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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 1998
Commission file number: 0-21313
PONTOTOC PRODUCTION, INC.
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(Name of small business issuer in its Charter)
Nevada 84-1349552
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
808 East Main, Ada, Oklahoma 74820
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(Address of principal executive offices, including zip code)
(580) 436-6100
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(Issuer's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if disclosure of delinquent filers pursuant 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. [ ]
The Issuer's revenues for its most recent fiscal year were $1,839,483.
As of June 22, 1998, 3,807,164 shares of the Registrant's common stock were
outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $5,200,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format (check one): Yes __ No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Pontotoc Production, Inc. (the "Company") was incorporated under the laws
of the State of Nevada on July 1, 1996, under the name Mahogany Capital, Inc.
for the purpose of completing a merger or acquisition with a private entity.
In September 1996, the Company filed a registration statement with the
Securities and Exchange Commission on Form 10-SB, wherein it registered its
common stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "34 Act"). As a result, the Company became a fully reporting
company under the 34 Act.
On December 10, 1997, the Company completed a reverse acquisition of 100%
of the outstanding common stock of Pontotoc Production Company, Inc., a Texas
corporation ("PPCI") in exchange for 3,165,000 shares of the Company's Common
Stock which resulted in the shareholders of PPCI acquiring approximately 84.4%
of the shares outstanding in the Company. In connection with the closing of
this transaction, several shareholders submitted for cancellation a total of
665,000 shares of common stock. As a result, after the acquisition of PPCI
there were a total of 3,750,000 shares outstanding.
On December 12, 1997, the Company's shareholders approved a proposal to
change the Company's name to Pontotoc Production, Inc.
Unless the context otherwise requires, the term "Company" as used herein
refers to the Company and its wholly-owned subsidiary, PPCI. PPCI was
incorporated in Texas on January 21, 1985.
DESCRIPTION OF BUSINESS
GENERAL
The Company is engaged in the exploration for and the acquisition,
development and production of oil and natural gas. The Company focuses on low
risk, shallow oil and gas properties in the State of Oklahoma. For the last
several years, the Company has been the most active driller of new wells in
south-central Oklahoma. Since its inception in 1985, the Company's subsidiary
has drilled in excess of 85 wells. Through drilling and acquisition, the
Company's estimated proved reserves have reached 1,526,072 barrels of oil and
478,371 mcf of gas with a present value of approximately $7,190,048 as of
March 31, 1998.
OIL AND GAS OPERATIONS
The Company's operations are conducted in the State of Oklahoma where the
Company owns producing and non-producing property interests in eight counties.
The Company's staff oversees the operations of existing properties, evaluates
property acquisition opportunities and drilling prospects, and oversees
drilling and completion of new wells. Operations are concentrated on shallow
to medium depth properties generally ranging from 1,500 to 5,000 feet. The
funds necessary for acquisition, exploration and development of properties are
generated through cash flow and bank debt.
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The Company acts as "operator" of 105 wells pursuant to standard industry
Operating Agreements.
MARKETS AND CUSTOMERS
Marketing of the Company's oil and gas production is influenced by many
factors which are beyond the Company's control and the exact effect of which
cannot be accurately predicted. These factors include changes in supply and
demand, changes in market prices, regulatory changes, and actions of major
foreign producers.
The Company sells its oil production to Sun Oil Co. (SUNOCO) at the
monthly New York Mercantile Exchange average less $.33. Crude oil and
condensate production are readily marketable. Crude oil is cost efficiently
transportable from production centers to demand centers and is, therefore,
subject to world-wide supply and demand. Oil prices are primarily dependent
upon available oil supplies which can vary significantly depending on
production and pricing policies of OPEC and other major producing countries
and on significant events in major producing regions such as the Persian Gulf
War in 1991.
Deregulation of natural gas pricing and transportation have resulted in
far-reaching and fundamental changes in the producing, transportation and
marketing segments of the natural gas industry. Gas price decontrol and the
advent of an active spot market for natural gas have resulted in prices
received by the Company being subject to significant fluctuations. Prices
tend to rise in peak demand periods such as fall and winter and to decline
during lower demand periods. The Company presently sells most of its gas
through short-term contracts with terms of one year or less which are designed
to obtain the best available prices and deliverabilities. Virtually all of
the Company's gas contracts provide for prices based on monthly spot prices
for the applicable market area. These prices are reduced ("netted") by the
costs of gathering and transporting the gas.
The Company periodically hedges the price of a portion of its crude oil
production by forward selling in the futures markets.
COMPETITION AND REGULATION
The oil and gas industry is intensely competitive. The Company competes
with larger more well established oil and gas companies including, on
occasion, major companies. The significant areas of competition are in
acquiring oil and gas reserves, acquiring leases for drilling or development,
and selling natural gas. The primary competitive factors for acquisitions are
the price the Company is willing to pay and the financial resources readily
available to the Company to fund acquisitions. The primary factors which
affect the Company's ability to sell its natural gas include proximity to
markets, proximity to and capacity of natural gas pipelines and transportation
and processing facilities, and quantities of gas which can be aggregated for
sale. Although both oil and gas are generally readily saleable at market
prices, they compete for market share with each other and with other energy
sources such as coal and nuclear power.
Oil and gas drilling and production operations are regulated by various
Federal, state and local agencies. These agencies issue binding rules and
regulations which increase the Company's cost of doing business and which
carry penalties, often substantial, for failure to comply. It is anticipated
that the aggregate burden on the Company of Federal, state and local
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regulation will continue to increase particularly in the area of rapidly
changing environmental laws and regulations. The Company believes that its
present operations substantially comply with applicable regulations. To date,
such regulations have not had a material effect on the Company's operations,
or the costs thereof. There are no known environmental or other regulatory
matters related to the Company's operations which are reasonably expected to
result in material liability to the Company. The Company does not believe
that capital expenditures related to environmental control facilities or other
regulatory matters will be material in fiscal 1998.
No prediction can be made as to what legislation or regulations may be
enacted or what additional legislation or regulations may be proposed.
EMPLOYEES
The Company currently has 12 employees. The Company is not subject to
any collective bargaining agreement and believes that its relationship with
its employees are good.
RISK FACTORS
Shareholders and investors in shares of the Company's Common Stock should
consider the following Risk Factors, in addition to other information in this
Report.
1. SUCCESS DEPENDENT ON MANAGEMENT. Success of the Company depends on
the active participation of James "Robby" Robson, Jr., the Company's
President. The Company does not have an employment agreement with Mr. Robson
and the Company has no "key man" life insurance on Mr. Robson. The loss of
the services of Mr. Robson would adversely affect the Company's business.
2. COMPETITION. The Company is in an industry characterized by intense
competition. As a result of the Company's small size, the Company is not a
significant factor in the oil and gas exploration and drilling industry. Many
of the Company's competitors are well established, have been in existence for
significantly longer periods of time than the Company, have financial,
marketing, and other personnel as well as other resources substantially
greater than the Company. (See "COMPETITION AND REGULATION.")
3. DECLINE IN PRICE OF OIL. The price of crude oil fell more than 34%
between December 1997 and June 1998, with the average price per barrel of oil
falling to less than $12.00. Although crude oil prices have improved
somewhat, there can be no assurance that such prices will return to
past levels or will not drop further.
4. TITLE TO FUTURE ACQUIRED PROPERTIES. Any interests which the
Company may acquire in undeveloped and non-producing acreage may be in the
form of direct interests in leases, options, or permits with respect to such
acreage. While the Company will attempt to acquire satisfactory title to such
oil and gas properties, title opinions may not be obtained prior to the time
of acquisition, with the attendant risk that some titles may be defective.
Under such circumstances, future expenditures may be incurred by the Company
for title work or some leasehold properties may be abandoned. In addition,
such leasehold interests may be subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens,
minor encumbrances, easements and restrictions, any of which may subject the
Company to future undetermined expenses.
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5. SPECULATIVE NATURE OF OIL AND GAS EXPLORATION. Oil and gas
exploration is highly speculative in nature, involves many risks, and
frequently results in unproductive properties. These risks are significantly
higher for exploratory wells. Therefore, there can be no assurance that the
oil and gas exploration and/or development activities of the Company will be
successful, or that any future production will be profitable.
6. OPERATING HAZARDS AND UNINSURED RISKS. Operations will be subject to
all of the risks normally incident to exploration for and production of oil
and gas, including blowouts, explosions and fires, seepage, and pollution,
each of which could result in damage to or destruction of oil and gas wells or
producing facilities, damage to life and property, environmental damage and
possible legal liability for any or all of such damages.
7. COMPETITION FOR SUITABLE PROPERTIES. There exists substantial
competition in the market for properties suitable for oil and gas exploration.
Established companies may have an advantage over the Company because of
substantially greater resources in terms of number of personnel, finances and
access to technical data to devote to the acquisition of properties. There
can be no assurance that properties can be obtained or that exploratory work
on any properties acquired in the future will result in commercially
producible reserves, or that any additional properties can be acquired
economically.
8. GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONTROLS. Activities of
the Company are subject to extensive federal, state and local laws and
regulations controlling not only the exploration for oil and gas, but also the
possible effects of such activities upon the environment. Existing as well as
future legislation and regulations could cause additional expense, capital
expenditures, restrictions and delays in the development of properties, the
extent of which cannot be predicted.
9. CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS. Management and
principal shareholders beneficially own over 68% of the outstanding Common
Stock. (See Item 11.)
10. NO ASSURANCE OF TRADING MARKET FOR COMMON STOCK. The Company's
Common Stock commenced trading in the over-the-counter market during February
1998. There has been only limited trading in the Company's Common Stock, and
there can be no assurance that the trading volume will increase. Any trading
is expected to be conducted in the over-the-counter market. Only six market
makers are currently making quotations on the "OTC Bulletin Board" of the
National Association of Securities Dealers, Inc. An investor may find it
difficult to dispose of, or to obtain accurate quotations as to the price of
the Common Stock.
11. DIFFICULTY OF TRADING "PENNY STOCKS." The Company's securities are
subject to a rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers (as defined in the rule) and accredited investors (generally,
institutions and, for individuals, an investor with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with such
investor's spouse). For transactions covered by this rule, the broker-dealer
must make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the
purchase. Consequently, the rule may restrict the ability of broker-dealers
to sell the securities and may affect the ability of shareholders to sell
their Common Stock in the secondary market.
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12. GENERIC PREFERRED STOCK AUTHORIZED. The Company's Articles of
Incorporation authorize the issuance of up to 5,000,000 shares of Preferred
Stock, the terms, preferences, rights and restrictions of which may be
established by its Board of Directors. Other companies on occasion have
issued series of such preferred stock with terms, rights, preferences and
restrictions that could be considered to discourage other persons from
attempting to acquire control of such companies and thereby insulate incumbent
management. It is possible the Company could issue shares of its Preferred
Stock for such a purpose. In certain circumstances, the existence of
corporate devices which would inhibit or discourage takeover attempts could
have a depressant effect on the market value of the stock of a company. The
Board of Directors has no current plans to issue any shares of Preferred
Stock. (See "DESCRIPTION OF SECURITIES.")
13. NO DIVIDENDS. The Company has paid no dividends on its Common Stock
since incorporation. The Company does not anticipate paying dividends on its
Common Stock in the foreseeable future and intends to devote any earnings to
the development of the Company's business.
14. COMMON STOCK ELIGIBLE FOR RESALE. Of the 3,807,164 shares of Common
Stock presently outstanding, approximately 3,482,753 shares are "restricted
securities" and under certain circumstances may be sold in compliance with
Rule 144 adopted under the Securities Act of 1933, as amended. Approximately
317,753 shares of Common Stock are currently eligible for resale under Rule
144. The remaining 3,165,000 shares will be eligible for resale beginning in
December 1998 under Rule 144 as currently in effect. Future sales of such
shares will in all likelihood depress the market price of the Company's Common
Stock.
ITEM 2. DESCRIPTION OF PROPERTY.
GENERAL
During the year ended March 31, 1998, the Company drilled seven wells
owning an average of 95% interest in each. Seven wells have been successfully
completed. In addition, the Company installed a waterflood in south central
Oklahoma which is in the initial stages of responding. Peak production is
expected in 18 to 20 months. The Company also expanded its producing property
by purchasing 100% interest in 20 wells located in Okmulgee and Creek County,
Oklahoma. Capital expenditures for oil and gas activities totaled $694,903 in
the year ended March 31, 1998.
During the year ended March 31, 1997, the Company drilled and made new
zone completions on fourteen wells of which twelve were successful oil wells.
One was made into an injection well and one was a dry hole. The Company also
purchased additional interests in twenty-five wells it operated and of which
it was a majority interest owner. Capital expenditures for oil and gas
activities totaled $842,928 in the year ended March 31, 1997.
During the year ended March 31, 1996, the Company drilled and made new
zone completions on eighteen wells in Pontotoc County, Oklahoma of which all
eighteen wells were successful. Total expenditures for oil and gas activities
was $1,255,626 the year ended March 31, 1996.
At March 31, 1998, the value of the Company's estimated reserves were
represented by 47 properties located in four Oklahoma counties.
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ESTIMATED PROVED OIL AND GAS RESERVES AND FUTURE NET REVENUES
In March 1998, Fletcher Lewis Engineering, an independent petroleum
engineering firm, estimated proved reserves for the Company's properties which
represented 81% of the total estimated future value of estimated reserves.
Remaining reserves were estimated to represent 19%. At March 31, 1998, oil
represented 81% and natural gas represented 19% of total reserves denominated
in equivalent barrels using a six Mcf of gas to one barrel of oil conversion
ratio.
The following table sets forth, as of March 31, 1998, information
regarding the Company's proved reserves. The average price used to calculate
estimated future net revenues was $16.50 per barrel held constant for oil and
$2.21 per Mcf for gas as of March 31, 1998. Amounts do not include estimates
of future Federal and state income taxes.
ESTIMATED FUTURE
NET OIL NET GAS FUTURE NET REVENUES
(BBLS) (MCF) NET REVENUES DISCOUNTED AT 10%
------- ------- ------------ -----------------
Proved Developed
Producing 612,713 356,772 $ 6,691,105 $ 4,783,638
Behind-Pipe 353,421 121,599 4,919,498 2,657,622
Proved Undeveloped 559,938 0 7,095,953 3,316,252
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Total 1,526,072 478,371 $18,706,556 $10,757,512
PRODUCTION, AVERAGE SALES PRICES AND AVERAGE PRODUCTION COSTS
The Company's net production quantities and average sales price per unit
for the indicated years are set forth below.
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
--------------- ---------------- ---------------
PRODUCT VOLUME PRICE VOLUME PRICE VOLUME PRICE
- ------- ------ ------ ------ ------ ------ ------
Gas (Mcf) 47,077 $ 1.74 45,660 $ 1.96 34,200 $ 2.04
Oil (bbls) 84,870 $19.45 47,007 $21.91 24,545 $17.45
Average production costs, including production taxes, per unit of
production (using a six to one conversion ratio of Mcfs to barrels) were
$5.49, $6.83 and $5.28 per barrel in the years ended March 31, 1998, 1997 and
1996, respectively.
PRODUCTIVE WELLS AND DEVELOPED ACREAGE
Developed acreage at March 31, 1998, totaled 3,800 net and 4,400 gross
acres. At March 31, 1998, the Company owned working interests in 78.85 net
(95 gross) oil wells and 8.3 net (10 gross) gas wells. In addition, the
Company owned royalty and production payment interests in approximately 25 oil
and gas wells.
UNDEVELOPED ACREAGE
As of March 31, 1998, the Company had no undeveloped acreage. It does
have undrilled acreage held by production.
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DRILLING AND NEW ZONE RECOMPLETIONS
The following tables set forth the number of gross and net oil and gas
wells in which the Company has participated in drilling or new zone
recompletions and the results thereof for the periods indicated.
GROSS WELLS
EXPLORATORY DEVELOPMENT
YEAR ENDED TOTAL GROSS ------------------- -----------------
MARCH 31, WELLS OIL GAS DRY OIL GAS DRY
- ----------- ----------- --- --- --- --- --- ---
1998 7 0 0 0 7 0 0
1997 14 0 0 0 12 0 2
1996 18 0 0 0 16 2 0
1985-1995 50 3 1 6 30 5 5
-- - - - -- - -
89 3 1 6 65 7 7
NET WELLS
EXPLORATORY DEVELOPMENT
YEAR ENDED TOTAL NET ------------------- -----------------
MARCH 31, WELLS OIL GAS DRY OIL GAS DRY
- ----------- ---------- --- --- --- --- --- ---
1998 5.80 0 0 0 5.80 0 0
1997 11.60 0 0 0 9.96 0 1.66
1996 14.94 0 0 0 13.28 1.66 0
1985-1995 41.50 2.49 0.83 3.32 26.56 4.15 4.15
----- ---- ---- ---- ----- ---- ----
73.84 2.49 0.83 3.32 55.60 5.81 5.81
PRESENT ACTIVITIES
On December 9, 1997, the Company signed an agreement to purchase certain
oil and gas properties from Bill G. Cantrell and American Energy, Inc.
("Cantrell"), and on April 1, 1998, the agreement was amended. The agreement,
as amended, provides that on or before July 9, 1998, the Company will purchase
from Cantrell certain producing oil and gas properties in exchange for a total
of $2,750,000 in cash and 402,360 shares of the Company's Common Stock. The
Company paid $50,000 of the cash and issued 20,000 shares of Common Stock on
the signing of the amendment. The agreement also provides that if the average
oil and gas equivalent production is less than 290 barrels per day during the
15 days prior to closing, the purchase price will be reduced proportionately.
Mr. Cantrell will be added to the Company's Board of Directors on the closing
of this transaction.
OFFICE LEASE
The Company currently leases approximately 4,500 square feet of office
space for its offices at 808 East Main, Ada, Oklahoma 74820. The space is
based on a month-to-month basis at a cost of $1,000 per month from an entity
which is partially owned by the families of Todd Robson and James Robson, Sr.
The Company believes that these offices are suitable and adequate to meet its
present and anticipated needs.
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ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings in which the Company is a party,
and the Company is not aware of any threatened legal proceedings involving the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. The Company's Common Stock trades in the
over-the-counter market, under the symbol "PNTU". Trading commenced during
February 1998. The following table sets forth the high and low bid prices for
the Company's Common Stock for the periods indicated as reported by the OTC
Bulletin Board. These prices are believed to be inter-dealer quotations and do
not include retail mark-ups, mark-downs, or other fees or commissions, and may
not necessarily represent actual transactions.
QUARTER ENDED HIGH BID LOW BID
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February 24, 1998 through
March 31, 1998 $2.25 $2.125
April 1, 1998 through June 25,
1998 $4.50 $2.1875
(b) HOLDERS. As of June 22, 1998, the Company had 55 shareholders of
record. This does not include shareholders who hold stock in their accounts
at broker/dealers.
(c) DIVIDENDS. The Company has never paid a cash dividend on its common
stock and does not expect to pay a cash dividend in the foreseeable future.
(d) RECENT SALES OF UNREGISTERED SECURITIES. None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
This Report contains forward-looking statements that involve a number of
risks and uncertainties. While these statements represent the Company's
current judgment in the future direction of the business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested herein. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements which may be made to reflect events of circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Certain factors
that could cause results to differ materially from those projected in the
forward-looking statements are set forth under "RISK FACTORS" in Item 1.
YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR ENDED MARCH 31, 1997
Operating revenues for the year ended March 31, 1998, increased $623,382
(51%) from the prior year due primarily to acquisitions and re-completions.
Production costs for the year ended March 31, 1998, increased $410,831
(110%) due to development of oil and gas properties and higher production
taxes due to increased production.
Depreciation, depletion and amortization costs for the year ended March
31, 1998, rose $75,618 (95%) as compared to the prior year due to the addition
of equipment and oil and gas properties. General and administrative costs
increased $141,442 (64%) due to increased accounting, engineering and legal
costs associated with property acquisitions.
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CAPITAL RESOURCES AND LIQUIDITY
The Company's working capital was $210,221 at March 31, 1998, as compared
to $96,105 at March 31, 1997. The increase in working capital is primarily
due to the net income for the year.
During the year ended March 31, 1998, cash generated by operating
activities was $641,487 compared to cash generated of $423,004 for the year
ended March 31, 1997. The increase in the amount of cash generated was
primarily due to the $13,927 increase in net earnings, an increase in
depreciation, depletion and amortization of $75,618, and a $183,472 reduction
in accounts receivable. These increases were partially offset by a decrease
in accounts payable and a decrease in deferred income taxes.
Cash used in investing activities during the year ended March 31, 1998
was $(687,073) compared to $(661,301) for the prior year. The Company paid
$678,606 toward the purchase of oil and gas properties during the year ended
March 31, 1998.
Cash provided by financing activities during the year ended March 31,
1998, was $47,419 compared to $302,741 during the prior year. The Company
borrowed a total of $938,033 during the year and repaid $890,614 towards its
loans.
The Company does not have any material commitments for capital
expenditures as of the filing of this Report except that the Company plans to
close on the acquisition of certain oil and gas properties from Bill Cantrell
on July 1, 1998. The purchase price is $2,750,000 in cash and 402,360 shares
of the Company's Common Stock. The Company is currently conducting a private
placement of Common Stock and Warrants with a $650,000 minimum and a
$1,950,000 maximum. The Company intends to use the proceeds from this
offering and the Company's line of credit to finance the acquisition. The
Company has a $3,000,000 line of credit with an in-state bank, and as of March
31, 1998, the available credit was approximately $2,531,377. Interest on the
line of credit is New York prime and the loan is secured by certain of the
Company's oil and gas properties.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are set forth on pages F-1 through F-15 hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company and its wholly-owned
subsidiary, their ages and positions held in the Company are as follows:
NAME AGE POSITIONS HELD AND TENURE
---- --- -------------------------
James "Robby" Robson, Jr. 39 President, Chief Executive Officer and
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Director
Todd Robson 35 Vice President, Secretary, Treasurer
and Director
James Robson, Sr. 59 Vice President and Director
Brian K. Gourley 36 Director
There is no family relationship between any Director or Executive Officer
of the Company except that James Robby Robson, Jr. and Todd Robson are
brothers and their father is James Robson, Sr.
The Company presently has no committees.
Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:
JAMES "ROBBY" ROBSON, JR. - President, Chief Executive Officer and
Director. Mr. Robson has served as the President, Chief Executive Officer and
a Director of the Company since December 1997, and has held these same
positions with Pontotoc Production Company, Inc., the Company's wholly-owned
subsidiary, since January 1987. From January 1985 through January 1987, he
worked as a consultant for Pontotoc Production Company, Inc. From April 1982
until January 1985, he served as the President of Robco Oil Co. From August
1981 until March 1982 he served as Vice President of Marketing for Daner Oil
Co., Inc. From March 1981 until August 1981, he was a free agent running back
with the Pittsburgh Steelers. Mr. Robson attended Youngstown State University
from 1977 until 1981.
TODD ROBSON - Vice President, Secretary, Treasurer and Director. Mr.
Robson has served as Vice President, Secretary and a Director of the Company
since December 1997, and has held these same positions with Pontotoc
Production Company, Inc., the Company's wholly-owned subsidiary, since January
1987. From January 1985 until January 1987, he served as President and a
Director of Pontotoc Production Company, Inc. From January 1983 until January
1985, he was Vice President of Marketing for Robco Oil Co., Inc.
JAMES ROBSON, SR. - Vice President and Director. Mr Robson has served as
Vice President and Director of the Company since December 1997, and has held
these same positions with Pontotoc Production Company, Inc., the Company's
wholly-owned subsidiary, since January 1985. From April 1982 until January
1985, he served as Vice President of Operations for Robco Oil Co., Inc.
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BRIAN K. GOURLEY - Director. Mr. Gourley has served as a Director of the
Company since January 1998. He has served as Chief Operating Officer and a
Partner of BetterBody Company, Ada, Oklahoma, a company engaged in orthopedic
manufacturing, since January 1998. From April 1989 until January 1997, he
served as Vice President of Operations and a Partner of Look, Inc., a company
engaged in manufacturing medical eye implant devices. From April 1986 until
April 1989, he was the Production Engineering Manager and Chief Engineer of
Electrovert USA Corp.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
Director, Officer or beneficial owner of more than 10% of the Company's Common
Stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other executive officer
whose total annual salary and bonus exceeded $100,000 for the year ended March
31, 1998 and 1997:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
- -----------------------------------
ANNUAL COMPENSATION AWARDS
PAYOUTS
----------------------- --------------------------
- -------
SECURI-
TIES
UNDERLY-
OTHER RE- ING
ALL
ANNUAL STRICTED OPTIONS/
OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP
COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS
SATION
- ------------------ ---- ------- ----- ------ -------- -------- -------
- ------
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
James "Robby" 1998 $84,000 -- $4,806 -- -- --
--
Robson, Jr., <FN1>
President 1997 $48,600 -- $4,118 -- -- --
--
<FN1>
________________
<FN>
<FN1> Represents dues paid to Oak Hill Country Club.
</FN>
</TABLE>
13
<PAGE>
<PAGE>
AGGREGATED OPTION EXERCISES IN YEAR ENDED
MARCH 31, 1998 AND MARCH 31, 1998 OPTION VALUES
SECURITIES UNDER- VALUE OF UNEXER-
SHARES LYING UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON AT 3/31/98 AT 3/31/98
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- ---------------- -----------------
James "Robby"
Robson, Jr. -0- $ -0- 0 / 0 0 / 0
OPTIONS GRANTS IN LAST FISCAL YEAR
Individual Grants
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE
---- ------------ ------------ ----------- ----------
James "Robby" -0- -- -- --
Robson, Jr.
STOCK OPTION PLAN
During November 1997, the Board of Directors adopted a Stock Option Plan
(the "Plan"), and on November 12, 1997, the Corporation's shareholders
approved the Plan. The Plan authorizes the issuance of options to purchase up
to 2,000,000 shares of the Company's Common Stock.
The Plan allows the Board to grant stock options from time to time to
employees, officers, directors and consultants of the Company. The Board has
the power to determine at the time that the option is granted whether the
option will be an Incentive Stock Option (an option which qualifies under
Section 422 of the Internal Revenue Code of 1986) or an option which is not an
Incentive Stock Option. Vesting provisions are determined by the Board at the
time options are granted. The option price for any option will be no less
than the fair market value of the Common Stock on the date the option is
granted.
Since all options granted under the Plan must have an exercise price no
less than the fair market value on the date of grant, the Company will not
record any expense upon the grant of options, regardless of whether or not
they are incentive stock options. Generally, there will be no federal income
tax consequences to the Company in connection with Incentive Stock Options
granted under the Plan. With regard to options that are not Incentive Stock
Options, the Company will ordinarily be entitled to deductions for income tax
purposes of the amount that option holders report as ordinary income upon the
exercise of such options, in the year such income is reported.
As of the filing of this Report, no options have been granted under this
Plan.
14
<PAGE>
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 22, 1998, the stock ownership
of each person known by the Company to be the beneficial owner of five percent
or more of the Company's Common Stock, each director individually, and all
officers and directors as a group. Each person has sole voting and investment
power over the shares except as noted.
AMOUNT AND
NAME AND ADDRESS NATURE OF BENE- PERCENT
OF BENEFICIAL OWNERS FICIAL OWNERSHIP OF CLASS
- ------------------------- ---------------- --------
James "Robby" Robson, Jr. 831,297 21.8%
1500 East 17th Street
Ada, Oklahoma 74820
Todd Robson 845,951 22.2%
701 South Shumard
Ada, Oklahoma 74820
James Robson, Sr. 845,951 22.2%
Route 4, Box 437
Ada, Oklahoma 47820
Brian K. Gourley 77,071 2.0%
305 North Lake Drive
Ada, Oklahoma 74820
All Directors and Executive 2,600,270 68.3%
Officers as a Group (4
Persons)
The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ACQUISITION OF PONTOTOC PRODUCTION COMPANY, INC.
On December 10, 1997, the Company completed the acquisition of 100% of
the outstanding common stock of Pontotoc Production Company, Inc., a Texas
corporation ("Pontotoc"), in exchange for 3,165,000 shares of the Company's
Common Stock (approximately 84.4% of the shares then outstanding).
The stock issuances were made pursuant to an Agreement between the
Company and Pontotoc. The terms of the Agreement were the result of
negotiations between the managements of the Company and Pontotoc. However,
the Board of Directors did not obtained any independent "fairness" opinion or
other evaluation regarding the terms of the Agreement, due to the cost of
obtaining such opinion or evaluation.
The 3,165,000 shares issued to acquire Pontotoc were issued to the
following shareholders of Pontotoc in the amounts set forth:
15
<PAGE>
<PAGE>
NAME NUMBER OF SHARES
---- ----------------
James "Robby" Robson, Jr. 831,297
Todd Robson 845,951
James Robson, Sr. 845,951
Brian K. Gourley 77,071
19 other shareholders 564,730
---------
Total 3,165,000
16
<PAGE>
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
3.1 Articles of Incorporation, Incorporated by reference to
as Amended Exhibit 2.1 to the Registrant's
Form 10-SB Registration State-
filed on September 5, 1996
3.2 Bylaws Incorporated by reference to
Exhibit 2 to the Registrant's
Form 10-SB Registration State-
ment filed on September 5, 1996
10.1 Share Exchange Agreement Incorporated by reference to
with Pontotoc Production the Registrant's Form 8-K dated
Company, Inc. dated December 10, 1997, and filed
December 10, 1997 December 23, 1997
27 Financial Data Schedule Filed herewith electronically
(b) REPORTS ON FORM 8-K. On January 20, 1998, the Company filed a Form
8-K which reported under Item 4 that the Company dismissed Schumacher &
Associates as its auditors and that the Company engaged Grant Thornton LLP as
its independent accountants for the fiscal year ended March 31, 1998.
17
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
Report of Independent Certified Public Accountants . . . . . F-2
Financial Statements:
Balance Sheets, March 31, 1998 and 1997 . . . . . . . . F-3
Statements of Earnings for the years
ended March 31, 1998 and 1997. . . . . . . . . . . . . . F-4
Statement of Stockholders' Equity
for the years ended March 31, 1998 and 1997. . . . . . . F-5
Statements of Cash Flows for the years
ended March 31, 1998 and 1997. . . . . . . . . . . . . . F-6
Notes to Financial Statements. . . . . . . . . . . . . . F-7-F-15
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Pontotoc Production, Inc.
We have audited the accompanying balance sheets of Pontotoc Production, Inc.,
as of March 31, 1998 and 1997, and the related statements of earnings,
stockholders' equity, and cash flows for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pontotoc Production, Inc., as
of March 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Oklahoma City, Oklahoma
May 13, 1998
F-2
<PAGE>
<PAGE>
PONTOTOC PRODUCTION, INC.
BALANCE SHEETS
MARCH 31,
ASSETS 1998 1997
---------- ----------
CURRENT ASSETS
Cash and cash equivalents (note A1) $ 119,332 $ 87,499
Trading securities (note A2) 5,250 4,500
Accounts receivable, net of allowance
for doubtful accounts of $2,974 in 1998
and $703 in 1997 (note A9) 250,234 312,963
Other (note A3) - 6,306
---------- ----------
Total current assets 374,816 411,268
PROPERTY AND EQUIPMENT - AT COST, net
(notes A4, B, and E) 133,774 163,091
OIL AND GAS PROPERTIES - AT COST, net,
using the full cost method (notes A5,
C, D, and E) 1,743,205 1,181,414
OTHER 4,900 3,250
---------- ----------
$2,256,695 $1,759,023
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 73,907 $ 107,981
Accrued and other current liabilities 24,404 24,000
Income taxes payable (note F) 16,423 17,688
Deferred income taxes (notes A8 and F) 40,802 57,685
Current portion of long-term debt (note E) 1,599 107,809
Other (note A3) 7,460 -
---------- ----------
Total current liabilities 164,595 315,163
LONG-TERM DEBT, less current maturities
(note E) 468,623 314,994
DEFERRED INCOME TAXES (notes A8 and F) 380,241 252,551
COMMITMENTS AND CONTINGENCIES (note G) - -
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value; author-
ized, 100,000,000 shares; issued and
outstanding, 3,750,000 shares 375 375
Additional paid-in capital 108,924 108,924
Retained earnings 1,133,937 767,016
---------- ----------
1,243,236 876,315
---------- ----------
$2,256,695 $1,759,023
========== ==========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<PAGE>
PONTOTOC PRODUCTION, INC.
STATEMENTS OF EARNINGS
YEAR ENDED MARCH 31,
1998 1997
---------- ----------
Operating revenues
Oil and gas sales (notes A7 and A9) $1,754,390 $1,082,118
Well supervision fees and overhead
reimbursements 85,093 112,830
Other - 21,153
---------- ----------
1,839,483 1,216,101
Operating costs and expenses
Production 784,075 373,244
Depreciation, depletion, and amortization 155,086 79,468
General, administrative, and other 362,738 221,296
---------- ----------
1,301,899 674,008
---------- ----------
Earnings from operations 537,584 542,093
Other income 11,655 17,325
Interest expense (44,630) (25,042)
---------- ----------
Earnings before income taxes 504,609 534,376
Provision for income taxes (notes A8 and F) 137,688 181,382
---------- ----------
NET EARNINGS $ 366,921 $ 352,994
========== ==========
Basic and diluted earnings per share .10 .09
========== ==========
Weighted average shares outstanding,
basic and diluted 3,750,000 3,750,000
========== ==========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<PAGE>
PONTOTOC PRODUCTION, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ---------- ----------
- ----------
<S> <C> <C> <C> <C> <C>
Balance at April 1,
1996, as previously
reported 10,800 $ 5,400 $103,899 $ 414,022 $
523,321
Adjustments for
combination with
Mahogany Capital,
Inc. 3,739,200 (5,025) 5,025 -
- -
--------- ------- -------- ----------
- ----------
Balance at April 1,
1996, as restated
(note A) 3,750,000 375 108,924 414,022
523,321
Net earnings - - - 352,994
352,994
--------- ------- -------- ----------
- ----------
Balance at March 31,
1997 3,750,000 375 108,924 767,016
876,315
Net earnings - - - 366,921
366,921
--------- ------- -------- ----------
- ----------
Balance at March 31,
1998 3,750,000 $ 375 $108,924 $1,133,937
$1,243,236
========= ======= ======== ==========
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<PAGE>
PONTOTOC PRODUCTION, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
1998 1997
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings $ 366,921 $ 352,994
Adjustments to reconcile net earnings
to net cash provided by operating
activities
Depreciation, depletion, and amortizat 155,086 79,468
Deferred income taxes 110,807 163,694
Gain on sale of property and equipment (487) (16,232)
Net unrealized loss on trading securities - 3,950
Change in assets and liabilities
(Increase) decrease in
Trading securities (750) (8,450)
Accounts receivable, net 62,729 (120,743)
Other current assets 6,306 (3,143)
Other assets (1,650) (850)
Increase (decrease) in
Accounts payable (34,074) (18,058)
Accrued and other current liabilities 7,864 4,334
Income taxes payable (1,265) (13,960)
-------- ---------
Net cash provided by operating activities 671,487 423,004
Cash flows from investing activities
Purchase of property and equipment (33,135) (49,829)
Proceeds on sales of property and equipment 24,668 34,520
Oil and gas property dispositions - 154,181
Oil and gas property additions (678,606) (800,173)
--------- ---------
Net cash used in investing activities (687,073) (661,301)
Cash flows from financing activities
Borrowings 938,033 502,600
Repayment of borrowings (890,614) (199,859)
--------- ---------
Net cash provided by financing activities 47,419 302,741
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,833 64,444
Cash and cash equivalents at beginning of year 87,499 23,055
--------- ---------
Cash and cash equivalents at end of year $ 119,332 $ 87,499
========= =========
Supplemental Cash Flow Information
Cash paid during the year for:
Interest $ 44,631 $ 25,042
Income taxes 28,146 31,648
Noncash investing and financing activities:
During 1998 and 1997, oil and gas property additions included deprecia-
tion on oil field service equipment of $16,997 and $16,391, respectively,
and additions of $57 and $26,364, respectively, financed through accounts
payable.
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<PAGE>
PONTOTOC PRODUCTION, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
On December 10, 1997, Pontotoc Production Company, Inc. ("Pontotoc") was
acquired by Mahogany Capital, Inc. ("Mahogany"), a nonoperating public shell
corporation, through exchange of 100% of the issued and outstanding shares of
Pontotoc's common stock for approximately 84% of the outstanding shares of
Mahogany's common stock. Mahogany's legal name was changed to Pontotoc
Production, Inc. (the "Company"). The acquisition is considered to be a
capital transaction, in substance equivalent to the issuance of stock by
Pontotoc for the net monetary assets of Mahogany, accompanied by a
recapitalization of Pontotoc. Common stock and additional paid-in capital at
April 1, 1996 have been restated to reflect the recapitalization for all
periods presented.
The major operations of the Company consist of exploration, production,
and sale of crude oil and natural gas in the United States with an area of
concentration in shallow reserves in the vicinity of Pontotoc County,
Oklahoma. Other business segments are not a significant factor in the
Company's operation.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less and money market funds to be cash
equivalents.
The Company maintains its cash in bank deposit accounts and money market
funds which may not be federally insured. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on such accounts.
2. TRADING SECURITIES
Trading securities are carried at fair value with unrealized gains and
losses included in earnings.
3. FUTURES CONTRACTS
The Company contracts to sell crude oil at future dates at prices based
on then current market prices. Due to wide fluctuations in the market prices
for crude oil, the Company frequently enters into futures contracts to hedge
the price risk associated with anticipated sales. Gains and losses on these
contracts are deferred recognized concurrently with the revenues from the
associated exposures. At March 31, 1998, the Company has entered into futures
contracts settling at various dates through June 1998.
The gains (losses) on these futures contracts at March 31, 1998 and 1997
of approximately $7,500 and $(6,300), respectively, have been deferred. These
deferred amounts are reflected in other current liabilities at March 31, 1998
and other current assets at March 31, 1997.
F-7
<PAGE>
<PAGE>
4. PROPERTY AND EQUIPMENT
Depreciation and amortization are provided in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives using an accelerated method. Estimated useful lives are as
follows:
Furniture, fixtures, and office equipment 5-7 years
Automobiles and trucks 5 years
Buildings 28 years
Leasehold improvements 7 years
Oil field service equipment 5-7 years
5. OIL AND GAS PROPERTIES
The full cost method of accounting is used to account for oil and gas
properties. Under this method of accounting, all costs incident to the
acquisition, exploration, and development of properties (both developed and
undeveloped), including costs of abandoned leaseholds, lease rentals,
unproductive wells, and well drilling and equipment costs, are capitalized.
These costs as well as future development costs on proved undeveloped
properties are amortized using the units-of-production method. The
units-of-production method is based primarily on estimates of reserve
quantities. Due to uncertainties inherent in this estimation process, it is
at least reasonably possible that reserve quantities will be revised
significantly in the near term. If the Company's unamortized costs exceed the
cost center ceiling (defined as the sum of the present value, discounted at
10%, of estimated future net revenues from proved reserves, less related
income tax effects), the excess is charged to expense in the year in which the
excess occurs. Generally, no gains or losses are recognized on the sale or
disposition of oil and gas properties. Income in connection with contractual
services performed on wells in which the Company has an economic interest is
credited to oil and gas properties as a component of the full cost pool.
6. LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
7. REVENUE RECOGNITION
Oil and gas sales are recognized when the product is transported from the
well site. Well supervision fees and overhead reimbursements from producing
properties are recognized when the services are performed.
8. INCOME TAXES
Deferred income taxes are provided for significant carryforwards and
temporary differences between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in taxable or
deductible amounts in future years. Deferred income tax assets or liabilities
are determined by applying the presently enacted tax rates and laws.
F-8
<PAGE>
<PAGE>
A valuation allowance for deferred tax assets is required when it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. Management believes a valuation allowance is not required for
deferred tax assets.
9. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company extends credit to purchasers of oil and natural gas which are
primarily large energy companies. The Company had one purchaser whose
purchases were 90% and 89%, respectively, of total revenues for the years
ended March 31, 1998 and 1997 and were 91% and 92%, respectively, of accounts
receivable at March 31, 1998 and 1997.
10. EARNINGS PER SHARE
Basic and diluted earnings per common share are based upon the weighted
average number of common shares outstanding. Basic and diluted earnings per
share are the same for all periods presented.
11. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates based on management's
knowledge and experience. Actual results could differ from those estimates.
NOTE B - PROPERTY AND EQUIPMENT
Major classes of property and equipment consisted of the following at
March 31:
1998 1997
-------- --------
Furniture, fixtures, and office equipment $ 41,605 $ 38,879
Automobiles and trucks 154,340 129,292
Buildings - 23,605
Leasehold improvements 7,261 5,281
Oil field service equipment 219,898 221,799
-------- --------
423,104 418,856
Less accumulated depreciation and
amortization 328,830 295,265
-------- --------
94,274 123,591
Land 39,500 39,500
-------- --------
$133,774 $163,091
======== ========
F-9
<PAGE>
<PAGE>
NOTE C - OIL AND GAS INFORMATION
Costs related to the oil and gas activities of the Company were incurred
as follows:
YEAR ENDED MARCH 31,
1998 1997
-------- --------
Property acquisition costs $487,960 $662,386
Development costs 206,943 $180,542
The Company had the following aggregate capitalized costs relating to the
Company's oil and gas activities at March 31:
1998 1997
---------- ----------
Proved oil and gas properties $1,964,316 $1,243,182
Unproved oil and gas properties - 26,231
Less accumulated depreciation, deple-
tion, and amortization (221,111) (87,999)
---------- ----------
$1,743,205 $1,181,414
========== ==========
Depreciation, depletion, and amortization expense amounted to $1.37 and
$1.00 per equivalent barrel of production for the years ended March 31, 1998
and 1997, respectively.
NOTE D - OIL AND GAS RESERVE DATA (UNAUDITED)
The following estimates of proved reserve quantities and related
standardized measure of discounted net cash flow are estimates only, and do
not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available. All of the
Company's reserves are located in the United States.
Proved reserves are estimated reserves of crude oil (including condensate
and natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
The standardized measure of discounted future net cash flows is computed
by applying year-end prices of oil and gas (with consideration of price
changes only to the extent provided by contractual arrangements) to the
estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves, less estimated future income tax expenses
(based on year-end statutory tax rates, with consideration of future tax rates
already legislated) to be incurred on pretax net cash flows less tax basis of
the properties and available credits, and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10% a year to reflect the estimated timing of the future cash
flows.
F-10
<PAGE>
<PAGE>
The following summaries of changes in reserves and standardized measure
of discounted future net cash flows were prepared from estimates of proved
reserves developed by an independent petroleum engineer.
Summary of Changes in Proved Reserves
Year ended March 31,
------------------------------------------
1998 1997
------------------- --------------------
Bbls Mcf Bbls Mcf
--------- ------- --------- -------
Proved developed and unde-
veloped reserves
Beginning of year 1,339,175 411,168 949,589 248,487
Extensions and discoveries 143,365 17,159 10,897 -
Purchase of minerals in place 38,944 45,854 425,696 208,341
Production (89,827) (43,572) (47,007) (45,660)
Revisions of estimates 94,415 47,762 - -
--------- ------- --------- -------
End of year 1,526,072 478,371 1,339,175 411,168
========= ======= ========= =======
Proved developed reserves
Beginning of year 753,284 411,168 636,085 248,487
End of year 966,134 478,371 753,284 411,168
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
MARCH 31,
1998 1997
----------- -----------
Future oil and gas revenues $26,024,555 $28,517,891
Future production and development costs (7,317,999) (7,396,248)
----------- -----------
Future net cash flows before income taxes 18,706,556 21,121,643
Future income taxes (6,202,125) (7,190,087)
----------- -----------
Future net cash flows after income taxes 12,504,431 13,931,556
Discounted at 10% for estimated timing of
cash flows (5,314,383) (6,007,365)
----------- -----------
Standardized measure of discounted future
net cash flows $ 7,190,048 $ 7,924,191
=========== ===========
F-11
<PAGE>
<PAGE>
NOTE D - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Changes in Standardized Measure of Discounted Future Net Cash Flows
Related to Proved Oil and Gas Reserves
YEAR ENDED MARCH 31,
1998 1997
---------- ----------
Sales and transfers of oil and gas produced,
net of production costs $ (937,167) $ (708,874)
Development costs incurred during year which
were previously estimated 73,315 180,542
Extensions and discoveries, net of related
development costs 1,718,519 77,637
Net change in income taxes 523,620 (1,546,490)
Accretion of discount 1,203,934 808,448
Purchase of minerals in place 328,437 4,178,365
Net changes in production rates and other (2,040,128) 138,137
Revisions in quantity estimates 872,743 -
Net change in sales and transfer prices,
net of related production costs (2,477,416) -
---------- ----------
Net increase (decrease) (734,143) 3,127,765
Balance at beginning of year 7,924,191 4,796,426
---------- ----------
Balance at end of year $7,190,048 $7,924,191
========== ==========
NOTE E - LONG-TERM DEBT
Long-term debt consisted of the following at March 31:
1998 1997
-------- --------
Note payable to Citizens Bank of Ada
("Citizens") bearing interest at 10.0% $ - $ 16,856
Note payable to Citizens bearing interest
at 7.4%; payable in monthly installments
of $302 through May 1998; collateralized
by property and equipment 598 4,036
Note payable to BancOne, Oklahoma, N.A.
("BancOne") bearing interest at bank prime
(8.5% at March 31, 1998); due in September
1999; collateralized by oil and gas properties 468,623 395,058
Other notes payable 1,001 6,853
-------- --------
470,222 422,803
Less current maturities 1,599 107,809
-------- --------
$468,623 $314,994
======== ========
F-12
<PAGE>
<PAGE>
Maturities of long-term debt at March 31, 1998 are as follows:
1999 $ 1,599
2000 468,623
--------
$470,222
========
The note payable to BancOne is subject to the provisions of a credit
agreement, covenants of which provide for, among other things, current ratio,
debt service ratios, and tangible net worth requirements, as defined.
NOTE F - INCOME TAX EXPENSE
The components of income tax expense are as follows:
YEAR ENDED MARCH 31,
1998 1997
-------- --------
Current
Federal $ 26,881 $ 13,223
State - 4,465
-------- --------
26,881 17,688
Deferred 110,807 163,694
-------- --------
$137,688 $181,382
======== ========
Deferred tax assets and liabilities consisted of the following at March
31:
1998 1997
-------- --------
Assets
Investments $ 9,448 $ 4,138
Alternative minimum tax credit carryforward - 7,153
Other 2,084 -
-------- --------
$ 11,532 $ 11,291
======== ========
Liabilities
Conversion from accrual to cash basis $ 50,250 $ 68,976
Property and equipment 6,254 6,254
Oil and gas properties 376,071 242,875
Other - 3,422
-------- --------
$432,575 $321,527
======== ========
F-13
<PAGE>
<PAGE>
The effective tax rate on earnings before income taxes differs from the
federal statutory tax rate. The following summary reconciles taxes at the
federal statutory tax rate with actual taxes for the years ended March 31:
1998 1997
-------- --------
Computed federal tax provision $171,567 $181,688
Increase (decrease) in tax from
Allowable percentage depletion in excess
of depletion for financial statements (23,120) (16,594)
Nondeductible expenses 3,568 2,881
State taxes, net of federal income tax benefit 4,390 21,161
Effect of graduated rates, tax credits, and
other (18,717) (7,754)
-------- --------
Provision for income taxes $137,688 $181,382
======== ========
NOTE G - COMMITMENTS AND CONTINGENCIES
1. LEASES
The Company conducts its operations from facilities which are leased from
an affiliate under an operating lease. The lease calls for monthly rentals of
$1,000 and is on a month-to-month basis.
Rent expense for the years ended March 31, 1998 and 1997 was $14,154 and
$14,802, respectively.
2. OTHER
The Company is involved in various legal actions relating to its
operations. Management believes that losses, if any, arising from such
actions will not be material to the Company's financial position or results of
operations.
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments as of March 31, 1998 and 1997 as
required by Statement of Financial Accounting Standards ("SFAS") No. 107,
Disclosure About Fair Value of Financial Instruments. Such information, which
pertains to the Company's financial instruments, is based upon the
requirements of SFAS No. 107 and does not purport to represent the aggregate
net fair value of the Company. The carrying amounts in the table are the
amounts at which the financial instruments are reported in the financial
statements.
All of the Company's financial instruments are held for purposes other
than trading except for trading securities. The carrying amounts of cash and
cash equivalents approximate fair values of such assets. The carrying amounts
of trading securities approximate fair values of such assets as carrying
values are adjusted to quoted market prices. Estimated fair value of fixed
rate long-term debt is the discounted amount of future cash flows using the
Company's current incremental rate of borrowing for similar liabilities. The
carrying amount of variable rate debt approximates fair value because interest
rates adjust to market rates.
F-14
<PAGE>
<PAGE>
1998 1997
---------------------- -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- --------- ----------
Financial assets
Cash and cash
equivalents $119,332 $119,332 $ 87,499 $ 87,499
Trading securities 5,250 5,250 4,500 4,500
Financial liabilities
Fixed rate long-term
debt (1,599) (1,599) (422,803) (419,196)
Variable rate long-
term debt (468,623) (468,623) - -
NOTE I - SUBSEQUENT EVENTS
Subsequent to March 31, 1998, the Company signed a letter of intent to
acquire oil and gas properties and equipment from an Oklahoma oil and gas
operator for approximately $2,750,000 and 402,000 shares of common stock. The
agreement required a nonrefundable payment to the operator of $50,000 and
20,000 shares of common stock and is subject to certain downward adjustments
if, upon completion of due diligence, at closing on July 9, 1998 the oil and
gas production from certain properties is below oil and gas production
quantities specified in the agreement.
Additionally, subsequent to March 31, 1998, the Company has offered to
sell through a private placement memorandum investment units at a price of
$26,000 per unit. Each unit consists of 8,000 shares of common stock at $3.25
per share and 8,000 Class A purchase warrants exercisable through February 1,
2000 at $3.75 per share. The minimum offering is 25 units and the maximum
offering is 75 units.
F-15
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: June 29, 1998 PONTOTOC PRODUCTION, INC.
By: /s/ James Robson
James "Robby" Robson, Jr., President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ James Robson President (Chief Executive June 29, 1998
James "Robby" Robson, Jr. Officer) and Director
/s/ Todd Robson Vice President, Secretary, June 29, 1998
Todd Robson Treasurer (Chief Finan-
ancial and Accounting
Officer) and Director
/s/ James Robson Vice President and Director June 29, 1998
James Robson, Jr.
/s/ Brian K. Gourley Director June 29, 1998
Brian K. Gourley
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of earnings found on pages F-3 and F-4 of the
Company's Form 10-KSB for the fiscal year ended March 31, 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 119,332
<SECURITIES> 0
<RECEIVABLES> 250,234
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 374,816
<PP&E> 133,774
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,256,695
<CURRENT-LIABILITIES> 164,595
<BONDS> 0
0
0
<COMMON> 375
<OTHER-SE> 1,242,861
<TOTAL-LIABILITY-AND-EQUITY> 2,256,695
<SALES> 1,754,390
<TOTAL-REVENUES> 1,839,483
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,301,899
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,630
<INCOME-PRETAX> 504,609
<INCOME-TAX> 137,688
<INCOME-CONTINUING> 366,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 366,921
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
