Potomac Energy Corp · 10KSB · For 12/31/97

Filed On 7/2/98   ·   SEC File 0-09474   ·   Accession Number 1047469-98-26292

Annual Report -- Small Business   ·   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report -- Small Business                       30    192K 
 2: EX-3.1      Articles of Incorporation/Organization or By-Laws      3     24K 
 3: EX-3.2      Articles of Incorporation/Organization or By-Laws     13     74K 
 4: EX-4.2      Instrument Defining the Rights of Security Holders    15     74K 
 5: EX-10.1     Material Contract                                     82    276K 
 6: EX-10.2     Material Contract                                     55    263K 
 7: EX-10.3     Material Contract                                      3     20K 
 8: EX-21.1     Subsidiaries of the Registrant                         1      5K 
 9: EX-27       Financial Data Schedule                                2      9K 

10KSB   ·   Annual Report -- Small Business
Document Table of Contents

10KSB
1st Page of 30
TOC
Top
Previous
Next
Bottom
Just 1st
 
Sponsored Ads...


     U.S. 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 fiscal year ended December 31, 1997.                     

    Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _____________ to _____________.

COMMISSION FILE NUMBER:  0-9474                                                 

      POTOMAC ENERGY CORPORATION
   (FORMERLY MIDWESTERN RESOURCES, INC.)
    (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

   OKLAHOMA                                 73-1088064
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
incorporation or organization)                                        

1400 FOUNDERS TOWER                                       
5900 MOSTELLER DRIVE                                        
OKLAHOMA CITY, OKLAHOMA                         73112-4605    

(Address of principal executive offices)                 (Zip Code)             

Issuer's telephone number:(405) 840-1427                                        

Securities to be registered under                                         
Section 12(b) of the Act:                                       

     Title of each class              Name of each exchange on which
                                      registered
NONE                                   NONE 

Securities to be registered under                                         
Section 12(g) of the Act:                                       

 COMMON STOCK, $.001 PAR VALUE
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section  
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such   
shorter period that the registrant was required to file such reports), and has  
been subject to such filing requirements for the past 90 days.  Yes     No  X   
                                                                  ---    ---

Check if there is no disclosure of delinquent filers in response to Item 405 of 
Regulation S-B is not contained 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 to this Form 10-KSB.                                           

Issuer's revenues for its most recent fiscal year was $1,443.                   

The aggregate market value of the voting stock held by non-affiliates based upon
the price at which the common equity was sold ($.25 per share) as of June 29,   
1998, was $1,257,065.                                                           

The number of outstanding of Common Stock as of June 29, 1998, was 7,628,261.   

      TRANSITIONAL SMALL BUSINESS DISCLOSURE
     FORMAT (CHECK ONE):
Yes     No  X   
  ---    ---

10KSB
2nd Page of 30
TOC
1st
Previous
Next
Bottom
Just 2nd

     TABLE OF CONTENTS

                                                        · Enlarge/Download Table


                                                                                                          PAGE
                                                                                                              
Part I                                                                                                        
Item 1.  Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 
Item 2.  Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5 
Item 3.  Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8 
Item 4.  Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . .  8 

Part II                                                                                                       
Item 5.  Market for Common Equity and Related Stockholders Matters . . . . . . . . . . . . . . . . . . . .  8 
Item 6.  Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . .  9 
Item 7.  Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 
Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
Item 11. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . 15 
Item 12. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . 16 
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
         (a)  Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
         (b)  Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 

10KSB
3rd Page of 30
TOC
1st
Previous
Next
Bottom
Just 3rd

      CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION

   Certain statements under the captions "Item 1.  Description of Business,"
"Item 2. Description of Property," and "Item 6.  Management's Discussion and    
Analysis or Plan of Operation," and elsewhere in this Report and the documents  
referenced herein constitute "forward-looking statements" within the meaning of 
Section 21E of the Securities Exchange Act of 1934, as amended.  Certain, but   
not necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategies that involve risks and  
uncertainties.  Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, levels of   
activity, performance or achievements of Potomac Energy Corporation, or industry
results, to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking        
statements.  As a result of the foregoing and other factors, no assurance can be
given as to future results, levels of activity and achievements and neither     
Potomac Energy Corporation nor any other person assumes responsibility for the  
accuracy and completeness of these statements.                                  

PART I                                                                          

ITEM 1.   DESCRIPTION OF BUSINESS.                                              

BACKGROUND                                                                      

  Potomac Energy Corporation ("PEC" or the "Company") (formerly Midwestern
Resources, Inc.) was formed in 1980 under the laws of the State of Oklahoma and 
became inactive and its corporate charter was suspended in 1983.  In March 1998,
the Company was reincorporated under the name "Midwestern-Oklahoma Energy       
Resources Corporation."  Effective June 17, 1998, Potomac Energy (Bermuda) Ltd.,
a Bermuda corporation ("Potomac (Bermuda)"), merged with and into Potomac       
Exploration Acquisition Corporation, a wholly-owned subsidiary of the Company   
("Potomac Acquisition"), pursuant to a Plan of Reorganization and Agreement of  
Merger dated June 12, 1998 (the "Merger").  As a condition of the Merger, on    
June 17, 1998, the outstanding Common Stock of the Company was reverse split on 
the basis of one share for each 41.40846 outstanding shares, which resulted in  
578,261 shares of Common Stock being outstanding immediately prior to the Merger
(the "Reverse Stock Split").  In consummation of the Merger, the Company issued 
7,050,000 shares of its Common Stock to the former shareholders of Potomac      
(Bermuda) and the Company's name was changed to "Potomac Energy Corporation."   
The Merger was accounted for as a reverse acquisition of the Company by Potomac 
(Bermuda).  Potomac (Bermuda) was formed on April 7, 1997.  Immediately prior to
the Merger, the Company did not have any assets or liabilities.                 

   The Company is a development stage company engaged in the exploration and
development of oil and gas properties outside of North America.  The Company,   
through its subsidiaries, owns interests in a prospective area located in       
Colombia, South America, which is in the initial stages of exploration and      
development.  Prior to the Merger, Potomac (Bermuda) had not conducted any      
operations other the acquisition of the interests in the Rosablanca Association 
Contract and the Montecristo Association Contract for exploration and           
development of the Rosablanca and Montecristo Blocks within the Middle Magdalena
Valley Basin, Colombia, South America.  The Rosablanca and Montecristo Blocks   
are in the initial stages of exploration.  See "Item 2.  Description of         
Property--Middle Magdalena Valley Basin."  The Company also may seek to acquire 
additional oil and gas exploration opportunities in Colombia which management   
believes may have large reserve potential; however, there is no assurance that  
additional interests will be acquired or if acquired will be capable of         
commercial development and production.  All references to the "Company" includes
Potomac Energy Corporation and its subsidiaries, unless the context indicates   
otherwise.                                                                      

EXPLORATION STRATEGY                                                            

The Company's oil and gas exploration and development operations are  
currently focused entirely on its activities in Colombia, South America.  Such  
operations are conducted through the Columbian branch of Potomac Energy (BVI)   
Ltd., a wholly-owned British Virgin Islands subsidiary corporation ("Potomac    
(BVI)").  The dependence on the activities in Columbia is likely to be reflected
in both the short-term performance and the Company's long-term financial        
results. The Company may serve as operator with respect to those properties     
acquired pursuant to association contracts in which the Company obtains a       
controlling interest or holds the largest ownership interest; however, it is    

     -1-

10KSB
4th Page of 30
TOC
1st
Previous
Next
Bottom
Just 4th

anticipated that the Company will also participate in the development of        
properties operated by third parties and in some cases may delegate operations  
to a third party.  The Company's business strategy includes:                    

-   Establishing production, cash flow and reserve value by developing proved 
undeveloped reserves;                                                 

-   Building the Company's base of operations by initially concentrating its  
development activities in Colombia;                                   

-   Acquiring additional properties with potential for development drilling to
     establish and maintain a significant inventory of undeveloped prospects and
to establish and enhance the Company's foundation for future growth;  

 -   Serving as operator of its wells to ensure technical performance and reduce
costs;                                                                

-   Establish relationships with other oil and gas exploration companies to   
access their undeveloped properties, geological data and financial    
resources;                                                            

-   Managing financial risk and mitigating technical risk by drilling in known
  productive trends with multi-geologic potential, diversifying investment
     over a number of wells in the Company's primary operating areas, developing
     properties that provide a balance between short and long reserve lives, and
 establishing and maintaining a balanced reserve profile between oil and
gas; and                                                              

-   Maintaining low general and administrative expenses.                      

Oil and gas exploration and development is a speculative business and 
involves a high degree of risk. The Company is subject to all the risks normally
incident to drilling for and producing oil and gas, including hazards such as   
high-pressured formations, blowouts, cratering, fires, spills, or other hazards 
or conditions, any of which could result in damage to or loss of life or        
property.  In accordance with industry practice, the Company is not fully       
insured against these risks nor are all such risks insurable.  Payment of such  
potential liabilities would reduce the funds available for exploration, drilling
and production and could have a material adverse effect on the Company.         

The Company has expended, and plans to continue to expend, significant
amounts of capital on the acquisition and exploration of its oil and gas        
interests. Even if the results of such activities are favorable, subsequent     
drilling at significant costs must be conducted on a property to determine if   
commercial development of the property is feasible. Oil and gas drilling may    
involve unprofitable efforts, not only from dry holes but from wells that are   
productive but do not produce sufficient  net revenues to return a profit after 
drilling, operating and other costs.  It is  difficult to project the costs of  
implementing an exploratory drilling program due to the inherent uncertainties  
of drilling in unknown formations, the costs associated with encountering       
various drilling conditions, such as high-pressured  zones and tools lost in the
hole, and changes in drilling plans and locations as  a result of prior         
exploratory wells or additional seismic data and  interpretations thereof.  The 
marketability of oil and gas which may be acquired or discovered by the Company 
will be affected by the quality and viscosity of the production and by numerous 
factors beyond its control, including market fluctuations, the proximity and    
capacity of oil and gas pipelines and processing equipment, government          
regulations, including regulations relating to prices, taxes, royalties, land   
tenure, importing and exporting of oil and gas and environmental protection.    
There can be no assurance the Company will be able to discover, develop and     
produce sufficient reserves in Colombia or elsewhere to recover the costs and   
expenses incurred in connection with the acquisition, exploration and           
development thereof and achieve profitability.                                  

COLOMBIA--OVERVIEW                                                              

The Company's success currently depends entirely on its drilling and  
exploration activities in Colombia.  This dependence is likely to be reflected  
in both the short-term performance and the Company's long-term financial        
results.                                                                        

   The Company's principal asset is a 25 percent interest in the Association
Contracts that relate to Rosablanca and Montecristo Blocks located in the Middle
Magdalena Valley Basin in and around Bogota, Colombia, South America (the       
"Rosablanca  and Montecristo Association Contracts").  As of the date of this   
Report, a well has not been drilled on either of the Rosablanca and Montecristo 
Blocks. The Rosablanca  and Montecristo Association Contracts were issued by    
Empresa Colombiana de Petroleos ("Ecopetrol"), the state-owned Colombian oil    
company, in November 1997, and provide generally for a six-year exploration     
phase followed by a 22-year production period, with partial relinquishments of  
acreage, excluding commercial fields, required commencing at the end of the     
sixth year                                                                      

     -2-

10KSB
5th Page of 30
TOC
1st
Previous
Next
Bottom
Just 5th

of the Rosablanca  and Montecristo Association Contracts.  The Company currently
intends to participate in the drilling of the initial well on the Magdalena     
Valley Basin before the end of 1998.  See "Item 2. Description of               
Property--Middle Magdalena Valley Basin--Rosablanca and Montecristo Association 
Contracts."                                                                     

     The Rosablanca and Montecristo Association Contracts entitle the Company to
engage in exploration, development and production activities on approximately   
695,000 acres (173,750 net acres) located in the Middle Magdalena Valley Basin, 
before any relinquishment to Ecopetrol.                                         

    Colombia is the fourth largest country in South America, with a total land
area of more than 1,038,700 square kilometers, with a population of 35.9 million
people (1993 census).  The official language is Spanish and the official        
currency is the Colombian peso.  Colombia has a democratic form of government.  
While Colombia experiences insurgency and national political protests, the      
Colombian economy has been among the best performers in Latin America during the
past 20 years. According to publicly available information, Colombia's Gross    
Domestic Product ("GDP") has grown by an average of four percent annually in the
last 10 years, approximately twice the average for Latin America.  Colombia is  
the only country in South America that did not have a single year of negative   
GDP or declining per capita income growth in the 1980s and the 1990s. Colombia  
recently introduced legislation to attract foreign investment in energy         
projects.  The measures include the exemption of new oil operations from the $1 
per barrel tax which was levied in 1992 to finance protection of oil operations.

According to publicly available information, the United States is     
Colombia's largest trading partner, accounting for more than 43 percent of that 
country's total imports and 38 percent of its total exports.  The United States 
is also the top provider of eight of Colombia's 15 largest imports.  United     
State oil companies now account for 11 of the 18 largest foreign oil concerns   
operating in Colombia.  Colombia is Latin America's third leading crude exporter
to the United States, after Venezuela and Mexico.                               

     Colombia is the only country in South America that has seaports on both the
Pacific and Atlantic Oceans, which provide access to major oil markets.  The    
country has three main crude oil export pipelines leading to the port of Covenas
in Colombia.  The pipeline from Cano Limon has a maximum capacity of 200,000    
barrels of oil per day ("BOPD"), and two pipelines from Vasconia with 300,000   
and 500,000 BOPD capacities.                                                    

The geology of Colombia has been studied since the mid-1800s and has  
continued to the present, amassing some detail of the tectonic framework and    
related stratigraphy.  During the evolution of the geological knowledge of      
Colombia, oil and natural gas exploration has been pursued in the Llanos,       
Putumayo and Magdalena basins. Exploration in the Magdalena Valley Basin began  
in 1918 with the drilling of the Guataqui wells in the Girardot subbasin,       
followed in 1951 by the Ortega discovery.  Since the mid-1980's the oil industry
has been the single largest component of economic growth, with total Colombian  
oil reserves currently estimated to be approximately 3.7 billion barrels of     
recoverable oil.  As of December 1993, 210 exploratory wells had been drilled,  
resulting in the discovery of 30 fields.                                        

  Two major physiographic features dominate the geography of Colombia.  To
the west lie the Andes mountains, which, north of the Ecuador border, bifurcate 
into three ranges, the Western, Central and Eastern Cordillera, extending toward
the Caribbean coast. These ranges are separated by the Cauca and Magdalena      
valleys, respectively.  To the east lies the Llanos, a savanna within the bounds
of the Orinoco Basin, which extends over the remainder of the country.          

  Association contracts acquired from Empresa Colombiana de Petroleos, the
Colombian national oil company ("Ecopetrol"), after being approved by all proper
Colombian governmental authorities as well as the board of Ecopetrol, are       
mutually executed by the parties and subsequently recorded as a public deed in  
Colombia.  Therefore, ownership of an association contract is of public record  
and protected by Colombian law.                                                 

RISKS INHERENT IN FOREIGN OPERATIONS                                            

There are risks inherent in the fact that the Company has acquired and
intends to continue to acquire interests in oil and gas properties located      
outside of North America in some cases in countries which may be considered     
politically and economically unstable.                                          

    Foreign properties, operations or investments may be adversely affected by
local political and economic developments, exchange controls, currency          
fluctuations, royalty and tax increases, retroactive tax claims, renegotiation  
of contracts with governmental entities, expropriation, import and export       
regulations and other foreign laws or policies                                  

     -3-

10KSB
6th Page of 30
TOC
1st
Previous
Next
Bottom
Just 6th

governing operations of foreign-based companies, as well as by laws and policies
of the United States affecting foreign trade, taxation and investment.  In      
addition, as the Company's operations are governed by foreign laws, in the event
of a dispute, the Company may be subject to the exclusive jurisdiction of       
foreign courts or may not be successful in subjecting foreign persons to the    
jurisdiction of courts in the United States.  The Company may also be hindered  
or prevented from enforcing its rights with respect to a governmental           
instrumentality because of the doctrine of sovereign immunity.                  

The Company's business is subject to political risks inherent in all  
foreign operations.  While Colombia has no history of nationalizing its business
nor expropriation of foreign assets, the Company's oil and gas operations are   
subject to certain risks, including: (i) loss of revenue, property, and         
equipment as a result of unforeseen events such as expropriation,               
nationalization, war and insurrection, (ii) risks of increases in taxes and     
governmental royalties, (iii) renegotiation of contracts with governmental      
entities, and (iv) changes in laws and policies governing operations of         
foreign-based companies in Colombia.  Guerrilla activity in Colombia has        
disrupted the operation of oil and gas projects in certain areas in Colombia but
has not affected the Company's interest in the Rosablanca  and Montecristo      
Association Contracts.  The Colombian government continues its efforts through  
negotiation and legislation to reduce the problems and effects of insurgent     
groups, including regulations containing sanctions such as impairment or loss of
contract rights on companies and contractors if found to be giving aid to such  
groups.  The associate parties will continue to cooperate with the government,  
and do not expect that future guerrilla activity will have a material impact on 
the exploration and development of the Rosablanca  and Montecristo Association  
Contracts.  However, there can be no assurance that such activity will not occur
or have such an impact and no opinion can be given on what steps the government 
may take in response to any such activity.  Colombia is among several nations   
whose progress in stemming the production and transit of illegal drugs is       
subject to annual certification by the President of the United States.  As of   
the date of this Report, Colombia has received such certification.  The         
consequences of the failure to receive certification generally include the      
following: all bilateral aid, except anti-narcotics and humanitarian aid, has   
been or will be suspended; the Export-Import Bank of the United States and the  
Overseas Private Investment Corporation will not approve financing for new      
projects in Colombia; United States representatives at multilateral lending     
institutions will be required to vote against all loan requests from Colombia,  
although such votes will not constitute vetoes; and the President of the United 
States and Congress retain the right to apply future trade sanctions.  Each of  
these consequences of the failure to receive such certification could result in 
adverse economic consequences in Colombia and could further heighten the        
political and economic risks associated with the Company's operations in        
Colombia.                                                                       

JOINT VENTURE ARRANGEMENTS                                                      

   As a means of diversifying exploration risks, the Company has and expects
to continue to enter into joint venture arrangements for the exploration and    
development of properties acquired under association contracts initially        
obtained by the Company or acquire only partial interests in oil and gas        
properties through joint venture agreements with other oil and gas corporations 
that may, by the terms of such joint venture agreements, be the operators of    
such properties and joint ventures.  Although the Company can take certain steps
to determine if the risk of the exploration activities to be conducted by the   
designated operator of such joint ventures is appropriately spread over a number
of prospects within a contract area of an association contract, there can be no 
assurance that the risk will be so allocated, that the exploration activities   
will be carried out by the operator in a manner deemed appropriate by the       
Company or that the activities will be successful.  In addition, the Company's  
ability to continue its exploration and development activities may be dependent 
upon the decision of its joint venture partner or partners to continue          
exploration and development activities and to finance their respective portions 
of the costs and expenses of the joint venture exploration activities.  If the  
Company's joint venture partners do not elect to continue and to finance their  
obligations to the joint venture, the Company may be required to accept an      
assignment of the partners' interests therein and assume their financing        
obligations of further development or relinquish the Company's interest in the  
joint venture or the association contract.                                      

MARKETS                                                                         

    In the event the Company's exploration and development drilling activities
result in the discover and production of oil and gas and upon Ecopetrol's       
declaration of the commerciality of the Company's discovery, oil produced from  
the Rosablanca and Montecristo Blocks may be sold to Ecopetrol or to third      
parties provided that 75 percent of the purchase price is paid in United States 
currency and the remainder in Colombian pesos.  In the event the                

     -4-

10KSB
7th Page of 30
TOC
1st
Previous
Next
Bottom
Just 7th

production is required to satisfy internal demand for oil in Colombia, the      
Company may be required to sell some or all of its production to Ecopetrol at   
prevailing market prices.  It is anticipated that any oil and gas production of 
the Company from its Colombian operations will be sold to Ecopetrol under       
contracts that provide for cancellation by either party with notice.  In the    
event of cancellation by Ecopetrol, the Company would be required to arrange for
the export and sale of its production.                                          

Since the early 1970's the market price for crude oil has been        
significantly affected by policies adopted by the member nations of the         
Organization of Petroleum Exporting Countries ("OPEC").  Members of OPEC        
establish prices and production quotas among themselves for petroleum products  
from time to time with the intent of controlling the current global supply and  
consequently price levels.  The Company is unable to predict the effect, if any,
which OPEC policy or price changes would have on any decision of Ecopetrol to   
continue or cancel production purchase contracts with the Company or the effect 
such policies and price changes might have on the ability of the Company to     
otherwise profitable export and market the Company's production from Colombia in
the event Ecopetrol should elect to cancel productions purchase contracts with  
may be entered into for the purchase of the Company's production.               

Changes in natural gas and crude oil prices significantly affect the  
revenues and cash flows of the Company attributable to oil and gas production   
and the value of its oil and gas properties.  Declines in the prices of crude   
oil and natural gas could have a material adverse effect on the business and    
financial condition of the Company.  The Company is unable to predict whether   
the prices of crude oil and natural gas will rise, stabilize or decline in the  
future.                                                                         

REGULATION                                                                      

  The Company's operations are subject to regulations imposed by the local
regulatory authorities including, without limitation, currency regulation,      
import and export regulation, taxation and environmental controls.  The         
regulations also generally specify, among other things, the extent to which     
properties may be acquired or relinquished, permits necessary for drilling of   
wells, spacing of wells, measures required for preventing waste of oil and gas  
resources and, in some cases, rates of production and sales prices to be charged
to purchasers.  Specifically, Colombian operations are governed by a number of  
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,  
and the Ministry of the Environment.  It is possible that the administration and
enforcement of current environmental laws and regulations or the passage of new 
environmental laws or regulations in Colombia could result in substantial costs 
and liabilities in the future or in delays in obtaining the necessary permits to
conduct and expand the Company's operations in such country. The Company has    
experienced and may continue to experience delays in obtaining the necessary    
environmental permits to expand its operations in Colombia.                     

EMPLOYEES                                                                       

    As of June 19, 1998, the Company The Company's operations are managed from
its offices in Oklahoma City,  with a staff of five employees as of June 19,    
1998, and use professional consulting services as needed.  The Company's        
employees are not represented by a labor organization.  The Company and its     
subsidiaries consider the relations with their employees and consultants to be  
good.dd                                                                         

ITEM 2.   DESCRIPTION OF PROPERTY.                                              

MIDDLE MAGDALENA VALLEY BASIN                                                   

   The Company has identified and completed the preliminary investigation of
oil and gas reserves existing in the Middle Magdalena Valley Basin in and around
Bogota, Colombia.  The Company has acquired a 25 percent interest in the        
Rosablanca and Montecristo Association Contracts on a joint-venture basis       
granting rights to develop oil and gas in certain specified properties known as 
the Rosablanca and the Montecristo Blocks (sometimes referred to as the         
Rosablanca II Block) located in the Middle Magdalena Valley Basin.  The         
Rosablanca Block covers approximately 326,000 acres and the Montecristo Block   
covers approximately 375,000 acres.                                             

   Oil and gas reserves have been investigated and explored in the Magdalena
Valley Basin since as early as 1940.  The first commercial field was established
by Trocco Oil in 1951 with proven recoverable reserves in excess of 800 million 
barrels.  Through the use of advanced technologies and exploration techniques   
such as seismic, gravimetric and magneto metric surveys, combined with now      
historically proven data and exploratory drilling, additional potentially large 
reserves have been identified and recovered throughout the Middle Magdalena     
Valley Basis.  Several independent                                              

     -5-

10KSB
8th Page of 30
TOC
1st
Previous
Next
Bottom
Just 8th

oil companies such as Trident Energy, Harken Oil and Gas, and Seven Seas along  
with major oil and gas producers such as Exxon, Inc., and Texaco, Inc., have    
made important recent discoveries that have drawn international attention to all
of Central and South America.                                                   

To date, approximately 1,300 kilometers of 2-D seismic data has been  
acquired on the Rosablanca Block and the Montecristo Block.  Based on analysis  
and processing of such data, it is estimated that combined anticipated          
recoverable oil reserves from the Rosablanca and Montecristo Blocks exceed one  
billion barrels.                                                                

Pursuant to agreement dated February 27, 1997 (the "GHK Agreement"),  
Omnipresent Exploration and Production Corporation (formerly Potomac Energy     
Corporation and predecessor in interest of Potomac (Bermuda)) and  GHK Company, 
L.L.C., an Oklahoma limited liability company ("GHK"), agreed to jointly acquire
and develop any association contracts related to the Rosablanca Block and the   
Montecristo Block acquired by Potomac (Bermuda) or GHK.  Under the GHK          
Agreement, the applications to acquire the association contract was assign to   
GHK for the purpose of allowing the association contracts on the specified      
blocks to be acquired by GHK.  With respect to any association contract         
obtained, GHK agreed to assign a 25 percent interest in such association        
contract to Potomac Energy  (BVI) Ltd., a British Virgin Islands wholly-owned   
subsidiary corporation of the Company ("Potomac (BVI)).  GHK is proposed to be  
designated as operator under the association contracts obtained.  The GHK       
Agreement further provides that (i) upon issuance of the association contracts, 
GHK will to pay Potomac (Bermuda) US$150,000, (ii) GHK will provide any initial 
guarantee for the performance of exploratory activity under the association     
contracts as required by Ecopetrol, (iii) following issuance of each such       
association contract, Potomac (Bermuda) will have three months to (A) qualify   
Potomac (BVI) to do business in Colombia, (B) reimburse GHK 25 percent of any   
initial guarantees required by Ecopetrol, and (C) demonstrate financial         
capability to pay 25 percent of the costs to perform the first year obligations 
of the association contract, and (iv) cause Potomac (BVI) to enter into an      
International Operating Agreement with accounting procedure for each contract   
area naming GHK's branch company as operator.  In the event the Company is      
unable, within the three-month period, to pay its 25 percent share of the       
guarantee or demonstrate financial ability to pay 25 percent of the costs to    
perform the first year obligations of the association contract, the Company will
forfeit all rights to its interest in the association contract.  Pursuant to the
Merger, Potomac Acquisition acquired and assumed all obligations of Potomac     
(Bermuda) under the agreement with GHK.  Following execution of the GHK         
Agreement, it was assigned and transferred to Seven Seas Petroleum, Inc. ("Seven
Seas") and to Potomac (BVI).  As of the date of this Report, Potomac (BVI) is   
qualified to do business in Colombia.                                           

  ROSABLANCA AND MONTECRISTO ASSOCIATION CONTRACTS.  On November 19, 1997,
the Association Contracts related to the Rosablanca Block and Montecristo Block 
(the " Rosablanca  and Montecristo Association Contracts") were awarded to the  
Colombian branch of Seven Seas and the Company became entitled to receive a 25  
percent interest in the Association Contracts, subject to the GHK Agreement.  In
connection with obtaining the Rosablanca and Montecristo Association Contracts, 
Seven Seas was not required to provide any form of financial guarantee of       
performance of the other Rosablanca and Montecristo Association Contracts.      

    The Rosablanca and Montecristo Association Contracts provide generally for
a three-to-six year exploration phase followed by a 22-year production period,  
with partial relinquishments of acreage, excluding commercial fields, required  
commencing at the end of the sixth year of each contract.  Under the terms of   
each contract, Seven Seas and the Company are required over a three-to-six-year 
period to undertake and complete certain work commitments involving exploration 
and development of the Rosablanca Block and the Montecristo Block.  Seven Seas  
and the Company are required during the first two years of the contracts to     
reprocess existing seismic date (300 kilometers on the Rosablanca Block and 500 
kilometers on the Montecristo Block), acquire and interpret landstat images and 
perform surface geological and geochemical work, and shoot and evaluate 100     
kilometers of new two dimensional  seismic and, at the election of the Company  
and Seven Sears, during the third year to drill one exploratory well.  In the   
event after the first two years, the Company and Seven Seas elect to drill an   
exploratory well, they will be required to relinquish and reduce their interest 
in the block to not more than 247,100 acres (100,000 hectares).  The contract   
will terminate at the end of the third year, unless an extension is granted by  
Ecopetrol pursuant to application or a commercial field has been discovered.    
The exploration period may be further extended beyond the third year upon annual
application to and approval by Ecopetrol for up to three years.  During each    
year of this extension, Seven Seas and the Company will be required to drill one
additional exploratory well that penetrates an hydrocarbon producing formation. 
In the event such work commitments are not completed as required, the contract  
rights will be forfeited.  Furthermore, if a                                    

     -6-

10KSB
9th Page of 30
TOC
1st
Previous
Next
Bottom
Just 9th

commercial field is discovered during the initial three-year period of the      
contract or any extension thereof, the block or contract area will be reduced 50
percent, two years thereafter will be reduced 50 percent of the remaining block 
or contract area and two years thereafter will be further reduced to the        
commercial fields that are producing or under development plus a reserve belt   
2.5 kilometers wide surrounding each Commercial Field within the block or       
contract area.  Upon application to and approval by Ecopetrol, the period for   
retention of the block or contract area may be extended for up to four years.   

     Under the terms of the contracts, Ecopetrol will receive a royalty equal to
20 percent of production (after pipeline tariffs are deducted) on behalf of the 
Colombian government and, in the event a commercially feasible discovery is     
made, Ecopetrol will acquire a 50 percent interest in the remaining production, 
bear 50 percent of the development costs, and reimburse Seven Seas, the Company 
and other joint venture partners, from Ecopetrol's share of future production,  
for 50 percent of the costs of certain exploration activities.  Upon acceptance 
of a field as commercial, Ecopetrol will acquire a 50 percent interest therein  
and the interests of the other parties to the contract, including the Company,  
will be reduced by 50 percent; all decisions regarding the development of a     
commercial field will be made by an Executive Committee consisting of           
representatives of the parties to the contract who will vote in proportion to   
their respective interests in such contract.  Decisions of the Executive        
Committee will be made by the affirmative vote of the holders of over 50 percent
of the interests in the contract.                                               

     If any commercial field in the respective contract areas produces in excess
of 60 million barrels, Ecopetrol's interest in production and costs for such    
contract area increases from 50 percent to 75 percent as the ratio of the       
accumulated income attributable to Seven Seas, the Company or any other joint   
venture partner other than Ecopetrol to the accumulated development, exploration
and operating costs of such parties (less any expenses reimbursed by Ecopetrol) 
increases from one to one to two to one.                                        

   Under the terms of the association contracts, in the event a discovery is
made and is not deemed to be commercially feasible by Ecopetrol, Seven Seas and 
the Company may expend up to $2 million over a one-year period to further       
develop the field, 50 percent of which will be reimbursed if Ecopetrol          
subsequently accepts the commercial feasibility thereof.  If Ecopetrol does not 
declare the field commercial, the joint venture may continue to develop the     
field at its own expense.  In such event, Ecopetrol will have the right to      
acquire a 50 percent interest therein upon payment of 200 percent of the amounts
expended by the joint venture, which payment may be made out of Ecopetrol's     
share of future production.                                                     

  The Company's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian corporate income tax at a rate of 35 percent.   
An additional remittance tax is imposed upon remittance of profits abroad at a  
rate of five percent.                                                           

PLAN OF DEVELOPMENT                                                             

    Seven Seas and the Company have established a 24-month plan of development
of the Rosablanca and Montecristo Blocks.  Under this plan, in addition to the  
minimum work commitments under the Rosablanca and Montecristo Association       
Contracts (the cost of which is estimated to be approximately $750,000),Seven   
Seas and the Company propose to (i) the obtain and process new two-dimensional  
seismic (75 kilometers on the Montecristo Blaock and 50 kilometers on the       
Rosablanca Block) at an estimated cost of $550,000, (ii) identify and drill one 
exploratory well on the Rosablanca Block at an estimated cost of $500,000, (iii)
drill one horizontal well on the Rosablanca Block at an estimated cost of       
$1,750,000, (iv) drill three additional horizontal wells on the Rosablanca Block
at an estimated cost of $3,750,000, and (v) reenter and deepen an existing well 
on the Montecristo Block at an estimated cost of $500,000.  In addition, the    
Company plans on participating, on a joint-venture basis, in the reworking of   
existing wells with a major oil company on blocks outside the Rosablanca and    
Montecristo Blocks at an estimated cost of $4,000,000.  The timing and          
undertakings under the development plan will depend upon a number of factors,   
most of which will not be within the control of the Company, including          
availability of capital resources of the Company and its joint venture partners,
the results of geological and geophysical surveys and analysis, the expected or 
actual results of  each development undertaking or operation which in large part
may be affected by the anticipated or current cost of such operations and the   
prices of crude oil and natural gas, general domestic and international economic
conditions within and without the oil and gas industry, and Columbian legal and 
regulatory compliance.  Therefore, this can be no assurance that such plan of   
development will be successful or will be completed as anticipated as of the    
date of this Report.                                                            

     -7-

10KSB
10th Page of 30
TOC
1st
Previous
Next
Bottom
Just 10th

UNCERTAINTY OF FUTURE ESTIMATES OF OIL AND NATURAL GAS RESERVES                 

     As of the date of this Report, the Company does not have any proved oil and
gas reserves.  However, it is anticipated that through development of the       
Company's interest in the Middle Magdalena Valley Basin and other properties    
acquired and developed, the Company will obtain and provide to the shareholders 
of the Company, through annual reports or other means, estimates of the         
Company's oil and gas reserves.  Estimates of the Company's proved oil and gas  
reserves and projected future net revenues will be based on reserve reports     
prepared by independent petroleum engineers.  The estimation of reserves        
requires substantial judgment on the part of the petroleum engineers, resulting 
in imprecise determinations, particularly with respect to new discoveries.      
Different reserve engineers may make different estimates of reserve quantities  
and revenues attributable thereto based on the same data. Estimates of proved   
undeveloped reserves, which in the future may comprise a substantial portion of 
the Company's reserves, are by their nature less certain. The accuracy of any   
reserve estimate depends on the quality of the available data as well as        
engineering and geological interpretation and judgment.  Results of drilling,   
testing and production and changes in the assumptions regarding decline and     
production rates, crude oil prices, revenues, taxes, capital expenditures,      
operating expenses, geologic success and quantities of recoverable crude oil may
vary substantially from those assumed in the estimates, may result in revisions 
to such estimates and could materially affect the estimated quantities and      
related value of reserves set forth herein.  The estimates of future net        
revenues will reflect oil and gas prices as of the date of estimation, without  
escalation. There can be no assurance, however, that such prices will be        
realized or that the estimated production volumes will be produced during the   
periods indicated.  Future performance that deviates significantly from the     
reserve reports could have a material adverse effect on the Company.            

OFFICE PROPERTIES                                                               

  The Company maintains its executive office in approximately 2000  square
feet at 1400 Founders Tower, 5900 Mosteller Drive,  Oklahoma City, Oklahoma     
73112-4605.  The office premises are occupied under a lease which expires June  
30, 1998, and the monthly rental payment is $3,100.  The Company has entered    
into a three year lease covering approximately 3,400  square feet, requiring    
monthly rental payments of $4,000, at Suite 1100W, The Oil Center, 2601         
Northwest Expressway, Oklahoma City, Oklahoma 73112-7293, to which the Company  
will relocate its executive offices on July 1, 1998.  The Company considers such
space to be adequate for its current needs.                                     

ITEM 3.  LEGAL PROCEEDINGS.                                                     

The Company does not have any pending litigation.                     

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                  

   During the fourth quarter of the fiscal year ended December 31, 1997, the
Company did not submit any matters to a vote of its shareholders through the    
solicitation of proxies or otherwise.                                           

PART II                                                                         

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.             

 The Company's Common Stock has not been traded since 1983 and as of the
date of this Report a market does not exist for the Common Stock.  On March 26, 
1998, there were approximately 1,625 holders of the Company's Common Stock.     

     The Company's dividend policy is to retain its earnings, if any, to support
the expansion of its operations.  The Board of Directors of the Company does not
intend to pay cash dividends on the Common Stock in the foreseeable future.  Any
future cash dividends will depend on future earnings, capital requirements,     
financial condition and other factors deemed relevant by the Board of Directors.
The Company's future earnings and cash flow are dependent principally upon the  
operating results of the exploration and production activities of Potomac (BVI) 
in Colombia, South America, and it is anticipated that such dependency will     
continue indefinitely in the future.                                            

     -8-

10KSB
11th Page of 30
TOC
1st
Previous
Next
Bottom
Just 11th

PENNY STOCK TRADING RULES                                                       

As of the date of this Report, a market for the Common Stock does not 
exist.  However, it is anticipated, although there can be no assurance, that the
Common Stock will be included and quoted on the Electronic Bulletin Board System
operated by the National Association of Securities Dealers, Inc. in the near    
term.  In such event, the Common Stock will be subject to the "penny stock"     
trading rules.  The penny stock trading rules impose additional duties and      
responsibilities upon broker-dealers recommending the purchase of a penny stock 
(by a purchaser that is not an accredited investor as defined by Rule 501(a)    
promulgated by the Commission under the 1933 Act) or the sale of a penny stock. 
Among such duties and responsibilities, with respect to a purchaser who has not 
previously had an established account with the broker-dealer, the broker-dealer 
is required to (i) obtain information concerning the purchaser's financial      
situation, investment experience, and investment objectives and  (ii) make a    
reasonable determination that transactions in the penny stock are suitable for  
the purchaser and the purchaser (or his independent adviser in such             
transactions) has sufficient knowledge and experience in financial matters and  
may be reasonably capable of evaluating the risks of such transactions, followed
by receipt of a manually signed written statement which sets forth the basis for
such determination and which informs the purchaser that it is unlawful to       
effectuate a transaction in the penny stock without first obtaining a written   
agreement to the transaction.  Furthermore, until the purchaser becomes an      
established customer (I.E., having had an account with the dealer for at least  
one year or, the dealer had effected three sales or more of penny stocks on     
three or more different days involving three or more different issuers), the    
broker-dealer must obtain from the purchaser a written agreement to purchase the
penny stock which sets forth the identity and number of shares or units of the  
security to be purchased prior to confirmation of the purchase.  A dealer is    
obligated to provide certain information disclosures to the purchaser of a penny
stock, including (i) a generic risk disclosure document which is required to be 
delivered to the purchaser before the initial transaction in a penny stock, (ii)
a transaction-related disclosure prior to effecting a transaction in the penny  
stock (I.E., confirmation of the transaction) containing bid and asked          
information related to the penny stock and the dealer's and salesperson's       
compensation (I.E., commissions, commission equivalents, markups and markdowns) 
in connection with the transaction, and (iii) the purchaser-customer must be    
furnished account statements, generally on a monthly basis, which include       
prescribed information relating to market and price information concerning the  
penny stocks held in the customer's account.  The penny stock trading rules do  
not apply to those transactions in which a broker-dealer or salesperson does not
make any purchase or sale recommendation to the purchaser or seller of the penny
stock.                                                                          

Required compliance with the penny stock trading rules affect or will 
affect the ability to resell the Common Stock by a holder principally because of
the additional duties and responsibilities imposed upon the broker-dealers and  
salespersons recommending and effecting sale and purchase transactions in such  
securities.  In addition, many broker-dealers will not effect transactions in   
penny stocks, except on an unsolicited basis, in order to avoid compliance with 
the penny stock trading rules.  The penny stock trading rules consequently may  
materially limit or restrict the liquidity typically associated with other      
publicly traded equity securities.  In this connection, the holder of Common    
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control the market in such securities and may set prices   
that are not based on competitive forces.  Furthermore, at times there may be a 
lack of bid quotes which may mean that the market among dealers is not active,  
in which case a holder of Common Stock may be unable to sell such securities.   
Because market quotations in the over-the-counter market are often subject to   
negotiation among dealers and often differ from the price at which transactions 
in securities are effected, the bid and asked quotations of the Common Stock may
not be reliable.                                                                

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.             

 THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS 
REPORT.                                                                         

PLAN OF OPERATION                                                               

  The Company's plan of operation for the next 12 months is focused on the
exploration, development and production operations to be conducted in Colombia, 
South America.   See "Item 2.  Description of Property--Middle Magdalena Valley 
Basin--Plan of Development."                                                    

     -9-

10KSB
12th Page of 30
TOC
1st
Previous
Next
Bottom
Just 12th

RESULTS OF OPERATIONS                                                           

  Potomac (Bermuda) was formed on April 7, 1997.  Prior to the Merger, PEC
was inactive and did not have any assets or liabilities.  Effective June 17,    
1998, Potomac (Bermuda)  merged with and into Potomac Acquisition and became a  
wholly-owned subsidiary of PEC.  The Merger was accounted for as a reverse      
acquisition of PEC by Potomac (Bermuda) under the purchase method of accounting.
Therefore, the following discussion and analysis of results of operations       
discussed below are only those of to Potomac (Bermuda) prior to the Merger.  See
"Item 1. Description of Business--Background" and "Item 12.  Certain            
Relationships and Related Transactions."                                        

 Potomac (Bermuda) is a development stage company that during the period
April 7, 1997 (Inception) through  December 31,  1997, did not have any revenue 
from oil and gas sales and incurred a net loss of $695,799.  There is no        
assurance that the Company will have revenues from oil and gas sales in the     
future.  The only revenues received by Potomac (Bermuda) during 1997 was derived
from interest income of $1,443 earned or accrued on cash and cash and marketable
securities.  During 1997, Potomac (Bermuda) obtained interests in the Rosablanca
and Montecristo Association Contracts and in connection therewith incurred      
$692,557 in professional fees and consulting expenses and incurred miscellaneous
expenses of $4,685.  Other than the activities associated with obtaining the    
Rosablanca and Montecristo Association Contracts, Potomac (Bermuda) did not     
conduct any operating activities during 1997.                                   

 During the three months ended March 31, 1998, Potomac (Bermuda) did not
have any revenue from oil and gas sales and incurred a net loss of $247,685.    
The only revenues received by Potomac (Bermuda) during the three months ended   
March 31, 1998 was derived from interest income of $1,007 earned or accrued on  
cash and cash and marketable securities.  In connection with the Rosablanca and 
Montecristo Association Contracts Potomac (Bermuda) incurred professional fees  
and consulting expenses of $247,888 and miscellaneous expenses of $804.         

YEAR 2000 COMPUTER SYSTEM COMPLIANCE                                  

The Company's computer systems are year 2000 compliant.  The Company's
computer systems which  employed two digit year date format rather than four    
digit date format have been programed to comply with year 2000 requirements on a
system-by-system basis.                                                         

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED                       

     In June 1997, The Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which requires the reporting of  all 
items of income that are recognized under accounting standards as components of 
comprehensive income, consisting of both net income and those items that bypass 
the income statement and are reported in the balance within a separate component
of stockholders' equity, be reported in a financial statement and displayed with
the same prominence as other financial statements.  This statement is effective 
for financial statements of the Company for the year ending December 31, 1998.  
Management of the Company believes that adoption of SFAS No. 130 will not have a
material effect on the Company's financial statements.                          

   In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which modifies segment reporting           
requirements and establishes certain criteria for reporting disclosures         
concerning a company's products and services, geographic areas and major        
customers in annual and interim financial statements.  This statement is        
effective for financial statements of the Company for the year ending December  
31, 1998.  Management of the Company believes that adoption of SFAS No. 131 will
not have a material effect on the Company's financial statements, other than    
possibly the disclosure related to the Company's services, geographic service   
area and major customers.                                                       

  In February 1998, FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits," which requires disclosures related 
to employer's obligations related to pension and other retirement benefits.     
This statement is effective for financial statements of the Company for the year
beginning after December 15, 1997.  Management of the Company believes that     
adoption of SFAS No. 132 will not have a material effect on the Company's       
financial statements.                                                           

Furthermore, in June 1998, FASB issued SFAS No. 133, "Accounting for  
Derivative Instruments and Hedging Activities," which requires disclosures      
related to trading and holding of derivative instruments and the                

      -10-

10KSB
13th Page of 30
TOC
1st
Previous
Next
Bottom
Just 13th

conduct of hedging activities.  This statement is effective for financial       
statements of the Company for the year beginning after June 15, 1999.           
Management of the Company believes that adoption of SFAS No. 133 will not have a
material effect on the Company's financial statements.                          

EFFECTS OF OIL AND GAS PRICE FLUCTUATIONS                             

 In the event the Company's exploration activities result in significant
production of crude oil or natural gas, the Company's operations and the value  
of its oil and gas assets, including producing and non-producing assets, will be
subject to the effects of fluctuations in crude oil and natural gas prices.  As 
a result of the instability and volatility of prices and the surplus of crude   
oil and natural gas, and current market conditions within the oil and gas       
industry, financial institutions have become more selective in the energy       
lending area and have reduced the percentage of existing reserves that may      
qualify for the borrowing base to support energy loans.                         

  In the future, the Company anticipates that its principal source of cash
flows, if any, will be from the production and sale of  crude oil and natural   
gas reserves which are depleting assets.  Cash flows from oil and gas production
sales depends upon the quantity of production and the price obtained for such   
production.  Generally, an increase in prices allows a company to finance its   
operations to a greater extent with internally generated funds, may allow a     
company to obtain equity financing more easily or on better terms and lessens   
the difficulty of attracting financing alternatives available to a company from 
industry partners and non-industry investors.  However, price increases heighten
the competition for oil and gas association contracts, leases and other         
contractual arrangement, increase the costs of exploration and development      
activities, and because of potential price declines, increase the risks         
associated with the purchase of producing properties while prices are at higher 
levels.                                                                         

     A decline in oil and gas prices (i) reduces internally generated cash flows
which in turn reduces the funds available for exploration for and replacement of
oil and gas reserves, (ii) increases the difficulty of obtaining equity         
financing and worsens the terms on which such financing may be obtained, (iii)  
reduces the number of available oil and gas properties on reasonable economic   
terms, (iv) may result in the expiration of oil and gas contractual interests   
based upon the potential oil and gas reserves in relation to exploration and    
development costs, (v) results in marginally productive oil and gas wells being 
abandoned as non-commercial wells, and (vi) increases the difficulty of         
attracting financing alternatives available from industry partners and          
non-industry investors.  However, price declines reduce the competition for oil 
and gas interests and, correspondingly, reduce the prices paid for such         
interests or result in obtaining such interests on more favorable terms.        
Furthermore, exploration and production costs generally decline, although the   
decline may not be at the same rate of decline of oil and gas prices.           

SEASONALITY                                                           

 It is anticipated that the results of operations of the Company will be
somewhat seasonal due to seasonal fluctuations in the price for crude oil and   
natural gas.  Historically, crude oil prices have been generally higher in the  
third and fourth quarters and natural gas prices have been generally higher in  
the fourth quarter.  Due to these seasonal price fluctuations, it is anticipated
that results of operations for individual quarterly periods may not be          
indicative of results which may be realized on an annual basis.                 

INFLATION AND CHANGES IN PRICES                                       

 Inflation principally affects the costs required to drill, complete and
operate oil and gas wells.  In recent years inflation has had a minimal effect  
on such costs.  However, increases and decreases in drilling activities, which  
generally a linked to crude oil and natural gas price increases and decreases,  
have resulted in the increase and decrease of drilling and exploration costs on 
an industry-wide basis.                                                         

LIQUIDITY AND CAPITAL RESOURCES                                                 

     Potomac (Bermuda) has financed its development state activities through the
sale of equity securities and does not have any borrowing facilities or         
arrangements in place to fund its capital commitments.  During 1997, net cash   
used by operating activities totaled $249,098, net cash used by investing       
activities totaled $60,120 and net cash provided by financing activities totaled
$412,000.  During the three months ended March 31, 1998, net cash used by       
operating activities totaled $77,685 and net cash provided by financing         
activities totaled $75,000.  As of March 31,                                    

      -11-

10KSB
14th Page of 30
TOC
1st
Previous
Next
Bottom
Just 14th

1998, Potomac (Bermuda) had working capital of $121,173, compared to working    
capital of $168,858 at December 31, 1997.                                       

  Under the terms of the Rosablanca and Montecristo Association Contracts,
the Company has certain minimum work commitments on a joint venture basis with  
Seven Seas, the Company's share of such costs is estimated to be approximately  
$750,000.  In addition to the minimum work commitments, the Company has         
established a 24-month plan of development of the Rosablanca and Montecristo    
Blocks at an estimated cost of $6,950,000. See "Item 2.  Description of         
Property--Middle Magdalena Valley Basin--Plan of Development."  The Company     
anticipates that the costs of development of the Rosablanca and Montecristo     
Blocks will be funded with proceeds from the sale of equity and debt securities 
and, although unlikely, borrowings.  There is no assurance that such funding    
will be available or on terms acceptable to the Company, in which event the     
Company may forfeit its interests in the Rosablanca and Montecristo Blocks.     

ITEM 7.  FINANCIAL STATEMENTS                                                   

     The response to this Item is set forth herein in a separate section of this
report, appearing on page F-2 through F-10.                                     

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND        
FINANCIAL DISCLOSURE.                                                           

    There have been no disagreements of the type required to be reported under
this Item between management of the Company and its independent accountants     
during 1997.                                                                    

PART III                                                                        

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;          
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.                              

Set forth below is certain information with respect to each executive 
officer and Director of the Company.  Directors are generally elected at the    
annual shareholders' meeting and hold office until the next annual shareholders'
meeting and until their successors are elected and qualify.  Executive officers 
are elected by the Board of Directors and serve at its discretion.  The Bylaws  
of the Company provide that the Board of Directors shall consist of not less    
than two and such number as the Board of Directors may from time to time        
determine by resolution or election.  The Company's Board of Directors currently
consists of six members.                                                        

                                                                · Download Table


NAME                               AGE   POSITION WITH THE COMPANY          
----                               ---   -------------------------          
                                                                            
Carl W. Swan . . . . . . . . . .  72     Chief Executive Officer            
                                           and Vice Chairman of the Board of
                                           Directors                        
Gene Callaway. . . . . . . . . .  49     President and Director             
James E. Frazier . . . . . . . .  34     Vice President, Chief Financial    
                                           Officer, Secretary               
                                           and Director                     
Frank H. Mahan . . . . . . . . .  56     Executive Vice President           
                                           and Director                     
Paul D. Meadows. . . . . . . . .  71     Chairman of the Board of Directors 
Joseph Edward Michaud. . . . . .  66     Director                           


    The executive officers of the Company devote such time to the business and
affairs of the Company as may be required, but not less than 50 percent of their
time.                                                                           

BACKGROUND OF COMPANY EXECUTIVE OFFICERS AND DIRECTORS                          

The following is a brief description of the business background of the
executive officers and Directors of the Company:                                

   CARL W. SWAN is Chief Executive Officer and Vice Chairman of the Board of
Directors of the Company.  Mr. Swan has been actively involved in all facets of 
the oil and gas industry since 1951.  He co-founded and served as President and 
Chief Executive Officer and a Director of Basin Petroleum Corporation, which was
a publicly held company that merged into Reserve Oil and Gas Corporation in     
1976.  Since 1976, Mr. Swan has operated Swan                                   

      -12-

10KSB
15th Page of 30
TOC
1st
Previous
Next
Bottom
Just 15th

Petroleum Corporation, a privately held oil and gas exploration company involved
in oil and gas drilling, exploration and refining.  Mr. Swan has extensive oil  
and gas drilling and production experience in several foreign countries.  Mr.   
Swan has conducted oil and gas operations with Frank Mahan through affiliated   
entities since 1989.  Mr. Swan is a graduate of the University of New Mexico.   

   GENE CALLAWAY is President and a Director of the Company and a practicing
attorney, specializing in the oil and gas area.  Mr. Callaway was employed by   
Shell Oil Company in several capacities including director of the Western U.S.  
Exploration and Production Legal Department, the largest division of Shell Oil, 
director of the Natural Gas Department, for four years was on assignment        
providing legal support for all international operations including Africa, Asia,
South and Central America and the Western Pacific area.  Mr. Callaway is a      
graduate of Louisiana State University and a member of the Texas and Louisiana  
Bar Associations.                                                               

    JAMES E. FRAZIER is Vice President, Chief Financial Officer, Secretary and
a Director of the Company.  Mr. Frazier is President and Chief Executive Officer
of JCZ Leasing, Inc., which provides financial services to more than 235        
commercial equipment dealers in Oklahoma and throughout the Southwestern United 
States, and a director of Heritage Financial Services, Inc., a private          
investment services company.  Mr. Frazier served as Vice President of Chase     
Manhattan Bank, N.A. and managed operations within the Global Securities and    
Institutional Trust Divisions as well as the Private Banking and Credit Services
Divisions.  Mr. Frazier is a graduate of Fordham University with a degree in    
economics.                                                                      

    FRANK H. MAHAN is an Executive Vice President and Director of the Company.
Mr. Mahan has 25 years experience in the oil and gas industry.  He has attended 
a number of management and supervisory courses involving the oil and gas        
industry.  He attended Oklahoma State University from 1960 until 1965, majoring 
in business management and has been involved in the management of several       
companies engaged in oil and gas drilling, exploration and production and has   
been an independent producer since 1979.  Mr. Mahan has conducted oil and gas   
operations with Carl W. Swan through affiliated entities since 1989.            

 PAUL D. MEADOWS is Chairman of the Board of Directors of the Company, a
private investor in and consultant with respect to oil and gas investments and  
Chairman and, as trustee of a family trust, a 50 percent shareholder of Vega    
Energy Company, an independent oil and gas company.  Mr. Meadows was a founder  
and served as a director of Ensource, Inc., a New York Stock Exchange           
exploration and production company, until its merger with UMC Petroleum         
Corporation in 1989 and thereafter, until September 1995, served on its         
technical advisory committee.  Mr. Meadows holds a Bachelor of Science Degree in
Petroleum Engineering and an Honorary Doctor of Science Degree from the New     
Mexico Institute of Mining and Technology.                                      

JOSEPH EDWARD MICHAUD is a Director of the Company and an independent 
analyst of oil and gas properties and an investor in exploratory and development
prospects.  Mr. Michaud has in excess of 40 years experience in the oil and gas 
business, including extensive training as a petroleum engineer while employed by
James A. Lewis Engineering, a leading consulting firm in reservoir analysis and 
property appraisals in the United States and Canada..                           

ITEM 10.  EXECUTIVE COMPENSATION                                                

The Company was inactive during 1997, 1996 and 1995 and no executive  
officer compensation was paid or accrued during such years.  The following table
sets forth certain information with respect to the total cash compensation, paid
or accrued, of the Chief Executive Officer of Potomac (Bermuda) during 1997.    
Such compensation was paid by BV Operating, Inc., an affiliate of Potomac       
(Bermuda).  With respect to each of their executive officers, Potomac (Bermuda) 
and its affiliates did not pay or accrue total compensation in excess of        
$100,000 during 1997.  Furthermore, Potomac (Bermuda) was formed in 1997;       
therefore, during 1996 and 1995, no compensation was paid to or accrued for the 
executive officers of Potomac (Bermuda) and its affiliates.                     

      -13-

10KSB
16th Page of 30
TOC
1st
Previous
Next
Bottom
Just 16th

    OFFICER COMPENSATION TABLE

                                                        · Enlarge/Download Table


                                                                    ANNUAL COMPENSATION        
                                                           ------------------------------------
                                                                                  ALL OTHER    
NAME AND PRINCIPAL POSITION                    YEAR        SALARY(1)  BONUS(2)  COMPENSATION(3)
---------------------------                    ----        --------   -------   -------------- 
                                                                                               
Carl W. Swan . . . . . . . . . . . . . . . . . 1997 . . . . $48,000    $1,000           $7,800 
  Chief Executive Officer of Potomac (Bermuda)                                                 


------------------------                                                        
(1)  Dollar value of base salary (both cash and non-cash) earned during the     
year.                                                                 
(2)  Dollar value of bonus (both cash and non-cash) earned during the year.     
(3)  The amounts reflected are for an automobile and telephone expense          
reimbursements, health insurance premiums paid by the Company.        

During 1997, Potomac (Bermuda) and the Company did not grant any stock
options to their executive officers and directors.  However, on April 1, 1998,  
Potomac (Bermuda) granted each of Carl W. Swan and Frank H. Mahan stock options 
exercisable on or before December 31, 2003, for the purchase of 100,000 shares  
of common stock of Potomac (Bermuda) for $1.00 per share, and issued to Gene    
Callaway and James E. Frazier 400,000 and 100,000 shares of common stock,       
respectively, for services rendered.  In connection with the Merger, all        
outstanding stock options of Potomac (Bermuda) were assumed by the Company and  
became exercisable for the purchase of shares of Common Stock of the Company for
$1.00 per share.                                                                

COMPENSATION OF DIRECTORS                                                       

The directors of the Company that are employees are not currently     
compensated for attending meetings of directors and committees of the Board of  
Directors, but are reimbursed out-of-pocket expenses.  The compensation of      
non-employee directors has not been determined by the Board of Directors, but   
non-employee directors are reimbursed out-of-pocket expenses incurred in        
attending meetings of directors and committees on which they serve.  During     
1997, the Board of Directors of PEC held no meetings; therefore, the members of 
the Board of Directors of PEC did not receive any compensation nor was any      
compensation accrued during 1997.                                               

LACK OF EMPLOYMENT ARRANGEMENTS AND LOSS OF KEY EMPLOYEES                       

     The Company does not have any written employment agreements or arrangements
with its officers and employees. Accordingly, each officer and employee of the  
Company may be terminated as determined in the sole discretion of the Company.  

    The Company has a limited operating history and the success of the Company
depends to a large degree upon the efforts of its executive officers, the loss  
of whose services could have a material adverse effect on the Company.  The     
Company does not maintain key man insurance covering the loss of life or        
disability of its executive officers.                                           

OFFICER AND DIRECTOR LIABILITY                                                  

     As permitted by the provisions of the Oklahoma General Corporation Act, the
Certificate of Incorporation (the "Certificate") eliminates in certain          
circumstances the monetary liability of directors of PEC for a breach of their  
fiduciary duty as directors.  These provisions do not eliminate the liability of
a director for (i) a breach of the director's duty of loyalty to PEC or its     
shareholders, (ii) acts or omissions by a director not in good faith or which   
involve intentional misconduct or a knowing violation of law, (iii) liability   
arising under Section 1053 of the Oklahoma General Corporation Act (relating to 
the declaration of dividends and purchase or redemption of shares in violation  
of the Oklahoma General Corporation Act), or (iv) any transaction from which the
director derived an improper personal benefit.  In addition, these provisions do
not eliminate liability of a director for violations of federal securities laws,
nor do they limit the rights of PEC or its shareholders, in appropriate         
circumstances, to seek equitable remedies such as injunctive or other forms of  
non-monetary relief.  Such remedies may not be effective in all cases.          

The Certificate and Bylaws of PEC provide that PEC shall indemnify all
directors and officers of PEC to the full extent permitted by the Oklahoma      
General Corporation Act.  Under such provisions, any director or officer, who in
his capacity as such, is made or threatened to be made, a party to any suit or  
proceeding, may be indemnified if the Board of Directors determines such        
director or officer acted in good faith and in a manner he reasonably           

      -14-

10KSB
17th Page of 30
TOC
1st
Previous
Next
Bottom
Just 17th

believed to be in or not opposed to the best interest of PEC.  The Certificate  
and Bylaws of PEC and the Oklahoma General Corporation Act further provide that 
such indemnification is not exclusive of any other rights to which such         
individuals may be entitled under the Certificate, the Bylaws, an agreement,    
vote of shareholders or disinterested directors or otherwise.  Insofar as       
indemnification for liabilities arising under the Act may be permitted to       
directors and officers of PEC pursuant to the foregoing provisions, or          
otherwise, PEC has been advised that in the opinion of the Commission such      
indemnification is against public policy as expressed in the Act and is,        
therefore, unenforceable.                                                       

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.       

The following table presents certain information as to the beneficial 
ownership of the Common Stock of the Company as of June 29, 1998, and the       
beneficial ownership of the Common Stock of (i) each person that beneficially   
more than five percent thereof, (ii) each executive officer and director of the 
Company, and (iii) all executive officers and directors as a group.  All persons
listed have sole voting and investment power with respect to their shares, and  
there is no family relationship between the executive officers and directors.   
For purposes of the following table, the number of shares and percent of        
ownership of outstanding Common Stock that the named person and beneficially    
owns includes shares of Common Stock that such person has the right to acquire  
within 60 days of the foregoing date upon exercise of outstanding stock options,
but such shares are not included for the purposes of computing the number of    
shares beneficially owned and percent of outstanding Common Stock of any other  
named person.                                                                   

                                                                · Download Table


                                                                 PERCENTAGE OF
                                                      SHARES      OUTSTANDING 
                                                   BENEFICIALLY   BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER                  OWNED       OWNED SHARES
------------------------------------               ------------  -------------
                                                                              
Carl W. Swan(1)(2) . . . . . . . . . . . . . . . .    1,100,000          14.6%

Frank H. Mahan(1)(2) . . . . . . . . . . . . . . .    1,100,000          14.6%

Auburn Trust(3). . . . . . . . . . . . . . . . . .    1,000,000          12.6%

Karl Rollke(4) . . . . . . . . . . . . . . . . . .      950,000          12.8%

Value Invest, Ltd.(5). . . . . . . . . . . . . . .      800,000          10.8%

Marlene S. Schiff(2)(6). . . . . . . . . . . . . .      500,000           6.6%

Lawrence Ronald Crow(3). . . . . . . . . . . . . .      500,000           6.6%

Lamar Lee Lindenmuth(3). . . . . . . . . . . . . .      500,000           6.6%

Peter R. Garland(7). . . . . . . . . . . . . . . .      400,000           5.4%

Gene Callaway(1) . . . . . . . . . . . . . . . . .      400,000           5.4%

James E. Frazier(1). . . . . . . . . . . . . . . .      200,000           2.7%

Paul D. Meadows(8) . . . . . . . . . . . . . . . .      200,000           2.6%

Joseph Edward Michaud(9) . . . . . . . . . . . . .      200,000           2.6%

Executive Officers and                                                        
  Directors as a Group (six persons)(10) . . . . .    3,200,000          39.9%


------------------------                                                        
(1)  The named person's address is 1400 Founders Tower, 5900 Mosteller Drive,   
Oklahoma City, OK 73112-4605.                                         
(2)  The number of beneficially owned shares of percentage of outstanding shares
  includes stock options exercisable for the purchase of 100,000 shares of
Common Stock.                                                         
(3)  The address of Auburn Trust is 440 Benmar, Suite 3020, Houston, Texas      
 77069.   The beneficiaries of Auburn Trust are Lawrence Ronald Crow and
Lamar Lee Lindenmuth, each a 50 percent beneficiary.                  
(4)  Mr. Rollke's address is 1888 Albeni Street, Apartment 1201, Vancouver,     
B.C., Canada V6 1B3.                                                  
(5)  The address of Value Invest, Ltd. is Letzibraben 89, 8040 Zurich,          
Switzerland.                                                          
(6)  Ms. Schiff's address is 950 Fifth Avenue, New York, New York 10021.        
(7)  Mr. Garland's address is 6610 Campden Drive, Spring, Texas 77379.          

      -15-

10KSB
18th Page of 30
TOC
1st
Previous
Next
Bottom
Just 18th

(8)  Mr. Meadows' address is Suite 202, 7860 East Berry Place, Englewood,       
   Colorado 80111.  The number of beneficially owned shares of percentage of
   outstanding shares includes stock options exercisable for the purchase of
200,000 shares of Common Stock.                                       
(9)  Mr. Michaud's address is 5964 East Princeton Circle, Englewood, Colorado   
80111.  The number of beneficially owned shares of percentage of      
   outstanding shares includes stock options exercisable for the purchase of
200,000 shares of Common Stock.                                       
(10) The number of beneficially owned shares of percentage of outstanding shares
  includes stock options exercisable for the purchase of 600,000 shares of
Common Stock.                                                         

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                       

   Set forth below is a description of transactions entered into between PEC
or Potomac (Bermuda) and certain of its officers, directors and shareholders    
during the last two years.  Certain of these transactions will continue in      
effect  and may result in conflicts of interest between PEC and such            
individuals.  Although these persons have fiduciary duties to PEC and its       
shareholders, there can be no assurance that conflicts of interest will always  
be resolved in favor of PEC.                                                    

     In connection with the reincorporation of PEC on March 10, 1998, Michael E.
Dunn, the former President and Director of the Company, was issued 300,696      
shares of Common Stock, after giving effect to the reverse stock split, for     
services rendered.                                                              

     In connection with the organization and formation of Potomac (Bermuda), (i)
each of Carl W. Swan and Frank H. Mahan contributed all of his rights under the 
applications with Ecopetrol related to the Rosablanca and Montecristo Blocks to 
Potomac (Bermuda) and in exchange therefor was issued 1,000,000 shares of common
stock of Potomac (Bermuda) and (ii) James E. Frazier was issued 100,000 shares  
of common stock of Potomac (Bermuda) for services rendered.  The value of the   
applications with Ecopetrol related to the Rosablanca and Montecristo Blocks was
estimated to be not less than $20,000 which was substantially less than the     
direct costs that Messrs. Swan and Mahan in making such applications.           

  On April 1, 1998, Potomac (Bermuda) (i) granted each of Messrs. Swan and
Mahan stock options exercisable on or before December 31, 2003 for the purchase 
of 100,000 shares of common stock of Potomac (Bermuda) for $1.00 per share, (ii)
issued to Gene Callaway and James E. Frazier 400,000 and 100,000 shares of      
common stock, respectively, for services rendered, and (iii) granted Mr. Dunn   
stock options exercisable on before December 31, 2003, to purchase 50,000 shares
of common stock for legal services rendered and to be rendered for $.50 per     
share.  On February 9, 1997, Potomac (Bermuda) granted Marlene S. Schiff stock  
options exercisable for the purchase of 100,000 shares of Common Stock on or    
before April 30, 1999, for $1.00 per share.  In addition, on May 8, 1998,       
Potomac (Bermuda) granted to each of Paul D. Meadows and Joseph Edward Michaud  
stock options exercisable on or before December 31, 2003 for the purchase of    
200,000 shares of common stock of Potomac (Bermuda) for $1.00 per share.  In    
connection with the Merger, all outstanding stock options of Potomac (Bermuda)  
were assumed by the Company and became exercisable for the purchase of shares of
Common Stock of the Company for $1.00 per share.                                

    Commencing in May 1997, Potomac (Bermuda) made certain monthly payments to
BV Operating, Inc., an Oklahoma corporation owned equally by Messrs. Swan and   
Mahan, for reimbursement of general overhead, employee salaries (including the  
compensation of the executive officers of Potomac (Bermuda)), travel and other  
expenses incurred in connection with services performed on behalf of Potomac    
(Bermuda) principally related to the application for and obtaining of the       
Rosablanca and Montecristo Association Contracts.  Potomac (Bermuda) reimbursed 
BV Operating, Inc. $132,130 and $100,500 during 1997 and the three months ended 
March 31, 1998, respectively.  The reimbursement arrangement with BV Operating, 
Inc. was terminated on June 30, 1998.                                           

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.                                     

(a)  EXHIBITS:                                                                  

3.1   The Registrant's Certificate of Incorporation.      

3.2   The Registrant's Bylaws.                            

      -16-

10KSB
19th Page of 30
TOC
1st
Previous
Next
Bottom
Just 19th

  4.1   Form of Certificate of Common Stock of the Registrant.

4.2   Plan of Reorganization and Agreement of Merger among
             Registrant, Potomac Exploration Acquisition Corporation and
     Potomac Energy (Bermuda) Ltd., dated June 12, 1998.

       10.1   Association Contract between Empresa Colombiana De Petroleos
           and Seven Seas Petroleum Colombia, the Rosablanca sector,
dated November 19, 1997.                      

       10.2   Association Contract between Empresa Colombiana De Petroleos
            and Seven Seas Petroleum Colombia, the Montecristo sector,
dated November 19, 1997.                      

      10.3   Letter of Intent between Potomac Energy Corporation and The
GHK Company L.L.C., dated February 27, 1997.  

21.1   Subsidiaries of Registrant.                          

27     Financial Data Schedule.                             

(b)  REPORTS ON FORM 8-K.                                                       

  During the last quarter of 1997, the Company did not file any reports on
Form 8-K.                                                                       

      -17-

10KSB
20th Page of 30
TOC
1st
Previous
Next
Bottom
Just 20th

SIGNATURES                                                                      

    In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.                                                                     

                POTOMAC ENERGY CORPORATION
                           (Formerly Midwestern Resources, Inc.)
            (Registrant)

         By: /S/CARL W. SWAN
                                      ------------------------------------------
                                     Carl W. Swan, Chief Executive Officer

Date:  June ___, 1998                                                           

   In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on  
the dates indicated.                                                            

Name                    Title                                  Date       
----                    -----                                  ----       

        Chief Executive Officer, Secretary
    and Vice Chairman of the Board
/S/CARL W. SWAN            Directors                              June ___, 1998
-------------------------                                                       
Carl W. Swan                                                              

/S/GENE CALLAWAY           President and Director                 June ___, 1998
-------------------------                                                       
Gene Callaway                                                             

     Vice President, Chief Financial
/S/JAMES E. FRAZIER        Officer, Secretary and Director        June ___, 1998
-------------------------                                                       
James E. Frazier                                                          

/S/FRANK H. MAHAN          Executive Vice President and Director  June ___, 1998
-------------------------                                                       
Frank H. Mahan                                                            

/S/PAUL D. MEADOWS         Chairman of the Board of Directors     June ___, 1998
-------------------------                                                       
Paul D. Meadows                                                           

/S/JOSEPH EDWARD MICHAUD   Director                               June ___, 1998
-------------------------                                                       
Joseph Edward Michaud                                                     

      -18-

10KSB
21st Page of 30
TOC
1st
Previous
Next
Bottom
Just 21st

      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                · Download Table

POTOMAC ENERGY (BERMUDA) LTD.:                                                
                                                                              
    Independent Auditors' Report . . . . . . . . . . . . . . . . . . . .   F-2

    Consolidated Balance Sheets, December 31, 1997                            
        and March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . .   F-3

    Consolidated Statements of Operations and Accumulated                     
        Deficit for the Period from Inception (April 7, 1997)                 
        to December 31, 1997 and the Three Months Ended                       
        March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . .   F-4

    Consolidated Statements of Stockholders' Equity                           
        for the Period from Inception (April 7, 1997)                         
        to December 31, 1997 and the Three Months Ended                       
        March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . .   F-5

    Consolidated Statements of Cash Flows                                     
        for the Period from Inception (April 7, 1997)                         
        to December 31, 1997 and the Three Months Ended                       
        March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . .   F-6

    Notes to Consolidated Financial Statements (March 31, 1998                
    Information is Unaudited). . . . . . . . . . . . . . . . . . . . . .   F-7

     F-1

10KSB
22nd Page of 30
TOC
1st
Previous
Next
Bottom
Just 22nd


      INDEPENDENT AUDITORS' REPORT

To the Stockholders                                                             
of Potomac Energy (Bermuda) Ltd.                                                

We have audited the accompanying consolidated balance sheet of POTOMAC
ENERGY (BERMUDA) LTD. (a Bermuda Corporation in the development stage) and      
subsidiary as of December 31, 1997, and the related consolidated statements of  
operations and accumulated deficit, stockholders' equity and cash flows for the 
period from inception (April 7, 1997) to December 31, 1997. These financial     
statements are the responsibility of the Company's management. Our              
responsibility is to express an opinion on these financial statements based on  
our audit.                                                                      

We conducted our audit in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audit provides a reasonable basis for our opinion.          

 In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Potomac     
Energy (Bermuda) Ltd. and subsidiary as of December 31, 1997, and the           
consolidated results of their operations and their cash flows for the period    
from inception (April 7, 1997) to December 31, 1997 in conformity with generally
accepted accounting principles.                                                 

                                     MURRELL, HALL, MCINTOSH & CO., PLLP

Moore, Oklahoma                                                                 
May 11, 1998                                                                    

     F-2

10KSB
23rd Page of 30
TOC
1st
Previous
Next
Bottom
Just 23rd

     POTOMAC ENERGY (BERMUDA) LTD.
      (A Development Stage Enterprise)
     Consolidated Balance Sheets

                                                        · Enlarge/Download Table


                                                         December 31,     March 31,  
                                                             1997           1998     
                                                         ------------   ------------ 
                                   ASSETS                                (Unaudited) 

                                                                                     
Current Assets                                                                       
    Cash                                                 $    102,782   $    100,097 
    Accounts Receivable                                       150,000             -- 
    Marketable Securities                                      37,777         37,777 
                                                         ------------   ------------ 

         Total Current Assets                            $    290,559   $    137,874 

Unevaluated Oil and Gas Interests, Full Cost Method             1,121          1,121 
Other Assets                                                   21,222         21,222 
                                                         ------------   ------------ 

TOTAL ASSETS                                             $    312,902   $    160,217 
                                                         ------------   ------------ 
                                                         ------------   ------------ 

                    LIABILITIES AND STOCKHOLDERS' EQUITY                             

Current Liabilities                                                                  
    Accounts Payable                                     $    121,701   $     16,701 
                                                         ------------   ------------ 

         Total Liabilities                               $    121,701   $     16,701 
                                                         ------------   ------------ 

Commitments and Contingencies                                      --             -- 

Stockholders' Equity                                                                 
    Common Stock, $.01 Par Value, 12,000,000 Shares                                  
       Authorized and 4,700,000 and 5,500,000 Issued                                 
       and Outstanding, Respecitively                    $     47,000   $     55,000 
    Additional Paid-In Capital                                840,000      1,032,000 
    Deficit Accumulated During Development Stage             (695,799)      (943,484)
                                                         ------------   ------------ 

         Total Stockholders' Equity                      $    191,201   $    143,516 
                                                         ------------   ------------ 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $    312,902   $    160,217 
                                                         ------------   ------------ 
                                                         ------------   ------------ 

See Accompanying Notes to Financial Statements  

F-3   

10KSB
24th Page of 30
TOC
1st
Previous
Next
Bottom
Just 24th

 POTOMAC ENERGY (BERMUDA) LTD.
(A Development Stage Enterprise)
 Consolidated Statements of Operations and Accumulated Deficit

                                                                · Download Table

                                       Period from Inception                 
                                          (April 7, 1997)                    
                                                to             Three Months  
                                            December 31           Ended      
                                               1997           March 31, 1998 
                                          --------------      -------------- 
                                                                (Unaudited)  
                                                                             
REVENUES                                                                     
    Interest Income                       $        1,443      $        1,007 
                                          --------------      -------------- 

         Total Revenues                   $        1,443      $        1,007 
                                          --------------      -------------- 

EXPENSES                                                                     

    Professional Fees and Consulting      $      692,557      $      247,888 
    Bank Service Charges                             591                 415 
    Postage and Delivery                             165                 389 
    Shipping                                         217                   - 
    Travel                                         2,666                   - 
    Telephone                                        736                   - 
    Office Supplies                                  310                   - 
                                          --------------      -------------- 

         Total Expenses                   $      697,242      $      248,692 
                                          --------------      -------------- 

Net Loss - Deficit Accumulated during                                        
    Development Stage                     $     (695,799)     $     (247,685)
                                          --------------      -------------- 
                                          --------------      -------------- 

Net Loss per Share                        $        (0.19)     $        (0.05)
                                          --------------      -------------- 
                                          --------------      -------------- 

Weighted Average Number of                                                   
    Common Shares Outstanding             $    3,731,439      $    5,043,820 
                                          --------------      -------------- 
                                          --------------      -------------- 

See Accompanying Notes to Financial Statements      

F-4 

10KSB
25th Page of 30
TOC
1st
Previous
Next
Bottom
Just 25th

 POTOMAC ENERGY (BERMUDA) LTD.
(A Development Stage Enterprise)
 Consolidated Statements of Stockholders' Equity

                                                        · Enlarge/Download Table

                                                  Common Stock                                                               
                                       ---------------------------------                     Accumulated                     
                                             Shares           Amount      Paid-In Capital      Deficit             Total     
                                        ---------------  ---------------  ---------------  ---------------   --------------- 
                                                                                                                             
April 7, 1997                                        --  $            --  $            --  $            --   $            -- 

Sale of Stock                                 2,800,000           28,000          384,000               --           412,000 
Shares Issued for Services                    1,900,000           19,000          456,000               --           475,000 
Net Loss                                             --               --               --         (695,799)         (695,799)
                                        ---------------  ---------------  ---------------  ---------------   --------------- 

December 31, 1997                             4,700,000  $        47,000  $       840,000  $      (695,799)  $       191,201 

Shares Issued for Services (Unaudited)          500,000            5,000          120,000               --           125,000 
Sale of Stock (Unaudited)                       300,000            3,000           72,000               --            75,000 
Net Loss (Unaudited)                                 --               --               --         (247,685)         (247,685)
                                        ---------------  ---------------  ---------------  ---------------   --------------- 

March 31, 1998 (Unaudited)                    5,500,000  $        55,000  $     1,032,000  $      (943,484)  $       143,516 
                                        ---------------  ---------------  ---------------  ---------------   --------------- 
                                        ---------------  ---------------  ---------------  ---------------   --------------- 

See Accompanying Notes to Financial Statements  

F-5 

10KSB
26th Page of 30
TOC
1st
Previous
Next
Bottom
Just 26th

 POTOMAC ENERGY (BERMUDA) LTD.
(A Development Stage Enterprise)
 Consolidated Statements of Cash Flows

                                                        · Enlarge/Download Table

                                                           Period from Inception                 
                                                              (April 7, 1997)      Three Months  
                                                               to December 31         Ended      
                                                                    1997          March 31, 1998 
                                                               --------------     -------------- 
                                                                                    (Unaudited)  
                                                                                                 
Cash Flows from Operating Activities                                                             
   Net Loss                                                    $     (695,799)    $     (247,685)
   Adjustments to Reconcile Net Loss to Net Cash Provided                                        
      by Operations:                                                                             
        Compensation Expense                                          475,000            125,000 
        (Increase) Decrease:                                                                     
           Accounts Receivable                                       (150,000)           150,000 
        Increase (Decrease):                                                                     
           Accounts Payable                                           121,701           (105,000)
                                                               --------------     -------------- 

              Net Cash Used by Operating Activities            $     (249,098)    $      (77,685)
                                                               --------------     -------------- 

Cash Flows from Investing Activities                                                             
   Exploration of Oil and Gas Properties                       $       (1,121)    $           -- 
   Purchase of Investments                                            (37,777)                -- 
   Other Assets                                                       (21,222)                -- 
                                                               --------------     -------------- 

              Net Cash Used by Investing Activities            $      (60,120)    $           -- 
                                                               --------------     -------------- 

Cash Flows from Financing Activities                                                             
   Sale of Stock                                               $      412,000     $       75,000 
                                                               --------------     -------------- 
   Payments on Long-Trem Debt                                                                    

              Net Cash Provided by Financing Activities        $      412,000     $       75,000 
                                                               --------------     -------------- 

NET INCREASE (DECREASE) IN CASH                                $      102,782     $       (2,685)

Cash at Beginning of Period                                                --            102,782 
                                                               --------------     -------------- 

CASH AT END OF PERIOD                                          $      102,782     $      100,097 
                                                               --------------     -------------- 
                                                               --------------     -------------- 

See Accompanying Notes to Financial Statements  

     F-6

10KSB
27th Page of 30
TOC
1st
Previous
Next
Bottom
Just 27th

   POTOMOC ENERGY (BERMUDA) LTD.
    Notes to Consolidated Financial Statements
   (March 31, 1998 Information is Unaudited)

NOTE 1 --  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES                         

    Nature of Operations - Potomac Energy (Bermuda) Ltd. (Potomac or Company),
a Bermuda corporation was incorporated April 7, 1997, for the sole purpose of   
internationally identifying, investigating, exploring and where determined      
advantageous developing, refining and marketing of oil and gas.                 

  Development Stage Operations - Potomac is a development stage enterprise
engaging in acquisition, exploration and development of oil and gas projects.   
The Company has yet to generate any revenue from oil and gas sales and has no   
assurance of future revenues from such sales. Oil and gas exploration and       
development is speculative in nature and as such involves a high degree of risk.
The Company plans to spend significant amounts on the acquisition and           
exploration of properties. These costs may require the Company to raise         
additional capital through debt or equity financing. Such additional financing  
may require the encumbrance of Company assets or agreements with other parties  
where some of the costs of exploration are paid by others in exchange for an    
interest in the property. The Company plans to acquire interests in properties  
internationally. Such plans have additional risks because in some cases the     
country where the acquisition occurs may be considered politically and/or       
economically unstable.                                                          

  Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make       
estimates and assumptions that affect the reported amounts of assets and        
liabilities and disclosure of contingent assets and liabilities at the date of  
the financial statements and the reported amounts of revenues and expenses      
during the reporting period. Actual results could differ from those estimates.  
Significant estimates include depreciation, depletion, and amortization of      
proved oil and gas reserves. Oil and natural gas reserve estimates used as the  
basis for depletion are inherently imprecise and are expected to change as      
future information becomes available.                                           

   Income Taxes - The Company is a foreign corporation and is subject to the
income tax laws of the various countries in which it may operate. Branch income 
from interests obtained through the association agreements in Columbia, South   
America (see Note 2)  are subject to Colombian corporate income tax as well as  
remittance tax.                                                                 

    Consolidation - The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Potomac Energy (BVI) Ltd. All   
material intercompany accounts and transactions have been eliminated.           

Fair Value of Financial Instruments - The recorded amounts of cash,   
accounts receivable and accounts payable approximate fair value because of the  
short-term maturity of these items.                                             

Oil and Gas Interests - The Company  follows the full-cost method of  
accounting for oil and natural gas properties. Under this method, all costs     
incurred in the acquisition, exploration and development, including unproductive
wells, are capitalized in separate cost centers for each country. Such          
capitalized costs include contract and concession acquisition, geological,      
geophysical and other exploration work, drilling, completing and equipping oil  
and gas wells, constructing production facilities and pipelines, and other      
related costs.                                                                  

     F-7

10KSB
28th Page of 30
TOC
1st
Previous
Next
Bottom
Just 28th

   POTOMOC ENERGY (BERMUDA) LTD.
    Notes to Consolidated Financial Statements
   (March 31, 1998 Information is Unaudited)

NOTE 1 --  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)             

Oil and Gas Interests (continued) -                                   
       The capitalized costs of oil and gas properties in each cost center
are amortized on composite units of production method based on future gross     
revenues from proved reserves. Sales or other dispositions of oil and gas       
properties are normally accounted for as adjustments of capitalized costs. Gain 
or loss is not recognized in income unless a significant portion of a cost      
center's reserves is involved. Capitalized costs associated with acquisition and
evaluation of unproved properties are excluded from amortization until it is    
determined whether proved reserves can be assigned to such properties or until  
the value of the properties is impaired. If the net capitalized costs of oil and
gas properties in a cost center exceed an amount equal to the sum of the present
value of estimated future net revenues from proved oil and gas reserves in the  
cost center and the lower of cost or fair value of properties not being         
amortized, both adjusted for income tax effects, such excess is charged to      
expense.                                                                        

Since the Company has not produced any oil or gas, a provision for    
depletion has not been made.                                                    

  Foreign Currency Translation - The majority of all costs associated with
foreign operations are paid in U.S. dollars as opposed to the local currency of 
the operations; therefore, the reporting and functional currency is the U.S.    
dollar. Gains and losses from foreign currency transactions are recognized in   
current net income. Monetary items are translated using the exchange rate in    
effect at the balance sheet date; non-monetary items are translated using       
historical exchange rates. Revenues and expenses are translated at the average  
rates in effect on the dates they occur. No material gains or losses were       
incurred during the periods presented.                                          

Organization Costs - Organization costs represent the normal cost of  
incorporating the Company. Organization costs are will be amortized on a        
straight-line basis.                                                            

     Net Loss per Share - Net loss per share is calculated based on the weighted
average number of common, and when dilutive, common equivalent shares           
outstanding. There were no differences between primary and fully diluted        
earnings per share for the periods presented.                                   

Investment Securities - The Company classifies its marketable debt    
securities as "held to maturity" if it has the positive intent and ability to   
hold the securities to maturity. All other marketable debt securities are       
classified as "available for sale". Securities classified as "available for     
sale" are carried in the financial statements at fair value. Realized gains and 
losses, determined using the specific identification method are included in     
earnings; unrealized holding gains and losses are reported as a separate        
component of stockholder's equity. Securities classified as held to maturity are
carried at amortized cost.                                                      

    Interim Financial Statements - The consolidated financial statements as of
March 31, 1998, and for the three months then ended are unaudited and, in the   
opinion of management, reflect all adjustments that are necessary for a fair    
presentation of the financial position as of such date and the results of       
operations and cash flows for the period then ended. All such adjustments are of
a normal and recurring nature.                                                  

     F-8

10KSB
29th Page of 30
TOC
1st
Previous
Next
Bottom
Just 29th

   POTOMOC ENERGY (BERMUDA) LTD.
    Notes to Consolidated Financial Statements
   (March 31, 1998 Information is Unaudited)

NOTE 1 --  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)             

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles 
have been omitted. The results of operations for the three months ended March   
31, 1998, are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998.                                       

NOTE 2 --  JOINT INTEREST OPERATION                                             

Potomac has entered into a joint venture agreement with Seven Seas    
Petroleum Colombia (Seven Seas), a branch of Seven Seas Petroleum, Inc. which is
a publically traded Canadian corporation. Seven Seas has obtained association   
contracts for oil and gas reserves identified through preliminary investigation 
in the Middle Magdalen Valley Basin in central Colombia, South America. Seven   
Seas has been accepted by Ecopetrol, the state owned oil company in Colombia, to
administer the  association contracts covering certain properties in Colombia,  
South America known as the Rosa Blanca and Montecristo Blocks. Seven Seas owns a
75 percent interest and Potomac owns a 25 percent interest. Seven Seas is       
designated as the operator. Upon the successful negotiation of the Association  
contracts  Seven Seas was required to pay Potomac a participation fee of        
$150,000 which was used to offset geophysical survey costs.                     

NOTE 3  -- RELATED PARTY TRANSACTIONS                                           

Potomac is managed by BV Operating, Ltd., an Oklahoma corporation, in 
accordance with a consulting agreement. BV Operating Ltd. (BV)  is owned by     
common shareholders of Potomac. Potomac pays a fixed rate of $30,000 per month  
to BV. BV is responsible for costs and expenses of all offices, salaries and    
wages plus applicable burdens and expenses except for directly chargeable items.
The direct charges include labor costs and benefits for field employees employed
on the joint property in Colombia, professional contract services, maintenance  
and repair of equipment, insurance, travel and other necessary expenses. The    
fixed rate adjusts annually in April and the agreement has a three year term    
unless terminated by BV with 90 days notice. The total paid to BV for the year  
ending December 31, 1997 was $132,130.                                          

  Potomac's Bermuda office is managed by a stockholder. The Company pays a
fee to the stockholder of $1,500 per month, paid quarterly. The agreement       
between these parties is cancellable without notice. The total paid during 1997 
was $18,000.                                                                    

 Geophysical studies on undeveloped properties were performed during the
year by a company owned by common shareholders of Potomac. Total fees paid to   
this company during 1997 were $150,000.                                         

NOTE 4  -- INVESTMENTS                                                          

     The amortized cost and approximate market value of investment securities at
December 31, 1997 were:                                                         

                                                                · Download Table

                              Amortized   Unrealized   Unrealized     Market 
                                Cost         Gains       Losses        Value 
                                ----         -----       ------        ----- 
                                                                             
Available for Sale                                                           
   Real  Estate Investment                                                   
   Trust                       $37,777      $    --     $    --       $37,777
                               -------      -------     -------       -------
                               -------      -------     -------       -------

     F-9

10KSB
Last Page of 30
TOC
1st
Previous
Next
Bottom
Just 30th

   POTOMOC ENERGY (BERMUDA) LTD.
    Notes to Consolidated Financial Statements
   (March 31, 1998 Information is Unaudited)

NOTE 5  -- SUBSEQUENT EVENTS (UNAUDITED)                                        

  Subsequent to December 31, 1997, Potomac completed a reverse merger with
Midwestern-Oklahoma Energy Resources Corporation. Midwestern is currently a     
public company registered on the U.S. Stock Exchange. Shares of Midwestern      
common stock will be issued to the shareholders of Potomac in connection with   
the merger pursuant to Regulation D (Rule 506) under the Securities Act of 1933.
In connection with the merger Midwestern changed its name to Potomac Energy     
Corporation and Potomac merged with and into Potomac Energy Corporation.        

Subsequent to December 31, 1997, the Company granted stock options to 
purchase 950,000 shares of common stock during various periods, which expire    
April, 1999 through December, 2003 at an exercise price of $1.00 except for     
50,000 shares which have an exercise price of $.50.                             

Subsequent to December 31, 1997, the Company entered into a three year
lease for office space . Rental payments under the new lease are $4,000 per     
month.                                                                          

      F-10

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10KSB Filing		Date		First		Last			Other Filings
		2/9/97		18
		2/27/97		8		19
		4/7/97		3		27
		11/19/97		8		19
		12/15/97		12
For The Period Ended		12/31/97		1		30
		3/10/98		18
		3/26/98		10
		3/31/98		12		30			10QSB
		4/1/98		16		18
		5/8/98		18
		5/11/98		22
		6/12/98		3		19
		6/17/98		3		12
		6/19/98		7
		6/29/98		1		17
		6/30/98		10		18			10QSB
		7/1/98		10
Filed On / Filed As Of		7/2/98
		7/10/98
		12/31/98		12		29			10KSB, NT 10-K
		4/30/99		18
		6/15/99		13
		12/31/3		16		18
Top									List All Filings