UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended MARCH 31, 2001
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number: 0-26402
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THE AMERICAN ENERGY GROUP, LTD.
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(Exact name of registrant as specified in its charter)
NEVADA 87-0448843
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(state or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
P O BOX 105 SIMONTON, TEXAS 77476
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(Address of principal executive offices) (Zip code)
(281)-346-0414
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check-mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check-mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
59,297,265 COMMON SHARES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 JUNE 30, 2000
(Unaudited) (Audited)
------------ ------------
ASSETS
Current Assets
Cash $ 891,742 $ 244,513
Restricted cash 774,986 1,100,000
Receivables 160,063 163,947
Other current assets 17,863 19,660
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Total Current Assets 1,844,654 1,528,120
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OIL AND GAS PROPERTIES USING
FULL COST ACCOUNTING
Properties being amortized 29,683,410 24,725,831
Properties not subject
to amortization 551,053 357,749
Accumulated amortization (13,832,314) (9,302,264)
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Net Oil and Gas Properties 16,402,149 15,781,316
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PROPERTY AND EQUIPMENT
Drilling and related equipment 387,267 384,679
Vehicles 139,801 139,801
Office equipment 52,834 48,933
Less: Accumulated depreciation (408,889) (353,718)
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Net Property and Equipment 171,013 219,695
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OTHER ASSETS
Debt issue costs 82,907 113,447
Investments 1,900 1,900
Deposits and other assets 5,100 5,100
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Total Other Assets 89,907 120,447
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TOTAL ASSETS $ 18,507,723 $ 17,649,578
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1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE AMERICAN ENERGY GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2001 June 30, 2000
(Unaudited) (Audited)
------------ ------------
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Accounts payable $ 1,488,929 $ 1,287,337
Accrued liabilities 789,679 632,329
Deposit on sale of assets 561,420 750,000
Notes payable - related party 30,000 30,000
Lease obligations - current 3,214 2,627
Notes payable - current 38,117 765,414
------------ ------------
Total Current Liabilities 2,911,359 3,467,707
------------ ------------
LONG-TERM LIABILITIES
Notes payable and long-term debt 1,220,000 1,220,000
Capital lease obligations 8,871 6,243
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Total Long-Term Liabilities 1,228,871 1,226,243
------------ ------------
Total Liabilities 4,140,230 4,693,950
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SHAREHOLDERS' EQUITY
Convertible preferred stock par value
$.001 per share authorized 20,000,000
shares issued and outstanding
At June 30, 2000: 41,500 shares
At March 31, 2001: 41,500 shares 42 42
Common stock, par value $.001
per share, authorized: 80,000,000
shares, issued and outstanding:
At June 30, 2000: 35,297,881 shares
At March 31, 2001: 63,465,565 shares 63,465 35,298
Paid in excess of par value 36,585,876 25,403,069
Accumulated deficit (22,281,890) (12,482,781)
------------ ------------
Net Shareholders' Equity 14,367,493 12,955,628
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,507,723 $ 17,649,578
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2
THE AMERICAN ENERGY GROUP, LTD. AND SUBISIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
REVENUES
Oil and gas sales $ 452,872 $ 507,965 $ 1,526,167 $ 1,300,440
Lease operating and production costs 177,741 163,085 552,007 504,193
----------- ----------- ----------- -----------
Gross Profit 275,131 344,880 974,160 796,247
----------- ----------- ----------- -----------
OTHER EXPENSES
Legal and professional fees 179,501 42,120 543,492 165,073
Administrative salaries 39,969 20,425 106,323 61,825
Office overhead expense 5,838 10,063 19,547 33,890
Franchise taxes 6,000 17,000 24,000 35,000
Depreciation and amortization expense 5,612,303 3,381 5,665,786 5,983,292
General and administrative expense 55,406 33,836 86,040 74,413
----------- ----------- ----------- -----------
Total Other Expenses 5,899,017 126,825 6,445,188 6,353,493
----------- ----------- ----------- -----------
NET OPERATING PROFIT (LOSS) (5,623,886) 218,055 (5,471,028) (5,557,246)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 5,625 225 6,493 8,301
Debt issue costs (11,896) 0 (34,586) 0
Loss on asset sales 0 0 0 (4,416)
Restricted shares issued to directors 0 0 (2,484,000) 0
Shares issued to retire warrants (276,000) 0 (1,766,125) 0
Interest expense (339) (1,962) (49,863) (2,824)
----------- ----------- ----------- -----------
Net Other Income (Expenses) (282,610) (1,737) (4,328,081) 1,061
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE TAX (5,906,496) 216,318 (9,799,109) (5,556,185)
Federal Income Tax 0 0 0 0
----------- ----------- ----------- -----------
NET INCOME (LOSS) FOR PERIOD ($5,906,496) $ 216,318 ($9,799,109) ($5,556,185)
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE (0.10) 0.01 (0.16) (0.17)
=========== =========== =========== ===========
3
THE AMERICAN ENERGY GROUP, LTD. AND SUBISIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
March 31 March 31
2001 2000
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($9,799,109) ($5,556,185)
Adjustments to Reconcile Net Loss to Cash
Provided by (Used in) Operating Activities:
Depreciation and amortization 5,612,303 5,814,507
Less amount capitalized to oil & gas properties (42,379) (21,371)
Common stock issued for services rendered 179,768
Restricted common stock issued to directors 2,484,000 --
Common stock issued for warrant retirement 1,766,125 --
Common stock issued for penalty fee 315,000 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables 3,884 (89,135)
(Increase) decrease in deposits and other assets 32,337 240
(Increase) decrease in other current assets 0 (5,599)
Increase (decrease) in accounts payable 413,875 (253,344)
Increase (decrease) in accrued expenses and
other current liabilities (31,230) 40,186
----------- -----------
Cash Provided by (Used in) Operating Activities 934,574 (70,701)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (4,073,342) (1,743,600)
Proceeds from the sale of equipment -- 10,000
Expenditures for other property and equipment (29,386) (6,089)
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Cash Provided By (Used in) Investing Activities (4,102,728) (1,739,689)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and
long-term liabilities -- 1,100,000
Proceeds from the issuance of common stock 4,850,429 100,000
Expenditures for offering costs (516,105) (327,673)
Proceeds from the issuance of convertible
voting preferred stock -- 400,000
Payments on notes payable and long-term liabilities (843,955) (204,113)
----------- -----------
Cash Provided By (Used in) Financing Activities 3,490,369 1,068,214
----------- -----------
NET INCREASE (DECREASE) IN CASH 322,215 (742,176)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,344,513 1,196,566
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CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,666,728 $ 454,390
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4
THE AMERICAN ENERGY GROUP, LTD. AND SUBISIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 30, 2000 THROUGH MARCH 31, 2001
(UNAUDITED)
CONVERTIBLE VOTING CAPITAL IN
COMMON STOCK PREFERRED STOCK EXCESS OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 35,297,881 $ 35,298 41,500 $ 42 $ 25,403,069 ($12,482,781)
Common stock issued for cash
@ $0.30 per share 8,443,249 8,443 -- -- 2,524,532 --
Common stock issued upon
conversion of debt @ $0.30 per share 599,225 599 -- -- 179,169 --
Common stock issued in
satisfaction of penalty fee at an
average price of $0.53 per share 258,239 258 -- -- 134,741 --
Cancellation of common stock - net (133,684) (134) -- -- 134 --
Offering costs related to the
issuance of comon stock -- -- -- -- (300,000) --
Common stock issued for cash
@ $0.30 per share 3,564,600 3,565 -- -- 1,065,815 --
Common stock issued upon conversion
of debt @ an average price
of $0.63 per share 3,366,079 3,367 -- -- 2,128,391 --
Common stock issued upon retirement
of warrants @ $0.80 per share 1,862,500 1,862 -- -- 1,488,263 --
Common stock issued to directors at an
average price of $0.46 per share 5,400,000 5,400 -- -- 2,478,600 --
Common stock issued in
satisfaction of penalty fee at an
average price of $0.66 per share 136,717 137 -- -- 89,863 --
Offering costs related to the
issuance of comon stock -- -- -- -- (54,773) --
Common stock issued for cash
@ $0.30 per share 4,160,245 4,160 -- -- 1,243,914 --
Common stock issued in
satisfaction of penalty fee at an
average price of $0.54 per share 165,514 165 -- -- 89,835 --
Common stock issued upon retirement
of warrants @ $0.80 per share 345,000 345 -- -- 275,655 --
Offering costs related to the
issuance of comon stock -- -- -- -- (161,332) --
Net (loss) for the nine months
ended March 31, 2001 -- -- -- -- -- (9,799,109)
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2001 63,465,565 $ 63,465 41,500 $ 42 $ 36,585,876 ($22,281,890)
============ ============ ============ ============ ============ ============
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The American Energy Group, Ltd. (the Company) was incorporated in the
State of Nevada on July 21, 1987 as Dimension Industries, Inc. Since
incorporation, the Company has had several name changes including DIM,
Inc. and Belize-American Corp. Internationale with the name change to
The American Energy Group, Ltd. effective November 18, 1994.
Effective September 30, 1994, the Company entered into an agreement to
acquire all of the issued and outstanding common stock of Simmons Oil
Company, Inc. (Simmons), a Texas Corporation, in exchange for the
issuance of certain convertible voting preferred stock (see Note 5).
The acquisition included wholly owned subsidiaries of Simmons, Sequoia
Operating Company, Inc. and Simmons Drilling Company, Inc. The
acquisition was recorded at the net book value of Simmons of $1,044,149
which approximates fair value.
During the year ended June 30, 1995, the Company incorporated
additional subsidiaries including American Energy-Deckers Prairie,
Inc., The American Energy Operating Corp., Tomball American Energy,
Inc., Cypress-American Energy, Inc., Dayton North Field-American
Energy, Inc. and Nash Dome Field-American Energy, Inc. In addition, in
May 1995, the Company acquired all of the issued and outstanding common
stock of Hycarbex, Inc. (Hycarbex), a Texas corporation, in exchange
for 120,000 shares of common stock of the Company, a 1% overriding
royalty on the Pakistan Project (see Note 2) and a future $200,000
production payment if certain conditions are met. In April 1995, the
name of that company was changed to Hycarbex-American Energy, Inc. All
of these companies are collectively referred to as "the Companies".
The Company and its subsidiaries (the Companies) are principally in the
business of acquisition, exploration, development and production of oil
and gas properties.
b. Going Concern
The accompanying consolidated financial statements have been prepared
assuming the Companies will continue as going concerns. The Companies
have experienced recurring losses and negative cash flows from
operations which raise substantial doubt about the Companies' ability
to continue as going concerns.
As discussed in Note 2, the Companies entered into an Asset and Stock
Purchase and Sale Agreement on May 9, 2000 with Northern Lights Energy,
Ltd., to sell the U.S. oil, gas and mineral leases, all related
equipment to operate the leases and the stock in and to the operating
subsidiary, The American Energy Operating Corp., for a total of
$4,000,000.
As of March 31, 2001, a total of $750,000 of the $4,000,000 purchase
price had been received by the Companies and thus the sale has not been
completed. If the sale is not completed, the $750,000 deposit must be
returned as a loan repayment. Once the U.S. operations are sold, the
Company intends to focus primarily on the development of the Pakistan
concession with its subsidiary, Hycarbex.
In addition, the Concession Agreement (Note 2) with the government of
Pakistan has expired. Management is currently trying to negotiate the
extension of the agreement and is operating as though the agreement has
been extended. In the event that the Concession Agreement is not
extended by the Government of Pakistan,
the Company would lose its rights to explore and develop the property
and the $551,053 in capitalized costs would be written off. Management
currently expects that the agreement will be extended.
Through March 31, 2001, the Companies completed a private placement
whereby 12,007,849 shares of its common stock were issued for
$3,602,355. A significant amount of these proceeds are being allocated
to the development of the Pakistan concession mentioned above.
The recovery of assets and continuation of future operations are
dependent upon the Companies' ability to obtain additional debt or
equity financing. Management is actively pursuing additional equity and
debt financing sources to finance future operations and anticipates an
increase in revenues from oil and gas production during the coming year
if the U.S. operations are not sold.
c. Accounting Methods
The Company's consolidated financial statements are prepared using the
accrual method of accounting. The Company has elected a June 30
year-end.
OIL AND GAS PROPERTIES
The full cost method is used in accounting for oil and gas properties.
Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related
overhead costs, are capitalized to the extent the capitalized costs do
not exceed certain required ceiling test calculations applicable to oil
& gas companies utilizing the full cost method of accounting. In
addition, depreciation on property and equipment used in oil and gas
exploration and interest costs incurred with respect to financing oil
and gas acquisition, exploration and development activities are
capitalized in accordance with full cost accounting. No interest was
capitalized during the three and nine months ended March 31, 2001 and
March 31, 2000. Depreciation capitalized during the three and nine
months ended March 31, 2001 and 2000 totaled $11,960 and $42,379, and,
$26,153 and $47,574, respectively. All capitalized costs of proved oil
and gas properties subject to amortization are being amortized on the
unit-of-production method using estimates of proved reserves.
Investments in unproved properties and major development projects not
subject to amortization are not amortized until proved reserves
associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized
costs to be amortized. As of March 31, 2001 and 2000, proved oil and
gas reserves had been identified on some of the Companies oil and gas
properties with revenues generated and barrels of oil produced from
those properties. Accordingly, amortization totaling $24,312 and
$71,433 and $83,195 and $238,710 has been recognized in the
accompanying consolidated financial statements for the three and nine
months ended March 31, 2001 and 2000, respectively, on proved and
impaired or abandoned oil and gas properties.
d. Principles of Consolidation
The consolidated financial statements include the Company and its
wholly-owned subsidiaries as detailed previously. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
e. Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
f. Property and Equipment and Depreciation
Property and equipment are stated at cost. Depreciation on drilling and
related equipment, vehicles and office equipment is provided using the
straight-line method over expected useful lives of five to seven years.
For the three and nine months ended March 31, 2001 and 2000, the
Companies incurred total depreciation of $18,390 and $55,171, and,
$22,561 and $67,682, respectively.
In accordance with full cost accounting, $11,960 and $42,379, and,
$26,153 and $47,574 of depreciation was capitalized as costs of oil and
gas properties for the three and six months ended March 31, 2001 and
2000, respectively, as previously discussed.
g. Basic Income Per Share of Common Stock For the Nine Months Ended
March 31,
2001 2000
------------ ------------
Income (numerator) $ (9,799,109) $ (5,556,185)
Shares (denominator) 61,220,185 33,903,641
------------ ------------
Per share amount $ ( 0.16) $ (0.17)
============= ============
h. Concentrations of Risk
From time to time, the cash balances in the Companies bank accounts
exceed federally insured limits. At March 31, 2001 and June 30, 2000,
the balances in excess of the limits were approximately $1,566,728 and
$1,244,513, respectively. Of these balances, approximately $937,688 and
$1,206,228, respectively, was in the country of Pakistan.
i. Foreign Operations
A significant portion of the assets of the Company relate to an oil and
gas concession located in the country of Pakistan (see Note 2).
Pakistan has experienced recently, or is experiencing currently,
economic or political instability. Hyperinflation, volatile exchange
rates and rapid political and legal change, often accompanied by
military insurrection, have been common in Pakistan. The Company may be
materially adversely affected by possible political or
economic instability in Pakistan. The risks include, but are not
limited to terrorism, military repression, expropriation, changing
fiscal regimes, extreme fluctuations in currency exchange rates, high
rates of inflation and the absence of industrial and economic
infrastructure. Changes in drilling or investment policies or shifts in
the prevailing political climate in Pakistan could adversely affect the
Company's business. Operations may be affected in varying degrees by
government regulations with respect to production restrictions, price
controls, export controls, income and other taxes, expropriation of
property, maintenance of claims, environmental legislation, labor,
welfare benefit policies, land use, land claims of local residents,
water use and well safety. The effect of these factors cannot be
accurately predicted.
j. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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.
k. Debt Issuance Costs
In connection with the receipt of the $1,100,000 note payable, the
Company incurred costs of $162,067. The Company capitalized these costs
and amortizes these costs over the term of the note payable (2.5 years)
as follows:
March 31,
2001
------------
Total costs incurred $ 162,067
Accumulated amortization (79,160)
------------
Net Debt Issuance Costs $ 82,907
============
l. Changes in Accounting Principle
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives as assets or liabilities, measured at fair market value.
Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash
flows. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management believes the adoption
of this statement had no material impact on the Company's consolidated
financial statements.
NOTE 2 - OIL AND GAS PROPERTIES
At the time the Company acquired Simmons Oil Company, Inc. and its
subsidiaries, those companies had ownership interests in oil and gas
prospects located in Texas. These properties contained oil and gas
leases on which existing wells had been shut-in and abandoned and had
additional sites available for further exploration and development.
During the nine months ended March 31, 2001 and year ended June 30,
2000, the Companies expended funds in exploration and development
activities and work over of existing wells on those properties and
other oil and gas properties acquired during those periods.
On March 10, 1995, American Energy - Deckers Prairie, Inc., a
wholly-owned subsidiary of the Company, entered into an agreement with
an unrelated entity to accept the transfer of all right, title and
interest to certain oil and gas leases located in the State of Texas
along with all personal property and equipment located on and used in
connection with those leases. In exchange, American Energy - Deckers
Prairie, Inc. assumed all contractual covenants related to those oil
and gas leases. The selling entity had previously sold working
interests in these oil and gas leases totaling from 33% to 48%
depending on the property.
As part of the acquisition agreement, American Energy - Deckers
Prairie, Inc. agreed to purchase the working interests from the
individual holders for the amount of their original investment plus
interest at 7% from the date of their investment, evidenced by a
"Drilling Investor Note" to each investor, due and payable on September
15, 1995. Each working interest holder has the option to retain his
working interest or sell it to American Energy - Deckers Prairie, Inc.
At June 30, 1997, the Companies had been unable to satisfy this
obligation and the financial guaranty bond securing the payment of the
Drilling Investor Notes had not been enforced, although the Companies
intended to satisfy this obligation. Most of the obligation was settled
during the year ended June 30, 1998 by issuing 140,383 shares of common
stock valued at $325,278. Accordingly, the value of the acquisition of
these working interest has been included in the accompanying
consolidated financial statements as part of the cost of oil and gas
properties along with the corresponding remaining liability (See Note
3).
On April 6, 1995, Hycarbex entered into a concession agreement with and
was issued an exploration license by the President and the Federal
Government of the Islamic Republic of Pakistan. This agreement and
license relate to oil and gas property known as the "Jacobabad Block"
(Block 2768-4) or the Pakistan concession and entitles Hycarbex to a
95% working interest in the property. The exploration license was
originally issued for a period of three years which was subsequently
extended for an additional year. During the first year Hycarbex
expended the minimum required $26,000 for processing and interpreting
data already available. In the second year which was included in the
year ended June 30, 1997, Hycarbex performed the minimum seismic work,
evaluating and interpreting the data from the work performed. As part
of the agreement, Hycarbex was to drill one exploratory well prior to
April 1998 to an agreed upon depth. During May 1998, the Company
obtained preliminary results of its first Middle Indus Basin
exploratory well in Pakistan. The well was spudded during March 1998
and was drilled to total depth during May 1998. A second exploratory
well was drilled during the year ended June 30, 1999. This well was
subsequently plugged because of encountered downhole and mechanical
conditions short of the target depth. As a result, the well bore was
plugged and the drill site moved. A replacement well was spudded on
April 5, 1999 which also was plugged due to encountering a combination
of dangerous levels of hydrogen
sulfide gas and loss of circulation while drilling and testing the
well. The well was plugged to prevent possible further release of
dangerous gas. The Company does not believe, however, that these
results will affect the ultimate success of the exploration efforts.
The Company intends to pursue further plans for the drilling of another
exploratory well upon completion of geological and geophysical analysis
of the test results. Having completed its three years of work
requirements and initial license term, the Company, per the provisions
of the original exploration license, relinquished 20% of the acreage
originally held under the concession, thereby retaining approximately
one million acres for further exploration and development. The
relinquished acreage is not part of the potentially productive
structure to be evaluated by the Company on the Jacobabad concession.
Effective May 29, 1999, the Government of Pakistan granted an
additional six-month extension in the existing terms of the Jacobabad
Exploration License so as to enable the Company to drill a renewal well
with a commitment and obligation to expend an additional $1,100,000.
The Company was granted a second extension to November 28, 2000 to
drill the renewal well. The Company fulfilled this obligation by
drilling the Jacobabad 3 well which was finished in January of 2001.
Hycarbex is currently renegotiating terms of this Jacobabad license
agreement with the intent of allowing additional geologic and
geophysical work to be completed before additional future drilling
commitments are defined.
On May 15, 1996, an unrelated entity acquired an option to purchase a
1% overriding royalty interest in the Pakistan concession.
Consideration of $3,800 was paid and the option exists for the life of
the Pakistan concession. The purchase price of the 1% overriding
royalty interest is $100,000. This option had not been exercised as of
March 31, 2001. As part of compensation arrangements with key
management, the Company established a royalty pool consisting of a 1%
overriding royalty on the Pakistan concession upon discovery and
establishment of production.
The concession agreement also required Hycarbex to provide a bank
guaranty for $551,000 which was done by an unrelated surety company.
That surety company received common stock of the Company as
compensation for providing the bond.
In May 1997, the Companies entered into an agreement to acquire certain
oil and gas properties and equipment in the state of Texas for a total
of $1,000,000 from an unrelated party. $75,000 cash was paid with the
balance of $925,000 to be paid over a maximum of four years with a
minimum of $175,000 the first year and $250,000 per year thereafter
until paid in full (see Note 3). This liability may be paid during each
year in the form of $10,000 per drill site and certain royalty
payments. As of March 31, 2001, there was no liability remaining under
this obligation.
During the year ended June 30, 1997, the Companies received $800,000 as
a joint venture investment in certain of the Companies oil and gas
properties. In June 1997, the Companies entered into agreements
representing $500,000 of the joint venture investors to repurchase
their interests for a total of 250,000 shares of common stock and notes
payable totaling $389,000 (see Notes 6 and 3, respectively). During the
year ended June 30, 1998, the Companies acquired the remaining $300,000
joint venture interest for 150,000 shares of common stock (valued at
$1.50 per share) and a note payable of $121,564 with additional
payments made to that individual prior to the consummation of that
transaction.
On May 9, 2000, the Companies entered into an Asset and Stock Purchase
and Sale Agreement with Northern Lights Energy, Ltd. to sell the U.S.
oil, gas and mineral leases, all related equipment to operate such
leases, and 100% of the outstanding stock of the operating subsidiary,
The American Energy Operating Corp., for a total of $4,000,000. As of
June 30, 2000, a total of $750,000 of the $4,000,000 had been received
by the Company which has been recorded in the accompanying consolidated
balance sheet as a deposit on the sale of assets as of June 30, 2000.
The Company initiated litigation to cancel this agreement and even if
unsuccessful, is uncertain as to when or if the remaining $3,250,000
will be received, and accordingly, has not recorded the sale effective
March 31, 2001.
NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT
The following is a summary of notes payable and long-term debt as of
March 31, 2001 and June 30, 2000, respectively:
MARCH 31, 2001 JUNE 30, 2000
---------------- ----------------
(UNAUDITED)
Note payable bearing no interest; payable $175,000 the first
year and $250,000 annually thereafter until
paid in full; secured by certain oil and gas assets $ 0 $ 132,140
Original issue discount note payable with a face value of
$1,500,000 bearing no interest, due March 17, 2002, secured by
certain oil and gas
properties (see note below) 1,500,000 1,500,000
Notes payable to various individuals, non-interest
bearing, due on demand 0 610,000
Note payable to Company's President,
non-interest bearing, due on demand, unsecured 30,000 30,000
----------- -----------
7% notes payable, due September 15, 1995,
secured by working interest in oil and gas properties 38,117 38,117
----------- -----------
Total notes payable and long-term debt 1,568,117 2,310,257
Less: unamortized discount (280,000) (294,843)
----------- -----------
Net notes payable and long-term debt 1,288,117 2,015,414
Less: related party note (30,000) (30,000)
Less: current portion (38,117) (765,414)
----------- -----------
Long-Term Liabilities $ 1,220,000 $ 1,220,000
=========== ===========
In connection with the $1,500,000 note payable, the Company has the
right to call the loan at its face value of $1,500,000. When the
Company calls the note, the investor has 20 days to exercise the
conversion of the note into shares of common stock at $1.00 per share
or receive payment of funds. The Company originally agreed to arrange
third party escrow of 2,000,000 free-trading shares of common stock to
secure the Company's covenant to register the stock. If the shares were
not registered within 90 days, the Company further agreed to pay a
penalty of 3% of the face value of the note, in either common stock or
cash for each full month the Registration Statement is not declared
effective. Accordingly, the Company issued 583,659 shares of common
stock valued at $270,002 as a result of this penalty fee for the year
ended June 30, 2000, and an additional 560,570 shares for the nine
months ended March 31, 2001. The Company has filed a registration
statement which has not been declared effective.
The following are the scheduled annual payments of notes payable and
long-term debt:
YEAR ENDING JUNE 30,
----------------------
2001 $ 68,117
2002 1,220,000
2003 -
2004 -
2005 -
2006 and thereafter -
------------
$ 1,288,117
Discounts on non-interest bearing notes payable have been determined
using an imputed interest rate ranging from 10% to 15%. These discounts
have been reflected as reductions in notes payable and long-term debt
in the accompanying consolidated financial statements.
NOTE 4 - CAPITAL LEASE OBLIGATIONS
The Company entered into certain lease agreements during the years
ended June 30, 1998 and 1997 and nine months ended March 31, 2001
relating to office equipment and portable buildings used in the field
which have been accounted for as capital leases. These leases have
terms of 32 to 60 months with total monthly lease payments of $784.
The following are the scheduled annual payments on these capital
leases:
YEAR ENDING JUNE 30,
----------------------
2001 $ 6,760
2002 4,822
2003 3,256
2004 -
2005 -
----------
Total minimum lease commitments 14,838
Less: Executory costs (such as taxes and insurance)
included in capital lease payments (658)
----------
Net minimum lease payments 14,180
Less: amount representing interest (2,095)
----------
Total capital lease obligations 12,085
Less: current portion (3,214)
----------
Total Long-Term Capital Lease Obligations $ 8,871
==========
NOTE 5 - CONVERTIBLE VOTING PREFERRED STOCK
On September 22, 1994, the board of directors of the Company approved
the issuance of 2,074,521 shares of the authorized preferred stock of
the Company, to be issued in a series, to be known as the "Convertible
Voting Preferred Stock, $.025 Non-Cumulative Dividend". A corresponding
certificate of issuance was filed with the State of Nevada. Holders of
these shares are entitled to a noncumulative, preferential dividend of
$.025 per share per annum, when declared by the board of directors,
payable from the surplus, net profits or assets of the Company. At any
time after September 30, 1999, the conversion election expires and the
board of directors of the Company may elect to redeem this Convertible
Voting Preferred Stock at a redemption price of $0.50 per share. Each
share of this Convertible Voting Preferred Stock shall be convertible
into five shares of the common stock of the Company.
Under the conversion privileges of these shares, the holder may elect
to convert 20% of the Convertible Voting Preferred Stock prior to
September 30, 1995 and an additional 20% every year thereafter until
September 30, 1999. The right to convert terminated for shares not
exercised before September 30, 1999, which total 41,500. At December
31, 2000, the remaining 41,500 preferred shares are no longer
convertible. The Company has the right to redeem these shares for $0.50
per share. Each share of this Convertible Voting Preferred Stock shall
be entitled to one shareholder vote. These 2,074,521, shares were
issued pursuant to the acquisition by the Company of Simmons Oil
Company, Inc. and its subsidiaries. One share of Convertible Voting
Preferred Stock was issued for every four shares of common stock of
Simmons Oil Company, Inc.
During the years ended June 30, 2000, 1999 and 1998, holders of shares
of the Convertible Voting Preferred Stock elected to convert their
shares into common stock of the Company in accordance with the
conversion provisions. Accordingly, 60,496 shares of convertible voting
preferred stock were converted into 302,500 shares of the Company's
common stock in 2000, 433,467 shares of convertible voting preferred
stock were converted into 2,167,330 shares of the Company's common
stock in 1999 and 540,096 shares of convertible voting preferred stock
were converted into 2,700,485 shares of the Company's common stock in
1998 (See Note 6).
A total of 41,500 convertible voting preferred shares were not
converted.
During the year ended June 30, 2000, the Company issued 400,000 Series
F Convertible Preferred Shares for total proceeds of $400,000. These
400,000 preferred shares were later converted into 1,400,000 shares of
common stock at a conversion ratio of 3.5 common shares.
NOTE 6 - COMMON STOCK
During the year ended June 30, 2000, 60,496 shares of convertible
voting preferred stock were converted into 302,500 shares of common
stock, and 400,000 shares of Series F convertible preferred stock were
converted into 1,400,000 shares of common stock (see Note 5).
39,441 shares of common stock were issued in lieu of outstanding
accounts payable during the year ended June 30, 1999. These shares have
been valued at $3.51 per share or $138,464. In addition, 138,223 shares
of common stock were issued for services rendered. These shares have
been valued at $2.18 per share or $301,168.
During the year ended June 30, 2000, the Company issued 133,334 shares
of common stock at $0.75 per share for a total of $100,000. As
discussed in Note 3, the Company issued 583,659 shares of common stock
valued at $270,002 as a result of a penalty fee related to a late
Registration filing for certain shares of stock.
During the nine months ended March 31, 2001, the Company issued
16,168,094 shares of common stock at $0.30 per share for a total of
$4,846,269. As discussed in Note 3, the Company issued 560,570 shares
of common stock valued at $224,999 as a result of a penalty fee related
to a late Registration filing for certain shares of stock.
During the nine months ended March 31, 2001, the Company issued
3,965,304 shares of common stock to various entities at an average
price of $0.63 per share for the satisfaction of debt.
During the nine months ended March 31, 2001, the Company issued
2,207,500 shares of common stock to various entities at $0.80 per share
to retire outstanding warrants.
During the nine months ended March 31, 2001, the Company issued
5,400,000 shares of restricted common stock to officers and directors
of the Company at $0.46 per share.
NOTE 7 - COMMON STOCK WARRANTS
Prior to the year ended June 30, 2000, the Company had 16,030,000
outstanding warrants. In the year ended June 30, 2000, the Company
issued a total of 3,575,000 warrants at varying exercise prices and
expiration dates. 8,180,000 warrants expired unexercised, leaving a
remaining balance of 11,425,000 warrants outstanding as of September
30, 2000. Subsequent to September 30, 2000, the Company issued 556,529
warrants with an exercise prices of $0.36 per share related to
offering costs of the private placement. During the nine months ended
March 31, 2001, the Company issued 2,207,500 shares of common stock
and paid $13,000 in cash to retire 9,725,000 warrants. In addition,
1,450,000 held by officers and directors of the Company were returned
to the Company, leaving a balance of 150,000 warrants outstanding in
former or present management as of March 31, 2001 as summarized below:
NAME NUMBER OF SHARES EXPIRATION DATE EXERCISE PRICE
----- ---------------- --------------- --------------
Linda F. Gann 5,000 5/1/2005 $1.25
55,000 6/18/2005 $3.97
10,000 12/9/2005 $4.03
5,000 5/4/2006 $1.56
-----
Total 75,000
------
Eli Bebout 75,000 5/17/2006 $1.50
------
Total warrants outstanding as of March 31, 2001, including those
issued to former or present management, are 806,529.
NOTE 8 - INCOME TAXES
Through March 31, 2001, the Companies have sustained net operating
loss carryforwards totaling approximately $22,281,890 that may be
offset against future taxable income through 2020. No tax benefit has
been reported in the accompanying consolidated financial statements,
because the potential tax benefits of the net operating loss
carryforwards are offset by a valuation allowance of the same amount.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
As discussed in Note 2, the Companies defaulted on the payment of the
Drilling Investor Notes due and payable September 15, 1995 related to
the acquisition of oil and gas leases in Harris County, Texas.
Although these notes are secured by a financial guarantee bond, there
is no assurance that the bond can be enforced. The Companies intend to
settle these obligations, along with the related accrued interest. The
ultimate effect on the Companies and outcome of the satisfaction of
this obligation cannot be determined.
The Company leases office space in Simonton, Texas at a monthly cost
of $1,033 plus utilities. The lease expired during November 2000 at
which time the Company began leasing the space on a month-to-month
basis at $1,200 per month
The Companies have minimum lease and royalty obligations associated
with their oil and gas properties of $77,300 annually, see also Note
2.
During the year ended June 30, 1997, the Board of Directors authorized
the establishment of a Management Royalty Pool equal to 1% of the
revenues from domestic oil and gas production. The beneficiaries and
their ownership in this pool are subject to variance based upon
certain performance criterion.
A shareholder of the Company previously asserted a right to the
exercise (by the payment of money) of 800,000 warrants for common
stock at the exercise price of $1.50 per share. The Company disputed
this right and the parties ceased negotiations. If asserted
successfully in litigation, the potential claims for financial relief
would be attorneys fees and the loss, if any, resulting in the
difference between the stock value on the date of intended exercise
versus the stock price on the date the court permits such exercise.
Since the stock price on the date of the potential exercise of the
warrants is unknown the amount of the potential loss cannot currently
be determined.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to March 31, 2001, the Company converted 4,168,300 shares
of its common stock owned by officers of the Company to a convertible
subordinated promissory note in the amount of $1,094,290, bearing
annual interest at the rate of 6%. The principal balance of the note
is due ten years from the date of issuance, with applicable prepayment
premiums due to the holders of the note as summarized below:
8% of principal balance if payment occurs between the 2nd and
5th anniversary date,
5% of principal balance if payment occurs between the 6th and
8th anniversary date,
2% of principal balance if payment occurs thereafter
The promissory note is convertible in common shares of the Company at
a conversion rate of $0.43 per share, adjusted accordingly for any
stock splits or dividends effected by the Company subsequent to the
original issue date of the note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements in this document concerning the Company other than purely
historical information (collectively "Forward-Looking Statements") reflect our
current expectations which are based on our historical operating trends,
estimates, proved reserves and other information currently available to us. This
statement assume, among other things, (i) that no significant changes will occur
in the operating environment of our oil and gas properties, and (ii) that there
will be no material acquisition or divestitures beyond those specifically
mentioned. We caution that the Forward-Looking Statements are subject to all of
the risks and uncertainties incident to the acquisition, development, and
marketing of, and exploration for oil and gas reserves. These risks include, but
are not limited to, commodity price risk, environmental risk, drilling risk,
reserves operations, and production risks, regulatory risks, counterparty risk
and lack of capital resources. Many of these risks are described in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2000 filed with the
Securities and Exchange Commission in October 2000. We may make material
acquisitions or dispositions, enter into new or terminate existing oil and gas
sales or hedging contracts, or enter into financing transactions. None of these
can be predicted with any certainty and, accordingly, are not taken into
consideration in the Forward-Looking Statements made herein. For all of the
foregoing reasons, actual results may vary materially from the Forward-Looking
Statements and there is no assurance that the assumptions used are necessarily
the most likely.
SUMMARY OF BUSINESS AND RECENT ACTIVITIES
As of March 31, 2001, we were engaged in our principal activity of developmental
drilling of new wells
and reworking operations on existing wells situated on our Texas oil and gas
properties. Our wholly owned subsidiary, Hycarbex-American Energy, Inc.,
likewise holds an oil and gas exploration license near Jacobabad, Pakistan.
During this quarter we finished drilling of an exploration well in Pakistan
which was subsequently plugged and abandoned as non-commercial. (See "PAKISTAN
OPERATIONS")
Historically, we have financed all of our operations with loan proceeds and with
proceeds from the sale of privately placed securities. We currently have an
increasing revenue stream from the sale of oil produced from our Texas
properties, but we will need additional funds for continued development of both
our domestic and international properties until such development reaches a stage
where revenues from existing operations are sufficient to finance the
development of these properties. These additional funds could be derived from
future loans, sales of securities or other outside sources.
In May of 2000, we entered into an agreement with Northern Lights Energy, Ltd.
to sell all of the Texas oil and gas leases, equipment and the stock of its
operating subsidiary for four million dollars. After the end of the current
quarter, Northern Lights Energy, Ltd. elected to waive its purchase rights
associated with the agreement and to receive repayment of the unreimbursed
portion of the $750,000 advanced by Northern Lights Energy, Ltd. at the time of
the execution of the agreement. The agreement provides for the repayment out of
25% of monthly production until paid. (See. "PART II, ITEM 1, LEGAL PROCEEDINGS)
We have resumed efforts to sell these same Texas oil and gas leases. If a sale
is ultimately consummated, we intend to use certain of the sale proceeds for
development of the Pakistan concession, but the Company's sole source of
revenues from existing operations would terminate with the sale. Subsequent to
such a sale, we can fund our ongoing operations only by using a cash reserve
from the sale proceeds or funds derived from future loans, sales of securities
or other outside sources. (See " EVENTS AFFECTING CAPITAL RESOURCES AND MATERIAL
ASSETS", "TEXAS GULF COAST OPERATIONS" and "LEGAL PROCEEDINGS")
We use the full cost method of accounting for our oil and gas properties. Under
this method, all costs associated with the acquisition, exploration and
development of oil and gas properties are capitalized in a "full cost pool".
Costs included in the full cost pool are charged to operations as depreciation,
depletion and amortization using the units of production method based on the
ratio of current production to estimated proven reserves as defined by
regulations promulgated by the U.S. Securities and Exchange Commission. Gain or
loss on disposition of oil and gas properties is not recognized unless it would
materially alter the relationship between the capitalized costs and estimated
proved reserves. Disposition of properties are reflected in the full cost pool.
The full cost method of accounting limits the costs the Company may capitalize
by requiring the Company to recognize a valuation allowance to the extent that
capitalized costs of its oil and gas properties in its full cost pool, net of
accumulated depreciation, depletion and amortization and any related deferred
income taxes, exceed the future net revenues of proved oil and gas reserves plus
the lower of cost or estimated fair market value of non-evaluation properties,
net of federal income tax.
The contract to sell the Texas assets to Northern Lights Energy, Ltd. provided
for a purchase price of $4,000,000. As of June 30, 2000, as well as the date of
this report, we had received a total of $750,000 of the $4,000,000. As indicated
above, Northern Lights Energy, Ltd. elected to convert this advance of purchase
money to a loan after the end of the current quarter. Our financial statements
currently reflect $551,023 in capitalized Costs related to the Pakistan
concession.
TEXAS GULF COAST OPERATIONS
We currently own and operate a total of 108 existing wellbores in two producing
oil fields, the Blue Ridge
Field and the Boling Dome Field, each of which are within fifty (50) miles of
the Houston, Texas metropolitan area. Most of these existing wells were drilled
by other oil companies prior to our acquisition of the properties and most of
these wells were inactive at the time of such acquisition. During the three (3)
months ending March 31, 2001, no new drilling activity was undertaken by the
Company.
In addition to new developmental wells already drilled, we continued our efforts
to rework and reactivate certain of the existing inactive wells present on the
Texas leases at the time of acquisition. During the quarter ended December 31,
2000, an average of thirty (30) of our 107 wells were producing daily with
varying production ranging from 2 barrels per day to 50 barrels per day. A small
number of these producing wells flow without mechanical pumping but the majority
require mechanical pumping assistance. Both the number of producing wells and
the daily production from those wells remained stable throughout the quarter.
Quoted oil prices during the quarter for sales of oil by the Company during the
quarter averaged $27.32 per barrel.
During the quarter ended March 31, 2000, we initiated negotiations with
interested parties for the sale of the Texas oil and gas leases in order to
focus our exploration activities on our Pakistan concession and in order to
raise a portion of the working capital necessary to continue such activities.
During the final quarter of the fiscal year ending June 30, 2000, and after
consideration of the relative terms of a number of verbal and written offers to
purchase these assets, we entered into an agreement to sell for four million
dollars all of the Texas oil and gas leases, Texas-based equipment and the stock
of its operating subsidiary, The American Energy Operating Corp. to Northern
Lights Energy, Ltd. A sale of the Texas oil and gas leases would eliminate our
current source of operating revenues, as our previous exploration activities on
our Pakistan concession were unsuccessful. . We initiated litigation during the
quarter commencing October 1, 2000, to cancel the contract and we then began
preliminary efforts to market the oil and gas leases to alternative prospective
purchasers. A settlement of the litigation was reached during the current
quarter which was conditioned upon Canadian Venture Exchange, but the settlement
as structured was disapproved by the Canadian Venture Exchange. Northern Lights
Energy, Ltd. Voluntarily terminate its purchase rights after the end of the
current quarter and we then increased our marketing activities to alternative
purchasers. There can be no assurances that such marketing efforts will be
successful. Additionally, under the terms of the contract with Northern Lights
Energy, Ltd., the election not to purchase by the purchaser results in the
obligation under the purchase agreement to repay Northern Lights Energy, Ltd.
the $750,000 advanced by Northern Lights Energy, Ltd. at the time of the
execution of the contract. The repayment must be made out of twenty five percent
25% of the monthly production from the Texas oil and gas leases. At the end of
the current fiscal quarter the balance due on the $750,000 note was $573,014.
(See PART II, ITEM 1 "LEGAL PROCEEDINGS").
In the event that the Texas oil and gas leases are not sold in the near term, we
anticipate that our domestic fields will continue to experience a gradual
increase in average daily production as additional existing wells are
reactivated and new developmental wells are drilled. We believe that such
steadily increasing domestic production in an environment of favorable oil
prices would generate a portion of the operating capital necessary to maintain
our ongoing reactivation and development programs. However, if these oil and gas
leases are not sold, as anticipated, we believe that we must continue to raise
additional capital through outside sources in order for the reactivation and
development programs to progress, even if oil prices remain stable at a
favorable level, because several of the Texas leases require continuous
development at specified time intervals. Generally, the failure to comply with
these time sensitive development obligations, unless extended by contract, will
result in the forfeiture of the undeveloped portions of the particular lease.
(See "EVENTS AFFECTING CAPITAL RESOURCES AND MATERIAL ASSETS")
PAKISTAN OPERATIONS
In the initial five years in which Hycarbex-American Energy, Inc. has held the
Jacobabad concession in the Middle Indus Basin of central Pakistan, we have
expended in excess of $13.0 Million in acquisition, geological, seismic,
drilling and associated costs. We have commenced four exploratory wells and
drilled three of such wells to the target depth on the Jacobabad concession to
date without achieving a commercial discovery. We have encountered natural gas
shows in all four wells. We suspended operations on one well pending further
testing (Kharnak 1), plugged one well due to mechanical and downhole
difficulties while drilling (David 1), and plugged two wells as non-commercial
(David 1A and Jacobabad 3). The plugging and abandonment of the David 1A well in
the spring of 1999 triggered a requirement under the exploration license that a
replacement well be drilled. This commitment remains outstanding. Associated
with the replacement well commitment, we must maintain $1,100,000 on deposit in
an account held jointly with the Pakistan government, with these funds being
dedicated for the replacement well. At the end of the current fiscal quarter,
the balance in this account was $774,986. We intend to supplement this account
to the required minimum with funds received from the sale of the Texas
properties and/or future loans, sales of securities or other outside sources.
During the previous quarter, we spudded our fourth well on the Jacobabad
concession named the Jacobabad No. 3. This well was drilled in fulfillment of
lease renewal commitment terms of the exploration license. In January 2001
Jacobabad No.3 was plugged and abandoned as non-commercial. Jacobabad 3
penetrated 2 separate zones containing small amounts of hydrocarbon along with
hydrogen sulfide, carbon dioxide, and formation waters. Per terms of the
Jacobabad license agreement, at the time Jacobabad 3 was determined to be
non-commercial, we incurred another renewal well commitment to retain our
license. Without the specific guarantees in place to assure fulfillment of
renewal well commitments, the Concession Agreement with the Government of
Pakistan would expire. Although we do not have such required guarantees in
place, we are currently negotiating extension of the agreement with the
Government of Pakistan and are operating as though the agreement has been
extended. We are renegotiating terms of this license agreement with the intent
of allowing additional geologic and geophysical work to be completed before
future drilling commitments are defined. In the event that the Government of
Pakistan does not extend the license agreement, we would lose our rights to
explore and develop the property. We currently expect that the agreement will be
extended.
RESULTS OF OPERATIONS
The following discussion compares the financial results for the nine months
ended March 31, 2001 to the nine months ended March 31, 2000.
REVENUES FROM OIL SALES
In the quarter ended March 31, 2001, we incurred a net operating loss of
$5,623,886 (including dry hole expenses incurred in Pakistan of $5,587,891),
with oil and gas sales of $452,872 as compared to a net operating profit of
$218,055 on oil and gas sales of $507,965 in the prior fiscal year's quarter
ended March 31, 2000. During the quarter ending March 31, 2001, we sold 16,577
barrels of oil net to our interest. Our net barrels of sales generated $452,872
and reflect average daily sales of 184 barrels of oil per day ("BOPD"), net
after deducting landowner royalties.
COMPARISON TO PREVIOUS QUARTER ENDED MARCH 31, 2000
As compared with the prior quarter ending March 31, 2000 in the previous fiscal
year, we realized an eleven percent (11%) decrease in revenues from oil sales on
average net oil prices per barrel of approximately the same amount. This
reduction is due primarily to operating practices employed by Northern Lights
Ltd during this fiscal quarter. Per terms of the executed purchase and sales
agreement, operatorship of the Texas properties transferred to the purchaser for
the interim period between execution of the purchase and sale agreement and
completion of the transaction. Following the decision by Northern Lights to not
purchase the properties subsequent to the end of the quarter, we have regained
control of operations, and production rates are increasing and expected to
continue to increase.
NET INCOME
Including other income, foreign and domestic administrative expenses, and
interest, we reported a net loss of $5,906,496 in the quarter ended March 31,
2001, versus a net profit of $216,318 in the prior fiscal year's quarter ended
March 31, 2000. Net operating income (loss) decreased by $6,122,814 from the
prior year's comparative quarter, primarily as a result of dry hole costs
incurred in the Pakistan operations.
TOTAL ASSETS / SHAREHOLDER'S EQUITY
In the quarter ended March 31, 2001, our Total Assets equaled $18,507,723, an
increase of $858,145 over the year ended June 30, 2000, or a net increase of 5%.
Net Shareholders Equity increased to $14,367,493 as of March 31, 2001, from
$12,955,628 as of June 30, 2000, or a net increase of 9%.
EVENTS AFFECTING CAPITAL RESOURCES AND MATERIAL ASSETS
We incurred the obligation to drill a replacement well when we plugged and
abandoned our David #1A well in the Spring of 1999 after encountering carbon
dioxide and dangerous levels of hydrogen sulfide gas. Other general requirements
of the exploration license include the requirement that a minimum of $1,100,000
be maintained on deposit in our Pakistan operating account toward the
anticipated costs associated with the drilling of the next required well. If we
sell our Texas oil and gas leases, the proceeds would be paid in cash to the
Company and would be applied to discharge the existing liens against these
assets, operating expenses and the Pakistan deposit and drilling requirements.
Currently, we do not have the required $1,100,000 on deposit in Pakistan.
Under the applicable local rules pertaining to petroleum concessions, the
Government of Pakistan can revoke the exploration license for any material
breach which is not cured within sixty days of written notice of noncompliance.
Our subsidiary, Hycarbex, has not received a notice of default as of the date of
this report, and do not expect to receive such a notice. A failure to make the
required deposits after a default notice from the Pakistan Government could
result in a forfeiture of the exploration license and a loss of the concession.
Upon any revocation of the license, Hycarbex could remain liable to the Pakistan
Government for liquidated damages equal to the required deposit amounts. We are
currently renegotiating terms of license agreements with the intent of allowing
for additional geologic and geophysical work to be completed before future
drilling commitments, and the financial guarantees associated with drilling
commitments, are fully defined.
Our cash position is critical given the requirement to deposit funds to cover
the cost of Pakistan commitments, as well as future development requirements
under certain of our Texas oil and gas leases if those leases are not sold in
the near future as anticipated. We intend to continue to explore and pursue all
available sources of working capital through potential loans, sales of
securities, sales of assets, joint venture affiliations, and other transactions
in order to meet our anticipated near term needs. In conjunction with these
efforts, we have retained an investment banking firm to assist in these efforts.
We cannot give assurance that these efforts will continue to prove successful.
In the event that additional capital raising efforts by the Company are
unsuccessful, the likely effects would be the forfeiture of the Pakistan
concession. If the Texas oil and gas leases are not sold, the likely result
would be a slowdown or postponement of scheduled reactivation and development
activities on those Texas properties.
The book value of our Total Assets is currently at $14,367,493, based upon the
full cost method of accounting for our oil and gas properties whereby all costs
associated with the acquisition, exploration and development of the properties
are capitalized in a "full cost pool". (See "SUMMARY OF BUSINESS AND RECENT
ACTIVITIES" above). The portion of these Total Assets capitalized in connection
with the Pakistan concession is $551,053. The book value of an oil and gas
property which is calculated using the full cost method of accounting does not
necessarily approximate the fair market value of the particular property. The
fair market value approach is generally determined by the price a willing
purchaser will pay for the property. Many factors can affect the market value,
including the recoupment period for the investment based upon the particular
property's income generating potential over a very limited in not short-term
period. Book value, on the other hand, will generally incorporate as a part of
the calculation the long-term income based upon development of the proven
reserves.
We incurred certain long term convertible debt in the amount of $1,500,000 in
the quarter ended September 30, 1999, which debt is convertible at the option of
the holder at the rate of one Common share for each one dollar of principal
converted. A contractual provision within the lending documents required the
Company to initiate a registration with the Securities & Exchange Commission of
the underlying Common shares by December 16, 1999. We filed a registration
statement on Form S-3 during the quarter ended December 31, 2000, and until it
is declared effective, we will incur a financial penalty of 3% (i.e. $45,000)
per month beginning January 20, 2000, and continuing until such time that the
registration is effective. We have elected to pay the penalty sum in common
stock as permitted in the lending documents. We are incurring similar 3% per
month stock penalties for late registration in connection with the private
placement of common stock to certain shareholders in the first fiscal quarter of
the current year.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter, we announced the settlement of our pending suit against
Northern Lights Energy, Ltd. for the purpose of canceling Northern Lights' right
to purchase our Texas-based assets under a May 9, 2000 agreement. The settlement
documents, which were conditioned on the approval of the Canadian Venture
Exchange, provided for delivery of the $4,000,000.00 purchase price in three
installments and further provided that upon the failure to pay any of the
installments, Northern Lights would automatically forfeit its purchase rights
and return to the status of a lender as to the $750,000.00 advance made by
Northern Lights upon execution of the May 9, 2000 agreement. Under that
agreement, the $750,000.000 advance was to be repaid to Northern Lights out of
twenty-five percent (25%) of our monthly production from the Texas oil and gas
leases in the event that Northern Lights elected not to consummate the purchase
of assets for any reason.
After submission of the signed settlement documents to the Canadian Venture
Exchange for approval, and after the end of the current fiscal quarter, the
Exchange disapproved the structure of the transaction because a potential
failure by Northern Lights to meet an installment obligation under the
settlement documents would have resulted in automatic termination of all
purchase rights and forfeiture of sums paid by Northern Lights under any prior
installment. A representative from the Exchange advised our management that the
Exchange's current published policies require a demonstration that any
purchasing entity has the necessary funds to complete the transaction and to
meet any installments arising in the first six months of an installment
purchase.
Based upon this failure to obtain Exchange approval, Northern Lights notified
American Energy of its decision to waive any purchase rights and to assume the
status of a lender under the May 9, 2000 agreement. This notification prompted
management to increase its efforts to secure an alternative purchaser for the
Texas-based assets, and such efforts are ongoing. The lawsuit shall remain in
place in order to resolve American Energy's remaining claims pertaining to
accounting issues, attorneys' fees and potential damage claims for the period of
Northern Lights' physical possession and operation of the leases and equipment.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
A summary of the significant adjustments to the outstanding securities of the
Company in the quarter ending March 31, 2001, is provided below:
COMMON STOCK
A net increase of 4,670,759 shares of Common Stock occurred during the quarter,
thereby increasing the total number of shares of outstanding Common Stock as of
March 31, 2001 to 63,465,565 shares in the following manner:
A total of 4,160,245 Common shares were issued privately place with investors at
$0.30 per share.
A total of 165,514 Common shares were issued as "penalty" shares due to
tardiness in effecting registration of the investors shares and convertible
securities purchased in September of 1999.
A total of 345,000 Common shares were issued upon surrender of outstanding
warrants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITIES HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (249.308 OF THIS CHAPTER)
(a) Exhibits
The Consolidated Financial Statements dated March 31, 2001 and 2000
(unaudited), and June 30, 2000 (Audited) are appended hereto and
expressly made a part hereof as Exhibit A.
(b) Reports on Form 8-K
None
SIGNATURES
THE AMERICAN ENERGY GROUP, LTD.
05/18/2001 C/V
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Charles Valceschini, President
05/18/2001 L/F/G
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Linda F. Gann, Secretary