U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT No. 1 to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
GENERAL AMERICAN ROYALTY, INC.
(Name of Small Business Issuer in its charter)
Delaware 75-2468002
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Energy Square, 4925 Greenville Ave., Ste. 717, Dallas, TX 75206
(Address of principal executive offices) (Zip Code)
Issuers' telephone number: 214-361-8535
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Securities to be registered under Section 12(g) of the Act:
Common Stock $0.001 par value
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(Title of class)
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TABLE OF CONTENTS
The Company..................................................................1
Glossary.....................................................................1
Description of Business......................................................3
Risks of Oil and Gas Activities.............................................10
Description of Property.....................................................12
Directors, Executive Officers and Significant Employees.....................13
Remuneration of Directors and Officers......................................16
Security Ownership of Management and Certain Securityholders................17
Interests of Management and Others in Certain Transactions..................18
Description of Securities...................................................19
Market Price of and Dividends on the Company's Common Equity
and Other Shareholder Matters..........................................20
Legal Proceedings...........................................................21
Changes in and Disagreements with Accountants...............................21
Recent Sales of Unregistered Securities.....................................21
Indemnification of Directors and Officers.................................. 23
Financial Statements........................................................24
Exhibits....................................................................25
Signatures..................................................................25
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PART I
THE COMPANY
History and Purpose. General American Royalty, Inc. (the "Company") is a
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Delaware corporation incorporated on December 28, 1992 as Hermes Capital
Management, Inc. It conducted no business activities under that name. On October
23, 1995 it changed its name to General American Royalty, Inc. It was organized
to engage in the following business activities:
* to acquire producing oil and gas royalty, overriding royalty and mineral
interests;
* to acquire nonproducing oil and gas royalty, overriding royalty, and
mineral interests;
* to purchase units of the Sabine Royalty Trust; and
* to manage joint ventures with institutional investors to accomplish the
above purposes.
The Company was activated in late 1995 and 1996 through the purchase of
certain producing oil and gas interests in exchange for shares of Common Stock
of the Company, cash, and a promissory note and through the receipt of $433,129
as the net proceeds from a private placement of Common Stock and from a public
offering of shares of Common Stock and Callable Stock Purchase Warrants at $5 a
unit, each unit consisting of 1 share of Common Stock and 1 Callable Common
Stock Purchase Warrant. See "Description of Securities." The offering was
conducted as a public offering, exempt from federal registration pursuant to the
provisions of Regulation D, Rule 504 (the "Rule 504 offering").
Purchasers of the units in the Rule 504 Offering hold 90,000 Callable
Common Stock Purchase Warrants, each warrant entitling the record owner to
purchase one share of the Company's Common Stock for $5. The warrants expired on
July 31, 1997. The Company's stock began trading on the NASDAQ OTC Bulletin
Board (Symbol TROY) in February 1997.
Address. The Company's address is One Energy Square, 4925 Greenville
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Avenue, Suite 717, Dallas, Texas, 75206. Its telephone number is 214-361-8535.
Its fax number is 214-361-7715.
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GLOSSARY
The following is a glossary of some of the terms used herein.
Company. General American Royalty, Inc., a Delaware corporation.
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Horizontal Drilling. The drilling of a vertical wellbore until the
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producing horizon is reached, at which point the wellbore is drilled
horizontally to encounter more of the producing formation of the wellbore.
Mineral Fee. The estate in land which gives the owner thereof the right to
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enter upon the land and explore, drill, produce, mine or otherwise exploit the
minerals underlying such land.
Net Profits Interest. An interest created out of the working interest of an
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oil and gas lease which is determined after the deduction of the costs normally
associated with a working interest but is not assessable for costs in excess of
revenues.
Oil and Gas Lease. An instrument by which a mineral fee owner grants to a
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lessee the right for a specific period of time to explore for oil and gas
underlying the lands covered by the lease, and the right to produce any oil and
gas so discovered generally for so long as there is production in paying
quantities from such lands.
Overriding Royalty. An interest created by the owner of the leasehold
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estate created by an oil and gas lease which gives its owner the right to
receive, free of costs of exploration and production, a specified percentage of
any oil and gas, or of the proceeds from the sale of any oil and gas, produced
under the lease attributable to the leasehold estate from which it is created.
An overriding royalty interest terminates when the underlying oil and gas lease
terminates.
Post Production Costs. Costs associated with the sale, marketing and
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transportation of oil and gas after production. Examples are: treating of oil or
gas; compression, dehydration and transportation of gas; and trucking or
shipping of oil. Post production costs may in some instances be borne by the
royalty owner.
Primary Term. The period of time (generally three or five years) during
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which an oil and gas lease may be kept alive by a lessee even though there is no
production by virtue of drilling operations on the lease and or by the payment
of delay rentals.
Royalty Interest. A specified percentage of any oil and gas produced, or of
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the proceeds from the sale of any oil and gas produced, free of the costs of
exploration and production. A royalty interest is normally the interest which
the owner of the mineral estate retains upon execution of an oil and gas lease,
but it may be created by the owner of the mineral fee by grant or reservation.
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Term Mineral and Royalty Interests. Mineral or royalty interests which were
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granted or reserved for a specific period of time. Usually these interests are
for such period of time and as long thereafter as oil and gas are produced from
the lands involved.
Working Interest. The interest acquired by a lessee under an oil and gas
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lease, also referred to as the leasehold estate. The owner of the working
interest has the exclusive right to exploit the oil and gas underlying the lands
covered by the oil and gas lease, and is required to bear all of the costs and
to assume all of the risks of operations conducted under such lease, including
all costs of drilling and operating any wells drilled on the land subject to
such lease.
3-D Seismic. A method of conducting seismographic surveys on a very close
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pattern to obtain significant amounts of geophysical data. The data is then
interpreted by the use of sophisticated computer programs. Three dimensional
models of the underlying rock formations are produced on the computer screen. It
is believed that 3-D seismic may prove to be more reliable than conventual
seismic data because of the quantity of data that can be gathered and processed.
DESCRIPTION OF BUSINESS
In General. The Company has purchased and owns, and proposes to continue to
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purchase and own mineral fee, royalty and overriding royalty interests in
producing and nonproducing oil and gas properties, principally in the major oil
and gas basins and regions of the United States. The Company commenced acquiring
producing mineral royalties in April 1996 and by February 1997 had acquired
producing mineral royalty and overriding royalty interests in approximately 670
wells in New Mexico and Texas. See "Description of Properties."
All of the Company's plans enumerated herein will depend not only upon the
Company's ability to attract private and public funding but will depend upon the
Company's compliance with the registration and the exemption from registration
requirements of the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and with various state securities commissions under
applicable state securities laws.
Plan of Immediate Operations. The Company proposes to raise additional
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equity capital during the next 12 months for the acquisition of producing
royalty and mineral interests as follows:
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* Equity offerings outside the U.S. pursuant to Regulation S of the
Securities and Exchange Commission.
* Completion of the Rule 504 Offering, which may raise a maximum of
$450,000 through exercise of its 90,000 Callable Common Stock Purchase
Warrants.
* An equity offering in the U.S., either registered or exempt from
registration, after the termination of the 6- month period that
follows the exercise or expiration of the Callable Common Stock
Purchase Warrants issued in the Rule 504 Offering.
Advantages of Mineral and Royalty Ownership. The cost and risk advantages
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of ownership of mineral, royalty and overriding royalty interests compared to
working interests are considerable. A comparison between the two shows the
following advantages:
1. Low overhead. There are no drilling or lease operating expenses which
may periodically require large cash outlays for equipment or services.
The result is a more stable operating cash flow.
2. Minimum manpower is required to manage royalty interests. Overhead
cost for a mineral and royalty interests company is considerably less
than that of an exploration and production company of comparable size.
A sizeable company can be managed by a small staff using the latest
computer technology. The availability of excellent computer software
maximizes efficiency and minimizes management time. Geological,
geophysical or engineering work can be performed on a contract basis
as needed.
3. In most states in which the Company intends to operate, minerals and
royalty interests are not subject to taxes until production is
established.
4. Minimum environmental risk is associated with minerals and royalty
interests.
5. Non-producing minerals and royalty interests will be purchased with
the intent of substantially increasing their value through their
development into drillable prospects. This will be accomplished either
through industry activity or through the use of contract employees
(geologists, geophysicists and engineers). There are many experienced
and talented individuals who are available to create exploration ideas
to be packaged and presented to exploration companies
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for drilling. This can be done with minimum overhead cost which would
be recouped through the sale of the prospect, lease bonuses or revenue
from newly discovered production. There would be no drilling cost to
the Company.
6. Minerals and royalty interests are perpetual unless a term is
specifically stated in the deeds through which they are acquired.
Efforts will be made to purchase perpetual interests.
The Purchase of Royalty and Mineral Interests. The Company's management
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proposes that acquisitions at first will be located in producing wells and
fields generating income, or, in non-producing areas where imminent exploration
activity in the area would dramatically increase their value, allowing the
Company to sell a portion of such purchased interests for a substantial profit,
in effect, paying for the interest retained, should that be desired. Subsequent
acquisitions of minerals and royalty interests could be in areas offsetting
production (developmental drilling) or in trend areas which have a high
probability of being prospective for oil and gas yet would require geological
and geophysical development using modern 3-D seismic or horizontal drilling
technology to enhance their value through leasing (lease bonuses) and,
ultimately, production.
Source of Acquisitions. There are several sources from which these
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acquisitions can be made.
Major Oil Companies. The possibility of purchasing mineral and royalty
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interests from major oil companies exists due to restructuring presently
occurring within the industry. Such companies are divesting themselves of
domestic producing properties considered marginal by their standards. This
divestiture accomplishes several of their goals. It reduces overhead (salaries
and benefits); it creates needed capital, which in turn can be reinvested in
other projects (international) which provide a greater return on investment; and
it assists in their attempts to relieve themselves of potential environmental
problems associated with those properties.
The major oil companies also own substantial mineral and royalty interests
whose sale could be an excellent source for such capital. These mineral and
royalty interest properties are normally managed within the companies by a
small, low-profile department which is not an integral part of the companies'
overall plans or operations.
Institutions. Minerals and royalty interests now owned or managed by
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institutions such as banks, colleges or universities, trusts, etc., will also be
targeted for purchase. Such institutions are frequently in need of additional
capital, which a sale could provide.
Estates, Families and Individuals. Considerable mineral interests large
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farms and ranches) are owned by estates, families and individuals. Mineral
interests are usually the first
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properties to be sold to pay off debt or to pay taxes to settle estates, etc.
These interests available for sale can be identified through the numerous local
contacts (ranchers, lawyers, county judges, county clerks, abstractors,
sheriffs, etc.) which the Company's management has established through years of
association with them.
Private Interest Royalty Companies. There are numerous private royalty and
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mineral companies which own interests in producing and nonproducing properties.
The owners of these private royalty companies may need liquidity and may be
interested in exchanging stock with the Company or selling for cash.
New Technology Areas. Prime targeted areas are those which are very active
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in exploration and drilling and lend themselves to the use of 3-D seismic and
horizontal drilling technology. Such areas include the Cotton Valley Reef play
in Freestone, Leon and Robertson Counties, Texas, and the extension of the play
as it is projected to continue through East Texas into Louisiana; the South
Texas Lobo Gas play in Dimmit, Maverick and Zavala Counties, Texas; and the
Lodgepole play in North Dakota, plus other areas in the traditional oil and gas
producing basins which currently have exploration activity or the potential for
future exploration activity, particularly with the application of new
technologies to these proven producing areas.
A Primer on Oil and Gas Interests and, Particularly, Royalty Interests.
Interests in Land; Surface Rights and Mineral Rights. The fee simple estate
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in land may be divided into two separate real property estates, the surface fee
and the mineral fee. The owner of the surface fee has the right to use and
possess the surface of the ground, while the owner of the mineral fee owns and
has the right to extract the minerals situated beneath the surface estate. The
mineral fee owner may create a royalty interest out of his mineral interest by
conveying or reserving a royalty interest or by granting an oil and gas lease.
The Company anticipates that much of its royalty interest acquisition efforts
will be directed toward acquiring mineral and royalty interests from persons who
have no interest in the surface fee. Certain states, such as Louisiana, have
enacted legislation causing ownership of a mineral fee which has been severed
from the surface fee for a specified period of time to revert to the owner of
the surface fee unless oil and gas is being produced from such lands.
Oil and Gas Leases: The Working Interest and The Royalty Interest. Oil and
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gas operations generally are conducted pursuant to oil and gas leases granted by
the mineral fee owner to a third party. By executing an oil and gas lease, the
mineral fee owner grants the lessee the right for a specified period of time to
explore for and produce any oil and gas underlying the lands covered by the
lease. The interest acquired by the lessee is called a "working interest," and
the owner of the working interest portion of an oil and gas lease is required to
bear all of its costs and to assume all of the risks of any operations conducted
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under the lease, including all costs of drilling and operating any wells drilled
pursuant to the lease. In consideration for his execution of an oil and gas
lease, the owner of the mineral fee will receive an additional cash payment,
called a lease bonus, and a royalty interest.
Oil and Gas Leases: Terms. Most oil and gas leases have a stated term
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(generally referred to as the primary term) of from one year to ten years and
expire at the end of the stated term unless oil or gas production has been
established on the lease. If production has been established on a lease, the
lease will continue in existence, at least with respect to the production
surrounding each producing well on the lease, until the well ceases to produce
in paying quantities. Upon the termination of an oil and gas lease, the right to
recover any unproduced oil and gas underlying the leased lands reverts to the
mineral fee owner who may then explore for such oil and gas for his own account
or lease the property to a new lessee.
Overriding Royalty Interests. The working interest owner under a lease may
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create an overriding royalty interest in his working interest in the lease. An
overriding royalty is similar to a royalty interest in that the owner of an
overriding royalty is entitled to receive free of exploration and production
costs a specified percentage of any oil and gas produced from the lease
attributable to the working interest from which it is created. However, unlike a
royalty interest, which is attributable to the ownership of a portion of the
mineral fee, an overriding royalty interest is simply a charge upon the working
interest from which it is created and will terminate concurrently with the
termination of the working interest.
Purchase of Minerals and Royalty Interests. While the Company will acquire
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mineral fee, royalty and overriding royalty interests in established wells when
such interest can be purchased upon satisfactory terms, the Company will also
purchase mineral fee, royalty and overriding royalty interests in recently
drilled wells with little or no production history. The Company will also
purchase mineral fee, royalty and overriding royalty interests under
non-producing leases in active exploration areas where the Company believes it
is likely wells will be drilled in the near future. The purchase of mineral fee,
royalty and overriding royalty interests in leases without an established
production history involves a greater degree of risk to the Company, because
estimates of oil and gas reserves in place based upon little production history
are less reliable than estimates based upon longer production history. Reserve
estimates in the first years following the commencement of production frequently
vary significantly from year to year, and there are no assurances that the
initial reserve estimates used by the Company to evaluate interests in newly
drilled wells will prove to be accurate.
Valuing Mineral and Royalty Interests. The manner in which the purchase
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price for mineral fee, royalty and overriding royalty interests is calculated
varies from area to area and seller to seller. Mineral fee, royalty and
overriding royalty interests involving relatively minor amounts of production
are generally sold without benefit of engineering estimates of the
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recoverable reserves attributable to such interests, and the purchase price is
frequently based upon some multiple of the average monthly production for some
recent period (e.g., 42 times the average monthly production for the preceding
six-month period). In the case of sales involving relatively large amount of
reserves, the parties will obtain engineering estimates of the recoverable
reserves and the cash flow anticipated to be realized therefrom, and the
purchase price will be negotiated on the basis of such estimates. The purchase
price paid for reserves is dependent upon the rate of return which is desired on
the investment and the parties' evaluation of the degree of risk that the
estimate of the recoverable reserves will prove to be incorrect. The identity of
the producing formation, its characteristics in a particular well (e.g.
porosity, permeability, oil and gas in place, water saturation and reservoir
pressure), the type of natural energy drive operating in the field, and the
general area in which the lease is located are all important factors in the
evaluation of a mineral fee, royalty or overriding royalty interest. The
Company's policy is to obtain assistance from qualified petroleum reservoir
engineers or geologists in evaluating, prior to purchase, the oil and gas
interests proposed to be purchased by the Company. Since the interests the
Company intends to purchase are non cost bearing and non possessory interests,
the information from the operator may not be available for use in the evaluation
of the interests which the Company seeks to purchase.
Financing the Purchase of Minerals and Royalty Interests. The terms of
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purchase of mineral fee, royalty, and overriding royalty interests range from
the entire purchase price being paid in a single installment at closing, to
seller financing with the seller agreeing to accept a note from the purchaser as
part of the purchase price, to bank financing where a portion of the purchase
price is borrowed from a bank or other institutional lender. The ability to use
bank financing for the purchase of oil and gas property interests depends upon
numerous factors, including the general credit worthiness of the purchaser, the
amount of estimated proved recoverable reserves attributable to the interests
being purchased and the production history and data available with respect to
the wells on the subject lands and in the surrounding area. The Company was
recently organized with limited resources and there are no assurances that the
Company will be able to obtain seller financing or bank financing for its
purchases of mineral fee, royalty and overriding royalty interests.
Formation of Drilling and Spacing Units. To avoid the drilling of
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unnecessary wells, to achieve the maximum recovery of oil and gas in place, and
to protect correlative rights among mineral interest owners, mineral interests
are often pooled, unitized or communitized, either voluntarily or by order of a
state regulatory commission. The most common form of communitization is the
formation of a unit to pool the mineral interest ownership for the drilling of a
single well. This type of unit is often referred to as a drilling and spacing
unit. Such units generally follow the normal well-spacing pattern in a
particular field, and may range from a size of ten acres or less to a size of
640 acres or more, depending upon a number of factors including the area
determined to be efficiently drained by a well producing from a particular
reservoir. If royalty interests are communitized, the royalty payable with
respect to oil and
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gas produced from a well completed on such unit may be allocated among the
royalty owners whose mineral interests are included within the boundaries of the
drilling and spacing unit for the well, generally in proportion to the number of
royalty acres owned by each.
Title to Interests. It will be the Company's general practice not to
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acquire a mineral fee, royalty or overriding interest without first having the
title to such interest examined by a landman or an attorney. All such mineral
interests acquired by the Company are evidenced by written conveyances, which
are duly filed in the applicable records of the county or parish in which such
mineral interests are located. In some instance the Company may acquire indirect
ownership in a mineral or royalty interest through a partnership. Generally, the
Company will not make on site inspections of the properties in which it acquires
an interest.
The Company's Position in the Industry. The Company does not know of a
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public royalty company in the United States that is active in the acquisition of
royalties and mineral interests. While there are other public entities that
could be classified as royalty companies, none is active in the acquisition of
additional royalty interests in oil and gas properties. Most other publicly-held
companies that formerly engaged in the business of accumulating royalty
interests in oil and gas properties are no longer in business. Although
successful, those companies have either been acquired or reorganized as
self-liquidating trusts whose ownership units were distributed to the
shareholders. The most prominent of such companies is the Sabine Royalty Trust,
which was created in 1983 by Sabine Corporation as a publicly-held trust to
distribute on a monthly basis the royalty income from the producing assets
placed in the trust by its owners, and the Permian Basin Royalty Trust and the
San Juan Basin Royalty Trust created by Southland Royalty Co. in 1980.
Employees. The Company has 2 full-time employees, filling the positions of:
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President and Chief Executive Officer; and Vice President, Secretary and
Treasurer. The Company has no part-time employees.
Compliance with Environmental Regulations. The cost of compliance with
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governmental provisions regulating the discharge of materials into the
environment is a cost that is borne by the working interest owners of oil and
gas wells. The Company, by limiting its activities to the acquisition of
non-working interest royalty and mineral interests, will bear none of these
costs. There is some risk of eventual liability under environmental regulations,
which risk can occur where royalty interests which convert to a possessory
interest are involved. In those instances, activities can result in liability
under federal, state and local environmental regulations for activities
involving, among other things, water pollution and hazardous waste
transportation, storage and disposal. Such liability can attach not only to the
operator of record of a well, but also to other parties that may be deemed to be
current or prior operators or owners of possessory interest in a property.
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RISKS OF OIL AND GAS ACTIVITIES
The Company intends to purchase non-cost bearing mineral and royalty
interests; however, risks in the oil business still exist. Even though a royalty
interest is not cost bearing, the underlying working interest must remain
profitable for the operator to continue to produce oil and gas. Therefore,
certain risks in the oil business incurred by the operator such as dry holes,
operating hazards, product prices and environmental risks may have a direct
effect on the royalty owner. Due to conditions beyond the control of the
Company, a significant portion of the reserves and cash flow from the properties
to be acquired may not be achieved.
Acquisition Risks; Uncertainty of Reserve Estimates. The Company's property
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acquisition activities will be based in part on available geological,
geophysical, production and engineering data, the extent, quality and
reliability of which varies. Geological, geophysical and engineering data
obtained by an operator of an oil and gas property may not be available for use
in evaluating mineral and royalty interests. Oil and gas reserve estimates and
the discounted present value estimates associated therewith are based on
numerous engineering, geological and operational assumptions that generally are
derived from limited data. Common assumptions include such matters as the areal
extent and average thickness of a particular reservoir, the average porosity and
permeability of the reservoir, the anticipated future production from existing
and future wells, future development and production costs and the ultimate
hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and
the discounted present value estimates associated therewith are frequently
revised in subsequent periods to reflect production data obtained after the date
of the original estimate. If reserve estimates are inaccurate, production rates
may decline more rapidly than anticipated and future production revenues may be
less than anticipated. Moreover, significant downward revisions of reserve
estimates may adversely affect the Company's borrowing power or have an adverse
impact on other financing arrangements. The inherent uncertainty of the
Company's reserve estimates increases the relative risk of economic success of
the Company.
Interests in Non-Producing Properties. The Company not only will purchase
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producing mineral fee, royalty and overriding royalty interests but similar
non-producing oil and gas interests. The purchase of interests in non-producing
properties involves a greater degree of risk than does the purchase of interests
in producing properties, because there is no assurance that any wells will ever
be drilled on such properties or, if drilled, that they will produce oil or gas
in commercial quantities. However, it is intended that a majority of the oil and
gas interests purchased by the Company will be producing.
Not an Oil and Gas Exploration Company. The principal purpose of the
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Company is to acquire mineral fee, royalty, overriding royalty interests and net
profits interests in oil and gas properties and not to actively explore for oil
and gas on these properties. The value of mineral fee, royalty and overriding
royalty interests presently held or to be acquired are dependent upon the
ability of the owner of the exploration rights (I) to discover and produce oil
or gas in amounts that will be commercially profitable, and (ii) if oil or gas
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is being produced, to continue to produce it in paying quantities.
Responsibility for the conduct of operations upon properties in which the
Company will own an interest will be vested in third party "operators," over
whom the Company will have no control. Mineral and royalty interests may
terminate after a specific term of years, unless the interest is producing oil
and gas. Therefore, if oil and gas is not being produced at the end of the term,
the mineral or royalty interest may terminate, or if the term has expired, the
interest may terminate upon cessation of production, and any mineral or royalty
interest so terminating would have no further value. Further, an overriding
royalty interest is entirely dependent upon the continuation of the lease or
concession from which it is created; therefore, if the owners of the lease do
not conduct exploratory activities prior to expiration of the lease, any
overriding royalty interest with respect to such property would be worthless.
Oil and Gas Markets. Oil and gas prices can be extremely volatile and are
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subject to substantial seasonal, political and other fluctuations. As a result,
the prices at which oil and gas produced for the Company may be sold is
uncertain and it is possible that under some market conditions the production
and sale of oil and gas from some or all of the Company's properties may not be
economical.
In most instances, the production from the Company's royalty interests will
be marketed by the operator, and the Company will have no control over the
marketing or sale of production. The availability of a ready market for oil and
gas and the prices obtained for such oil and gas depend upon numerous factors
beyond the control of the Company, including competition from other oil and gas
producers and national and international economic and political developments. In
addition, the marketability of natural gas production depends upon the
availability and capacity of gas gathering systems and pipelines.
Competition and Markets. The oil and gas business is highly competitive and
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has few barriers to entry. The Company will be competing with other oil and gas
companies and investment partnerships in the search for, and obtaining of,
desirable proved producing royalty and mineral interests. Many of the Company's
competitors are larger than the Company and have substantially greater access to
capital and technical resources than does the Company and may, therefore, have a
significant competitive advantage. Many of the Company's competitors are capable
of making a greater investment in a given area than is the Company, although
large and small companies alike are subject to the economics of cost
effectiveness. It can be expected that prices for oil and gas will continue to
fluctuate, depending upon a number of conditions over which the Company has no
control, including actions taken by the Organization of Petroleum Exporting
Countries ("OPEC"), turmoil in the Middle East, and the price of alternative
fuels. The prices at which the Company's oil and gas production will be sold
will have a substantial effect on its earnings (if any) and its results of
operations.
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DESCRIPTION OF PROPERTY
The Company owns small mineral, royalty and overriding royalty interests in
approximately 670 oil and gas wells located in two counties in New Mexico and
eleven counties in Texas. These interests were acquired in four transactions
during fiscal year 1996.
Basin Fruitland Coal Field - San Juan County, New Mexico. This is a 2.5%
overriding royalty interest in 9 wells and a 1.25% overriding royalty interest
in 3 wells. The interests cover the rights to the Fruitland Coal formation only.
The wells are operated by Marathon Oil Company, have produced a total of
approximately 8.5 BCF of gas through 1995, and at October 31, 1996 had an
estimated 13 BCF of gross recoverable gas reserves remaining. Monthly production
from the 12 wells is in excess of 300,000 MCF of gas. As of April 1997, monthly
income after severance taxes to the interest of the Company is approximately
$4,500.
Alta Mesa Gas Field - Brooks County, Texas. This is a 0.333 percent
overriding royalty interest in 16 producing wells and a 0.005 percent overriding
royalty interest in 5 producing wells located in the South Texas Alta Mesa gas
field. Production depths range from 1,100 foot depth gas sands to the Vicksburg
sands at depths in excess of 7,000 feet. Gross remaining reserves at October 31,
1996 were estimated to be 20.0 billion cubic feet of gas and 424,000 barrels of
condensate. Remaining life of the wells is estimated to be in excess of fifteen
years. As of April 1997 monthly income after severance taxes to the interest of
the Company is approximately $1,500.
North Wilton Strawn Waterflood Unit - Young County, Texas. This is a 3.125
percent overriding royalty interest in the 3-well North Wilton Strawn Waterflood
Unit in Young County, Texas. At October 31, 1996, estimated gross remaining
reserves of 42,000 barrels of oil are to be recovered over an estimated sixteen
year life. As of April 1997 monthly income after severance taxes to the interest
of the Company is approximately $270.
Dumraese Estate Purchase - Lea County, New Mexico and Bexar, Brooks,
Colorado, DeWitt, Duval, Jim Wells, Lavaca, Starr and Stephens Counties, Texas.
Effective August 1, 1996, the Company purchased small mineral, royalty and
overriding royalty interests in over 635 producing oil and gas wells located in
numerous oil and gas fields in New Mexico and Texas. The properties range from
large unitized waterfloods to single low rate producing wells. As of April 1997,
monthly income after severance taxes to the interest of the Company is
approximately $3,200.
The Company's Offices. The Company leases 2,345 square feet of office space
---------------------
at One Energy Square, 4925 Greenville Avenue, Suite 717, Dallas, Texas, 75206.
The three-year lease expires November 30, 1999. Monthly rent currently is
$2,833.
12
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND
SIGNIFICANT EMPLOYEES
Set forth below are the identities of the directors, executive officers and
significant employees of the Company and a brief account of their business
experience, especially during the last 5 years, including their principal
occupations and employment during that period and the names and principal
businesses of any corporations or organizations in which such occupations and
employments were carried on. All offices with the Company have been held since
1996 and expire in April 1998.
Person Office
-------- --------
James F. Smith, 60 President, Chief Executive
Officer and Director
James E. Mitschke, 55 Vice President and Director
Sam Nicholson, 49 Secretary and Treasurer
Daniel M. Vines, 41 Director
Malcolm E. Wilson, Jr., 71 Director
Bill L. Bledsoe, 61 Director
J. Donald Hill, 64 Director
Douglas Weedon, 61 Director
George E. Green, 61 Director
C. B. Harrison, Jr. General Counsel
James F. Smith. Mr. Smith received a Bachelor of Business Administration degree
- --------------
in 1958 from Southern Methodist University and attended the Graduate School of
Business Administration during 1959-1960 at the University of Texas at Austin.
After leaving college he embarked on a career in the oil and gas business,
although he was also active in the ownership of several banks and savings and
loan associations from 1960 through 1968. Mr. Smith has been engaged in the
domestic oil and gas industry for over 30 years, his companies having drilled
over 400 wells during this period. He has completed three initial public
offerings for companies of which he was a founder and an executive officer,
which are PetroDynamics, Inc. in 1968, Toltec Oil & Gas, Inc. in 1979 and Toltec
Royalty Corporation in 1980.Toltec Royalty Corporation was sold to an American
Stock Exchange company in 1982. Toltec Oil & Gas, Inc. was merged with a public
company in 1983 which later became Coda Energy, Inc. Both PetroDynamics and
Toltec Royalty were active in the acquisition of oil and gas royalty interests.
From 1990 until joining the Company in October 1995, Mr. Smith was
president of National Ice Cream Co. in Dallas, Texas.
13
<PAGE>
James E. Mitschke. Mr. Mitschke is a petroleum landman with more than 23
-----------------
years experience in the oil and gas industry. He has been employed during this
period as a landman for several companies, all based in Dallas, Texas, which
include Hunt Energy Corporation, Wessely Energy Corporation, and Murchison
Exploration Company. His positions with these companies have ranged from area
land manager to vice president-land. He is a member of the American Association
of Professional Landmen and served as the chairman of its industry affairs
committee, 1980-81 and as a director, 1981-82. He has been a member of the
Dallas Association of Petroleum Landmen for a number of years and was its
president in 1979 and served on its board of directors from 1978-80. Mr.
Mitschke has a bachelor of arts degree from Southwestern Oklahoma State
University in Weatherford, Oklahoma.
Sam E. Nicholson. Mr. Nicholson received his Bachelor of Business
------------------
Administration in accounting from the University of Texas at Arlington, in 1978.
In 1984 he became a Certified Public Accountant in the State of Texas. Mr.
Nicholson has over 14 years experience in the oil and gas industry. From 1992 to
1993 he was self-employed as a practicing accountant primarily for the oil and
gas industry. From 1993 to 1995 he served as the controller for Superior Energy
Co., Inc. in Dallas, Texas. In 1995 he joined the Company as an officer and
principal financial officer.
Mr. Nicholson is a member of the American Institute of Certified Public
Accountants and the Texas Society of Certified Public Accountants.
Daniel M.Vines. Mr. Vines is the principal shareholder and chief executive
--------------
officer of Sabine Texican Pipeline Company, a Texas corporation that is a
natural gas, intrastate, pipeline and marketing company engaged in the business
of purchasing, gathering, marketing and transporting natural gas. Mr. Vines also
serves as the executive vice president and a director of Lufkin Creosoteing Co.,
Inc., which is the second largest wood preservative company in Texas and whose
clientele is composed of most of the major utility companies in Texas. He also
is a shareholder and chairman of the board of directors of Trenton Sales, Inc.,
a chemical trading and marketing company. Mr. Vines graduated from Stephen F.
Austin State University in 1978 with a degree in forestry.
Malcolm E. Wilson, Jr. Mr. Wilson is a professional petroleum geologist
----------------------
with considerable experience as a chief executive officer of an independent oil
company. From 1948 to 1975 he was employed as a geologist with General American
Oil Company of Texas where, prior to his resignation in January 1975, he was
Vice President of Geology. During 1975 and 1976 he was a Petroleum Consultant to
Baruch-Foster Corporation, May Petroleum Company, and Republic Production
Company of Texas. From 1977 until February 1991 he was the President and Chief
Executive Officer of Baruch- Foster Corporation and all its subsidiaries. In
February 1991, such company was merged with another oil company, and
14
<PAGE>
Mr. Wilson, since that time, has managed his personal investments, which are
primarily mineral, royalty and overriding royalty interests, and he has served
as a Petroleum Consultant. Mr. Wilson has considerable experience as a geologist
and has either personally geologically mapped prospects or supervised the
geological and geophysical mapping for the companies and clients with which he
was associated in many of the major oil and gas fields in Louisiana, Texas,
Oklahoma, New Mexico, Mississippi, Alabama, the Rocky Mountain, the Gulf of
Mexico, and some foreign countries.
Bill L. Bledsoe. Mr. Bledsoe received a Bachelor of Science degree from the
---------------
University of North Texas (Denton) in 1957.
Mr. Bledsoe has 35 years of experience in the general management of
domestic and international oil and gas exploration and production. From 1960
through 1965 he served in the land department of Texaco, Inc. in New Orleans and
Shreveport, Louisiana. From 1965 to 1979 he served the various organizations of
H. L. Hunt in a number of management capacities worldwide, being Assistant Land
Manager of Placid Company, Vice President/Land Manager of Hunt Energy
Corporation, General Manager of Hunt International Petroleum Corporation and
President of Pursue Energy Corporation, among others. From 1979 to the present
he has owned and served as President of Bledsoe Energy Corporation and Bledsoe
Petro Corporation, both of Dallas, Texas and which are exploration and
production companies, operating approximately 300 wells in Texas, Oklahoma and
New Mexico.
J. Donald Hill. Mr. Hill is the Chairman and Chief Executive Officer of
--------------
Excel Technology, Inc., a company which is based in Long Island, New York. Excel
Technology, Inc. trades on NASDAQ under the symbol XLTC.
Mr. Hill has extensive experience in investment banking, having served as a
General Partner of Loeb, Rhoades & Company from 1966 to 1977 and Vice Chairman
of First Affiliated Securities, Inc. from 1978 to 1988. From 1988 to 1990 he was
Director of Corporate Finance at Weeden & Company, an investment banking firm
and member of the New York Stock Exchange. During 1991 he was the Chief
Executive Officer of Medstone International, Inc., a company engaged in shock
wave therapy devices. He served as President and Chief Financial Officer of a
subsidiary of Excel Technology, Inc., Excel/Quantronix, from November, 1992
until becoming Chief Executive Officer of Excel Technology, Inc. in 1995.
Douglas Weedon. Mr. Weedon was employed by Republic National Bank of Dallas
--------------
from 1958 until 1974 and was elected an officer in 1961. From 1974 until 1986 he
served as President and Chief Executive Officer of Republic Money Orders, Inc.,
with annual sales exceeding $4 billion. Since 1986 Mr. Weedon has served as
President of Cougar Enterprises, Inc., a public company engaged in oil and gas
activities, and as president of two diversified marketing organizations.
15
<PAGE>
In 1993, he became President and a principal of Inland Acceptance Company.
Under state reimbursement programs, Inland provides funding for eligible claims
for petroleum contaminated sites. Mr. Weedon is a graduate of Southern Methodist
University and Southwestern Graduate School of Banking at S.M.U.
George Green. Mr. Green received a Bachelor of Business Administration
-------------
degree from the University of Texas at Austin in 1958, majoring in corporate
finance, with a minor in stock market theory and pricing. From 1961 until 1979
he was a stock and commodities broker. From 1979 until the present he has served
as the owner and operator of George E. Green Investments, which manages
family-owned assets including oil and gas production.
C.B. Harrison, Jr. Mr. Harrison is an attorney in Dallas, Texas practicing
------------------
primarily in the area of oil and gas law. He is also engaged in the oil and gas
business in Dallas and is an officer and director of Unigas Company, Inc., MHM
Oil Company, MHM Pipeline Company and Fox Operating. Mr. Harrison was formerly a
director of Toltec Royalty Corporation and Toltec Oil & Gas, Inc. and a director
and president of Intramerican Oil and Minerals, Inc. In addition he is a
graduate of the University of Texas School of Law and a member of the Texas Bar
Association. He is a Certified Professional Landsman.
REMUNERATION OF DIRECTORS AND OFFICERS
Set forth below is the aggregate annual remuneration during fiscal year
1996 of the only officer or director who received remuneration, and of the
officers and directors as a group. During fiscal year 1996 the officers named
below spent the time deemed necessary to discharge their duties in their
capacities as officers and directors of the Company. Although their 1996 weekly
hours at times were less than full time, the Company expects these individuals
to work on a full time basis during the current fiscal year.
Name of Individual
or Capacities in Which
Identity of Group Remuneration was Received Remuneration
- ------------------ ------------------------- ------------
James F. Smith Chief Executive Officer $ 14,950
Sam E. Nicholson Secretary and Treasurer 7,500
Officers and
directors as a group
(10 persons) Secretary and Treasurer $ 22,450
16
<PAGE>
Proposed future payments. All remuneration payments now being made and
proposed to be made in the future, pursuant to any ongoing plan or arrangement,
to any of the persons in the group described above are as follows:
Monthly
Person Capacity Remuneration
---------- ------------------ ------------
Jim F. Smith President $ 3,000
Sam E. Nicholson Secretary and Treasurer 3,000
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN SECURITY HOLDERS
As of April 30, 1997, set forth below are the numbers of shares and the
percentage of outstanding shares of Common Stock of the Company held of record
by each of the 2 highest paid persons who are officers and directors of the
Company, by all officers and directors as a group, and by each shareholder who
owns more than 10 percent of any class of the Company's securities, including
those shares subject to outstanding options or warrants:
Title of Name and Address Amount Percent
Class of Owner Owned of Class
- -------- ---------------- ------ --------
Common Ben C. Burkett, II (3) 40,000 4.4%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
Common James F. Smith(1)(2) 40,000 4.4%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
Common Sam E. Nicholson 10,000 1.1%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
Common Sammie S. Smith(2) 105,000 11.5%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
17
<PAGE>
Common Lawrence E. Steinberg 100,000 11.0%
5420 LBJ Freeway, Ste 540
Dallas, TX 75240
Common Officers and Directors
as a group (10 persons) 250,000 27.5%
(1) Of these shares, 10,000 are held of record by Mr. Smith and 15,000 are held
of record by each of two trusts of which Mr. Smith is the trustee. One trust is
for the benefit of Mr. Smith's children, and the other trust is for the benefit
of the Company's employees.
(2) Mr. and Mrs. Smith are husband and wife. They each disavow any beneficial
interest in the shares held of record or beneficially by the other.
(3) Mr Burkett resigned from the board of directors effective May 15, 1997.
INTERESTS OF MANAGEMENT AND OTHERS
IN CERTAIN TRANSACTIONS
Eagle Equity Oil & Gas L.P., an entity under the control of Lawrence E.
Steinberg, on July 24, 1996 loaned $140,000 to the Company. The loan was due on
September 23, 1996, provided for interest at 12 percent a year, and was
collateralized by the properties in the Basin Fruitland Coal Field, San Juan
County, New Mexico purchased by the Company from the proceeds of the loan (see
"Description of Property"). The loan was paid down to $40,000 by August 31, 1996
from the proceeds of the sale of securities by the Company in a Regulation D,
Rule 504 public offering (see "The Company - History and Purpose").
On August 13, 1996 Eagle Equity Oil & Gas L.P. loaned an additional
$130,000 to the Company. The loan was due October 14, 1996, provided for
interest at 12 percent a year, and was collateralized by the oil and gas
properties in the Basin Fruitland Coal Field, the Alta Mesa Gas Field in Brooks
County, Texas and the North Wilton Strawn Waterflood Unit in Young County, Texas
(see "Description of Properties") and a life insurance policy on the president
of the Company.
The loans were paid off in January 1997 from the proceeds of a bank loan
made to the Company.
18
<PAGE>
Mr. Lawrence E. Steinberg, who controls Eagle Equity Oil & Gas L.P.,
contemporaneously with the transactions described above, purchased 110,000
shares of Common Stock of the Company for $1,000 from James F. Smith, president
and a director of the Company. He holds 30,000 of these shares in his name and
35,000 in each of two trusts for his children. See note 2 to the Company's
October 31, 1997 financial statements.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 20 million shares of Common Stock,
$0.001 par value, and 5 million shares of Preferred Stock. The presently
outstanding shares of Common Stock are fully paid and nonassessable. There are
no shares of Preferred Stock issued and outstanding.
Common Stock. There are presently outstanding 910,000 shares of Common
------------
Stock.
Voting Rights. Holders of shares of Common Stock are entitled to one vote
--------------
per share on all matters submitted to a vote of the shareholders. Shares of
Common Stock do not have cumulative voting rights; accordingly, the holders of a
majority of the shareholder votes eligible to vote and voting for the election
of the Board of Directors can elect all members of the Board of Directors.
Dividend Rights. Holders of record of shares of Common Stock are entitled
----------------
to receive dividends when and if declared by the Board of Directors out of funds
of the Company legally available therefor.
Liquidation Rights. Upon any liquidation, dissolution or winding up of the
------------------
Company, holders of shares of Common Stock are entitled to receive pro rata all
of the assets of the Company available for distribution to shareholders after
distributions are made to the holders of the Company's Preferred Stock.
Preemptive Rights. Holders of Common Stock do not have any preemptive
------------------
rights to subscribe for or to purchase any stock, obligations or other
securities of the Company.
Registrar and Transfer Agent. The Company's registrar and transfer agent is
----------------------------
Securities Transfer Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas
75248.
Dissenters' Rights. Under current Delaware law, a shareholder is afforded
-------------------
dissenters' rights which, if properly exercised, may require the Company to
purchase his shares. Dissenters' rights commonly arise in extraordinary
transactions such as mergers,
19
<PAGE>
consolidations, reorganizations, substantial asset sales, liquidating
distributions, and certain amendments to the Company's certificate of
incorporation.
The Warrants. As of July 31, 1997 the 78,500 outstanding Callable Common
------------
Stock Purchase Warrants expired. During April and May 1997 the Company received
$55,750 from the exercise of 11,500 Warrants.
Each Warrant is transferrable, but only to residents of the State of New
York or the District of Columbia and to "accredited investors" in the State of
Colorado, and entitles the record owner to purchase one share of the Company's
Common Stock for $5.00. The Warrants were originally to expire on April 30,
1997, but the expiration date was extended to July 31, 1997. The Company can
call in the Warrants on 15 days notice by issuing a written notice of call at
any time after the Company's Common Stock has traded at or above a $6.00 closing
bid or trade price for 10 consecutive trading days. Exercise of a Warrant is
effected by written notification of such exercise and delivery of the
$5.00-a-share exercise price either to the Company or to a member firm of the
National Association of Securities Dealers.
Preferred Stock. The Company is also authorized to issue 5 million shares
----------------
of Preferred Stock.
The Preferred Stock or any series thereof shall have such designations,
preferences and relative, participating, optional or special rights and
qualifications, limitations or restrictions thereof as shall be expressed in the
resolution or resolutions providing for the issue of such stock adopted by the
board of directors and may be made dependent upon facts ascertainable outside
such resolution or resolutions of the board of directors, provided that the
manner in which such facts shall operate upon such designations, preferences,
rights and qualifications, limitations or restrictions of such class or series
of stock is clearly and expressly set forth in the resolution or resolutions
providing for the issuance of such stock by the board of directors.
PART II
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Market Information. The Company's Common Stock trades on the NASD OTC
-------------------
Bulletin Board. Its symbol is TROY.
The range of high and low bid information for the Common Stock since
trading began in February 1997 through June 30, 1997 is as follows:
20
<PAGE>
1997 High Low
---- ---- ---
Feb. - June 6 3 1/2
The source of the above bid information is Quotran. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Holders. The approximate number of holders of record of the Common Stock is
-------
85.
Dividends. There have been no dividends declared on the Common Stock.
---------
Although there are no restrictions on the Company's ability to declare and pay
dividends (assuming earnings), the Company does not presently propose to pay
dividends but, rather, to employ any earnings for the acquisition of mineral or
royalty interests.
LEGAL PROCEEDINGS
Neither the Company nor its property is a party to any pending legal
proceeding, nor is the Company aware of any contemplated legal proceeding by any
governmental authority against either the Company or its property.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS
None.
RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company sold securities of the Company
without registering the securities under the Securities Act of 1933 as follows:
Regulation D, Rule 506 Offering. During late 1995 and early 1996 the
---------------------------------
Company sold shares of Common Stock to the Company's officers and directors,
other organizers of the Company, sellers of oil and gas interests, and oil and
gas investors. The number of shares sold for cash and for services are set forth
below. The type and amount of consideration received by the Company for services
is described in the footnotes. No underwriting commissions or discounts were
paid.
21
<PAGE>
The officers and directors receiving shares of common stock were James F.
Smith, Ben C. Burkett, II (resigned May 15, 1997), James E. Mitschke, J. Donald
Hill, George E. Green, Malcolm E. Wilson, Jr., Daniel M. Vines, Bill L. Bledsoe,
Douglas L. Weedon and Sammie Sharley-Smith. Non-director organizers receiving
shares for their services were Hamilton Richardson and Dale Morgan. Legal
counsel receiving shares was Thomas J. Kenan.
Class of No. of Total Cash Value of NonCash
Persons Shares Price Considerations
- -------- ------ ---------- --------------
Officers and 325,000(1) $3,000 $285
Directors
Other organizers 118,000(2) 0 $118
Securities
Law Counsel 40,000(3) 0 $40
Investors 5,000 $250 0
Sellers of oil
and gas properties
to Company 57,000(4) 0 $57,000
(1) Of these shares, 285,000 were sold in October 1995 to 10 officer- and
director-organizers of the Company for organizational services rendered
valued nominally at $0.001 a share, the par value of the stock.
(2) These shares were sold in October 1995 to two organizers of the Company for
organizational services rendered valued nominally at $0.001 a share, the
par value of the stock, which two organizers subsequently were not elected
directors or officers of the Company.
(3) These shares were sold in October 1995 to the Company's securities law
counsel for legal services rendered valued nominally at $0.001 a share, the
par value of the stock. This counsel later received an aggregate of
$9,177.60 in cash fees for legal services rendered.
(4) Of these shares, 30,000 were issued in July 1996 as part of the $230,000
purchase price of the Company's Basin Fruitland Coal Field
22
<PAGE>
properties in San Juan County, New Mexico. The 30,000 shares were valued at
$1 a share. Cash consideration of $200,000 was also paid in the purchase of
the properties. See "Description of Properties - Basin Fruitland Coal Field
- San Juan County, New Mexico." An additional 27,000 shares were issued in
August 1996 as part of the $157,000 purchase price of the Company's Alta
Mesa Gas Field properties in Brooks County, Texas and the North Wilton
Strawn Waterflood Unit property in Young County, Texas. The 27,000 shares
were valued at $1 a share. Cash consideration of $130,000 was also paid in
the purchase of the properties. See "Description of Properties - Alta Mesa
Gas Field Brooks County, Texas; North Wilton Strawn Waterflood Unit in
Young County, Texas."
There were no more than 35 "non-accredited investors" in the above group,
and all of the persons were deemed to be "sophisticated investors" by the
Company.
Regulation D, Rule 504 Offering. From July 1996 to November 1996, the
Company sold 90,000 units of securities for $450,000. Each unit was sold for
$5.00 and consisted of one share of Common Stock and one Callable Common Stock
Purchase Warrant (see "Description of Securities"). The units were sold in a
public offering conducted in the State of New York, the District of Columbia and
outside the U.S. to non-U.S. persons.
Costs incurred in connection with the stock offering included financial
public relations, legal, accounting, and printing costs totaling $60,089. No
commissions were paid.
There have been no sales of securities by the Company during the 12 months
preceding this offering that were made in reliance on Section 3(b) of the
Securities Act or in violation of Section 5 of the Securities Act. Should all
90,000 Callable Common Stock Purchase Warrants held by the purchasers of the
units be exercised, a total of $900,000 in securities will have been sold by the
Company in this offering conducted pursuant to the exemption from registration
provided by Regulation D, Rule 504.
INDEMNIFICATION OF DIRECTORS
AND OFFICERS
Pursuant to the General Corporation Law of the State of Delaware, under
most circumstances the Company's officers and directors may not be held liable
to the Company or its shareholders for errors in judgment or other acts or
omissions in the conduct of the Company's business unless such errors in
judgment, acts or omissions constitute fraud, gross negligence or malfeasance.
23
<PAGE>
FINANCIAL STATEMENTS
Set forth below are the audited financial statements of the Company as of
October 31, 1996 and for the fiscal year ended October 31, 1996 and the report
of Coopers & Lybrand L.L.P., independent accountants, with respect to such
financial statements, and the unaudited financial statements of the Company as
of April 30, 1997 and for the six month periods ended April 30, 1997 and 1996.
Index to Financial Statements Page
Report of Independent Accountants ..................................F-1
Balance Sheet as of October 31, 1996 ...............................F-2
Statement of Operations for the Year
Ended October 31, 1996 .............................................F-3
Statement of Stockholders' Equity for
the Year Ended October 31, 1996 ....................................F-4
Statement of Cash Flows for the Year
Ended October 31, 1996 .............................................F-5
Notes to Financial Statements ......................................F-6
Balance Sheet as of April 30, 1997 (unaudited) ....................F-10
Statements of Operations for the 6 month periods ended
April 30, 1996 and 1997 (unaudited)................................F-11
Statements of Cash Flows for the 6 month periods ended
April 30, 1996 and 1997 (unaudited) ...............................F-12
Notes to Unaudited Financial Statements ...........................F-13
24
<PAGE>
Report of Independent Accountants
To the Board of Directors
General American Royalty, Inc.:
We have audited the accompanying balance sheet of General American Royalty, Inc.
as of October 31, 1998 and the related statements of operations, stockholders'
equity and cash flows for the year then ended. 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 bases for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of General American Royalty, Inc.
as of October 31, 1996, and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1, the previously issued financial statements of General
American Royalty, Inc., as of and for the year ended October 31, 1996, have been
restated.
COOPERS & LYBRAND, L.L.P.
Dallas, Texas
November 30, 1996,
except as to the information
presented in Note 6, for which
the date is January 21, 1997
F-1
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
BALANCE SHEET
October 31, 1996
ASSETS
Current assets:
Cash $ 37,916
Accounts receivable, oil and gas 29,608
Accounts receivable-officers 3,135
Accounts receivable-other 1,650
Prepaid expenses 2,834
---------
Total current assets 75,143
Royalty interests in oil and gas properties,
less accumulated depletion of $21,381 545,815
Deferred financing costs, net of amortization of $83,846 25,154
Other assets, net of amortization of $100 3,929
---------
Total Assets $ 650,041
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,022
Accounts payable-shareholder 3,000
Notes payable to shareholder,
current portion 33,333
Total current liabilities 46,355
Notes payable to shareholder 136,667
Total liabilities 183,022
F-2
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
BALANCE SHEET
October 31, 1996
Stockholders' equity:
Common stock, $.001 par value, 20,000,000
shares authorized, 910,000 shares issued
and outstanding 910
Preferred stock, $.001 par value, 5,000,000
shares authorized, no shares issued or
outstanding -
Additional paid-in capital 598,219
Accumulated deficit (132,110)
--------
Total stockholders' equity 467,019
--------
Total liabilities and stockholders' equity $650,041
========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Revenues:
Oil and gas royalty income, net of severance
and valorem taxes $ 50,035
Cost and expenses:
General and administrative expense 71,814
Amortization of deferred financing costs 83,846
Depletion and amortization expense 21,481
Interest expense 5,004
---------
182,145
Net Loss $ (132,110)
========
Net loss per common share $ (0.17)
========
Weighted average number of common shares outstanding 766,356
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the year ended October 31, 1996
<TABLE>
<S> <C> <C> <C> <C>
Additional Total
Common Stock Paid - In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------------- ----------- ----------- -------------
Balance at October 31, 1995 - - - - -
Sale of common stock 763,000 $ 763 $ 42,455 - $ 43,218
Common stock issued for
oil and gas interests 57,000 57 56,943 - 57,000
Offering of common stock
and other warrants, net
of offering costs 90,000 90 498,821 - 498,911
Net loss - - - $ (132,110) (132,110)
------- ------ -------- ---------- --------
Balance at October 31, 1996 910,000 $,910 $598,219 $ (132,110) $467,019
======= === ======== ========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
For the year ended October 31, 1996
Cash flows from operating activities:
Net Loss $ (132,110)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion and amortization 21,481
Amortization of deferred financing costs 83,846
Increase in accounts receivable (34,393)
Increase in prepaid expenses ( 2,834)
Increase in accounts payable 13,022
Noncash payment of stock for services 508
Increase in other assets (4,029)
-------
Net cash used in operating activities (54,509)
-------
Cash flows from investing activities:
Purchase of royalty interests (510,196)
--------
Net cash used in investing activities (510,196)
--------
Cash flows from financing activities:
Issuance of common stock 432,621
Proceeds from borrowings 170,000
--------
Net cash provided by financing activities 602,621
--------
Net increase in cash 37,916
Cash at beginning of year -
-------
Cash at end of year $ 37,916
========
Non-cash financing activities:
Contribution of securities by shareholder $ 109,000
========
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
- ----------------------------------------------
General American Royalty, Inc. ("Company") was incorporated on December 28, 1992
in the state of Delaware as Hermes Capital Management, Inc. and was inactive
until it changed its name on October 23, 1995 to General American Royalty, Inc.
The Company is engaged in the business of acquiring and managing producing oil
and gas royalty, overriding royalty and mineral interests in Texas and New
Mexico.
Restatement of Accounts
- -----------------------
The previously filed October 31, 1996 financial statements included in the
Company's Form 10- SB have been restated to 1) increase additional paid-in
capital by $109,000 to reflect the value of common stock transferred to a lender
from the Company's president in connection with the completion of July 1996
financing by the Company and 2) increase the loss from operations for the year
ended October 31, 1996 by $83,846 in related financing expenses and 3) increase
deferred financing costs by $25,154 in connection with the transaction.
Royalty Interests in Oil and Gas Properties
- -------------------------------------------
Costs of acquiring interests in producing royalty interests, including
evaluation costs, are capitalized and depleted on a straight-line basis over a
period of ten years, since overall U.S. proved reserves are about eight to ten
times over all production. The Company owns a large number of interests whose
acquisition costs are not individually significant. The Company annually reviews
significant properties for impairment comparing estimated future cash flows to
the carrying amount of the asset. If impairment is indicated, the asset is
written down to its fair value based upon its expected future discounted cash
flows.
Income Taxes
- ------------
The Company follows Statement of Financial Standards No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities based on the difference between the financial statement and the tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
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.
F-7
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Notes Payable:
- -----------------
The Company has $170,000 in notes payable, bearing interest at 12%, that are due
on November 30, 1996. Notes are collateralized by mortgages and deeds of trust
on certain oil and gas royalty and mineral interests and by life insurance
policies covering the president of the Company (see Note 6).
In connection with the $170,000 of notes payable, the Company's president
transferred 110,000 shares of his benefically owned common stock to the lender
at closing in July 1996. The Company has recorded $109,000 as contributed
capital for the value of the shares transferred and recognized the entire amount
as deferred financing costs. For the year ended October 31, 1996, $83,846 of
this amount has been charged to operations.
3. Related Party Transactions:
- ------------------------------
As of October 31, 1996 the Company has accounts receivable for travel advances
due from one officer of approximately $3,100 and a payable to one shareholder of
$3,000.
4. Equity Transactions:
- -----------------------
The Company closed its initial offering of common stock and warrants on October
31, 1996. The offering consisted of the sale of 90,000 units at $5.00 per unit.
Each unit consisted of one share of common stock ($.001 par value) and one stock
purchase warrant entitling the holder to one share of common stock of the
Company at a purchase price of $5.00. The Company can call in the warrants on 15
days notice, if not exercised by the holder prior to the expiration of a 15-day
notice period, should the Company's common stock trade at or above $6.00
reported closing bid or trade price for 10 consecutive trading days. Costs
incurred in connection with the stock offering totaling $60,089 have been
recorded as a reduction of additional paid-in capital. The warrants expire on
April 30, 1997.
The Company purchased two royalty interests for cash and 57,000 shares of common
stock valued at $1.00 per share.
5. Income Taxes:
- ----------------
A reconciliation of income tax benefit computed at the federal statutory rate
and the Company's income tax provision of $0 for the year ended October 31, 1996
is as follows:
F-8
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
Pretax loss at statutory rate $(16,410)
State taxes (1,158)
Meals and entertainment 1,024
Key man life insurance 131
--------
Deferred tax asset valuation allowance $16,413
========
The Company's deferred income tax balance at October 31, 1996 consisted of the
following:
Deferred tax assets:
Net operating loss carryforward $ 16,413
Valuation allowance (16,413)
--------
Net deferred income tax asset $ 0
========
The Company has a net operating loss carryforward of approximately $48,000,
which will expire in 2011. None of the benefit of the net operating loss has
been recognized in the financial statements.
6. Subsequent Event:
- --------------------
On January 21, 1997, the Company entered into a $200,000 financing arrangement
with State Bank & Trust Company, Dallas. The Company has collateralized the loan
with mortgages and deeds of trust on certain royalty interests in oil and gas
properties.
The loan is payable in monthly installments of $6,667 commencing June 21, 1997
and a final payment of unpaid principal on January 21, 1998, and bears interest
at a fluctuating rate per annum equal to 2% in excess of the corporate prime
rate of interest published in the Wall Street Journal. Interest is payable
monthly commencing on February 21, 1997.
The majority of the loan proceeds will be used to repay the shareholder notes
payable of $170,000 (see Note 2).
Management anticipates that the remainder of the loan proceeds combined with
monthly royalty income amounts and proceeds from exercises of stock purchase
warrants, will be sufficient to meet its operating requirement.
F-9
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
7. Supplemental Oil and Gas Information(Unaudited):
- ---------------------------------------------------
Reserve Quantities
- ------------------
Information regarding estimates of the proved oil and gas reserves attributable
to the Company are based on reports prepared by J.W. Cunningham, Inc. and John
Burns, independent petroleum engineering consultants. Estimates were prepared in
accordance with Statement of Financial Accounting Standards No. 69 and the
guidelines established by the Securities and Exchange Commission Rule 4-10(a) of
Regulation S-X, using prices and costs as of the day of the estimates.
Oil and gas reserve quantities (all located in the United States) are estimates
based on information available at the time of their preparation. Such estimates
are subject to change as additional information becomes available. Reserves
actually recovered, and the timing of production of those reserves, may differ
substantially from original estimates.
Estimated quantities of proved developed reserves of oil and gas as of
October 31, 1996 were as follows:
Oil(barrels) 11,000
======
Gas (Mcf) 422,000
=======
F-10
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
BALANCE SHEET
April 30,
1997 October 31,
ASSETS (Unaudited) 1996
----------- -----------
Current assets:
Cash $ 14,301 $ 37,916
Accounts receivable-oil & gas 25,998 29,608
Accounts receivable-officers 5,070 3,135
Accounts receivable-other 1,650 1,650
Prepaid expenses 6,330 2,834
------- --------
53,349 75,143
------- --------
Equipment, less accumulated depreciation of $142 984 -
Royalty interest in oil and gas properties, less
accumulated depletion of $49,741 & $21,381 517,455 545,815
Deferred financing, net of amortization of $83,846 - 25,154
Other assets, net of amortization of $125 & $100 4,085 3,929
------- --------
Total Assets $ 575,873 $ 650,041
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,934 $ 10,022
Accounts payable-shareholder - 3,000
Note payable 200,000 33,333
------- --------
233,934 46,355
------- --------
Notes payable to shareholder - 136,667
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized,
916,500 & 910,000 outstanding 917 910
Preferred stock, $.001 par value,
4,000,000 shares authorized,
no shares issued or outstanding - -
Additional paid-in capital 630,212 598,219
Accumulated deficit (289,190) (132,110)
-------- ---------
Total stockholders' equity 341,939 467,019
-------- ---------
Total liabilities and stockholders' equity $ 575,873 $ 650,041
======== =========
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
April 30, April 30,
1997 1996 1997 1996
--------- --------- ---------- --------
Revenues:
Oil and gas royalty income, net of
severance and ad valorem taxes $ 47,755 $ 3,473 $ 93,105 $ 3,473
-------- -------- --------- -------
Costs and expenses:
General and administrative 102,097 13,245 186,219 22,661
Amortization of deferred
financing costs - - 25,154 -
Depletion, depreciation and
amortization 14,299 1,342 28,552 1,367
Interest Expense 5,118 - 10,260 -
-------- --------- --------- -------
Total costs and expenses 121,514 14,587 250,185 24,028
--------- -------- --------- -------
Net loss $ (73,759) $ (11,114) $(157,080) $(20,555)
========= ======== ========= =======
Net loss per common share $ (.08) $ (.01) $ (.17) $ (.03)
======== ======== ========= =======
Weighted average number of
common shares outstanding 911,055 760,160 910,505 746,310
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended April 30, 1997
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional Total
Common Stock Paid - In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ---------- ----------- ------------
Balance at October 31,
1996 910,000 $ 910 $ 598,219 $ (132,110) $ 467,019
Exercise of common stock
purchase warrants, net
of costs 6,500 7 31,993 - 32,000
Net loss - - - (157,080) (157,080)
------- ------ --------- ---------- ---------
Balance at April 30,
1996 916,500 $ 917 $ 630,212 $ (289,190) $ 341,939
======= ===== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
(Unaudited)
Six Months Ended
April 30,
1997 1996
-------- --------
Cash flows from operating activities:
Net loss $(157,080) $(20,555)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depletion, depreciation and
amortization 28,552 1,367
Amortization of deferred financing costs 25,154 -
Decrease (increase) in accounts receivable 1,675 (3,823)
Increase in prepaid expe (3,497) (1,500)
Noncash payment of stock for
services - 508
Increase in accounts payable 20,912 2,666
Increase in other assets (206) (5,554)
---------- ---------
Net cash used in operating activities (84,490) (26,891)
Cash flows from investing activities:
Purchase of equipment (1,125) -
Purchase of royalty and mineral interests - (158,000)
---------- ---------
Net cash used in investing activities (1,125) (158,000)
Cash flows from financing activities:
Issuance of common stock 32,000 42,710
Proceeds from borrowings 200,000 157,000
Payments on borrowings (170,000) -
---------- --------
Net cash provided by financing activities 62,000 199,710
---------- --------
Net decrease in cash (23,615) 14,819
Cash at beginning of period 37,916 -
---------- --------
Cash at end of period $ 14,301 $ 14,819
========= =======
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited financial statements reflect the financial position
as of April 30, 1997 and the results of operations and cash flows of General
American Royalty, Inc. ("Company") for the three and six month periods ended
April 30, 1997. The financial statements have been prepared in conformity with
generally accepted accounting principles and contain such adjustments as
management feels are necessary to present fairly, in all material aspects, the
financial position and results of operations of the Company.
1. Summary of Significant Accounting Policies:
- ----------------------------------------------
The Company was incorporated on December 28, 1992 in the state of Delaware as
Hermes Capital Management, Inc. and was inactive until it changed its name on
October 23, 1995 to General American Royalty, Inc. The Company is engaged in the
business of acquiring and managing producing oil and gas royalty, overriding
royalty and mineral interests in Texas and New Mexico.
Restatement of Accounts
- -----------------------
The previously filed January 31, 1997 financial statements included in the
Company's Form 10- SB have been restated to 1) increase additional paid-in
capital by $109,000 to reflect the value of common stock transferred to a lender
from the Company's president in connection with the completion of July 1996
financing by the Company and 2) increase the loss from operations for the three
months ended January 31, 1997 by $25,154 in related financing expenses and 3)
increase accumulated deficit as of October 31, 1996 by $83,846 in connection
with the transaction.
Royalty Interests in Oil and Gas Properties
- -------------------------------------------
Costs of acquiring interests in producing royalty interests, including
evaluation costs, are capitalized and depleted on a straight-line basis over a
period of ten years, since overall U.S. proved reserves are about eight to ten
times over all production. The Company owns a large number of interests whose
acquisition costs are not individually significant. The Company annually reviews
significant properties for impairment comparing estimated future cash flows to
the carrying amount of the asset. If impairment is indicated, the asset is
written down to its fair value based upon its expected future discounted cash
flows.
Income Taxes
- ------------
The Company follows Statement of Financial Standards No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities based on the
F-15
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
Income Taxes
- ------------
The Company follows Statement of Financial Standards No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities based on the difference between the financial statement and the tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
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.
2. Note Payable
- ---------------
As of April 30, 1997 the Company had a $200,000 note payable to State Bank &
Trust Company, Dallas. The loan was collateralized with mortgages and deeds of
trust on certain royalty interests in oil and gas properties owned by the
Company.
The loan required monthly installments of $6,667 commencing June 21, 1997 and a
final payment of unpaid principal on January 21, 1998, plus monthly interest at
a fluctuating rate per annum equal to 2% in excess of the corporate rate of
interest published in the Wall Street Journal. The loan was repaid in June 1997
(see Note 6).
3. Stockholders' Equity
- -----------------------
As of April 30, 1997, 6,500 of the 90,000 outstanding common stock purchase
warrants were exercised. The net proceeds to the Company from the exercise of
these warrants was $32,000. Subsequent to April 30, 1997 an additional 5,000
warrants were exercised that netted $25,000 in additional equity capital. The
remaining 78,500 warrants expired on July 31, 1997.
4. Related Party Transactions
- -----------------------------
As of April 30, 1997, the Company has accounts receivable for travel advances
due from one officer of approximately $5.070.
F-16
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
5. Income Taxes
- ---------------
The company has net loss carry forwards which will begin to expire in 2011. None
of the benefit of the net operating loss has been recognized in the financial
statements.
6. Subsequent Event
- -------------------
On June 20, 1997, the Company entered into a $300,000 financing agreement with
Eagle Equity Oil & Gas, L.P., a Dallas based lender and a shareholder of the
Company. The Company has collateralized the loan with mortgages and deeds of
trust on certain royalty interests in oil and gas properties, a personal
guarantee by James F. Smith, President of the Company and a term life insurance
policy on Mr. Smith for $300,000.
The full principal amount of $300,000 plus any unpaid accrued interest is
payable on December 31, 1997, and bears interest at a rate of 14% per annum.
Interest is payable monthly commencing on July 20, 1997.
7. Year-end Balance Sheet
- -------------------------
The year-end condensed balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
F-17
<PAGE>
EXHIBITS
Index to Exhibits. The following exhibits are included as part of this
registration statement:
Exhibit Number Description of Exhibit
10 Consent of Coopers & Lybrand
L.L.P.
27 Financial Data Schedule
SIGNATURES
In accordance with Section 12 of the Securities Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENERAL AMERICAN ROYALTY, INC.
August 12, 1997 By: /s/ James F. Smith
------------------------
James F. Smith, President
<PAGE>
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form 10-SB of our
report dated November 10, 1996, except as to the information presented in Note
6, for which the date is January 21, 1997, on our audit of the financial
statements of General American Royalty, Inc.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 26, 1997
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This Schedule contains Summary Financial Information
extracted from October 31, 1996 Financial Statements and
is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<CIK> 0001014491
<NAME> General American Royalty, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1997
<CASH> 37,916
<SECURITIES> 0
<RECEIVABLES> 31,258
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 75,143
<PP&E> 567,196
<DEPRECIATION> 21,381
<TOTAL-ASSETS> 650,041
<CURRENT-LIABILITIES> 46,355
<BONDS> 0
0
0
<COMMON> 910
<OTHER-SE> 466,109
<TOTAL-LIABILITY-AND-EQUITY> 650,041
<SALES> 50,035
<TOTAL-REVENUES> 50,035
<CGS> 0
<TOTAL-COSTS> 93,295
<OTHER-EXPENSES> 83,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,004
<INCOME-PRETAX> (132,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (132,110)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
