerly
Mercator Advisory Group, LLC is the general partner of the Mercator Momentum
Fund III, L.P. The Mercator Momentum Fund III is a private investment limited
partnership organized under California law. David F. Firestone, is the managing
member of M.A.G. Capital, LLC . Mr. Firestone has voting and investment control
over the shares held by the Mercator Momentum Fund III, L.P. The selling
stockholder has agreed not to convert the Debentures or to exercise warrants to
the extent such stockholder's beneficial ownership of our common stock would
exceed 9.99% of our common stock then outstanding.
(7) Represents up to 1,690,462 shares of common stock issuable upon exercise of
common stock warrants and 5,710,001 shares issuable upon conversion of the 7%
Debenture calculated at the "Floor Price". Monarch Pointe Fund, Ltd. is a
corporation organized under the laws of the British Virgin Islands. M.A.G.
Capital, LLC, formerly Mercator Advisory Group, LLC is the manager of Monarch
Pointe Fund, Ltd. David Firestone is the managing member of M.A.G. Capital, LLC.
Mr. Firestone has voting and investment control over the shares held by Monarch
Pointe Fund, Ltd. The selling stockholder has agreed not to convert the
Debentures or to exercise warrants to the extent such stockholder's beneficial
ownership of our common stock would exceed 9.99% of our common stock then
outstanding. The selling shareholder disclaims beneficial ownership in excess of
9.99% of the outstanding shares of our common stock.
(8) Represents 17,690,059 shares of common stock issuable upon the exercise of
common stock warrants or upon conversion of the 7% Convertible Debentures at the
"Floor Price" owned by the collective Mercator entities and Robinson Reed to
which beneficial ownership, is attributed to M.A.G. Capital, LLC, formerly
Mercator Advisory Group, LLC. M.A.G. Capital has voting and investment control
over the Mercator Momentum Fund, L.P., the Mercator Momentum Fund III, L.P. the
Monarch Pointe Fund, Ltd., and Robinson Reed, Inc. The selling stockholder has
agreed not to convert the Debentures or to exercise warrants to the extent such
stockholder's beneficial ownership of our common stock would exceed 9.99% of our
common stock then outstanding. The total number of shares and the percentage of
share ownership attributed to M.A.G. Capital, in the table above, represents the
total of all shares of the four Mercator entities and Robinson Reed, if there
were no contractually imposed limitations on beneficial ownership. The selling
shareholder disclaims beneficial ownership in excess of 9.99% of the outstanding
shares of our common stock.
(9) Represents 17,690,059 shares of common stock issuable upon the exercise of
common stock warrants or upon conversion of the 7% Convertible Debentures at the
"Floor Price" owned by the collective Mercator entities and Robinson Reed to
which beneficial ownership, is attributed to David F. Firestone as the managing
member of M.A.G. Capital, LLC, formerly Mercator Advisory Group, LLC. M.A.G.
Capital has voting and investment control over the Mercator Momentum Fund, L.P.,
the Mercator Momentum Fund III, L.P. the Monarch Pointe Fund, Ltd., and Robinson
Reed, Inc. As the managing member of M.A.G. Capital, LLC, Mr. Firestone has
indirect voting and investment control over all of the Mercator entities. The
selling stockholder has agreed not to convert the Debentures or to exercise
warrants to the extent such stockholder's beneficial ownership of our common
stock would exceed 9.99% of our common stock then outstanding. The total number
of shares and the percentage of share ownership attributed to Mr. Firestone, in
the table above, represents the total of all shares of the four Mercator
entities and Robinson Reed, if there were no contractually imposed limitations
on beneficial ownership. Mr. Firestone disclaims beneficial ownership in excess
of 9.99% of the outstanding shares of our common stock.
(10) Represents 500,000 common shares owned by Michael Ward. Mr. Ward is the
Company's CEO, President and member of the board of directors.
(11)Represents 500,000 common shares owned by Royis Ward.
(12) Represents 500,000 common shares owned by James B. Smith. Mr .Smith is the
Company's CFO and Sr. Vice President.
(13)Represents 500,000 common shares owned by Ahmed Karim. Mr. Karim is the
Company's Vice President and member of the board of directors.
(14)Represents 500,000 common shares owned by Samuel Simon. Mr. Simon is
employed by the Company as an accountant.
(15)Represents 246,710 shares of common stock issuable upon exercise of common
stock warrants and 1,111,110 shares issuable upon conversion of the 7% Debenture
calculated at the "Floor Price". Robinson Reed, Inc. is a British Virgin Islands
26
International Business Company. M.A.G. Capital, LLC exercises voting and
dispositive powers with respect to the Robinson Reed over the warrants,
debentures and underlying common stock.
PLAN OF DISTRIBUTION
In this section of the prospectus, the term "selling stockholder" means and
includes: (1) the persons identified in the tables above as the selling
stockholders; and (2) any of their donees, pledgees, distributees, transferees
or other successors in interest who may (a) receive any of the shares of our
common stock offered hereby after the date of this prospectus and (b) offer or
sell those shares hereunder.
The shares of our common stock offered by this prospectus may be sold from time
to time directly by the selling stockholders. Alternatively, the selling
stockholders may from time to time offer such shares through underwriters,
brokers, dealers, agents or other intermediaries. The distribution of the common
stock by the selling stockholders may be effected: in one or more transactions
that may take place on the OTCBB (including one or more block transaction)
through customary brokerage channels, either through brokers acting as agents
for the selling stockholders, or through market makers, dealers or underwriters
acting as principals who may resell these shares on the OTCBB; in
privately-negotiated sales; by a combination of such methods; or by other means.
These transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at other negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the selling stockholders in connection with sales of
our common stock.
The Mercator group of selling stockholders have agreed not initiate short sales
of our common stock. Additionally, the Mercator group of selling stockholders
have agreed not to sell, in the aggregate during any trading day, shares of our
stock totaling more that 20% of the total shares of our stock traded on any such
trading day. Any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus. There is no underwriter or coordinating broker acting in connection
with the proposed sale of shares of common stock the selling stockholders.
Although the shares of common stock covered by this prospectus are not currently
being underwritten, the selling stockholders or their underwriters, brokers,
dealers or other agents or other intermediaries, if any, that may participate
with the selling stockholders in any offering or distribution of common stock
may be deemed "underwriters" within the meaning of the Securities Act and any
profits realized or commissions received by them may be deemed underwriting
compensation thereunder.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of shares of the common stock offered hereby may not
simultaneously engage in market making activities with respect to the common
stock for a period of up to five days preceding such distribution. The selling
stockholders will be subject to the applicable provisions of the Exchange Act
and the rules and regulations promulgated thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales by the selling stockholders.
In order to comply with certain state securities or blue sky laws and
regulations, if applicable, the common stock offered hereby will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In certain
states, the common stock may not be sold unless they are registered or qualified
for sale in such state, or unless an exemption from registration or
qualification is available and is obtained.
We will bear all costs, expenses and fees in connection with the registration of
the common stock offered hereby. However, the selling stockholders will bear any
brokerage or underwriting commissions and similar selling expenses, if any,
attributable to the sale of the shares of common stock offered pursuant to this
prospectus.
27
We have agreed to indemnify certain of the selling stockholders against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments to which any of those stockholders may be required to make in respect
thereof.
DIRECTORS AND EXECUTIVE OFFICERS
Date became
Name Age Position director or officer
--------------------------------------------------------------------------------
Michael Ward 49 Director, President October 21, 1998
James B. Smith, C.P.A. 51 Chief Financial Officer, V.P. August 16,2003
Ahmed Karim 33 Director, Vice President October 21, 1998
Carl Hessel 41 Director January 28, 2004
Robert Dowies 54 V.P. October 18, 2004
MICHAEL WARD: Mr. Ward is the President, Chief Executive Officer and Chairman of
our Board of Directors. Michael Ward has served in his present capacities since
October 21, 1998. He is Vice President and Chief Executive Officer of Tidelands
Gas Corporation. He is a Manager and Vice President of Development of Rio Bravo
Energy, LLC. Mr. Ward has more than 25 years of diversified experience as an oil
and gas professional. He was educated in business management and administration
at Southwest Texas State University and the University of Texas. He has wide
experience in the capacity in which he successfully served in operating oil and
gas companies in the United States. During the past 20 years, he has been
associated with Century Energy Corporation where his duties and responsibilities
were production and drilling superintendent and supervised 300 re-completions
and new drills in Duval County, Texas. In association with Omega Minerals, Inc.,
where he was vice president and part owner, he operated 65 wells in 23 counties
in South and West Texas: 17 wells in Seminole and Osage Counties, Oklahoma, 44
wells in Neosho and Wilson Counties, Kansas and 125 wells in Brown, Pike,
Schuyler and Scott Counties. Illinois. He was president and owner of Major
Petroleum Company. He drilled, completed and produced 42 wells in South and West
Texas counties. The company was sold. With Tidelands Oil Corporation, his duties
included supervising and performing remedial well work, work-overs and economic
evaluation of the corporate properties. The primary area of interest was in
Maverick County, Texas. He has performed project financing analysis and
consulting of refinery acquisitions for the Yemen government. Currently, he is
negotiating new gas purchase and sale contracts, supervising and administering
the sale of gas line connections and hookups. Mr. Ward is the corporate
secretary and a director of Ecoloclean Industries, Inc. Ecoloclean Industries,
Inc. is a reporting issuer under the Securities Exchange Act of 1934. Ecoloclean
Industries, Inc. shares are quoted on the NASD OTC Electronic Bulletin Board
under the symbol ECCI. Mr. Ward's father, Royis Ward is the President of
Ecoloclean Industries, Inc.
JAMES B. SMITH: On August 16, 2003, we employed James B. Smith to act as an
Senior Vice President and Chief Financial Officer. Mr. Smith received a Bachelor
of Science from Texas A&M University and a Master of Professional accounting
degree from the McCombs School of Business at the University of Texas, Austin.
He is licensed as a Certified Public Accountant in Texas and Colorado. From 1996
through 2001, he directed the financial affairs and tax planning for several
closely held corporations engaged in land development in Colorado. From 2000
through 2003, he served as Chief Financial Officer for Starr Produce Company, a
major produce company with significant subsidiaries in real estate development
and agr-business.
AHMED KARIM: Mr. Karim Vice President and director of the Company. He is a
graduate of Simon Fraser University. He holds a degree in Business
Administration, specializing in marketing and international business. Since 1995
his business experience includes work with Quest Investments Group and
Interworld Trade and Finance where his responsibilities included marketing,
finance and investor relations.
CARL HESSEL: On January 28, 2004, Mr. Hessel joined our board of directors. Mr.
Hessel founded Margaux Investment Management Group, S.A. which is located in
Geneva, Switzterland in 2001. Prior to 2001, he served as Vice President of
MerrillLynch were he was responsible for creating global high net worth
28
management platform. He began his career at Goldman Sachs and help build the
Scandinavian ultra-high net worth market. Mr. Hessel received his M.B.A. from
Wharton Business School and a degree in Finance and Management from the
University of Pennsylvania. He was awarded the Marcus Wallenberg Foundation's
Scholarship.
ROBERT W. DOWIES: On October 18, 2004, we employed Robert W. Dowies as our Vice
President of Gas Markets and Supply. Mr. Dowies has 30 years experience in the
energy marketing. Ten years as the owner of a natural gas trading company and 20
years with a public utility. Until his employment with Tidelands Oil & Gas
Corporation, since 1998, Mr. Dowies worked for Trebor Energy Resources, Inc. in
Houston, Texas. His principal responsibilities were the development of financial
alliances with various energy merchants and producers providing a $50 million
dollar credit support for gas marketing activities, financial trading accounts,
pipeline transportation agreements, storage strategies and capital projects. He
developed and implemented marketing strategies which resulted in $40 million
dollars of annual revenue. He designed and coordinated the construction and
implementation of a natural gas gathering system. We entered into a three year
employment contract paying him an annual salary of $100,000 which includes an
annual stock grant of 100,000 shares.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock of the Company. Officers, directors and greater than
10% shareholders are required by the Securities and Exchange Commission to
furnish the Company with copies of all section 16(a) reports they file. Based
solely on copies of such forms furnished as provided above, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended December 31, 2003 2004, all Section 16(a) filing
requirements applicable to its executive officers, directors and beneficial
owners of more than 10%of its Common Stock were complied with, except as
follows: (1) Royis Ward, former officer and director, failed to file eleven
Forms 4's representing 13 transactions, Statement of Changes in Beneficial
Ownership of Securities, during the 90 day period following his resignation, he
also did not file a Form 5, Statement of Annual Beneficial Ownership due
February 14, 2003, (2) Ahmed Karim, director and vice president, failed to file
seven Forms 4, representing eight transactions during 2003 and a Form 5 due
February 14, 2003, (3) Michael Ward, director and president, failed to file a
Form 5 due February 14, 2003. Michael Ward failed to file one Forms 5, Statement
of Annual Beneficial Ownership, due February 14, 2004 and three Form's 4
representing two stock grants under his employment agreement and one option
exercise, (2)Ahmed Karim failed to file one Form 5, Statement of Annual
Beneficial Ownership, due February 14, 2004.
Executive Officer Compensation
The following sets forth the compensation of the officers of the Company in the
year ended December 31, 2004.
Summary Compensation.
The following table sets forth the compensation paid by the Company during
fiscal year 2004 to its officers. This information includes the dollar value of
base salaries, bonus awards and number of stock options granted, and certain
other compensation, if any.
Table 1.
Stock
Underlying Stock
Name and Position Year Salary Bonus Options Grants
Michael Ward, Pres. 2004 $252,000 $28,550 500,000(1) 1,000,000
James Smith, V.P,CFO 2004 $168,000 $11,996 500,000(1) 552,000(2)
Ahmed Karim, V.P.(3) 2004 -0- -0- 500,000(1) -0-
Robert Dowies (4) 2004 $100,000 $ 4,167 -0- 100,000(3)
(1) These stock options were exercised on September 14, 2004 by the delivery of
one-year promissory notes in the amount of $110,000 each.
(2) Mr. Smith received a stock grant of 52,800 shares which was issued under the
2003 Stock Grant and Option Plan. He also received 500,000 shares pursuant to
his employment agreement under the 2004 Stock Grant and Option Plan.
29
(3) Mr. Karim received compensation as a director.
(4) Mr. Dowies joined the company on October 18, 2004. His employment agreement
entitles him to an annual stock grant of 100,000 shares. The first 50,000 shares
will vest and be payable April 18, 2005. Thereafter, stock grants will be
payable every six months, October 18 and April 18 for the term of the employment
agreement.
Executive Officer Compensation
During 2004, the Company had four executive officers, Michael Ward, James B.
Smith, Ahmed Karim and Robert Dowies. Michael Ward's was paid $252,000 salary
and a bonus of $28,550. James B. Smith was paid $130,200, plus an $11,996 bonus.
Messrs. Ward and Smith have new and different employment agreements for 2004
discussed below in the Employment Agreement paragraph. During 2004 Michael Ward
received 1,000,000 shares of common stock as his annual stock grant under the
terms of his employment agreement. Mr. Smith received 552,800 shares of common
stock as his annual stock grant under the terms of his employment agreement.
We hired Robert Dowies on October 18, 2004 as Vice President. He will work in
the area of gas marketing, supply and distribution. We paid Mr. Dowies $19,444
during 2004. We entered into a three year employment contract paying him an
annual salary of $100,000 which includes an annual stock grant of 100,000
shares. Mr. Dowies employment agreement stock grant will vest on April 18, 2005.
Mr. Karim did not receive any officer salary during 2004.
Director Compensation
On April 11, 2001, the Company agreed to compensate Ahmed Karim, a director, for
services provided at the rate of $5,000 per month until June 30, 2003 and $3,000
per month thereafter. For the year ended December 31, 2004, we incurred $36,000
for director compensation. There are no other formal or informal understandings
or arrangements relating to director compensation.
On February 5, 2003, we granted Michael Ward and Ahmed Karim common stock
options to purchase 500,000 shares each at $0.22 per share. These stock options
were exercised on September 14, 2004 and the exercise price was paid by the
delivery of $110,000 promissory notes bearing interest at an annual rate of 5%
due, on or before September 14, 2005.
Committees of the Board of Directors
Tidelands does not have a Compensation committee. The Board of Directors acts as
the Compensation Committee. Tidelands has no compensation written policies
outlining factors and criteria underlying awards or payments in relation to
executive officers. Michael Ward abstained from voting on his Employment
Agreement.
Employment and Consulting Agreements with Management
The Company has entered into employment agreements with the following officers:
MICHAEL WARD - Under the terms of Mr. Ward's employment agreement, commencing
January 1, 2004, he was employed as the Company's President and Chief Executive
Officer for a term of five (5) years. His base annual salary is $252,000. The
annual salary may be increased from year to year, as determined by our board of
directors acting as the Compensation Committee, by at least the Consumer Price
Index. As additional compensation, Mr. Ward will be entitled to an annual stock
grant of One Million (1,000,000) shares. Stock grant dates are June 30 and
December 31 each year. As incentive compensation, Mr. Ward will be entitled to
additional compensation equal to two percent of our net profits and one percent
of the increase in sales over a previous year's sales, effective with the fiscal
year ending 2004. Mr. Ward is entitled to all employee benefits as provided by
the Company. He is entitled to four weeks paid vacation and an annual automobile
allowance of $12,000.
JAMES B. SMITH: Under the terms of Mr. Smith's employment agreement, commencing
October 1, 2004, he was employed as the Company's Senior Vice President and
Chief Financial Officer for a term of four (4) years. His base annual salary is
$168,000. The annual salary may be increased from year to year, as determined by
our board of directors acting as the Compensation Committee, by at least the
30
Consumer Price Index. As additional compensation, Mr. Smith will be entitled to
an annual stock grant of Five Hundred (500,000) shares. Stock grant dates are
October 1 during the four year term. The first year stock grant was paid October
1, 2004. As incentive compensation, Mr. Smith will be entitled to additional
compensation equal to two percent of our net profits and one percent of the
increase in sales over a previous year's sales, effective October 1, 2004. Mr.
Smith is entitled to all employee benefits as provided by the Company. He is
entitled to four weeks paid vacation and an annual automobile allowance of
$12,000.
ROBERT W. DOWIES: We employed Mr. Dowies on October 26, 2004 as our Vice
President of Gas Markets and Supply. His employment agreement is for a term of
three (3) years. His annual salary is $100,000. He is entitled to an annual
stock grant of 100,000 common shares. The first 50,000 shares will vest and be
payable April 18, 2005. Thereafter, stock grants will be payable every six
months, October 18 and April 18 for the term of the employment agreement. Mr.
Dowies is entitled to two (2) weeks paid vacation and all employee benefits as
provided by the Company.
Code of Ethical Conduct
Our board of directors adopted a Code of Ethical Conduct which applies to all
our Company directors, officers and employees, including our principal executive
officer and principal financial officer, principal accounting officer or
comptroller, or other persons performing similar functions.
PRINCIPAL SHAREHOLDERS
The following table sets forth the Common Stock ownership information as of
March 31, 2005, with respect to(i) each person known to the Company to be the
beneficial owner of more than 5% of the Company's Common Stock; (ii) each
director of the Company; and (iii) all directors, executive officers and
designated stockholders of the Company as a group. This information as to
beneficial ownership was obtained from public record sources. Unless otherwise
indicated, we believe that each has sole voting and investment power with
respect to the shares beneficially owned. The percentages are based on
62,363,359 shares of our common stock issued and outstanding as of March 31,
2005.
(a) Beneficial Ownership of more than 5% based on 62,363,359 common shares.
Beneficial Ownership of 5%.
Table 1.
(1) (2) (3) (4)
Title of Class Name and Address Amount and Nature Percent of Class
Common Stock
Common Mercator Momentum
Fund, LP (1) 3,291,974 (2)(7) 5.278%(8)
555 S. Flower St. Shared Voting and
Suite 4200 Dispositive Power
Los Angeles, CA 90071
Common Mercator Momentum 2,268,092(3)(7) 3.636%
Fund III, LP(1) Shared Voting and
555 S. Flower St. Dispositive Power
Suite 4200
Los Angeles, CA 90071
Common Monarch Pointe 7,400,463 (4)(7) 11.86%(8)
Fund, Ltd. (1) Shared Voting and
c/o Bank of Ireland Dispositive Power
Securities Services Ltd.
New Century House
International Fin. Ser.Ctr.
Mayor Street Lower
Dublin 1
Republic of Ireland
31
Common M.A.G. Capital, LLC(1) 17,690,059 (5)(7) 28.37%(8)
555 S. Flower St. Shared Voting and
Suite 4500 Dispositive Power
Los Angeles, CA 90071
Common David F. Firestone (1) 17,690,059 (6)(7) 28.37%(8)
555 S. Flower St Shared Voting and
Suite 4500 Dispositive Power
Los Angeles, CA 90071
Common ACH Securities, S.A. 4,000,000 (9) 6.414%
30 Quai Gustave Ador
P.O. Box 6235 Geneva,
Switzerland
Common Margaux Investment 3,988,889 (14) 6.396
Management Group
9 Rue de Commerce
CH 1211 Geneva 11
Switzerland
Common Impact International, LLC 9,199,980(10) 14.75
111 W. 5th St. Ste.720
Tulsa, OK 74103
Common Michael Ward 6,817,038(11) 10.93%
1862 W. Bitters Rd.
San Antonio, TX78248
Total 48.48% (12)
Notes:
(1) Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe
Fund, Ltd., M.A.G. Capital, LLC., formerly, Mercator Advisory Group, LLC and
David F. Firestone are referred to "Reporting Persons". Mr. Firestone has voting
and investment control over the shares held by Mercator Momentum Fund, LP,
Mercator Momentum Fund III, LP, Monarch Pointe Fund, Ltd., Robinson Reed,
Inc.and the M.A.G. Capital, LLC. Each Mercator entity owns warrants to purchase
shares of our common stock. Mercator Momentum Fund, LP, Mercator Momentum Fund
III, LP, Monarch Pointe Fund, Ltd. each own 7% Convertible Debentures (the
"Debentures") issued by us which are convertible into our common stock. Each
Debenture is convertible into the number of shares of common stock determined by
dividing the principal balance of the Debenture by the Conversion Price at the
time of the conversion. The Conversion Price is defined as 85% of the "Market
Price", which is defined as the average of the lowest four intra-day trading
prices of our common stock during the ten trading days preceding the conversion,
however, the Conversion Price may not be less than $0.45 or more than $0.76,
adjusted for stock splits and similar events. Upon the occurrence of certain
events specified in the Debentures, including any Event of Default, as defined
in the Debentures, the Conversion Price will be reduced from 85% of the Market
Price to 75% of the Market Price, but in no event higher than $0.76 or lower
than $0.45 per share. The documentation governing the terms of the warrants and
Debentures contains provisions prohibiting any exercise of the warrants or
conversion of the Debentures that would result in the Reporting Persons owning
beneficially more than 9.99% of the outstanding common stock as determined under
Section 13(d) of the Securities Exchange Act of 1934. The Reporting Persons have
never had beneficial ownership of more than 9.99% of our outstanding common
stock.
(2) Represents up to 751,974 shares of common stock issuable upon exercise of
common stock warrants and 2,540,000 shares issuable upon conversion of the 7%
Debenture calculated at the "Floor Price". Mercator Momentum Fund, L.P. is a
private investment limited partnership organized under California law. M.A.G.
Capital, LLC, formerly Mercator Advisory Group, is the general partner of the
Momentum Fund. David F. Firestone, as is the managing member of M.A.G. Capital,
LLC. Mr. Firestone has voting and investment control over the shares held by the
Mercator Momentum Fund, L.P. The selling stockholder has agreed not to convert
32
the Debentures or to exercise warrants to the extent such stockholder's
beneficial ownership of our common stock would exceed 9.99% of our common stock
then outstanding. Mercator Momentum Fund, LP is a private investment limited
partnership organized under California law. M.A.G. Capital, LLC, a California
limited liability company, is its general partner. David F. Firestone is the
Managing Member of the M.A.G. Capital, LLC. Mr. Firestone has voting and
investment control over the Mercator Momentum Fund, L.P.
(3) Represents up to 518,092 shares of common stock issuable upon exercise of
common stock warrants and 1,750,000 shares issuable upon conversion of the 7%
Debenture calculated at the "Floor Price". M.A.G. Capital, LLC, formerly
Mercator Advisory Group, is the general partner of the Mercator Momentum Fund
III, L.P. The Mercator Momentum Fund III is a private investment limited
partnership organized under California law. M.A.G. Capital, LLC, formerly
Mercator Advisory Group, is the general partner of the Momentum Fund III, L.P.
David F. Firestone, as is the managing member of M.A.G. Capital, LLC . Mr.
Firestone has voting and investment control over the shares held by the Mercator
Momentum Fund III, L.P. The selling stockholder has agreed not to convert the
Debentures or to exercise warrants to the extent such stockholder's beneficial
ownership of our common stock would exceed 9.99% of our common stock then
outstanding.
(4) Represents up to 1,690,462 shares of common stock issuable upon exercise of
common stock warrants and 5,710,001 shares issuable upon conversion of the 7%
Debenture calculated at the "Floor Price". Monarch Pointe Fund, Ltd. is a
corporation organized under the laws of the British Virgin Islands. M.A.G.
Capital, LLC, formerly Mercator Advisory Group, is the general partner of
Monarch Pointe Fund, Ltd. David Firestone is the managing member of M.A.G.
Capital, LLC. Mr. Firestone has voting and investment control over the shares
held by Monarch Pointe Fund, Ltd. The selling stockholder has agreed not to
convert the Debentures or to exercise warrants to the extent such stockholder's
beneficial ownership of our common stock would exceed 9.99% of our common stock
then outstanding.
(5) Represents 17,690,059 shares of common stock issuable upon the exercise of
common stock warrants or upon conversion of the 7% Convertible Debentures at the
"Floor Price" owned by the collective Mercator entities and Robinson Reed to
which beneficial ownership, is attributed to M.A.G. Capital, LLC, formerly
Mercator Advisory Group, LLC. M.A.G. Capital has voting and investment control
over the Mercator Momentum Fund, L.P., the Mercator Momentum Fund III, L.P. the
Monarch Pointe Fund, Ltd., and Robinson Reed, Inc. The selling stockholder has
agreed not to convert the Debentures or to exercise warrants to the extent such
stockholder's beneficial ownership of our common stock would exceed 9.99% of our
common stock then outstanding. The total number of shares and the percentage of
share ownership attributed to M.A.G. Capital, in the table above, represents the
total of all shares of the four Mercator entities and Robinson Reed, if there
were no contractually imposed limitations on beneficial ownership. The selling
shareholder disclaims beneficial ownership in excess of 9.99% of the outstanding
shares of our common stock.
(6) Represents 17,690,059 shares of common stock issuable upon the exercise of
common stock warrants or upon conversion of the 7% Convertible Debentures at the
"Floor Price" owned by the collective Mercator entities and Robinson Reed to
which beneficial ownership, is attributed to David F. Firestone as the managing
member of M.A.G. Capital, LLC, formerly Mercator Advisory Group, LLC. M.A.G.
Capital has voting and investment control over the Mercator Momentum Fund, L.P.,
the Mercator Momentum Fund III, L.P. the Monarch Pointe Fund, Ltd., and Robinson
Reed, Inc. As the managing member of M.A.G. Capital, LLC, Mr. Firestone has
indirect voting and investment control over all of the Mercator entities. The
selling stockholder has agreed not to convert the Debentures or to exercise
warrants to the extent such stockholder's beneficial ownership of our common
stock would exceed 9.99% of our common stock then outstanding. The total number
of shares and the percentage of share ownership attributed to Mr. Firestone, in
the table above, represents the total of all shares of the four Mercator
entities and Robinson Reed, if there were no contractually imposed limitations
on beneficial ownership. Mr. Firestone disclaims beneficial ownership in excess
of 9.99% of the outstanding shares of our common stock.
(7) The 17,690,059 is comprised of 3,291,974 shares of Mercator Momentum Fund,
2,268,092 shares of the Mercator Momentum Fund III, and 7,400,463 shares of
Monarch Point Fund, and 1,357,820 shares of Robinson Reed, Inc., plus 3,371,710
shares of M.A.G. Capital, LLC. all of which are issuable upon the conversion of
the 7% Convertible Debentures at "Floor Price" and warrants. The right to vote
33
and the right to dispose of the shares beneficially owned by Mercator Momentum
Fund, LP, Mercator Momentum Fund III, LP, and Monarch Pointe Fund, Ltd. are, in
each case, shared among either of the three funds, as applicable, and both
M.A.G. Capital, LLC and David F. Firestone. Additionally, M.A.G. Capital and
David F. Firestone having voting and dispositive authority over Robinson Reed,
Inc. Therefore, the 17,690,059 shares of beneficial ownership are attributed to
M.A.G. Capital, LLC and David F. Firestone.
(8) The agreements governing the terms of the 7% Debentures and the warrants
contain provisions prohibiting any conversion of the Debentures or exercise of
the warrants that would result in the Mercator Momentum Fund, LP, the Mercator
Momentum Fund III, LP; the Monarch Pointe Fund, Ltd., or M.A.G. Capital, LLC;
collectively owning beneficially more than 9.99% of the outstanding shares of
our common stock as determined under Section 13(d) of the Securities Exchange
Act of 1934. As a result of these provisions, the entities disclaim beneficial
ownership in excess of 9.99% of the outstanding shares of our common stock.
(9) Represents 4,000,000 common shares issued and outstanding. Peter Andersson
has voting and dispositive power with respect to the securities owned by ACH
Securities.
(10) Represents 7,500,000 shares issuable upon the exercise of warrants at the
exercise price of $0.335 per share and 1,699,980 shares of common stock. Robert
S. May has voting and dispositive power with respect to the securities owned by
Impact International, LLC.
(11) Mr. Ward is the President, Chief Executive officer and Chairman of our
Board of Directors.
(12) This total does not reflect the summation of the percentages of beneficial
ownership of Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch
Pointe Fund, Ltd., M.A.G. Capital, LLC and David F. Firestone for the reason set
forth in footnote 8. We have included 9.99% once in the summation for all
Mercator related entities.
(13) Mercator Group totals only include 9.99%.
(14) Represents 1,988,889 shares of common stock presently issued and
outstanding and 2,000,000 shares of common stock issuable upon
exercise(a)1,000,000 shares at $0.50 per share, and 1,000,000 shares at $2.50
per share. Carl Hessel has voting and dispositive power with respect to the
securities owned by Margaux Investment Management Group.
(b) Security Ownership of Management. Based on 61,603,359 shares as set forth in
(a) above as of December 31, 2004.
Table 2.
Percent of
Title of Class Name and Address Amount and Nature Class
Common Michael Ward 6,817,038 10.93%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common James B. Smith 1,042,668(1) 1.67%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common Ahmed Karim 502,500 0.805%
1532 Woods Dr.
N. Vancouver, B.C.
Canada V7R 1A9
Common Robert W. Dowies 80,000 (2) 0.128%
1862 W. Bitters Rd.
San Antonio, TX 78248
34
Common Carl Hessel (3) 4,442,221 7.12%
c/o Margaux Investment
Management Group, S.A.
9 Rue de Commerce
CH 1211 Geneva 11
Switzerland
Total 12,884,427 20.66%
Notes:
(1) Includes 500,000 shares in the name of Aigle Partners, Ltd. in which Mr.
Smith has a partnership interest and 500,000 shares in the name of du Midi
Trust, in which Mr. Smith has a beneficial interest.
(2) Mr. Dowies became vested in 50,000 common shares on April 18, 2005 under the
terms of his employment contract. The shares have not been issued as of June 15,
2005.
(3) Mr. Hessel is a partner in Margaux Investment Management Group, S.A. Mr.
Hessel also exercises voting and dispositive control over the Margaux securities
and as such beneficial ownership reflects 2,000,000 common stock warrants owned
by Margaux, 1,988,889 shares owned by Margaux and 453,332 shares owned
personally by Mr. Hessel.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On November 9, 2004, we issued 500,000 common shares to James B. Smith which
represents the annual stock grant under the terms of his employment agreement.
The stock grant transaction was valued at $151,000.
On October 18, 2004 we entered into an employment agreement with Robert Dowies.
Mr. .Dowies became a Company Vice President. His annual salary is $ 100,000
including an annual stock grant of 100,000 shares.
On October 13, 2004, we sold Four Million (4,000,000) Tidelands Oil & Gas common
shares to ACH Securities, S.A., a company domiciled in Geneva, Switzerland, for
Two Million ($2,000,000) Dollars. On October 14, 2004, in connection with the
ACH Securities transaction, we issued Margaux Investment Group, S.A. common
stock warrants to purchase One Million (1,000,000) Tidelands Oil & Gas common
shares for Fifty ($0.50) Cents per share and One Million (1,000,000) shares for
$2.50 per share. Mr. Carl Hessel, a company director, is a partner in Margaux
Investment Management Group, S.A. and, as such he has an indirect financial
interest in the common stock warrants. Mr. Hessel also exercises voting and
dispositive control over the Margaux securities.
On September 14, 2004, we issued 500,000 shares of common stock to Michael Ward
as a stock grant under his employment agreement. The shares were valued at
$106,875.
On September 14, 2004, the following individuals exercised common stock options:
Michael Ward, the Company's President and Director, exercised his common stock
option to purchase 500,000 common shares for $110,000 payable on a promissory
note bearing interest at the rate of 5% payable in full on, or before September
14, 2005. The shares are subject to a security agreement.
Ahmed Karim, the Company's Vice President and Director, exercised his common
stock option to purchase 500,000 common shares for $110,000 payable on a
promissory note bearing interest at the rate of 5% payable in full on, or before
September 14, 2005. The shares are subject to a security agreement.
James Smith, the Company's Chief Financial Officer, exercised his common stock
option to purchase 500,000 common shares for $110,000 payable on a promissory
note bearing interest at the rate of 5% payable in full on, or before September
14, 2005. The shares are subject to a security agreement.
On June 30, 2004, we issued 3,322 common shares to Carl Hessel for $ 4,983. Carl
Hessel was a member of our board of directors at the time of issuance.
On January 29, 2004, the Company executed an agreement with Royis Ward, the a
former officer and director and the father of Michael Ward, our President and
CEO, to provide charter air transportation for our Company employees, customers
and contractors to job sites and other business related destinations. A $300,000
5% interest bearing loan due January 2007 was advanced by the Company regarding
the transaction. The loan balance is credited by air time charges at standard
industry rates offset by interest charges computed on the average monthly
balance. As of December 31, 2004, the loan balance was $286,606.
35
On January 8, 2004, we authorized the issuance of 300,000 common shares to Carl
Hessel for services valued at $450,000. These shares were issued before Mr.
Hessel joined our Board of Directors.
During 2003, the Company had four executive officers, Michael Ward, Royis Ward,
James B. Smith and Ahmed Karim. Michael Ward's annual salary is $120,000. Royis
Ward's annual salary is $120,000. Royis Ward resigned his officer and director
positions on October 1, 2003 and received a $25,000 severance entitlement, which
was also accrued. James B. Smith's annual salary was $80,000 beginning August
16, 2003, his employment date. We paid 1,506,272 common shares in lieu of
$331,380 accrued wages owed to Michael Wards in 2003. We paid 2,089,897 common
shares in lieu of $459,777 accrued wages to Royis Ward in 2003. These shares
were issued as stock grants in lieu of compensation under the 2003 Non-Qualified
Stock Grant and Option Plan.
On February 5, 2003, we granted Michael Ward, Royis Ward and Ahmed Karim common
stock options to purchase 500,000 shares each at $0.22 per share. On August 16,
2003, we granted James B. Smith common stock options to purchase 500,000 shares
at $0.22 per share. The options expire March 5, 2005.
On February 18, 2003, effective January 1, 2003, the Company sold 100% of the
issued and outstanding common stock of Tidelands Oil Corporation, a Texas
corporation and Tidelands Gas Corporation, a Texas corporation, to Royis Ward
for a total price of $48,471. This amount was offset against his officer loan of
$117,492. See Note 5 to the attached financial statements.
On June 30, 2003, we paid Mr. Karim all of his accrued director compensation by
issuing him 340,909 shares in lieu of $75,000.
LEGAL PROCEEDINGS
Matter No. 1:
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands
Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial
District Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
to make payments on a note she executed payable to Northern in the original
principal amount of $1,950,000. Northern's suit was filed on November 13, 2002.
Sheerin answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses of
fraudulent inducement by Northern, estoppel, waiver and the further claim that
the note does not comport with the legal requirements of a negotiable
instrument. Sheerin seeks a judicial ruling that Northern be denied any recovery
on the note. Sheerin's answer included a counterclaim against Northern, ZG
Gathering, and Ken Lay generally alleging, among other things, that Northern, ZG
Gathering, Ltd. and Ken Lay, fraudulently induced her execution of the note.
Northern has filed a general denial of Sheerin's counterclaims. Sheerin's answer
included a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from ZG
Gathering Ltd. and that, as a part of the agreement, Tidelands agreed to satisfy
all of the obligations due and owing to Northern, thereby relieving Sheerin of
all obligations she had to Northern on the $1,950,000 promissory note in
question. Tidelands and Sheerin agreed to delay the Tideland's answer date in
order to allow time for mediation of the case. Tideland's participated in a
mediation on March 11, 2003. The case was not settled at that time. Tideland's
answered the Sheerin suit on March 26, 2003. Tideland's answer denies all of
Sheerin's allegations.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended original
third party cross-actions and requests for disclosure. In these amended
pleadings, she sued Michael Ward, Royis Ward, James B. Smith, Carl Hessell and
Ahmed Karim in their individual capacities. Her claims against these individuals
are for fraud, breach of contract, breach of the Uniform Commercial Code, breach
of duty of good faith and fair dealing and conversion.
36
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L. Sheerin,
a partner of ZG Gathering, Ltd. In addition, the Company issued 1,000,000 shares
of its common stock to various partners of ZG Gathering, Ltd. On December 3,
2003, Sheerin filed a separate lawsuit against Tidelands in the 150th District
Court of Bexar County, Texas on this promissory note seeking a judgment against
Tidelands for the principle amount of the note, plus interest. On December 29th,
2003, Tidelands answered this lawsuit denying liability on the note. On April 1,
2004, Tidelands filed a plea in abatement asking the court to dismiss or abate
Sheerin's lawsuit on the $300,000 promissory note as it was related to and its
outcome was dependent on the outcome of the Sheerin third party cross action
against Tidelands in Cause Number 2002-C1-16421. The company believes that the
promissory note and shares of common stock should be cancelled based upon the
outcome of the litigation described above. Accordingly, our financial statements
reflect this belief.
On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended third party
cross action against Tidelands adding a claim for the $300,000 promissory note.
In these amended pleadings, Sheerin also deleted her claims against Carl Hessell
and Ahmed Karim.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified amounts of
actual damages, statutory damages, unspecified amounts of exemplary damages,
attorneys fees, costs of suit, and prejudgment and post judgment interest.
Some discovery has been completed at this time. Based on initial
investigation, and discovery to date, Tidelands appears to have a number of
potential defenses to Sheerin's claims. Tideland's intends to aggressively
defend the lawsuit. At this stage in the litigation, and in light of our
continuing investigation and incomplete discovery, we cannot give a more
definitive evaluation of the extent Tideland's liability exposure.
Matters No. 2-4 involve Sonterra Energy Corporation, a wholly owned subsidiary
of Tidelands Oil & Gas Corporation.
Matter No. 2:
On May 4, 2005, HBH Development Company, LLC initiated legal action
against Sonterra Energy Corporation in the District Court of Travis County,
Texas, 98th Judicial District. This action involves the developer of the
Austin's Colony Subdivision in Travis County, Texas and the propane distribution
system originally constructed by Southern Union Company. Southern Union entered
into a letter agreement with HBH concerning the construction and operation of a
propane distribution system in the subdivision to be owned and operated by
Southern Union. Southern Union assigned the letter agreement and its interests
in the propane system to Oneok, Inc., the parent company of Oneok Propane
Company. Sonterra acquired its interest in the propane system from Oneok Propane
Distribution Company. HBH is claiming that Sonterra has failed or refused to pay
HBH rent and easement use fees under the terms of the letter agreement. HBH
alleges that Sonterra's actions cause a failure of the assignment whereby it
acquired rights in the propane system or alternatively, if the assignment is
effective, for breach of contract. HBH seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, cancellation of the contract and rights associated with the propane
distribution system, issue to HBH a writ of possession for the property, and for
attorneys fees.
Sonterra is defending the legal action. It believes that under the
terms of the letter agreement between HBH Development Company and Southern Union
Company, that the easement use fees terminated when Southern Union conveyed its
interest in the propane distribution system to Oneok Propane Company.
Matter No. 3:
On May 4, 2005, Senna Hills, Ltd. initiated legal action against
Sonterra Energy Corporation in the District Court of Travis County, Texas, 53rd
Judicial District. This action involves the developer of the Senna Hills
Subdivision in Travis County, Texas and the propane distribution system
originally constructed by Southern Union Company. Southern Union entered into a
letter agreement with Senna Hills concerning the construction and operation of a
propane distribution system in the subdivision to be owned and operated by
Southern Union. Southern Union assigned the letter agreement and its interests
in the propane system to Oneok, Inc., the parent company of Oneok Propane
Company. Sonterra acquired its interest in the propane system from Oneok Propane
37
Distribution Company. Senna Hills is claiming that Sonterra has failed or
refused to pay Senna Hills rent and easement use fees under the terms of the
letter agreement. Senna Hills alleges that Sonterra's actions cause a failure of
the assignment whereby it acquired rights in the propane system or
alternatively, if the assignment is effective, for breach of contract. Senna
Hills seeks to have the court terminate Sonterra's rights in the propane
distribution system, award unspecified monetary damages, and cancellation of the
contract and rights associated with the propane distribution system, issue to
Senna Hills a writ of possession for the property, and attorneys fees.
Senna Hills sold certain undeveloped sections of Senna Hills
Subdivision to a new owner. Sonterra believes that it has the right to expand
its distribution system into such undeveloped sections of the subdivision.
Sonterra plans to expand the distribution system into these sections under an
agreement with the new owner. Senna Hills has stated that although it is not
presently objecting to Sonterra's expansion of the system at this time, it is
reserving its claim that Sonterra does not have the right to do so and that it
intends to ask the court to cancel Sonterra's right to use and possession of the
propane distribution system, including the system in the new sections of the
subdivision.
Sonterra is defending the legal action. It believes that under the
terms of the letter agreement between Senna Hills and Southern Union Company,
that the easement use fees terminated when Southern Union conveyed its interest
in the propane distribution system to Oneok Propane Company.
Matter No. 4:
On April of 2005, Goodson Builders, Ltd. named Sonterra Energy
Corporation in a legal action titled, Goodson Builders, Ltd, Plaintiff vs. Jim
Blackwell and BNC Engineering, LLC, Defendants. The legal action is in the
District Court of Travis County, Texas 345th Judicial District. This legal
action arises from a claim that an underground propane storage tank and
underground distribution lines is situated on the Plaintiff's lot in the Hills
of Lakeway subdivision, Travis County, Texas. Plaintiff alleges that there is no
recorded easement setting forth the rights and obligations of the parties for
use of the propane tank and lines. However, there is reference to a "suburban
propane easement" on the plat document. Plaintiff alleges that the property is
being used without permission and the use constitutes an on-going trespass.
Plaintiff asks the court to determine that his lot is not subject to a "suburban
propane easement", declare the propane equipment the property of plaintiff,
enjoin Sonterra from use of Plaintiff's land, and award damages. The Plaintiff
seeks damages of $165,000 based on a market rental rate he claims to be $5,000
per month, $50,000 damages for depreciation of the value of the lot, an
unspecified amount of exemplary damages, and attorneys fees. Sonterra is
defending the claims.
Matter No. 5:
On April 20th, 2005, Tidelands filed suit against L.L. Capital Group,
L.L.C. in Bexar County, Texas, 224th Judicial District Court. On August 11th,
2004, Tidelands entered into a consulting services agreement with L.L. Capital.
The agreement provided for L.L. Capital to provide advisory services to
Tidelands regarding certain business opportunities, including various types of
financial arrangements. As compensation for the services that were to be
provided, L.L. Capital was to receive $500,000 of unrestricted common stock and
$550,000 of restricted common stock, and $500,000 of Warrants Shares exercisable
at $1.45 per share.
L. L. failed to perform the required services for which Tidelands has
sued to rescind the agreement and have all stock and warrants returned to
Tidelands, for discharge from any obligation under the agreement, and for its
attorneys fees and costs.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue One Hundred Million (100,000,000) shares of
common stock, par value $0.001 per share. As of December 31, 2004, there were
61,603,359 shares of common stock issued and outstanding. The holders of the
common stock are not entitled to pre-emptive or preferential rights to subscribe
to any unissued stock or other securities. The shareholders are not entitled to
cumulative voting rights. The common stock is not assessable and not subject to
the payment of any corporate debts. The holders of our common stock are entitled
to one vote for each share on all matters submitted to the shareholders for
vote. Holders are entitled to share ratably in any dividends which may be
38
declared, from time to time, by the board of directors in its discretion, from
legally available funds. If we are liquidated, dissolved, or wound up, the
holders of common shares are entitled to share pro rata all assets remaining
after full payment of all liabilities. There are no conversion rights or
redemption or sinking fund provisions for the common stock.
Common Stock Warrants
Impact Warrants
---------------
We amended the Stock Purchase Warrant Agreement dated April 16, 2003 between
Tidelands and Impact International, LLC in connection with our purchase of Reef
Ventures, LLC. We issued Impact International, LLC a stock warrant for Ten
Million (10,000,000) shares of Tideland's common stock, plus such additional
shares of common stock which may be issued upon the occurrence of an untimely
registration event, less the 500,000 shares we issued to Impact on April 13,
2004. The cash exercise price is $0.335 per share. The expiration date of the
warrant is April 16, 2006.
We have agreed to use our best efforts to register the shares issuable upon
exercise of the Impact warrant with the SEC so that Impact will be permitted to
publicly resell the common shares. We have agreed to use our best efforts to
keep the registration statement effective as long as it is necessary for Impact
to sell the shares.
If the registration statement is declared effective (i) by April 7, 2005, if the
registration is on Form S-3, or (ii) July 7, 2005 if the registration statement
is on Form SB-2 or any other registration form, the registration statement will
be deemed timely (a "Timely Registration"). In the event of a Timely
Registration, Impact will exercise the warrant for all of the remaining shares
under the warrant on a cash basis payable by Impact through the execution of a
promissory note payable to Tidelands (the "Impact Note"), as of the effective
date of the Registration Statement. In the event that we do not accomplish a
Timely Registration, then Impact may exercise the warrant at any time after the
date which is the last date for a Timely Registration, at its option on a cash
basis or pursuant to Section 1.2 of the warrant agreement on a net exercise
cashless basis for all the remaining shares under the warrant. If Impact elects
to exercise the warrants on a net exercise cashless basis, we will increase the
number of shares available for issuance under the warrant, regardless of whether
issued for cash or on a net exercise basis so that the total number of shares
issued would total 10,000,000 shares.
Until the Registration Statement is declared effective, we are obligated issue
500,000 common shares under the cashless exercise provisions of the Amended
Stock Purchase Warrant each 90 days period commencing July 14, 2004, until the
Registration Statement is declared effective by the SEC.
On June 9, 2005, Impact presented us with a Notice of Exercise for 7,500,000
common shares under the terms of the Warrant and First Amendment to the Stock
Purchase Warrant Agreement dated May 25, 2004. Impact has tendered a promissory
note in the amount of $2,512,000 in lieu of payment. The note will reduce and
offset our principal balance owed under the Purchase and Sale Agreement dated
May 25, 2004 whereby we purchased the Eagle Pass pipeline.
Mercator Warrants
As part of our November 18, 2004 financing with Mercator Momentum Fund, LP,
Mercator Momentum Fund III, LP, Monarch Pointe Fund, Ltd., and M.A.G. Capital,
LLC, formerly, Mercator Advisory Group, LLC ("Mercator Group"), we issued 3 year
warrants to purchase up to 3,289,474 shares of our common stock at $0.80 per
share and up to 3,289,474 shares of our common stock at $0.87 per share. The
shares issuable upon exercise of these warrants have been registered in this
registration statement on Form SB-2, of which this prospectus is a part.
o Mercator Momentum Fund, LP 417,763 warrants exercisable at $0.87 and
417,763 warrants exercisable at $0.80;
o Mercator Momentum Fund III, LP 287,829 warrants exercisable at $0.87
and 287,829 warrants exercisable at $0.80;
o Monarch Pointe Fund, LP 939,145 warrants exercisable at $0.87 and
939,145 warrants exercisable at $0.80.
o Mercator Advisory Group, LLC 1,644,737 warrants exercisable at $0.87
and 1,644,737 warrants exercisable at $0.80.
39
The agreements governing the terms of the warrants contain provisions
prohibiting any exercise of the warrants that would result in Mercator Momentum
Fund, LP, the Mercator Momentum Fund III, LP; the Monarch Pointe Fund, Ltd., or
M.A.G. Capital, LLC; collectively owning beneficially more than 9.99% of the
outstanding shares of our common stock as determined under Section 13(d) of the
Securities Exchange Act of 1934. As a result of these provisions, such entities
disclaim beneficial ownership in excess of 9.99% of the outstanding shares of
our common stock.
7% Convertible Debentures
As a part of our November 18, 2004 financing with the Mercator Group, we issued
7% Convertible Debentures in the aggregate principal amount of $5,000,000. The
Debentures mature May 18, 2006. We are required to pay interest monthly. The
aggregate monthly interest payment is $29,166.67. The allocation of the
debentures is as follows:
o Mercator Momentum Fund, LP acquired $1,270,000 7% Convertible
Debentures;
o Mercator Momentum Fund III, LP acquired $875,000 7% Convertible
Debentures;
o Monarch Pointe Fund, LP acquired $2,855,000 7% Convertible Debentures.
The payment of funds for the debentures is structured in two tranches. On
November 19, 2004, we received a total of $3,250,000 which represents 65% of the
funds due. We received $1,750,000 balance on the 7% Convertible Debentures two
(2) trading days after we filed this Registration Statement with the SEC.
Each Debenture is convertible into the number of shares of common stock
determined by dividing the principal balance of the Debenture by the Conversion
Price at the time of the conversion. The Conversion Price is defined as 85% of
the "Market Price", which is defined as the average of the lowest four intra-day
trading prices of our common stock during the ten trading days preceding the
conversion, however, the Conversion Price may not be less than $0.45 or more
than $0.76, adjusted for stock splits and similar events. Upon the occurrence of
certain events specified in the Debentures, including any Event of Default, as
defined in the Debentures, the Conversion Price will be reduced from 85% of the
Market Price to 75% of the Market Price, but in no event higher than $0.76 or
lower than $0.45 per share.
The agreements governing the terms of the 7% Convertible Debentures contain
provisions prohibiting any conversion of the Debentures that would result in
Mercator Momentum Fund, LP, the Mercator Momentum Fund III, LP; the Monarch
Pointe Fund, Ltd. , or M.A.G. Capital, LLC; collectively owning beneficially
more than 9.99% of the outstanding shares of our common stock as determined
under Section 13(d) of the Securities Exchange Act of 1934. As a result of these
provisions, these entities disclaim beneficial ownership in excess of 9.99% of
the outstanding shares of our common stock.
Mercator Assignment
On June 1, 2005, Mercator Momentum Fund, Mercator Momentum Fund III and Monarch
Pointe Fund, (collectively "Mercator Funds") have assigned Five Hundred Thousand
($500,000) Dollars of their outstanding 7% Convertible Debentures to Robinson
Reed, Inc., a British Virgin Islands International Business Company. M.A.G.
Capital, LLC exercises voting and dispositive powers over Robinson Reed, Inc.
Robinson Reed, Inc. is a managed account for M.A.G. Capital, Inc. which acts as
an investment advisor.
Additionally, the Mercator Funds assigned Robinson Reed, Inc. a total of 328,948
common stock purchase warrants representing 164,474 $0.80 common stock warrants
and 164,474 $0.87 common stock warrants.
Subsequently, Robinson Reed, Inc. assigned M.A.G. Capital, LLC a total of 82,236
common stock purchase warrants representing 41,118 $0.80 Warrants and 41,118
$0.87 Warrants.
In connection with the above assignments, we entered into an Addendum to the
November 18, 2004 Securities Purchase and Registration Rights Agreements with
the Mercator Funds and M.A.G. Capital, LLC (formerly Mercator Advisory Group,
LLC) and Robinson Reed, Inc. Robinson Reed, Inc. has agreed to be bound by the
terms and conditions under the Securities Purchase and Registration Rights
Agreements and certified that all of the representations and warranties made by
the Holders are true and correct with respect to Robinson Reed, Inc.
40
Other Warrants
Margaux Investment Management Group owns 2,000,000 common stock warrants
1,000,000 warrants with an exercise price of $0.50 per share and an expiration
date of August 14, 2006 and another 1,000,000 with an exercise price of $2.50
with an expiration date October 26, 2007.
Penny Stock Rules
Our common stock is covered by the Securities and Exchange Commission's penny
stock rules. These rules include a rule that imposes additional sales practice
requirements on broker-dealers who sell our securities to persons other than
established customers and accredited investors. Accredited investors are
generally institutions with assets in excess of $5,000,000 or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouses. For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and transaction prior to the sale. The rule may affect the ability of
broker-dealers to sell our securities and may also affect the availability
ability of purchasers of our stock to sell their shares in the secondary market.
It may also cause fewer brokers to be willing to make a market in our common
stock and it may affect the level of news coverage we receive.
Stock Transfer Agent
Our Stock Transfer Agent is Signature Stock Transfer Co., Inc. located at One
Preston Park, 2301 Ohio Dr., Suite 100, Plano, Texas 75093. The agent's
telephone number is (972) 612-4120.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon by Gregory M.
Wilson, Attorney at Law. Mr. Wilson is a shareholder of our Company.
EXPERTS
Our balance sheet as of December 31, 2004 and 2003 and the statements of our
operations, shareholders' equity and cash flows for the years then ended, have
been included in this prospectus in reliance on the report of Baum & Company,
P.A., certified public accountants, given on the authority of that firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference room.
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act covering the sale of the securities offered under this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information in the registration
statement. Certain items of the registration statement are omitted in accordance
with the rules and regulations of the SEC. Statements contained in this
prospectus as to the contents of any contract or other documents are not
necessarily complete and in each instance where reference is made to the copy of
such contract or documents filed as an exhibit to the registration statement,
statements about the document are qualified in all respects by that reference
and the exhibits and schedules to the exhibits. For further information
regarding Tidelands Oil & Gas Corporation and the securities offered under this
prospectus, we refer you to the registration statement and those exhibits and
schedules, which may be obtained from the SEC at its principal office in
Washington, D.C. upon payment of the fees prescribed by the SEC.
41
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS For the period ending March 31, 2005
Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004.........................................F-2
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2005 and 2004...........................F-3
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004........................ F-4-5
Notes to Condensed Consolidated Financial Statements......................F-6-10
F-1
TIDELANDS OIL &GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(ASSETS)
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
Current Assets:
Cash $ 4,623,198 $ 5,459,054
Cash Restricted 75,000 25,000
Accounts and Loans Receivable 404,488 516,387
Inventory 60,159 82,523
Prepaid Expenses 418,362 487,488
------------ ------------
Total Current Assets 5,581,207 6,570,452
------------ ------------
Property Plant and Equipment, Net 9,245,326 9,086,313
------------ ------------
Other Assets:
Deposits 6,608 4,108
Deferred Charges 38,750 116,250
Note Receivable 287,170 286,606
Goodwill 1,158,937 1,158,937
------------ ------------
Total Other Assets 1,491,465 1,565,901
------------ ------------
Total Assets $ 16,317,998 $ 17,222,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 438,830 $ 574,224
Notes Payable 0 0
------------ ------------
Total Current Liabilities 438,830 574,224
Long-Term Debt 11,817,301 11,731,883
------------ ------------
Total Liabilities 12,256,131 12,306,107
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.001 Par Value Per Share,
100,000,000 Shares Authorized, 62,363,359
and 61,603,359 Shares Issued and
Outstanding at March 31, 2005
and December 31, 2004 Respectively 62,364 61,604
Paid-in Capital in Excess of Par Value 22,918,580 22,537,340
Subscriptions Receivable (550,000) (550,000)
Accumulated (Deficit) (18,369,077) (17,132,385)
------------ ------------
Total Stockholders' Equity 4,061,867 4,916,559
------------ ------------
Total Liabilities and Stockholders' Equity $ 16,317,998 $ 17,222,666
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements
F-2
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
Revenues:
Gas Sales and Pipeline Fees $ 586,949 $ 0
Construction Services 41,126 0
------------------ ------------------
Total Revenues 628,075 0
------------------ ------------------
Expenses:
Cost of Sales 284,679 0
Operating Expenses 66,774 0
Depreciation 115,441 11,280
Interest 209,787 4,719
Sales, General and Administrative 1,220,911 1,522,209
------------------ ------------------
Total Expenses 1,897,592 1,538,208
------------------ ------------------
(Loss) From Operations (1,269,517) (1,538,208)
(Loss) on Sale of Asset (3,167) 0
Interest and Dividend Income 35,992 3,867
------------------ ------------------
Net (Loss) $ (1,236,692) $ (1,534,341)
================== ==================
Net (Loss) Per Common Share:
Basic and Diluted $ (0.02) $ (0.03)
================== ==================
Weighted Average Number of Common
Shares Outstanding 61,983,359 46,850,314
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
F-3
TIDELANDS OIL &GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ --------------------
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (1,236,692) $ (1,534,341)
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 115,441 11,280
Loss on Disposal of Equipment 3,167 0
Issuance of Common Stock:
For Services Provided 382,000 1,226,816
Changes in:
Accounts Receivable 111,899 (517)
Inventory 22,364 0
Prepaid Expenses 69,126 (300,499)
Deferred Charges 77,500 0
Deposits (2,500) 0
Accounts Payable and
Accrued Expenses (135,394) (591,783)
------------------ --------------------
Net Cash (Required)
By Operating Activities (593,089) (1,189,044)
------------------ --------------------
Cash Flows Provided (Required)
By Investing Activities:
Acquisitions of Property, Plant
and Equipment (278,421) (140,258)
Disposals of Equipment 800 0
------------------ --------------------
Net Cash (Required)
By Investing Activities (277,621) (140,258)
------------------ --------------------
See Accompanying Notes to Condensed Consolidated Financial Statements
F-4
TIDELANDS OIL &GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
Cash Flows (Required) Provided
by Financing Activities:
Proceeds from Issuance of Common Stock 0 4,083,334
Proceeds From Long-Term Loans 85,418 0
Repayment of Short-Term Loans 0 (100,000)
Loan to Related Party (564) 0
------------------ ------------------
Net Cash Provided by
Financing Activities 84,854 3,983,334
------------------ ------------------
Net Increase (Decrease) in Cash (785,856) 2,654,032
Cash at Beginning of Period 5,484,054 894,457
------------------ ------------------
Cash at End of Period $ 4,698,198 $ 3,548,489
================== ==================
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 115,994 $ 4,719
================== ==================
Cash Payments for Income Taxes $ 0 $ 0
================== ==================
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 382,000 $ 1,226,816
Repayment of Loans 0 75,000
Payment of Accounts Payable 0 38,311
Prepayment of Legal Fees 0 258,000
------------------ ------------------
Total Non-Cash Financing Activities $ 382,000 $ 1,598,127
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
F-5
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
for the three month periods ended March 31, 2005 and 2004 have been
prepared in conformity with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-QSB and Regulation S-B. The financial
information as of December 31, 2004 is derived from the registrant's
Form 10-KSB for the year ended December 31, 2004. Certain information
or footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In the opinion of management, the accompanying
financial statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results
of the interim periods presented. While the registrant believes that
the disclosures presented are adequate to keep the information from
being misleading, it is suggested that these accompanying financial
statements be read in conjunction with the registrant's audited
consolidated financial statements and notes for the year ended December
31, 2003, included in the registrant's Form 10-KSB for the year ended
December 31, 2003.
Operating results for the three-month period ended March 31, 2005 are
not necessarily indicative of the results that may be expected for the
remainder of the fiscal year ending December 31, 2005. The accompanying
unaudited condensed consolidated financial statements include the
accounts of the registrant, its wholly-owned subsidiaries, Rio Bravo
Energy, LLC, Sonora Pipeline, LLC, Arrecefe Management, LLC, Marea
Associates, L.P., Reef Ventures, L.P., Reef International, LLC, Reef
Marketing, LLC, and Terranova Energia S. de R. L. de C. V. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
F-6
TIDELANDS OIL &GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 2 - RESTRICTED CASH
------ ----------------
Restricted cash consists of certificates of deposit to secure three
letters of credit issued to the Railroad Commission of Texas regarding
our gas processing plant and two pipeline systems.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
A summary of property, plant and equipment at March 31, 2005 and
December 31, 2004 is as follows:
Estimated
March 31, December 31, Economic
2005 2004 Life
------------ ------------ ------------
Pre Construction Costs:
International Crossings to Mexico $ 27,601 $ 27,601 N/A
Mexican Gas Storage Facility
and Related Pipelines 1,096,703 928,232 N/A
Propane Distribution Systems 207,415 207,415 N/A
------------ ------------
Total 1,331,719 1,163,248
Office Furniture, Equipment and
Leasehold Improvements 87,217 46,141 5 Years
Pipelines - Domestic 431,560 431,560 15 Years
Pipeline - Eagle Pass, TX to Piedras
Negras, Mexico 6,106,255 6,106,255 20 Years
Gas Processing Plant 186,410 186,910 15 Years
Tanks & Lines - Propane Distribution
System 1,596,439 1,596,439 5 Years
Machinery and Equipment 57,180 57,180
Trucks, Autos and Trailers 127,798 63,175
------------ ------------
Total 9,924,578 9,650,408
Less: Accumulated Depreciation 679,252 564,095
------------ ------------
Net Property,
Plant and Equipment $ 9,245,326 $ 9,086,313
============ ============
Depreciation expense for the three months ended March 31, 2005 and
March 31, 2004 was $115,441 and $11,280 respectively.
F-7
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 4 - LONG-TERM DEBT
------ --------------
A summary of long-term debt at March 31, 2005 and December 31, 2004 is
as follows:
March 31, December 31,
2005 2004
------------ ------------
Note Payable, Secured, Interest Bearing
at 2% Over Prime Rate, Maturing
May 25, 2008 $ 6,817,301 $ 6,731,883
Convertible Debentures, Unsecured,
7% Interest Bearing,
Maturing May 17, 2006 5,000,000 5,000,000
------------ ------------
11,817,301 11,731,883
Less: Current Maturities 0 0
------------ ------------
Total Long-Term Debt $ 11,817,301 $ 11,731,883
============ ============
NOTE 5 - LITIGATION
------ ----------
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs.
Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the
150th Judicial District Court, Bexar county, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas when
it sued Betty Lou Sheerin for her failure to make payments on a note
she executed payable to Northern in the original principal amount of
$1,950,000. Northern's suit was filed on November 13, 2002. Sheerin
answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses
of fraudulent inducement by Northern, estoppel, waiver and the further
claim that the note does not comport with the legal requirements of a
negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied any recovery on the note. Sheerin's answer included a
counterclaim against Northern, ZG Gathering, and Ken Lay generally
alleging, among other things, that Northern, ZG Gathering, Ltd. and Ken
Lay, fraudulently induced her execution of the note. Northern has filed
a general denial of Sheerin's counterclaims. Sheerin's answer included
a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from
ZG Gathering Ltd. and that, as a part of the agreement, Tidelands
agreed to satisfy all of the obligations due and owing to Northern,
thereby relieving Sheerin of all obligations she had to Northern on the
$1,950,000 promissory note in question. Tidelands and Sheerin agreed to
delay the Tideland's answer date in order to allow time for mediation
of the case. Tideland's participated in a mediation on March 11, 2003.
The case was not settled at that time. Tideland's answered the Sheerin
suit on March 26, 2003. Tideland's answer denies all of Sheerin's
allegations.
F-8
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 5 - LITIGATION (CONTINUED)
------ ---------------------
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended
original third party cross-actions and requests for disclosure. In
these amended pleadings, she sued Michael Ward, Royis Ward, James B.
Smith, Carl Hessell and Ahmed Karim in their individual capacities. Her
claims against these individuals are for fraud, breach of contract,
breach of the Uniform Commercial Code, breach of duty of good faith and
fair dealing and conversion.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its common stock to various partners of ZG
Gathering, Ltd. On December 3, 2003, Sheerin filed a separate lawsuit
against Tidelands in the 150th District Court of Bexar County, Texas on
this promissory note seeking a judgment against Tidelands for the
principle amount of the note, plus interest. On December 29th, 2003,
Tidelands answered this lawsuit denying liability on the note. On April
1, 2004, Tidelands filed a plea in abatement asking the court to
dismiss or abate Sheerin's lawsuit on the $300,000 promissory note as
it was related to and its outcome was dependent on the outcome of the
Sheerin third party cross action against Tidelands in Cause Number
2002-C1-16421. The Company believes that the promissory note and shares
of common stock should be cancelled based upon the outcome of the
litigation described above. Accordingly, our financial statements
reflect this belief.
On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended
third party cross action against Tidelands adding a claim for the
$300,000 promissory note. In these amended pleadings, Sheerin also
deleted her claims against Carl Hessell and Ahmed Karim.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified
amounts of actual damages, statutory damages, unspecified amounts of
exemplary damages, attorneys fees, costs of suit, and prejudgment and
post judgment interest.
Some discovery has been completed at this time. Based on initial
investigation, and discovery to date, Tidelands appears to have a
number of potential defenses to Sherrin's claims. Tideland's intends to
aggressively defend the lawsuit. At this stage in the litigation, and
in light of our continuing investigation and incomplete discovery, we
cannot give a more definitive evaluation of the extent of Tideland's
liability exposure.
NOTE 6 - COMMON STOCK TRANSACTIONS
------ -------------------------
On January 3, 2005, the Company issued 200,000 shares of its common
stock for 2005 legal fees valued at $100,000 under the 2004 Stock Grant
and Option Plan.
On February 1, 2005, the Company issued 500,000 shares of its
restricted common stock valued at $200,000 to Impact International, LLC
pursuant to the terms of the purchase of Reef Ventures, L.P.
On February 25, 2005, the Company approved the issuance of 60,000
shares of its restricted common stock valued at $82,000 for investor
public relations services. These shares are to be issued during the
second quarter of 2005.
NOTE 7 - SUMMARY OF TERMS OF CONVERTIBLE DEBENTURE AND WARRANTS
------ ------------------------------------------------------
On November 18, 2004, the Company entered into a Securities Purchase
Agreement with Mercator Momentum Fund, LP, Mercator Momentum Fund III,
LP, Monarch Pointe Fund, LP, (collectively, "the Funds") and Mercator
Advisory Group, LLC ("Mercator"). In exchange for $5,000,000, the
Company issued to the "Funds" and Mercator Advisory Group, 7%
convertible debentures with a maturity date of May 18, 2006. Under the
terms of the agreement, the Company is obligated to make monthly
interest payments until maturity of $29,166,67.
F-9
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 7 - SUMMARY OF TERMS OF CONVERTIBLE DEBENTURE AND WARRANTS (CONTINUED)
------ ------------------------------------------------------
The 7% Convertible Debentures are convertible into the Company's common
stock at a 15% discount to the market price at the time of conversion,
subject to a $0.45 floor and a $0.76 ceiling.
The Company has granted the Funds and Mercator registration rights on
these securities. If the company does not have its registration
statement effective within 90 days from filing, or extend its best
efforts to do so, the discount will be increased to 25% of the market
price at the time of conversion.
In connection with this financing the Company issued 6,578,948 common
stock warrants which expire November 18, 2007. The warrants are
exercisable at prices ranging from $.80 to $.87.
NOTE 8 - COMMITMENT FOR SUITE LICENSE AGREEMENT
------ --------------------------------------
On June 4, 2004, the Company entered into a Suite License Agreement
with the San Antonio Spurs, L.C.C. commencing July 1, 2004 for a period
of five years. The annual license fee for the first year is $159,000
and is subject to a 6% per annum price escalation thereafter. The
annual fee is payable in installments as indicated in the agreement.
The future annual license fee commitments are as follows:
2005 $ 168,540
2006 178,652
2007 189,371
2008 200,733
----------
$ 737,296
==========
NOTE 9 - RELATED PARTY TRANSACTION
------ -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
prepayment of $300,000 5% interest bearing loan due in January 2007 was
made by the Company regarding the transaction. The loan balance is
credited by airtime charges at standard industry rates offset by
interest charges computed on the average monthly balance. At March 31,
2005, the loan balance was $287,170.
NOTE 10 - SUBSEQUENT EVENTS
------- -----------------
During April and May, 2005, three separate legal actions were initiated
against Sonterra Energy Corporation (Sonterra), a wholly-owned
subsidiary of the Company. Two of the actions concern claims made by
developers against Sonterra for their failure to pay rent and easement
use fees as a result of their asset purchase from Oneok Propane
Distribution Company on November 1, 2004. The third action involves a
claim made by a builder that Sonterra does not have a proper easement
for the current use of certain property. The Company believes that the
three actions filed are without merit and intend to vigorously defend
itself. Litigation regarding these three actions are still in their
early stages, therefore, potential financial impacts, if any, cannot be
determined at this time.
F-10
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors....................................... F-3
Consolidated Balance Sheets at December 31, 2003 and
December 31, 2004.................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 2004 and 2003....................... F5
Consolidated Statement of Operations for the Years Ended
December 31, 2004 and 2003........................................... F-6
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2004 and 2003........................................... F7-8
Notes to Consolidated Financial Statements........................... F-9-25
F-2
BAUM & COMPANY, P.A.
1515 UNIVERSITY DRIVE, SUITE 209
CORAL SPRINGS, FLORIDA 33071
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Tidelands Oil & Gas Corporation
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of Tidelands Oil &
Gas Corporation as of December 31, 2004 and 2003, and the related consolidated
statements of stockholders' equity (deficit), operations, and cash flows for the
years ended December 31, 2004 and 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Tidelands Oil & Gas Corporation as of December 31, 2004 and 2003, and the
results of their consolidated operations and their consolidated cash flows for
the years ended December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
Baum & Company, P.A.
Coral Springs, Florida
April 13, 2005
F-3
TIDELANDS OIL &GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
YEARS ENDED
ASSETS
------
December 31, December 31,
2004 2003
------------ ------------
Current Assets:
Cash $ 5,459,054 $ 894,457
Cash Restricted (Note 2) 25,000 0
Accounts and Loans Receivable 516,387 228
Inventory 82,523 0
Prepaid Expenses (Note 3) 487,488 22,209
------------ ------------
Total Current Assets 6,570,452 916,894
------------ ------------
Property Plant and Equipment, Net (Notes 1, 4) 9,086,313 604,192
------------ ------------
Investment - Reef Ventures, L.P. (Note 14) -- 98,629
------------ ------------
Other Assets:
Deposits 4,108 3,800
Deferred Charges 116,250 0
Note Receivable (Note 10) 286,606 0
Goodwill 1,158,937 0
------------ ------------
Total Other Assets 1,565,901 3,800
------------ ------------
Total Assets $ 17,222,666 $ 1,623,515
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts Payable and Accrued Expenses $ 574,224 $ 813,905
Notes Payable 0 325,000
------------ ------------
Total Current Liabilities 574,224 1,138,905
Long-Term Debt (Note 5) 11,731,883 --
------------ ------------
Total Liabilities 12,306,107 1,138,905
------------ ------------
Commitments and Contingencies (Notes 9, 11, 12) -- --
Stockholders' Equity:
Common Stock, $.001 Par Value per Share,
100,000,000 Shares Authorized, 61,603,359
and 44,825,302 Shares Issued and
Outstanding at 2004 and 2003 Respectively 61,604 44,826
Paid-in Capital in Excess of Par Value 22,537,340 11,072,987
Subscriptions Receivable (550,000) (18,000)
Accumulated (Deficit) (17,132,385) (10,615,203)
------------ ------------
Total Stockholders' Equity 4,916,559 484,610
------------ ------------
Total Liabilities and Stockholders' Equity $ 17,222,666 $ 1,623,515
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-4
TIDELANDS OIL AND GAS CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004 AND 2003
Total
Additional Stock Stockholders'
Common Stock Paid-In Subscription Accumulated Equity/
Shares Amount Capital Receivable (Deficit) (Deficit)
------------- ------------- ------------- ------------- ------------- -------------
Balance -
December 31, 2002 33,683,329 $ 33,684 $ 6,715,108 $ (18,000) $ (9,266,722) $ (2,535,930)
Common Stock Issued
for Cash 781,395 781 1,049,219 -- -- 1,050,000
Common Stock Issued
for Services Regarding
$1,000,000 Sale of
Common Stock 300,000 300 335,700 -- -- 336,000
Fee for Services re: Sale
of Common Stock -- -- (336,000) -- -- (336,000)
Issuances of Common Stock
for Services 4,323,500 4,324 2,187,273 -- -- 2,191,597
Issuances of Common
Stock for Conversion of
Deferred Officers'
Salaries 3,596,169 3,596 787,561 -- -- 791,157
Issuance of Common Stock
for Conversion of Deferred
Director's Fees 340,909 341 74,659 -- -- 75,000
Issuance of Common
Stock for Conversion of
Accrued Legal Fees 500,000 500 62,000 -- -- 62,500
Issuance of Common Stock
for Conversion of Notes
Payable 1,300,000 1,300 197,467 -- -- 198,767
Net Loss -- -- -- -- (1,348,481) (1,348,481)
------------- ------------- ------------- ------------- ------------- -------------
Balance -
December 31, 2003 44,825,302 $ 44,826 $ 11,072,987 $ (18,000) $ (10,615,203) $ 484,610
Common Stock Issued
for Cash 6,725,545 6,725 6,081,592 -- -- 6,088,317
Common Stock Issued
for Services Regarding
$4,083,335 Sale of Stock 300,000 300 449,700 -- -- 450,000
Fee for Services
Regarding Sale of
Common Stock -- -- (450,000) -- -- (450,000)
Issuance of Common
Stock for Services 6,602,800 6,603 4,596,463 -- -- 4,603,066
Issuance of Common
Stock for Subscription 2,500,000 2,500 547,500 (550,000) -- --
Issuance of Common
Stock for Conversion of
Note Payable and
Accrued Interest 75,000 75 113,236 -- -- 113,311
Write Off Stock
Subscription Receivable -- -- -- 18,000 -- 18,000
Issuance of Common Stock
to Acquire 50% of
Sonterra Energy Corp. 574,712 575 125,862 -- -- 126,437
Net Loss -- -- -- -- (6,517,182) (6,517,182)
------------- ------------- ------------- ------------- ------------- -------------
Balance
December 31, 2004 61,603,359 $ 61,604 $ 22,537,340 $ (550,000) $ (17,132,385) $ 4,916,559
============= ============= ============= ============= ============= =============
See Accompanying Notes to Consolidated Financial Statements
F-5
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
YEARS ENDED
December 31, December 31,
2004 2003
------------ ------------
Revenues:
Gas Sales and Pipeline Fees $ 1,800,863 $ 0
Construction Service 82,975 0
Other 0 178,856
------------ ------------
Total Revenues 1,883,838 178,856
------------ ------------
Expenses:
Cost of Sales 1,508,891 --
Operating Expenses 99,665 27,767
Depreciation 244,889 43,006
Interest 300,566 53,163
Officers & Directors Salaries & Fees 1,331,848 313,000
General and Administrative 4,965,421 2,624,132
------------ ------------
Total Expenses 8,451,280 3,061,068
------------ ------------
Loss from Operations (6,567,442) (2,882,212)
Gain on Sale of Subsidiary -- 1,533,731
Interest Income 50,260 --
------------ ------------
Net (Loss) $ (6,517,182) $ (1,348,481)
============ ============
Net (Loss) Per Common Share:
Basic and Diluted
-----------------
(Loss) from Continuing Operations $ (0.12) $ (0.07)
Gain on Sale of Subsidiary 0.00 0.04
------------ ------------
Total $ (0.12) $ (0.03)
============ ============
Weighted Average Number of Common
Shares Outstanding 53,214,230 39,254,316
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-6
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED
December 31, December 31,
2004 2003
------------ ------------
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss)
Continuing Operations $ (6,517,182) $ (1,348,481)
Discontinued Operations -- --
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 244,889 43,006
Issuance of Common Stock:
for Services Provided 4,603,066 2,191,597
Officers' Salaries -- 185,000
Changes in:
Accounts Receivable (516,159) 16,078
Stock Subscriptions Receivable (532,000) 0
Inventory (82,523) 12,155
Prepaid Expenses (465,279) 21,392
Other Assets (116,558) (1,805)
Accounts Payable and Accrued Expenses (201,370) (677,815)
------------ ------------
Net Cash Provided (Required)
by Operating Activities (3,583,116) 441,127
------------ ------------
Cash Flows Provided (Required)
By Investing Activities:
(Increase) in Investments (933,871) (98,629)
Acquisitions of Property, Plant & Equipment (8,727,010) (134,505)
Disposals of Oil
and Gas Properties -- 598,924
------------ ------------
Net Cash Provided (Required)
by Investing Activities (9,660,881) 365,790
------------ ------------
See Accompanying Notes to Consolidated Financial Statements
F-7
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(CONTINUED)
YEARS ENDED
December 31, December 31,
2004 2003
------------ ------------
Cash Flows (Required) Provided
by Financing Activities:
Proceeds from Issuance of Common Stock 6,638,317 1,050,000
Proceeds from Long-Term Loans 6,731,883 --
Proceeds from Issuance of
Convertible Debentures 5,000,000 --
Repayment of Short-Term Loans (250,000) --
Repayment of Loans Due to Related Parties -- (933,554)
Proceeds of Loans from Related Parties -- 80,349
Loan to Related Party (286,606) --
Repayment of current Maturities of
Long-Term Debt -- (302,924)
------------ ------------
Net Cash (Required) Provided by
Financing Activities 17,833,594 (106,129)
------------ ------------
Net Increase in Cash 4,589,597 700,788
Cash at Beginning of Period 894,457 193,669
------------ ------------
Cash at End of Period $ 5,484,504 $ 894,457
============ ============
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 38,320 $ 38,773
============ ============
Cash Payments for Income Taxes $ 0 $ 0
============ ============
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 4,603,066 $ 2,191,597
Repayment of Loans 75,000 198,767
Payment of Accounts Payable 38,311 62,500
Repayment of Loans from Related Parties -- 866,157
Acquisition Cost 126,437 --
------------ ------------
Total Non-Cash Financing Activities $ 4,842,814 $ 3,319,021
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-8
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------ ------------------------------------------
This summary of significant accounting policies is presented to assist
in understanding these consolidated financial statements. The
consolidated financial statements and notes are representations of
management who is responsible for their integrity and objectivity. The
accounting policies used conform to accounting principles generally
accepted in the United States of America and have been consistently
applied in the preparation of these consolidated financial statements.
Organization
------------
Tidelands Oil and Gas Corporation (the Company and formerly C2
Technologies, Inc.), was incorporated in the state of Nevada on
February 25, 1997. On December 1, 2000, the Company completed its
acquisition of Rio Bravo Energy, LLC and their related entities thereby
making Rio Bravo Energy, LLC a wholly-owned subsidiary of the Company.
During 2004, the Company acquired all of the stock of Sonterra Energy
Corporation (Sonterra) and through this wholly-owned subsidiary, the
Company purchased all of the assets of a gas distribution organization
(see Note 14-Acquisitions). The Company also, during 2004, increased
its ownership interest from 25% to 98% in Reef Ventures, LP and their
wholly-owned subsidiaries (Reef International LLC and Reef Marketing
LLC) (see Note 14-Acquisitions).
Nature of Operations
--------------------
The Company currently operates a natural gas pipeline between Eagle
Pass, Texas and Piedras Negras, Mexico and a propane distribution
system serving residential customers in the Austin, Texas area. In
addition, the company is planning the reopening of its gas processing
plant and pipeline in Texas and is engaged in the development of
natural gas storage facilities in Mexico.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated.
Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107 "Disclosure About
Fair Value of Financial Instruments," requires the disclosure of the
fair value of off-and-on balance sheet financial instruments. Unless
otherwise indicated, the fair values of all reported consolidated
assets and consolidated liabilities, which represent financial
instruments (none of which are held for trading purposes), approximate
the carrying values of such amounts.
F-9
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
Use of Estimates
----------------
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are recorded at historical cost.
Depreciation of property, plant and equipment is provided on the
straight-line method over the estimated useful lives of the related
assets. Maintenance and repairs are charged to operations. Additions
and betterments, which extend the useful lives of the assets, are
capitalized. Upon retirement or disposal of the property, plant and
equipment, the cost and accumulated depreciation are eliminated from
the accounts, and the resulting gain or loss is reflected in
operations.
Long-Lived Assets
-----------------
Statement of Financial Accounting Standards 144 (SFAS 144) "Accounting
for the Impairment or disposal of long-lived assets" requires that
long-lived assets to be held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that
the related carrying amount may not be recoverable. When required,
impairment losses on assets to be held and used are recognized based on
the fair value of the asset, and long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value less cost to
sell.
The requirements of SFAS 144 and the evaluation by the Company did not
have a significant effect on the consolidated financial position or
results of consolidated operations.
F-10
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 109 (SFAS 109) "Accounting for Income
Taxes," which requires the establishment of a deferred tax asset or
liability for the recognition of future deductions of taxable amounts
and operating loss carryforwards, Deferred tax expense or benefit is
recognized as a result of the change in the deferred asset or liability
during the year. If necessary, the Company will establish a valuation
allowance to reduce any deferred tax asset to an amount which will,
more likely than not, be realized.
Net (Loss) Per Common Share
---------------------------
The Company accounts for net (loss) per share in accordance with
Statement of Financial Accounting Standard 128 ("SFAS 128") "Earnings
per Share". Basic (loss) per share is based upon the net (loss)
applicable to the weighted average number of common shares outstanding
during the period. Diluted (loss) per share reflects the effect of the
assumed conversions of convertible securities and exercise of stock
options only in the periods in which such affect would have been
dilutive.
Goodwill
--------
Goodwill represents the excess of purchase price and related costs over
the value assigned to the net tangible and identifiable assets of
businesses acquired. Statement of Financial Accounting Standards No.
142 (SFAS142), "Goodwill and other Intangible Assets" requires Goodwill
to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired, rather than
being amortized as previous accounting standards required. Furthermore,
SFAS 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to
be indefinite. In management's opinion, there has been no impairment to
the value of the value of recorded goodwill during the year ended
December 31, 2004.
New Accounting Standards
------------------------
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations", (SFAS No. 143) was
issued and is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The adoption of SFAS
143 does not have a material effect on our consolidated financial
statements.
F-11
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
New Accounting Standards (Continued)
------------------------------------
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities",
(SFAS No. 146) was issued and is effective for periods beginning after
December 31, 2002. SFAS No. 146 requires, among other things, that
costs associated with an exit activity (including restructuring and
employee and contract termination costs) or with a disposal of
long-lived assets be recognized when the liability has been incurred
and can be measured at fair value. Companies must record in earnings
from continuing operations costs associated with an exit or disposal
activity that does not involve a discontinued operation. Costs
associated with an activity that involves a discontinued operation
would be included in the results of discontinued operations. The
implementation of the provisions of SFAS No. 146 does not have a
material effect on the consolidated financial statements.
In December 2002, Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation, (SFAS No. 148) was issued and
is effective for fiscal years beginning after December 15, 2002. SFAS
No. 148 amends the disclosure requirements of SFAS No. 123, Accounting
for Stock-Based Compensation, (SFAS No. 123) to require prominent
disclosures in both interim and annual financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also amends
SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Company had decided not to
voluntarily adopt the SFAS No. 123 fair value method of accounting for
stock-based employee compensation. Therefore, the new transition
alternatives allowed in SFAS No. 148 will not affect the consolidated
financial statements.
NOTE 2 - RESTRICTED CASH
------ ----------------
Restricted cash consists of a certificate of deposit to secure a letter
of credit issued to the Railroad Commission of Texas.
F-12
TIDELANDS OIL &GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 3 - PREPAID EXPENSES
------ ----------------
A summary of prepaid expenses at December 31, 2004 and December 31,
2003 is as follows:
December 31, December 31,
2004 2003
------------ ------------
Prepaid Expenses $ 4,802 $ 16,000
Prepaid Insurance 82,318 6,139
Prepaid License Fee 79,500 0
Prepaid Financing 310,000 0
Prepaid Rent 8,301 0
Prepaid Interest 2,567 70
------------ ------------
$ 487,488 $ 22,209
============ ============
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
A summary of property, plant and equipment at December 31, 2004 and
December 31, 2003 is as follows:
Estimated
December 31, December 31, Economic
2004 2003 Life
------------ ------------ ------------
Pre-Construction Costs:
International Crossings to Mexico $ 27,601 $ 20,600 N/A
Mexican Gas Storage Facility
and Related Pipelines 928,232 112,708 N/A
Propane Distribution Systems 207,415 0 N/A
------------ ------------
Total 1,163,248 133,308
Office Furniture, Equipment and
Leasehold Improvements 46,141 19,449 5 Years
Pipelines - Domestic 431,560 431,560 15 Years
Pipeline - Eagle Pass, TX to Piedras
Negras, Mexico 6,106,255 0 20 Years
Gas Processing Plant 186,410 166,410 15 Years
Tanks &Lines - Propane Distribution
System 1,596,439 0 5 Years
Machinery and Equipment 57,180 0 5 Years
Trucks, Autos and Trailers 63,175 0 5 Years
------------ ------------
Total 9,650,408 750,727
Less: Accumulated Depreciation 564,095 146,535
------------ ------------
Net Property, Plant and Equipment $ 9,086,313 $ 604,192
============ ============
Depreciation expense for the years ended December 31, 2004 and December
31, 2003 was $244,889 and $43,006 respectively.
F-13
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 5 - LONG-TERM DEBT
------ --------------
A summary of long-term debt at December 31, 2004 and December 31, 2003
is as follows:
December 31, December 31,
2004 2003
------------ ------------
Note Payable, Unsecured, 10% Interest
Bearing, Maturing December 31, 2004 $ 0 $ 250,000
Note Payable, Unsecured, 10% Interest
Until April 17, 2001, 18% Interest
Thereafter, Payable on Demand 0 75,000
Note Payable, Secured, Interest Bearing
at 2% Over Prime Rate, Maturing
May 25, 2008 6,731,883 0
Convertible Debentures, Unsecured,
7% Interest Bearing,
Maturing May 18, 2006 5,000,000 0
------------ ------------
11,731,883 325,000
Less: Current Maturities 0 325,000
------------ ------------
Total Long-Term Debt $ 11,731,883 $ 0
============ ============
Summary of Terms of Convertible Debenture and Warrants:
-------------------------------------------------------
On November 18, 2004, the Company entered into a Securities Purchase
Agreement with Mercator Momentum Fund, LP, Mercator Momentum Fund III,
LP, Monarch Pointe Fund, LP, (collectively, "the Funds") and Mercator
Advisory Group, LLC ("Mercator"). In exchange for $5,000,000, the
Company issued to the "Funds" and Mercator Advisory Group, 7%
convertible debentures with a maturity date of May 18, 2006. Under the
terms of the agreement, the Company is obligated to make monthly
interest payments until maturity of $29,166.67.
F-14
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 5 - LONG-TERM DEBT (CONTINUED)
------ --------------------------
The 7% Convertible Debentures are convertible into the Company's common
stock at a 15% discount to the market price at the time of conversion,
subject to a $0.45 floor and a $0.76 ceiling.
The Company has granted the Funds and Mercator registration rights on
these securities. If the Company does not have its registration
statement effective within 90 days from filing, or extend its best
efforts to do so, the discount will be increased to 25% of the market
price at the time of conversion.
o In connection with this financing the Company issued
6,578,948 common stock warrants which expire November
18, 2007. The warrants are exercisable at prices
ranging from $.80 to $.87.
NOTE 6 - INCOME TAXES
------ ------------
The Company files a consolidated federal income tax return. At December
31, 2004, the Company had a net operating loss carry forward of
approximately $16,330,000 available to offset future federal taxable
income through 2024.
The components of the deferred tax assets and liabilities accounts at
December 31, 2004 are as follows:
Total Deferred Tax Assets $5,517,000
Less: Valuation Allowance 5,517,000
----------
Deferred Tax Asset (Liability) $ 0
==========
F-15
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 7 - COMMON STOCK TRANSACTIONS
------ -------------------------
During January and February 2004, the Company issued 2,722,223 shares
of restricted common stock for $4,083,335
On January 8, 2004, the Company authorized the issuance of 200,000
shares of its common stock for 2004 legal fees valued at $344,000 under
the Stock Grant and Option Plan.
On January 8, 2004, the Company issued 300,000 shares of its restricted
valued at $450,000 regarding the private placement of the Company's
common stock.
On January 8, 2004, the Company authorized the issuance of 700,000
shares of its restricted common stock for consulting services valued at
$1,050,000. These shares were issued during January and February 2004.
On January 8, 2004, the Company issued 52,800 shares of its common
stock valued at $90,816 to a Company officer under the Stock Grant and
Option Plan.
On January 8, 2004, the Company approved the issuance of 75,000 shares
of its restricted common stock in payment of a $75,000 promissory note
and $38,311 of accrued interest. These shares were issued February 3,
2004.
During the second quarter 2004, the Company issued 3,322 shares of its
restricted common stock for $4,983.
On April 12, 2004, the Company issued 500,000 shares of its restricted
common stock valued at $497,000 to Impact International, Inc. pursuant
to the terms of the purchase of Reef Venture, L.P. described above.
On April 15, 2004, the Company issued 700,000 shares of its restricted
common stock for consulting services valued at $728,000.
On April 15, 2004, the Company issued 450,000 shares of its restricted
common stock for consulting services valued at $468,000.
On July 2, 2004, the Company issued 500,000 shares of its restricted
common stock valued at $250,625 to Impact International, Inc. pursuant
to the terms of purchase of Reef Ventures, L.P. described above.
On August 1, 2004, the Company issued 1,000,000 shares of its
restricted common stock valued at $383,750 pursuant to a one-year
contract to provide consulting services.
F-16
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 7 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On September 14, 2004, the Company issued 4,000,000 shares of its
restricted common stock for $2,000,000 which was received during
October 2004.
On September 14, 2004, the Company issued 500,000 shares of its
restricted common stock valued at $106,875 pursuant to an employment
contract with an officer of the Company.
On September 14, 2004, three current officers and directors, a prior
officer/director and an employee of the Company each exercised a
warrant to acquire 500,000 shares of restricted common stock for
$110,000. The parties also executed a one-year promissory note bearing
5% P.A. interest in favor of the Company and a security agreement
against the newly issued stock until full payment has been remitted.
On October 14, 2004, the Company approved issuance of 500,000 shares of
its restricted common stock valued at $160,000 for legal services in
connection with the preparation of a SB-2 registration statement filed
on December 17, 2004.
On November 1, 2004, the Company approved the issuance of 500,000
shares of its common stock valued at $435,000 pursuant to an employment
contract with an officer of the Company.
On November 1, 2004, the Company issued 500,000 shares of its
restricted common stock valued at $110,000 to Impact International,
Inc. pursuant to the terms of purchase of Reef Ventures, L.P. described
above.
On November 1, 2004, the company issued 574,712 shares of its
restricted common stock valued at $126,437 in connection with the
acquisition of 50% of the outstanding common stock at Sonterra Energy
Corporation, now a wholly-owned subsidiary of the Company.
On November 3, 2004, the Company issued 500,000 shares of its
restricted common stock valued at $151,000 pursuant to an employment
contract with an officer of the Company.
F-17
TIDELANDS OIL &GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 8 - STOCK OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE
------ DEBENTURES
-----------------------------------------------------------------------
The following table presents the activity for options, warrants and
shares reserved for issuance upon conversion of outstanding convertible
debentures:
Shares Reserved Weighted
Stock Stock for Convertible Average
Options Warrants Debentures Exercise Price
---------- ---------- --------- --------------
Outstanding - December 31, 2003 2,500,000 8,516,807 0 $0.31
Granted / Issued 250,000 10,562,141 1,111,111 0.69
Exercised (2,500,000) (1,500,000) 0 0.14
---------- ---------- --------- -----
Outstanding - December 31, 2004 250,000 17,578,948 1,111,111 $0.60
========== ========== ========= =====
Note: The 11,111,111 shares represents the maximum shares which
could be issued upon conversion of the convertible debentures
at the minimum stock price level of $.45; 6,578,948 shares
represents the minimum shares which could be issued upon
conversion of the convertible debentures at the maximum stock
price level of $.76. (See NOTE 5-Summary of Terms of
Convertible Debentures and Warrants)
The 2003 Non-Qualified Stock Grant and Option Plan has 210,122 shares
remaining available for future issuance while the 2004 Non-Qualified
Stock Grant and Option Plan has 4,500,000 shares remaining available
for future issuance.
Accounting for Stock Based Compensation
As allowed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company has elected to
apply the intrinsic-value-based method of accounting. Under this
method, the Company measures stock based compensation for option grants
to employees assuming that options granted at market price at the date
of grant have no intrinsic value. Restricted stock awards were valued
based on the discounted market price of a share of non-restricted stock
on the date earned. No compensation expense has been recognized for
stock-based incentive compensation plans other than for restricted
stock awards pursuant to executive employment agreements.
NOTE 9 - COMMITMENT FOR SUITE LICENSE AGREEMENT
------ --------------------------------------
On June 4, 2004, the Company entered into a Suite License Agreement
with the San Antonio Spurs, L.C.C. commencing July 1, 2004 for a period
of five years. The annual license fee for the first year is $159,000
and is subject to a 6% per annum price escalation thereafter. The
annual fee is payable in installments as indicated in the agreement.
F-18
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 9 - COMMITMENT FOR SUITE LICENSE AGREEMENT (Continued)
------ --------------------------------------------------
The future annual license fee commitments are as follows:
2005 $ 168,540
2006 178,652
2007 189,371
2008 200,733
----------
$ 737,296
==========
NOTE 10 - RELATED PARTY TRANSACTION
------- -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
$300,000 5% interest bearing loan due in January 2007 was made by the
Company regarding the transaction. The loan balance is credited by
airtime charges at standard industry rates offset by interest charges
computed on the average monthly balance. At December 31, 2004, the loan
balance was $286,606.
NOTE 11 - LEASES
------- ------
The Company entered into an operating lease on August 1, 2003 for the
rental of its executive office at a monthly rent of $3,400, expiring
November 30, 2005.
The Company's wholly owned subsidiary, Sonterra Energy Corporation,
entered into an operating lease on October 1, 2004 for a propane tank
site at an annual rent of $10,000 expiring September 30, 2019.
Future commitments under the operating lease are as follows:
Year Ending Total
----------- ----------
2005 $ 47,400
2006-2019 137,500
----------
Total Minimum Lease Payments $ 184,900
==========
Rent expense for the years ended December 31, 2004 and 2003 was $43,300
and $28,100, respectively.
F-19
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 12 - COMMITMENTS AND CONTINGENCIES
------- -----------------------------
The Company is subject to the laws and regulations relating to the
protection of the environment. The Company's policy is to accrue
environmental and related cleanup costs of a non-capital nature when it
is both probable that a liability has been incurred and when the amount
can be reasonably estimated. Although it is not possible to quantify
with any degree of certainty the financial impact of the Company's
continuing compliance efforts, management believes any future
remediation or other compliance related costs will not have a material
adverse effect on the consolidated financial condition or reported
results of consolidated operations of the Company.
NOTE 13 - LITIGATION
-------- ----------
On January 6, 2003, the Company was served as a third party defendant
in a lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin
vs. Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and others, in
the 150th Judicial District Court, Bexar County, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas
Company (Northern) when it sued Betty Lou Sheerin for her failure to
make payments on a note she executed payable to Northern in the
original principal amount of $1,950,000. Northern's suit was filed on
November 13, 2002. Sheerin answered Northern's lawsuit on January 6,
2003. Sheerin's answer generally denied Northern's claims and raised
the affirmative defenses of fraudulent inducement by Northern,
estoppel, waiver and the further claim that the note does not comport
with the legal requirements of a negotiable instrument.
Sheerin seeks a judicial ruling that Northern be denied any recovery on
the note. Sheerin's answer included a counterclaim against Northern, ZG
Gathering, and others generally alleging, among other things, that
Northern, ZG Gathering, Ltd. and others, fraudulently induced her
execution of the note. Northern has filed a general denial of Sheerin's
counterclaims. Sheerin's answer included a third party cross claim
against Tidelands Oil & Gas Corporation. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from
ZG Gathering, Ltd. and that, as a part of the agreement, Tidelands
agreed to satisfy all of the obligations due and owing to Northern,
thereby relieving Sheerin of all obligations she had to Northern on the
promissory note in question.
F-20
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 13 - LITIGATION (CONTINUED)
-------- ----------------------
She alleges that Tidelands is liable to her for all of her actual
damages, costs of the lawsuit and other unstated relief. Tidelands and
Sheerin agreed to delay the Tidelands' answer date in order to allow
time for mediation of the case. Tidelands participated in mediation on
March 11, 2003. The case was not settled at that time. Tidelands
answered the Sheerin suit on March 26, 2003. Tidelands' answer denies
all of Sheerin's allegations. No discovery has been completed at this
time. Based on initial investigations, however, Tidelands appears to
have a number of potential defenses to Sheerin's claims and Tidelands
intends to aggressively defend the lawsuit.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its restricted common stock to various
partners of ZG Gathering, Ltd. The company believes that the
aforementioned promissory note and shares of restricted common stock
will be cancelled based upon the outcome of the litigation described
above. Accordingly, the Company's financial statements reflect that
position.
NOTE 14 - ACQUISITIONS
------- -------------
Reef Ventures, L.P. Transaction
-------------------------------
On May 25, 2004, the Company entered into a Purchase and Sale Agreement
for Reef Ventures, L.P. by and between Impact International, LLC
("Impact") and Coahuila Pipeline, LLC. ("Coahuila"), (jointly "Seller")
and Tidelands Oil & Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer"). The transaction closed
on June 18, 2004.
Purchase and Sale Agreement - Background
----------------------------------------
Reef Ventures, L.P. was formed in Texas on April 16, 2003. Coahuila
owned one percent (1%) of Reef Ventures, L.P. Impact was a limited
partner of Reef Ventures and owned seventy-two percent (72%) of Reef
Ventures, L.P. Tidelands formed Arrecefe Management, L.L.C., a Texas
limited liability company, to act as the general partner for Reef
Ventures, L.P. Tidelands had already owned twenty-five percent (25%) of
Reef Ventures, L.P.
F-21
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
------- ------------------------
Summary of Purchase and Sale Agreement
The Company and Arrecefe purchased Impact's and Coahuila's units of
interest in Reef Ventures, L.P., respectively. Impact financed the sale
of the Reef interests by taking back a promissory note (the "Tidelands
Note") in the amount of $6,523,773 payable as follows:
(a) The "Tidelands Note" bears interest at prime plus two (2%) percent.
The note calls for quarterly interest payments during the first fifteen
(15) months, and thereafter, principal and interest would be due
quarterly amortized over twenty (20) years, but not to exceed an amount
equal to One Hundred (100%) percent of Reef's net cash flow. The unpaid
balance of the note would be due at the end of the fourth year.
(b) The Tidelands' note is secured by (i) a deed of trust (the "Deed of
Trust") from the Partnership to Impact, covering the pipeline and
related facilities, easements, rights-of-way and the Gas Contracts
which comprise the project, being that 12-inch pipeline Project for
transporting natural gas from Eagle Pass Texas to Piedras Negras,
Mexico, defined in the Partnership Agreement.
The Deed of Trust would include a present assignment of Reef's rights
to receive cash flow from the Gas Project which would be exercisable by
Impact only upon default under the Tidelands' Note, Reef guarantee, or
Reef Deed of Trust. (ii) a guaranty of payment and performance from the
Partnership (the "Partnership Guaranty"), and (iii) a pledge agreement
whereby the Partnership pledges to Impact its 98% membership interest
in Reef.
Summary of Amendment to Warrant and Registration Rights Agreements
During 2004, the Stock Purchase Warrant Agreement dated April 16, 2003
was amended. The amended Agreement provides that the total number of
shares which Impact is entitled to receive under the warrant is Ten
Million (10,000,000) shares of Tidelands' common stock, plus such
additional shares of common stock which may be issued upon the
occurrence of an untimely registration event, less the 500,000 shares
previously issued to Impact on April 13, 2004. The exercise price is
$0.335 per share. The expiration date of the warrant is extended to
April 16, 2006.
F-22
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
------- ------------------------
The Company has agreed to use its best efforts to register the shares
under the warrant with the Securities and Exchange Commission so that
Impact will be permitted to publicly resell the common shares.
Tidelands agreed to use its best efforts to keep the registration
statement effective as long as it is necessary for Impact to sell the
shares.
If the registration statement is declared effective (i) by April 7,
2005, if the registration is on Form S-3, or (ii) July 7, 2005, if the
registration statement is on Form SB-2 or any other registration form,
the registration statement will be deemed timely (a "Timely
Registration"). In the event of a Timely Registration, Impact will
exercise the warrant for all of the remaining shares under the warrant
on a cash basis payable by Impact through the execution of a promissory
note payable to Tidelands (the "Impact Note"), as of the effective date
of the registration statement. In the event that the Company does not
accomplish a Timely Registration, then Impact may exercise the warrant
at anytime after the date which is the last date for a Timely
Registration, at its option on a cash basis or pursuant to Section 1.2
of the warrant agreement on a net exercise cashless basis for all the
remaining shares under the warrant. If Impact elects to exercise the
warrants on a net exercise cashless basis, we will increase the number
of shares available for issuance under the warrant, regardless of
whether issued for cash or on a net exercise basis, so that the total
number of shares issued would total 10,000,000 shares.
If the registration statement is not filed or declared effective on or
before July 14, 2004, the Company will be obligated to issue 500,000
common shares under the cashless exercise provisions of the amended
Stock Purchase Warrant. For each 90 day period that the registration
statement was not filed or declared effective, the Company would
continue to issue 500,000 share blocks of common stock, until declared
effective. Accordingly, the Company issued 500,000 restricted common
shares during July and 500,000 restricted common shares during November
since the registration statement was not filed by October 14, 2004.
F-23
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
------- ------------------------
The unaudited pro-forma condensed consolidated results of operations of
the Company have been prepared as if the acquisition of the
seventy-three percent (73%) of Reef Ventures, L.P. had occurred January
1, 2004:
Tidelands Oil & Gas Corporation
Condensed Consolidated Statement of Operations
Year Ended December 31, 2004
"Proforma"
(Unaudited)
Revenues $ 4,526,340
Net (Loss) $ (6,577,712)
Net (Loss) Per Common Share - Basic $ (0.12)
Weighted Average Shares Outstanding - Basic 53,214,230
Net (Loss) Per Common Shares - Diluted $ (0.09)
Weighted Average Shares Outstanding - Diluted 73,192,763
Stock Purchase Warrant
On April 16, 2003, the Company issued a stock purchase warrant for the
purchase of common shares of the Company's outstanding stock at the
time of exercise, which as of December 31, 2003 would be 8,516,807
shares. This number represents common stock available under the terms
and conditions of a Stock Purchase Warrant Agreement where Impact has
the right to acquire 19% of the issued and outstanding common stock of
the Company. The warrant agreement is subject to an anti-dilution
provision. Impact has given the Company notice of its intent to
exercise the warrant. The Company has not issued any common shares to
date.
This sale included the commitment of Impact Energy Services and related
entities to construct and fund, up to $8,000,000, for multiple
international pipelines from South Texas to Mexico.
Pursuant to contractual obligation for these transactions, the maximum
exercise price is $.335 which could be reduced to zero depending on the
market price at time of exercise.
F-24
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
------- ------------------------
ONEOK PROPANE DISTRIBUTION COMPANY
----------------------------------
On November 1, 2004, through the Company's subsidiary, Sonterra Energy
Corporation, we entered into an Asset Purchase and Sale Agreement with
ONEOK Propane Distribution Company, a division of ONEOK Propane
Company, a Delaware corporation. The Company purchased the assets of
this division for Two Million ($2,000,000). The assets consist of
propane distribution systems, including gas mains, yard lines, meters
and storage tanks, serving thirteen residential subdivisions in the
Austin, Texas, Area.
The propane distribution system is comprised of approximately 25 miles
of gas main pipe, 75,000 feet of yard lines, 850 meters, and storage
tanks with a combined capacity of 156,000 gallons.
The purchase price was allocated as follows:
Gas mains, yard lines, meters and storage tanks $1,708,786
Inventory of propane and construction materials 76,415
Goodwill 219,799
----------
$2,000,000
==========
F-25
You should rely only on the information
contained in this document or to which
we have referred you. We have not
authorized anyone to provide you with
information that is different. This
document may only be used where it is
legal to sell these securities. The
information in this document may only be
accurate on the date of this document. Common Stock
----------------------------------
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
PROSPECTUS SUMMARY
RISK FACTORS
USE OF PROCEEDS
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
DIVIDENDS AND DIVIDEND POLICY _________________
MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS PROSPECTUS
BUSINESS _________________
PROPERTIES
MANAGEMENT'S DISCUSSION AND
ANALYSIS
PLAN OF DISTRIBUTION
DIRECTORS AND EXECUTIVE OFFICERS
PRINCIPAL SHAREHOLDERS
TRANSACTIONS WITH MANAGEMENT Dated June 15, 2005
AND OTHERS
LEGAL PROCEEDINGS
DESCRIPTION OF SECURITIES
LEGAL MATTERS
EXPERTS
AVAILABLE INFORMATION
INDEX TO FINANCIAL STATEMENTS
WHERE YOU CAN FIND MORE INFORMATION