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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
July 1, 1998
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Date of Report (date of earliest event reported)
Pontotoc Production, Inc.
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Exact Name of Registrant as Specified in its Charter
Nevada 0-21313 84-1349552
- --------------------------- --------------- ----------------------
State or Other Jurisdiction Commission File IRS Employer Identifi-
of Incorporation Number cation Number
808 E. Main, Ada, Oklahoma 74820
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Address of Principal Executive Offices, Including Zip Code
(580) 436-6100
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Registrant's Telephone Number, Including Area Code
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 1, 1998, the Company closed on the acquisition of certain oil and
gas properties from Bill G. Cantrell and his affiliated company. The purchase
price was $2,750,000 in cash and 402,360 restricted shares of the Company's
Common Stock. Included in the purchase were interests in approximately 82 oil
and gas leases located in the following counties in Oklahoma: Pontotoc, Coal,
Garvin, and Seminole. The purchase also included two workover rigs, one
drilling rig, and miscellaneous oil field equipment which relates to the
ongoing production of the oil and gas properties.
The purchase was funded with $2,050,000 of bank borrowings and $700,000
from the proceeds of a private offering of common stock and warrants which was
partially closed on July 1, 1998.
This acquisition is expected to increase the Company's daily oil
production by 75% to approximately 700 barrels of oil per day, and proven
producing reserves are expected to increase by 90% and proven undeveloped
reserves are expected to increase by 128%.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. The following
financial statements for the properties acquired from Bill G. Cantrell for the
years ended March 31, 1998 and 1997 are filed herewith:
INDEX PAGE
Report of Independent Certified Public Accountants ................. 3
Combined Statements of Revenue and Direct Operating Expenses
of Certain Acquired Property Interests ............................ 4
Notes to Financial Statements ...................................... 5-7
(b) PRO FORMA FINANCIAL INFORMATION. The unaudited pro forma combined
balance sheet as of March 31, 1998, and the unaudited pro forma combined
statement of operations for the year ended March 31, 1998, which give effect
to the acquisition of certain property interests which the Company acquired
from Bill G. Cantrell are filed herein on pages 8-13.
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Board of Directors
Pontotoc Production, Inc.
We have audited the accompanying Combined Statements of Revenue and Direct
Operating Expenses of Certain Acquired Property Interests (combined
statements) for the years ended March 31, 1998 and 1997. The combined
statements are the responsibility of the Acquired Property Interests'
management. Our responsibility is to express an opinion on the combined
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 combined statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the combined statements. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying combined statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the Form 8-K of Pontotoc Production, Inc.) as
described in Note A and are not intended to be a complete presentation of the
Acquired Property Interests' revenue and expenses.
In our opinion, the combined statements referred to above present fairly, in
all material respects, the revenue and direct operating expenses as described
in Note A of the Acquired Property Interests for the years ended March 31,
1998 and 1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Oklahoma City, Oklahoma
July 23, 1998
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PONTOTOC PRODUCTION, INC.
COMBINED STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES
OF CERTAIN ACQUIRED PROPERTY INTERESTS
Year ended March 31,
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1998 1997
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Revenue-oil and gas sales $1,513,612 $1,529,603
Direct operating expenses
Lease operations 554,604 613,238
Production taxes 110,236 109,921
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664,840 723,159
---------- ----------
Excess of revenue over direct
operating expenses $ 848,772 $ 806,444
========== ==========
The accompanying notes are an integral part of these statements.
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PONTOTOC PRODUCTION, INC.
NOTES TO COMBINED STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF CERTAIN
ACQUIRED PROPERTY INTERESTS
March 31, 1998 and 1997
NOTE A - BASIS OF PRESENTATION AND GENERAL INFORMATION
The accompanying combined statements present the ownership interest of
Pontotoc Production, Inc. (the "Company") in the revenue and direct operating
expenses of certain oil and gas property interests acquired from Bill G.
Cantrell on July 1, 1998 (the "Properties"). The combined statements include
the revenue and direct operating expenses of the properties for the years
ended March 31, 1998 and 1997, except for certain properties which were
acquired by Bill G. Cantrell in December 1996, for which information prior to
that date was not available.
The accompanying combined statements do not reflect provisions for
depletion, depreciation, and amortization, if any, which may have been
recorded in the financial records of the previous interest owner. The combined
statements do not reflect certain additional expenses that may have been
incurred in connection with the ownership of the Properties such as interest
on indebtedness and general and administrative expenses incurred individually
by the prior interest owners as such costs are not comparable to those which
will result from the future operation of the Properties.
Lease operations expense includes monthly administrative overhead costs
and other direct costs of operating the Properties which were charged to the
joint account of all working interest owners by the operator of the wells.
The Properties are not taxpaying entities. Any taxable income arising
from the operation of the Properties accrues directly to the interest owner.
Accordingly, no provision for income taxes has been made in the combined
statements of revenue and direct operating expenses.
NOTE B - OIL AND GAS RESERVE DATA (UNAUDITED)
The following estimates of proved developed and proved undeveloped
reserve quantities and related standardized measure of discounted future net
cash flows are estimates only, and do not purport to reflect realizable values
or fair market values of the Properties' reserves. It is emphasized 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 Properties' 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.
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PONTOTOC PRODUCTION, INC.
NOTES TO COMBINED STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF CERTAIN
ACQUIRED PROPERTY INTERESTS - CONTINUED
March 31, 1998 and 1997
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, 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.
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
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Bbls Mcf Bbls Mcf
--------- --------- --------- ---------
Proved developed and unde-
veloped reserves
Beginning of year 1,695,731 1,203,618 1,607,681 300,834
Purchase of minerals in place - - 160,482 902,784
Production (86,187) (9,948) (72,432) -
--------- --------- --------- ---------
End of year 1,609,544 1,193,670 1,695,731 1,203,618
========= ========= ========= =========
Proved developed reserves
Beginning of year 1,082,147 1,203,618 994,097 300,834
End of year 931,360 1,193,670 1,082,147 1,203,618
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
March 31,
1998 1997
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Future oil and gas revenues $ 28,178,821 $ 29,692,433
Future production and development costs (10,187,888) (10,852,728)
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Future net cash flows 17,990,933 18,839,705
Discounted at 10% for estimated timing of
cash flows (5,948,756) (7,373,539)
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Standardized measure of discounted future
net cash flows $ 12,042,177 $ 11,466,166
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PONTOTOC PRODUCTION, INC.
NOTES TO COMBINED STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF CERTAIN
ACQUIRED PROPERTY INTERESTS - CONTINUED
March 31, 1998 and 1997
NOTE B - 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
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Sales and transfers of oil and gas
produced, net of production costs $ (848,772) $ (806,444)
Accretion of discount 1,146,617 976,583
Purchase of minerals in place - 1,217,330
Net changes in production rates and other 278,166 312,869
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Net increase 576,011 1,700,338
Balance at beginning of year 11,466,166 9,765,828
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Balance at end of year $ 12,042,177 $ 11,466,166
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PONTOTOC PRODUCTION, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma combined balance sheet as of March 31, 1998 and the
unaudited pro forma combined statement of operations for the year ended March
31, 1998 give effect to the acquisition of certain property interests acquired
from Bill G. Cantrell by Pontotoc Production, Inc. ("Pontotoc"), which has
been accounted for using the purchase method of accounting. The pro forma
combined financial statements are presented for illustrative purposes only and
are not necessarily indicative of the operating results that would have
occurred if the transactions given pro forma effect herein had been
consummated as of the time reflected herein, nor are they necessarily
indicative of the future operating results or financial position of Pontotoc.
The pro forma adjustments are based upon available information and certain
assumptions that Pontotoc believes are reasonable. This information should be
read in conjunction with the historical financial statements and related notes
of Pontotoc and the combined statements of Revenue and Direct Operating
Expenses of Certain Acquired Property Interests.
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PONTOTOC PRODUCTION, INC.
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
March 31, 1998
Historical Pro forma
ASSETS Pontotoc Adjustments Combined
----------- ------------- ----------
Cash and cash equivalents $ 119,332 $ (700,000)(1) $ 202,441
783,109 (4)
Accounts receivable and other
current assets 255,484 - 255,484
Property and equipment, net 133,774 - 133,774
Oil and gas properties, net 1,743,205 3,168,350 (1) 4,911,555
Other assets 4,900 - 4,900
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Total assets $2,256,695 $3,251,459 $5,508,154
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 73,907 $ - $ 73,907
Accrued and other current
liabilities 90,688 - 90,688
Long-term debt 468,623 2,050,000 (1) 2,518,623
Deferred income taxes 380,241 - 380,241
Stockholders' equity 1,243,236 418,350 (1) 2,444,695
783,109 (4)
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$2,256,695 $3,251,459 $5,508,154
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See notes to pro forma combined financial statements.
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PONTOTOC PRODUCTION, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
Year ended March 31, 1998
<TABLE>
<CAPTION>
Historical Pro forma
Pontotoc Properties Adjustments Combined
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<S> <C> <C> <C> <C>
Operating revenues
Oil and gas sales $1,754,390 $1,513,612 $ - $3,268,002
Well supervision fees and
overhead reimbursements 85,093 - - 85,093
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1,839,483 1,513,612 - 3,353,095
Operating costs and expenses
Production 784,075 664,840 - 1,448,915
Depreciation, depletion,
and amortization 155,086 - 178,000(2) 333,086
General, administrative,
and other 362,738 - - 362,738
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1,301,899 664,840 178,000 2,144,739
Earnings from opera-
tions 537,584 848,772 (178,000) 1,208,356
Other income 11,655 - - 11,655
Interest expense (44,630) - (175,000)(5) (219,630)
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Earnings before income
taxes 504,609 848,772 (353,000) 1,000,381
Provision for income taxes 137,688 - 188,000 (3) 325,688
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NET EARNINGS $ 366,921 $ 848,772 $ (541,000) $ 674,693
========== ========= =========== ===========
Basic and diluted earnings
per share .10 .15
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Weighted average common
shares outstanding,
basic and diluted 3,750,000 4,411,260
========== ===========
</TABLE>
See notes to pro forma combined financial statements.
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PONTOTOC PRODUCTION, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
On July 1, 1998, certain oil and gas properties were acquired by Pontotoc
Production, Inc. for cash of $2,750,000 and approximately 400,000 shares of
restricted common stock. The properties are valued at the cash paid plus the
estimated fair value of the common stock issued. The accompanying pro forma
combined balance sheet has been presented as if the acquisition occurred on
March 31, 1998 and the accompanying pro forma combined statement of operations
for the year ended March 31, 1998 has been prepared as if the acquisition was
consummated on April 1, 1997.
Basic and diluted earnings per share have been presented as if the shares of
common stock issued in conjunction with a private offering and the acquisition
of properties had been outstanding beginning April 1, 1997. Warrants issued
in conjunction with the private placement shares are not assumed exercised
because they were antidilutive.
NOTE B - PRO FORMA ADJUSTMENTS
Pro forma adjustments are necessary to reflect the assumed effect of the
combination on the balance sheet as of March 31, 1998 and statement of
operations assuming the acquisition was consummated on April 1, 1997. The
accompanying pro forma balance sheet and statement of operations reflect the
following adjustments:
(1) To record the acquisition of oil and gas properties for cash and
402,260 shares of restricted common stock and to record bank borrowing of
$2,050,000 to partially fund the acquisition
(2) To record depreciation, depletion, and amortization expense on oil
and gas properties acquired
(3) To record estimated income tax expense at the combined effective rate
(4) To record sale of 259,000 shares of common stock and warrants to
purchase 259,000 shares in a private offering and the use of proceeds to
partially fund the acquisition
(5) To record interest expense for the year ended March 31, 1998 at the
effective rate of 8.5%
NOTE C - OIL AND GAS RESERVE DATA (UNAUDITED)
The following tables contain certain oil and gas disclosures reflecting the
pro forma combined oil and gas activities as of and for the year ended March
31, 1998.
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PONTOTOC PRODUCTION, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE C - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Summary of Changes in Proved Reserves
Year ended March 31, 1998
Bbls Mcf
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Proved developed and undeveloped reserves
Beginning of year 3,034,906 1,614,786
Extensions and discoveries 143,365 17,159
Purchase of minerals in place 38,944 45,854
Production (176,014) (53,520)
Revisions of estimates 94,415 47,762
--------- ---------
End of year 3,135,616 1,672,041
========= =========
Proved developed reserves
Beginning of year 1,835,431 1,614,786
End of year 1,898,094 1,672,041
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
Year ended
March 31, 1998
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Future oil and gas revenues $ 54,203,376
Future production and development costs 17,505,887
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Future net cash flows before income taxes 36,697,489
Future income taxes (12,166,122)
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Future net cash flows after income taxes 24,531,367
Discounted at 10% for estimated timing of cash flows (9,291,125)
------------
Standardized measure of discounted future net
cash flows $ 15,240,242
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PONTOTOC PRODUCTION, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE C - 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
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Sales and transfers of oil and gas produced, net
of production costs $ (1,785,939)
Development costs incurred during year which were
previously estimated 73,315
Extensions and discoveries, net of related development
costs 1,718,519
Net change in income taxes 396,263
Accretion of discount 2,350,551
Purchase of minerals in place 328,437
Net changes in production rates and other (1,761,962)
Revisions in quantity estimates 872,743
Net change in sales and transfer prices, net of
related production costs (2,477,416)
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Net decrease (285,489)
Balance at beginning of year 15,525,731
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Balance at end of year $ 15,240,242
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PONTOTOC PRODUCTION, INC.
Dated: August 13, 1998 By:/s/ James Robby Robson, Jr.
James Robby Robson, Jr., President
