UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2004
Commission File Number 0-29613
TIDELANDS OIL & GAS CORPORATION
(Name of small business issuer in its charter)
Nevada 66-0549380
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1862 West Bitters Rd., San Antonio, TX 78410
(Address of principal executive office)
(210) 764-8642
(Issuer's Telephone Number)
Securities Registered Pursuant of Section 12(b) of the Act: None
Securities Registered Pursuant of Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Check whether the issuer (1) 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 in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10-KSB. [ ]
The issuer had operating revenues of $1,883,838 for the year ended December 31,
2004.
This report contains a total of 51 pages. The Exhibit Index appears on page 24.
As of December 31, 2004, there were 61,603,359 shares of the issuer's common
stock outstanding. The aggregate market value of the $51,281,153 shares of the
issuer's voting stock held by non-affiliates was $$56,409,269 based on the low
bid price on that date as reported by the NASD OTC Electronic Bulletin Board.
The sum excludes the shares held by officers, directors, and stockholders whose
ownership exceeded 10% of the outstanding shares at December 31, 2004, in that
such persons may be deemed affiliates of the Company. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
TIDELANDS OIL & GAS CORPORATION
FORM 10-KSB
December 31, 2004 Page
PART I
ITEM 1. Business........................................................... 2
ITEM 2. Properties......................................................... 4
ITEM 3. Legal Proceedings.................................................. 4
ITEM 4. Submission of Matters to vote of Security Holders.................. 5
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
And Small Business Issuer Purchases of Equity Securities.......... 5
ITEM 6. Management's Discussion and Analysis or Plan of Operation.......... 7
ITEM 7. Financial Statements............................................... 11
ITEM 8. Changes In and Disagreements with Accounting and
Financial Disclosure........................................ 11
ITEM 8A. Controls and Procedures............................................ 11
ITEM 8B. Other Information.................................................. 12
PART III
ITEM 9. Directors, Executive Officers, Promoters, and Control
Persons: Compliance with Section 16(a) of the Exchange Act.. 12
ITEM 10. Executive Compensation............................................ 14
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................ 16
ITEM 12. Certain Relationships and Related Transactions.................... 19
ITEM 13. Exhibits.......................................................... 20
ITEM 14. Principal Accounting Fees and Services............................ 22
SIGNATURES.................................................................. 23
EXHIBIT INDEX............................................................... 24
1
PART I
ITEM 1. BUSINESS.
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has nine subsidiaries which it
directly and indirectly owns as follows: (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates, L.P. , (4) Terranova Energia, S.de R.L. de
C.V. and (5) Sonterra Energy Corporation. We also own a 97% limited partnership
interest in Reef Ventures, L.P.(6) Arrecefe Management LLC owns a 1% general
partner interest in Reef Ventures, L.P. Rio Bravo Energy, LLC owns 100% of the
member interest in Sonora Pipeline LLC. (7) Reef Ventures, L.P. owns 100% of the
member interest in Reef International LLC(8) and Reef Marketing LLC(9).
The Company's products and services are primarily focused on development and
operation of transportation, processing, distribution and storage projects for
natural gas and natural gas liquids in the northeastern states of Mexico
(Chihuahua, Coahuila, Nuevo Leon and Tamaulipas) and the State of Texas.
Reef Ventures International Pipeline
Until September 30, 2004, we derived our revenue from sales of natural gas to
Conagas, the local distribution company in Piedras Negras, Coahuila, through the
pipeline owned by Reef Ventures, L.P. On September 1, 2004, we converted the
revenue source for this pipeline to a transportation fee. As a reseller of
natural gas we were obligated to restrict of use of $1,000,000 of cash in order
to fund a credit facility in favor of the seller of natural gas. We believe that
converting the revenue source to a transportation fee that we will double net
revenues based upon current gas volumes committed for delivery to the customer
in Piedras Negras, Coahuila. Additionally, Management is evaluating an expansion
of the pipeline in Coahuila to serve new markets along the state highway No. 57
corridor to Monclova, Coahuila. The planned Liquid Petroleum Gas ( LPG) line
between Eagle Pass, Texas and Piedras Negras, Coahuila is being re-evaluated in
light of new supply sources emerging in Nuevo Laredo and Reynosa, Tamaulipas. A
decision to proceed, modify or abandon the LPG project at this location is
expected in the future. The above projects were acquired in connection with the
buyout of the Impact general and limited partnership interests in Reef Ventures,
L.P.
Tidelands Oil & Gas Storage Enterprise
In December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
to design, build and operate an underground natural gas storage facility in the
vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
at other regions in Mexico. The MOU provides for exclusivity in the development
of the projects and the related transportation and interconnecting pipelines to
and from the storage facilities.
We have completed the initial study of the Burgos facility and expect to
complete final contract negotiations with the Secretary of Energy and PEMEX for
the construction and operation of the facility before the end of 2005. A system
of two interconnecting pipelines is also proposed to enhance the overall
pipeline grid in Mexico and the operational efficiency of the proposed storage
facility. The capital budget for these projects exceeds $700 Million Dollars and
is expected to be funded through issuance of additional equity of the Company ,
the addition of joint venture partners and/or debt financing. Marea Associates,
L.P. was formed to own the majority interest in Terranova Energia, S. de R.L. de
C.V., a Mexican company which will conduct all business dealings in Mexico on
behalf of Tidelands. Rio Bravo Energy LLC, an existing wholly owned subsidiary
owns the general partner interest in Marea Associates, L.P. and a minority
interest in Terranova Energia, S. de R.L. de C.V.
Rio Bravo Energy, LLC
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an
oilfield which produced high BTU casinghead gas from which gas processing
operations would yield valuable hydrocarbon components such as propane, butane
and natural gasolines. As the field depleted lower volumes of casinghead gas
were being delivered by Conoco, and other gas producers could not be contracted
with for processing of additional replacement volumes of gas. Therefore, in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume operation of the plant. Management plans to reopen
the plant when adequate volumes of gas from third party producers makes plant
operations economically attractive. The gas plant has the capability to
fractionate natural gas into commercial grade propane and butane. The maximum
2
intake capacity of gas plant is 10 million cubic feet of gas per day. Presently,
we are evaluating opening the plant for LPG production for our Sonterra Energy
Corporation Austin propane business. The market for the products of plant
operation could include our future propane/butane terminal and pipeline crossing
into Mexico, and/or LPG supply to Sonterra's propane business in Austin, Texas.
Sonora Pipeline, LLC
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline. This pipeline network was
acquired in conjunction with the Chittim Gas Processing Plant acquisition and,
when operational, could generate revenue from transportation fees to be charged
to third party gas producers shipping natural gas to the gas plant owned by Rio
Bravo Energy LLC.
Sonterra Energy Corporation Business
On November 1, 2004, through our subsidiary, Sonterra Energy Corporation
subsidiary, we entered into an Asset Purchase and Sale Agreement with Oneok
Propane Distribution Company, a division of ONEOK Propane Company, a Delaware
corporation. We purchased the assets of this division for Two Million
($2,000,000). The assets consist of propane distribution systems, including gas
mains, yard lines, meters and storage tanks, serving the following residential
13 subdivisions in the Austin, Texas. Additionally, we provide gas to Arbolago
and Hills of Lakeway subdivisions. The 15 subdivisions include:
o Arbolago*
o Austin's Colony Phase II
o Costa Bella
o Hills of Lakeway
o Jacarandas
o Lake Pointe
o La Ventana
o Lakewinds Estates
o Northshore on Lake Travis Phase I
o Riverbend
o Rob Roy Rim
o Senna Hills
o Sterling Acres
o The Point
o The Preserve at Barton Creek
These subdivisions contain 1,333 lots. Presently, 850 of lots are metered for
use. There are 483 number of unmetered lots. As new homes are constructed on
these lots our customer base will grow. Presently, 100% of the subdivisions are
metered for propane consumption.
The propane distribution system is comprised of approximately 25 miles of gas
main pipe, 75,000 feet of yard lines, 850 meters, storage tanks with a combined
capacity of 156,000 gallons. Sonterra is the exclusive seller of propane in
these subdivisions and is not considered a regulated utility. Sonterra purchases
propane products from a number of distributors in Austin, Texas.
We financed the purchase of these assets by selling Four Million (4,000,000)
shares to ACH Securities, S.A., a company domiciled in Geneva, Switzerland, for
Two Million ($2,000,000) Dollars. On October 14, 2004, in connection with the
ACH Securities transaction, we issued Margaux Investment Group, S.A. common
stock warrants to purchase One Million (1,000,000) shares for Fifty ($0.50)
Cents per share and One Million (1,000,000) shares at $2.50 per share.
The Texas Railroad Commission regulates all aspects of the production,
transportation and processing of petroleum products, including propane, in the
State of Texas.
3
Competition
-----------
Reef Ventures, L.P. Eagle Pass Pipeline Crossing
Our Eagle Pass international pipeline crossing competes with a pipeline owned by
West Texas Gas, Inc. pipeline crossing which is located two miles north of Eagle
Pass. We believe that the West Texas Gas crossing will be able to compete with
us only marginally beginning in 2006 due to a very limited transmission
capability and marketing efforts currently being undertaken by Management.
Sonterra Energy Corporation Propane Distribution
Our propane distribution business serving the 15 Austin subdivisions is not
subject to competition within the existing acquired subdivisions because we are
the sole propane supplier. The residential subdivisions are subject to a propane
supply covenant granting us the exclusive supply of propane for each
subdivision. In the future, we will compete in the bidding process for new
propane distribution systems as new residential subdivisions are developed. We
may also be able to acquire additional existing propane distribution systems
from competitors.
Employees
---------
Tidelands has seven full time employees including our corporate officers. Our
Sonterra Energy subsidiary, which operates the Austin propane gas distribution
company, has 9 full-time employees.
ITEM 2. DESCRIPTION OF PROPERTIES
Reef Ventures, L.P. owns and operates the international natural gas pipeline and
related facilities located in Maverick County, Texas and Coahuila, Mexico.
Tidelands owns a 97% limited partnership interest in this entity. We acquired
this interest from Impact International, LLC. Impact financed our purchase of
this system and we owe Impact $ 6,731,883.
Rio Bravo Energy, LLC owns and operates the Chittim Gas Processing Plant which
is located in Maverick, County, Texas. The plant is currently shut down. The gas
plant has the capability to fractionate natural gas into commercial grade
propane and butane. In the near future, we may activate this plant and produce
propane for our Sonterra propane business in Austin, Texas.
Sonora Pipeline, LLC owns the Sonora Pipeline network consisting of
approximately 80 miles of pipeline. No significant encumbrances exist with
respect to the assets of this company. The pipeline is currently inactive and
will be used primarily to transport natural gas from third party producers to
supply feedstock for the Chittim Gas Processing Plant owned by Rio Bravo Energy
LLC.
Sonterra Energy Corporation operates a propane distribution systems providing
propane to 15 residential subdivisions in Austin, Texas. The propane
distribution system is comprised of approximately 25 miles of gas main pipe,
75,000 feet of yard lines, 850 meters and storage tanks with a combined capacity
of 156,000 gallons of LPG.
We lease our San Antonio executive office. We entered into this office lease on
August 1, 2003. The term expires November 30, 2005. Our monthly lease payment is
$3,400. Our rent expense for 2004 was $43,300. This figure includes $2,500 rent
paid on behalf of the Sonterra Energy Corporation operations.
ITEM 3. LEGAL PROCEEDINGS
On January 6, 2003, we were served as a third party defendant in a lawsuit
titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil &
Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
4
to make payments on a note she executed payable to Northern in the original
principal amount of $1,950,000. Northern's suit was filed on November 13, 2002.
Sheerin answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses of
fraudulent inducement by Northern, estoppel, waiver and the further claim that
the not does not comport with the legal requirements of a negotiable instrument.
Sheerin seeks a judicial ruling that Northern be denied any recovery on the
note. Sheerin's answer included a counterclaim against Northern, ZG Gathering,
and Ken Lay generally alleging, among other things, that Northern, ZG Gathering,
Ltd. and Ken Lay, fraudulently induced her execution of the note. Northern has
filed a general denial of Sheerin's counterclaims. Sheerin's answer included a
third party cross claim against Tidelands. She alleges that Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG Gathering Ltd.
and that, as a part of the agreement, Tidelands agreed to satisfy all of the
obligations due and owing to Northern, thereby relieving Sheerin of all
obligations she had to Northern on the promissory note in question. She alleges
that Tidelands is liable to her for all of her actual damages, costs of the
lawsuit and other unstated relief. Tidelands and Sheerin agreed to delay the
Tideland's answer date in order to allow time for mediation of the case.
Tideland's participated in a mediation on March 11, 2003. The case was not
settled at that time. Tideland's answered the Sheerin suit on March 26, 2003.
Tideland's answer denies all of Sheerin's allegations. No discovery has been
completed at this time. Based on initial investigation, however, Tidelands
appears to have a number of potential defenses to Sheerin's claims. Tideland's
intends to aggressively defend the lawsuit. At this early stage in the
litigation, and in light of our continuing investigation of the facts and the
issues in the case, we cannot give a more definitive evaluation of the extent
Tideland's liability exposure.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her first and
second amended original answer, affirmative defenses, special exceptions and
second amended original counterclaim, second amended original third party
cross-actions and requests for disclosure. In these amended pleadings, she sued
Michael Ward, Royis Ward, James B. Smith, Carl Hessel and Ahmed Karim in their
individual capacities. Her claims against these individuals are for fraud,
breach of the Uniform Commercial Code, breach of duty of good faith and fair
dealing and conversion. These claims are being vigorously defended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the security holders during the quarter
ended December 31, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
Market For Common Equity And Related Stockholder Matters
Our common stock is traded on the OTC Electronic Bulletin Board. The following
table sets forth the high and low bid prices of our common stock for each
quarter for the years 2003 and 2004. The quotations set forth below reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Common Stock
Our common stock trades Over-the-Counter (OTC) on the OTC Bulletin Board under
the symbol TIDE. Table 1. sets forth the high and low bid information for the
past two years. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
These quarterly trade and quote data provided by NASDAQ OTC Bulletin Board.
5
Table 1.
Bid Information
Fiscal Quarter Ended
High Low
December 31, 2004 1.36 0.60
September 30, 2004 2.18 0.73
June 30, 2004 3.18 1.70
March 31, 2004 4.45 1.72
December 31, 2003 2.57 0.75
September 30, 2003 1.05 0.24
June 30, 2003 0.47 0.20
March 31, 2003 0.40 0.15
On December 31, 2004, the closing bid and closing ask prices for shares of our
common stock in the over-the-counter market, as reported by NASD OTC BB were
$1.10 and $1.36 per share, respectively.
We believe that there are presently 39 market makers for our common stock. When
stock is traded in the public market, characteristics of depth, liquidity and
orderliness of the market may depend upon the existence of market makers as well
as the presence of willing buyers and sellers. We do not know if these or other
market makers will continue to make a market in our common stock. Further, the
trading volume in our common stock has historically been both sporadic and
light.
As of December 31, 2004, we had an aggregate of 86 stockholders of record as
reported by our transfer agent, Signature Stock Transfer Co., Inc. Certain
shares are held in the "street" names of securities broker dealers and we
estimate the number of stockholders which may be represented by such securities
broker dealer accounts may exceed 1,500.
Dividends and Dividend Policy
There are no restrictions imposed on the Company which limit its ability to
declare or pay dividends on its common stock, except as limited by state
corporation law. During the year ended December 31, 2004, no cash or stock
dividends were declared or paid and none are expected to be paid in the
foreseeable future.
We expect to continue to retain all earnings generated by our future operations
for the development and growth of our business. The Board of Directors will
determine whether or not to pay dividends in the future in light of our
earnings, financial condition, capital requirements and other factors.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plan information as of
December 31, 2004. Information is included for equity compensation plans not
approved by our security holders.
6
Table 1.
Equity Compensation Plan Information
------------------------ ------------------------ ---------------------- ------------------------
Plan Category Number of Securities to Weighted-average Number of Securities
be issued upon exercise Exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants, and rights equity compensation
plans (excluding
securities reflected in
column (a)
------------------------ ------------------------ ---------------------- ------------------------
(a) (b) (c)
------------------------ ------------------------ ---------------------- ------------------------
Equity Compensation
Plans approved by
security holders None None None
------------------------ ------------------------ ---------------------- ------------------------
Equity Compensation
Plans not approved by 500,000 (1) $ 0.125 None
security holders 5,000,000 (2) $ 0.287 210,122
5,000,000 (3) $ 0.87 4,500,000
------------------------ ------------------------ ---------------------- ------------------------
Total 10,500,000 $0.333 4,710,122
------------------------ ------------------------ ---------------------- ------------------------
(1) This plan registered shares issued for legal services rendered on behalf of
the Company and approved by our Board of Directors. These shares were issued in
lieu of cash legal fees for services rendered during 2002.
(2) On May 27, 2003, the Company adopted the 2003 Non-Qualified Stock Grant and
Option Plan. The Plan reserved 5,000,000 shares. The Plan is administered by our
Board of Directors. Directors, officers, employees consultants, attorneys, and
others who provide services to our Company are eligible participants.
Participants are eligible to be granted warrants, options, common stock as
compensation.
(3) On November 2, 2004, the company adopted the 2004 Non-Qualified Stock Grant
and Option Plan. The Plan reserved 5,000,000 shares. The Plan is administered by
our Board of Directors. Directors, officers, employees consultants, attorneys,
and others who provide services to our Company are eligible participants.
Participants are eligible to be granted warrants, options, common stock as
compensation. On November 5, 2004, under the terms of James Smith's employment
agreement, we granted and issued 500,000 common shares to him under this Plan.
Recent Sales of Unregistered Securities
All sales of unregistered securities have been previously reported in
our filed periodic reports filed with the Securities & Exchange Commission on
Forms 8-K and 10-QSB.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Business Overview
Our products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects for natural gas
and natural gas liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.
We previously derived our revenue from sales of natural gas to Conagas, the
local distribution company in Piedras Negras, Coahuila, through the pipeline
owned by Reef Ventures, L.P. We converted the revenue source for this pipeline
to a transportation fee on September 1, 2004 with the execution of a new
agreement with Conagas. This contract arrangement freed up of use of $1,000,000
of our restricted cash which we used to fund a credit facility in favor of the
seller of natural gas to Reef Ventures, L.P. We believe that as a result of the
conversion of the revenue source to a transportation fee, net revenues will be
doubled based upon current gas volumes committed for delivery to Conagas. .
Management is evaluating an expansion of the pipeline in Coahuila to serve new
markets along the state highway No. 57 corridor to Monclova, Coahuila. The
planned natural gas liquid line between Eagle Pass, Texas and Piedras Negras,
Coahuila is being re-evaluated in light of new supply sources emerging in Texas
and Mexico. The above projects were acquired in connection with the buyout of
the Impact general and limited partnership interests in Reef Ventures, L.P.
which is described in further detail in Note 14 to the Consolidated Financial
Statements for the periods ended December 31, 2004 and December 31, 2003 below.
7
In December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
to design, build and operate an underground natural gas storage facility in the
vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
at other regions in Mexico. The MOU provides for exclusivity in the development
of the projects and the related transportation and interconnecting pipelines to
and from the storage facilities.
We have completed the initial study of the Burgos facility and expect to
complete final contract negotiations with the Secretary of Energy and PEMEX for
the construction and operation of the facility shortly. A system of two
interconnecting pipelines is also proposed to enhance the overall pipeline grid
in Mexico and the operational efficiency of the storage facility. Permit
applications for all these projects will be filed in 2005 with the Mexican
Energy Regulatory Commission. The capital budget for these projects exceeds $700
Million Dollars. We anticipate funding these projects with additional equity of
the Company, the addition of joint venture partners and/or debt financing. Marea
Associates, L.P. was formed during the fiscal quarter ended June 30, 2004 to own
the majority interest in Terranova Energia, S. de R.L. de C.V., a Mexican
company which will conduct all business dealings in Mexico on behalf of the
Tidelands. Rio Bravo Energy LLC, an existing wholly owned subsidiary owns the
general partner interest in Marea Associates, L.P. and a minority interest in
Terranova Energia, S. de R.L. de C.V.
We are in the preliminary design phase for an LNG regasification terminal to be
located in offshore Mexican waters of the Gulf of Mexico near Matamoros,
Tamaulipas. The Dorado LNG Terminal would provide additional supply for
Northeast Mexico natural gas markets which are currently importing approximately
1.0 BCF per day from the U.S. The capital cost to build the terminal and
interconnecting pipeline to the planned storage facility is expected to be over
$200 million USD. Management estimates a cumulative capital investment of
approximately $1 billion USD for the LNG regasification terminal, the pipelines
in the U.S. and Mexico and the Mexican storage facility. These projects are
targeted to address the critical infrastructure needs for the natural gas and
power markets in Northeast Mexico through the year 2013. A collateral
opportunity to import natural gas into the U.S. via the project's route and
facilities is also contemplated. Management is in active negotiations for LNG
supply, U.S. supply and off take gas contracts in Mexico and the U.S. The
projects will be developed and operated with a tolling business model as the
revenue premise, however, joint venture or contractual relationships with third
parties may allow the Company to participate in merchant operations in the
energy supply business for Mexican and U.S. customers.
The Company has engaged Sanders Morris Harris, Inc., an energy investment
banking firm in Houston, Texas, as its primary financial advisor with respect to
the capital raise requirements for the above projects. We have also had
substantive and ongoing discussions with interested third parties for private
equity and debt and will continue those discussions in the upcoming year as
further development of the projects occurs.
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an
oilfield which produced high BTU casinghead gas from which gas processing
operations would yield valuable hydrocarbon components such as propane, butane
and natural gasolines. As the field depleted lower volumes of casinghead gas
were being delivered by Conoco and other gas producers could not be contracted
with for processing of additional replacement volumes of gas. Therefore, in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume operation of the plant. We plan to reopen the plant
in 2005 when adequate volumes of LPG feedstock from third parties makes plant
operations economically attractive. We are evaluating the feasibility of opening
the gas plant for LPG production for our Sonterra LPG business in Austin, Texas.
Additionally, the market for the products of the Chittim plant operation could
include our future propane/butane terminal and pipeline crossing into Mexico. As
noted above, Rio Bravo Energy LLC owns a general partner interest in Marea
Associates, L.P. and the minority interest in Terranova Energia, S. de R.L. de
C.V.
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
8
consists of approximately 80 miles of gas pipeline. Presently, the line is not
in use. The pipeline was acquired in conjunction with the Chittim Gas Processing
Plant acquisition. When operational, it would generate revenue from
transportation fees charged to third party gas producers shipping natural gas to
the Chittim Gas Plant owned by Rio Bravo Energy LLC. Sonora Pipeline LLC will
also own and operate the U.S. (Texas) pipeline segments to be constructed in
connection with the Mexican pipeline, LNG regasification terminal and gas
storage projects which will interconnect to the U.S. via two international
pipeline crossings near McAllen, Texas. The estimated capital cost of these U.S.
segments is approximately $60 million USD.
Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the residential propane distribution business on November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin, Texas. Sonterra's existing and future market area includes several
central Texas locations that do not have access to natural gas as a fuel for
home heating and appliance usage. Current expansion of over 400 lots within the
existing subdivisions is possible. Sonterra has also entered into a new
agreement with the developer of Northshore on Lake Travis to expand the
currently serviced lots by an additional 1,000 units. Up to 2,625 additional
lots may be available for installation of residential propane delivery in
developments currently in the planning stages in the nearly central Texas
vicinity.
Results of Operations
REVENUES: The Company reported revenues of $1,883,838 for the twelve months
ended December 31, 2004 as compared with revenues from continuing operations of
$178,856 for the twelve months ended December 31, 2003. The revenue increase
resulted primarily from the acquisition of an additional 73% interest in Reef
Ventures, L.P. which owns and operates a natural gas pipeline serving the
Piedras Negras, Coahuila market. Natural gas sold ($1,323,459) and
transportation fees ($76,767) charged from these operations totaled $1,400,227
for the twelve months ended December 31, 2004. Sales of propane by Sonterra
Energy Corporation to its residential customer base ($363,413), service call
income for its customers ($34,373), and installation income for new yard lines
and meter sets ($2,850) totaled to $400,636 for the twelve months ended December
31, 2004. A new revenue source from Sonterra Energy Corporation was construction
services related to propane main lines and tank sites for subdivisions under
development, which resulted in $82,975 of revenues for the twelve months ended
December 31, 2004. Other Revenues decreased by $178,856 for the twelve months
ended December 31, 2004 as compared to the twelve months ended December 31,
2003.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $3,061,068 for the twelve months ended December 31, 2003 to
$8,451,280 for the twelve months ended December 31, 2004. Each category of cost
and expense increased significantly due to the rapid growth in assets and
operating expenses experienced by the Company during the twelve months ended
December 31, 2004. Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31, 2004.
Operating Expenses increased from $27,767 for the twelve months ended December
31, 2003 to $99,665 for the twelve months ended December 31, 2004. Depreciation
Expense increased from $43,006 for the twelve months ended December 31, 2003 to
$244,889 for the twelve months ended December 31, 2004. Interest Expense
increased from $53,163 for the twelve months ended December 31, 2003 to $300,566
for the twelve months ended December 31, 2004. Each of these increases resulted
primarily from growth related to the acquisition of 98% of the partnership
interest in the Reef Ventures, L.P. international pipeline operations and the
acquisition of the residential propane sales business near Austin, Texas by
Sonterra Energy Corporation. Officers & Directors Salaries & Fees increased from
$313,000 for the twelve months ended December 31, 2003 to $1,331,848 for the
twelve months ended December 31, 2004. This increase resulted from the addition
of additional directors and officers combined with the increased use of stock
based compensation in the employment agreements of officers. General and
Administrative Expenses increased from $2,624,132 for the twelve months ended
December 31, 2003 to $4,965,421 for the twelve months ended December 31, 2004
due to the results from the startup and initial operation of the additional
business units mentioned above and the expenses for expanded Company operations
associated with the development of new midstream energy projects in the U.S. and
Mexico during that period.
9
COST OF SALES: Total Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31, 2004.
Cost of sales increased by $1,299,518 for the purchase cost of natural gas
resold thru our international pipeline operated by Reef Ventures, L.P. and by
$209,373 for the purchase cost of propane, meter sets and yard lines sold to
residential customers by Sonterra Energy Corporation.
OPERATING EXPENSES: Operating expenses from continuing operations which are
expenses related to the operation of Company assets in an active business
segment increased from $27,767 for the twelve months ended December 31, 2003 to
$99,665 for the twelve months ended December 31, 2004 which is a total increase
of $71,898. This increase was due to the operating expenses incurred for the
international pipeline crossing operated by Reef Ventures, L.P. and the
operating expenses incurred by Sonterra Energy Corporation. Depreciation expense
increased by $201,883 during the twelve months ended December 31, 2004 due to
the acquisition of the natural gas pipeline owned by Reef Ventures, L.P. and the
depreciable assets acquired by Sonterra Energy Corporation for the operation of
the residential propane distribution systems in Austin, Texas. Interest expense
increased by $247,403 during the twelve months ended December 31, 2004 due to
the debt incurred to acquire the natural gas pipeline owned by Reef Ventures,
L.P. and the issuance of convertible debt to entities associated with the
Mercator Advisory Group, LLC, now known as MAG Capital, LLC. Officers &
Directors Salaries & Fees increased by $1,018,848 during the twelve months ended
December 31, 2004 as a result of the addition of one director and two officers
to the Company combined with the increased use of stock based compensation in
the employment agreements of officers.
GENERAL AND ADMINISTRATIVE: General & Administrative Expenses increased by
$2,341,289 during the twelve months ended December 31, 2004. Consulting fees,
legal fees, and financing fees increased by $1,822,414 for the twelve months
ended December 31, 2004. The remaining increase in G & A costs of $518,875for
the twelve months ended December 31, 2004 was from increases in travel costs,
office rent, insurance premiums, entertainment, and payroll plus other expenses
associated with additional employees. The significant expansion of scope in the
business plan for the Company and the need to conserve cash working capital for
certain project predevelopment costs required the use of significant issuances
of stock for general and administrative expenses during the twelve months ended
December 31, 2004.
NET LOSS FROM OPERATIONS: Net loss of ($1,348,481) for the twelve months ended
December 31, 2003 increased to ($6,517,182) for the twelve months ended December
31, 2004, an increase in the amount of loss of $5,168,701. Included in the net
loss from operations is $4,603,066 of expenses for financing costs, consulting
fees, legal fees, and employee compensation paid by issuance of common stock.
LIQUIDITY AND CAPITAL RESOURCES: Direct capital expenditures during the twelve
months ended December 31, 2004 totaled $8,727,010 as compared with $134,505 for
the twelve months ended December 31, 2003. The increased capital expenditures
were composed of the acquisition of the assets of Reef Ventures, L.P. natural
gas pipeline ($5,933,442), increased office furniture, equipment and leasehold
costs ($26,550), higher pre-construction costs regarding potential international
pipeline crossings and storage facilities in Mexico ($822,525), pre-construction
costs related to propane distribution systems ($207,415), machinery, equipment,
trucks, autos and trailers from the Sonterra asset acquisition ($120,355),
storage tanks and main lines for propane distribution ($1,596,439) and
additional equipment for our gas processing plant ($20,000). The Company also
paid $1,158,937 for goodwill associated with the acquisition of the Reef
Ventures, L.P. and Sonterra Energy Corporation assets. Total debt increased from
$1,138,905 at December 31, 2003 to $12,306,107 at December 31, 2004. The
increase in total debt is primarily due to: (1) the acquisition indebtedness
created in the acquisition of the Reef Ventures, L.P. partnership interests from
Coahuila Pipeline LLC and Impact International LLC as described in Note 5 and
Note 14 to the Consolidated Financial Statements for the period ended December
31, 2004, and (2) the issuance of Convertible Debentures to the MAG Capital,
LLC, formerly Mercator Advisory Group, LLC, funds as described in Note 5 of the
Consolidated Financial Statements for the period ended December 31, 2004. Total
debt as of December 31, 2004 and December 31, 2003 expressed as a percentage of
the sum of total debt and shareholders' equity was 71.45% and 70.15%
respectively.
10
On June 4, 2004, the Company entered into a SBC Center Terrace Suite License
Agreement with the San Antonio Spurs, LLC, commencing July 1, 2004, for a period
of five years. The annual license fee is $159,000 for that first year and is
subject to a 6% per annum price escalation thereafter. The annual fee is payable
in installments as indicated in the agreement. Future annual license fee
commitments total $737,296. (See Note 4 of the Audit Report below).
Net loss for the twelve months ended December 31, 2004 was ($6,517,182) an
increase in net loss of 483% from the net loss of ($1,348,481) for the twelve
months ended December 31, 2003. Diluted net loss per common share increased 300%
to ($0.09). The net loss per share calculation for the twelve months ended
December 31, 2004 included an increase in actual and equivalent shares
outstanding. In addition, the period ended December 31, 2003 included a one time
gain of partial sale of a subsidiary in the amount of $1,533,731 which
influenced the difference in net income (loss) per share for the periods ending
December 31, 2003 versus December 31, 2004.
FORWARD-LOOKING STATEMENTS:
We have included forward-looking statements in this report. For this purpose,
any statements contained in this report that are not statements of historical
fact may be deemed to be forward looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions, demand for the Company's products, competitive factors in the
industries in which we compete or intend to compete, natural gas availability
and cost and timing, impact and other uncertainties of our future acquisition
plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Independent Accountant's Report..................................... F-3
Financial Statements
Balance Sheets............................................... F-4
Statements of Operations..................................... F-4
Statements of Stockholder's Equity........................... F-6
Statements of Cash Flows..................................... F-7 - F-8
Notes to Financial Statements................................ F-9 - F-25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
11
As of the end of the reporting period, December 31, 2004, we carried
out an evaluation, under the supervision and with the participation of our
management, including the Company's Chairman and Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities
Exchange Act of 1934 (the "Exchange Act"), which disclosure controls and
procedures are designed to insure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms. Based upon that evaluation, the Chairman and the Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's period SEC filings.
(b) Changes in Internal Control.
Subsequent to the date of such evaluation as described in
subparagraph(a)above, there were no changes in our internal controls or other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
(c) Limitations.
Our management, including our Principal Executive Officer and Principal
Financial Officer, does not expect that our disclosure controls or internal
controls over financial reporting will prevent all errors or all instances of
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system's objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and any design may not
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
ITEM 8B. OTHER INFORMATION:
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Date became director
Name Age Position or officer
--------------------------------------------------------------------------------
Michael Ward 49 Director, President October 21, 1998
James B. Smith, C.P.A. 51 Chief Financial Officer, August 16, 2003
Sr. V.P.
Ahmed Karim 33 Director, Vice President October 21, 1998
Robert Dowies 54 V.P. October 18, 2004
Carl Hessel 41 Director January 28, 2004
12
MICHAEL WARD: Mr. Ward is the President, Chief Executive Officer and Chairman of
our Board of Directors. Michael Ward has served in his present capacities since
October 21, 1998. He is Vice President and Chief Executive Officer of Tidelands
Gas Corporation. He is a Manager and Vice President of Development of Rio Bravo
Energy, LLC. Mr. Ward has more than 25 years of diversified experience as an oil
and gas professional. He was educated in business management and administration
at Southwest Texas State University and the University of Texas. He has wide
experience in the capacity in which he successfully served in operating oil and
gas companies in the United States. During the past 20 years, he has been
associated with Century Energy Corporation where his duties and responsibilities
were production and drilling superintendent and supervised 300 re-completions
and new drills in Duval County, Texas. In association with Omega Minerals, Inc.,
where he was vice president and part owner, he operated 65 wells in 23 counties
in South and West Texas: 17 wells in Seminole and Osage Counties, Oklahoma, 44
wells in Neosho and Wilson Counties, Kansas and 125 wells in Brown, Pike,
Schuyler and Scott Counties. Illinois. He was president and owner of Major
Petroleum Company. He drilled, completed and produced 42 wells in South and West
Texas counties. The company was sold. With Tidelands Oil Corporation, his duties
included supervising and performing remedial well work, work-overs and economic
evaluation of the corporate properties. The primary area of interest was in
Maverick County, Texas. He has performed project financing analysis and
consulting of refinery acquisitions for the Yemen government.
JAMES B. SMITH: On August 16, 2003, we employed James B. Smith to act as a
Senior Vice President and Chief Financial Officer. Mr. Smith received a Bachelor
of Science from Texas A&M University and a Master of Professional accounting
degree from the McCombs School of Business at the University of Texas, Austin.
He is licensed as a Certified Public Accountant in Texas and Colorado. From 1996
through 2001, he directed the financial affairs and tax planning for several
closely held corporations engaged in land development in Colorado. From 2000
through 2003, he served as Chief Financial Officer for Starr Produce Company, a
major produce company with significant subsidiaries in real estate development
and agri-business.
AHMED KARIM: Mr. Karim Vice President and director of the Company. He is a
graduate of Simon Fraser University. He holds a degree in Business
Administration, specializing in marketing and international business. Since 1995
his business experience includes work with Quest Investments Group and
Interworld Trade and Finance where his responsibilities included marketing,
finance and investor relations.
ROBERT W. DOWIES: On October 18, 2004, we employed Robert W. Dowies as our Vice
President of Gas Markets and Supply. Mr. Dowies has 30 years experience in the
energy marketing. Ten years as the owner of a natural gas trading company and 20
years with a public utility. Until his employment with Tidelands Oil & Gas
Corporation, since 1998, Mr. Dowies worked for Trebor Energy Resources, Inc. in
Houston, Texas. His principal responsibilities were the development of financial
alliances with various energy merchants and producers providing a $50 million
dollar credit support for gas marketing activities, financial trading accounts,
pipeline transportation agreements, storage strategies and capital projects. He
developed and implemented marketing strategies which resulted in $40 million
dollars of annual revenue. He designed and coordinated the construction and
implementation of a natural gas gathering system. We entered into a three year
employment contract paying him an annual salary of $100,000 which includes an
annual stock grant of 100,000 shares.
CARL HESSEL: On January 28, 2004, Mr. Hessel joined our board of directors. Mr.
Hessel founded Margaux Investment Management Group, S.A. which is located in
Geneva, Switzerland in 2001. Prior to 2001, he served as Vice President of
Merrill Lynch were he was responsible for creating global high net worth
management platform. He began his career at Goldman Sachs and help build the
Scandinavian ultra-high net worth market. Mr. Hessel received his M.B.A. from
Wharton Business School and a degree in Finance and Management from the
University of Pennsylvania. He was awarded the Marcus Wallenberg Foundation's
Scholarship.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
13
initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock of the Company. Officers, directors and greater than
10% shareholders are required by the Securities and Exchange Commission to
furnish the Company with copies of all section 16(a) reports they file. Based
solely on copies of such forms furnished as provided above, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended December 31, 2004, all Section 16(a) filing requirements
applicable to its executive officers, directors and beneficial owners of more
than 10%of its Common Stock were complied with, except as follows:
Michael Ward failed to file one Form 5, Statement of Annual Beneficial Ownership
due February 14, 2004, and three Form's 4 representing two stock grants under
his employment agreement and one option exercise, (2)Ahmed Karim failed to file
one Form 5, Statement of Annual Beneficial Ownership, due February 14, 2004.
ITEM 10. EXECUTIVE COMPENSATION
The following sets forth the compensation of the officers of the
Company in the year ended December 31, 2004.
Summary Compensation.
The following table sets forth the compensation paid by the Company during
fiscal year 2004 to its officers. This information includes the dollar value of
base salaries, bonus awards and number of stock options granted, and certain
other compensation, if any.
Table 1.
Stock
Underlying Stock
Name and Position Year Salary Bonus Options Grants
Michael Ward, Pres. 2004 $252,000 $28,550 500,000(1) 1,000,000
James Smith, V.P,CFO 2004 $168,000 $11,996 552,800(1,2) 500,000
Ahmed Karim, V.P.(3) 2004 -0- -0- 500,000(1) -0-
Robert Dowies (4) 2004 $100,000 $ 4,167 -0- 100,000(3)
(1) These stock options were exercised on September 14, 2004 by the delivery of
one-year promissory notes in the amount of $110,000 each.
(2) Mr. Smith received a stock grant of 52,800 shares which was issued under the
2003 Stock Grant and Option Plan.
(3)Mr. Karim received compensation as a director.
(4) Mr. Dowies joined the company on October 18, 2004. His employment agreement
entitles him to an annual stock grant of 100,000 shares. The first 50,000 shares
will vest and be payable April 18, 2005. Thereafter, stock grants will be
payable every six months, October 18 and April 18 for the term of the employment
agreement.
Executive Officer Compensation
During 2004, the Company had four executive officers, Michael Ward, James B.
Smith, Ahmed Karim and Robert Dowies. Michael Ward's was paid $252,000 salary
and a bonus of $28,550. James B. Smith was paid $130,200, plus an $11,996 bonus
. Messrs. Ward and Smith have new and different employment agreements for 2004
discussed below in the Employment Agreement paragraph. During 2004, Michael Ward
received 1,000,000 shares of common stock as his annual stock grant under the
terms of his employment agreement. Mr. Smith received 552,800 shares of common
stock as his annual stock grant under the terms of his employment agreement.
We hired Robert Dowies on October 18, 2004 as Vice President. He will work in
the area of gas marketing, supply and distribution. We paid Mr. Dowies $19,444
during 2004. We entered into a three year employment contract paying him an
annual salary of $100,000 which includes an annual stock grant of 100,000
shares. Mr. Dowies employment agreement stock grant will vest on April 18, 2005.
Mr. Karim did not receive any officer salary during 2004.
14
Director Compensation
On April 11, 2001, the Company agreed to compensate Ahmed Karim, a director, for
services provided at the rate of $5,000 per month until June 30, 2003 and $3,000
per month thereafter. For the year ended December 31, 2004, we incurred $36,000
for director compensation. There are no other formal or informal understandings
or arrangements relating to director compensation.
On February 5, 2003, we granted Michael Ward and Ahmed Karim common stock
options to purchase 500,000 shares each at $0.22 per share. These stock options
were exercised on September 14, 2004 and the exercise price was paid by the
delivery of $110,000 promissory notes bearing interest at an annual rate of 5%
due, on or before September 14, 2005.
Committees of the Board of Directors
Tidelands does not have a Compensation committee. The Board of Directors acts as
the Compensation Committee. Tidelands has no compensation written policies
outlining factors and criteria underlying awards or payments in relation to
executive officers. Michael Ward abstained from voting on his Employment
Agreement.
Employment and Consulting Agreements with Management
The Company has entered into employment agreements with the following officers:
MICHAEL WARD - Under the terms of Mr. Ward's employment agreement, commencing
January 1, 2004, he was employed as the Company's President and Chief Executive
Officer for a term of five (5) years. His base annual salary is $252,000. The
annual salary may be increased from year to year, as determined by our board of
directors acting as the Compensation Committee, by at least the Consumer Price
Index. As additional compensation, Mr. Ward will be entitled to an annual stock
grant of One Million (1,000,000) shares. Stock grant dates are June 30 and
December 31 each year. As incentive compensation, Mr. Ward will be entitled to
additional compensation equal to two percent of our net profits and one percent
of the increase in sales over a previous year's sales, effective with the fiscal
year ending 2004. Mr. Ward is entitled to all employee benefits as provided by
the Company. He is entitled to four weeks paid vacation and an annual automobile
allowance of $12,000.
JAMES B. SMITH: Under the terms of Mr. Smith's employment agreement, commencing
October 1, 2004, he was employed as the Company's Senior Vice President and
Chief Financial Officer for a term of four (4) years. His base annual salary is
$168,000. The annual salary may be increased from year to year, as determined by
our board of directors acting as the Compensation Committee, by at least the
Consumer Price Index. As additional compensation, Mr. Smith will be entitled to
an annual stock grant of Five Hundred (500,000) shares. Stock grant dates are
October 1 during the four year term. The first year stock grant was paid October
1, 2004. As incentive compensation, Mr. Smith will be entitled to additional
compensation equal to two percent of our net profits and one percent of the
increase in sales over a previous year's sales, effective October 1, 2004. Mr.
Smith is entitled to all employee benefits as provided by the Company. He is
entitled to four weeks paid vacation and an annual automobile allowance of
$12,000.
ROBERT W. DOWIES: We employed Mr. Dowies on October 26, 2004 as our Vice
President of Gas Markets and Supply. His employment agreement is for a term of
three (3) years. His annual salary is $100,000. He is entitled to an annual
stock grant of 100,000 common shares. The first 50,000 shares will vest and be
payable April 18, 2005. Thereafter, stock grants will be payable every six
months, October 18 and April 18 for the term of the employment agreement. Mr.
Dowies is entitled to two (2) weeks paid vacation and all employee benefits as
provided by the Company.
15
Code of Ethical Conduct
Our board of directors adopted a Code of Ethical Conduct which applies to all
our Company directors, officers and employees, including our principal executive
officer and principal financial officer, principal accounting officer or
comptroller, or other persons performing similar functions.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth the Common Stock ownership information as of
December 31, 2004, with respect to (i) each person known to the Company to be
the beneficial owner of more than 5% of the Company's Common Stock; (ii) each
director of the Company; and (iii) all directors, executive officers and
designated stockholders of the Company as a group. This information as to
beneficial ownership was furnished to the Company by or on behalf of the persons
named. Unless otherwise indicated, we believe that each has sole voting and
investment power with respect to the shares beneficially owned. The percentages
are based on 61,603,359 shares of our common stock issued and outstanding as of
December 31, 2004.
(a) Beneficial Ownership of more than 5% based on 61,603,359 common shares.
Beneficial Ownership of 5%.
Table 1.
(1) (2) (3) (4)
Title of Class Name and Address Amount and Nature Percent of Class
Common Stock
Common Mercator Momentum
Fund, LP (1) 2,789,372 (2)(7) 4.53%(8)
555 S. Flower St. Shared Voting and
Suite 4500 Dispositive Power
Los Angeles, CA 90071
Common Mercator Momentum 1,921,811(3)(7) 3.12%
Fund III, LP(1) Shared Voting and
555 S. Flower St. Dispositive Power
Suite 4500
Los Angeles, CA 90071
Common Monarch Pointe 6,270,597 (4)(7) 9.99%(8)
Fund, Ltd. (1) Shared Voting and
c/o Bank of Ireland Dispositive Power
Securities Services Ltd.
New Century House
International Fin. Ser.Ctr.
Mayor Street Lower
Dublin 1
Republic of Ireland
Common MAG Capital, LLC(1) 6,558,009 (5) 9.99%(8)
555 S. Flower St. Shared Voting and
Suite 4500 Dispositive Power
Los Angeles, CA 90071
Common David F. Firestone (1) 6,558,009 (6)(7) 9.99% (8)
555 S. Flower St Shared Voting and
Suite 4500 Dispositive Power
Los Angeles, CA 90071
16
Common ACH Securities, S.A. 4,000,000 (9) 6.49%
30 Quai Gustave Ador
P.O. Box 6235
Geneva, Switzerland
Common Margaux Investment 3,988,889 (14) 6.47%
Management Group
9 Rue de Commerce
CH 1211 Geneva 11
Switzerland
Common Impact International, LLC (1) 9,829,500(10) 15.95%
111 W. 5th St. Ste.720
Tulsa, OK 74103
Common Michael Ward 6,317,038(11) 10.25%
1862 W. Bitters Rd.
San Antonio, TX78248
Total 49.15%(12)
Notes:
(1) Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe
Fund, Ltd., MAG Capital, LLC., formerly, Mercator Advisory Group, LLC and David
F. Firestone are referred to "Reporting Persons". Mr. Firestone has voting and
investment control over the shares held by Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Monarch Pointe Fund, Ltd. and the MAG Capital, LLC. Each
Mercator entity own warrants to purchase shares of our common stock. Mercator
Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe Fund, Ltd.
each own 7% Convertible Debentures (the "Debentures") issued by us which are
convertible into our common stock. Each Debenture is convertible into the number
of shares of common stock determined by dividing the principal balance of the
Debenture by the Conversion Price at the time of the conversion. The Conversion
Price is defined as 85% of the "Market Price", which is defined as the average
of the lowest four intra-day trading prices of our common stock during the ten
trading days preceding the conversion, however, the Conversion Price may not be
less than $0.45 or more than $0.76, adjusted for stock splits and similar
events. Upon the occurrence of certain events specified in the Debentures,
including any Event of Default, as defined in the Debentures, the Conversion
Price will be reduced from 85% of the Market Price to 75% of the Market Price,
but in no event higher than $0.76 or lower than $0.45 per share. The
documentation governing the terms of the warrants and Debentures contains
provisions prohibiting any exercise of the warrants or conversion of the
Debentures that would result in the Reporting Persons owning beneficially more
than 9.99% of the outstanding common stock as determined under Section 13(d) of
the Securities Exchange Act of 1934. The Reporting Persons have never had
beneficial ownership of more than 9.99% of our outstanding common stock.
(2) Mercator Momentum Fund, LP is a private investment limited partnership
organized under California law. MAG Capital, LLC, a California limited liability
company, is its general partner. David F. Firestone is the Managing Member of
the MAG Capital, LLC. Mr. Firestone has voting and investment control over the
Mercator Momentum Fund, L.P. Mercator Momentum Fund, LP owns Debentures with a
principal balance of $1,270,000 and warrants to purchase up to 835,526 shares of
our common stock. The number of shares beneficially owned have been determined
using a Conversion Price of $0.65 with respect to the Debentures.
(3) Mercator Momentum Fund III, LP is a private investment limited partnership
organized under California law. MAG Capital, LLC, a California limited liability
company, is its general partner. David F. Firestone is the Managing Member of
MAG Capital, LLC. Mr. Firestone has voting and investment control over the
Mercator Momentum Fund III, L.P. Mercator Momentum Fund III, LP owns Debentures
with a principal balance of $835,000 and warrants to purchase up to 575,658
shares of our common stock. The number of shares beneficially owned have been
determined using a Conversion Price of $0.65 with respect to the Debentures.
(4) Monarch Pointe Fund, Ltd. is a corporation organized under of the British
Virgin Islands. MAG Capital, LLC controls the investments of Monarch Pointe
Fund. Mr. Firestone has voting and investment control over the Monarch Pointe
Fund, Ltd.. Monarch Pointe Fund owns Debentures with a principal balance of
$2,855,000 and warrants to purchase up to 1,878,290 shares of our common stock.
The number of shares beneficially owned have been determined using a Conversion
Price of $0.65 with respect to the Debentures.
17
(5) MAG Capital, LLC, formerly, Mercator Advisory Group, LLC., owns warrants to
purchase up to 3,289,474 shares of our common stock. Mr. Firestone has voting
and investment control over MAG Capital, LLC.
(6) David F. Firestone does not own any of our securities.
(7) The right to vote and the right to dispose of the shares beneficially owned
by Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, and Monarch
Pointe Fund, Ltd. are, in each case, shared among either of the three funds, as
applicable, and both MAG Capital, LLC and David F. Firestone.
(8) The agreements governing the terms of the 7% Debentures and the warrants
contain provisions prohibiting any conversion of the Debentures or exercise of
the warrants that would result in the Mercator Momentum Fund, LP, the Mercator
Momentum Fund III, LP; the Monarch Pointe Fund, Ltd. , or MAG Capital, LLC;
collectively owning beneficially more than 9.99% of the outstanding shares of
our common stock as determined under Section 13(d) of the Securities Exchange
Act of 1934. As a result of these provisions, the entities disclaim beneficial
ownership in excess of 9.99% of the outstanding shares of our common stock.
(9) Represents 4,000,000 common shares issued and outstanding. Peter Andersson
has voting and dispositive power with respect to the securities owned by ACH
Securities.
(10) Represents 8,000,000 shares issuable upon the exercise of warrants at the
exercise price of $0.335 per share and 1,829,500 shares of common stock. Robert
S. May has voting and dispositive power with respect to the securities owned by
Impact International, LLC.
(11) Mr. Ward is the President, Chief Executive officer and Chairman of our
Board of Directors.
(12) This total does not reflect the summation of the percentages of beneficial
ownership of Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch
Pointe Fund, Ltd., MAG Capital, LLC and David F. Firestone for the reason set
forth in footnote 8. We have included 9.99% once in the summation for all
Mercator related entities.
(13) Mercator Group totals only include 9.99%.
(14) Represents 1,988,889 shares of common stock presently issued and
outstanding and 2,000,000 shares of common stock issuable upon
exercise(a)1,000,000 shares at $0.50 per share, and 1,000,000 shares at $2.50
per share. Carl Hessel has voting and dispositive power with respect to the
securities owned by Margaux Investment Management Group.
(b) Security Ownership of Management. Based on 61,603,359 shares as set
forth in (a) above as of December 31, 2004.
Table 2.
Percent of
Title of Class Name and Address Amount and Nature Class
Common Michael Ward 6,317,038 10.25%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common James B. Smith 1,042,668(1) 1.69%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common Ahmed Karim 502,500 0.815%
1532 Woods Dr.
N. Vancouver, B.C.
Canada V7R 1A9
Common Robert W. Dowies 30,000 0.048%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common Carl Hessel (2) 4,442,221 7.21%
c/o Margaux Investment
Management Group, S.A.
9 Rue de Commerce
CH 1211 Geneva 11
Switzerland
Total 12,334,427 20.02%
18
Notes:
(1) Includes 500,000 shares in the name of Aigle Partners, Ltd. in which Mr.
Smith has a partnership interest and 500,000 shares in the name of du Midi
Trust, in which Mr. Smith has a beneficial interest.
(2) Mr. Hessel is a partner in Margaux Investment Management Group, S.A. Mr.
Hessel also exercises voting and dispositive control over the Margaux securities
and as such beneficial ownership reflects 2,000,000 common stock warrants owned
by Margaux, 1,988,889 shares owned by Margaux and 453,332 shares owned
personally by Mr. Hessel.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 9, 2004, we issued 500,000 common shares to James B. Smith which
represents the annual stock grant under the terms of his employment agreement.
On October 18, 2004 we entered into an employment agreement with Robert Dowies.
Mr .Dowies became a Company Vice President. His annual salary is $ 100,000
including an annual stock grant of 100,000 shares.
On October 13, 2004, we sold Four Million (4,000,000) Tidelands Oil & Gas common
shares to ACH Securities, S.A., a company domiciled in Geneva, Switzerland, for
Two Million ($2,000,000) Dollars. On October 14, 2004, in connection with the
ACH Securities transaction, we issued Margaux Investment Group, S.A. common
stock warrants to purchase One Million (1,000,000) Tidelands Oil & Gas common
shares for Fifty ($0.50) Cents per share and One Million (1,000,000) shares for
$2.50 per share. Mr. Carl Hessel, a company director, is a partner in Margaux
Investment Management Group, S.A. and, as such he has an indirect financial
interest in the common stock warrants.
On September 14, 2004, we issued 500,000 shares of common stock to Michael Ward
as a stock grant under his employment agreement. The shares were valued at
$106,875.
On September 14, 2004, the following individuals exercised common stock options:
Michael Ward, the Company's President and Director, exercised his common stock
option to purchase 500,000 common shares for $110,000 payable on a promissory
note bearing interest at the rate of 5% payable in full on, or before September
14, 2005. The shares are subject to a security agreement.
Ahmed Karim, the Company's Vice President and Director, exercised his common
stock option to purchase 500,000 common shares for $110,000 payable on a
promissory note bearing interest at the rate of 5% payable in full on, or before
September 14, 2005. The shares are subject to a security agreement.
James Smith, the Company's Chief Financial Officer, exercised his common stock
option to purchase 500,000 common shares for $110,000 payable on a promissory
note bearing interest at the rate of 5% payable in full on, or before September
14, 2005. The shares are subject to a security agreement.
On June 30, 2004, we issued 3,322 common shares to Carl Hessel for $ 4,983. Carl
Hessel was a member of our board of directors at the time of issuance.
On January 29, 2004, the Company executed an agreement with Royis Ward, a former
officer and director and the father of Michael Ward, our President and CEO, to
provide charter air transportation for our Company employees, customers and
contractors to job sites and other business related destinations. A $300,000 5%
19
interest bearing loan due January 2007 was advanced by the Company regarding the
transaction. The loan balance is credited by airtime charges at standard
industry rates offset by interest charges computed on the average monthly
balance. As of December 31, 2004, the loan balance was $286,606.
On January 8, 2004, we authorized the issuance of 300,000 common shares to Carl
Hessel for services valued at $450,000. These shares were issued before Mr.
Hessel joined our Board of Directors.
During 2004, the Company had four executive officers, Michael Ward, James B.
Smith, Robert Dowies and Ahmed Karim. Michael Ward's annual salary is $252,000.
James B. Smith's annual salary was $168,000. Mr. Dowies annual salary is
$100,000.
On February 5, 2003, we granted Michael Ward, Royis Ward and Ahmed Karim common
stock options to purchase 500,000 shares each at $0.22 per share. On August 16,
2003, we granted James B. Smith common stock options to purchase 500,000 shares
at $0.22 per share. The options were exercised on September 14, 2004.
On February 18, 2003, effective January 1, 2003, the Company sold 100% of the
issued and outstanding common stock of Tidelands Oil Corporation, a Texas
corporation and Tidelands Gas Corporation, a Texas corporation, to Royis Ward
for a total price of $48,471. This amount was offset against his officer loan of
$117,492.
On June 30, 2003, we paid Mr. Karim all of his accrued director compensation by
issuing him 340,909 shares in lieu of $75,000.
ITEM 13. EXHIBITS
Exhibit Description Location of Exhibit
2.0 Amendment No. 2 to the Asset Purchase and Sale and between Incorporated by reference
Sonterra Energy Corporation and Oneok Propane Distribution to Exhibit 10.1
Company. 8-K filed November 15, 2004
2.1 Amendment No. 1 to the Asset Purchase and Sale and between Incorporated by reference to
Sonterra Energy Corporation and Oneok Propane Distribution Exhibit 10.2
Company. 8-K filed November 15, 2004
2.3 Asset Purchase and Sale Agreement by and between Sonterra Energy Incorporated by reference to
Corporation and Oneok Propane Distribution Company. Exhibit 10.3
8-K filed November 15, 2004
2.4 Purchase and Sale Agreement for Reef Ventures, L.P. by and Incorporated by reference
between Impact International, LLC ("Impact") and Coahuila Exhibit 10 to 8-K filed
Pipeline, LLC, ("Coahuila"), (jointly "Seller") and Tidelands June 25, 2004
Oil & Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer") dated
May 25, 2004 with Exhibits.
2.5 Purchase and Sale Agreement for Reef Marketing, L.L.C. Incorporated by reference
and Reef International, L.L.C. by and between Tidelands Exhibit 10.1 to 8-K filed
Oil & Gas Corporation and Impact International, L.L.C. May 8, 2003
and Coahuila Pipeline, L.L.C. dated April 16, 2003.
2.6 Agreement of Limited Partnership of Reef Ventures, L.P. "
2.7 Stock Purchase Warrant Impact "
2.8 Registration Rights Agreement Impact "
3.0 Restated Articles of Incorporation of Tidelands Oil Included with this filing
& Gas Corporation., a Nevada corporation.
20
3.1 Restated Bylaws of Tidelands Oil & Gas Corporation. Included with this filing
4.0 7% Convertible Debenture Mercator Momentum Fund, LP Incorporated by reference to
Exhibit 10.2 to 8-K filed on
December 3, 2004
4.1 7% Convertible Debenture Mercator Momentum Fund III, LP Incorporated by reference to
Exhibit 10.3 to 8-K filed on
December 3, 2004
4.2 7% Convertible Debenture Monarch Pointe Fund, LP Incorporated by reference to
Exhibit 10.4 to 8-K filed on
December 3, 2004
10.0 Employment Agreement with Michael Ward Incorporated by reference to
Exhibit 10.0 to SB-2
filed December 17, 2004.
10.1 Employment Agreement with James B. Smith Incorporated by reference to
Exhibit 10.1 to SB-2 filed
December 17, 2004
10.2 Employment Agreement with Robert Dowies Incorporated by reference to
Exhibit 10.2 to SB-2 filed
December 17, 2004
10.3 2003 Non-Qualified Stock Grant and Option Plan Incorporated by reference to
Form S-8 filed on June 11, 2003
10.4 Securities Purchase Agreement Incorporated by reference to
10.5 Warrant Margaux Incorporated by reference to
Exhibit 10.5 to SB-2 filed
December 17, 2004
10.6 Warrant Margaux Incorporate by reference to
Exhibit 10.6 to SB-2 filed
December 17, 2004
10.7 Amended Stock Purchase Warrant Impact International Incorporated by reference
Exhibit 10 to 8-K filed
June 25, 2004
10.8 Registration Rights Agreement with Mercator Group Incorporated by reference to
Exhibit 10.5 to 8-K filed on
December 3, 2004
10.9 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, LP. $0.87 Exhibit 10.6 to 8-K filed on
December 3, 2004
10.10 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, LP $0.80 Exhibit 10.7 to 8-K filed on
December 3, 2004
10.11 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, III, LP $0.87 Exhibit 10.8 to 8-K filed on
December 3, 2004
10.12 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund III, LP $0.80 Exhibit 10.9 to 8-K filed on
December 3, 2004
10.13 Warrant to Purchase Common Stock Monarch Pointe Incorporated by reference to
Fund, LP $0.87 Exhibit 10.10 to 8-K filed on
December 3, 2004
21
10.14 Warrant to Purchase Common Stock Monarch Pointe Incorporated by reference to
Fund, LP $0.80 Exhibit 10.11 to 8-K filed on
December 3, 2004
10.15 Warrant to Purchase Common Stock Mercator Advisory Incorporated by reference to
Group, LLC. $0.87 Exhibit 10.12 to 8-K filed on
December 3, 2004
10.16 Warrant to Purchase Common Stock Mercator Advisory Incorporated by reference to
Group, LLC $0.80 Exhibit 10.13 to 8-K filed on
December 3, 2004
10.17 SBC Center Terrace Suite License Agreement Included with this filing
21 List of Subsidiaries Included with this filing
31.1 Chief Executive Officer-Section 302 Certification pursuant "
to Sarbanes- Oxley Act.
31.2 Chief Financial Officer- Section 302 Certification pursuant "
to Sarbanes-Oxley Act.
32.1 Chief Executive Officer-Section 906 Certification pursuant "
to Sarbanes-Oxley Act.
32.2 Chief Financial Officer- Section 906 Certification pursuant "
to Sarbanes-Oxley Act.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Company paid or accrued the following fees in each of the prior two
fiscal years to its principal accountant, Baum & Co., P.A. of Coral Springs,
Florida.
Year End Year End
12-31-04 12-31-03
(1) Audit Fees $53,860 $49,324
(2) Audit-related Fees -0- -0-
(3) Tax Fees -0- -0-
(4) All other fees -0- -0-
------- -------
Total Fees $53,860 $49,324
======= =======
The Company has no formal audit committee. However, as defined in Sarbanes-Oxley
Act of 2002, the entire Board of Directors is the Company's defacto audit
committee.
The Company's principal accountant, Baum & Co., P.A. did not engage any other
persons or firms other than the principal accountant's full-time, permanent
employees.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) to the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-KSB Report for the period
ending December 31, 2004 to be signed on its behalf by the undersigned,
thereunto duly authorized on this 15th day of April, 2005.
TIDELANDS OIL & GAS CORPORATION
BY: /s/ Michael Ward
------------------------------------------
Michael Ward, President, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: April 15, 2005 /s/ Michael Ward
------------------------------------------
Michael Ward, President, Director
/s/ James B. Smith
------------------------------------------
James B. Smith, Senior Vice President, CFO
/s/ Ahmed Karim
------------------------------------------
Ahmed Karim
Vice President, Director
23
EXHIBIT INDEX
Exhibit Description Location of Exhibit
2.0 Amendment No. 2 to the Asset Purchase and Sale and between Incorporated by reference
Sonterra Energy Corporation and Oneok Propane Distribution to Exhibit 10.1
Company. 8-K filed November 15, 2004
2.1 Amendment No. 1 to the Asset Purchase and Sale and between Incorporated by reference to
Sonterra Energy Corporation and Oneok Propane Distribution Exhibit 10.2
Company. 8-K filed November 15, 2004
2.3 Asset Purchase and Sale Agreement by and between Sonterra Energy Incorporated by reference to
Corporation and Oneok Propane Distribution Company. Exhibit 10.3
8-K filed November 15, 2004
2.4 Purchase and Sale Agreement for Reef Ventures, L.P. by and Incorporated by reference
between Impact International, LLC ("Impact") and Coahuila Exhibit 10 to 8-K filed
Pipeline, LLC, ("Coahuila"), (jointly "Seller") and Tidelands June 25, 2004
Oil & Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer") dated
May 25, 2004 with Exhibits.
2.5 Purchase and Sale Agreement for Reef Marketing, L.L.C. Incorporated by reference
and Reef International, L.L.C. by and between Tidelands Exhibit 10.1 to 8-K filed
Oil & Gas Corporation and Impact International, L.L.C. May 8, 2003
and Coahuila Pipeline, L.L.C. dated April 16, 2003.
2.6 Agreement of Limited Partnership of Reef Ventures, L.P. "
2.7 Stock Purchase Warrant Impact "
2.8 Registration Rights Agreement Impact "
3.0 Restated Articles of Incorporation of Tidelands Oil Included with this filing
& Gas Corporation., a Nevada corporation.
3.1 Restated Bylaws of Tidelands Oil & Gas Corporation. Included with this filing
4.0 7% Convertible Debenture Mercator Momentum Fund, LP Incorporated by reference to
Exhibit 10.2 to 8-K filed on
December 3, 2004
4.1 7% Convertible Debenture Mercator Momentum Fund III, LP Incorporated by reference to
Exhibit 10.3 to 8-K filed on
December 3, 2004
4.2 7% Convertible Debenture Monarch Pointe Fund, LP Incorporated by reference to
Exhibit 10.4 to 8-K filed on
December 3, 2004
10.0 Employment Agreement with Michael Ward Incorporated by reference to
Exhibit 10.0 to SB-2
filed December 17, 2004.
10.1 Employment Agreement with James B. Smith Incorporated by reference to
Exhibit 10.1 to SB-2 filed
December 17, 2004
10.2 Employment Agreement with Robert Dowies Incorporated by reference to
Exhibit 10.2 to SB-2 filed
December 17, 2004
10.3 2003 Non-Qualified Stock Grant and Option Plan Incorporated by reference to
Form S-8 filed on June 11, 2003
10.4 Securities Purchase Agreement Incorporated by reference to
10.5 Warrant Margaux Incorporated by reference to
Exhibit 10.5 to SB-2 filed
December 17, 2004
10.6 Warrant Margaux Incorporate by reference to
Exhibit 10.6 to SB-2 filed
December 17, 2004
10.7 Amended Stock Purchase Warrant Impact International Incorporated by reference
Exhibit 10 to 8-K filed
June 25, 2004
10.8 Registration Rights Agreement with Mercator Group Incorporated by reference to
Exhibit 10.5 to 8-K filed on
December 3, 2004
24
10.9 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, LP. $0.87 Exhibit 10.6 to 8-K filed on
December 3, 2004
10.10 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, LP $0.80 Exhibit 10.7 to 8-K filed on
December 3, 2004
10.11 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, III, LP $0.87 Exhibit 10.8 to 8-K filed on
December 3, 2004
10.12 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund III, LP $0.80 Exhibit 10.9 to 8-K filed on
December 3, 2004
10.13 Warrant to Purchase Common Stock Monarch Pointe Incorporated by reference to
Fund, LP $0.87 Exhibit 10.10 to 8-K filed on
December 3, 2004
10.14 Warrant to Purchase Common Stock Monarch Pointe Incorporated by reference to
Fund, LP $0.80 Exhibit 10.11 to 8-K filed on
December 3, 2004
10.15 Warrant to Purchase Common Stock Mercator Advisory Incorporated by reference to
Group, LLC. $0.87 Exhibit 10.12 to 8-K filed on
December 3, 2004
10.16 Warrant to Purchase Common Stock Mercator Advisory Incorporated by reference to
Group, LLC $0.80 Exhibit 10.13 to 8-K filed on
December 3, 2004
10.17 SBC Center Terrace Suite License Agreement Included with this filing
21 List of Subsidiaries Included with this filing
31.1 Chief Executive Officer-Section 302 Certification pursuant "
to Sarbanes- Oxley Act.
31.2 Chief Financial Officer- Section 302 Certification pursuant "
to Sarbanes-Oxley Act.
32.1 Chief Executive Officer-Section 906 Certification pursuant "
to Sarbanes-Oxley Act.
32.2 Chief Financial Officer- Section 906 Certification pursuant "
to Sarbanes-Oxley Act.
25
TIDELANDS OIL & GAS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
TIDELANDS OIL & GAS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT .................................... F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets................................. F-4
Statements of Consolidated Stockholders' Equity............. F-5
Statements of Consolidated Operations ...................... F-6
Statements of Consolidated Cash Flows....................... F-7 - F-8
Notes to Consolidated Financial Statements ................. F-9 - F-25
F-2
BAUM & COMPANY, P.A.
1515 UNIVERSITY DRIVE, SUITE 209
CORAL SPRINGS, FLORIDA 33071
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Tidelands Oil & Gas Corporation
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of Tidelands Oil &
Gas Corporation as of December 31, 2004 and 2003, and the related consolidated
statements of stockholders' equity (deficit), operations, and cash flows for the
years ended December 31, 2004 and 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Tidelands Oil & Gas Corporation as of December 31, 2004 and 2003, and the
results of their consolidated operations and their consolidated cash flows for
the years ended December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
Baum & Company, P.A.
Coral Springs, Florida
April 13, 2005
F-3
TIDELANDS OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
YEARS ENDED
ASSETS
------
December 31, December 31,
2004 2003
------------ ------------
Current Assets:
Cash $ 5,459,054 $ 894,457
Cash Restricted (Note 2) 25,000 0
Accounts and Loans Receivable 516,387 228
Inventory 82,523 0
Prepaid Expenses (Note 3) 487,488 22,209
------------ ------------
Total Current Assets 6,570,452 916,894
------------ ------------
Property Plant and Equipment, Net (Notes 1, 4) 9,086,313 604,192
------------ ------------
Investment - Reef Ventures, L.P. (Note 14) -- 98,629
------------ ------------
Other Assets:
Deposits 4,108 3,800
Deferred Charges 116,250 0
Note Receivable (Note 10) 286,606 0
Goodwill 1,158,937 0
------------ ------------
Total Other Assets 1,565,901 3,800
------------ ------------
Total Assets $ 17,222,666 $ 1,623,515
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts Payable and Accrued Expenses $ 574,224 $ 813,905
Notes Payable 0 325,000
------------ ------------
Total Current Liabilities 574,224 1,138,905
Long-Term Debt (Note 5) 11,731,883 --
------------ ------------
Total Liabilities 12,306,107 1,138,905
------------ ------------
Commitments and Contingencies (Notes 9, 11, 12) -- --
Stockholders' Equity:
Common Stock, $.001 Par Value per Share,
100,000,000 Shares Authorized, 61,603,359
and 44,825,302 Shares Issued and
Outstanding at 2004 and 2003 Respectively 61,604 44,826
Paid-in Capital in Excess of Par Value 22,537,340 11,072,987
Subscriptions Receivable (550,000) (18,000)
Accumulated (Deficit) (17,132,385) (10,615,203)
------------ ------------
Total Stockholders' Equity 4,916,559 484,610
------------ ------------
Total Liabilities and Stockholders' Equity $ 17,222,666 $ 1,623,515
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-4
TIDELANDS OIL AND GAS CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004 AND 2003
Total
Additional Stock Stockholders'
Common Stock Paid-In Subscription Accumulated Equity/
Shares Amount Capital Receivable (Deficit) (Deficit)
------------- ------------- ------------- ------------- ------------- -------------
Balance -
December 31, 2002 33,683,329 $ 33,684 $ 6,715,108 $ (18,000) $ (9,266,722) $ (2,535,930)
Common Stock Issued
for Cash 781,395 781 1,049,219 -- -- 1,050,000
Common Stock Issued
for Services Regarding
$1,000,000 Sale of
Common Stock 300,000 300 335,700 -- -- 336,000
Fee for Services re: Sale
of Common Stock -- -- (336,000) -- -- (336,000)
Issuances of Common Stock
for Services 4,323,500 4,324 2,187,273 -- -- 2,191,597
Issuances of Common
Stock for Conversion of
Deferred Officers'
Salaries 3,596,169 3,596 787,561 -- -- 791,157
Issuance of Common Stock
for Conversion of Deferred
Director's Fees 340,909 341 74,659 -- -- 75,000
Issuance of Common
Stock for Conversion of
Accrued Legal Fees 500,000 500 62,000 -- -- 62,500
Issuance of Common Stock
for Conversion of Notes
Payable 1,300,000 1,300 197,467 -- -- 198,767
Net Loss -- -- -- -- (1,348,481) (1,348,481)
------------- ------------- ------------- ------------- ------------- -------------
Balance -
December 31, 2003 44,825,302 $ 44,826 $ 11,072,987 $ (18,000) $ (10,615,203) $ 484,610
Common Stock Issued
for Cash 6,725,545 6,725 6,081,592 -- -- 6,088,317
Common Stock Issued
for Services Regarding
$4,083,335 Sale of Stock 300,000 300 449,700 -- -- 450,000
Fee for Services
Regarding Sale of
Common Stock -- -- (450,000) -- -- (450,000)
Issuance of Common
Stock for Services 6,602,800 6,603 4,596,463 -- -- 4,603,066
Issuance of Common
Stock for Subscription 2,500,000 2,500 547,500 (550,000) -- --
Issuance of Common
Stock for Conversion of
Note Payable and
Accrued Interest 75,000 75 113,236 -- -- 113,311
Write Off Stock
Subscription Receivable -- -- -- 18,000 -- 18,000
Issuance of Common Stock
to Acquire 50% of
Sonterra Energy Corp. 574,712 575 125,862 -- -- 126,437
Net Loss -- -- -- -- (6,517,182) (6,517,182)
------------- ------------- ------------- ------------- ------------- -------------
Balance
December 31, 2004 61,603,359 $ 61,604 $ 22,537,340 $ (550,000) $ (17,132,385) $ 4,916,559
============= ============= ============= ============= ============= =============
See Accompanying Notes to Consolidated Financial Statements
F-5
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
YEARS ENDED
December 31, December 31,
2004 2003
------------ ------------
Revenues:
Gas Sales and Pipeline Fees $ 1,800,863 $ 0
Construction Service 82,975 0
Other 0 178,856
------------ ------------
Total Revenues 1,883,838 178,856
------------ ------------
Expenses:
Cost of Sales 1,508,891 --
Operating Expenses 99,665 27,767
Depreciation 244,889 43,006
Interest 300,566 53,163
Officers & Directors Salaries & Fees 1,331,848 313,000
General and Administrative 4,965,421 2,624,132
------------ ------------
Total Expenses 8,451,280 3,061,068
------------ ------------
Loss from Operations (6,567,442) (2,882,212)
Gain on Sale of Subsidiary -- 1,533,731
Interest Income 50,260 --
------------ ------------
Net (Loss) $ (6,517,182) $ (1,348,481)
============ ============
Net (Loss) Per Common Share:
Basic and Diluted
-----------------
(Loss) from Continuing Operations $ (0.12) $ (0.07)
Gain on Sale of Subsidiary 0.00 0.04
------------ ------------
Total $ (0.12) $ (0.03)
============ ============
Weighted Average Number of Common
Shares Outstanding 53,214,230 39,254,316
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-6
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED
December 31, December 31,
2004 2003
------------ ------------
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss)
Continuing Operations $ (6,517,182) $ (1,348,481)
Discontinued Operations -- --
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 244,889 43,006
Issuance of Common Stock:
for Services Provided 4,603,066 2,191,597
Officers' Salaries -- 185,000
Changes in:
Accounts Receivable (516,159) 16,078
Stock Subscriptions Receivable (532,000) 0
Inventory (82,523) 12,155
Prepaid Expenses (465,279) 21,392
Other Assets (116,558) (1,805)
Accounts Payable and Accrued Expenses (201,370) (677,815)
------------ ------------
Net Cash Provided (Required)
by Operating Activities (3,583,116) 441,127
------------ ------------
Cash Flows Provided (Required)
By Investing Activities:
(Increase) in Investments (933,871) (98,629)
Acquisitions of Property, Plant & Equipment (8,727,010) (134,505)
Disposals of Oil
and Gas Properties -- 598,924
------------ ------------
Net Cash Provided (Required)
by Investing Activities (9,660,881) 365,790
------------ ------------
See Accompanying Notes to Consolidated Financial Statements
F-7
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(CONTINUED)
YEARS ENDED
December 31, December 31,
2004 2003
------------ ------------
Cash Flows (Required) Provided
by Financing Activities:
Proceeds from Issuance of Common Stock 6,638,317 1,050,000
Proceeds from Long-Term Loans 6,731,883 --
Proceeds from Issuance of
Convertible Debentures 5,000,000 --
Repayment of Short-Term Loans (250,000) --
Repayment of Loans Due to Related Parties -- (933,554)
Proceeds of Loans from Related Parties -- 80,349
Loan to Related Party (286,606) --
Repayment of current Maturities of
Long-Term Debt -- (302,924)
------------ ------------
Net Cash (Required) Provided by
Financing Activities 17,833,594 (106,129)
------------ ------------
Net Increase in Cash 4,589,597 700,788
Cash at Beginning of Period 894,457 193,669
------------ ------------
Cash at End of Period $ 5,484,504 $ 894,457
============ ============
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 38,320 $ 38,773
============ ============
Cash Payments for Income Taxes $ 0 $ 0
============ ============
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 4,603,066 $ 2,191,597
Repayment of Loans 75,000 198,767
Payment of Accounts Payable 38,311 62,500
Repayment of Loans from Related Parties -- 866,157
Acquisition Cost 126,437 --
------------ ------------
Total Non-Cash Financing Activities $ 4,842,814 $ 3,319,021
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-8
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------ ------------------------------------------
This summary of significant accounting policies is presented to assist
in understanding these consolidated financial statements. The
consolidated financial statements and notes are representations of
management who is responsible for their integrity and objectivity. The
accounting policies used conform to accounting principles generally
accepted in the United States of America and have been consistently
applied in the preparation of these consolidated financial statements.
Organization
------------
Tidelands Oil and Gas Corporation (the Company and formerly C2
Technologies, Inc.), was incorporated in the state of Nevada on
February 25, 1997. On December 1, 2000, the Company completed its
acquisition of Rio Bravo Energy, LLC and their related entities thereby
making Rio Bravo Energy, LLC a wholly-owned subsidiary of the Company.
During 2004, the Company acquired all of the stock of Sonterra Energy
Corporation (Sonterra) and through this wholly-owned subsidiary, the
Company purchased all of the assets of a gas distribution organization
(see Note 14-Acquisitions). The Company also, during 2004, increased
its ownership interest from 25% to 98% in Reef Ventures, LP and their
wholly-owned subsidiaries (Reef International LLC and Reef Marketing
LLC) (see Note 14-Acquisitions).
Nature of Operations
--------------------
The Company currently operates a natural gas pipeline between Eagle
Pass, Texas and Piedras Negras, Mexico and a propane distribution
system serving residential customers in the Austin, Texas area. In
addition, the company is planning the reopening of its gas processing
plant and pipeline in Texas and is engaged in the development of
natural gas storage facilities in Mexico.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated.
Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107 "Disclosure About
Fair Value of Financial Instruments," requires the disclosure of the
fair value of off-and-on balance sheet financial instruments. Unless
otherwise indicated, the fair values of all reported consolidated
assets and consolidated liabilities, which represent financial
instruments (none of which are held for trading purposes), approximate
the carrying values of such amounts.
F-9
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
Use of Estimates
----------------
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are recorded at historical cost.
Depreciation of property, plant and equipment is provided on the
straight-line method over the estimated useful lives of the related
assets. Maintenance and repairs are charged to operations. Additions
and betterments, which extend the useful lives of the assets, are
capitalized. Upon retirement or disposal of the property, plant and
equipment, the cost and accumulated depreciation are eliminated from
the accounts, and the resulting gain or loss is reflected in
operations.
Long-Lived Assets
-----------------
Statement of Financial Accounting Standards 144 (SFAS 144) "Accounting
for the Impairment or disposal of long-lived assets" requires that
long-lived assets to be held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that
the related carrying amount may not be recoverable. When required,
impairment losses on assets to be held and used are recognized based on
the fair value of the asset, and long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value less cost to
sell.
The requirements of SFAS 144 and the evaluation by the Company did not
have a significant effect on the consolidated financial position or
results of consolidated operations.
F-10
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 109 (SFAS 109) "Accounting for Income
Taxes," which requires the establishment of a deferred tax asset or
liability for the recognition of future deductions of taxable amounts
and operating loss carryforwards, Deferred tax expense or benefit is
recognized as a result of the change in the deferred asset or liability
during the year. If necessary, the Company will establish a valuation
allowance to reduce any deferred tax asset to an amount which will,
more likely than not, be realized.
Net (Loss) Per Common Share
---------------------------
The Company accounts for net (loss) per share in accordance with
Statement of Financial Accounting Standard 128 ("SFAS 128") "Earnings
per Share". Basic (loss) per share is based upon the net (loss)
applicable to the weighted average number of common shares outstanding
during the period. Diluted (loss) per share reflects the effect of the
assumed conversions of convertible securities and exercise of stock
options only in the periods in which such affect would have been
dilutive.
Goodwill
--------
Goodwill represents the excess of purchase price and related costs over
the value assigned to the net tangible and identifiable assets of
businesses acquired. Statement of Financial Accounting Standards No.
142 (SFAS142), "Goodwill and other Intangible Assets" requires Goodwill
to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired, rather than
being amortized as previous accounting standards required. Furthermore,
SFAS 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to
be indefinite. In management's opinion, there has been no impairment to
the value of the value of recorded goodwill during the year ended
December 31, 2004.
New Accounting Standards
------------------------
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations", (SFAS No. 143) was
issued and is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The adoption of SFAS
143 does not have a material effect on our consolidated financial
statements.
F-11
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
New Accounting Standards (Continued)
------------------------------------
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities",
(SFAS No. 146) was issued and is effective for periods beginning after
December 31, 2002. SFAS No. 146 requires, among other things, that
costs associated with an exit activity (including restructuring and
employee and contract termination costs) or with a disposal of
long-lived assets be recognized when the liability has been incurred
and can be measured at fair value. Companies must record in earnings
from continuing operations costs associated with an exit or disposal
activity that does not involve a discontinued operation. Costs
associated with an activity that involves a discontinued operation
would be included in the results of discontinued operations. The
implementation of the provisions of SFAS No. 146 does not have a
material effect on the consolidated financial statements.
In December 2002, Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation, (SFAS No. 148) was issued and
is effective for fiscal years beginning after December 15, 2002. SFAS
No. 148 amends the disclosure requirements of SFAS No. 123, Accounting
for Stock-Based Compensation, (SFAS No. 123) to require prominent
disclosures in both interim and annual financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also amends
SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Company had decided not to
voluntarily adopt the SFAS No. 123 fair value method of accounting for
stock-based employee compensation. Therefore, the new transition
alternatives allowed in SFAS No. 148 will not affect the consolidated
financial statements.
NOTE 2 - RESTRICTED CASH
------ ----------------
Restricted cash consists of a certificate of deposit to secure a letter
of credit issued to the Railroad Commission of Texas.
F-12
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 3 - PREPAID EXPENSES
------ ----------------
A summary of prepaid expenses at December 31, 2004 and December 31,
2003 is as follows:
December 31, December 31,
2004 2003
------------ ------------
Prepaid Expenses $ 4,802 $ 16,000
Prepaid Insurance 82,318 6,139
Prepaid License Fee 79,500 0
Prepaid Financing 310,000 0
Prepaid Rent 8,301 0
Prepaid Interest 2,567 70
------------ ------------
$ 487,488 $ 22,209
============ ============
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
A summary of property, plant and equipment at December 31, 2004 and
December 31, 2003 is as follows:
Estimated
December 31, December 31, Economic
2004 2003 Life
------------ ------------ ------------
Pre-Construction Costs:
International Crossings to Mexico $ 27,601 $ 20,600 N/A
Mexican Gas Storage Facility
and Related Pipelines 928,232 112,708 N/A
Propane Distribution Systems 207,415 0 N/A
------------ ------------
Total 1,163,248 133,308
Office Furniture, Equipment and
Leasehold Improvements 46,141 19,449 5 Years
Pipelines - Domestic 431,560 431,560 15 Years
Pipeline - Eagle Pass, TX to Piedras
Negras, Mexico 6,106,255 0 20 Years
Gas Processing Plant 186,410 166,410 15 Years
Tanks & Lines - Propane Distribution
System 1,596,439 0 5 Years
Machinery and Equipment 57,180 0 5 Years
Trucks, Autos and Trailers 63,175 0 5 Years
------------ ------------
Total 9,650,408 750,727
Less: Accumulated Depreciation 564,095 146,535
------------ ------------
Net Property, Plant and Equipment $ 9,086,313 $ 604,192
============ ============
Depreciation expense for the years ended December 31, 2004 and December
31, 2003 was $244,889 and $43,006 respectively.
F-13
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 5 - LONG-TERM DEBT
------ --------------
A summary of long-term debt at December 31, 2004 and December 31, 2003
is as follows:
December 31, December 31,
2004 2003
------------ ------------
Note Payable, Unsecured, 10% Interest
Bearing, Maturing December 31, 2004 $ 0 $ 250,000
Note Payable, Unsecured, 10% Interest
Until April 17, 2001, 18% Interest
Thereafter, Payable on Demand 0 75,000
Note Payable, Secured, Interest Bearing
at 2% Over Prime Rate, Maturing
May 25, 2008 6,731,883 0
Convertible Debentures, Unsecured,
7% Interest Bearing,
Maturing May 18, 2006 5,000,000 0
------------ ------------
11,731,883 325,000
Less: Current Maturities 0 325,000
------------ ------------
Total Long-Term Debt $ 11,731,883 $ 0
============ ============
Summary of Terms of Convertible Debenture and Warrants:
-------------------------------------------------------
On November 18, 2004, the Company entered into a Securities Purchase
Agreement with Mercator Momentum Fund, LP, Mercator Momentum Fund III,
LP, Monarch Pointe Fund, LP, (collectively, "the Funds") and Mercator
Advisory Group, LLC ("Mercator"). In exchange for $5,000,000, the
Company issued to the "Funds" and Mercator Advisory Group, 7%
convertible debentures with a maturity date of May 18, 2006. Under the
terms of the agreement, the Company is obligated to make monthly
interest payments until maturity of $29,166.67.
F-14
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 5 - LONG-TERM DEBT (CONTINUED)
------ --------------------------
The 7% Convertible Debentures are convertible into the Company's common
stock at a 15% discount to the market price at the time of conversion,
subject to a $0.45 floor and a $0.76 ceiling.
The Company has granted the Funds and Mercator registration rights on
these securities. If the Company does not have its registration
statement effective within 90 days from filing, or extend its best
efforts to do so, the discount will be increased to 25% of the market
price at the time of conversion.
o In connection with this financing the Company issued
6,578,948 common stock warrants which expire November
18, 2007. The warrants are exercisable at prices
ranging from $.80 to $.87.
NOTE 6 - INCOME TAXES
------ ------------
The Company files a consolidated federal income tax return. At December
31, 2004, the Company had a net operating loss carry forward of
approximately $16,330,000 available to offset future federal taxable
income through 2024.
The components of the deferred tax assets and liabilities accounts at
December 31, 2004 are as follows:
Total Deferred Tax Assets $5,517,000
Less: Valuation Allowance 5,517,000
----------
Deferred Tax Asset (Liability) $ 0
==========
F-15
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 7 - COMMON STOCK TRANSACTIONS
------ -------------------------
During January and February 2004, the Company issued 2,722,223 shares
of restricted common stock for $4,083,335
On January 8, 2004, the Company authorized the issuance of 200,000
shares of its common stock for 2004 legal fees valued at $344,000 under
the Stock Grant and Option Plan.
On January 8, 2004, the Company issued 300,000 shares of its restricted
valued at $450,000 regarding the private placement of the Company's
common stock.
On January 8, 2004, the Company authorized the issuance of 700,000
shares of its restricted common stock for consulting services valued at
$1,050,000. These shares were issued during January and February 2004.
On January 8, 2004, the Company issued 52,800 shares of its common
stock valued at $90,816 to a Company officer under the Stock Grant and
Option Plan.
On January 8, 2004, the Company approved the issuance of 75,000 shares
of its restricted common stock in payment of a $75,000 promissory note
and $38,311 of accrued interest. These shares were issued February 3,
2004.
During the second quarter 2004, the Company issued 3,322 shares of its
restricted common stock for $4,983.
On April 12, 2004, the Company issued 500,000 shares of its restricted
common stock valued at $497,000 to Impact International, Inc. pursuant
to the terms of the purchase of Reef Venture, L.P. described above.
On April 15, 2004, the Company issued 700,000 shares of its restricted
common stock for consulting services valued at $728,000.
On April 15, 2004, the Company issued 450,000 shares of its restricted
common stock for consulting services valued at $468,000.
On July 2, 2004, the Company issued 500,000 shares of its restricted
common stock valued at $250,625 to Impact International, Inc. pursuant
to the terms of purchase of Reef Ventures, L.P. described above.
On August 1, 2004, the Company issued 1,000,000 shares of its
restricted common stock valued at $383,750 pursuant to a one-year
contract to provide consulting services.
F-16
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 7 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On September 14, 2004, the Company issued 4,000,000 shares of its
restricted common stock for $2,000,000 which was received during
October 2004.
On September 14, 2004, the Company issued 500,000 shares of its
restricted common stock valued at $106,875 pursuant to an employment
contract with an officer of the Company.
On September 14, 2004, three current officers and directors, a prior
officer/director and an employee of the Company each exercised a
warrant to acquire 500,000 shares of restricted common stock for
$110,000. The parties also executed a one-year promissory note bearing
5% P.A. interest in favor of the Company and a security agreement
against the newly issued stock until full payment has been remitted.
On October 14, 2004, the Company approved issuance of 500,000 shares of
its restricted common stock valued at $160,000 for legal services in
connection with the preparation of a SB-2 registration statement filed
on December 17, 2004.
On November 1, 2004, the Company approved the issuance of 500,000
shares of its common stock valued at $435,000 pursuant to an employment
contract with an officer of the Company.
On November 1, 2004, the Company issued 500,000 shares of its
restricted common stock valued at $110,000 to Impact International,
Inc. pursuant to the terms of purchase of Reef Ventures, L.P. described
above.
On November 1, 2004, the company issued 574,712 shares of its
restricted common stock valued at $126,437 in connection with the
acquisition of 50% of the outstanding common stock at Sonterra Energy
Corporation, now a wholly-owned subsidiary of the Company.
On November 3, 2004, the Company issued 500,000 shares of its
restricted common stock valued at $151,000 pursuant to an employment
contract with an officer of the Company.
F-17
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 8 - STOCK OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE
------ DEBENTURES
-----------------------------------------------------------------------
The following table presents the activity for options, warrants and
shares reserved for issuance upon conversion of outstanding convertible
debentures:
Shares Reserved Weighted
Stock Stock for Convertible Average
Options Warrants Debentures Exercise Price
---------- ---------- --------- --------------
Outstanding - December 31, 2003 2,500,000 8,516,807 0 $0.31
Granted / Issued 250,000 10,562,141 1,111,111 0.69
Exercised (2,500,000) (1,500,000) 0 0.14
---------- ---------- --------- -----
Outstanding - December 31, 2004 250,000 17,578,948 1,111,111 $0.60
========== ========== ========= =====
Note: The 11,111,111 shares represents the maximum shares which
could be issued upon conversion of the convertible debentures
at the minimum stock price level of $.45; 6,578,948 shares
represents the minimum shares which could be issued upon
conversion of the convertible debentures at the maximum stock
price level of $.76. (See NOTE 5-Summary of Terms of
Convertible Debentures and Warrants)
The 2003 Non-Qualified Stock Grant and Option Plan has 210,122 shares
remaining available for future issuance while the 2004 Non-Qualified
Stock Grant and Option Plan has 4,500,000 shares remaining available
for future issuance.
Accounting for Stock Based Compensation
As allowed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company has elected to
apply the intrinsic-value-based method of accounting. Under this
method, the Company measures stock based compensation for option grants
to employees assuming that options granted at market price at the date
of grant have no intrinsic value. Restricted stock awards were valued
based on the discounted market price of a share of non-restricted stock
on the date earned. No compensation expense has been recognized for
stock-based incentive compensation plans other than for restricted
stock awards pursuant to executive employment agreements.
NOTE 9 - COMMITMENT FOR SUITE LICENSE AGREEMENT
------ --------------------------------------
On June 4, 2004, the Company entered into a Suite License Agreement
with the San Antonio Spurs, L.C.C. commencing July 1, 2004 for a period
of five years. The annual license fee for the first year is $159,000
and is subject to a 6% per annum price escalation thereafter. The
annual fee is payable in installments as indicated in the agreement.
F-18
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 9 - COMMITMENT FOR SUITE LICENSE AGREEMENT (Continued)
------ --------------------------------------------------
The future annual license fee commitments are as follows:
2005 $ 168,540
2006 178,652
2007 189,371
2008 200,733
----------
$ 737,296
==========
NOTE 10 - RELATED PARTY TRANSACTION
------- -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
$300,000 5% interest bearing loan due in January 2007 was made by the
Company regarding the transaction. The loan balance is credited by
airtime charges at standard industry rates offset by interest charges
computed on the average monthly balance. At December 31, 2004, the loan
balance was $286,606.
NOTE 11 - LEASES
------- ------
The Company entered into an operating lease on August 1, 2003 for the
rental of its executive office at a monthly rent of $3,400, expiring
November 30, 2005.
The Company's wholly owned subsidiary, Sonterra Energy Corporation,
entered into an operating lease on October 1, 2004 for a propane tank
site at an annual rent of $10,000 expiring September 30, 2019.
Future commitments under the operating lease are as follows:
Year Ending Total
----------- ----------
2005 $ 47,400
2006-2019 137,500
----------
Total Minimum Lease Payments $ 184,900
==========
Rent expense for the years ended December 31, 2004 and 2003 was $43,300
and $28,100, respectively.
F-19
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 12 - COMMITMENTS AND CONTINGENCIES
------- -----------------------------
The Company is subject to the laws and regulations relating to the
protection of the environment. The Company's policy is to accrue
environmental and related cleanup costs of a non-capital nature when it
is both probable that a liability has been incurred and when the amount
can be reasonably estimated. Although it is not possible to quantify
with any degree of certainty the financial impact of the Company's
continuing compliance efforts, management believes any future
remediation or other compliance related costs will not have a material
adverse effect on the consolidated financial condition or reported
results of consolidated operations of the Company.
NOTE 13 - LITIGATION
-------- ----------
On January 6, 2003, the Company was served as a third party defendant
in a lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin
vs. Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and others, in
the 150th Judicial District Court, Bexar County, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas
Company (Northern) when it sued Betty Lou Sheerin for her failure to
make payments on a note she executed payable to Northern in the
original principal amount of $1,950,000. Northern's suit was filed on
November 13, 2002. Sheerin answered Northern's lawsuit on January 6,
2003. Sheerin's answer generally denied Northern's claims and raised
the affirmative defenses of fraudulent inducement by Northern,
estoppel, waiver and the further claim that the note does not comport
with the legal requirements of a negotiable instrument.
Sheerin seeks a judicial ruling that Northern be denied any recovery on
the note. Sheerin's answer included a counterclaim against Northern, ZG
Gathering, and others generally alleging, among other things, that
Northern, ZG Gathering, Ltd. and others, fraudulently induced her
execution of the note. Northern has filed a general denial of Sheerin's
counterclaims. Sheerin's answer included a third party cross claim
against Tidelands Oil & Gas Corporation. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from
ZG Gathering, Ltd. and that, as a part of the agreement, Tidelands
agreed to satisfy all of the obligations due and owing to Northern,
thereby relieving Sheerin of all obligations she had to Northern on the
promissory note in question.
F-20
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 13 - LITIGATION (CONTINUED)
-------- ----------------------
She alleges that Tidelands is liable to her for all of her actual
damages, costs of the lawsuit and other unstated relief. Tidelands and
Sheerin agreed to delay the Tidelands' answer date in order to allow
time for mediation of the case. Tidelands participated in mediation on
March 11, 2003. The case was not settled at that time. Tidelands
answered the Sheerin suit on March 26, 2003. Tidelands' answer denies
all of Sheerin's allegations. No discovery has been completed at this
time. Based on initial investigations, however, Tidelands appears to
have a number of potential defenses to Sheerin's claims and Tidelands
intends to aggressively defend the lawsuit.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its restricted common stock to various
partners of ZG Gathering, Ltd. The company believes that the
aforementioned promissory note and shares of restricted common stock
will be cancelled based upon the outcome of the litigation described
above. Accordingly, the Company's financial statements reflect that
position.
NOTE 14 - ACQUISITIONS
------- -------------
Reef Ventures, L.P. Transaction
-------------------------------
On May 25, 2004, the Company entered into a Purchase and Sale Agreement
for Reef Ventures, L.P. by and between Impact International, LLC
("Impact") and Coahuila Pipeline, LLC. ("Coahuila"), (jointly "Seller")
and Tidelands Oil & Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer"). The transaction closed
on June 18, 2004.
Purchase and Sale Agreement - Background
----------------------------------------
Reef Ventures, L.P. was formed in Texas on April 16, 2003. Coahuila
owned one percent (1%) of Reef Ventures, L.P. Impact was a limited
partner of Reef Ventures and owned seventy-two percent (72%) of Reef
Ventures, L.P. Tidelands formed Arrecefe Management, L.L.C., a Texas
limited liability company, to act as the general partner for Reef
Ventures, L.P. Tidelands had already owned twenty-five percent (25%) of
Reef Ventures, L.P.
F-21
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
------- ------------------------
Summary of Purchase and Sale Agreement
The Company and Arrecefe purchased Impact's and Coahuila's units of
interest in Reef Ventures, L.P., respectively. Impact financed the sale
of the Reef interests by taking back a promissory note (the "Tidelands
Note") in the amount of $6,523,773 payable as follows:
(a) The "Tidelands Note" bears interest at prime plus two (2%) percent.
The note calls for quarterly interest payments during the first fifteen
(15) months, and thereafter, principal and interest would be due
quarterly amortized over twenty (20) years, but not to exceed an amount
equal to One Hundred (100%) percent of Reef's net cash flow. The unpaid
balance of the note would be due at the end of the fourth year.
(b) The Tidelands' note is secured by (i) a deed of trust (the "Deed of
Trust") from the Partnership to Impact, covering the pipeline and
related facilities, easements, rights-of-way and the Gas Contracts
which comprise the project, being that 12-inch pipeline Project for
transporting natural gas from Eagle Pass Texas to Piedras Negras,
Mexico, defined in the Partnership Agreement.
The Deed of Trust would include a present assignment of Reef's rights
to receive cash flow from the Gas Project which would be exercisable by
Impact only upon default under the Tidelands' Note, Reef guarantee, or
Reef Deed of Trust. (ii) a guaranty of payment and performance from the
Partnership (the "Partnership Guaranty"), and (iii) a pledge agreement
whereby the Partnership pledges to Impact its 98% membership interest
in Reef.
Summary of Amendment to Warrant and Registration Rights Agreements
During 2004, the Stock Purchase Warrant Agreement dated April 16, 2003
was amended. The amended Agreement provides that the total number of
shares which Impact is entitled to receive under the warrant is Ten
Million (10,000,000) shares of Tidelands' common stock, plus such
additional shares of common stock which may be issued upon the
occurrence of an untimely registration event, less the 500,000 shares
previously issued to Impact on April 13, 2004. The exercise price is
$0.335 per share. The expiration date of the warrant is extended to
April 16, 2006.
F-22
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
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The Company has agreed to use its best efforts to register the shares
under the warrant with the Securities and Exchange Commission so that
Impact will be permitted to publicly resell the common shares.
Tidelands agreed to use its best efforts to keep the registration
statement effective as long as it is necessary for Impact to sell the
shares.
If the registration statement is declared effective (i) by April 7,
2005, if the registration is on Form S-3, or (ii) July 7, 2005, if the
registration statement is on Form SB-2 or any other registration form,
the registration statement will be deemed timely (a "Timely
Registration"). In the event of a Timely Registration, Impact will
exercise the warrant for all of the remaining shares under the warrant
on a cash basis payable by Impact through the execution of a promissory
note payable to Tidelands (the "Impact Note"), as of the effective date
of the registration statement. In the event that the Company does not
accomplish a Timely Registration, then Impact may exercise the warrant
at anytime after the date which is the last date for a Timely
Registration, at its option on a cash basis or pursuant to Section 1.2
of the warrant agreement on a net exercise cashless basis for all the
remaining shares under the warrant. If Impact elects to exercise the
warrants on a net exercise cashless basis, we will increase the number
of shares available for issuance under the warrant, regardless of
whether issued for cash or on a net exercise basis, so that the total
number of shares issued would total 10,000,000 shares.
If the registration statement is not filed or declared effective on or
before July 14, 2004, the Company will be obligated to issue 500,000
common shares under the cashless exercise provisions of the amended
Stock Purchase Warrant. For each 90 day period that the registration
statement was not filed or declared effective, the Company would
continue to issue 500,000 share blocks of common stock, until declared
effective. Accordingly, the Company issued 500,000 restricted common
shares during July and 500,000 restricted common shares during November
since the registration statement was not filed by October 14, 2004.
F-23
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
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The unaudited pro-forma condensed consolidated results of operations of
the Company have been prepared as if the acquisition of the
seventy-three percent (73%) of Reef Ventures, L.P. had occurred January
1, 2004:
Tidelands Oil & Gas Corporation
Condensed Consolidated Statement of Operations
Year Ended December 31, 2004
"Proforma"
(Unaudited)
Revenues $ 4,526,340
Net (Loss) $ (6,577,712)
Net (Loss) Per Common Share - Basic $ (0.12)
Weighted Average Shares Outstanding - Basic 53,214,230
Net (Loss) Per Common Shares - Diluted $ (0.09)
Weighted Average Shares Outstanding - Diluted 73,192,763
Stock Purchase Warrant
On April 16, 2003, the Company issued a stock purchase warrant for the
purchase of common shares of the Company's outstanding stock at the
time of exercise, which as of December 31, 2003 would be 8,516,807
shares. This number represents common stock available under the terms
and conditions of a Stock Purchase Warrant Agreement where Impact has
the right to acquire 19% of the issued and outstanding common stock of
the Company. The warrant agreement is subject to an anti-dilution
provision. Impact has given the Company notice of its intent to
exercise the warrant. The Company has not issued any common shares to
date.
This sale included the commitment of Impact Energy Services and related
entities to construct and fund, up to $8,000,000, for multiple
international pipelines from South Texas to Mexico.
Pursuant to contractual obligation for these transactions, the maximum
exercise price is $.335 which could be reduced to zero depending on the
market price at time of exercise.
F-24
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 14 - ACQUISITIONS (CONTINUED)
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ONEOK PROPANE DISTRIBUTION COMPANY
----------------------------------
On November 1, 2004, through the Company's subsidiary, Sonterra Energy
Corporation, we entered into an Asset Purchase and Sale Agreement with
ONEOK Propane Distribution Company, a division of ONEOK Propane
Company, a Delaware corporation. The Company purchased the assets of
this division for Two Million ($2,000,000). The assets consist of
propane distribution systems, including gas mains, yard lines, meters
and storage tanks, serving thirteen residential subdivisions in the
Austin, Texas, Area.
The propane distribution system is comprised of approximately 25 miles
of gas main pipe, 75,000 feet of yard lines, 850 meters, and storage
tanks with a combined capacity of 156,000 gallons.
The purchase price was allocated as follows:
Gas mains, yard lines, meters and storage tanks $1,708,786
Inventory of propane and construction materials 76,415
Goodwill 219,799
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$2,000,000
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F-25