SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended
December 31, 2001
Commission File #0-30503
PANGEA PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO
(State or other jurisdiction of incorporation or organization)
76-0635938
(IRS Employer Identification Number)
5090 Richmond Avenue, #425, Houston, Texas 77056
(Address of principal executive offices)(Zip Code)
(910) 457-1121
(Registrant's telephone no., including area code)
6776 Southwest Freeway, Suite 620, Houston, Texas 77074
(Former name, former address and former fiscal year, if changed since last
report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Revenues for year ended December 31, 2001: $34,251
Aggregate market value of the voting common stock held by non-affiliates of the
registrant as of April 10, 2002, was: $1,135,828
Number of shares of the registrant's common stock outstanding as of April 10,
2002 was: 52,186,900.
4/15/2002 Pangea 2001 10-K Page 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL INFORMATION ABOUT PANGEA
Pangea Petroleum Corporation is a publicly traded company listed on the OTC
Electronic Bulletin Board under the symbol "PAPO." We are an independent energy
company with a business plan focused on exploration and drilling as well as the
purchase, re-engineering, exploitation and development of proven oil and gas
properties as a core business activity. Pangea has a subsidiary, Mass Energy.
The Company structure will remain small through the use of carefully selected
consultants, contractors and service companies.
Pangea's business objective is to use capital and established proven technology
to create value by generating production from established reserves that are of
little interest to the major companies in the industry. Initially, the Company
will focus on mature petroleum provinces in the United States that have adequate
production and distribution infrastructures. In most cases, the Company will
invest in projects to a sufficient degree to maintain decision-making control
while leaving routine operating responsibility in the hands of competent
partners and/or contractors. Producing properties may be resold after enhanced
production is established as appropriate to establish and maintain maximum asset
value.
PANGEA PETROLEUM ORGANIZATION.
We are a Colorado corporation incorporated on March 11, 1997 under the name Zip
Top, Inc. On December 11, 1998, we changed our name to Pangea Petroleum
Corporation. Until our acquisition of Mass Energy, Inc. in October 2000, we
operated as a development stage company
BUSINESS STRATEGY
Our business strategy contemplates exploration and drilling as well as the
purchase, re-engineering, exploitation and development of proved oil and gas
properties as a core business activity. Our strategy will continue to include
exploration and development drilling programs designed to use under-balanced
horizontal drilling technologies and to use three dimensional ("3-D") seismic
technology with comprehensive integration of subsurface control, production,
engineering, and other data, as available, as a means of reducing risks.
REVENUE MODEL
Revenue potential and asset enhancement will be the guiding principal for all
our investments. Projects will be selected and developed in a manner that will
minimize capital required and maximize the utilization of existing production
and collection infrastructure and geologic data. We will try to minimize risk by
producing from known reserves and other reserves made available by work-overs
and other established techniques. Revenue streams from product sales will be
enhanced by the careful selection and priorization of projects.
4/15/2002 Pangea 2001 10-K Page 3
The key financial assumption in our business plan is that a significant number
of attractive energy investments will continue to be available for purchase and
appropriate technology will be available through service companies and
consultants to develop these properties. The planned mix of investments will
support a predictable, growing revenue stream from product sales and augmented
by income from the sale of enhanced productive properties.
Pangea will create value in three ways. First of all, we will develop a market
leading position in the identification and exploitation of under-producing oil
and gas reserves in established energy provinces such as the State of Texas.
Using a judicial mix of current, proven technology and capital, Pangea will
optimize production from established reserves. First-rate service companies that
have been selected from an approved group of merit-based companies will
implement approved projects. Revenue streams will be maximized by carefully
marketing the products through a combination of spot and contract sales and in
some cases product sales will be hedged.
The second major thrust for value creation will be the enhanced asset value
realized from the development of the under-utilized reserves acquired by
purchase. These reserves can
frequently be produced for a number of years and then re-sold in the market
place for greater value because of enhanced production and timing.
The final thrust will be the formation of strategic alliances and partnerships
that will enable Pangea to play a greater role in the development of older
reserves than it could achieve on its own. These partnerships might take the
form of jointly owned reserves, production sharing agreements with service
companies in return for production guarantees, or some combination of these and
other shared business arrangements. Pangea's organization will fully utilize
strategic marketing to fully implement its business plan. We will select a
strategic marketing consultant to guide us through this process. Pangea intends
to become a significant participant in select market niches in the energy
industry. The niches include the development of under producing oil and natural
gas reserves with capital and technology, the resale of improved and re-packaged
producing properties and participation in the final production stage and
disposition of select offshore projects. We will create value for our
shareholders by leading the market in our niches and maintaining a strong
financial base.
RISK FACTORS
Going Concern Risk
- ------------------
We have had and could have losses, deficits and deficiencies in liquidity, which
could impair our ability to continue as a going concern.
4/15/2002 Pangea 2001 10-K Page 4
In Note #2 to our consolidated financial statements, our independent auditors
have indicated that certain factors raise substantial doubt about our ability to
continue as a going concern. Since its inception, the Company has suffered
recurring losses from operations and has been dependent on existing stockholders
and new investors to provide the cash resources to sustain its operations.
During the years ended December 31, 2001, 2000 and 1999, the Company reported
net losses and negative cash flows from operations as follows:
2001 2000 1999
------------ ------------ ----------
Net loss $(9,000,347) $(6,502,646) $(659,769)
Negative cash flows from operations $ (396,624) $(1,573,624) $(519,222)
The Company's continuing negative operating results have produced a working
capital deficit of $(2,051,528) at December 31, 2001 and have caused the Company
to become severely delinquent on various accounts payable. Vendors have
initiated legal actions against Mass Energy, Inc. to force payment of past due
accounts, but Mass Energy, Inc. lacks the cash resources to make such payments.
Accordingly, the results of such legal actions cannot be predicted. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
The Company's strategic plan for dealing with its cash flow problems is
currently being developed, but may include additional private placements of the
Company's common stock, the abandonment of unprofitable projects and the
exchange of common stock for settlement of vendor accounts. There can be no
assurance that any of the plans developed by the Company will produce cash flows
sufficient to overcome current liquidity problems.
The Company's long-term viability as a going concern is dependent on certain key
factors, as follows:
- The Company's ability to obtain adequate sources of outside financing
to convince vendors to drop legal actions against the Company and to
allow the Company to continue forward with current exploration
efforts.
- The Company's ability to locate, prove and produce from economically
viable oil and gas reserves.
- The Company's ability to ultimately achieve adequate profitability and
cash flows to sustain continuing operations.
IMPLEMENTATION OF BUSINESS STRATEGY DEPENDENT ON ADDITIONAL FINANCING
We must obtain outside financing to fund the expansion of our operations and to
meet our obligations as they become due. Any additional debt or equity financing
may be dilutive to the interests of our stockholders. Such outside financing
must be provided from the sale of equity securities, borrowing, or other sources
4/15/2002 Pangea 2001 10-K Page 5
of third party financing. Further, the sale of equity securities would
substantially dilute our existing stockholders' interests, and borrowings from
third parties could result in our assets being pledged as collateral. Loan
terms, which would increase our debt service requirements, could restrict our
operations. There is no assurance that we can obtain financing on favorable
terms.
INDUSTRY
The petroleum industry is a global industry that is fundamental to all economic
activity. It is composed of the down stream sector (refining, marketing,
products and derivatives) and the upstream sector that is focused on finding and
producing crude oil and natural gas. Oil and natural gas are commodities that
are found throughout the world and they have been produced in increasing
quantities since the mid 19th century. The exploration, production and
transportation of these materials in the modern era generate an enormous
appetite for capital because quantities sufficient to fuel the world's economic
machine are rapidly becoming more difficult to find and expensive to produce.
Consequently, a few global corporations and state energy companies dominate the
industry. These companies tend to concentrate their investments on very large
prospects and to quickly abandon less productive, older reserves.
The production technology in the petroleum industry has improved tremendously in
recent years, however commercial quantities of oil and gas are frequently left
in place when fields are abandoned. This fact is particularly true in older
reservoirs that were abandoned before modern technologies were available.
Additionally, the economic level of interest varies with company size. A small
company such as Pangea is frequently willing to devote resources to a field that
is not of interest to a major oil and gas company.
Mature energy provinces such as the United States have many productive fields
with production and collection infrastructure in place that can be purchased.
The infrastructure represents a significant required investment if production is
to continue. These fields offer investment potential for those companies willing
to commit capital and appropriate technology. The technology is readily
available from consultants, service companies, and other groups established to
support the petroleum production sector.
This plan will target the petroleum niche composed of fields with established
reserves that require capital and/or technology in order to enhance or restore
production.
ABOUT MASS ENERGY
Mass Energy, Inc. is a wholly owned subsidiary since October 2000. Mass Energy
is a Texas corporation organized on November 24, 1997. Mass Energy currently has
no real operations. While their business strategy was focused on the
exploration and drilling, they incurred significant debt in drilling of one
well. There is currently sufficient money to sustain them into the first
4/15/2002 Pangea 2001 10-K Page 6
quarter of 2002; however, Mass Energy will not have money to develop further
projects without a substantial capital infusion. Since Mass Energy sold the
majority of their assets in December 2001, it is not anticipated that they will
be able to obtain additional working capital or to continue meeting their debt
obligations.
M&R Exploration Company and Mass Energy, Inc., both Texas business corporations,
merged effective November 1, 1997. The plan of merger was adopted in accordance
with the Texas Business Corporations Act. Under the terms of the merger, M&R
Exploration Company was the surviving corporation. The plan of merger provided
for the change of the corporate name to Mass Energy, Inc.
In 2001, Mass Energy drilled on leases in Starr and Jackson, County, Texas.
Drilling initially produced results on the Jackson County, Texas lease that
proved to be uneconomical to continue production. Substantial debt was incurred
in the drilling of this lease and there are currently outstanding liens on the
well totaling approximately $824,946.59. Additionally several lawsuits have been
filed against Mass Energy for payment of debts incurred in the drilling of this
well. These lawsuits assert claims which total approximately $479,672.00.
In December 2001, Mass Energy sold their interest in leases in Jackson County,
Texas and Starr County, Texas. Mass Energy retained a back-in working interest
in both of these properties. Additionally, the lease in Shelby County, Texas
was sold by Mass Energy.
Currently, Mass Energy has no operations nor do they intend to start drilling on
any new prospects in the foreseeable future. The Company is presently
evaluating various alternatives in response to the litigation and is considering
various alternatives with respect to Mass Energy.
JOINT OPERATIONS WITH OTHERS; NON-OPERATOR STATUS
We own less than 100% of the working interest in our oil and gas holdings.
Operations are likely to be conducted jointly with other working interest
owners. Joint operating arrangements are customary in the oil and gas industry
and are generally conducted pursuant to a joint operating agreement whereby a
single working interest owner is designated the operator. We could possibly be a
non-operating working interest owner in other wells in the future. For
properties where we own less than 50% of the working interest, drilling and
operating decisions may not be entirely within our control. If we disagree with
the decision of a majority of working interest owners, we may be required, among
other things, to postpone the proposed activity, relinquish or farm-out its
interest or decline to participate. If we decline to participate, we might be
forced to relinquish our interest or may be subject to certain non- consent
penalties, as provided in the applicable operating agreement. Such penalties
typically allow participating working interest owners to recover from the
proceeds of production, if any, an amount equal to 200%-500% of the
non-participating working interest owner's share of the cost of such operations.
4/15/2002 Pangea 2001 10-K Page 7
Under most operating agreements, the operator is given direct and full control
over all operations on the property and is obligated to conduct operations in a
workman-like manner; however the operator is usually not liable to the working
interest owners for losses sustained or for liabilities incurred, except those
resulting from its own gross negligence or willful misconduct. Each working
interest owner is generally liable for its share of the costs of developing and
operating jointly owned properties. The operator is required to pay the expenses
of developing and operating the property and will invoice working interest
owners for their proportionate share of such costs. In instances where we are a
non-operating working interest owner, we may have a limited ability to exercise
control over operations and the associated costs of such operations. The success
of our investment in such non-operated activities may, therefore, be dependent
upon a number of facts that are outside of our direct control.
Under most operating agreements and the laws of certain states, operators of oil
and gas properties may be granted liens on the working interests of other
non-operating owners in the well to secure the payment of amounts due to the
operator. The bankruptcy or failure of the operator or other working interest
owners to pay vendors who have supplied goods or services applicable to wells
could result in filing of mechanics' and materialmens' liens which would
encumber the well and the interests of all joint owners. At this time, we do not
have any joint operating agreements. However, we may in the future conduct
operations jointly with other working interest owners pursuant to a joint
operating agreement whereby a single working interest owner is designated the
operator.
MARKETS AND CUSTOMERS
The revenue generated by our operations are highly dependent upon the prices of,
and demand for crude oil and natural gas. Historically, the markets for crude
oil and natural gas have been volatile and are likely to continue to be volatile
in the future. The prices received by the Company for its crude oil and natural
gas production and the level of such production are subject to wide fluctuations
and depend on numerous factors beyond our control including seasonality, the
condition of the United States economy (particularly the manufacturing sector),
foreign imports, political conditions in other oil-producing and natural
gas-producing countries, the actions of the Organization of Petroleum Exporting
Countries and domestic regulation, legislation and policies. Decreases in the
prices of crude oil and natural gas could have an adverse effect on the carrying
value of any proved reserves or revenue from operations in the future.
COMPETITION
We operate in a highly competitive environment. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas properties. The principal competitive factors in the acquisition of
such undeveloped crude oil and natural gas properties include the staff and data
necessary to identify, investigate and purchase such properties, and the
financial resources necessary to acquire and develop such properties. We compete
with major and independent crude oil and natural gas companies for properties
4/15/2002 Pangea 2001 10-K Page 8
and the equipment and labor required to develop and operate such properties.
Many of these competitors have financial and other resources substantially
greater than ours.
Our principal competitors include major integrated oil companies and their
marketing affiliates and national and local gas gatherers, brokers, marketers
and distributors of varying sizes, financial resources and experience. Certain
competitors, such as major crude oil and natural gas companies, have capital
resources and control supplies of natural gas substantially greater than the
Company. Smaller local distributors may enjoy a marketing advantage in their
immediate service areas. We compete against other companies in our natural gas
processing business both for supplies of natural gas and for customers to which
we sell our products. Competition for natural gas supplies is based primarily on
location of natural gas gathering facilities and natural gas gathering plants,
operating efficiency and reliability and ability to obtain a satisfactory price
for products recovered. Competition for customers is based primarily on price
and delivery capabilities.
REGULATORY MATTERS
Our operations are affected from time to time in varying degrees by political
developments and federal, state, provincial and local laws and regulations. In
particular, oil and gas production operations and economics are, or in the past
have been, affected by price controls, taxes, conservation, safety,
environmental, and other laws relating to the petroleum industry, by changes in
such laws and by constantly changing administrative regulations.
PRICE REGULATIONS
In the recent past, maximum selling prices for certain categories of crude oil,
natural gas, condensate and NGLs in the United States were subject to federal
regulation. In 1981, all federal price controls over sales of crude oil,
condensate and NGLs were lifted. In 1993, the Congress deregulated natural gas
prices for all "first sales" of natural gas. As a result, all sales of our
United States produced crude oil, natural gas, condensate and NGLs may be sold
at market prices, unless otherwise committed by contract.
STATE AND OTHER REGULATION
All of the jurisdictions in which we lease or own producing crude oil and
natural gas properties have statutory provisions regulating the exploration for
and production of crude oil and natural gas, including provisions requiring
permits for the drilling of wells and maintaining bonding requirements in order
to drill or operate wells and provisions relating to the location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled and the plugging and abandoning of
wells. Our operations are also subject to various conservation laws and
regulations. These include the regulation of the size of drilling and spacing
units or proration units and the density of wells that may be drilled and the
unitization or pooling of crude oil and natural gas properties. In this regard,
some states and provinces allow the forced pooling or integration of tracts to
facilitate exploration while other states and provinces rely on voluntary
pooling of lands and leases. In addition, state and provincial conservation laws
4/15/2002 Pangea 2001 10-K Page 9
establish maximum rates of production from crude oil and natural gas wells,
generally prohibit the venting or flaring of natural gas and impose certain
requirements regarding the ratability of production. Some states, such as Texas
and Oklahoma, have, in recent years, reviewed and substantially revised methods
previously used to make monthly determinations of allowable rates of production
from fields and individual wells. The effect of these regulations is to limit
the amounts of crude oil and natural gas we can produce from its wells, and to
limit the number of wells or the location at which we can drill.
State and provincial regulation of gathering facilities generally includes
various safety, environmental, and in some circumstances, non-discriminatory
take requirements, but does not generally entail rate regulation. In the United
States, natural gas gathering has received greater regulatory scrutiny at both
the state and federal levels in the wake of the interstate pipeline
restructuring under Order 636. For example, on August 19, 1997, the Texas
Railroad Commission enacted a Natural Gas Transportation Standards and Code of
Conduct to provide regulatory support for the State's more active review of
rates, services and practices associated with the gathering and transportation
of gas by an entity that provides such services to others for a fee, in order to
prohibit such entities from unduly discriminating in favor of their affiliates.
In the event we conduct operations on federal or Indian oil and gas leases, such
operations must comply with numerous regulatory restrictions, including various
non-discrimination statutes, and certain of such operations must be conducted
pursuant to certain on-site security regulations and other permits issued by
various federal agencies. In addition, in the United States, the Minerals
Management Service ("MMS") has recently issued a final rule to clarify the types
of costs that are deductible transportation costs for purposes of royalty
valuation of production sold off the lease. In particular, MMS will not allow
deduction of costs associated with marketer fees, cash out and other pipeline
imbalance penalties, or long-term storage fees. Further, the MMS has been
engaged in a three-year process of promulgating new rules and procedures for
determining the value of oil produced from federal lands for purposes of
calculating royalties owed to the government. The oil and gas industry as a
whole has resisted the proposed rules under an assumption that royalty burdens
will substantially increase. We cannot predict what, if any, effect any new rule
will have on its operations.
ENVIRONMENTAL MATTERS
Our operations are subject to numerous federal, state, provincial and local laws
and regulations controlling the generation, use, storage, and discharge of
materials into the environment or otherwise relating to the protection of the
environment. These laws and regulations may require the acquisition of a permit
or other authorization before construction or drilling commences; restrict the
types, quantities, and concentrations of various substances that can be released
into the environment in connection with drilling, production, and gas processing
activities; suspend, limit or prohibit construction, drilling and other
activities in certain lands lying within wilderness, wetlands, and other
protected areas; require remedial measures to mitigate pollution from historical
and on-going operations such as use of pits and plugging of abandoned wells;
4/15/2002 Pangea 2001 10-K Page 10
restrict injection of liquids into subsurface strata that may contaminate
groundwater; and impose substantial liabilities for pollution resulting from our
operations. Environmental permits required for our operations may be subject to
revocation, modification, and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations and
permits, and violations are subject to injunction, civil fines, and even
criminal penalties. We believe that it is in substantial compliance with current
environmental laws and regulations, and that we will not be required to make
material capital expenditures to comply with existing laws. Nevertheless,
changes in existing environmental laws and regulations or interpretations
thereof could have a significant impact on us as well as the oil and gas
industry in general, and thus we are unable to predict the ultimate cost and
effects of future changes in environmental laws and regulations.
In the United States, the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as "Superfund," and comparable state
statutes impose strict, joint, and several liability on certain classes of
persons who are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a disposal site or sites where a release occurred and companies that generated,
disposed or arranged for the disposal of the hazardous substances released at
the site. Under CERCLA such persons or companies may be retroactively liable for
the costs of cleaning up the hazardous substances that have been released into
the environment and for damages to natural resources, and it is common for
neighboring land owners and other third parties to file claims for personal
injury, property damage, and recovery of response costs allegedly caused by the
hazardous substances released into the environment. The Resource Conservation
and Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize imposition of substantial
civil and criminal penalties for failing to prevent surface and subsurface
pollution, as well as to control the generation, transportation, treatment,
storage and disposal of hazardous waste generated by oil and gas operations.
Although CERCLA currently contains a "petroleum exclusion" from the definition
of "hazardous substance," state laws affecting our operations impose cleanup
liability relating to petroleum and petroleum related products, including crude
oil cleanups. In addition, although RCRA regulations currently classify certain
oilfield wastes which are uniquely associated with field operations as "non-
hazardous," such exploration, development and production wastes could be
reclassified by regulation as hazardous wastes thereby administratively making
such wastes subject to more stringent handling and disposal requirements. We
currently own or lease properties that for many years have been used for the
exploration and production of oil and gas. Although we utilize standard industry
operating and disposal practices, hydrocarbons or other wastes may be disposed
of or released on or under the properties owned or leased by us or on or under
other locations where such wastes have been taken for disposal. In addition,
many of these properties have been operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes was not under our control.
These properties and the wastes disposed thereon may be subject to CERCLA, RCRA,
and analogous state laws. Our operations are also impacted by regulations
governing the disposal of naturally occurring radioactive materials ("NORM").
4/15/2002 Pangea 2001 10-K Page 11
The Company must comply with the Clean Air Act and comparable state statutes
which prohibit the emissions of air contaminants, although a majority of our
activities are exempted under a standard exemption. Moreover, owners, lessees
and operators of oil and gas properties are also subject to increasing civil
liability brought by surface owners and adjoining property owners. Such claims
are predicated on the damage to or contamination of land resources occasioned by
drilling and production operations and the products derived from them, and are
usually causes of action based on negligence, trespass, nuisance, strict
liability and fraud.
United States federal regulations also require certain owners and operators of
facilities that store or otherwise handle oil to prepare and implement spill
prevention, control and countermeasure plans and spill response plans relating
to possible discharge of oil into surface waters. The federal Oil Pollution Act
("OPA") contains numerous requirements relating to prevention of, reporting of,
and response to oil spills into waters of the United States. For facilities that
may affect state waters, OPA requires an operator to demonstrate $10 million in
financial responsibility. State laws mandate crude oil cleanup programs with
respect to contaminated soil.
We are not currently involved in any administrative, judicial or legal
proceedings arising under domestic or foreign federal, state, or local
environmental protection laws and regulations, or under federal or state common
law, which would have a material adverse effect on our financial position or
results of operations. Moreover, we maintain insurance against costs of clean-up
operations, but it is not fully insured against all such risks. A serious
incident of pollution may, as it has in the past, also result in the suspension
or cessation of operations in the affected area.
TITLE TO PROPERTIES
As is customary in the crude oil and natural gas industry, we make only a
cursory review of title to undeveloped crude oil and natural gas leases at the
time they are acquired by us. However, before drilling commences, we require a
thorough title search to be conducted, and any material defects in title are
remedied prior to the time actual drilling of a well begins. To the extent title
opinions or other investigations reflect title defects, we, rather than the
seller of the undeveloped property, is typically obligated to cure any title
defect at its expense. If we were unable to remedy or cure any title defect of a
nature such that it would not be prudent to commence drilling operations on the
property, we could suffer a loss of its entire investment in the property. We
believe that we have good title to our oil and gas leases.
STRATEGIC ALLIANCE WITH PARADIGM ADVANCED TECHNOLOGIES
In the summer of 2000, Pangea entered into a strategic alliance with Paradigm
Advanced Technologies to jointly operate Worldlink USA, LLC, a development stage
company (that we previously owned) that owns and licenses video streaming
technology and a library of concerts previously broadcast over the Internet.
Paradigm is a development stage company engaged in the business of developing,
4/15/2002 Pangea 2001 10-K Page 12
marketing, and selling digital image and interactive global positioning system
tracking technology.
RECENT FINANCING
In December 2000, January 2001 and February 2001, we entered into certain
Securities Purchase Agreements with Generation Capital Associates, STL Capital
Partners, LLC Greenwood Partners, L.P. and The Apmont Group, Inc. The terms of
the securities purchase agreements are summarized below.
Purchaser Purchase Price Maximum Amount Maximum Amount of
Of Shares Warrants (1)(2)
- ------------------- ----------------- --------------- ---------------------------
Generation Capital
Associates $600,000 1,600,000 3,450,000 A Warrants (3)
3,450,000 B Warrants (3)
STL Capital
Partners, LLC $250,000 666,667 1,333,333 A Warrants
1,333,333 B Warrants
Greenwood
Partners, L.P. $200,000 533,333 1,066,666 A Warrants
1,066,666 B Warrants
The Apmont
Group, Inc. $250,000 550,000 (7) 1,100,000 C Warrants (5) (7)
1,100,000 D Warrants (6) (7)
Totals $1,300,000 3,350,000 5,924,999 A Warrants (4)
5,924,999 B Warrants (4)
1,100,000 C Warrants (5) (7)
1,100,000 D Warrants (6) (7)
<FN>
(1) Upon exercise, each A Warrant is convertible into one share of our Common
Stock and one B Warrant. The A Warrants and B Warrants are both exercisable for
5 years commencing December 29, 2000.
(2) Upon exercise, each B Warrant is convertible into one share of our Common
Stock. The B Warrants are not "callable."
4/15/2002 Pangea 2001 10-K Page 13
(3) Includes 250,000 A Warrants issued to Generation Capital Associates as a
document preparation fee to the Company. As stated in (1) above, each A Warrant
is convertible into one share of our Common Stock and one B Warrant. As stated
in (2) above, each B Warrant is convertible into one share of our Common Stock.
(4) Includes 75,000 A Warrants issued to M. Richard Cutler as an escrow agent
fee. As stated in (1) above, each A Warrant is convertible into one share of our
Common Stock and one B Warrant. As stated in (2) above, each B Warrant is
convertible into one share of our Common Stock.
(5) Upon exercise, each C Warrant is convertible into one share of our Common
Stock and one D Warrant. The C Warrants and D Warrants are both exercisable for
5 years commencing February 8, 2001.
(6) Upon exercise, each D Warrant is convertible into one share of our Common
Stock. The D Warrants are not "callable."
(7) Includes 50,000 shares and 100,000 C Warrants issued to Bathgate, McColley
Capital Group LLC as a finders fee. As stated in (5) above, each C Warrant is
convertible into one share of our Common Stock and one D Warrant. As stated in
(6) above, each D Warrant is convertible into one share of our Common Stock.
Each A Warrant has a maximum exercise price of $0.75 and a minimum exercise
price of $0.05. If this Registration Statement is not declared effective by
April 13, 2001, the exercise price is $0.375. We can purchase or "call" the A
Warrants at $.05 per Warrant on 30 days notice if our Common Stock has a closing
bid price of at least $2.75 for 20 consecutive trading days after this
Registration Statement is declared effective by the SEC. Each B Warrant has an
exercise price of $1.75. If this Registration Statement is not declared
effective by April 13, 2001, the exercise price is $0.375.
Each C Warrant has a maximum exercise price of $1.00 and a minimum exercise
price of $0.05. We can purchase or "call" the C Warrants at $.05 per warrant on
30 days notice if our common stock has a closing bid price of at least $2.75 for
20 consecutive trading days after this Registration Statement is declared
effective by the SEC. Each D Warrant has an exercise price of $1.75. Each C
Warrant has the exercise price is $0.50.
The Warrant holders and the Company are presently negotiating certain terms of
the Warrants to exchange some of their Warrants for other securities of our
Company. The outcome of these negotiations is unknown.
Notwithstanding the above, the Warrant Agreements that we signed with the above
parties do not allow any of the parties to exercise Warrants that would cause
such party to be the beneficial owner of more than 5% of our then outstanding
shares of Common Stock. This restriction shall not prevent any such party from
acquiring more than 5% of our shares of Common Stock as long as such party does
not beneficially own more than 5% at any given time. The maximum amount of
4/15/2002 Pangea 2001 10-K Page 14
shares of our Common Stock that can be acquired under the Securities Purchase
Agreements are as follows: Generation Capital Associates - 8,500,000; Greenwood
Partners, LP - 2,666,665; STL Capital Partners, LLC - 3,333,333, and The Apmont
Group, Inc. - 2,500,000.
The Securities Purchase Agreements provide that if the average bid price of our
Common Stock is less than $.50 for the 30 trading days commencing on the earlier
of the effective date of this Registration Statement or 105 days from the first
traunch closing date (specifically, the first trauch closing date was December
29, 2000), the A Warrants and B Warrants both become "cashless" with a strike
price of $.01.
With respect to the above described transaction, we have entered into escrow
agreements with the above parties and M. Richard Cutler, Esq. and David A.
Rapaport, Esq. as joint escrow agents ("Escrow Agents"). The Escrow Agents will
hold the maximum amount of shares issuable under the Securities Purchase
Agreements which is a total of 16,749,998 shares of our Common Stock. To date,
the Escrow Agents have been issued a total of 16,149,998 shares of our Common
Stock.
EMPLOYEES
As of April 10, 2002, Pangea has 1 full-time employee and 1 part-time employee,
including executive officers, non- executive officers, secretarial and clerical
personnel and field personnel. Pangea also retains independent geological and
engineering consultants and administrative assistance on a limited basis and
expects to continue to do so in the future.
As of April 10, 2001, Mass Energy has no employees.
ITEM 2. DESCRIPTION OF PROPERTY
- -------------------------------
Pangea's mailing address is 5090 Richmond Avenue #425, Houston, Texas. Pangea
formerly officed with Mass Energy at 6776 SW Freeway, Suite 620, Houston, Texas
77074 until November of 2001 when Mass Energy closed their offices. With the
closure of the Mass Energy offices, Pangea will be relocating to new space.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Mass Energy incurred substantial debt in the drilling of the Jackson County,
Texas lease and there are currently outstanding liens on the well totaling
approximately $824,946.59. Additionally several lawsuits have been filed
against Mass Energy for payment of debts incurred in the drilling of this well.
These lawsuits assert claims which total approximately $479,672.
Several of the lawsuits have recently been filed and are in the early stages of
discovery. The Company is currently evaluating their response to this
litigation.
4/15/2002 Pangea 2001 10-K Page 15
$37,396.38 - Data Wise Solutions, Inc. vs. Mass Energy, Inc., Cause Number
2001-37198, in the District Court 295 Judicial District Harris County, Texas
$28,601.53 - Continuous Operations, Inc. vs. Mass Energy, Inc. and Randy Massey
Individually, Cause Number 757,695, in the County Civil Court at Law Number 2,
Harris County, Texas
$112,936.15 - Pyramid Tubular Products, Inc. vs. Mass Energy, Inc. n/k/a Pangea
Petroleum Corporation and Randy Massey, Individually, Cause Number 857,646, in
the County Cival Court at Law Number of Three, Harris County, Texas
$28,601.53 - Soloco Texas, L.P., vs. Mass Energy, Inc., F/K/A M & R Exploration
Company, Cause Number 01-12-11746
$8,344.59 - Roywell Services, Inc. vs. Mass Energy, Inc., Cause Number
01-11-11734, in the District Court of Jackson County, Texas 267th Judicial
District
$63,879.23 - Tesco Corporation (US) f/k/a Tesco Drilling Technology, Inc. vs.
Mass Energy, Inc., Cause Number 01-12-11747, in the District Court of Jackson
County, Texas 24th Judicial District
$4,668.17 - Sup-R-Jar Inc. vs. Mass Energy, Inc., Cause Number SC42C4000972 L,
in the Small Claims Court of Harris County, Texas Precinct 4, Place 2
$195,244.42 - Cactus Drilling Company vs. Mass Energy, Inc., Cause Number
01-10-11720, in the District Court of Jackson County, Texas 24th Judicial
District
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------
As of December 31, 2001, Pangea had 52,186,900 shares of common stock
outstanding and had approximately 383 stockholders of record.
The following table sets forth certain information as to the high and low bid
quotations quoted on the OTC Bulletin Board for 1999, 2000 and 2001 (through
March 31, 2002). Information with respect to over-the-counter bid quotations
represents prices between dealers, does not include retail mark-ups, mark-downs
or commissions, and may not necessarily represent actual transactions.
4/15/2002 Pangea 2001 10-K Page 16
Period High Low
-------- ------ -----
1999
First Quarter 5.00 1.44
Second Quarter 6.50 1.44
Third Quarter 2.38 .44
Fourth Quarter 1.00 .18
2000
First Quarter 1.94 .19
Second Quarter 2.99 .28
Third Quarter 2.81 1.19
Fourth Quarter 1.78 .63
2001
First Quarter 1.72 .63
Second Quarter .81 .26
Third Quarter .041 .10
Fourth Quarter .29 .09
2002
First Quarter .10 .03
The bid price of our common stock was $.028 per share on April 10, 2002.
OUR TRANSFER AGENT AS OF APRIL 10, 2002 IS:
Olde Monmouth Stock Transfer Co., Inc.
77 Memorial Parkway, Suite 101
Atlantic Highlands, New Jersey 07716
STOCK PRICE PERFORMANCE GRAPH
The performance graph as set forth below compares the cumulative total
stockholder return of our common stock from December 31, 1998 through December
31, 2001, with Standard & Poors 500 Index (our Broad Market Index) and with
Standard & Poors Oil Composite Index (our Peer Group Index). The graph assumes
that the value of the investment in our common stock and each index was $100 on
December 31, 1998, and that all dividends, if any, were reinvested. The
comparisons in this table are not intended to forecast or be indicative of
possible future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN OF PANGEA PETROLEUM CORPORATION,
THE S&P 500 INDEX (BROAD MARKET INDEX) AND THE S&) OIL COMPOSITE INDEX (PEER
GROUP INDEX)
[GRAPH]
4/15/2002 Pangea 2001 10-K Page 17
1998 1999 2000 2001
Pangea Petroleum Corporation 100 12 42 5
Broad Market Index 100 119 107 93
Peer Group Index 100 114 121 105
DIVIDENDS
We do not intend to retain future earnings to support our growth. Any payment of
cash dividends in the future will be dependent upon: the amount of funds legally
available therefore; our earnings; financial condition; capital requirements;
and other factors which our Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL STATEMENTS
We have derived the following selected consolidated financial information as of
December 31, 2001 and 2000, and for each of the years in the three-year period
ended December 31, 2001, from our audited consolidated financial statements
included in this report. You should read this information in conjunction with
those consolidated financial statements and the notes thereto. We have derived
the selected consolidated financial information as of December 31, 1999, 1998
and 1997, and for each of the years in the two-year period ended December 31,
1998, from our audited consolidated financial statements of the Company, that
are not included herein. Please read "Management' Discussion and Analysis of
Financial Condition and Results of Operations".
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Sales and operating revenue $ 34,251 $ - $ 33,431 $ - $ -
Loss from operations (9,000,347) (6,502,646) (695,769) (3,362) -
Net loss (9,000,347) (6,502,646) (695,769) (3,362) -
Basic and dilutive net loss
per share $ (0.18) $ (0.27) $ (0.04) $ (0.00) $ -
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Working capital $(2,051,528) $ 362,767 $ (552,228) $ - $ -
Property and equipment, net 460,908 2,440,446 77,021 - -
Total assets 665,808 3,500,793 85,607 - -
Notes payable 519,426 110,000 463,120 - -
Stockholders' equity (deficit) (1,463,924) 2,975,843 (474,219) 317 -
4/15/2002 Pangea 2001 10-K Page 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of our financial condition, results of operations,
liquidity and capital resources. This discussion should be read in conjunction
with our Consolidated Financial Statements and the notes thereto included
elsewhere in this Form 10-K.
FORWARD-LOOKING INFORMATION-GENERAL
This report contains a number of forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance
including statements regarding the Company's projections. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates", "believes", "expects",
"intends", "future", "plans", "targets" and similar expressions identify
forward-looking statements. Readers are cautioned to not place undue reliance
on the forward-looking statements contained herein, which speak only as of the
date hereof the Company undertakes no obligation to publicly revise these
forward-looking statements, to reflect events or circumstances that may arise
after the date hereof. Additionally, these statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including, but not limited to, the Company's dependence on limited cash
resources, and its dependence on certain key personnel within the Company.
Accordingly, actual results may differ, possibly materially, from the
predictions contained herein.
GENERAL
Pangea Petroleum Corporation ("Pangea" or "Company"), a Colorado corporation,
was organized on March 11, 1997, as Zip Top, Inc. On December 11, 1998, the
Company changed our name to Pangea Petroleum Corporation. Pangea has one
subsidiary, Mass Energy, IncPangea is located at 5090 Richmond, #425, Houston,
Texas 77056. Pangea has a the Company website is www.pangeapetroleum.com.
Since its inception, the Company has suffered recurring losses from operations
and has been dependent on existing stockholders and new investors to provide the
cash resources to sustain its operations. During the years ended December 31,
2001, 2000 and 1999, the Company reported net losses and negative cash flows
from operations as follows:
2001 2000 1999
------------ ------------ ----------
Net loss $(9,000,347) $(6,502,646) $(659,769)
Negative cash flows from operations $ (396,624) $(1,573,624) $(519,222)
The Company's continuing negative operating results have produced a working
capital deficit of $(2,051,528) at December 31, 2001 and have caused the
Company's subsidiary Mass Energy, Inc. to become severely delinquent on various
accounts payable. Vendors have initiated legal actions against Mass Energy, Inc.
to force payment of past due accounts, but Mass Energy, Inc. lacks the cash
resources to make such payments. Accordingly, the results of such legal actions
cannot be predicted. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
The Company's strategic plan for dealing with its cash flow problems is
currently being developed, but may include additional private placements of the
Company's common stock, the abandonment of unprofitable projects and the
exchange of common stock for settlement of vendor accounts. There can be no
assurance that any of the plans developed by the Company will produce cash flows
sufficient to overcome current liquidity problems.
The Company's long-term viability as a going concern is dependent on certain key
factors, as follows:
- The Company's ability to obtain adequate sources of outside financing
to convince vendors to drop legal actions against the Company and to
allow the Company to continue forward with current exploration
efforts.
- The Company's ability to locate, prove and produce from economically
viable oil and gas reserves.
- The Company's ability to ultimately achieve adequate profitability and
cash flows to sustain continuing operations.
RESULTS OF OPERATIONS
To date, the results of the Company oil and gas investments through its
subsidiary Mass Energy have yielded revenue only $34,000. These revenues are
substantially less than what the Company expected when investments were made in
the Jackson County well and in Starr County TX and Kern County CA leases. The
first Mass Energy well in Jackson County has produced substantially less product
than the Company was lead to believe by experts and the well also incurred a
very substantial cost over run. Consequently, that well is now judged to be
non-economic to produce. The Company is currently evaluating its investment in
Mass Energy and expects to make a decision on that investment before the middle
4/15/2002 Pangea 2001 10-K Page 19
of the year. The Company's Duval County well has produced since the third
quarter, however revenue from that activity is currently tied up in a legal
dispute between Pangea and the operator of the well. The Company expects to
prevail in this case.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000.
The substantial increased loss of approximately 9 million for 2001 as compared
to a loss of approximately 6.5 million 2000 is due mainly to two factors. The
first and most important was the previously discussed cost over-runs associated
with drilling and completing the Jackson county well and the fact that the well
was non-economic. The second factor was increased overhead cost associated with
increased operations of Mass Energy.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999.
The increased loss that is shown in year 2000 results as compared to year end
1999 results is directly attributed to the re-organization and sale of a portion
of the WorldLink USA asset, the Mass Energy acquisition, the finalization of a
long term financing package for energy development projects and the greatly
increased level of energy project spending.
LIQUIDITY AND CAPITAL RESOURCES
The Company used funds from a long term financing package obtained in late 2000,
capital received from investors and loans from insiders to invest in Mass Energy
projects, to invest in the Duval County well and to operate the Company. The
Company's Mass Energy subsidiary has accounts payable of more approximately 1.3
million, Mass Energy also has notes receivables of more than $.2 million and
property and equipment valued at approximately $.4 million. The receivables may
not be collectable and the liquidity of Mass is in doubt. The Company has
essentially no long term debt and assets valued at more than $100,000.
2002 Outlook
The Company is liquid and intends to invest in additional oil and gas projects.
The Company intends to convert currents assets into cash in order to invest in
projects. The investment level will be heavily dependent on securing additional
capital from investors or debt. There is no assurance that additional equity or
debt financing will be available on terms acceptable to Management. Management
also believes that the Company will prevail in the previously mentioned legal
action against the operator of the Duval County well.
The market price of the Company's common stock has fluctuated significantly
since it began to be publicly traded in 1997 and may continue to be highly
volatile. Factors such as the ability of the Company to achieve development
goals, ability of the Company to profitably complete energy projects, the
ability of the Company to raise additional funds, general market conditions and
4/15/2002 Pangea 2001 10-K Page 20
other factors affecting the Company's business that are beyond the Company's
control may cause significant fluctuations in the market price of the Company's
common stock. The market prices of the stock of many energy companies have
fluctuated substantially, often unrelated to the operating or research and
development performance of the specific companies. Such market fluctuations
could adversely affect the market price for the Company's common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the company are set forth beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
R. B. Bassie & Co., P.C., Independent Public Accountants, audited our balance
sheets as of December 31, 2000 and 1999 and the related statements of
operations, stockholders' deficit and cash flows for the years then ended. Such
financial statements accompanied our Form 10-K for the year ended December 31,
2000 and were filed with the Securities and Exchange Commission on April 16,
2001. The report of R. B. Bassie & Co., P.C. on such financial statements,
dated January 26, 2001, except Notes 7 and 12, which are dated March 23, 2001,
did not contain an adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
Our client-auditor relationship with R. B. Bassie & Co., P.C. ceased on or about
March 20
Ham, Langston & Brezina, LLP, Certified Public Accountants of Houston, Texas,
was appointed by the Company on March 26, 2002, pursuant to a recommendation of
our Chairman of the Board and Chief Executive Officer, Mr. Charles B. Pollock,
to audit our financial statements for our fiscal year ended December 31, 2001.
During our two most recent fiscal years and the subsequent interim period
preceding their appointment as independent accountants, neither the Company nor
anyone on its behalf consulted Ham, Langston & Brezina, L.L.P. regarding either
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements, nor has Ham, Langston &
Brezina, L.L.P. provided to the Company a written report or oral advice
regarding such principles or audit opinion.
During our two most recent fiscal years and any subsequent interim period
preceding the date of dismissal, there were no disagreements between R. E.
Bassie & Co., P.C. and us, whether resolved or not resolved, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved, would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports.
4/15/2002 Pangea 2001 10-K Page 21
We have provided R. E. Bassie & Co., P.C. with a copy of this disclosure and
R.E. Bassie & Co., P.C. has provided us with a letter addressed to the
Securities and Exchange Commission agreeing with this disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT:
The directors and officers of the Company, as of April 10, 2002, are set forth
below. The directors hold office for their respective term and until their
successors are duly elected and qualified. The officers serve at the will of the
Board of Directors.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, and positions of the executive officers and
directors of the Company
Name Age Office
- ------- ----- --------
Charles B. Pollock 62 Chief Executive Officer
and Chairman of
The Board of Directors
Edward R. Skaggs 36 Director
AJ Leigh 54 CFO
CHARLES B. POLLOCK, 62 was appointed the Chief Executive Officer and Chairman of
the Board of the Company in June 1999. From January 1994 to September 1995, Mr.
Pollock was President of Praxair Indonesia, an industrial gas company where his
responsibilities were those as Chief Executive Officer of such company. From
October 1995 to August 1996, he was manager of Praxair, Inc., an industrial gas
company. His responsibilities included strategic marketing and competition
analysis. From September 1996 to May 1999, Mr. Pollock was self-employed as a
consultant in which his projects included the acquisition and sale of
businesses, competitive anlysis and strategic marketing. Mr. Pollock received
his Bachelor of Science degree in 1962 from North Carolina State University, his
Master of Science degree in Ceramic Engineering from North Carolina State
University in 1968 and his PhD in Material Engineering from North Carolina State
University in 1972.
4/15/2002 Pangea 2001 10-K Page 22
EDWARD R. SKAGGS, was appointed to the Board of Directors of the Company on
December 18, 2000. Mr. Skaggs has over 10 years of experience in investigations
and security. In addition, he has extensive experience in retail management
specifically dealing in personnel issues and security matters. Mr. Skaggs
started his career as an Assistant District Manager for EZ Mart Store in 1988.
In June 1991, he left EZ Mart to form an investigative consulting firm, Skaggs &
Associates, Inc. where he continues to work. He received a Bachelor of Arts
degree in Political Science from Texas Tech University in 1992.
AJ LEIGH, III, 54, was appointed as Chief Financial Officer in March of 2002.
Mr. Leigh, a C.P.A., has been engaged in public accounting for over twenty years
and maintains an office in Houston, Texas. He received his Bachelor of Science
Degree in accounting from the University of Southern Mississippi in 1971.
The Directors named above will serve until the next annual meeting of the
shareholders of the Company in the year 2002. Directors will be elected for
one-year terms at each annual shareholder's meeting.
All officers and directors listed above will remain in office until the next
annual meeting of our stockholders, and until their successors have been duly
elected and qualified. There are no agreements with respect to the election of
Directors. We have not compensated our Directors for service on our Board of
Directors, any committee thereof, or reimbursed for expenses incurred for
attendance at meetings of our Board of Directors and/or any committee of our
Board of Directors. Officers are appointed annually by our Board of Directors
and each Executive Officer serves at the discretion of our Board of Directors.
We do not have any standing committees. Our Board of Directors may in the future
determine to pay Directors' fees and reimburse Directors for expenses related to
their activities.
None of our Officers and/or Directors have ever filed any bankruptcy petition,
been convicted of or been the subject of any criminal proceedings or the subject
of any order, judgment or decree involving the violation of any state or federal
securities laws.
CERTAIN LEGAL PROCEEDINGS
No existing director, or executive officer of the Company has appeared as a
party in any legal proceeding material to an evaluation of his ability or
integrity during the past five years.
4/15/2002 Pangea 2001 10-K Page 23
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Charles B. Pollock untimely filed his Form 5 on February 19, 2002. Mr. Skaggs
has not filed a timely Form 5. Mr. Massey filed an untimely Form 5 on March 15,
2002. Mr. Leigh has not timely filed one Form 3.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------ ----------------------------------
Awards Payouts
------------------------ --------
Name and Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Principal Position ($) ($) Compensation Stock Underlying Payouts Compensation
($) Award(s) Options / ($) ($)
($) SARs
(#)
- ------------------- ---- ------- ------ ------------- ----------- ----------- -------- -------------
Charles B. 1999 28,000 -0- 0 0 0 -0- -0-
Pollock 2000 16,000 -0- 0 0 450,000 -0- -0-
CEO and 2001 0 -0- 3,000 1,000,000 300,000 -0- -0-
Chairman of the
Board of
Directors
- ------------------- ---- ------- ------ ------------- ----------- ----------- -------- -------------
Randall Massey 1999 N/A N/A N/A N/A N/A N/A N/A
(1) 2000 15,000 N/A 0 -0- 80,000 (1) N/A N/A
Director, COO 2001 117,000 -0- -0- -0- 400,000 -0- 15,432.90
- ------------------- ---- ------- ------ ------------- ----------- ----------- -------- -------------
<FN>
(1) Randall Massey resigned from all positions with Mass Energy on March 15, 2002.
(2) Pangea Stock Options with an exercise price of $1.00 per share.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR:
Individual Grants
- ------------------------------------------------------------ -------------------
Name Number of Percent of Exercise Expiration Grant Date Present
Securities Total of Base Date Value ($)
Underlying Options / Price
Options/ SARs ($/sh)
SARs Granted to
Granted Employees
(#) in Fiscal
Year
- ---------- ----------- ----------- ---------- ---------- -------------------
Charles B. 475,000 17% $ 1.00 September 0
Pollock 2003
- ---------- ----------- ----------- ---------- ---------- -------------------
Randall 600,000 29% $ 1.00 September 0
Massey 200,000 $ 0.20 2003
- ---------- ----------- ----------- ---------- ---------- -------------------
4/15/2002 Pangea 2001 10-K Page 24
- -------------- ------------ ---------------- ---------------- ----------------
Name Shares Value Realized Number of Value of
Acquired on ($) Securities Unexercised In-
Exercise (#) Underlying The-Money
Unexercised Options/SARs
Options / SARs At Fiscal Year-
At Fiscal Year- End ($)
End (#) Exercisable /
Exercisable / Unexercisable
Unexercisable
- -------------- ------------ ---------------- ---------------- ----------------
Charles B. 300,000 $ 3,000 175,000 0
Pollock
- -------------- ------------ ---------------- ---------------- ----------------
Randall Massey 200,000 $ 57,000.00 600,000 0
- -------------- ------------ ---------------- ---------------- ----------------
EMPLOYMENT AGREEMENTS
We have entered into employment agreement with Mr. Charles Pollock. The
following sets forth the terms of the employment agreement:
Charles B. Pollock--On June 1, 1999, we entered into an employment agreement
with Mr. Pollock that ends on December 31, 2002 to act as our Chairman of the
Board of Directors and Chief Executive Officer. Pursuant to the employment
agreement, Mr. Pollock is paid a salary of $6,000 per month plus an option to
purchase 50,000 Pangea S-8 shares per month at an exercise price of $1.00 per
share. In addition, we offered to provide medical benefits (currently not being
used) for Mr. Pollock. Mr. Pollock also receives as a bonus three (3%) percent
of the net proceeds received by us upon the successful completion of the sale of
any major company assets (major asset is defined as an asset whose sale price is
$500,000 or more).
Mr. Massey had an employment agreement that terminated upon his resignation in
March 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based upon information received from the persons concerned, each person known to
us to be the beneficial owner of more than five percent of the outstanding
shares of our Common Stock, each director, each of our executive officers and
all of our directors and executive officers as a group, owned beneficially as of
April 10, 2002, the number and percentage of outstanding shares of our Common
Stock indicated in the following table:
4/15/2002 Pangea 2001 10-K Page 25
Name and Address of
Beneficial Owner Number of Shares (1) (3) Percentage (2)
Charles B. Pollock 1,499,286 2%
2014 Bonner Bussells Drive
Southport, NC 28461
AJ Leigh III -0- -0-
6776 SW Freeway, Suite 310
Houston, TX 77056
Edward Skaggs -0- -0-
PO Box 570611
Houston, TX 77257
All directors and executive officers as a group
(as a group)
1,499,286 2%
Rapid Release Research, LLC 8,505,677 18.03%
4900 Woodway Drive, Suite 750
Houston, Texas 77056
Jacob International Inc. 5,591,000 11.85%
4550 Post Oak Place, Suite 175
Houston, TX 77027
* Less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole
voting and investment power.
(2) Based on 52,186,900 shares of our Common Stock issued and outstanding.
(3) To date, we have issued 16,149,998 shares of our Common Stock to David
Rapaport and M. Richard Cutler, as joint escrow agents, in accordance with
certain Securities Purchase Agreements we have executed with Generation Capital
Associates, Greenwood Partners, LP STL Capital Partners, LLC, and The Apmont
Group, Inc. respectively. Neither Messrs. Rapaport or Cutler have any beneficial
ownership in any such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At December 31, 2000, the Company had notes receivable due from Randy Massey in
the amount of $158,500. The Company recognized approximately $2,500 in interest
income during the three months ended December 31, 2000 in association with the
note receivable. Approximately $150,000 of the balance is evidenced by a
promissory note. Under the note, interest accrues on the unpaid principal at
6.25% per annum. In addition, Mr. Massey is required to maintain term life
insurance payable to the Company in an amount sufficient to pay the principal
and accrued interest in full in the event of the subsidiary former president's
death. During 2001 Mr. Massey did not make any payments of principal or interest
on these notes receivable.
At December 31, 2001, the Mass Energy had notes receivable due from Sandstone
Ventures, Inc., an affiliate of Randy Massey in the amount of $40,000. The
Company recognized interest is due in association with the note receivable.
Under the note, interest accrues on the unpaid principal at 7.0% per annum.
At December 31, 2001 the Company has notes payable to a major stockholder, Rapid
Release Research, of $185,242. Additionally the Company has notes payable to
Mary Pollock, a former officer and daughter of Charles Pollock of $73,846.
Finally the Company has notes payable to Charles Pollock of $185,000.
4/15/2002 Pangea 2001 10-K Page 26
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) The following documents are filed as part of this report:
None
(b) Reports on Form 8-K
None
4/15/2002 Pangea 2001 10-K Page 27
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the undersigned has duly caused this Form 10-K to be signed on its
behalf by the undersigned, there unto duly authorized, in the City of Houston,
Texas, on April 15, 2002.
PANGEA PETROLEUM CORPORATION
By: /s/ Charles B. Pollock
Date: April 11, 2002
- ----------------------------------
Charles B. Pollock, Chairman of the Board, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
By: /s/ Charles B. Pollock
Date: April 11, 2002
- ----------------------------------
Charles B. Pollock, Chairman of the Board, and Chief Executive Officer
By: /s/ AJ Leigh, III
Date: April 11, 2002
- ----------------------------------
AJ Leigh, III, Chief Financial Officer
By: /s/ Edward R. Skaggs
Date: April 11, 2002
- ----------------------------------
Edward R. Skaggs, Director
4/15/2002 Pangea 2001 10-K Page 28
PANGEA PETROLEUM CORPORATION
__________
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
F-1
PANGEA PETROLEUM CORPORATION
TABLE OF CONTENTS
__________
PAGE
----
Reports of Independent Accountants F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2001
and 2000 F-5
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2001, 2000 and 1999 F-7
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 F-8
Notes to Consolidated Financial Statements F-11
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Pangea Petroleum Corporation
We have audited the accompanying consolidated balance sheet of Pangea Petroleum
Corporation and subsidiaries as of December 31, 2001 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Pangea
Petroleum Corporation and subsidiaries as of December 31, 2001, and the results
of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses, negative cash
flows from operations and has a net capital deficiency at December 31, 2001 that
raise substantial doubt about its ability to continue as a going concern.
Management's plans with regard to this matter are also discussed in Note 2.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas
April 14, 2002
F-3
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders:
Pangea Petroleum Corporation
We have audited the consolidated balance sheet of Pangea Petroleum Corporation
and Subsidiary as of December 31, 2000, and the related consolidated statements
of operations, stockholders' equity and cash flows for the two-year periods then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pangea Petroleum
Corporation and Subsidiary as of December 31, 2000, and the results of their
operations and their cash flows for the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ R.E. Bassie & Co.
Houston, Texas
January 26, 2001
F-4
PANGEA PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001 AND 2000
__________
ASSETS 2001 2000
------ ------------- ------------
Current assets:
Cash $ 17,377 $ 599,727
Accounts receivable, net 14,188 77,017
Prepaid expenses 1,693 2,939
Notes receivable from related parties - 208,034
------------- ------------
Total current assets 33,258 887,717
------------- ------------
Property held for investment 46,642 46,642
Investment in Paradigm Advanced Technologies, Inc. 125,000 125,000
Property and equipment 562,390 2,579,865
Less accumulated depreciation, depletion and amortization (101,482) (139,419)
------------- ------------
Net property and equipment 460,908 2,440,446
Other assets - 988
------------- ------------
Total assets $ 665,808 $ 3,500,793
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 1,557,590 $ 351,458
Accrued liabilities 52,716 63,492
Notes payable to related parties 474,480 110,000
------------- ------------
Total current liabilities 2,084,786 524,950
------------- ------------
Notes payable to related parties, net of current portion 44,946 -
------------- ------------
Total liabilities 2,129,732 524,950
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock: $.01 par value; 5,000,000 shares authorized -
Common stock: $.001 par value; 100,000,000 shares authorized;
52,186,900 and 42,584,900 shares issued and outstanding at
December 31, 2001 and 2000, respectively 52,187 42,585
Additional paid-in capital 14,717,956 10,835,978
Accumulated deficit (16,218,067) (7,217,720)
------------- ------------
(1,447,924) 3,660,843
Less common stock subscriptions receivable (16,000) (685,000)
------------- ------------
Total stockholders' equity (deficit) (1,463,924) 2,975,843
------------- ------------
Total liabilities and stockholders' equity (deficit) $ 665,808 $ 3,500,793
============= ============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PANGEA PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
__________
2001 2000 1999
------------ ------------ ------------
Revenues:
Sales and operating revenues $ 34,251 $ - $ 33,431
Interest income 12,555 4,953 -
------------ ------------ ------------
Total revenues 46,806 4,953 33,431
------------ ------------ ------------
Costs and expenses:
Exploration-dry hole and abandonment expense 4,874,253 1,377,967 -
Cost of sales 14,994 28,284 71,105
Selling, general and administrative 4,012,818 3,842,010 208,818
Impairment of oil and gas properties 116,364 552,550 75,653
Depreciation, depletion and amortization 6,945 4,939 12,774
Acquisition costs - 79,250 236,000
(Gain) loss on disposition of assets (17,218) - 61,000
Interest expense 38,997 622,599 63,850
------------ ------------ ------------
Total costs and expenses 9,047,153 6,507,599 729,200
------------ ------------ ------------
Net loss $(9,000,347) $(6,502,646) $ (695,769)
============ ============ ============
Basic and diluted net loss per common share $ (0.18) $ (0.27) $ (0.04)
============ ============ ============
Weighted average common shares 49,025,431 24,304,257 17,784,313
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PANGEA PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
__________
TOTAL
ADDITIONAL STOCK STOCKHOLDERS'
COMMON STOCK PAID-IN RETAINED SUBSCRIPTIONS EQUITY
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE (DEFICIT)
---------- ------- -------------- ---------- -------------- ----------
Balance, December 31, 1998 17,724,000 $17,724 $ 1,581 $ (19,305) $ - $ -
Common stock issued for cash under private
placement 50,000 50 106,450 - - 106,500
Common stock issued for services 35,000 35 74,515 - - 74,550
Common stock issued for property 50,000 50 40,450 - - 40,500
Net loss - - - (695,769) - (695,769)
---------- ------- -------------- ---------- -------------- ----------
Balance at December 31, 1999 17,859,000 $17,859 $ 222,996 $(715,074) $ - $(474,219)
========== ======= ============== ========== ============== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PANGEA PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
__________
TOTAL
ADDITIONAL STOCK STOCKHOLDERS'
COMMON STOCK PAID-IN RETAINED SUBSCRIPTIONS EQUITY
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE (DEFICIT)
---------- ------- ----------- ------------ --------------- ---------------
Balance at December 31, 1999 17,859,000 $17,859 $ 222,996 $ (715,074) $ - $ (474,219)
Common stock issued for cash under private
placement 15,055,645 15,056 1,746,084 - (685,000) 1,076,140
Common stock issued for investor relations
services 2,789,372 2,789 2,705,621 - - 2,708,410
Common stock issued for contractual services 154,750 155 237,150 - - 237,305
Common stock issued to acquire oil and gas
property 325,000 325 454,675 - - 455,000
Stock options exercised for cash 1,156,000 1,156 1,362,577 - - 1,363,733
Common stock issued to convert debt to equity 3,245,133 3,245 1,233,875 - - 1,237,120
Common stock issued to acquire Mass Energy,
Inc. 2,000,000 2,000 2,748,000 - - 2,750,000
Issuance of warrants - - 125,000 - - 125,000
Net loss - - - (6,502,646) - (6,502,646)
---------- ------- ----------- ------------ --------------- ---------------
Balance at December 31, 2000 42,584,900 $42,585 $10,835,978 $(7,217,720) $ (685,000) $ 2,975,843
========== ======= =========== ============ =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-8
PANGEA PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
__________
TOTAL
ADDITIONAL STOCK STOCKHOLDERS'
COMMON STOCK PAID-IN RETAINED SUBSCRIPTIONS EQUITY
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE (DEFICIT)
---------- ------- ----------- ------------- --------------- ---------------
Balance at December 31, 2000 42,584,900 $42,585 $10,835,978 $ (7,217,720) $ (685,000) $ 2,975,843
Common stock issued for cash 3,633,333 3,633 608,867 - 685,000 1,297,500
Common stock issued upon exercise of stock
options 2,225,000 2,225 1,152,775 - (16,000) 1,139,000
Common stock issued to acquire assets 100,000 100 152,900 - - 153,000
Common stock issued for services 1,585,667 1,586 900,604 - - 902,190
Common stock issued to compensate employees 2,058,000 2,058 689,682 - - 691,740
Issuance of compensatory stock options - - 377,150 - - 377,150
Net loss - - - (9,000,347) - (9,000,347)
---------- ------- ----------- ------------- --------------- ---------------
Balance at December 31, 2001 52,186,900 $52,187 $14,717,956 $(16,218,067) $ (16,000) $ (1,463,924)
========== ======= =========== ============= =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-9
PANGEA PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
__________
2001 2000 1999
------------ ------------ ----------
Cash flows from operating activities:
Net loss $(9,000,347) $(6,502,646) $(695,769)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 6,945 4,939 12,774
Gain on sale of assets (17,218) - -
Bad debt expense 208,034 - -
Dryhole costs and impairment of unproved properties 4,990,617 1,584,407 75,653
Stock issued as compensation for services 1,593,930 2,945,715 -
Issuance of compensatory stock options 377,150 245,233 -
Accrued interest converted to equity - 622,449 -
Notes payable issued for compensation 172,838 - -
Note payable issued for accrued interest 11,008 - -
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable 62,829 268,875 (7,598)
Prepaid expenses 1,246 2,950 -
Other assets 988 - (988)
Accounts payable and accrued liabilities 1,195,356 (584,246) 96,706
Advances from joint interest parties - (161,300) -
------------ ------------ ----------
Net cash used in operating activities (396,624) (1,573,624) (519,222)
------------ ------------ ----------
Cash flows from investing activities:
Cash acquired in acquisition of Mass Energy, Inc. - 494,868 -
Proceeds from sale of property and equipment 17,218 - -
Purchase of investment real estate - (46,642) -
Capital and exploratory expenditures (2,865,024) - (90,898)
------------ ------------ ----------
Net cash provided by (used in) investing activities (2,847,806) 448,226 (90,898)
------------ ------------ ----------
Cash flows from financing activities:
Proceeds from the sale of common stock 2,436,500 2,194,640 90,500
Proceeds from advances from related parties - (708,066) 357,620
Proceeds from notes payable to related parties 255,580 238,551 162,000
Payments of notes payable to related parties (30,000) - -
------------ ------------ ----------
Net cash provided by financing activities 2,662,080 1,725,125 610,120
------------ ------------ ----------
Net increase (decrease) in cash and cash equivalents (582,350) 599,727 -
Cash and cash equivalents at beginning of year 599,727 - -
------------ ------------ ----------
Cash and cash equivalents at end of year $ 17,377 $ 599,727 $ -
============ ============ ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-10
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------
ORGANIZATION
------------
Pangea Petroleum Corporation (the "Company"), is a Colorado corporation
engaged in oil and gas exploration and development. The Company was
originally incorporated in 1997 as Zip Top, Inc. and subsequently adopted a
name change to Pangea Petroleum Corporation. On April 26, 2000, the Company
was recapitalized when the Company acquired the non-operating public shell,
Segway II Corporation. Segway II Corporation had no significant assets or
liabilities at the date of acquisition and, accordingly, the transaction
was accounted for as a recapitalization. In October 2000 the Company
acquired its wholly owned subsidiary, Mass Energy, Inc. (See Note 3).
PRINCIPLES OF CONSOLIDATION
-----------------------------
The consolidated financial statements presented herein include the accounts
of the Company and its predecessor, Zip Top, Inc., and its wholly owned
subsidiary, Mass Energy, Inc., after elimination of all significant
intercompany accounts and transactions.
ACCOUNTING ESTIMATES
---------------------
The preparation of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates. These estimates
mainly involve the useful lives of property and equipment, the impairment
of unproved oil and gas properties, the valuation of deferred tax assets
and the realizability of accounts receivable.
OIL AND GAS PRODUCING ACTIVITIES
------------------------------------
The Company follows the "successful efforts" method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs (cost to acquire mineral interests in oil and gas
properties) and costs (to drill and equip) of exploratory and development
wells are capitalized when incurred, pending determination of whether the
well has found proved reserves. If an exploratory well has not found proved
reserves in commercial quantities, the costs associated with the well are
charged to expense. The costs of development wells are capitalized whether
productive or nonproductive. Geological and geophysical costs and the costs
of carrying and retaining undeveloped properties are expensed as incurred.
Management estimates that the salvage value of lease and well equipment
will approximately offset the future liability for plugging and abandonment
of the related wells. Accordingly, no accrual for such costs has been
recorded.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at
the time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's average holding period.
Capitalized costs of producing oil and gas properties after considering
estimated dismantlement and abandonment costs and estimate salvage values,
are depreciated and depleted by the unit-of-production method. On the sale
or retirement of a complete unit of a proved property, the cost and related
accumulated depreciation, depletion, and amortization are eliminated from
the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is
charged to accumulated depreciation, depletion, and amortization with a
resulting gain or loss recognized in the statement of operations.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the property had
been assessed individually. If a partial interest in an unproved property
is sold, the amount received is treated as a reduction of the cost of the
interest retained.
OTHER PROPERTY AND EQUIPMENT
-------------------------------
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of 5 years for ITD
Units and 3 to 5 years for office furniture and equipment and
transportation and other equipment. Additions or improvements that increase
the value or extend the life of an asset are capitalized. Expenditures for
normal maintenance and repairs are expensed as incurred. Disposals are
removed from the accounts at cost less accumulated depreciation and any
gain or loss from disposition is reflected in operations.
F-11
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS
----------------------------------
In the event facts and circumstances indicate the carrying value of a
long-lived asset, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
is required. Based upon a recent evaluation by management, an impairment
write-down of the Company's long-lived assets was recorded to write such
assets down to their estimated net realizable value.
REAL ESTATE HELD FOR INVESTMENT
-----------------------------------
Real estate held for investment is carried at the lower of cost or fair
market value. Management assesses the value of real estate held for
investment on a quarterly and annual basis to determine if any impairment
to this net realizable value has occurred. Management closely monitors any
changes in the real estate market, which would indicate that a change in
the value of its holdings has occurred and also obtains independent third
party appraisals on its holdings on an as-needed basis.
CASH AND CASH EQUIVALENTS
----------------------------
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when
purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
CONCENTRATION OF CREDIT RISK
-------------------------------
Financial instruments which subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with major financial institutions
selected based upon management's assessment of the banks' financial
stability. Balances periodically exceed the $100,000 federal depository
insurance limit. The Company has not experienced any losses on deposits.
Accounts receivable generally arise from sales of services to customers
operating in the United States. Collateral is generally not required for
credit granted. As of December 31, 2001, all of the Company's trade
receivables were due from one customer. During the years ended December 31,
2001 and 1999, 100% of the Company's revenues was received from two
customers.
OIL AND GAS REVENUES
-----------------------
Oil and gas revenues are recorded under the sales method. The Company
recognizes oil and gas revenues as production occurs. As a result, the
Company accrues revenue relating to production for which the Company has
not received payment.
EARNINGS PER SHARE
--------------------
The Company has adopted SFAS No. 128, which provides for calculation of
"Basic" and "Diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing net income available to common
shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity similar to fully
diluted earnings per share.
STOCK BASED COMPENSATION
--------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation" established
financial accounting and reporting standards for stock-based employee
compensation plans. It defined a fair value based method of accounting for
an employee stock option or similar equity instrument and encouraged all
entities to adopt that method of accounting for all of their employee stock
compensation plans and include the cost in the income statement as
compensation expense. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company
accounts for compensation cost for stock option plans in accordance with
APB Opinion No. 25.
F-12
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------
INCOME TAXES
-------------
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. A
valuation allowance, if necessary, is provided against deferred tax assets,
based upon management's assessment as to their realization.
NEW ACCOUNTING PRONOUNCEMENTS
-------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the
amortization of goodwill and requires that goodwill be reviewed annually
for impairment. SFAS No. 142 also requires that the useful lives of
previously recognized intangible assets be reassessed and the remaining
amortization periods be adjusted accordingly. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 and affects all goodwill and
other intangible assets recorded on the Company's balance sheet at that
date, regardless of when the assets were initially recorded. The
implementation of SFAS No. 142 is not expected to have a material impact on
the Company's results of operations or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement is
effective for fiscal years beginning after June 15, 2002. The Company does
not expect the implementation of SFAS No. 143 to have a material impact on
the Company's results of operation or financial position.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets", which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single
accounting model for impairment of long-lived assets. The Company does not
expect the implementation of SFAS No. 144 to have a material impact on the
Company's results of operation or financial position.
RECLASSIFICATIONS
-----------------
Certain prior year amounts in the 2000 consolidated balance sheet have been
reclassified to conform to the 2001 presentation. In 2000, the Company
recorded 215,000 shares of its common stock as issued for conversion of
note payable. However, the common stock was never issued and the note
payable is still outstanding. The accompanying December 31, 2000 financial
statements include a reclassification reducing common stock and additional
paid-in capital and increasing notes payable and accounts payable by
$75,000. This reclassification had no impact on the statement of
operations.
In addition, certain items in the 2000 and 1999 financial statements have
been reclassified to conform to the 2001 presentation. These
reclassifications had no effect on the Company's financial position, net
loss or cash flows.
2. GOING CONCERN CONSIDERATIONS
------------------------------
Since its inception, the Company has suffered recurring losses from
operations and has been dependent on existing stockholders and new
investors to provide the cash resources to sustain its operations. During
the years ended December 31, 2001, 2000 and 1999, the Company reported net
losses and negative cash flows from operations as follows:
2001 2000 1999
------------ ------------ ----------
Net loss $(9,000,347) $(6,502,646) $(659,769)
Negative cash flows from operations $ (396,624) $(1,573,624) $(519,222)
The Company's continuing negative operating results have produced a working
capital deficit of $(2,051,528) at December 31, 2001 and have caused the
Company's subsidiary Mass Energy, Inc. to become severely delinquent on
various accounts payable. Vendors have initiated legal actions against Mass
Energy, Inc. to force payment of past due accounts, but Mass Energy, Inc.
lacks the cash resources to make such payments. Accordingly, the results of
such legal actions cannot be predicted. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
F-13
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
2. GOING CONCERN CONSIDERATIONS, CONTINUED
------------------------------------------
The Company's strategic plan for dealing with its cash flow problems is
currently being developed, but may include additional private placements of
the Company's common stock, the abandonment of unprofitable projects and
the exchange of common stock for settlement of vendor accounts. There can
be no assurance that any of the plans developed by the Company will produce
cash flows sufficient to overcome current liquidity problems.
The Company's long-term viability as a going concern is dependent on
certain key factors, as follows:
- The Company's ability to obtain adequate sources of outside financing
to convince vendors to drop legal actions against the Company and to
allow the Company to continue forward with current exploration
efforts.
- The Company's ability to locate, prove and produce from economically
viable oil and gas reserves.
- The Company's ability to ultimately achieve adequate profitability and
cash flows to sustain continuing operations.
3. ACQUISITION OF MASS ENERGY, INC. AND RECAPITALIZATION
-----------------------------------------------------------
On October 5, 2000, the Company acquired Mass Energy, Inc., a Houston,
Texas based oil and gas exploration company, in a transaction accounted for
as a purchase (the "Purchase"). The purchase price was 2,000,000 shares of
the Company's restricted common stock issued in exchange for all of the
outstanding common stock of Mass Energy, Inc. The $4,521,856 purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The purchase price
allocation was based on valuations and estimates.
Following is the purchase price allocation in connection with the purchase
of Mass Energy, Inc.:
Assets Acquired:
- ----------------
Current assets $ 848,585
Noncurrent assets 198,500
Oil and gas properties 3,458,696
Other property and equipment, net 16,075
----------
Total assets acquired $4,521,856
==========
Liabilities Assumed and Consideration Given:
- --------------------------------------------
Current liabilities $1,771,856
Common stock issued 2,750,000
----------
Total liabilities assumed and other
consideration given $4,521,856
==========
Mass Energy, Inc.'s results of operations are included in the accompanying
consolidated financial statements from October 5, 2000 and throughout the
year ended December 31, 2001. Following is the Company's unaudited pro
forma results of operations for the years ended December 31, 2000 and 1999,
as if the Purchase would have been consummated as of January 1, 2000 and
1999:
PROFORMA INFORMATION
- ---------------------
2000 1999
------------ ------------
Sales $ - $ 835,207
Loss from operations $(5,830,791) $ (655,326)
Net loss applicable to common shareholders $(6,416,583) $ (800,311)
Basic and diluted net loss per share $ (.24) $ (.04)
Weighted average shares outstanding 25,947,941 19,784,313
============ ============
F-14
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
4. ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable at December 31, 2001 and 2000 consist of the following:
2001 2000
--------- ----------
Accounts receivable-joint interest billings $ 3,961 $ 160,257
Other accounts receivable 40,716 21,494
--------- ----------
44,677 181,751
Less allowance for doubtful accounts (30,489) (104,734)
--------- ----------
$ 14,188 $ 77,017
========= ==========
5. NOTES RECEIVABLE FROM RELATED PARTIES
-----------------------------------------
Notes receivable from related parties at December 31, 2001 and 2000 consist
of demand notes receivable from the former owner of Mass Energy, Inc. and
from a company that he owns. These notes bear interest at rates ranging
from 6.25% to 7% per year and are uncollateralized. The notes are fully
reserved at December 31, 2001. Following is an analysis of notes receivable
from related parties.
2001 2000
---------- --------
Contractual balance $ 190,000 $190,000
Accrued interest 30,489 18,034
---------- --------
220,489 208,034
Less allowance for doubtful notes (220,489) -
---------- --------
$ - $208,034
========== ========
6. PROPERTY HELD FOR INVESTMENT
-------------------------------
Property held for investment consists of a parcel of real estate in Fort
Bend County, Texas. The Company holds a 40% ownership interest in the
property in joint ownership with certain related parties.
7. INVESTMENT IN PARADIGM ADVANCED TECHNOLOGIES, INC.
-------------------------------------------------------
During the year ended December 31, 1999, the Company owned 100% of
WorldLink USA, Inc. ("WorldLink"), a company that owns and/or licenses
certain streaming video technology and a library of concerts previously
broadcast over the internet. At December 31, 1999, the Company determined
that its investment in WorldLink was no longer economically viable and
initiated a search for a purchaser or partner.
On September 7, 2000, the Company entered into an agreement (the "Exchange
Agreement") with Paradigm Advanced Technologies, Inc. ("Paradigm") under
which the Company agreed to contribute the WorldLink assets to a new Nevada
limited liability company, WorldLink USA, LLC, to be 50% owned by the
Company and Paradigm but to be operated by Paradigm. In exchange for the
contribution of the WorldLink assets to the LLC and the granting to
Paradigm of a warrant for purchase of 12,500,000 shares of the Company's
common stock at $1 per share, the Company received 7,300,000 shares of
Paradigm common stock and a warrant to acquire 12,500,000 shares of
Paradigm stock at $1 per share. The warrants issued and the Paradigm
warrants received in the Exchange Agreement may not be exercised until
after the second anniversary of the Exchange Agreement.
The Company's investment in Paradigm common stock and warrants is reported
in the accompanying balance sheet as of December 31, 2001 and 2000, at its
estimated fair value at the date of the Exchange Agreement of $125,000. The
Company reports its investment in Paradigm using the cost method and
periodically compares the carrying value of its investment to the fair
market value to determine whether a write-down is necessary.
F-15
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
8. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following at December 31, 2001 and
2000:
2001 2000
---------- -----------
Unproved oil and gas properties, not subject to
amortization (successful efforts method) $ 454,246 $2,426,839
Machinery and equipment 108,144 153,026
---------- -----------
562,390 2,579,865
Less accumulated depreciation, depletion and
amortization (101,482) (139,419)
---------- -----------
Net property and equipment $ 460,908 $2,440,446
========== ===========
During the year ended December 31, 2001 substantially all of the
exploration projects in which the Company is involved resulted in dry holes
or were productive at an economically unacceptable level. Accordingly,
during the year ended December 31, 2001, the Company recorded dry hole,
abandonment and impairment charges totaling $4,990,617. During the year
ended December 31, 2000 and 1999, such charges totaled $1,930,517 and
$75,653, respectively.
9. NOTES PAYABLE TO RELATED PARTIES
--------------------------------
Notes payable to related parties consist of the following at December 31,
2001 and 2000:
2001 2000
---------- ---------
Notes payable to stockholders of the Company, bearing
interest from the prime rate (4.75% at December 31,
2001) to 20% per year, interest due monthly and
principal due on demand. The notes are not collat-
eralized. $ 260,338 $ 35,000
Note payable to a stockholder of the Company, bearing
interest at the prime rate (4.75% at December 31,
2001), interest due quarterly, principal of $9,100
due on January 10, 2002 and $6,600 per quarter for
each quarter thereafter until its maturity on
October 10, 2004, when all unpaid principal and
interest is due. The note is not collateralized. 73,846 -
Notes payable to an affiliated company, bearing int-
erest at 18% per year, principal and interest due
on demand. The notes are not collateralized. 185,242 25,000
---------- ---------
519,426 60,000
Less current portion (474,480) (60,000)
---------- ---------
Long-term portion of notes payable to related parties $ 44,946 $ -
========== =========
Included in accrued liabilities at December 31, 2001 and 2000 is accrued
interest owed to these related parties of $28,648 and $-0-, respectively.
Future annual maturities of the notes payable to related parties as of
December 31, 2001 are as follows:
YEAR ENDED
DECEMBER 31,
- -------------
2002 $474,480
2003 26,400
2004 18,546
--------
519,426
========
F-16
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
10. INCOME TAXES
-------------
The Company has incurred losses since its inception and, therefore, has not
been subject to federal income taxes. As of December 31, 2001, the Company
had net operating loss ("NOL") carryforwards for income tax purposes of
approximately $19,400,000 which expire in various tax years through 2021.
Under the provisions of Section 382 of the Internal Revenue Code, the net
operating loss carryforwards resulting from the acquisition of Mass Energy,
Inc. and the ownership change in the Company when it recapitalized in 2000
could severely limit the Company's ability to utilize its NOL carryforward
to reduce future taxable income and related tax liabilities. Additionally,
because United States tax laws limit the time during which NOL
carryforwards may be applied against future taxable income, the Company may
be unable to take full advantage of its NOL for federal income tax purposes
should the Company generate taxable income.
The composition of deferred tax assets and the related tax effects at
December 31, 2001 and 2000 are as follows:
2001 2000
------------ ------------
Net operating losses $ 6,600,594 $ 3,636,083
Basis of property and equipment 227,430 213,589
Allowance for doubtful accounts and notes
receivable 74,966 -
Other 26,945 26,945
------------ ------------
Total deferred tax assets 6,929,935 3,876,617
Less valuation allowance (6,929,935) (3,876,617)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
The difference between the income tax benefit in the accompanying statement
of operations and the amount that would result if the U.S. Federal
statutory rate of 34% were applied to pre-tax loss for the years ended
December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
--------------------- --------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
------------ ------- ------------ ------- ---------- -------
Benefit for income tax
at federal statutory
rate $(3,060,118) (34.0%) $(2,210,899) (34.0%) $(236,561) (34.0%)
Non-deductible expenses 6,800 - 6,146 - - -
Increase in valuation
allowance 3,053,318 34.0 2,204,753 34.0 236,561 34.0
------------ ------- ------------ ------- ---------- -------
$ - - % $ - _ - % $ - _ - %
============ ======= ============ ======= ========== =======
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
OPERATING LEASE
---------------
The Company leases office space under an operating lease which expires in
2003. At December 31, 2001, the future annual lease payments required under
the noncancellable operating lease are as follows:
YEAR ENDED
DECEMBER 31,
-------------
2002 $44,360
2003 37,191
-------
81,551
=======
Rent expense incurred under operating leases for the years ended December
31, 2001, 2000 and 1999 was $38,423, $15,191 and $19,900, respectively.
EMPLOYMENT AGREEMENT
---------------------
The Company has entered into an employment agreement with its Chairman and
Chief Executive Officer for a period of one year through December 31, 2002.
The employment agreement provides for a salary of $10,000 per month, which
the Company may defer and pay, plus accrued interest at the prime rate on
amounts deferred, in the form of common stock of the Company based on 30%
of the closing bid price.
F-17
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
11. COMMITMENTS AND CONTINGENCIES, CONTINUED
----------------------------------------
LEGAL PROCEEDINGS
-----------------
During the year ended December 31, 2001, various vendors that provide
services and supplies to the Company initiated legal actions to force the
Company to pay past due amounts. These legal actions pertain to
approximately $480,000 of the Company's accounts payable and accrued
liabilities and all balances claimed by the vendors have been fully accrued
at December 31, 2001.
The Company may also be periodically subject to legal proceedings and
claims that arise in the ordinary course of its business. In the opinion of
management, such legal proceedings and claims will not materially affect
the financial position, results of operations or cash flows of the Company.
12. STOCKHOLDERS' EQUITY
---------------------
PREFERRED STOCK
----------------
The Company's articles of incorporation authorize the issuance of up to
5,000,000 shares of preferred stock, with a par value of $.01 and other
characteristics determined by the Company's board of directors. As of
December 31, 2001 and 2000, there was no preferred stock issued or
outstanding.
COMMON STOCK
-------------
During the years ended December 31, 2001, 2000 and 1999, the Company issued
shares for cash under private placements of securities, for compensation to
employees and consultants, for acquisition of properties, for acquisition
of Mass Energy, Inc. and for conversion of debt to equity. These issuances
are shown on the accompanying statement of stockholders' equity (deficit).
Included in stock issuances for the year ended December 31, 2001 were
shares issued under a Securities Purchase Agreement (the "Securities
Purchase Agreement") whereby the Company issued 12,650,000 shares of
restricted common stock to an escrow agent (the "Escrowed Shares") for the
benefit of four investor groups in exchange for $1,300,000 in cash. The
terms of the Securities Purchase Agreement required the Company to file a
Registration Statement with the Securities and Exchange Commission to
register the Escrowed Shares and included provisions for the issuance of
four series of warrants with exercise prices to be set based on a
combination of certain future events and the performance of the Company's
common stock. Following is an analysis of shares and warrants issuable
under the Securities Purchase Agreement.
MAXIMUM
PURCHASE NUMBER OF MAXIMUM NUMBER
PURCHASER PRICE SHARES OF WARRANTS
- ----------------------------- ---------- --------- --------------------
Generation Capital Associates $ 600,000 1,600,000 3,450,000 A Warrants
3,450,000 B Warrants
STL Capital Partners, LLC 250,000 666,667 1,333,333 A Warrants
1,333,333 B Warrants
Greenwood Partners, L.P. 200,000 533,333 1,066,666 A Warrants
1,066,666 B Warrants
The Apmont Group, Inc. 250,000 550,000 1,100,000 C Warrants
1,100,000 D Warrants
Escrow Agent Fee - - 75,000 A Warrants
75,000 B Warrants
---------- --------- -----------
Total $1,300,000 3,350,000 14,049,998 Warrants
========== ========= ===========
STOCK OPTIONS
--------------
The Company periodically issues incentive stock options to key employees,
officers, and directors to provide additional incentives to promote the
success of the Company's business and to enhance the ability to attract and
retain the services of qualified persons. The issuance of such options are
approved by the Board of Directors. The exercise price of an option granted
is determined by the fair market value of the stock on the date of grant.
F-18
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
12. STOCKHOLDERS' EQUITY, CONTINUED
---------------------------------
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options is greater than or equal to the market
price of the underlying stock on the date of grant, no compensation expense
is recognized. During the year ended December 31, 2001, compensation
expense of $377,150 was recognized related to the issuance of stock options
with a market price exceeding the exercise price on the date of grant. No
compensation expense was recognized in 2000 or 1999.
Proforma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2001, 2000 and 1999 as
follows:
DECEMBER 31,
----------------------------
2001 2000 1999
-------- -------- --------
Dividend yield 0% 0% 0%
Expected volatility 185% 185% 169%
Risk free interest 5% 53.6% 48.7%
Expected lives 3 years 3 years 3 years
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of proforma disclosures, the estimated fair value of the
options is included in expense over the option's vesting period or expected
life.
2001 2000 1999
------------- ------------- ------------
Net loss as reported $ (9,000,347) $ (6,502,646) $ (695,769)
Adjustment calculated in accordance
with SFAS 123 (1,435,800) (3,642,330) (892,044)
------------- ------------- ------------
Proforma net loss $(10,436,147) $(10,144,976) $(1,587,813)
============= ============= ============
Loss per common share, as reported $ (0.18) $ (0.27) $ (0.04)
Proforma and diluted net loss per
common share $ (0.21) $ (0.42) $ (0.09)
A summary of the Company's stock option activity and related information
for the years ended December 31, 2001, 2000 and 1999 follows:
F-19
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
12. STOCKHOLDERS' EQUITY, CONTINUED
---------------------------------
NUMBER OF WEIGHTED
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
----------- ---------
Balance outstanding at January 1, 1999 - $ -
Issued 920,000 $ 0.91
Exercised - -
Cancelled - -
Expired - -
-----------
Balance outstanding at December 31, 1999 920,000 $ 0.91
-----------
Issued 3,862,500 $ 2.97
Exercised (1,156,000) $ 0.97
Cancelled (350,000) $ 4.14
Expired (20,000) $ 3.00
-----------
Balance outstanding at December 31, 2000 3,256,500 $ 2.97
-----------
Issued 3,118,500 $ 0.64
Exercised (2,225,000) $ 0.52
Cancelled - -
Expired - -
-----------
Balance outstanding at December 31, 2001 4,150,000 $ 2.55
===========
All outstanding stock options are exercisable at December 31, 2001. A
summary of outstanding stock options are December 31, 2001 follows:
REMAINING
NUMBER OF COMMON CONTRACTED
STOCK EQUIVALENTS EXPIRATION DATE LIFE (YEARS) EXERCISE PRICE
- ----------------- --------------- ------------ ---------------
350,000 November 2003 1.8 $ 0.50
230,000 November 2003 1.8 1.00
600,000 November 2003 1.8 2.00
1,500,000 November 2003 1.8 5.00
40,000 December 2003 1.9 1.00
350,000 January 2004 2.0 1.00
370,000 February 2004 2.1 1.00
160,000 March 2004 2.2 1.00
100,000 April 2004 2.3 1.00
125,000 May 2004 2.3 1.00
150,000 June 2004 2.4 1.00
75,000 July 2004 2.5 1.00
50,000 August 2004 2.6 1.00
50,000 September 2004 2.7 1.00
- -----------------
4,150,000
=================
Effective in March 2002, the Company adopted a Stock Option and Grant Plan
(the "Plan") under which incentive stock options, non-qualified stock
options, restricted stock, and common stock of the Company may be granted
from time to time to employees and consultants of the Company. The Plan
allows for grants to other individuals contributing to the success of the
Company at the discretion of the Company's board of directors. The purpose
of the Plan is to provide additional incentives to promote the success of
the Company and to enhance the Company's ability to attract and retain the
services of qualified individuals. The Company has reserved 5,000,000
shares of stock for issuance under the Plan and up to 400,000 additional
shares will be reserved and available for issuance under the Plan each year
beginning in 2003 and continuing until 2012.
STOCK WARRANTS
---------------
A summary of the Company's stock warrant activity and related information
for the years ended December 31, 2001, 2000 and 1999 follows::
F-20
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
12. STOCKHOLDERS' EQUITY, CONTINUED
---------------------------------
NUMBER OF
SHARES
UNDER EXERCISE WEIGHTED
WARRANT PRICE AVERAGE PRICE
---------- ------------ --------------
Warrants outstanding at
December 31, 1999 - $ - $ -
Issued - $ - $ -
Canceled - $ - $ -
Exercised - $ - $ -
----------
Warrants outstanding at
December 31, 1999 - $ - $ -
Issued to Paradigm Ad-
vanced Technologies,
Inc. 12,500,000 $ 1.00 $ 1.00
Issued in connection with
financing arrangement 14,049,998 $0.375-$0.50 $ 0.43
Canceled - $ - $ -
Exercised - $ - $ -
----------
Warrants outstanding at
December 31, 2000 26,549,998 $ 1.00 $ 0.71
Issued - $ - $ -
Canceled - $ - $ -
Exercised - $ - $ -
----------
Warrants outstanding at
December 31, 2001 26,549,998 $ 1.00 $ 0.71
==========
The warrants issued in connection with the financing arrangement are all
exercisable for five years and include various provisions that could reduce
the exercise price. The Company is currently negotiating to establish the
final terms.
13. RELATED PARTY TRANSACTIONS
----------------------------
During the years ended December 31, 2001, 2000 and 1999, the Company was
engaged in various transactions with related parties as follows:
In November 2001, the Company entered into a consulting agreement with
a stockholder to provide recordkeeping and other administrative
services. The total compensation due under the three month agreement
is $15,303, of which $10,303 was incurred and paid in 2001.
During 2000, the Company paid health insurance costs on behalf of a
company owned by a stockholder. The Company's balance sheet includes a
receivable from that stockholder of $8,857 and $13,824 at December 31,
2001 and 2000, respectively, related to insurance expense paid on
behalf of this related party.
During 2000, the Company incurred a broker's fee of $25,000 to a
company owned by a stockholder in connection with the Company's
acquisition of Segway II Corporation (See Note 1). This amount has not
been paid and is included in accounts payable at December 31, 2001 and
2000.
In addition to the transactions and balances described above, the
Company has various related party notes receivable (See Note 5) and
notes payable (See Note 9) at December 31, 2001 and 2000.
14. NON-CASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------
During the years ended December 31, 2001, 2000 and 1999, the Company
engaged in various non-cash financing and investing activities as
follows:
F-21
PANGEA PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
14. NON-CASH INVESTING AND FINANCING ACTIVITIES, CONTINUED
-----------------------------------------------------------
2001 2000 1999
-------- ---------- -------
Common stock issued to acquire property $153,000 $ 455,000 $74,515
Acquisition of Mass Energy, Inc. in exchange
for common stock, net of $494,868 of cash
acquired - 2,255,132 -
Common stock issued in exchange for sub-
scription receivable 16,000 685,000 -
Debt converted to common stock - 1,312,120 -
Following is an analysis of cash paid for interest and income taxes:
Cash paid for interest $ - $ - $ -
Cash paid for income taxes - - -
F-22