UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the quarterly period ending June 30, 2005
[_] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-29613
TIDELANDS OIL & GAS CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 66-0549380
------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
1862 West Bitters Rd., San Antonio, TX 78248
--------------------------------------------
(Address of principal executive offices)
(210) 764-8642
--------------
(Issuer's telephone number)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - $0.001 par value
Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 30, 2005, there were 74,279,148 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format : Yes No X
--- ---
TIDELANDS OIL & GAS CORPORATION
FORM 10-QSB
INDEX
-----
Page
PART I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2005 and December 31, 2004............................. 3
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2005 and 2004............... 4
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2005 and 2004................. 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2005 and 2004................. 6-7
Notes to Condensed Consolidated Financial Statements............ 8-14
Item 2 - Management's Discussion and Analysis or Plan of Operation....... 15-19
Item 3 - Controls and Procedures......................................... 19-20
PART II - Other Information
Item 1 - Legal Proceedings............................................... 20-24
Item 2 - Changes in Securities and Use of Proceeds....................... 24
Item 3 - Defaults Upon Senior Securities................................. 24
Item 4 - Submission of Matters to a Vote of Security Holdings............ 25
Item 5 - Other Information............................................... 25
Item 6 - Exhibits and Reports on Form 8K ................................ 25
Signature................................................................ 25
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(ASSETS)
--------
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
Current Assets:
Cash $ 3,468,839 $ 5,459,054
Cash Restricted 75,846 25,000
Accounts and Loans Receivable 309,323 516,387
Inventory 75,573 82,523
Prepaid Expenses 302,531 487,488
------------ ------------
Total Current Assets 4,232,112 6,570,452
------------ ------------
Property Plant and Equipment, Net 9,630,591 9,086,313
------------ ------------
Other Assets:
Deposits 6,608 4,108
Deferred Charges 0 116,250
Note Receivable 286,114 286,606
Goodwill 1,158,937 1,158,937
------------ ------------
Total Other Assets 1,451,659 1,565,901
------------ ------------
Total Assets $ 15,314,362 $ 17,222,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts Payable and Accrued Expenses $ 656,302 $ 574,224
Convertible Debentures Payable 2,480,000 0
------------ ------------
Total Current Liabilities 3,136,302 574,224
Long-Term Debt 4,368,490 11,731,883
------------ ------------
Total Liabilities 7,504,792 12,306,107
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 Par Value Per Share,
100,000,000 Shares Authorized, 74,279,148
and 61,603,359 Shares Issued and
Outstanding at June 30, 2005
and December 31, 2004 Respectively 74,281 61,604
Paid-in Capital in Excess of Par Value 28,655,789 22,537,340
Subscriptions Receivable (550,000) (550,000)
Accumulated (Deficit) (20,370,500) (17,132,385)
------------ ------------
Total Stockholders' Equity 7,809,570 4,916,559
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,314,362 $ 17,222,666
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements
-3-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
June 30, 2005 June 30, 2004
------------- -------------
Revenues:
Gas Sales and Pipeline Fees $ 262,541 $ 507,712
Construction Services 77,995 0
------------- -------------
Total Revenues 340,536 507,712
------------- -------------
Expenses:
Cost of Sales 130,569 497,820
Operating Expenses 62,363 2,616
Depreciation 120,954 36,638
Interest 184,073 43,718
Sales, General and Administrative 1,877,659 2,184,169
------------- -------------
Total Expenses 2,375,618 2,764,961
------------- -------------
(Loss) From Operations (2,035,082) (2,257,249)
(Loss) on Sale of Asset 0 0
Interest and Dividend Income 33,659 7,206
------------- -------------
Net (Loss) $ (2,001,423) $ (2,250,043)
============= =============
Net (Loss) Per Common Share:
Basic and Diluted $ (0.03) $ (0.05)
----------------- ============= =============
Weighted Average Number of Common
Shares Outstanding 68,321,251 49,701,986
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
-4-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
------------- -------------
Revenues:
Gas Sales and Pipeline Fees $ 849,490 $ 507,712
Construction Services 119,121 0
------------- -------------
Total Revenues 968,611 507,712
------------- -------------
Expenses:
Cost of Sales 415,248 497,820
Operating Expenses 129,137 2,616
Depreciation 236,395 47,918
Interest 393,860 48,437
Sales, General and Administrative 3,098,570 3,706,378
------------- -------------
Total Expenses 4,273,210 4,303,169
------------- -------------
(Loss) From Operations (3,304,599) (3,795,457)
(Loss) on Sale of Asset (3,167) 0
Interest and Dividend Income 69,651 11,073
------------- -------------
Net (Loss) $ (3,238,115) $ (3,784,384)
============= =============
Net (Loss) Per Common Share:
Basic and Diluted $ (0.05) $ (0.08)
----------------- ============= =============
Weighted Average Number of Common
Shares Outstanding 67,941,251 47,676,976
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
-5-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
------------- -------------
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (3,238,115) $ (3,784,384)
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 236,395 47,918
Loss on Disposal of Equipment 3,167 0
Issuance of Common Stock:
For Services Provided 1,098,625 3,005,816
Changes in:
Accounts Receivable 207,064 (540,528)
Inventory 6,950 0
Prepaid Expenses 184,957 (328,404)
Deferred Charges 116,250 0
Deposits (2,500) (308)
Accounts Payable and
Accrued Expenses 82,078 (33,274)
------------- -------------
Net Cash (Required)
By Operating Activities (1,305,129) (1,633,164)
------------- -------------
Cash Flows Provided (Required)
By Investing Activities:
Increase in Investments 0 (575,363)
Acquisitions of Property, Plant
and Equipment (784,640) (6,347,501)
Disposals of Equipment 800 0
------------- -------------
Net Cash (Required)
By Investing Activities (783,840) (6,922,864)
------------- -------------
See Accompanying Notes to Condensed Consolidated Financial Statements
-6-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(CONTINUED)
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
------------- -------------
Cash Flows Provided (Required)
by Financing Activities:
Proceeds from Issuance of Common Stock 0 4,088,317
Proceeds From Long-Term Loans 149,108 6,523,773
Repayment of Short-Term Loans 0 (100,000)
Repayment of Loan by Related Party 492 0
------------- -------------
Net Cash Provided by
Financing Activities 149,600 10,512,090
------------- -------------
Net Increase (Decrease) in Cash (1,939,369) 1,956,062
Cash at Beginning of Period 5,484,054 894,457
------------- -------------
Cash at End of Period $ 3,544,685 $ 2,850,519
============= =============
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 266,938 $ 14,123
============= =============
Cash Payments for Income Taxes $ 0 $ 0
============= =============
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 1,098,625 $ 3,005,816
Repayment of Note 2,512,500 75,000
Repayment of Convertible Debentures 2,520,000 0
Payment of Accounts Payable 0 38,311
------------- -------------
Total Non-Cash Financing Activities $ 6,131,125 $ 3,119,127
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
-7-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited condensed consolidated financial statements
for the six month periods ended June 30, 2005 and 2004 have been
prepared in conformity with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-QSB and Regulation S-B. The financial
information as of December 31, 2004 is derived from the registrant's
Form 10-KSB for the year ended December 31, 2004. Certain information
or footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In the opinion of management, the accompanying
financial statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results
of the interim periods presented. While the registrant believes that
the disclosures presented are adequate to keep the information from
being misleading, it is suggested that these accompanying financial
statements be read in conjunction with the registrant's audited
consolidated financial statements and notes for the year ended December
31, 2004, included in the registrant's Form 10-KSB for the year ended
December 31, 2004.
Operating results for the six-month period ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the
remainder of the fiscal year ending December 31, 2005. The accompanying
unaudited condensed consolidated financial statements include the
accounts of the registrant, its wholly-owned subsidiaries, Rio Bravo
Energy, LLC, Sonora Pipeline, LLC, Arrecefe Management, LLC, Marea
Associates, L.P., Reef Ventures, L.P., Reef International, LLC, Reef
Marketing, LLC, and Terranova Energia S. de R. L. de C. V. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
-8-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - LONG-TERM DEBT
------ --------------
A summary of long-term debt at June 30, 2005 and December 31, 2004 is
as follows:
June 30, December 31,
2005 2004
------------ ------------
Note Payable, Secured, Interest Bearing
at 2% Over Prime Rate, Maturing
May 25, 2008 $ 4,368,490 $ 6,731,883
Convertible Debentures, Unsecured,
7% Interest Bearing,
Maturing May 17, 2006 2,480,000 5,000,000
------------ ------------
6,848,490 11,731,883
Less: Current Maturities 2,480,000 0
------------ ------------
Total Long-Term Debt $ 4,368,490 $ 11,731,883
============ ============
NOTE 3 - LITIGATION
------ ----------
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs.
Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the
150th Judicial District Court, Bexar county, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas when
it sued Betty Lou Sheerin for her failure to make payments on a note
she executed payable to Northern in the original principal amount of
$1,950,000. Northern's suit was filed on November 13, 2002. Sheerin
answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses
of fraudulent inducement by Northern, estoppel, waiver and the further
claim that the note does not comport with the legal requirements of a
negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied any recovery on the note. Sheerin's answer included a
counterclaim against Northern, ZG Gathering, and Ken Lay generally
alleging, among other things, that Northern, ZG Gathering, Ltd. and Ken
Lay, fraudulently induced her execution of the note. Northern has filed
a general denial of Sheerin's counterclaims. Sheerin's answer included
a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from
ZG Gathering Ltd. and that, as a part of the agreement, Tidelands
agreed to satisfy all of the obligations due and owing to Northern,
thereby relieving Sheerin of all obligations she had to Northern on the
$1,950,000 promissory note in question. Tidelands and Sheerin agreed to
delay the Tideland's answer date in order to allow time for mediation
of the case. Tideland's participated in a mediation on March 11, 2003.
The case was not settled at that time. Tideland's answered the Sheerin
suit on March 26, 2003. Tideland's answer denies all of Sheerin's
allegations.
-9-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 3 - LITIGATION (CONTINUED)
------ ----------------------
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended
original third party cross-actions and requests for disclosure. In
these amended pleadings, she sued Michael Ward, Royis Ward, James B.
Smith, Carl Hessell and Ahmed Karim in their individual capacities. Her
claims against these individuals are for fraud, breach of contract,
breach of the Uniform Commercial Code, breach of duty of good faith and
fair dealing and conversion.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its common stock to various partners of ZG
Gathering, Ltd. On December 3, 2003, Sheerin filed a separate lawsuit
against Tidelands in the 150th District Court of Bexar County, Texas on
this promissory note seeking a judgment against Tidelands for the
principle amount of the note, plus interest. On December 29th, 2003,
Tidelands answered this lawsuit denying liability on the note. On April
1, 2004, Tidelands filed a plea in abatement asking the court to
dismiss or abate Sheerin's lawsuit on the $300,000 promissory note as
it was related to and its outcome was dependent on the outcome of the
Sheerin third party cross action against Tidelands in Cause Number
2002-C1-16421. The Company believes that the promissory note and shares
of common stock should be cancelled based upon the outcome of the
litigation described above. Accordingly, our financial statements
reflect this belief.
On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended
third party cross action against Tidelands adding a claim for the
$300,000 promissory note. In these amended pleadings, Sheerin also
deleted her claims against Carl Hessel and Ahmed Karim.
On August 5, 2005, Northern Natural Gas Company filed its Fourth
Amended Original Petition which, for the first time, named Tidelands as
a defendant to Northern. Northern seeks to impose liability on
Tidelands for $1,950.000 promissory note signed by McDay Energy
Partners, Ltd. (the predecessor to ZG Gathering, Ltd.) and Sheerin and
the $1,700,000 promissory note signed by McDay only. Northern contends
that Tidelands is alternatively liable to Northern for payment of both
such promissory notes totaling $3,709,914 plus interest because
Northern is a third party beneficiary under a December 3, 2001 purchase
and sale agreement between ZG and Tidelands claiming that in such
agreement Tidelands agreed to assume and satisfy all indebtedness due
and owing Northern by Sheerin and ZG. Northern also claims that it is
entitled to foreclosure of a lien on the gas gathering system and
pipeline that was the subject of the promissory notes in question.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified
amounts of actual damages, statutory damages, unspecified amounts of
exemplary damages, attorneys fees, costs of suit, and prejudgment and
post judgment interest.
Some discovery has been completed at this time. Based on initial
investigation, and discovery to date, Tidelands appears to have a
number of potential defenses to the claims of Sheerin and Northern.
Tideland's intends to aggressively defend the lawsuit. At this stage in
the litigation, and in light of our continuing investigation and
incomplete discovery, we cannot give a more definitive evaluation of
the extent of Tideland's liability exposure.
-10-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 3 - LITIGATION (CONTINUED)
------ ----------------------
During April and May, 2005, three separate legal actions were initiated
against Sonterra Energy Corporation (Sonterra), a wholly-owned
subsidiary of the Company. Two of the actions concern claims made by
developers against Sonterra for their failure to pay rent and easement
use fees as a result of their asset purchase from Oneok Propane
Distribution Company on November 1, 2004. The third action involves a
claim made by a builder that Sonterra does not have a proper easement
for the current use of certain property. The Company believes that the
three actions filed are without merit and intend to vigorously defend
itself. Litigation regarding these three actions are still in their
early stages, therefore, potential financial impacts, if any, cannot be
determined at this time.
NOTE 4 - COMMON STOCK TRANSACTIONS
------ -------------------------
On May 1, 2005, the company issued 500,000 shares of its restricted
common stock valued at $225,000 to Impact International, LLC pursuant
to the terms of the purchase of Reef Ventures, L.P.
On June 15, 2005, Mercator Momentum Fund, L.P., Mercator Momentum Fund
III, L.P. and Monarch Pointe Fund, Ltd. (the "Funds") notified the
Company of their intent to convert a portion of their 7% Convertible
Debentures into common stock as follows:
Mercator Momentum Fund converted $380,000 dollars of 7% Convertible
Debentures into 500,000 common shares at the "Ceiling Price" of $0.76
per share.
Mercator Momentum Fund III converted $273,600 dollars of 7% Convertible
Debentures into 360,000 common shares at the "Ceiling Price" of $0.76
per share.
Monarch Point Fund converted $866,400 dollars of 7% Convertible
Debentures into 1,140,000 common shares at the "Ceiling Price" of $0.76
per share.
On June 22, 2005, the Company issued these common shares to the Funds.
-11-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 4 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ ------------------------------------
On June 23, 2005, the Company issued Impact International, LLC Seven
Million Five Hundred Thousand (7,500,000) common shares in response to
Impact's exercise of their common stock purchase warrants. Impact
tendered payment in the form of a promissory note in the amount of
$2,512,500. The note will reduce and offset the principal balance owed
by the Company under the Purchase and Sale Agreement dated May 25, 2004
whereby it acquired the Eagle Pass pipeline by purchasing an additional
73% of Reef Ventures, LP.
On June 27, 2005, the Company authorized the issuance of 150,000 shares
of its restricted common stock valued at $97,500 to each of the three
members of the Board of Directors, Michael R. Ward, Ahmed Karim and
Carl Hessel
On June 27, 2005, the Company authorized the issuance of 150,000 shares
of common stock under a 2004 non-qualified stock grant and option plan
which was registered on Form S-8, November 5, 2004. the shares were
valued at $199,125 and were issued to James B. Smith, the Company's
Senior Vice President, CFO and newly appointed member of the Board of
Directors.
On June 27, 2005, Mercator Momentum Fund, L.P., Mercator Momentum Fund
III, L.P. and Monarch Pointe Fund, Ltd. (the "funds") notified the
company of their intent to collectively convert $1,000,000 of their 7%
Convertible Debentures into common stock as follows:
Mercator Momentum Fund converted $250,000 dollars of 7% Convertible
Debentures into 328,947 common shares at the "Ceiling Price" of $0.76
per share. The Principal balance of the Debenture after this partial
debenture conversion is $513,000 dollars.
Mercator Momentum Fund III converted $175,000 dollars of 7% Convertible
Debentures into 230,263 common shares at the "Ceiling Price" of $0.76
per share. The principal balance of the Debenture after this partial
debenture conversion is $338,900 dollars.
Monarch Point Fund converted $575,000 dollars of 7% Convertible
Debentures into 756,579 common shares at the "Ceiling Price" of $0.76
per share. The principal balance of the Debenture after this partial
debenture conversion is $1,128,100 dollars.
-12-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 4 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On June 28, 2005, the Company issued these common shares to the Funds.
The Mercator and Impact shares were included in Tideland's registration
statement filed on Form SB-2 which was declared effective by the
Securities & Exchange commission on May 27, 2005.
NOTE 5 - 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 M.A.G.
Capital, LLC ("MAG"), formerly Mercator Advisory Group, LLC. 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.
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. 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. The Company granted the Funds and M.A.G.
registration rights on both groups of securities, such registration was
declared effective May 27, 2005.
During June, the Funds converted $2,520,000 of their 7% Convertible
Debentures to 3,315,789 shares of the Company's common stock. (See
detailed explanation of these transactions in Note 4 Common Stock
Transactions above.)
The Funds also transferred $500,000 of their 7% Convertible Debentures
to Robinson Reed, Inc. (a managed account of M.A.G.) along with 328,948
of their common stock warrants. Monthly interest payments have been
reduced to approximately $14,667 as a result of the aforementioned
conversions.
-13-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 6 - RELATED PARTY TRANSACTION
------ -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
prepayment of $300,000 5% interest bearing loan due in January 2007 was
made by the Company regarding the transaction. The loan balance is
credited by airtime charges at standard industry rates offset by
interest charges computed on the average monthly balance. At June 30,
2005, the loan balance was $286,114.
-14-
Item 2. Management's Discussion and Analysis or Plan of Operation
Business Overview
Our products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects for natural gas
and natural gas liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.
We derive our revenue from transportation fees from delivery of natural gas to
Conagas, the local distribution company in Piedras Negras, Coahuila, through the
pipeline owned by Reef Ventures, L.P. and the sale of propane gas to residential
customers through the assets owned by Sonterra Energy Corporation. We also
design and construct residential propane delivery systems for new residential
developments in Central Texas.
With respect to our pipeline system owned by Reef Ventures, L.P., management is
evaluating an expansion of the pipeline in Coahuila to serve new markets along
the state highway No. 57 corridor to Monclova, Coahuila. We currently expect
that this project will not be activated until the fourth quarter of 2005. The
planned natural gas liquid line between Eagle Pass, Texas and Piedras Negras,
Coahuila is being re-evaluated in light of new supply sources emerging in Texas
and Mexico. We are evaluating the utility of the project as either a tolling
business model for existing demand in Coahuila or as a merchant facility in a
direct contract with the propane importation arm of PEMEX. We expect further
development of the project to be announced by the fourth quarter of 2005.
Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the residential propane distribution business on November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin, Texas. Sonterra's existing and future market area includes several
central Texas locations that do not have access to natural gas as a fuel for
home heating and appliance usage. Current expansion of over 400 lots within the
existing subdivisions is possible. Sonterra has also entered into a new
agreement with the developer of Northshore on Lake Travis to expand the
currently serviced lots by an additional 1,000 units. Up to 2,625 additional
lots may be available for installation of residential propane delivery in
developments currently in the planning stages in the nearly central Texas
vicinity. Management is actively seeking new subdivision installation of propane
systems in the Central Texas and has recently identified 4 new subdivisions in
the San Antonio/Austin Hill Country corridor as prospective for system
installation.
-15-
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 casing head 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 casing head 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 either reopen the
plant in 2005 when adequate volumes of LPG feedstock from third parties makes
plant operations economically attractive or sell the assets to a third party. As
noted above, Rio Bravo Energy LLC owns a general partner interest in Marea
Associates, L.P. and the minority interest in Terranova Energia, S. de R.L. de
C.V.
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline. Presently, the line is not
in use. The pipeline was acquired in conjunction with the Chittim Gas Processing
Plant acquisition. When operational, it would generate revenue from
transportation fees charged to third party gas producers shipping natural gas to
the Chittim Gas Plant owned by Rio Bravo Energy LLC. Management is evaluating
whether to sell or utilize these assets and a decision is expected by the fourth
quarter of 2005.Sonora Pipeline LLC will also own and operate the U.S. (Texas)
pipeline segments to be constructed in connection with the Mexican pipeline, LNG
regasification terminal and gas storage projects which will interconnect to the
U.S. via two international pipeline crossings near McAllen, Texas. The estimated
capital cost of these U.S. segments is approximately $60 million USD. Management
expects a filing with the Federal Energy Regulatory Commission in the third
quarter of 2005 for permission to operate these new pipelines and the granting
of presidential permits for the international crossings near Penitas and
Progreso, Texas for delivery of natural gas into the state of Tamaulipas and the
pipelines owned by our Mexican subsidiary, Terranova Energia S. de R.L. de C.V.
In October 2003, we entered into a confidentiality agreement with Pemex
Exploration and Production ("PEP") to facilitate the exclusive exchange of well
control and seismic data for the purpose of evaluating the feasibility and
design of one or more underground natural gas storage facilities in the Burgos
Basin of Northeast Mexico. In December 2003, we entered into a Memorandum of
Understanding (MOU) with PEMEX to design, build and operate an underground
natural gas storage facility in the vicinity of Reynosa, Tamaulipas, Mexico, in
the Burgos Basin area and eventually at other regions in Mexico. The MOU
provides for exclusivity in the development of the projects and the related
transportation and interconnecting pipelines to and from the storage facilities.
We have completed the initial study of the Burgos facility and our Mexican
subsidiary, Terranova Energia, S. de R.L. de C.V. has filed for a permit to
build and operate the gas storage facility with the Comision Reguladora de
Energia (CRE) in Mexico. A system of two interconnecting pipelines is also
proposed to enhance the overall pipeline grid in Mexico and the operational
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efficiency of the storage facility. A permit from the CRE for the construction
and operation of these pipelines has been filed in the first quarter of 2005.
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 anticipates a permit filing with the CRE in the
third or fourth quarter of 2005. 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 the Project & Export Finance team of HSBC Securities
(USA), Inc. as its 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 participation and
will continue those discussions in the upcoming year as further development of
the projects occurs.
Results of Operations
REVENUES: The Company reported revenues of $968,611 for the six months ended
June 30, 2005 as compared with revenues from continuing operations of $507,712
for the six months ended June 30, 2004. The revenue increase resulted from
additional revenues due to the acquisition of the Sonterra Energy Corporation
assets from ONEOK. These operations were not included in the results for the six
months ended June 30, 2004.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
decreased from $4,303,169 for the six months ended June 30, 2004 to $4,273,210
for the six months ended June 30, 2005. Cost of Sales decreased from $497,820
for the six months ended June 30, 2004 to $415,248 for the six months ended June
30, 2005 as described below. Operating Expenses increased from $2,616 for the
six months ended June 30, 2004 to $129,137 for the six months ended June 30,
2005. Depreciation Expense increased from $47,918 for the six months ended June
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30, 2004 to $236,395 for the six months ended June 30, 2005. Interest Expense
increased from $ 48,437 for the six months ended June 30, 2004 to $393,860 for
the six months ended June 30, 2005. The increases in Operating Expenses,
Depreciation Expense and Interest Expense resulted primarily from growth in
assets and debt related to the acquisition of 98% of the partnership interest in
the Reef Ventures, L.P. international pipeline operations and the acquisition of
the residential propane sales business near Austin, Texas by Sonterra Energy
Corporation. Sales, General and Administrative Expenses decreased from
$3,706,378 for the six months ended June 30, 2004 to $3,098,570 for the six
months ended June 30, 2005 as described below.
COST OF SALES: Total Cost of Sales decreased from $497,820 for the six months
ended June 30, 2004 to $415,248 for the six months ended June 30, 2005. This
decrease resulted due to the change in operations of the Reef Ventures, L.P.
pipeline from gas marketing to transportations fees as the operating model for
this business segment. The entire cost of sales expense category now represents
cost of propane and the cost of propane system assets incurred by Sonterra
Energy Corporation.
OPERATING EXPENSES: Operating expenses from continuing operations increased from
$2,616 for the six months ended June 30, 2004 to $129,137 for the six months
ended June 30, 2005. This increase was primarily due to additional operating
expenses incurred by Sonterra Energy Corporation in its operations for the
period which were not present in the comparative six months for 2004.
Depreciation expense increased by $188,477 for the period ended June 30, 2005
due to the reporting of five months of additional depreciation related to the
acquisition of the natural gas pipeline owned by Reef Ventures, L.P. and six
months of depreciation related to the depreciable assets acquired by Sonterra
Energy Corporation for the operation of the residential propane distribution
systems in Austin, Texas. Interest expense increased by $345,423 during the six
months ended June 30, 2005 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.
SALES, GENERAL AND ADMINISTRATIVE: Sales, General & Administrative Expenses
decreased by $607,808 during the six months ended June 30, 2005 as compared with
the period ended June 30, 2004. Decreased consulting fees were primarily
responsible for the difference between the respective periods.
NET LOSS FROM OPERATIONS: Net loss of ($3,795,457) for the six months ended June
30, 2004 decreased to ($3,304,599) for the six months ended June 30, 2005, a
decrease in the amount of loss of $490,858. Included in the net loss from
operations is $1,098,625 of expenses for director fees, financing costs,
consulting fees, and legal fees paid by issuance of common stock.
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LIQUIDITY AND CAPITAL RESOURCES: Direct capital expenditures during the six
months ended June 30, 2005 totaled $784,640. The capital expenditures were
composed of increased office furniture, equipment and leasehold costs plus
pre-construction costs regarding potential international pipeline crossings and
storage facilities in Mexico, and additional machinery, equipment, trucks, autos
and trailers for the operation of the Sonterra Energy Corporation propane
systems. Total debt decreased from $12,306,107 at December 31, 2004 to $
7,504,792 at June 30, 2005. The decrease in total debt is due primarily to
conversion of debentures to common stock in the amount of $2,520,000 and the
exercise of warrants which reduced an outstanding note payable in the amount of
$2,512,500. Net loss for the six months ended June 30, 2005 was ($3,238,115) a
decrease in net loss of 14% from the net loss of ($3,784,384) for the six months
ended June 30, 2004. Basic and diluted net loss per common share decreased 37.5%
to ($0.05). The net loss per share calculation for the six months ended June 30,
2005 included an increase in actual and equivalent shares outstanding.
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 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the reporting period, June 30, 2005, 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
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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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Matter No. 1:
On January 6, 2003, we were served as a third party defendant in a lawsuit
titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil &
Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
to make payments on a note she executed payable to Northern in the original
principal amount of $1,950,000. Northern's suit was filed on November 13, 2002.
Sheerin answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses of
fraudulent inducement by Northern, estoppel, waiver and the further claim that
the note does not comport with the legal requirements of a negotiable
instrument. Sheerin seeks a judicial ruling that Northern be denied any recovery
on the note. Sheerin's answer included a counterclaim against Northern, ZG
Gathering, and Ken Lay generally alleging, among other things, that Northern, ZG
Gathering, Ltd. and Ken Lay, fraudulently induced her execution of the note.
Northern has filed a general denial of Sheerin's counterclaims. Sheerin's answer
included a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from ZG
Gathering Ltd. and that, as a part of the agreement, Tidelands agreed to satisfy
all of the obligations due and owing to Northern, thereby relieving Sheerin of
all obligations she had to Northern on the $1,950,000 promissory note in
question. Tidelands and Sheerin agreed to delay the Tideland's answer date in
order to allow time for mediation of the case. Tidelands participated in
mediation on March 11, 2003. The case was not settled at that time. Tideland's
answered the Sheerin suit on March 26, 2003. Tideland's answer denies all of
Sheerin's allegations.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her first and
second amended original answer, affirmative defenses, special exceptions and
second amended original counterclaim, second amended original third party
cross-actions and requests for disclosure. In these amended pleadings, she sued
Michael Ward, Royis Ward, James B. Smith, Carl Hessell and Ahmed Karim in their
individual capacities. Her claims against these individuals are for fraud,
breach of contract, breach of the Uniform Commercial Code, breach of duty of
good faith and fair dealing and conversion. Sheerin has now non-suited her
claims against Michael Ward, Royis Ward, and James B. Smith.
In September 2002, as a pre-closing deposit to the purchase of the ZG pipelines,
the Company executed a $300,000 promissory note to Betty L. Sheerin, a partner
of ZG Gathering, Ltd. In addition, the Company issued 1,000,000 shares of its
common stock to various partners of ZG Gathering, Ltd. On December 3, 2003,
Sheerin filed a separate lawsuit against Tidelands in the 150th District Court
of Bexar County, Texas, Case Number 2003-CI-18795, on this promissory note
seeking a judgment against Tidelands for the principle amount of the note, plus
interest. On December 29th, 2003, Tidelands answered this lawsuit denying
liability on the note. On April 1, 2004, Tidelands filed a plea in abatement
asking the court to dismiss or abate Sheerin's lawsuit on the $300,000
promissory note as it was related to and its outcome was dependent on the
outcome of the Sheerin third party cross action against Tidelands in Cause
Number 2002-C1-16421. The company believes that the promissory note and shares
of common stock should be cancelled based upon the outcome of the litigation
described above. Accordingly, our financial statements reflect this belief.
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On September 15, 2004 and again on October 15, 2004 respectively, Sheerin
amended her pleadings to include a third and fourth amended third party cross
action against Tidelands adding a claim for the $300,000 promissory note. In
these amended pleadings, Sheerin also deleted her claims against Carl Hessel and
Ahmed Karim. After adding the claim on the $300,000 promissory note to the third
party claims of Sheerin against Tidelands in Cause No. 2002-C1-16421, Sheerin
dismissed Cause Number 2003-C1-18795.
Sheerin seeks damages against Tidelands for indemnity for any sums found to be
due from her to Northern Natural Gas Company, unspecified amounts of actual
damages, statutory damages, unspecified amounts of exemplary damages, attorneys
fees, costs of suit, and prejudgment and post judgment interest.
On August 5, 2005, Northern Natural Gas Company filed its Fourth Amended
Original Petition which, for the first time, named Tidelands as a defendant to
Northern. Northern seeks to impose liability on Tidelands for $1,950.000
promissory note signed by McDay Energy Partners, Ltd. (the predecessor to ZG
Gathering, Ltd.) and Sheerin and the $1,700,000 promissory note signed by McDay
only. Northern contends that Tidelands is alternatively liable to Northern for
payment of both such promissory notes totaling $3,709,914 plus interest because
Northern is a third party beneficiary under a December 3, 2001 purchase and sale
agreement between ZG and Tidelands claiming that in such agreement Tidelands
agreed to assume and satisfy all indebtedness due and owing Northern by Sheerin
and ZG. Northern also claims that it is entitled to foreclosure of a lien on the
gas gathering system and pipeline that was the subject of the promissory notes
in question.
Some discovery has been completed at this time. Based on initial investigation,
and discovery to date, Tidelands appears to have a number of potential defenses
to the claims of Sheerin and Northern. Tideland's intends to aggressively defend
these lawsuits. At this stage in the litigation, and in light of our continuing
investigation and incomplete discovery, we cannot give a more definitive
evaluation of the extent of Tideland's liability exposure.
Matter No. 2:
On May 4, 2005, HBH Development Company, LLC initiated legal action against
Sonterra Energy Corporation in the District Court of Travis County, Texas, 98th
Judicial District. This action involves the developer of the Austin's Colony
Subdivision in Travis County, Texas and the propane distribution system
originally constructed by Southern Union Company. Southern Union entered into a
letter agreement with HBH concerning the construction and operation of a propane
distribution system in the subdivision to be owned and operated by Southern
Union. Southern Union assigned the letter agreement and its interests in the
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propane system to Oneok, Inc., the parent company of Oneok Propane Company.
Sonterra acquired its interest in the propane system from Oneok Propane
Distribution Company. HBH is claiming that Sonterra has failed or refused to pay
HBH rent and easement use fees under the terms of the letter agreement. HBH
alleges that Sonterra's actions cause a failure of the assignment whereby it
acquired rights in the propane system or alternatively, if the assignment is
effective, for breach of contract. HBH seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, cancellation of the contract and rights associated with the propane
distribution system, issue to HBH a writ of possession for the property, and for
attorneys fees.
Sonterra is defending the legal action. It believes that under the terms of the
letter agreement between HBH Development Company and Southern Union Company,
that the easement use fees terminated when Southern Union conveyed its interest
in the propane distribution system to Oneok Propane Company.
Matter No. 3:
On May 4, 2005, Senna Hills, Ltd. initiated legal action against Sonterra Energy
Corporation in the District Court of Travis County, Texas, 53rd Judicial
District. This action involves the developer of the Senna Hills Subdivision in
Travis County, Texas and the propane distribution system originally constructed
by Southern Union Company. Southern Union entered into a letter agreement with
Senna Hills concerning the construction and operation of a propane distribution
system in the subdivision to be owned and operated by Southern Union. Southern
Union assigned the letter agreement and its interests in the propane system to
Oneok, Inc., the parent company of Oneok Propane Company. Sonterra acquired its
interest in the propane system from Oneok Propane Distribution Company. Senna
Hills is claiming that Sonterra has failed or refused to pay Senna Hills rent
and easement use fees under the terms of the letter agreement. Senna Hills
alleges that Sonterra's actions cause a failure of the assignment whereby it
acquired rights in the propane system or alternatively, if the assignment is
effective, for breach of contract. Senna Hills seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, and cancellation of the contract and rights associated with the propane
distribution system, issue to Senna Hills a writ of possession for the property,
and attorneys fees.
Senna Hills sold certain undeveloped sections of Senna Hills Subdivision to a
new owner. Sonterra believes that it has the right to expand its distribution
system into such undeveloped sections of the subdivision. Sonterra plans to
expand the distribution system into these sections under an agreement with the
new owner. Senna Hills has stated that although it is not presently objecting to
Sonterra's expansion of the system at this time, it is reserving its claim that
Sonterra does not have the right to do so and that it intends to ask the court
to cancel Sonterra's right to use and possession of the propane distribution
system, including the system in the new sections of the subdivision.
Sonterra is defending the legal action. It believes that under the terms of the
letter agreement between Senna Hills and Southern Union Company, that the
easement use fees terminated when Southern Union conveyed its interest in the
propane distribution system to Oneok Propane Company.
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Matter No. 4:
On April of 2005, Goodson Builders, Ltd. named Sonterra Energy Corporation in a
legal action titled, Goodson Builders, Ltd, Plaintiff vs. Jim Blackwell and BNC
Engineering, LLC, Defendants. The legal action is in the District Court of
Travis County, Texas 345th Judicial District. This legal action arises from a
claim that an underground propane storage tank and underground distribution
lines is situated on the Plaintiff's lot in the Hills of Lakeway subdivision,
Travis County, Texas. Plaintiff alleges that there is no recorded easement
setting forth the rights and obligations of the parties for use of the propane
tank and lines. However, there is reference to a "suburban propane easement" on
the plat document. Plaintiff alleges that the property is being used without
permission and the use constitutes an on-going trespass. Plaintiff asks the
court to determine that his lot is not subject to a "suburban propane easement",
declare the propane equipment the property of plaintiff, enjoin Sonterra from
use of Plaintiff's land, and award damages. The Plaintiff seeks damages of
$165,000 based on a market rental rate he claims to be $5,000 per month, $50,000
damages for depreciation of the value of the lot, an unspecified amount of
exemplary damages, and attorneys' fees. Sonterra is defending the claims.
Matter No. 5:
On April 20th, 2005, Tidelands filed suit against L.L. Capital Group, L.L.C. in
Bexar County, Texas, 224th Judicial District Court. On August 11th, 2004,
Tidelands entered into a consulting services agreement with L.L. Capital. The
agreement provided for L.L. Capital to provide advisory services to Tidelands
regarding certain business opportunities, including various types of financial
arrangements. As compensation for the services that were to be provided, L.L.
Capital was to receive $500,000 of unrestricted common stock and $550,000 of
restricted common stock, and $500,000 of Warrants Shares exercisable at $1.45
per share.
L. L. failed to perform the required services for which Tidelands has sued to
rescind the agreement and have all stock and warrants returned to Tidelands, for
discharge from any obligation under the agreement, and for its attorney's fees
and costs.
The parties have commenced settlement negotiations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
All unregistered sales of equity securities were disclosed in Current Reports
filed on Form 8-K during the second quarter.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the second quarter of the fiscal
year covered by this report.
Item 5. Other Information
None.
Item 6. Exhibits
a) Exhibits
Exhibit No. Exhibit Name
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 and Financial Officer-Section 906
Certification pursuant to Sarbanes-Oxley Act.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TIDELANDS OIL & GAS CORP.
Dated: August 10, 2005 /s/ Michael Ward
-------------------------
By: Michael Ward
Title: President, CEO
Dated: August 10, 2005 /s/ James B. Smith
-------------------------
By: James B. Smith
Title: CFO
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