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FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1997
REGISTRATION NO. 0-22349
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
AMENDMENT NO. 1
TO
FORM 10-SB/A
GENERAL FORM OF REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
_________________
PAN WESTERN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1130486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 SOUTH BOULDER AVENUE
SUITE 300
TULSA, OKLAHOMA 74119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 582-4957
_________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class to be Registered
------------------- ------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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PAN WESTERN ENERGY CORPORATION
FORM 10-SB
________________________________________________________
TABLE OF CONTENTS
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PART I
Page
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Glossary of Terms............................................. 3
Item 1. Description of Business....................................... 5
Item 2. Management's Discussion and Analysis or Plan of Operation..... 17
Item 3. Description of Property....................................... 25
Item 4. Security Ownership of Certain Beneficial Owners and Management 29
Item 5. Directors, Executive Officers, Promoters and Control Persons.. 30
Item 6. Executive Compensation........................................ 32
Item 7. Certain Relationships and Related Transactions................ 36
Item 8. Description of Securities..................................... 37
PART II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters......................... 41
Item 2. Legal Proceedings............................................. 42
Item 3. Changes in and Disagreements with Accountants................. 42
Item 4. Recent Sales of Unregistered Securities....................... 42
Item 5. Indemnification of Directors and Officers..................... 43
PART F/S
Financial Statements.......................................... 44
PART III
Item 1. Index to Exhibits............................................. 45
Item 2. Description of Exhibits....................................... 45
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Certain statements in this Registration Statement under the captions
"Item 1. Description of Business", "Item 2. Management's Discussion and Analysis
or Plan of Operation" and "Item 3. Description of Property", and elsewhere in
this Registration Statement constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry trends and results, to be materially
different from any future results, trends, performance, or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, among others, the following: general
economic and business conditions; oil and gas and other industry conditions and
trends, including supply and demand; fluctuations in the prices for oil, gas and
refined products; competition; import protection and regulation (including the
implementation of the World Trade Organization and North American Free Trade
Agreement); the loss of any significant customers; changes in business strategy
or development plans; availability, terms and deployment of debt and equity
capital; quality of management; business abilities and judgment of personnel;
availability of qualified personnel; changes in or the failure to comply with
government regulations (including environmental regulation); and other factors
referenced in this Registration Statement. See "Item 1. Description of Business
- - Cautionary Statement and Risk Factors."
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GLOSSARY OF TERMS
The following are definitions of certain technical terms used throughout
this Registration Statement in connection with the oil and gas exploration and
development business of the Company.
"Bbl" - One stock tank barrel or 42 U.S. Gallons liquid volume, usually
used herein in reference to crude oil or other liquid hydrocarbons.
"Boe" - Equivalent barrels of oil and, with reference to natural gas,
natural gas equivalents are determined using the ratio of six Mcf of natural gas
to one Bbl of crude oil, condensate or natural gas liquids.
"Common Stock" - The common stock of the Company, par value $0.01 per
share.
"Company" - Pan Western Energy Corporation, an Oklahoma corporation.
"Developed acreage" - The number of acres which are allocated or assignable
to producing wells or wells capable of production.
"Development well" - A well drilled within a presently proved productive
area of an oil or natural gas reservoir, as indicated by reasonable
interpretation of available data, with the objective of completing in that
reservoir.
"Exploratory well" - A well drilled either in search of a new, undiscovered
pool or oil or natural gas, or to extend the known limits of a field under
development.
"Gross acres or gross wells" - The total acres or wells, as the case may
be, in which an entity has an interest, either directly or through an affiliate.
"Lease" - Full or partial interests in an oil and gas lease, oil and gas
mineral rights, fee rights or other rights, authorizing the owner thereof to
drill for, reduce to possession and produce oil and natural gas upon payment of
rentals, bonuses and/or royalties. Oil and gas leases are generally acquired
from private landowners and federal and state governments.
"MBbl" - One thousand barrels of crude oil or other liquid hydrocarbons.
"Mcf" - One thousand cubic feet of natural gas expressed, where gas sales
contracts are in effect, in terms of contractual temperature and pressure bases
and, where contracts are nonexistent, at 60 degrees Fahrenheit and 14.65 pounds
per square inch absolute.
"MMcf" - One million cubic feet of natural gas expressed, where gas sales
contracts are in effect, in terms of contractual temperature and pressure bases
and, where contracts are nonexistent, at 60 degrees Fahrenheit and 14.65 pounds
per square inch absolute.
"Net; net revenue interest" - Production or revenue that is owned by the
respective person and produced for its interest after deducting royalties and
other similar interests.
"Net acres or wells" - A party's interest in acres or wells calculated by
multiplying the number of gross acres or gross wells in which such party has an
interest by the fractional interest of such party in each such acre or well.
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"Operating costs" - The expenses of producing oil or natural gas from a
formation, consisting of the costs incurred to operate and maintain wells and
related equipment and facilities, including labor costs, repair and maintenance,
supplies, insurance, production, severance and cost production excise taxes.
"Preferred Stock" - The preferred stock of the Company, par value $0.05 per
share.
"Producing reserves" - Proven developed reserves expected to be produced
from existing completion intervals open for production in existing wells.
"Productive well" - A well that is producing oil or natural gas or that is
capable of production.
"Prospect" - An area in which a party owns or intends to acquire one or
more oil and natural gas interests which is geographically defined on the basis
of geological data and which is reasonably anticipated to contain at least one
reservoir of oil, gas or other hydrocarbons.
"Proven undeveloped reserves" - Proven reserves which can be expected to be
recovered from new wells on undeveloped acreage or from existing wells where a
relatively major expenditure is required for recompletion.
"Royalty interest" - An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of the costs of production.
"Working interest" - The operating interest under a lease which gives the
owner the right to drill, produce and conduct operating activities on the
property and a share of production, subject to all royalty interests.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Pan Western Energy Corporation (the "Company") is an independent oil and
gas company engaged in the acquisition, development and production of oil and
gas in the United States. The Company was incorporated in 1981 under the laws
of the State of Oklahoma with the objective of exploring for, developing,
producing and managing oil and gas reserves. Early efforts of the Company
focused on exploratory drilling in Oklahoma, Colorado, Kansas, Nebraska and
Texas. Since 1989, the Company has focused primarily on the acquisition of
producing oil and gas properties in Oklahoma and Texas. During 1995 and 1996,
the Company acquired the producing oil and gas properties of six limited
partnerships in which the Company was the general partner. These producing
properties, along with producing properties acquired from others during the same
period, significantly increased the Company's asset base.
The Company currently owns and operates producing oil and gas properties
located in the states of Texas and Oklahoma and owns royalty interests in 14
non-operated wells located in the state of Ohio. Daily gross production from
109 wells operated by the Company in these states currently averages
approximately 234 Bbls of oil and 1,395 Mcf of gas. Total daily production from
both operated and non-operated wells, net to the Company's interest, currently
averages approximately 175 Bbls of oil and 788 Mcf of gas from a total of 68 net
wells.
In seeking to acquire additional oil and gas properties, the Company
focuses primarily on properties with producing oil and gas reserves which it
believes have potential for additional exploitation through additional
development and enhanced recovery via lateral completions and improved operating
techniques rather than highly speculative exploration efforts. The Company
intends to focus its acquisition program on producing properties in which the
Company will become the operator following acquisition, allowing the Company to
maintain a low cost operating structure. The Company will also seek properties
that are underdeveloped, overly burdened with expenses or owned by financially
troubled companies. Management intends to focus on oil and gas properties
located in the mid-continent region of the United States where Company personnel
are best able to draw on their prior oil and gas experience. The Company
intends to acquire properties using internally generated cash flow, bank
borrowings and, when appropriate, Common Stock of the Company.
The Company's principal offices are located at 1850 South Boulder Avenue,
Suite 300, Tulsa, Oklahoma 74119 and its telephone number is (918) 582-4957.
CAUTIONARY STATEMENT AND RISK FACTORS
Cautionary Statement Regarding Forward-Looking Statements. In the interest
of providing the Company's shareholders and potential investors with certain
information regarding the Company, including management's assessment of the
Company's future plans and operations, certain statements set forth in this
Registration Statement contain or are based on the Company's projections or
estimates of revenue, income, earnings per share and other financial items or
relate to management's future plans and objectives or to the Company's future
economic and financial performance. All such statements, other than statements
of historical fact, contained in this Registration Statement, including
statements in "Item 1. Description of Business, Item 2. Management's Discussion
and Analysis or Plan of Operation and Item 3. Description of Property" generally
are accompanied by words such as "anticipate," "believe," "intend," "estimate,"
"project" or "expect" or similar statements. Such statements are "forward-
looking statements" within the meaning of Section 27A of the Securities Act
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of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and are made pursuant to and in reliance on the safe harbor provisions
of such sections.
Although any forward-looking statements contained in this Registration
Statement or otherwise expressed by or on behalf of the Company are, to the
knowledge and in the judgment of the officers and directors of the Company,
reasonable and expected to prove true, management is not able to predict the
future with certainty and no assurance can be given that such statements will
prove correct. Forward-looking statements involve known and unknown risks and
uncertainties which may cause the Company's actual performance and financial
results in future periods to differ materially from any projection, estimate or
forecasted result. These risks and uncertainties include, among other things:
general economic and business conditions; oil and gas industry conditions and
trends; volatility of oil and gas prices; product supply and demand; market
competition; risks inherent in the Company's oil and gas operations; imprecision
of reserve estimates; the Company's ability to replace and expand oil and gas
reserves; the Company's ability to generate sufficient cash flow from operations
to meet its current and future obligations; the Company's ability to access and
terms of external sources of debt and equity capital; and such other risks and
uncertainties described from time to time in the Company's periodic reports and
filings with the Securities and Exchange Commission. These and other risks are
described elsewhere in this Registration Statement and will be described from
time to time in the Company's future filings with the Securities and Exchange
Commission. Accordingly, shareholders and potential investors are cautioned
that certain events or circumstances could cause actual results to differ
materially from those projected, estimated or predicted. In addition, forward-
looking statements are based on management's knowledge and judgment as of the
date of this Registration Statement, and the Company does not intend to update
any forward-looking statements to reflect events occurring or circumstances
existing hereafter.
History of Losses; Accumulated Deficit. For the fiscal years ended
December 31, 1996 and 1995, the Company incurred net losses of $252,444 and
$364,092 respectively. At December 31, 1996, the Company had an accumulated
deficit of $880,537 and its working capital deficit was $1,361,893. For the
three months ended March 31, 1997, the Company incurred a net loss of $39,693
and its working capital deficit was $1,358,965. It is expected that the Company
will continue to experience losses in the near term. The Company's ability to
achieve profitability and generate cash flow will be dependent upon obtaining
additional debt or equity capital and acquiring or developing additional oil and
gas properties. There can be no assurance that the Company will be able to do
so. See "Item 2. Management's Discussion and Analysis or Plan of Operation" and
the Company's Financial Statements included elsewhere in this Registration
Statement.
Limited Available Capital; Need for Additional Financing. Without raising
additional capital, the Company will be unable to acquire additional producing
oil and gas properties and its ability to develop its existing oil and gas
properties will be limited to the extent of available cash flow. Accordingly,
in order for the Company to achieve its business objective and achieve
profitable operations, it will be necessary to generate additional cash flow
from operations, raise additional capital or enter into joint oil and gas
development arrangements. Management intends to fund future acquisitions and
develop its oil and gas reserves using cash flow from operations as well as
borrowings, public and private sales of debt and equity securities and joint oil
and gas development arrangements, among other possible sources. The Company has
no present arrangements for future borrowings and its cash flow from operations
is not expected to be adequate to provide the funds needed for these purposes.
There can be no assurance the Company will be able to raise additional funds in
sufficient amounts to allow the Company to successfully implement its present
business strategy of additional oil
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and gas property acquisitions or the development of its existing oil and gas
reserves. No assurance can be given as to the availability or terms of any
additional financing or joint development arrangements or that such terms as are
available may not be dilutive to the interests of the Company's shareholders.
Industry Conditions; Impact on Company's Profitability. The profitability
and revenues of the Company are dependent, to a significant extent, upon
prevailing market prices for oil and gas. In the past, oil and gas prices and
markets have been volatile. Prices are subject to wide fluctuations in response
to changes in supply of, and demand for, oil and gas, market uncertainty and a
variety of additional factors that are beyond the control of the Company. Such
factors include world political conditions, weather conditions, government
regulations, the price and availability of alternative fuels and overall
economic conditions. Crude oil and natural gas prices have increased
significantly over the past 12 months. Any decline from current oil or gas
prices would have a material adverse effect on the Company's revenues and
operating income and might, under certain conditions, require a write-down of
the book value of the Company's oil and gas properties.
Acquisition Strategy. The Company must acquire producing properties or
locate and develop new oil and gas reserves to replace those being depleted by
production. Without acquisition of producing properties or successful drilling
and exploration activities, the Company's reserves and revenues will decline as
reserves are depleted by production from existing properties. Subject to the
availability of sufficient capital, the Company intends to acquire additional
producing oil and gas properties, although no funds are currently available to
the Company for this purpose. Although the Company engages in discussions
regarding the acquisition of additional properties on a regular basis, as of the
date of this Registration Statement the Company has no agreements or
understandings to acquire any other properties and there can be no assurance
that the Company will be able to identify and acquire additional producing oil
and gas properties that will prove to be profitable to the Company. The process
of integrating acquired properties into the Company's operations may result in
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's resources. In connection with
acquisitions, the Company could become subject to significant contingent
liabilities arising from the exploration and development activities conducted on
the acquired properties to the extent the Company assumes, or an acquired entity
becomes liable for, unknown or contingent liabilities or in the event that such
liabilities are imposed on the Company under theories of successor liability.
See "Acquisition and "Exploitation Activities" and "Production".
Reliance on Estimates of Proved Reserves; Depletion of Reserves. There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. The oil
and gas reserve data set forth in this Registration Statement represents
estimates only. Oil and gas reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured in
an exact manner, and estimates by other engineers might differ from those
included in this Registration Statement. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. This Registration Statement contains estimates of
the Company's proved oil and gas reserves and the projected future net revenue
therefrom, which have been prepared by an independent petroleum engineering
firm. Actual future production, oil and gas prices, revenue, capital
expenditures, taxes and operating expenses may vary substantially from those
assumed in making estimates, and the Company's reserves may be subject to
material upward or downward revision. In addition, the Company's ability to
develop its reserves will be dependent upon the timely availability of capital
for this purpose without
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which the Company's ability to produce the projected amounts of oil and gas will
be adversely affected, thereby adversely affecting the projected future net
revenue. See "Reserves".
Dependence on Other Operators. With respect to wells not operated by the
Company in which it owns an interest, the operators are, in some cases,
privately-held companies which may have limited financial resources. If a third
party operator experiences financial difficulty and fails to pay for materials
and services in a timely manner, the wells operated by such third party
operators could be subject to material and workmen's liens. In such event, the
Company would incur costs in discharging such liens. The Company has no reason
to believe that its current operators are experiencing significant financial
difficulties.
Competition. The oil and gas industry is highly competitive. The Company
competes with major integrated and independent oil and gas companies in
acquiring oil and gas properties. Many competitors have resources substantially
exceeding the resources of the Company. See "Competition".
Acquisition and Production Risks. The successful acquisition and
exploitation of producing oil and gas properties requires an assessment of the
recoverable reserves, future oil and gas prices, operating costs, the existence
of potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact and their accuracy is inherently uncertain.
Although the Company's management will perform a review of the assets of all
proposed acquisitions which management believes to be consistent with standard
industry practices, such reviews are inherently incomplete. The Company intends
to focus its due diligence efforts on the properties that management believes
contain the majority of the value in a proposed acquisition and sample the
balance of included properties. Even an in-depth review of all properties and
records of a proposed acquisition will not necessarily reveal existing or
potential problems or risks nor will it permit the Company to become
sufficiently familiar with the properties to fully assess their deficiencies,
liabilities and capabilities. Inspections are not likely to be performed on
each and every well, and potential environmental problems are not necessarily
observable even when an inspection is undertaken. Although the Company's
management has substantial experience in the oil and gas business, the
particular oil and gas assets that the Company may acquire may be unfamiliar.
Operational and Environmental Hazards; Insurance. The oil and gas industry
involves a number of operating risks, such as the risks of fire, blowouts,
explosions, cratering, pipe failure, casing collapse and abnormally pressured
formations, the occurrence of any of which could materially and adversely affect
the Company. The business is also subject to environmental hazards including
oil and saltwater spills, gas leaks, ruptures and discharges of toxic gases.
These risks could result in substantial losses to the Company due to injury and
loss of life, severe damage to and destruction of property and equipment,
pollution and other environmental damage, and suspension of operations. As the
owner of working interests in its oil and gas properties, the Company bears its
proportionate share of the obligations and liabilities arising out of the
exploration and development of those properties. Generally, owners of working
interests in oil and gas properties are jointly and severally liable for all
such obligations and liabilities. As a result, there exists a risk that the
Company could become liable for amounts in excess of its proportionate share of
such obligations and liabilities, although generally the Company would have a
right of contribution against the other working interest owners. In accordance
with customary industry practices, the Company maintains insurance against some,
but not all, of such risks and losses. The occurrence of such an event not
fully covered by insurance could have a material adverse effect on the financial
position and operations of the Company. The Company does
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not carry insurance covering environmental impairment liabilities. The Company
can provide no assurance that the insurance it carries will be adequate to cover
any loss or exposure to liability, or that such insurance will continue to be
available on terms acceptable to the Company. See "Operational Hazards and
Insurance".
Government Regulation. The Company's business is subject to extensive
federal, state and local laws and regulations relating to the exploration for,
development, production, marketing and transmission of oil and gas, as well as
environmental and safety matters. Such laws and regulations have generally
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Because the requirements
imposed by such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance with such requirements. The
states of Oklahoma and Texas have adopted revisions to its production allowable
rules under which they regulate the quantities of natural gas which producers
may produce within their respective borders. Legislation has recently been
introduced in the United States Congress to restrict the ability of states to
regulate the production of natural gas. It is impossible at this time to
determine the effect, if any, these developments may have on the natural gas
industry as a whole. However, the Company does not believe these developments
will materially affect its operations. There is no assurance that federal,
state or local laws and regulations enacted in the future will not adversely
affect the Company's ability to explore for, produce and market oil and natural
gas. See "Regulation."
Reliance on Key Personnel. The Company is dependent upon the services of
Sid L. Anderson, President; Buddie E. Livingston, II, its Vice President of
Operations, and Vincent R. Kemendo, its Vice President of Finance. The loss of
the services of any of these individuals could have a material adverse effect
upon the Company. The Company does not maintain insurance on the lives of
Messrs. Anderson, Livingston, or Kemendo. See "Item 5. Directors, Executive
Officers, Promoters and Control Persons."
Authorization and Discretionary Issuance of Preferred Stock; Anti-takeover
Provisions. The Company's Certificate of Incorporation authorizes the issuance
of Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of holders of the Company's
Common Stock. In the event of issuance, the Preferred Stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control of the Company, which could have the effect of discouraging
bids for the Company and thereby prevent shareholders from receiving a premium
for their shares over the then-current market prices. Although the Company has
no present intention to issue any additional shares of its Preferred Stock,
there can be no assurance that the Company will not do so in the future.
The Oklahoma General Corporation Act includes provisions which are intended
to encourage persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Company's Directors rather than pursue
non-negotiated takeover attempts. These existing takeover provisions may have a
significant effect on the ability of a shareholder to benefit from certain kinds
of transactions that may be opposed by the incumbent Directors.
Qualification Requirements for Nasdaq Securities. There is currently no
trading market for the Common Stock of the Company. For the Company's Common
Stock to be eligible for initial
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inclusion on Nasdaq, the Company must, among other things, maintain at least
$4,000,000 in total assets, and have at least $2,000,000 of capital and surplus.
In addition, the bid price of the Common Stock must be at least $3.00 per share,
the market value of the outstanding Common Stock must be at least $1,000,000 and
there must be at least 300 holders of the Common Stock. The Company does not
currently meet these requirements and there can be no assurance that the
Company's Common Stock will meet the requirements for inclusion on Nasdaq in the
future. It is currently anticipated that trading, if any, in the Common Stock
will be conducted in the over-the-counter market on the OTC Bulletin Board, a
NASD-sponsored inter-dealer quotation system, or in what are commonly referred
to as the "pink sheets." As a result, a shareholder may find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
Company's Common Stock. In addition, the Company's Common Stock is currently
subject to a Commission rule that imposes additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors. For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
the Company's Common Stock and the ability of shareholders to sell their shares
of Common Stock in the secondary market. See "Part II, Item 1. Market Price and
Dividends on the Registrant's Common Equity and Other Shareholder Matters."
Dividends Unlikely. The Company has never declared or paid dividends on
its Common Stock and currently does not intend to pay dividends in the
foreseeable future. The Company currently intends to follow a policy of
retaining all earnings, if any, to finance the expansion and development of its
business. In any event, future dividend policy will depend upon the Company's
earnings, financial condition, working capital requirements, and will be at the
discretion of the Board of Directors.
BUSINESS STRATEGY
The Company's business strategy has been and will continue to be the
acquisition of producing oil and gas properties and exploitation of those
properties to maximize production and ultimate reserve recovery. The Company's
present business strategy is to concentrate on expanding its asset base and cash
flow primarily through emphasis on the following activities:
. Acquiring additional producing oil and gas properties, including
properties with potential for developmental drilling to maintain a
significant inventory of undeveloped prospects and to enhance the
Company's foundation for future growth;
. Increasing production cash flow and asset value by developing the
Company's proven undeveloped reserves;
. Building on the Company's existing base of operations by concentrating
its development activities in its primary operating areas of Texas and
Oklahoma;
. Serving as operator of its wells to ensure technical performance and
reduce costs;
. Expanding its relationships with major and large independent oil and
gas companies to access their producing as well as undeveloped
properties, seismic data and financial
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resources;
. Managing financial risk and mitigating technical risk by:
. drilling in known productive trends with multi-horizon geologic
potential;
. diversifying investment over a large number of wells in the
Company's primary operating areas;
. developing properties that provide a balance between short and
long reserve lives;
. Using, where appropriate, the horizontal drilling technology licensed
by the Company from Amoco Corporation to enhance recovery of oil and
gas from producing properties;
. Offering horizontal drilling services on a contract basis to third
parties using the horizontal drilling technology licensed by the
Company from Amoco Corporation; and
. Maintaining low general and administrative expenses and increasing
economies of scale to reduce per unit Operating Costs and reserve
addition costs.
ACQUISITION AND EXPLOITATION ACTIVITIES
Acquisitions. Historically, the Company has allocated a substantial
portion of its capital expenditures to the acquisition of producing oil and gas
properties. During fiscal years 1996 and 1995, the Company acquired 706,949 and
1,843,970 Mcf of natural gas and 428,519 and 1,258,830 Bbls of oil for total
costs of approximately $222,000 and $2,246,000 respectively. These acquisitions
represent a cost of $0.41 per Boe in 1996 and $1.43 per Boe in 1995. The
Company has financed its acquisitions primarily through cash flow, bank
borrowings and issuance of Common Stock.
During 1996, the Company purchased from unaffiliated third parties four
small working interests in producing wells which the Company operates. The total
purchase price paid for these interests was $10,855. In addition, effective May
31, 1996, the Company acquired the remaining interests in two partnerships which
had not been acquired in a 1995 transaction described below. The Company
acquired these partnership interests in exchange for 46,320 shares of the
Company's Common Stock. This acquisition was negotiated on behalf of the Company
by its President, Sid Anderson, and the partnership interests acquired were
valued at approximately $59,000 based upon the estimated value of the
partnerships' oil and gas reserves as determined by an independent petroleum
reservoir engineer. Also in 1996, the Company acquired the Northwest Antelope
Mississippi Chat Unit located in Noble and Garfield Counties, Oklahoma from four
unaffiliated sellers for a total purchase price of $152,500. This acquisition
was negotiated on behalf of the Company by its President, Sid Anderson, and the
purchase price was based on a review of the property by an independent petroleum
reservoir engineer. One of the sellers in this transaction was Kato Operating
Company. Approximately six months after this acquisition, the president of Kato
Operating Company, Mr. B. E. (Bud) Livingston, was elected to the Board of
Directors of the Company. See "Part I, Item 7. Certain Relationships and Related
Transactions."
During 1995, the Company acquired all of the limited partners' interests in
four oil and gas limited partnerships in which it was the general partner and
liquidated the partnerships. In addition, the Company acquired approximately 96%
and 74% of the limited partners' interest in two other partnerships in which the
Company was the general partner. The consideration paid by the Company for these
limited partnership interests consisted of 1,349,900 shares of the Company's
Common Stock which was valued at approximately $1,267,000 based upon the
estimated value of the partnerships' oil and gas reserves as determined by an
independent petroleum reservoir engineer. The consideration paid also included
$8,392 in cash and the assumption by the Company of approximately $611,000 in
partnership debt. This acquisition was negotiated on behalf of the Company by
its President, Sid Anderson. See "Part II, Item 4. Recent Sales of Unregistered
Securities." In addition, during 1995 the Company purchased working interests in
two producing oil and gas properties from Kato Operating Company, Livingston Oil
and other unaffiliated third parties for a total purchase price of $975,000. The
properties purchased consisted of a unit containing 10 producing wells and
several shut-in wells located in Stonewall County, Texas and also included a
group of five producing leases with a total of nine producing wells located in
Lipscomb County, Texas. This acquisition was negotiated on behalf of the Company
by its President, Sid Anderson. The purchase price paid by the Company was based
on a review of the properties by independent petroleum reservoir engineers.
Approximately seven months after this acquisition, Mr. B. E. (Bud) Livingston,
President of both Kato Operating Company and Livingston Oil, was elected to the
Board of Directors of the Company. See "Part I, Item 7. Certain Relationships
and Related Transactions." Also during 1995, the Company purchased small working
interests in wells which the Company operated from three unaffiliated
individuals for a total purchase price of approximately $4,000.
To the extent that it has the capital resources to do so, the Company
intends to continue to pursue a business strategy that emphasizes reserve
additions through acquisitions. The Company intends to focus its acquisition
program on producing properties which it believes have potential for additional
exploitation through additional development and enhanced recovery via lateral
completions and improved operating techniques. The Company will seek properties
that are underdeveloped, overly burdened with expenses or owned by financially
troubled companies. Management intends to focus on properties located in the
mid-continent region of the United States, primarily in the states of Texas and
Oklahoma, where Company personnel are best able to draw on their prior oil and
gas experience. It is anticipated that a majority of the potential acquisition
opportunities will be internally generated by Company personnel, although some
opportunities may be brought to the Company by non-employee Directors or
stockholders of the Company. The Company does not currently have any plans to
engage professional firms or consultants that specialize in acquisitions but may
do so in the future. The Company may utilize any one or a combination of lines
of credit with banks, public and private sales of debt and equity securities,
joint oil and gas development arrangements and internally-generated cash flow to
finance its acquisition efforts. No assurance can be given that sufficient
external or internal funds will be available to fund the Company's desired
acquisitions.
11
<PAGE>
The Company maintains its own land, geological, petroleum engineering and
accounting staff which participate in evaluating prospective acquisitions. The
Company utilizes an acquisitions screening approach using applicable engineering
and geological criteria in the review and evaluation process. This evaluation
process helps to form the basis of the purchase price for a potential
acquisition. The Company generally considers the following in its decision-
making process: discounted future net revenues, payout, dollars per proven
barrels of oil and/or Mcf of gas and other potential behind pipe zones or
drilling opportunities. The Company will continue to weigh the comparative
value of various methods of reserve acquisitions and employ the method it
believes is most advantageous in any given transaction. After the acquisition
of oil and gas properties, management generally develops a reservoir depletion
plan to maximize production rates, ultimate reserve recovery and cash flow
generation. Such plans consider field operating procedures, workovers,
recompletions, secondary recovery implementation, additional drilling and such
other procedures as the situation dictates.
The Company does not have a specific budget for the acquisition of oil and
gas properties since the timing and size of acquisitions are difficult to
forecast. However, the Company is constantly reviewing acquisition
possibilities.
Development Activities. The Company concentrates its acquisition efforts
on proved producing properties which demonstrate a potential for significant
additional development through workovers, behind-pipe recompletions, secondary
recovery operations, the drilling of development or infill wells, and other
exploitation activities which the Company may find appropriate. The Company has
pursued an active workover and recompletion program on the properties it has
acquired and intends to continue its workover and recompletion program in the
future as properties acquired warrant. In connection with oil and gas property
acquisitions, properties are reviewed and evaluated by the Company with a view
toward taking the appropriate actions to maximize production. Such actions may
include repair or replacement of equipment or more extensive efforts such as
recompletion in a different producing zone or implementation of secondary
recovery operations. The expenditures required for the Company's workover and
recompletion program have historically been financed, and it is expected that
they will continue to be financed, by borrowings and internally generated funds.
Exploratory drilling has been minimal to date. The Company reviews
exploration proposals from other companies and individuals and may from time to
time participate in certain ventures where the risk-reward ratio is sufficiently
high to warrant capital outlays. The Company does not anticipate generating
exploration projects utilizing its own staff at the present time. Consequently,
exploratory drilling within the United States will likely only remain a small
part of the Company's business.
PRODUCTION
The Company owns and operates producing oil and gas properties located in
the states of Texas and Oklahoma and owns royalty interests in 14 non-operated
wells located in the state of Ohio. The Company continuously evaluates the
profitability of its oil, gas and related activities and has a policy of
divesting itself of unprofitable oil and gas properties or areas of operation
that are not consistent with its operating philosophy.
The Company operates 109 producing wells and owns non-operated interests in
14 producing wells and units in these states. Oil and gas sales from the
Company's producing oil and gas properties
12
<PAGE>
accounted for substantially all of the Company's revenues for the years ended
December 31, 1995 and 1996.
The following summarizes the Company's principal areas of oil and gas
production activity.
<TABLE>
<CAPTION>
AVERAGE AVERAGE NUMBER OF NET PROVED
LOCATION WORKING NET REVENUE PRODUCING RESERVES
FIELD NAME (COUNTY, STATE) INTEREST INTEREST WELLS EQUIVALENT BBLS.
- ---------- --------------- --------- ------------ --------- ----------------
<S> <C> <C> <C> <C> <C>
Flowers Stonewall, TX 100.00% 87.50% 16 458,864
Noble and 97.98% 78.94% 20 537,018
Antelope Garfield, OK
Pegs Hills Borden, TX 100.00% 80.00% 5 78,594
Higgins West Lipscomb, TX 100.00% 82.20% 8 1,058,187
Kellin Lipscomb, TX 100.00% 87.50% 2 347,322
Centrahoma Coal, OK 83.02% 65.54% 12 642,480
Bowlegs Seminole, OK 100.00% 87.50% 2 88,749
Fitts Pontotoc, OK 81.97% 64.92% 13 44,000
Hardscrabble Lincoln, OK 28.16 22.27% 5 21,443
</TABLE>
OIL AND GAS PARTNERSHIPS
The Company is the sole general partner in Pan Western 1986 Drilling
Program, Ltd. limited partnership ("1986 Program") and Pan Western 1987
Production Program, Ltd. limited partnership ("1987 Program"), whose purposes
are the acquisition, drilling, development, production, marketing and operation
of oil and gas properties. As general partner, the Company is entitled to
18.57% and 15% of the current earnings or losses for the 1986 and 1987 Programs,
respectively, and is also entitled to a "back-in" interest upon payout. For
additional information regarding these partnerships, See Note 3 to the Company's
Consolidated Financial Statements elsewhere in this Registration Statement.
HORIZONTAL DRILLING
The Company has entered into a license agreement with Amoco Corporation for
a patented short-radius horizontal drilling and completion technology. The
technology is designed to permit enhanced recovery of oil and gas from producing
formations which have high bottom hole pressures but low permeability. This
technology has been used in several oil and gas fields at both foreign and
domestic locations. The Company currently plans to use this technology to
maximize recoverable oil and gas reserves on a number of the Company's
properties and to offer the technology as a service to other oil and gas
producers. The Company intends to offer its customers a complete package of
services needed to complete a short-radius horizontal extension without having
to rely on several different contractors as is the case with most of the other
companies offering horizontal drilling services. The Company plans to offer
these services through its wholly-owned subsidiary, Lateral Completion
Technologies, Inc. ("LCT"). The Company currently estimates the costs to fund
the initial operations of LCT to be approximately $1,500,000 for the purchase of
drilling and associated equipment necessary to exploit the Amoco technology and
approximately $500,000 for working capital for the first year of operation. The
Company anticipates that it will obtain the required funding through a joint
venture arrangement with an industry partner or through debt or equity
financing. No assurance can be given that such capital will be available on
terms satisfactory to the Company.
13
<PAGE>
MARKETING
The availability of a market for oil and gas produced or marketed by the
Company is dependent upon a number of factors beyond its control which cannot be
accurately predicted. These factors include the proximity of wells to, and the
available capacity of, natural gas pipelines, the extent of competitive domestic
production and imports of oil and gas, the availability of other sources of
energy, fluctuations in seasonal supply and demand, and governmental regulation.
In addition, there is always the possibility that new legislation may be enacted
which would impose price controls or additional taxes upon crude oil or natural
gas, or both. In the event a productive gas well is completed in an area that is
distant from existing gas pipelines, the Company may allow the well to remain
shut-in until a pipeline is extended to the well or until additional wells are
drilled to establish the existence of sufficient producing reserves to justify
the cost of extending existing pipelines to the area. It appears that the United
States is emerging from a period of oversupply of natural gas which has, and may
still, cause delays, restrictions or reductions of natural gas production and
which in the past has adversely affected gas prices. Oversupplies of natural gas
can be expected to recur from time to time and may result in depressed gas
prices and in the gas producing wells of the Company being shut-in.
Since the early 1970's the supply and market price for crude oil has been
significantly affected by policies adopted by the member nations of OPEC.
Members of OPEC establish among themselves prices and production quotas for
petroleum products from time to time with the intent of manipulating the global
supply and price levels for crude oil. In addition, Canada recently revised its
laws affecting the exportation of natural gas to the United States. Mexico also
continues to fine tune its import/export policies. The oil and gas policies of
the United States, Canada and Mexico are impacted by the Canadian/U.S. Free
Trade Agreement, the General Agreement on Tariffs and Trade, and the North
American Free Trade Agreement. These factors are expected to increase
competition and may adversely affect the price of natural gas in certain areas
of the United States. The Company is unable to predict the effect, if any,
which OPEC, Canadian and Mexican policies, and emerging international trade
doctrines will have on the amount of, or the prices received for, oil and
natural gas produced and sold by the Company.
Changes in oil and natural gas prices significantly affect the revenues and
cash flow of the Company and the value of its oil and gas properties.
Significant declines in the prices of oil and natural gas could have a material
adverse effect on the business and financial condition of the Company. The
Company is unable to predict accurately whether the price of oil and natural gas
will rise, stabilize or decline in the future.
Substantially all of the Company's crude oil and condensate production is
sold at posted prices under short term contracts, as is customary in the
industry. The most significant purchasers of the Company's oil and gas
production during the year ended December 31, 1996 were Conoco Oil Company, Sun
Oil Company, Total Petroleum, Inc., and Octagon Resources, Inc. which accounted
for 18%, 16%, 15% and 11% of the Company's total oil and gas revenues,
respectively. No other purchaser of crude oil or natural gas during this period
exceeded 10% of the Company's oil and gas sales.
The Company's gas production is sold primarily on the spot market or under
market sensitive long term agreements with a variety of purchasers, including
intrastate and interstate pipelines, their marketing affiliates, independent
marketing companies and other purchasers who have the ability to
14
<PAGE>
move the gas under firm transportation agreements.
COMPETITION
Competition in the acquisition of producing oil and gas properties and in
the exploration and production of oil and gas is intense. In seeking to obtain
desirable producing properties, new leases and exploration prospects, the
Company faces competition from both major and independent oil and gas companies
as well as from numerous individuals. Many of these competitors have financial
and other resources substantially in excess of those available to the Company.
Increases in worldwide energy production capability and decreases in energy
consumption as a result of conservation efforts have brought about substantial
surpluses in energy supplies in recent years. This, in turn, has resulted in
substantial competition for markets historically served by domestic natural gas
resources both with alternate sources of energy and among domestic gas
suppliers. As a result, there have been reductions in oil and gas prices,
widespread curtailment of gas production and delays in producing and marketing
gas after it is discovered. Changes in government regulations relating to the
production, transportation and marketing of natural gas have also resulted in
significant changes in the historical marketing patterns of the industry.
Generally, these changes have resulted in the abandonment by many pipelines of
long-term contracts for the purchase of natural gas, the development by gas
producers of their own marketing programs to take advantage of new regulations
requiring pipelines to transport gas for regulated fees, and the emergence of
various types of gas marketing companies and other aggregators of gas supplies.
As a consequence, gas prices, which were once effectively determined by
government regulation, are now largely established by market competition.
Competitors of the Company in this market include other producers, gas pipelines
and their affiliated marketing companies, independent marketers, and providers
of alternate energy supplies.
REGULATION
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies,
both federal and state, have issued rules and regulations applicable to the oil
and gas industry and its individual members, some of which carry substantial
penalties for the failure to comply. The regulatory burden on the oil and gas
industry increases its cost of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
Exploration and Production. Exploration and production operations of the
Company are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilling and
producing, and the plugging and abandoning of wells. The Company's operations
are also subject to various conservation matters. These include the regulation
of the size of drilling and spacing units or proration units, the density of
wells which may be drilled, and the unitization or pooling of oil and gas
properties or interests. In this regard, some states allow the forced pooling
or integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases. In addition, state conservation laws
establish maximum
15
<PAGE>
rates of production from oil and gas wells, generally prohibit the venting or
flaring of gas, and impose certain requirements regarding the rate of
production. The effect of these regulations is to limit the amounts of oil and
gas the Company can produce from its wells, and to limit the number of wells or
the locations at which the Company can drill.
The states of Oklahoma and Texas have adopted or are considering revisions
to their production allowable rules under which they regulate the quantities of
natural gas which may be produced within their borders. The stated rationale
behind such prorationing legislation and rulemaking is the conservation of
natural resources, prevention of waste and protection of the correlative rights
of oil and gas interest owners by limiting production to the available market.
It is impossible at this time to determine the effect, if any, these
developments may have on the natural gas industry as a whole. The Company does
not believe the developments will materially affect its operations.
Certain of the Company's oil and gas leases are granted by the federal
government and administered by various federal agencies. Such leases require
compliance with detailed federal regulations and orders which regulate, among
other matters, drilling and operations on these leases and calculation of
royalty payments to the federal government. The Mineral Lands Leasing Act of
1920 places limitations on the number of acres under federal leases that may be
owned in any one state. While the Company does not have a substantial federal
lease acreage position in any state or in the aggregate, the Company does own
interests in federal oil and gas leases which produce amounts of oil and gas
material to the Company The Mineral Lands Leasing Act of 1920 and related
regulations also may restrict a corporation from holding title to federal
onshore oil and gas leases if stock of such corporation is owned by citizens of
foreign countries which are not deemed reciprocal under such Act. Reciprocity
depends, in large part, on whether the laws of the foreign jurisdiction
discriminate against a United States person's ownership of rights to minerals in
such jurisdiction. The purchase of shares in the Company by citizens of foreign
countries who are not deemed to be reciprocal under such Act could have an
impact on the Company's ownership of federal leases.
The Company's operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Permits are
required for various of the Company's operations, and these permits are subject
to revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations are subject to fines, injunctions or both. It is possible that
increasingly strict requirements will be imposed by environmental laws and
enforcement policies thereunder. The Company is also subject to laws and
regulations concerning occupational safety and health. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in the aggregate to the Company's overall operations by reason of
environmental or occupational safety and health laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
Natural Gas Sales and Transportation. Federal legislation and regulatory
controls have historically affected the price of the gas produced by the Company
and the manner in which such production is marketed. The transportation and
sale for resale of gas in interstate commerce are regulated pursuant to the
Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the
"NGPA") and Federal Energy Regulatory Commission ("FERC") regulations
promulgated
16
<PAGE>
thereunder. Since 1978, maximum selling prices of certain categories of gas,
whether sold in interstate or intrastate commerce, have been regulated pursuant
to the NGPA. The NGPA established various categories of gas and provided for
graduated deregulation of price controls of several categories of gas and the
deregulation of sales of certain categories of gas. All price deregulation
contemplated under the NGPA has already taken place.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company performs a minimal
title investigation before acquiring oil and gas properties, which generally
consists of obtaining a title report from legal counsel covering title to the
major properties (for example, properties comprising at least 80% by value of
the acquired properties) and due diligence reviews by independent landmen of the
remaining properties. The Company believes that it has satisfactory title to
such properties in accordance with standards generally accepted in the oil and
gas industry. A title opinion is obtained prior to the commencement of any
drilling operations on such properties. The Company's properties are subject to
customary royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens which the Company believes do not materially
interfere with the use of or affect the value of such properties. Substantially
all of the Company's oil and gas properties are and will continue to be
mortgaged to secure borrowings under the Company's credit facilities.
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formations, producing facilities or
other property, or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risk. The
Company carries insurance against certain of these risks but, in accordance with
standard industry practice, the Company is not fully insured for all risks,
either because such insurance is unavailable or because the Company elects not
to obtain insurance coverage because of cost. Although such operational risks
and hazards may to some extent be minimized, no combination of experience,
knowledge and scientific evaluation can eliminate the risk of investment or
assure a profit to any company engaged in oil and gas operations.
EMPLOYEES
The Company employs a total of seven full time personnel at its offices in
Tulsa, Oklahoma and one field employee in the state of Texas. The Company also
engages the services of 17 additional contract field personnel. The Company
believes its relations with its employees and contractors are excellent.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The selected financial information set forth below for each of the
Company's fiscal years ended December 31, 1996 and 1995 is derived from the
audited consolidated financial statements of the Company appearing elsewhere in
this Registration Statement. The selected financial information set forth below
for the three months ended March 31, 1997 and 1996 is derived from the unaudited
consolidated financial statements of the Company appearing elsewhere in this
Registration Statement and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's financial position and results of operations.
The operating results for the three months ended March 31, 1997 and 1996 are not
necessarily indicative of the operating results for the entire year. The
selected financial information set forth below should
17
<PAGE>
be read together with management's discussion and analysis set forth below and
the Company's audited and unaudited consolidated financial statements, including
the notes thereto, appearing elsewhere in this Registration Statement.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
------------------------- -------------------------
1996 1995 1997 1996
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales.......................... $ 1,675,193 $ 983,841 $416,442 $356,637
Operating income........................... 122,524 168,691 22,346 39,645
----------- ---------- -------- --------
Total revenue.............................. 1,797,717 1,152,532 438,788 396,282
Lease operating costs...................... 725,432 473,927 178,006 150,123
Depreciation, depletion, and amortization.. 318,556 302,618 78,482 83,981
Interest expense........................... 233,411 97,252 51,476 49,195
Salaries and wages......................... 375,482 273,953 93,968 93,350
General and administrative................. 378,535 364,280 117,188 70,381
Loss before income taxes................... (252,444) (368,437) (39,693) (60,382)
Net loss................................... (252,444) (364,092) (39,693) (60,382)
Net loss per common share.................. (.08) (.13) (0.01) (0.02)
BALANCE SHEET DATA:
Working capital (deficit).................. (1,361,893) (820,247)
Property and equipment, net................ 2,930,856 2,924,166
Total assets............................... 3,626,212 3,224,312
Current portion of long-term debt and
notes payable............................ 1,338,665 650,719
Long-term debt............................. 1,072,469 1,434,445
Stockholders' equity....................... 554,330 553,968
</TABLE>
RESULTS OF OPERATIONS
The Company follows the "successful efforts" method of accounting for its
oil and gas properties whereby costs of productive wells and productive leases
are capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves. Depletion of capitalized costs is provided on a
well-by-well basis. Exploratory expenses, including geological and geophysical
expenses and annual delay rentals, are charged to expense as incurred.
Exploratory drilling costs, including the cost of stratigraphic test wells, are
initially capitalized, but charged to expense if and when the well is determined
to be unsuccessful.
The factors which most significantly affect the Company's results of
operations are (i) the sale prices of crude oil and natural gas, (ii) the level
of oil and gas sales, (iii) the level of lease operating expenses, (iv) the
level of exploratory activities, and (v) the level of and interest rates on
borrowings. Total sales volumes and the level of borrowings are significantly
impacted by the degree of success the Company experiences in its efforts to
acquire oil and gas properties and its ability to maintain or increase
production from existing oil and gas properties through its development and
production enhancement activities. The following table reflects certain
historical operating data for the periods presented.
18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31
---------------------- ---------------------------
1996 1995 1997 1996
---------- ---------- ----------- ---------
<S> <C> <C>
NET SALES VOLUMES:
Oil (Bbls) 56,871 38,177 12,434 12,329
Natural gas (Mcf) 263,123 215,956 61,428 62,939
Oil equivalent (Boe) 100,725 74,170 22,672 22,819
AVERAGE SALES PRICES:
Oil (per Bbl) $ 20.85 $ 18.34 $ 22.13 $ 18.73
Natural gas (per Mcf) 1.86 1.31 2.28 1.68
OPERATING EXPENSES PER BOE OF NET
SALES:
Lease operating $ 7.20 $ 6.39 $ 7.85 $ 6.58
General, administrative and other 9.99 10.04 9.79 9.82
Depreciation, depletion and
amortization 3.16 4.08 3.46 3.68
</TABLE>
Relatively modest changes in either oil or gas prices significantly impact
the Company's results of operations and cash flow and could significantly impact
the Company's borrowing capacity. Prices received by the Company for sales of
oil and natural gas have fluctuated significantly from period to period. The
Company's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is substantially dependent on oil and gas
prices. Domestic spot oil prices have ranged from a low of approximately $11 per
barrel in July 1986 to a high of approximately $40 per barrel in October 1991,
with a current price of approximately $18.50 per barrel. The fluctuations in
oil prices during these periods reflect market uncertainty regarding OPEC's
ability to control the production of its member countries, as well as concerns
related to the global supply and demand for crude oil. Since the end of the
Gulf War in early 1991, crude oil prices have experienced continued weakness,
primarily as a result of OPEC's inability to maintain disciplined production
quotas by member countries and the uncertainty associated with Iraq's return to
the crude oil export market. These factors continue to overhang the market and
will create significant price volatility for the foreseeable future.
Natural gas prices received by the Company fluctuate generally with changes
in the spot market price for gas. Spot market gas prices have generally
declined in recent years because of lower worldwide energy prices as well as
excess deliverability of natural gas in the United States. However, natural gas
prices have rebounded recently and appear to be poised for further
strengthening. Domestic spot natural gas prices have ranged from a low of
approximately $0.90 per Mcf in January 1992 to a high of approximately $4.44 per
Mcf in December 1996, with a current price of approximately $3.25 per Mcf.
Environmental concerns coupled with recent increases in the use of natural gas
to produce electricity have combined to improve prices. As part of continued
deregulation of natural gas, U.S. pipelines have been made more accessible to
both buyers and sellers of natural gas and, as a result, natural gas will be
able to more effectively compete for market share with other end-use energy
forms.
The Company's principal source of cash flow is the production and sale of
its crude oil and natural gas reserves, which are depleting assets. Cash flow
from oil and gas sales depends upon the
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<PAGE>
quantity of production and the price obtained for such production. An increase
in prices permits the Company to finance its operations to a greater extent with
internally generated funds. A decline in oil and gas prices reduces the cash
flow generated by the Company's operations, which in turn reduces the funds
available for servicing debt, acquiring additional oil and gas properties and
exploring for an developing new oil and gas reserves.
In addition to the foregoing, the results of the Company's operations vary
due to seasonal fluctuations in the sales prices and volumes of natural gas. In
recent years, natural gas prices have been generally higher in the fall and
winter. Due to these seasonal fluctuations, results of operations for
individual annual and quarterly periods may not be indicative of results which
may be realized on an annual basis.
The following events have directly affected the comparability of the
results of operations and financial position of the Company during the periods
presented:
. Effective April 1, 1995, the Company acquired all of the limited
partners' interests in four oil and gas limited partnerships in which
it was the sole general partner and liquidated the partnerships. In
addition, effective April 1, 1995, the Company acquired approximately
74% and 96% of the limited partners' interest in two additional oil
and gas limited partnerships in which the Company was also the sole
general partner. The consideration paid by the Company for these
limited partnership interests was 1,349,900 shares of the Company's
Common Stock, $8,392 in cash, and the assumption of approximately
$611,000 in partnership debt. The stock was valued at approximately
$1,267,000 based upon the estimated value of the partnerships' oil and
gas reserves.
. On December 1, 1995, the Company purchased the 50% partnership
interest it did not already own in South Boulder Associates, Ltd. and
liquidated the partnership. The Company previously owned a 50%
interest in this partnership and was the general partner. South
Boulder Associates, Ltd. owned the office building located at 1850
South Boulder Avenue, Tulsa, Oklahoma which is the location of the
executive offices of the Company. The purchase price for this
partnership interest was $50,000 in cash and the assumption of
approximately $168,000 in partnership debt.
. In December 1995, the Company acquired the producing oil and gas
property known as the West Flowers Unit, located in Stonewall County,
Texas. The Company paid $625,000 for this property and expended an
additional $134,485 in capitalized costs during the year ended
December 31, 1996. Sales of oil and gas from this property accounted
for approximately 21% of the oil and gas revenues and approximately
18% of the lease operating expense of the Company during the year
ended December 31, 1996.
. In January 1996, the Company acquired the producing oil and gas
property known as the Northwest Antelope Mississippi Chat Unit,
located in Noble and Garfield Counties, Oklahoma. The Company paid
$152,500 for this property and incurred an additional $218,113 in
capitalized costs on the property during the year ended December 31,
1996. Sales of oil and gas from this property accounted for
approximately 9% of the oil and gas revenues and approximately 18% of
the lease
20
<PAGE>
operating expenses of the Company for the year ended December 31,
1996.
. In May 1996, the Company acquired the remaining limited partnership
interests which it had not acquired in April 1995 in two oil and gas
limited partnerships which the Company then liquidated. The
consideration paid for these interests was 46,320 shares of Common
Stock which was valued at approximately $59,000 based on the estimated
value of the partnership oil and gas assets acquired.
Year ended December 31, 1996 compared to year ended December 31, 1995.
Total revenues for the year ended December 31, 1996 increased 55.9% to
$1,797,717 compared to $1,152,532 for the year ended December 31, 1995. Oil and
gas revenues increased from $983,841 for the year ended December 31, 1995 to
$1,675,193 for the year ended December 31, 1996. These increases were
attributable to both increases in production and increases in average prices
received during the year. Average prices received by the Company were $20.85
per Bbl of oil and $1.86 per Mcf of gas during fiscal 1996 compared to $18.34
per Bbl of oil and $1.31 per Mcf of gas received during fiscal 1995.
Oil and gas production for the year ended December 31, 1996 was 18,694 Bbls
and 47,167 Mcf higher than production volumes experienced during the prior year.
These production increases were primarily attributable to the production from
producing oil and gas properties purchased in December 1995 and January 1996.
Production from the Northwest Antelope Mississippi Chat Unit, which the Company
acquired in January 1996, amounted to 4,919 Bbls of oil and 21,029 Mcf of gas
during fiscal 1996 and production from the West Flowers Unit, which the Company
acquired in December 1995, amounted to 16,294 Bbls of oil and 4,627 Mcf of gas
during fiscal 1996.
Operating income declined from $168,891 during the year ended December 31,
1995 to $122,524 during the year ended December 31, 1996. The decline is
attributable to the loss of operating revenues received from the various limited
partnerships which were acquired by the Company in April 1995. Prior to their
acquisition, the Company had charged these partnerships for administrative
overhead and field supervision in connection with the Company's activities in
operating the wells for the partnerships. The Company continues to charge third
party working interest owners these overhead fees on a monthly basis on wells
that the Company operates.
Lease operating expenses increased from $473,927 during 1995 to $725,432
during the year ended December 31, 1996. Lease operating expense is comprised
of the normal and recurring expenses incurred in the operation of oil and gas
wells, production taxes, compression and dehydration fees and transportation
costs. Normal and recurring lease operating expense increased from $410,198 in
fiscal 1995 to $624,074 during fiscal 1996. Oil and gas properties acquired
during December 1995 and January 1996 accounted for approximately $238,200 of
this increase while normal lease operating expense on wells the Company owned
during both fiscal 1995 and 1996 declined by approximately $24,300 due to more
efficient operating procedures. Production taxes during 1996 amounted to
$96,939 compared to $57,446 in the prior year. The increase in taxes is a
direct result of increased revenue from oil and gas sales experienced during the
year ended December 31, 1996. Compression and dehydration fees increased from
$1,889 during fiscal 1995 to $3,304 during fiscal 1996 and transportation costs
paid by the Company declined to $1,114 during fiscal 1996 from $4,394 during the
prior year.
Compensation expense increased from $273,953 during fiscal 1995 to $375,482
during fiscal
21
<PAGE>
1996. Approximately $70,000 of this increase is a result of the inclusion of a
full year's salary for two executive officers who joined the Company in
September and December 1995. The remainder of the increase is attributable to
increases in compensation to existing employees.
Depreciation, depletion and amortization expense for the year ended
December 31, 1996 was $318,556 compared to $302,618 for the prior year.
Depletion of oil and gas assets is based on a unit of production method and
support equipment is depreciated over its estimated useful life. The increase
is attributable to both increased production of oil and gas during 1996 and
increased capitalized costs being depleted during the year. The increase in
capitalized costs is primarily attributable to the purchase of producing oil and
gas properties during December 1995 and January 1996.
General and administrative expenses for the year ended December 31, 1996
increased to $378,535 from $364,280 for the prior year reflecting primarily
increases in professional fees, insurance costs, and travel and transportation
costs.
Other expense increased from $106,191 in 1995 to $252,156 in 1996. This
increase is comprised primarily of the loss from operations for the office
building which the Company owns and the increase in interest expense. During
December 1995, the Company acquired the remaining outside interest in the
partnership which owned the office building in which its executive offices are
located. During fiscal 1995, the Company paid rent to this partnership in the
amount of $25,800. Interest expense increased from $97,252 during fiscal 1995
to $233,411 during fiscal 1996. The increase is attributable to both the debt
assumed when the Company acquired the oil and gas limited partnerships during
the year and the additional debt incurred to purchase producing oil and gas
properties acquired in December 1995 and January 1996.
Year ended December 31, 1995 compared to year ended December 31, 1994. The
Company's operations for the year ended December 31, 1995 include nine months of
activity of six oil and gas limited partnerships in which the company was the
general partner. These partnership interests were acquired from the limited
partners in exchange for Common Stock of the Company effective April 1, 1995.
Total revenues were $1,152,532 for the year ended December 31, 1995
compared to $811,202 for the year ended December 31, 1994. This represents a
42% increase in total revenues for the period. Oil and gas revenues for the
period ended December 31, 1995 were $983,841 with $700,408 coming from oil sales
and $283,433 from gas sales. Oil sales were based on the sale of 38,177 barrels
at an average price of $18.34 per barrel. Gas sales were based on the sale of
215,956 Mcf at an average price of $1.31 per Mcf. Operating income, which
consists of revenues received from other working interest holders in wells that
the Company operates including reimbursement of allocated Company overhead,
field supervision overhead, and compressor fee income, amounted to $168,691 for
the year ended December 31, 1995 compared to $255,638 for the year ended
December 31, 1994. The decline in operating income during the year ended
December 31, 1995 was almost entirely attributable to the loss of revenues from
the limited partnerships which were acquired by the Company in fiscal 1995.
Lease operating expenses for the year ended December 31, 1995 were $473,927
compared to $251,024 for the year ended December 31, 1994. This increase is
primarily a result of the inclusion of lease operating expenses associated with
the oil and gas properties owned by the limited partnerships acquired by the
Company in fiscal 1995. Lease operating expenses include production taxes paid,
22
<PAGE>
compression and dehydration charges, transportation fees paid, and normal
operating expenses incurred.
Depreciation, depletion and amortization expenses increased to $302,618 for
the year ended December 31, 1995 from $109,214 for the prior year. The increase
is primarily a result of depreciation and depletion expenses incurred on oil and
gas properties which were previously owned by the limited partnerships acquired
by the Company.
General and administrative and compensation expense were $638,233 during
the year ended December 31, 1995 compared with $693,509 for the year ended
December 31, 1994. The reduction in these expenses is primarily a result of a
decrease in bad debt expense associated with non-payment of invoices by outside
working interest owners on wells operated by the Company.
Interest expense for the year ended December 31, 1995 amounted to $97,252
compared to $41,640 for the year ended December 31, 1994. This increase is
attributable to the assumption, by the Company, of notes payable which were
previously liabilities of the limited partnerships acquired by the Company.
Net gain on the sale of assets during the year ended December 31, 1995
amounted to $5,777 compared to $113,112 for the year ended December 31, 1994.
During the year ended December 31, 1994 the Company sold three oil and gas
properties to third parties and realized significant gains on the sale. During
the year ended December 31, 1995 the Company sold a greater number of oil and
gas properties, but the properties sold had been developed by the Company, were
approaching the end of their economic lives, and were sold at lower prices for
only slight losses or gains.
Three months ended March 31, 1997 compared to three months ended March 31,
1996. The Company completed the sale of its oil and gas properties located in
the state of Kansas effective February 1, 1997. This sale included seven gross
(5.6 net) wells which had daily gross production of 20.5 (12.9) net barrels of
oil per day. Total proved developed oil reserves for these properties at
December 31, 1996 were estimated to be 33,010 barrels of oil. The sales price
received by the Company was $120,000 which resulted in a gain of approximately
$44,000.
The net loss of the Company declined by $20,689 from a loss of $60,382 for
the quarter ended March 31, 1996 to a loss of $39,693 for the quarter ended
March 31, 1997. The reduced loss is due primarily to increased prices received
by the Company on the sale of its production during the three months ended March
31, 1997 and the gain realized from the sale of the Company's Kansas oil and gas
properties described above.
Oil and gas sales were $416,442 for the first quarter of 1997 compared to
$356,637 for the first quarter of 1996. This represents an increase of $59,805
which is due primarily to higher prices received by the Company for the sale of
its oil and gas production during the three months ended March 31, 1997.
Operating income declined by $17,299 during the three months ended March
31, 1997 to $22,346 compared to $39,645 for the three months ended March 31,
1996. The decline is attributable to lower overhead charges on a fewer number of
wells operated by the Company.
Lease operating expenses for the three months ended March 31, 1997
increased $27,883 to $178,006 from $150,123 during the three months period ended
March 31, 1996. Approximately $10,729 of this increase is due to higher
production taxes paid by the Company during the first quarter of 1997 as a
result of the higher revenues received. In addition, the Company experienced an
increase in the number and amount of expenses incurred in completing workovers
on wells operated by the Company during the quarter ended March 31, 1997.
Depreciation, depletion and amortization declined to $78,482 for the three
month period ended March 31, 1997 compared to $83,981 during the three month
period ended March 31, 1996. The decline is due primarily to the absence of
depreciation expense on oil and gas properties located in Kansas which were sold
during the quarter ended March 31, 1997.
General and administrative expenses increased by $46,807 from $70,381
during the quarter ended March 31, 1996 to $117,188 during the quarter ended
March 31, 1997. The increase was due primarily to increased expenses incurred in
preparing the Company's Registration Statement on Form 10-SB for filing with the
Securities and Exchange Commission and other expenses related to the
registration of the Company's Common Stock under the Securities Exchange Act of
1934. Legal fees increased by approximately $10,600, accounting and audit fees
increased by approximately $7,500, other professional expenses increased by
approximately $10,600, and travel and entertainment expenses increased by
approximately $16,500.
Other income (expense) declined from expense of $58,830 experienced during
the quarter ended March 31, 1996 to expense of $10,837 during the quarter ended
March 31, 1997. Major changes included an increase in interest expense for the
period to $51,476 compared to $49,195 for the same period a year ago. The
increase is attributable to inclusion of interest expense on a $500,000 line of
credit on which a total of $349,713 had been borrowed as of March 31, 1997. In
addition, as described above, the Company sold its oil and gas properties
located in the state of Kansas effective February 1, 1997 for $120,000 which
resulted in a gain on sale of approximately $44,000 in the quarter ended March
31, 1997.
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities. In general, because the Company's oil
and gas reserves are depleted by production, the success of its business
strategy is dependent upon a continuous acquisition and exploration and
development program.
The domestic spot price for crude oil has ranged from $11.00 to $40.00 per
barrel over the past ten years. To the extent that crude oil prices continue
fluctuating in this manner, the Company expects material fluctuations in
revenues from quarter to quarter which, in turn, could adversely affect the
Company's ability to timely service its debt to its principal banks and fund its
ongoing operations and could, under certain circumstances, require a write-down
of the book value of the Company's oil and gas reserves.
Since the Company is engaged in the business of acquiring producing oil and
gas properties, from time to time it acquires certain non-strategic and marginal
properties in some of its purchases. A portion of the Company's on-going
profitability is related to the disposition of these non-strategic properties on
a regular basis. The Company expects to continue to pursue sales of these
types of properties in the future. In most cases the revenue from these
properties is insignificant and in many cases does not exceed the lease
operating expense. As a result, a portion of the Company's capital resources
are generated by the sale of assets from continuing operations. Sales of non-
strategic and
23
<PAGE>
minor interests oil and gas properties accounted for $7,326 in losses during
fiscal 1996 and $5,777 in gains during fiscal 1995.
Capital Expenditures. The timing of most of the Company's capital
expenditures is discretionary. Currently there are no material long-term
commitments associated with the Company's capital expenditure plans.
Consequently, the Company has a significant degree of flexibility to adjust the
level of such expenditures as circumstances warrant. The Company primarily uses
internally generated cash flow and proceeds from the sale of oil and gas
properties to fund capital expenditures, other than significant acquisitions,
and to fund its working capital needs. If the Company's internally generated
cash flows should be insufficient to meet its debt service or other obligations,
the Company may reduce the level of discretionary capital expenditures or
increase the sale of non-strategic oil and gas properties in order to meet such
obligations. The level of the Company's capital expenditures will vary in
future periods depending on energy market conditions and other related economic
factors. The Company anticipates that its cash flow will be sufficient to fund
its operations and debt service at their current levels for the next year.
Substantially all of the Company's capital expenditures have been made to
acquire oil and gas properties. During the year ended December 31, 1995, the
Company completed five acquisitions of oil and gas properties for a cost of
approximately $2,246,000, including the value of the oil and gas properties
acquired by the Company in connection with the acquisition of 100% of the
limited partners' interest in four limited partnerships and approximately 74%
and 97% of the limited partners' interest in two additional limited
partnerships, respectively, for a total of 1,349,900 shares of the Company's
Common Stock, $8,392 in cash and the assumption of approximately $611,000 in
partnership debt. During the year ended December 31, 1996, the Company
completed three acquisitions of oil and gas properties for a cost of
approximately $222,000, including the value of the remaining limited partners'
interest in the two limited partnerships which were not 100% acquired in fiscal
1995. These remaining limited partnership interests were acquired for 46,320
shares of the Company's Common Stock. The Company's strategy is to continue to
expand its reserve base principally through acquisitions of producing oil and
gas properties. As a result, it is likely that capital expenditures will exceed
cash provided by operating activities in years where significant growth occurs
in the Company's oil and gas reserve base. In such cases, additional external
financing will be required.
The Company intends to continue its practice of reserve replacement and
growth through the acquisition of producing oil and gas properties, although at
this time it is unable to predict the number and size of such acquisitions, if
any, which will be completed. The Company's ability to finance its oil and gas
acquisitions is determined by its cash flow from operations and available
sources of debt and equity financing.
As of March 31, 1997, the Company had a working capital deficit of
$1,358,965 compared to a working capital deficit of $1,361,893, as of December
31, 1996. During the three month period ended March 31, 1997 the Company
experienced a decrease in cash flow of $70,591 primarily as a result of
reductions in both accounts receivable and accounts payable, proceeds from the
sale of oil and gas properties and reductions in long term debt. Subsequent to
March 31, 1997 the Company completed a private placement of 75,000 shares of its
Common Stock for total proceeds of $150,000 which the Company will use to fund
working capital needs. See "Part II, Item 4. Recent Sales of Unregistered
Securities."
Financing Arrangements. To date, the Company has financed its acquisitions
of oil and gas properties primarily through bank borrowings and issuance of
Common Stock. At December 31, 1996, the Company was indebted to three principal
lenders in the aggregate amount of $2,176,603. Aggregate monthly payments on
this indebtedness are approximately $63,000 and interest rates range from 8.6%
to 10.0%. At maturity of this indebtedness, which will occur from May 1997 to
March 2001, principal amounts due will range from $25,000 to $682,000. The
Company anticipates that at maturity it will be able to refinance this
indebtedness as necessary on satisfactory terms. Substantially all of the
Company's oil and gas properties are subject to mortgages granted to secure this
debt.
24
<PAGE>
The Company owns the office building in Tulsa, Oklahoma in which its
executive offices are located. The Company financed the acquisition of this
building through borrowing from a bank. At December 31, 1996, the Company was
indebted to this bank in the principal amount of $210,969. This loan bears
interest at the rate of 9.5% per year, and requires monthly payments of $2,261,
with approximately $175,000 due at maturity in March 2001. The Company has
granted a mortgage on the building to secure this debt.
For additional information regarding the indebtedness of the Company at
December 31, 1996, see Note 5 to the Company's audited consolidated financial
statements elsewhere in this Registration Statement.
SEASONALITY
The results of operations of the Company are somewhat seasonal due to
seasonal fluctuations in the price for crude oil and natural gas. Recently,
crude oil prices have been generally higher in the third calendar quarter and
natural gas prices have been generally higher in the first calendar quarter.
Due to these seasonal fluctuations, results of operations for individual
quarterly periods may not be indicative of results which may be realized on an
annual basis.
INFLATION AND PRICES
In recent years, inflation has not had a significant impact on the
Company's operations or financial condition. The generally downward pressure on
oil and gas prices during most of such periods has been accompanied by a
corresponding downward pressure on costs incurred to acquire, develop and
operate oil and gas properties as well as the costs of drilling and completing
wells on properties.
ITEM 3. DESCRIPTION OF PROPERTY
OIL AND GAS PROPERTIES
All of the Company's oil and gas properties, reserves and activities are
located onshore in the continental United States in the states of Texas and
Oklahoma. There are no quantities of oil or gas produced by the Company which
are subject to long-term supply or similar agreements with foreign governmental
authorities.
Oil and Gas Reserves. Sycamore Resources, LLC ("Sycamore Resources)", an
independent petroleum engineering consulting firm, has made estimates of the
Company's oil and gas reserves as of January 1, 1997. Sycamore Resources' report
covers the estimated present value of future net cash flows before income taxes
(discounted at 10%) attributable to the Company's proved developed reserves, as
well as its proved undeveloped reserves and estimated future net cash flows from
such reserves. The Sycamore Resources report includes the Company's oil and gas
properties located in the state of Kansas which have subsequently been sold, and
does not include the Company's royalty interests in 14 wells located in the
state of Ohio which are not material to the Company's total oil and gas
reserves.
25
<PAGE>
The quantities of the Company's proved reserves of oil and natural gas
presented below include only those amounts which the Company reasonably expects
to recover in the future from known oil and gas reservoirs under existing
economic and operating conditions. Proved developed reserves are limited to
those quantities which are recoverable commercially at current prices and costs,
under existing regulatory practices and with existing technology. Accordingly,
any changes in prices, operating and development costs, regulations, technology
or other factors could significantly increase or decrease estimates of the
Company's proved developed reserves. The Company's proved undeveloped reserves
include only those quantities which the Company reasonably expects to recover
from the drilling of new wells based on geological evidence from offsetting
wells. The risks of recovering these reserves are higher from both geological
and mechanical perspectives than the risks of recovering proved developed
reserves.
Set forth below are estimates of the Company's net proved reserves and
proved developed reserves and the estimated future net revenues from such
reserves and the present value thereof based upon the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69. "Disclosures about Oil and Gas Producing Activities." Estimated future
net cash flows from proved reserves are determined by using estimated quantities
of proved reserves and the periods in which they are expected to be developed
and produced based on economic conditions at the date of the report. The
estimated future production is priced at current prices at the date of the
report. The resulting estimated future cash inflows are then reduced by
estimated future costs to develop and produce reserves based on cost levels at
the date of the report. No deduction has been made for depletion, depreciation
or income taxes or for indirect costs, such as general corporate overhead.
Present values were computed by discounting future net revenues at 10% per
annum.
The following table sets forth estimates of the proved oil and natural gas
reserves of the Company as of January 1, 1997, as evaluated by Sycamore
Resources.
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
--------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Developed Undeveloped Total Developed Undeveloped Total
Oklahoma --------- ----------- --------- --------- ----------- ---------
Texas 658,373 0 658,373 2,588,536 2,476,810 5,065,346
Kansas(1) 563,520 1,023,781 1,587,301 1,325,861 918,874 2,244,735
33,010 0 33,010 0 0 0
Total --------- --------- --------- --------- --------- ---------
1,254,903 1,023,781 2,278,684 3,914,397 3,395,684 7,310,081
========= ========= ========= ========= ========= =========
</TABLE>
_______________________
(1) Subsequent to January 1, 1997 the Company sold its oil and gas properties
in the state of Kansas. See "Sale of Kansas Oil and Gas Properties."
The following table sets forth amounts as of December 31, 1996 determined
in accordance with the requirements of the applicable accounting standards, of
the estimated future net cash flows from production and sale of the proved
reserves attributable to the Company's oil and gas properties before income
taxes and the present value thereof. Benchmark prices used in determining the
future net cash flow estimates as of January 1, 1997 were $24.25 per barrel for
oil and $2.78 per Mcf for gas.
26
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------
(IN THOUSANDS)
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
RESERVES RESERVES RESERVES
--------- ----------- --------
<S> <C> <C> <C>
Estimated future net cash
flows from proved
reserves before income
taxes $28,701 $28,360 $57,061
Present value of estimated
future net cash flows from
proved reserves before
income taxes (discounted
at 10%) $16,947 $19,359 $36,306
</TABLE>
The estimation of oil and gas reserves is a complex and subjective process
which is subject to continued revisions as additional information becomes
available. Reserve estimates prepared by different engineers from the same data
can vary widely. Therefore, the reserve data presented herein should not be
construed as being exact. Any reserve estimate depends in part on the quality
of available data, engineering and geologic interpretation, and thus represents
only an informed professional judgment. Subsequent reservoir performance may
justify upward or downward revision of such estimate.
Estimates of the Company's proved reserves have never been filed or
included in reports to any federal authority or agency.
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see Note 16 to
the Company's Consolidated Financial Statements - Supplementary Financial
Information About Oil and Gas Producing Activities (unaudited).
Productive Wells and Acreage. The following table sets forth the Company's
producing wells and Developed Acreage assignable thereto at December 31, 1996.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
----------------------------------------
DEVELOPED ACREAGE OIL GAS TOTAL
- ------------------- ----------- ----------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
- ----- --- ----- --- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C>
16,141 13,578 80 53.38 43 14.63 123 68.01
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. Wells
which are completed in more than one producing horizon are counted as one well.
Of the gross wells reported above, nine had multiple completions.
At December 31, 1996, the Company held no undeveloped acres.
27
<PAGE>
Production, Unit Prices and Costs. The following table set forth
information with respect to production and average unit prices and costs for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995
-------- --------
<S> <C> <C>
PRODUCTION:
Gas (Mcf) 263,123 215,956
Oil (Bbls) 56,871 38,177
AVERAGE SALES
PRICES:
Gas (per Mcf) $ 1.86 $ 1.31
Oil (per Bbl) 20.85 18.34
AVERAGE LEASE
OPERATING
COSTS PER BOE (1) 7.20 6.39
</TABLE>
____________________________________
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and repair,
labor and utilities.
Drilling Activity. During the years ended December 31, 1995 and 1996, the
Company did not drill or participate in the drilling of any exploratory or
development wells. To the extent the Company engages in drilling activities in
the future other than horizontal drilling activities (See "Item 1. Description
of Business - Horizontal Drilling"), all such activities will be conducted with
independent contractors. The Company currently owns no drilling equipment.
Sale of Kansas Oil and Gas Properties. Effective February 1, 1997, the
Company sold all of its producing oil and gas properties in the state of Kansas.
This sale included 7 gross (5.6 net) wells which had average daily gross
production of 20.5 (12.9 net) barrels of oil per day. Total proved developed
oil reserves at December 31, 1996 amounted to 33,010 barrels of oil. There were
no proved undeveloped oil reserves associated with these properties. The sale
price received by the Company was $120,000 which resulted in a gain on sale of
assets of approximately $52,000.
OFFICE FACILITIES
The Company owns the office building in Tulsa, Oklahoma in which its
executive offices are located. The Company occupies approximately 2,862 square
feet of space in this building with the remaining 5,724 square feet available
for rental to third parties. At present, approximately 1,430 square feet are
unoccupied. The building is subject to a mortgage in the current principal
amount of $210,969 payable in monthly installments of $2,261 until March 2001 at
which time the balance of approximately $175,000 will be due. The Company
believes this facility is adequate for its present requirements. Except for
this office building, the Company owns no material properties other than its oil
and gas properties.
28
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On February 18, 1997, the Company declared a four-for-one stock split in
the form of a stock dividend payable to the Company's shareholders of record on
April 1, 1997. All references to outstanding shares, share ownership and per
share amounts in this Registration Statement are presented giving effect to such
stock dividend.
As of June 10, 1997, the Company had 3,308,560 issued and outstanding
shares of Common Stock, the Company's only class of equity securities issued and
outstanding. The following table sets forth, as of June 10, 1997, the number
and percentage of shares of Common Stock of the Company owned beneficially by
(i) each director of the Company, (ii) each Named Officer of the Company named
in the Summary Compensation Table in Item 6 below, (iii) all directors and
executive officers of the Company as a group, and (iv) each person known to the
Company to own of record or beneficially more than five percent of the Company's
Common Stock. Except as otherwise indicated, the persons named in the table have
sole voting and investment power with respect to the shares indicated. As of
June 10, 1997, the Company had 302 holders of Common Stock of record.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS(1)
- ------------------------ ------------------ -------------------
<S> <C> <C>
Sid L. Anderson(2)(6) 1,327,000 38.5%
Clayton E. Woodrum(3) 67,350 2.0%
Buddie E. Livingston, II(2)(6) 32,000 1.0%
Vincent R. Kemendo(2)(6) 94,500 2.9%
C. Dennis McKittrick(4) 29,705 *
B. E. (Bud) Livingston(2)(7) 15,000 *
Anthony I. Ciciola(2)(8) 15,000 *
Pangloss International, 481,250 13.6%
S.A. (5)
All Executive Officers and 1,580,555 43.8%
Directors as a group (7
persons)(2)(3)(4)
</TABLE>
_________________________________________
* less than one percent
(1) Based upon 3,308,560 issued and outstanding shares of Common Stock at June
10, 1997. Shares of Common Stock which an individual or group has the right
to acquire within 60 days pursuant to the exercise of options, warrants, or
other convertible securities are deemed to be outstanding for the purpose
of computing the percentage ownership of such individual or group, but are
not deemed to be outstanding for the purpose of computing the percentage
29
<PAGE>
ownership of any other individual or group shown in the table.
(2) Includes (a) with respect to Mr. Anderson, 139,500 shares issuable to him
upon exercise of presently exercisable options; (b) with respect to Mr.
Livingston, II 32,000 shares issuable to him upon exercise of presently
exercisable options; (c) with respect to Mr. Kemendo, 32,000 shares
issuable to him upon exercise of presently exercisable options; (d) with
respect to Mr. Livingston, 15,000 shares issuable to him upon exercise of
presently exercisable options; and (e) with respect to Mr. Ciciola, 15,000
shares issuable to him upon exercise of presently exercisable options.
(3) Includes 17,850 shares held by Mr. Woodrum's spouse and 49,500 shares
issuable to Mr. Woodrum upon exercise of presently exercisable options.
The address of Mr. Woodrum is Suite 605, 9 East 4th Street, Tulsa, Oklahoma
74103.
(4) Includes 12,205 shares held by Southern Financial Group, Inc., a company of
which Mr. McKittrick is President and Chief Executive Officer, and 17,500
shares issuable to Mr. McKittrick upon exercise of presently exercisable
options. The address of Mr. McKittrick is Suite 201, 140 North Main,
Summerville, South Carolina 29483.
(5) Includes 225,000 shares issuable to Pangloss International, S.A. upon
exercise of presently exercisable Common Stock purchase warrants. The
address of Pangloss International, S.A. is New Moon House, Eastern Road,
Nassau, Bahamas. Pangloss International, S.A. is a Bahamian corporation,
all of the outstanding shares of which are owned by Robert A. Nihon who, by
reason of such ownership, may be deemed the beneficial owner of the
Company's securities held of record by Pangloss International, S.A. Mr.
Nihon's address is the same as the address of Pangloss International.
(6) The address of Mssrs. Anderson, Kemendo and Livingston, II is Suite 300,
1850 South Boulder, Tulsa, Oklahoma 74119.
(7) The address of Mr. Livingston is Highway 66 North, Turnpike Gate, Bristow,
Oklahoma 74010.
(8) The address of Mr. Ciciola is 8277 Jean Nicolet, Montreal, QC H1R 2R2.
There are no arrangements known to management which may result in a change
in control of the Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the executive officers and directors of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
------ ----- ----------
<S> <C> <C>
Sid L. Anderson 50 Chairman of the Board, President and
Chief Executive Officer
Clayton E. Woodrum 57 Executive Vice President, Secretary
and Director
Buddie E. Livingston, II 42 Vice President - Operations
Vincent R. Kemendo 42 Vice President and Chief Financial
Officer
C. Dennis McKittrick 47 Director
B. E. (Bud) Livingston 70 Director
Anthony I. Ciciola 50 Director
</TABLE>
The Company's Directors will serve until the next annual meeting of
shareholders and until their successors are elected and qualified. Officers are
elected at thee annual meeting of the Board of Directors following the annual
meeting of shareholders and serve at the discretion of the Board.
30
<PAGE>
Directors of the Company do not receive any compensation for serving in their
capacity as directors, but are reimbursed for out-of-pocket expenses incurred in
attending meetings.
Sid L. Anderson. Mr. Anderson has served as Chairman of the Board of
Directors and President of the Company since its organization in 1981. From 1977
to 1981, Mr. Anderson was engaged in the private practice of law, specializing
in taxation. From 1972 to 1977 Mr. Anderson was employed as a tax manager with
Peat, Marwick, Mitchell & Co. in Tulsa, Oklahoma. Mr. Anderson received his
Bachelor of Business Administration in Accounting and his Juris Doctor degrees
from the University of Oklahoma in 1969 and 1972, respectively. Mr. Anderson was
admitted to the Oklahoma Bar Association in 1972 and became a Certified Public
Accountant in Oklahoma in 1974. Mr. Anderson is currently a member of the
Natural Gas Committee and is a former Director of the Oklahoma Independent
Petroleum Association. He is also a member of the Executive Advisory Board for
the College of Business Administration at the University of Tulsa and a Regent
of Rogers University. Mr. Anderson is a Trustee and former Chairman of the Tulsa
Industrial Authority.
Clayton E. Woodrum. Mr. Woodrum has been a principal in the financial
consulting firm of Woodrum, Wilson, Kemendo & Cuite, P.C. and its predecessors,
located in Tulsa, Oklahoma since 1986. Mr. Woodrum received his Bachelor of
Science degree in Accounting in 1963 from Kansas State University and became a
Certified Public Accountant in Oklahoma in 1965.
Buddie E. Livingston, II. Mr. Livingston joined the Company on September 1,
1995. From 1981 through August, 1995 Mr. Livingston was production
superintendent for KATO Operating Company located in Bristow, Oklahoma. From
1975 to 1981 Mr. Livingston was employed by Sun Oil Company, USA as a senior
engineer and production specialist and worked in sun's domestic and
international operations. Mr. Livingston attended the University of South
Louisiana. Mr. Livingston is the son of Mr. B. E. (Bud) Livingston, a Director
of the Company.
Vincent R. Kemendo. Mr. Kemendo joined the Company on December 26, 1995.
Prior to that, since 1991, Mr. Kemendo was a consultant with the consulting firm
of Woodrum, Shoulders, Kemendo & Evanson in Tulsa, Oklahoma. From 1988 to 1991,
Mr. Kemendo was employed as Controller for Mathews Auto Electric, Inc., an auto
parts warehousing operation. From 1983 to 1988, Mr. Kemendo was Vice President-
Budgeting and Administration for Fitzgerald, DeArman & Roberts, Inc., a regional
brokerage firm with corporate headquarters in Tulsa, Oklahoma. Prior to that
time Mr. Kemendo was employed by Cotton Petroleum Corporation as Coordinator of
Financial Analysis. Mr. Kemendo received his Bachelor of Science in Business
Administration degree from Drake University in 1977 and received his Masters of
Business Administration from Oklahoma State University in 1978.
C. Dennis McKittrick. Mr. McKittrick was elected a Director of the Company
in July 1993. Mr. McKittrick is Executive Vice President of Southern Financial
Group, Inc., an investment banking firm headquartered in Columbia, South
Carolina. From 1988 to 1992, Mr. McKittrick was Executive Vice President of
McCarley and Associates, an investment banking firm headquartered in Greenville,
South Carolina. Prior to 1988, Mr. McKittrick was First Vice President and
Partner of Johnson, Lane, Space, Smith and Co., Inc., an investment banking firm
headquartered in Savannah, Georgia.
B. E. (Bud) Livingston. Mr. Livingston was elected a Director of the
Company in June 1996. Since 1979, Mr. Livingston has been President of his own
oil and gas production companies, KATO
31
<PAGE>
Operating Company and Livingston Oil Company, and has performed independent
consulting services for other oil and gas companies. From 1948 through 1978, Mr.
Livingston was employed by Sunray Oil Corporation in a number of positions the
most recent of which was Manager of Operations - Mid-Continent Region. Mr.
Livingston is the father of Buddie E. Livingston, II, the Vice President -
Operations for the Company.
Antony I. Ciciola. Mr. Ciciola is the Chairman and Chief Executive Officer
of American Glove Corporation located in Amsterdam, New York. Since 1992, Mr.
Ciciola has been a principal of Hospimed Distribution, Inc., an enterprise that
manufactures and distributes disposable hospital, medical and non-medical
products. Since 1987, he has been President of Taulen Consultant, Inc., a
company specializing in the design and setup of manufacturing facilities. From
1975 to 1993, Mr. Ciciola was President of Action Pipe Fabrication, Inc., a
major fire protection and automatic sprinkler fabrication and contractor in the
Province of Quebec, Canada. Mr. Ciciola graduated from Ahuntsic College in 1968
with a degree in collegial studies in fluid dynamics, piping and gears. Mr.
Ciciola is a Canadian citizen and resides in Montreal, Canada.
ITEM 6. EXECUTIVE COMPENSATION
The table below sets forth, in summary form, (1) the compensation paid, for
the years shown, to Sid L. Anderson, the Company's President, and the two other
highest-paid executive officers of the Company serving as executive officers on
December 31, 1996 (the "Named Officers"); (2) the stock options and stock
appreciation rights granted to the Named Officers for the years shown; and (3)
long-term payouts and other compensation to the Named Officers for the years
shown.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Awards Options/ Payouts Compensation
Position Year ($) ($) ($)(1) ($) SARs (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sid L. Anderson, 1996 150,000 6,250 94,347(2) --- --- --- ---
Chairman of the Board 1995 58,333 --- 110,573(3) --- --- --- ---
and President 1994 --- --- 160,928(4) --- --- --- ---
Buddie E. Livingston, II 1996 48,000 2,000 --- --- --- --- 216
Vice President of 1995 --- --- --- --- --- --- ---
Operations(5) 1994 --- --- --- --- --- --- ---
Vincent R. Kemendo 1996 40,000 1,667 --- --- --- --- ---
Vice President of 1995 667 --- --- --- --- --- ---
Finance(6) 1994 --- --- --- --- --- --- ---
</TABLE>
______________________________
(1) Except as noted, none of the executive officers listed received perquisites
or other personal benefits that exceeded the lesser of $50,000 or 10
percent of the salary and bonus for such officers.
32
<PAGE>
(2) Includes a $75,370 guaranty fee paid to Mr. Anderson (see "Employment
Agreements") and a total of $18,977 paid by the Company to or on behalf of
Mr. Anderson for country club dues, automobile allowance and lease expense
and life insurance premiums.
(3) Includes a $30,000 guaranty fee (see "Employment Agreements") and $54,350
in consulting fees paid to Mr. Anderson and a total of $26,233 paid by the
Company on behalf of Mr. Anderson for country club dues, automobile lease
expense and life insurance premiums. Consulting fees paid to Mr. Anderson
were to compensate him for management services rendered to the Company on
substantially a full time basis in his capacity as Chairman, President,
Chief Executive Officer and owner of 70% of the Company's issued and
outstanding Common Stock. The amount of consulting fees paid was determined
by Mr. Anderson from time to time based on the Company's financial
condition and Mr. Anderson's financial needs.
(4) Includes $135,200 in consulting fees paid to Mr. Anderson and a total of
$25,728 paid by the Company on behalf of Mr. Anderson for country club
dues, automobile lease expense and life insurance premiums. Consulting fees
paid to Mr. Anderson were to compensate him for management services
rendered to the Company on substantially a full time basis in his capacity
as Chairman, President, Chief Executive Officer and owner of 70% of the
Company's issued and outstanding Common Stock. The amount of consulting
fees paid was determined by Mr. Anderson from time to time based on the
Company's financial condition and Mr. Anderson's financial needs.
(5) Mr. Livingston joined the Company as a full time employee on January 1,
1996.
(6) Mr. Kemendo joined the Company on December 26, 1995.
BONUS PLAN
The Company has an incentive compensation bonus plan in effect for certain
salaried employees other than its President. The annual bonus pool is equal to
10% of annual net income of the Company in excess of $100,000. The plan is
currently administered and allocated among the eligible employees by the
Company's Board of Directors. No distributions have been made from this plan
since its inception.
STOCK OPTIONS
Director Stock Option Plan. The Company has adopted a Directors' Stock
Option Plan pursuant to which non-employee Directors of the Company may be
granted options to purchase shares of Common Stock of the Company. The total
number of shares which may be issued pursuant to this plan is 150,000 shares of
Common Stock. The plan provides that the exercise price of options granted
pursuant to the plan shall not be less than the fair market value of the shares
of Common Stock on the date of grant and that options granted are exercisable
for the lesser of ten years from the date of grant or 30 days following
termination as a member of the Company's Board of Directors. The plan is
administered by the Board of Directors. Through December 31, 1996, options to
purchase 15,000 shares of the Company's Common Stock at an exercise price of
$1.30 per share had been granted under this plan. In January 1997 additional
options to purchase a total of 50,000 shares of Common Stock at an exercise
price of $1.40 per share were granted under the plan to the four non-employee
Directors of the Company. The total number of options granted under this Plan as
of the date of this Registration Statement is 65,000 options with exercise
prices ranging from $1.30 to $1.40 per share of Common Stock.
Employee Stock Option Plan. The Company has adopted an Employee Stock
Option Plan pursuant to which employees and any other persons who perform
substantial services for or on behalf of the Company may be granted options to
purchase shares of Common Stock of the Company. Directors who are also employees
are eligible to receive options under this plan. The total number of shares
which may be issued pursuant to this plan is 100,000 shares of Common Stock. The
plan provides that the exercise price of options granted pursuant to the plan
shall not be less than the fair
33
<PAGE>
market value of the shares of Common Stock on the date of grant and that options
granted are exercisable for the lesser of ten years from the date of grant or 30
days following termination of employment with the Company. The plan is
administered by the Board of Directors. Through December 31, 1996, no options
had been granted under this plan.
During the years ended December 31, 1996 and 1995 (i) no restricted stock
awards were granted, (ii) no stock options or stock appreciation rights were
granted, (iii) no options or stock appreciation rights were exercised, and (iv)
no awards under any long-term incentive plan were made to any officer or
employee of the Company.
The following table sets forth information relating to the exercises of
stock options by each of the Company's officers and directors during the year
ended December 31, 1996 and the value of unexercised stock options as of
December 31, 1996.
AGGREGATED OPTION EXERCISES IN THE FISCAL
YEAR ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
OPTION EXERCISES
DURING YEAR
ENDED DECEMBER 31, 1996 NUMBER OF SECURITIES
-----------------------
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED VALUE DECEMBER 31, 1996 AT DECEMBER 31, 1996
-------------------------- ---------------------------------
NAME ON EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ------------ --------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sid L. Anderson None None --- 7,500(1) --- $5,250
Clayton E. Woodrum None None --- 7,500(2) --- 5,250
Buddie E. Livingston II None None --- --- --- ---
Vincent R. Kemendo None None --- --- --- ---
C. Dennis McKittrick None None --- 7,500(2) --- 5,250
B. E. (Bud) Livingston None None --- --- --- ---
Anthony I. Ciciola None None --- --- --- ---
</TABLE>
- --------------------
(1) Reflects options granted in July 1993 not under either of the Company's
option plans, exercisable at $1.30 per share.
(2) Reflects options granted in July 1993 under the Company's Directors' Stock
Option Plan, exercisable at $1.30 per share.
Recently Granted Options. Effective January 21, 1997, the Company granted
options to purchase a total of 570,000 shares of Common Stock to certain
officers of the Company. These options were not granted under either of the
Company's stock option plans. The options granted vest at 40% on date of grant,
30% one year from the date of grant and the remaining 30% two years from the
date of grant. These options must be exercised during the holder's employment
with the Company or within 30 days of termination of employment. In addition,
the holder waives all rights to exercise any vested options granted if
employment by the Company is terminated for cause.
In addition, effective January 21, 1997 the Company granted options to
purchase a total of 50,000 shares of Common Stock to four non-employee directors
of the Company. These options were issued under the Company's Director's Stock
Option Plan and are fully vested as of the date of grant.
The table below sets forth, in summary form, (i) the name of each person
receiving a grant of stock options from the Company effective January 21, 1997;
(ii) the number of securities underlying the options; (iii) the percent such
grant represents of the total options granted to employees effective
34
<PAGE>
January 21, 1997; and (iv) the per-share exercise price of the options granted.
OPTION GRANTS EFFECTIVE JANUARY 21, 1997
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS EXERCISE OR
OPTIONS/SARS GRANTED BASE PRICE
NAME GRANTED JANUARY 21, 1997 ($/SHARE)
---- ------------ ---------------- -----------
<S> <C> <C> <C>
Sid L. Anderson 330,000 53% 1.40
Clayton E. Woodrum 90,000 15% 1.40
Buddie E. Livingston II 80,000 13% 1.40
Vincent R. Kemendo 80,000 13% 1.40
C. Dennis McKittrick 10,000 2% 1.40
B. E. (Bud) Livingston 15,000 2% 1.40
Anthony I. Ciciola 15,000 2% 1.40
------- ----
Total 620,000 100%
======= ====
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Sid L. Anderson,
President of the Company. The term of Mr. Anderson's Employment Agreement
continues until the later of October 31, 2000 or so long as Mr. Anderson is a
personal guarantor of any of the Company's debt. Under this Agreement, Mr.
Anderson receives a base salary of $150,000 per year, plus additional annual
incentive compensation in an amount equal to 10% of the Company's annual audited
pre-tax net income in excess of $150,000. In addition, Mr. Anderson is entitled
to participate in all benefit programs the Company makes available to employees.
The Agreement also provides for the payment to Mr. Anderson of an automobile
allowance of $1,000 per month, and such other benefits as may be determined from
time to time by the Board of Directors of the Company. In addition, under the
terms of a separate Guaranty Fee Agreement between Mr. Anderson and the Company,
Mr. Anderson is entitled to a semi-annual payment of an amount equal to the
greater of $15,000 or 3% of the aggregate amount of Company indebtedness
guaranteed personally by him. To secure payment of this fee, the Company has
granted Mr. Anderson a security interest in the Company's equipment, inventory,
fixtures, receivables and other assets. Mr. Anderson's Employment Agreement
provides that the Company has the right to terminate the Agreement at any time
upon written notice and, unless the Agreement has been terminated for cause, as
defined, the Company is obligated to pay Mr. Anderson the compensation payable
for the remainder of the term of the Agreement, including any incentive
compensation, vacation pay or accrued employee benefits. Mr. Anderson has the
right to terminate his employment with the Company upon 30 days written notice
in which event, the Company is only obligated to compensate him under the terms
of the Agreement up to the date of termination. The Agreement also contains
provisions restricting Mr. Anderson from engaging in business activities in
competition with the Company.
The Company has also entered into employment agreements with Buddie E.
Livingston, II, and Vincent R. Kemendo pursuant to which they are employed by
the Company as Vice
35
<PAGE>
President - Operations and Vice President - Finance, respectively. The
agreements with Messrs. Livingston and Kemendo expire on December 31, 2000,
unless extended by the Company's Board of Directors. Under these agreements,
Messrs. Livingston and Kemendo receive base salaries of $48,000 and $40,000 per
year, respectively. In addition, Messrs. Livingston and Kemendo are entitled to
participate in all benefit programs the Company makes available to employees.
Under their agreements, Messrs. Livingston and Kemendo are eligible to
participate in the Company's incentive compensation bonus plan. See "Bonus
Plan". The Company has the right to terminate each of these employment
agreements upon written notice and, unless the agreement has been terminated for
cause, as defined, the Company is obligated to pay the terminated individual the
compensation payable for the remainder of the term of his agreement, including
any incentive compensation, vacation pay or accrued employee benefits. Messrs.
Livingston and Kemendo each have the right to terminate their employment
agreements with the Company upon 30 days written notice to the Company in which
event the Company is only obligated to compensate the individual up to the date
of termination. Each of the Employment Agreements also contain certain
provisions restricting Messrs. Livingston and Kemendo from engaging in business
activities in competition with the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Until December 1, 1995, the Company leased its executive offices in Tulsa
Oklahoma from a partnership in which the Company was a general partner and owned
a 50% interest. During 1995, $25,800 was paid to the partnership as rent.
Effective December 1, 1995, the Company acquired the remaining 50% interest in
the partnership for $50,000 in cash and assumption of approximately $168,000 of
partnership debt. The partnership was then liquidated. See "Item 3. Description
of Properties - Office Facilities".
Through August 1995, the Company sold gas produced from certain wells it
operates to a gas marketing company owned by Sid L. Anderson, Chairman of the
Board, President and Chief Executive Officer of the Company. Such sales for the
year ended December 31,1995 were approximately $89,000. The gas marketing
company collected a 3% commission on the resale of such gas, which was utilized
to pay income and other taxes of the gas marketing company. Effective September
1, 1995, the Company began to sell gas produced from the wells to an
unaffiliated purchaser.
In 1995, the Company began paying a fee to Sid L. Anderson, Chairman of the
Board, President and Chief Executive Officer of the Company, pursuant to the
terms of a Guaranty Fee Agreement. Under the terms of this Agreement, Mr.
Anderson receives an annual fee for guaranteeing Company debt equal to the
greater of $15,000 or 3% of the guaranteed debt. During 1996 and 1995, fees paid
to Mr. Anderson under this Agreement were approximately $76,000 and $30,000,
respectively. See "Item 6. Executive Compensation - Employment Agreements".
The Company incurs fees for tax and accounting services provided by a firm
in which Clayton E. Woodrum, Executive Vice President and a Director of the
Company, is a partner. Amounts paid by the Company to this firm during 1996 and
1995 were $39,943 and $34,476, respectively. In addition, during 1996, the
Company issued a total of 35,700 shares of Common Stock to this firm in payment
for services rendered. The value assigned to this stock, $49,980, was based on
billings received from the firm. At the request of the firm, 17,850 of these
shares were issued to Pat Woodrum, spouse of Clayton E. Woodrum, and 17,850 of
these shares were issued to Andrea Kemendo, spouse of a
36
<PAGE>
partner in the firm.
During October, 1995 the Company purchased two producing oil and gas
properties from KATO Operating Company ("KATO"), Livingston Oil and other
third parties for a purchase price of $975,000. Subsequent to this
transaction, Mr. B. E. Livingston, who is the President and owner of both
KATO and Livingston Oil, was elected as a Director of the Company. The
producing properties purchased consisted of a field containing 10 producing
wells and several shut-in wells and a group of five producing leases which
contain a total of nine producing wells. Additionally, in January, 1996 the
Company purchased a producing oil and gas property from several individuals
and entities, including an affiliate of KATO, for $152,000. KATO was the
operator of the property purchased and the interest acquired from the KATO
affiliate amounted to a 2.03% working interest in the property. These
transactions were reviewed by the Board of Directors and were determined,
based on negotiations that occurred at the time, to be on terms no less
favorable to the Company than could have been obtained at the time and
under the same circumstances from non-affiliated persons.
During 1995, the Company paid $5,000 to McKittrick and Associates and
paid $20,000 and issued 12,205 shares of Common Stock, valued at $1.39 per
share, to Southern Financial Group, Inc. for investment banking services
rendered in connection with the acquisition by the Company of limited
partner interests in six limited partnerships in which the Company was the
sole general partner. Mr. C. Dennis McKittrick, a Director of the Company,
is the President of McKittrick and Associates and President and Chief
Executive Officer of Southern Financial Group, Inc. Management believes,
based on negotiations that occurred at the time, that these transactions
were no less favorable to the Company than could have been obtained at the
time and under the same circumstances from non-affiliated persons.
Pursuant to an agreement signed in February 1996, B. E. (Bud)
Livingston, a member of the Company's Board of Directors, will provide
evaluation and reservoir engineering services to the Company with respect
to oil and gas wells in Coal County, Oklahoma and Borden and Stonewall
Counties, Texas in exchange for an amount equal to the net of a percentage
of the net revenue interest and a percentage of the lease operating
expenses attributable to certain producing oil and gas wells located in
Garfield and Noble Counties, Oklahoma. During 1996, no amounts were paid by
the Company to Mr. Livingston pursuant to this Agreement.
Any future transactions between the Company and its directors,
officers, principal shareholders or their affiliates will be on terms no
less favorable to the Company than may be obtained in similar, arms length
transactions with unaffiliated third parties.
ITEM 8. DESCRIPTION OF SECURITIES
On February 18, 1997, the Company declared a four-for-one stock split
in the form of a stock dividend payable to the Company's shareholders of
record on April 1, 1997. All references to outstanding shares, share
ownership and per share amounts in this Registration Statement are
presented giving effect to such stock dividend.
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, par value $0.01 per share ("Common Stock"), and
25,000,000 shares of Preferred Stock, par value $0.05 per share ("Preferred
Stock"). As of the date of this Registration Statement, the Company had
3,308,560 issued and outstanding shares of Common Stock, excluding
1,081,250 shares held by the Company as treasury stock. No shares of
Preferred Stock are issued and outstanding as of the effective date of this
Registration Statement.
37
<PAGE>
The following description of certain matters relating to the capital stock
of the Company is a summary and is qualified in its entirety by the provisions
of the Company's Certificate of Incorporation and Bylaws, copies of which have
been filed with the Securities and Exchange Commission as exhibits to this
Registration Statement.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the preferential right to receive dividends with
respect to any Preferred Stock that from time to time may be outstanding. In the
event of the dissolution, liquidation or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of all liabilities of the Company and subject to the prior distribution
rights of the holders of any Preferred Stock that may be outstanding at that
time. The holders of Common Stock do not have cumulative voting rights or
preemptive or other rights to acquire or subscribe for additional, unissued or
treasury shares. All outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 25,000,000 shares of
Preferred Stock, in one or more series, and to fix the rights, preferences,
qualifications, privileges, limitations or restrictions of each such series
without any further vote or action by the shareholders, including the dividend
rights, dividend rate, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or the designations
of such series. No shares of Preferred Stock have ever been issued, and the
Company has no present plans to issue any Preferred Stock.
STOCKHOLDER ACTION
Pursuant to the Company's Certificate of Incorporation, with respect to any
act or action required of or by the holders of the Company's Common Stock, the
affirmative vote of the holders of a majority of the issued and outstanding
Common Stock entitled to vote thereon is sufficient to authorize, affirm, ratify
or consent to such act or action, except as otherwise provided by law.
The Bylaws of the Company provides that shareholders may take certain
action without the holding of a meeting by written consent or consents signed by
the holders of a majority of the outstanding shares of the capital stock of the
Company entitled to vote thereon. Prompt notice of the taking of any action
without a meeting by less than unanimous consent of the stockholders will be
given to those stockholders who do not consent in writing to the action. The
purposes of this provisions are to facilitate action by stockholders and to
reduce the corporate expense associated with annual and special meetings of
stockholders. Pursuant to rules and regulations of the Commission, if
stockholder action is taken by written consent, the Company will be required to
send each stockholder entitled to vote on the matter acted on, but whose consent
was not solicited, an information statement containing information substantially
similar to that which would have been contained in a proxy statement.
38
<PAGE>
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The Company's authorized but unissued capital stock consists of 21,691,440
shares of Common Stock (including 1,081,250 shares held in treasury) and
25,000,000 shares of Preferred Stock. One of the effects of the existence of
authorized but unissued capital stock may be to enable the Board of Directors to
render more difficult or to discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or otherwise, and
thereby to protect the continuity of the Company's management. If in the due
exercise of its fiduciary obligations, for example, the Board of Directors were
to determine that a takeover proposal was not in the Company's best interests,
such shares could be issued by the Board of Directors without stockholder
approval in one or more private offerings or other transactions that might
prevent or render more difficult or costly the completion of the takeover
transaction by diluting the voting or other rights of the proposed acquirer or
insurgent stockholder or stockholder group, by creating a substantial voting
block in institutional or other hands that might undertake to support the
position of the incumbent Board of Directors, by effecting an acquisition that
might complicate or preclude the takeover, or otherwise. In this regard, the
Company's Certificate of Incorporation grants the board of Directors broad power
to establish the rights and preferences of the authorized and unissued shares of
Preferred Stock, one or more series of which could be issued entitling holders
to vote separately as a class on any proposed merger or consolidation, to
convert shares of Preferred Stock into a larger number of shares of Common Stock
or other securities, to demand redemption at a specified price under prescribed
circumstances related to a change in control, or to exercise other rights
designed to impede a takeover. The issuance of shares of Preferred Stock
pursuant to the Board's authority described above could decrease the amount of
earnings and assets available for distribution to holders of Common Stock, and
adversely affect the rights and powers, including voting rights, of such holders
and may have the effect of delaying, deferring or preventing a change in control
of the Company. The Board of Directors does not currently intend to seek
stockholder approval prior to any issuance of authorized but unissued stock,
unless otherwise required by law.
CERTIFICATE OF INCORPORATION AND BYLAWS
Under Oklahoma law, the exclusive power to adopt, amend and repeal bylaws
of a corporation is conferred solely upon the shareholders unless the
corporation's certificate of incorporation also confers such power upon its
Board of Directors. Under the Company's Certificate of Incorporation, the Board
of Directors has been granted this power. The Company's Bylaws also provide
that the number of directors shall be no fewer than three and no greater than
nine as fixed from time to time by resolution of the board of Directors. These
provisions, in addition to the existence of authorized but unissued capital
stock, may have the effect, either alone or in combination with each other, of
making more difficult or discouraging an acquisition of the Company deemed
undesirable by the Board of Directors.
OKLAHOMA TAKEOVER STATUTES
Upon this Registration Statement becoming effective, the Company will
become subject (unless the Company's Certificate of Incorporation is amended by
the Company's shareholders to be excluded) to the control share provisions of
Section 1090.1 of the Oklahoma General Corporation Act ("OGCA"). Generally, and
subject to various conditions and exceptions, the control share provisions of
the OGCA deny voting rights to "control shares" of a public company meeting
certain jurisdictional
39
<PAGE>
nexus requirements. "Control shares" are shares acquired by a person that, when
added to other shares owned by the "acquiring person," have voting power in the
election of directors within any of the following ranges: 20% or more but less
than 33 1/3%; 33 1/3% or more but less than a majority; or a majority or more.
Full voting rights may be returned by resolution of the shareholders approved by
a majority vote of all voting power, excluding interested shares.
The Company is also subject to Section 1090.3 of the OGCA which in general,
prevents an "interested shareholder" from engaging in a "business combination"
with an Oklahoma corporation for three years following the date such person
became an interested shareholder, unless (i) prior to the date such person
became an interested shareholder, the board of directors of the corporation
approved the transaction in which the interested shareholder became an
interested shareholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested shareholder's
becoming an interested shareholder, the interested shareholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held (x) by directors who are also officers of the
corporation and (y) by employee stock plans that do not provide employees with
the rights to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer); or (iii) on or subsequent to
the date of the transaction in which such person became an interested
shareholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of shareholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation now owned by the interested shareholder. Under Section 1090.3, the
restrictions described above do not apply to certain business combinations
proposed by an interested shareholder following the announcement or notification
of one of a number of extraordinary transactions involving the corporation and a
person who had not been an interested shareholder during the previous three
years or who became an interested shareholder during the previous three years or
who became an interested holder with the approval of a majority of the
corporation's directors, if such extraordinary transaction is approved or not
opposed by a majority of the directors who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors.
Section 1090.3 defines a "business combination" to include (i) any merger
or consolidation involving the corporation and an interested stockholder, (ii)
any sale, transfer, pledge or other disposition involving an interested
stockholder of 10% or more of the assets of the corporation, (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer by
the corporation of any stock of the corporation to an interested stockholder,
(iv) any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested shareholder or (v) the receipt
by an interested shareholder of any loans, guarantees, pledges or other
financial benefits provided by or through the corporation. In addition, Section
1090.3 defines an "interested shareholder" as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the corporation and any
entity or person affiliated with or controlling or controlled by such an entity
or person.
SHAREHOLDER REPORTS
The Company will furnish to its shareholders annual reports containing
audited financial statements reported on by independent auditors for each fiscal
year. Quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year will be furnished to a
40
<PAGE>
shareholder upon request.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
The shares of Common Stock of the Company have limited transferability and
there is no established trading market for the Company's Common Stock. Further,
there can be no predictions or assurance as to whether a trading market may
ultimately develop in the Company's Common Stock. The Company has no present
plans or intentions to initiate any public offering of its Common Stock or other
securities in the foreseeable future, nor has the Company agreed to register any
of its outstanding shares of Common Stock under the Securities Act on behalf of
any shareholder. To the extent that a public trading market develops in the
Company's Common Stock after the effective date of this Registration Statement,
such market would be in the general over-the-counter securities market.
HOLDERS
In addition to the 3,308,560 shares of Common Stock currently issued and
outstanding, there are outstanding options to purchase a total of 642,500 shares
of Common Stock at exercise prices ranging from $1.30 to $1.40 per share. Of
these options, 300,500 are currently exercisable. In addition, there are
outstanding warrants to purchase 225,000 shares of Common Stock at exercise
prices ranging from $1.20 to $1.60 per share.
As of June 10, 1997, the Company had 302 holders of record of its Common
Stock.
DIVIDENDS
The Company has never paid any dividends on its Common Stock. The Company
expects to retain all available earnings generated by its operations for the
development and growth of its business and does not anticipate paying any cash
dividends in the foreseeable future. Any future determination as to the payment
of dividends will be made at the discretion of the Board of Directors and will
depend on a number of factors, including the future earnings, capital
requirements, financial condition and future prospects of the Company,
restrictions in the Company's current or future financing agreements and such
other factors as the Board of Directors may deem relevant.
TRANSFER AGENT
The Company currently serves as its own transfer agent for the Company's
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least two years, including an "affiliate",
41
<PAGE>
is entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (i) 1% of the then outstanding shares of the Company's
Common Stock or (ii) an amount equal to the average weekly reported volume of
trading in such shares during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain manner of sale limitations,
notice requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed an
"affiliate" of the Company and who has beneficially owned Restricted Shares for
at least three years is entitled to sell such shares under Rule 144 without
regard to these volume or other limitations. Restricted shares properly sold in
reliance on Rule 144 are thereafter freely tradable without restriction or
registration under the Securities Act, unless thereafter held by an "affiliate"
of the Company.
Of the 3,308,560 shares of the Company's Common Stock outstanding,
3,255,360 are eligible for sale under Rule 144 immediately following the
effective date of this Registration Statement. Substantially all of the
remaining 53,200 outstanding shares of Common Stock which are currently
subject to Rule 144 resale restrictions will be eligible for resale under Rule
144 commencing in November 1997 through January 1998.
No predictions can be made of the effect, if any, of future public sales of
restricted shares or the availability of restricted shares for sale in the
public market. Sales of substantial amounts of Common Stock under Rule 144
could adversely affect prevailing market prices.
ITEM 2. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceeding.
From time to time the Company is a defendant in various legal proceedings which
are considered routine litigation incidental to the Company's business, the
disposition of which management does not anticipate will have a material effect
on the financial position or result of operations of the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Within the three-year period immediately preceding the filing date of this
Registration Statement, the Company issued securities not registered under the
Securities Act of 1933 (the "Securities Act") as set forth below. No underwriter
was involved in any of the stock transactions discussed below nor were any
underwriting discounts or, except as noted, commissions paid. Each certificate
representing shares issued bears a restrictive legend and stop transfer
instructions were entered on the Company's stock transfer records with respect
thereto.
42
<PAGE>
In November 1995 (effective April 1, 1995) the Company exchanged a total of
1,337,695 newly issued shares of Common Stock, valued at $0.95 per share, $8,293
in cash and assumption of approximately $611,000 in debt for (i) 100% of the
limited partners' interests in four Oklahoma limited partnerships, (ii) 96% of
the limited partners' interest in an Oklahoma limited partnership, and (iii) 74%
of the limited partners' interest in an Oklahoma limited partnership. Effective
May 31, 1996, the Company acquired the remaining limited partners' interests in
the latter two partnerships in exchange for 46,320 newly issued shares of the
Company's Common Stock, valued at $0.95 per share. The Company was the sole
general partner in each of these partnerships which owned oil and gas properties
in the states of Oklahoma, Texas and Kansas. The shares were issued to
approximately 90 limited partners in exchange for their limited partner
interests. Subsequent to completion of the exchange, each of the partnerships
was liquidated and the oil and gas properties were conveyed to the Company as
the sole remaining partner. The Company paid $5,000 to McKittrick and Associates
and $20,000 and 12,205 newly issued shares of Common Stock to Southern Financial
Group, Inc. as investment banking fees for their assistance in completing the
exchange. C. Dennis McKittrick, President of McKittrick and Associates and
President and Chief Executive Officer of Southern Financial Group, Inc., is a
Director of the Company. In effecting this transaction, the Company relied upon
exemptions from registration of the shares of Common Stock issued under the
Securities Act provided by Sections 3(b) and 4(2) of the Securities Act and
Regulation D promulgated thereunder based upon the fact that there was no public
offering of the shares, the shares were acquired by a limited number of persons
with whom the Company had a pre-existing relationship and who represented, and
the Company reasonably believed, that the shares were being acquired for
investment purposes only and not with a view to their distribution and that such
persons had such knowledge and experience in financial and business matters that
they were capable of evaluating the merits and risks of an investment in the
Company's Common Stock.
In November 1995 the Company issued 168,750 shares of Common Stock to
Pangloss International, S.A. in partial payment of indebtedness of the Company.
For the purpose of this transaction, the Common Stock was valued at $0.33 per
share. In effecting this transaction, the Company relied upon exemptions from
registration of the shares of Common Stock issued under the Securities Act
provided by Section 4(2) of the Securities Act and Regulation D based upon the
fact that there was no public offering of the shares, the shares were acquired
by a single entity, Pangloss International, S.A. who the Company reasonably
believed was acquiring the shares for investment purposes only and not with a
view to their distribution and that Pangloss International and its sole
shareholder had such knowledge and experience in finance and business matters
that it was capable of evaluating the merits and risks of an investment in the
Company's Common Stock.
During the period of January through November 1996 the Company issued a
total of 126,640 shares of Common Stock to 33 private investors for a purchase
price of $1.40 per share paid in cash. In effecting this transaction, the
Company relied upon exemptions from registration under the Securities Act of the
shares of Common Stock issued provided by Sections 3(b) and 4(2) of the
Securities Act and Regulation D promulgated thereunder based upon the fact that
there was no public offering of the shares, the shares were acquired by a
limited number of persons who represented, and the Company reasonably believed,
that the shares were being acquired for investment purposes only and not with a
view to their distribution and that such persons had such knowledge and
experience in financial and business matters that they were capable of
evaluating the merits and risks of an investment in the Company's Common Stock.
In March 1996 the Company sold 87,500 shares of Common Stock to Pangloss
International, S.A. for a purchase price of $1.20 per share paid in cash. In
effecting this transaction, the Company relied upon exemptions from registration
of the shares of Common Stock issued under the Securities Act provided by
Section 4(2) of the Securities Act and Regulation D based upon the fact that
there was no public offering of the shares, the shares were acquired by a single
entity with whom the Company had a preexisting relationship, Pangloss
International, S.A. who the Company reasonably believed was acquiring the shares
for investment purposes only and not with a view to their distribution and that
Pangloss International and its sole shareholder had such knowledge and
experience in finance and business matters that it was capable of evaluating the
merits and risks of an investment in the Company's Common Stock.
In January 1997 the Company issued a total of 35,700 shares of Common Stock
in payment for tax and accounting services rendered by the firm of Woodrum,
Wilson, Kemendo & Cuite, P.C. at a value of $1.40 per share. At the request of
the firm, 17,850 of these shares were issued to Andrea Kemendo, spouse of a
partner in the firm, and 17,850 of these shares were issued to Pat Woodrum. Pat
Woodrum is the wife of Clayton E. Woodrum, a partner with the firm and Executive
Vice President and a Director of the Company. In effecting this transaction, the
Company relied upon exemptions from registration of the shares of Common stock
issued under the Securities Act provided by Sections 3(b) and 4(2) of the
Securities Act and Regulation D promulgated thereunder based upon the fact that
there was no public offering of the shares issued, the shares were acquired by a
limited number of persons with whom the Company had a pre-existing relationship
and who the Company reasonably believed were acquiring the shares for investment
purposes only and not with a view to their distribution and that such persons
had such knowledge and experience in financial and business matters that they
were capable of evaluating the merits and risks of an investment in the
Company's Common Stock.
In April 1997, the Company completed a private placement of 75,000 shares
of the Company's Common Stock to 150 private investors for a purchase price of
$2.00 per share paid in cash. In effecting this transaction, the Company relied
upon exemptions from registration of the shares of Common Stock issued under the
Securities Act provided by Sections 3(b) and 4(2) of the Securities Act and
Regulation D promulgated thereunder based upon the fact that there was no public
offering of the shares issued, the shares were acquired by a limited number of
persons who represented that, the Company reasonably believed, were acquiring
the shares for investment purposes only and not with a view to their
distribution and that such persons had such knowledge and experience in
financial and business matters that they were capable of evaluating the merits
and risks of an investment in the Company's Common Stock.
Effective March 21, 1997, the Company amended and restated its Certificate
of Incorporation which had the effect, among others, of eliminating shareholder
preemptive rights to subscribe for additional shares of the Company's Common
Stock. Subsequent to March 31, 1997, the Company informed those shareholders of
the Company who, based upon their preemptive rights, were entitled to acquire
additional shares of Company Common Stock, of their right to acquire such
shares. Based upon responses received from shareholders to date, the Company
anticipates that it will issue up to an additional 47,368 shares of Common Stock
to up to 20 shareholders upon payment of per share prices ranging from $1.65 to
$4.75. In effecting this transaction, the Company is relying upon exemptions
from registration of the shares of the Common Stock to be issued under the
Securities Act provided by Sections 3(b) and 4(2) of the Securities Act and
Regulation D promulgated thereunder based upon the fact that there has been and
will be no public offering of the shares to be issued, the shares will be
acquired by a limited number of existing shareholders who the Company reasonably
believes are acquiring the shares for investment purposes only and not with a
view to their distribution and that such persons have such knowledge and
experience in financial and business matters that they are capable of evaluating
the merits and risks of an investment in the Company's Common Stock.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation of the Company
authorizes and the Amended and Restated Bylaws of the Company provide that the
Company shall indemnify its officers and directors to the fullest extent
permitted by applicable law. Section 1031 of the Oklahoma General Corporation
Act (the "OGCA") provides, in general, that each director and officer of a
corporation may be indemnified against expenses (including attorneys' fees,
judgments, fines and amounts paid in
43
<PAGE>
settlement) actually and reasonably incurred in connection with the defense or
settlement of any threatened, pending or completed legal proceedings in which he
is involved by reason of the fact that he is or was a director of officer of
such corporation, if he acted in good faith in a manner that he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceedings, if he had no reasonable
cause to believe that his conduct was unlawful. If the legal proceeding,
however, is by or in the right of the corporation, the director or officer may
not be indemnified in respect of any claim, issue or manner as to which he shall
have been adjudged to be liable to the corporation unless a court determines
otherwise.
As permitted by Section 1006 of OGCA, the Amended and Restated Certificate
of Incorporation of the Company provides that no director of the Company shall
be personally liable to the Company or its stockholders for monetary damages for
breach of his fiduciary duty as a director, provided, however, that such
provision shall not apply to any liability of a director (1) for any breach of a
director's duty of loyalty to the Company or its stockholders, (2) for acts or
omissions that are not in good faith or involve intentional misconduct or a
knowing violation of the law, (3) under Section 1053 of the OGCA or (4) for any
transaction from which the director derived an improper personal benefit.
PART F/S
The audited consolidated financial statements of the Company as of December
31, 1996 and 1995 included in this Registration Statement have been audited by
an independent auditor whose report is included elsewhere in this Registration
Statement. The unaudited consolidated financial statements of the Company as of
March 31, 1997 and for the three months ended March 31, 1997 and 1996 included
elsewhere in this Registration Statement include, in the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the financial position and results of operation of the
Company for the period covered.
44
<PAGE>
PART III
ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2. Charter and Bylaws
*2.1 Amended and Restated Certificate of Incorporation
*2.2 Amended and Restated Bylaws
3. Instruments Defining the Rights of Security Holders
Not Applicable
5. Voting Trust Agreement
Not Applicable
6. Material Contracts
*6.1 Employment Agreement dated November 1, 1995 between Pan
Western Energy Corporation and Sid L. Anderson
*6.2 Guaranty Fee Agreement dated November 1, 1995 between Pan
Western Energy Corporation and Sid L. Anderson
*6.3 Security Agreement dated November 1, 1995 between Pan Western
Energy Corporation and Sid L. Anderson
*6.4 Employment Agreement dated February 19, 1996 between Pan
Western Energy Corporation and Buddie E. Livingston, II
*6.5 Employment Agreement dated February 24, 1996 between Pan
Western Energy Corporation and Vincent R. Kemendo
*6.6 Technical Information and Patent License Agreement dated July
11, 1996 between Pan Western Energy Corporation and Amoco
Corporation
*6.7 Pan Western Energy Corporation 1992 Directors' Stock Option
Plan
*6.8 Pan Western Energy Corporation 1992 Employee Stock Option Plan
*6.9 Letter Agreement dated February 6, 1996 between Pan Western
Energy Corporation and Bud E. Livingston
7. Material Foreign Patents
Not Applicable
8. Additional Exhibits
*8.1 Sycamore Resources, LLC report on Pan Western Energy
Corporation oil and gas reserves as of January 1, 1997
*8.2 Consent of Sycamore Resources, LLC
- --------------------
* Previously filed.
45
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Company has caused this Registration Statement to be signed by the undersigned,
thereunto duly authorized.
PAN WESTERN ENERGY CORPORATION
(Registrant)
Date: June 20, 1997
By: /s/ SID L. ANDERSON
--------------------------------------------------
Sid L. Anderson, President
46
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1996 AND 1995, AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
[LOGO OF DELOITTE & TOUCHE LLP APPEARS HERE]
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Pan Western Energy Corporation:
We have audited the accompanying consolidated balance sheets of Pan Western
Energy Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, 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, such financial statements present fairly, in all material
respects, the consolidated financial position of Pan Western Energy Corporation
and subsidiaries at December 31, 1996 and 1995 and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 21, 1997
Tulsa, Oklahoma
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 232,699 $ 15,683
Restricted cash 103,995 -
Receivables:
Trade, net of allowance of $11,080 283,095 247,570
Due from stockholder 1,594 -
Due from affiliated partnerships 1,187 6,781
Income tax receivable 14,950 14,950
---------- ----------
Total current assets 637,520 284,984
---------- ----------
Property and equipment:
Oil and gas properties (successful efforts method) 3,474,363 3,218,328
Other property and equipment 374,932 369,046
---------- ----------
3,849,295 3,587,374
Less accumulated depreciation and depletion 918,439 663,208
---------- ----------
Net property and equipment 2,930,856 2,924,166
---------- ----------
Other assets 57,836 15,162
---------- ----------
$3,626,212 $3,224,312
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 472,412 $ 250,764
Undistributed oil and gas revenues 149,276 165,936
Due to affiliated partnership 7,540 8,069
Accrued liabilities 31,520 29,743
Current portion of long-term debt 1,338,665 650,719
---------- ----------
Total current liabilities 1,999,413 1,105,231
Long-term debt 1,072,469 1,434,445
Minority interests in consolidated partnerships - 130,668
---------- ----------
Total liabilities 3,071,882 2,670,344
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock ($.05 par value; authorized 25,000,000
shares; no shares issued or outstanding) - -
Common stock ($.01 par value; authorized 1996,
25,000,000 shares; 1995, 12,500,000 shares
issued 1996 - 4,314,810 shares; 1995 - 4,018,650 shares) 43,148 40,187
Additional paid-in capital 1,610,701 1,360,856
Accumulated deficit (880,537) (628,093)
Treasury stock (1,081,250 shares) (218,982) (218,982)
---------- ----------
Total stockholders' equity 554,330 553,968
---------- ----------
$3,626,212 $3,224,312
========== ==========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUE:
Oil and gas sales $1,675,193 $ 983,841
Operating income 122,524 168,691
---------- ----------
1,797,717 1,152,532
---------- ----------
OPERATING EXPENSES:
Lease operating 725,432 473,927
Salaries and wages 375,482 273,953
Depreciation, depletion and amortization 318,556 302,618
General and administrative 378,535 364,280
---------- ----------
1,798,005 1,414,778
---------- ----------
OPERATING LOSS (288) (262,246)
---------- ----------
OTHER INCOME (EXPENSE):
Loss from rental operations, net (22,781) -
(Loss) gain on sale of assets, net (7,326) 5,777
Interest income 4,493 77
Interest expense (233,411) (97,252)
Equity in income (loss) of affiliated
partnerships 6,202 (9,935)
Minority interest in loss (earnings) of
consolidated partnerships 667 (4,858)
---------- ----------
(252,156) (106,191)
---------- ----------
LOSS BEFORE INCOME TAXES (252,444) (368,437)
Income tax benefit - 4,345
---------- ----------
NET LOSS $ (252,444) $ (364,092)
---------- ----------
NET LOSS PER SHARE $ (0.08) $ (0.13)
---------- ----------
WEIGHTED AVERAGE COMMON SHARES 3,141,035 2,772,836
========== ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
STOCK CAPITAL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1995, AS ORIGINALLY
REPORTED $ 5,000 $ 352,836 $ (264,001) $ (106,481) $ (12,646)
Retroactive adjustment to
reflect additional shares to be
issued in four-for-one stock
split effected in the form of a
stock dividend in February,
1997 20,000 (20,000) - - -
--------- ---------- ----------- ----------- -----------
BALANCES, JANUARY 1,
1995, AS ADJUSTED 25,000 332,836 (264,001) (106,481) (12,646)
Issuance of stock 15,187 1,028,020 - - 1,043,207
Purchase of treasury shares - - - (112,501) (112,501)
Net loss - - (364,092) - (364,092)
--------- ---------- ----------- ----------- -----------
BALANCES, DECEMBER 31,
1995, AS ADJUSTED 40,187 1,360,856 (628,093) (218,982) 553,968
Issuance of stock 2,961 249,845 - - 252,806
Net loss - - (252,444) - (252,444)
--------- ---------- ----------- ----------- -----------
BALANCES, DECEMBER 31, 1996 $ 43,148 $1,610,701 $ (880,537) $ (218,982) $ 554,330
========= ========== =========== =========== ===========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (252,444) $ (364,092)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization 318,556 302,618
(Gain) loss on sale of assets, net 7,326 (5,777)
Equity in (income) loss of affiliated partnerships (6,202) 9,935
Minority interest in earnings of consolidated partnerships (667) 4,858
Bad debt expense 1,649 13,716
Credit for deferred income taxes - (4,345)
Stock issued for services 49,980 17,000
Increase in receivables (33,175) (30,034)
Increase in other assets (3,850) -
Increase in accounts payable 221,118 4,631
Increase in accrued liabilities 7,982 23,531
Increase (decrease) in undistributed oil and gas revenues (16,660) (18,157)
----------- -----------
Net cash provided by (used in) operating activities 293,613 (46,116)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (549,086) (1,042,488)
Purchase of certificate of deposit (103,995) -
Purchase of royalty (40,000) -
Proceeds from the disposal of oil and gas properties 8,219 232,399
Purchase of South Boulder Associates, Ltd. - (50,000)
Net cash acquired in partnership acquisitions - 57,409
----------- -----------
Net cash used in investing activities (684,862) (802,680)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,263,893 1,294,881
Repayment of long-term debt (937,924) (378,905)
Cash paid to acquire common stock - (112,501)
Proceeds from sale of common stock 282,296 56,250
----------- -----------
Net cash provided by financing activities 608,265 859,725
----------- -----------
NET INCREASE IN CASH 217,016 10,929
CASH, BEGINNING OF YEAR 15,683 4,754
----------- -----------
CASH, END OF YEAR $ 232,699 $ 15,683
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 231,225 $ 87,254
----------- -----------
Income taxes paid $ - $ -
----------- -----------
</TABLE>
See notes to financial statements.
-5-
<PAGE>
PAN WESTERN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Pan Western Energy Corporation (the "Company") was organized
effective September 2, 1981 under the laws of the State of Oklahoma. The
purpose of the Company is the acquisition, drilling, development,
production and operation of oil and gas properties.
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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company's majority-owned partnerships, Pan Western
1993-A Production Program, Ltd. and Pan Western 1993-C Production Program,
Ltd. The Company acquired the majority interest in these partnerships
effective April 1, 1995 and the remaining partnership interests were
acquired effective June 1, 1996. In 1996, the Company formed Lateral
Completion Technologies, Inc. ("LCT"), a wholly owned subsidiary. LCT did
not have any activities in 1996. All material intercompany transactions and
balances are eliminated in consolidation.
INVESTMENTS IN AFFILIATED PARTNERSHIPS - Investments in affiliated oil and
gas partnerships in which the Company owns less than a majority interest
are accounted for using the equity method, with amounts stated at original
cost, adjusted for the Company's share of undistributed earnings or losses.
Management regularly reviews the carrying amount of these investments for
impairment and will adjust the carrying amount when, based on these
reviews, they determine that such amount is not recoverable.
OIL AND GAS PROPERTIES - The Company follows the successful efforts method
of accounting for oil and gas producing activities. Costs to acquire
mineral interests in oil and gas properties, to drill and equip exploratory
wells that find proved reserves and to drill and equip development wells
are capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties are depreciated and
depleted by the unit-of-production method. Support equipment is depreciated
over its estimated useful life.
On the sale or retirement of a complete unit of a proved property, the cost
and related accumulated depreciation, depletion, and amortization are
eliminated from the property accounts, and the resultant gain or loss is
recognized. On the retirement or sale of a partial unit of proved property,
the cost is charged to accumulated depreciation, depletion, and
amortization with a resulting gain or loss recognized in income.
Valuation allowances are provided if the net capitalized cost of oil and
gas properties exceed their estimated realizable value based on the
undiscounted future net revenues. Unproved oil and gas properties
-6-
<PAGE>
are periodically assessed for impairment of value and, if necessary, a loss
is recognized by providing an allowance.
OTHER PROPERTY AND EQUIPMENT - Other property and equipment is stated at
cost and is depreciated using accelerated methods over the estimated lives
of the respective assets which range from 5 to 27.5 years.
OPERATING INCOME - Operating income represents income earned by the Company
as operator of oil and gas properties and as general partner for certain
limited partnerships. Operating income consists primarily of administrative
overhead fees, field supervision charges and compressor charges.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS No. 109 requires the recognition of deferred tax
liabilities and assets for the tax effects of (a) temporary differences
between tax bases and financial reporting bases of assets and liabilities,
and (b) operating loss and tax credit carryforwards. The Company records a
valuation allowance for the amount of net deferred tax assets when, in
management's opinion, it is more likely than not that such assets will not
be realized.
LONG-LIVED ASSET IMPAIRMENT - Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting
for Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed Of," ("SFAS 121"). SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS
121 also requires that assets to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. The adoption of SFAS 121
did not have a significant effect on the Company's consolidated financial
statements.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123
establishes a fair value method and disclosure standards for stock-based
employee compensation arrangements, such as stock purchase plans and stock
options. It also applies to transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees,
requiring that such transactions be accounted for based on fair value. As
allowed by SFAS 123, the Company will continue to follow the provisions of
Accounting Principles Board Opinion No. 25 for its stock-based employee
compensation arrangements.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosure regarding the fair value of financial instruments for
which it is practical to estimate that value. For accounts receivable and
accounts payable, the carrying amount approximates fair value because of
the short maturity of those instruments. The fair value of the Company's
long-term debt is estimated to approximate carrying value based on the
borrowing rates currently available to the Company for bank loans with
similar terms and maturities.
EARNINGS (LOSS) PER SHARE - Loss per share is calculated based on the
weighted average common shares outstanding retroactively adjusted for the
four-for-one stock split effected in the form of a stock dividend declared
by the Company on February 18, 1997 (see Note 10). Outstanding stock
options and warrants are not included in the computation since their effect
on loss per share is antidilutive.
RESTRICTED CASH - Restricted cash consists of a certificate of deposit that
serves as collateral on a line of credit with a bank.
-7-
<PAGE>
Reclassifications -Certain 1995 amounts have been reclassified to conform
with 1996 presentations.
2. PARTNERSHIP ACQUISITIONS
In 1995 and 1996, the company acquired several entities. These acquisitions
were accounted for using the purchase method and the purchase price was
allocated to assets acquired, primarily oil and gas properties, and
liabilities assumed based on their estimated fair values. The results of
operations of the entities have been included in the Company's consolidated
financial statements subsequent to the dates of acquisition.
Effective April 1, 1995, the Company acquired all of the limited partners'
interests in several oil and gas limited partnerships for which it was the
general partner and liquidated the partnerships. The partnership interests
acquired were: the Pan Western 1991-A Production Program, Ltd.; the Pan
Western 1991-B Production Program, Ltd.; the Pan Western 1992-B Production
Program, Ltd.; and the Pan Western 1993-B Production Program, Ltd.
In addition, effective April 1, 1995, the Company acquired 96% of the
limited partners' interest in the Pan Western 1993-A Production Program,
Ltd. ("1993-A"), and approximately 74% of the limited partners' interest in
the Pan Western 1993-C Production Program, Ltd. ("1993-C"). The Company is
the general partner in these partnerships.
The consideration paid by the Company for these limited partnership
interests consisted of 1,349,900 shares of the Company's common stock
(valued at approximately $1,267,000 based on the estimated value of the
partnerships' oil and gas reserves) and $8,392 in cash, and included
approximately $611,000 in partnerships' debt.
Effective May 31, 1996, the Company acquired the remaining interests in the
1993-A and 1993-C partnerships in exchange for 46,320 shares of the
Company's common stock (valued at approximately $59,000 based on estimated
value of the partnerships' oil and gas reserves).
On December 1, 1995, the Company purchased the remaining 50% partnership
interest in South Boulder Associates, Ltd. and liquidated the partnership.
The Company previously owned a 50% interest in this partnership and was the
general partner. South Boulder Associates, Ltd. owns and manages the office
building known as "Boulder on the Park", located at 1850 South Boulder
Avenue, Tulsa, Oklahoma. The purchase price paid for the remaining interest
was $50,000 in cash, and included approximately $168,000 in partnership
debt.
The following unaudited pro-forma information combines the results of
operations of the Company and the various partnerships discussed above, as
if the acquisitions had taken place on January 1, 1995, after giving effect
to the effect on depreciation and depletion based upon purchase amounts
allocated to producing oil and gas properties and other property.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total revenues $ 1,797,717 $ 1,309,230
------------ ------------
Net loss $ (253,726) $ (346,620)
------------ ------------
Net loss per common share $ (0.08) $ (0.13)
------------ ------------
</TABLE>
-8-
<PAGE>
The pro-forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined during the periods presented and is not intended to be a
projection of future results or trends.
Effective November 30, 1995, the Company acquired several oil and gas
properties for a cash purchase price of $975,000. Oil and gas revenue from
these properties for the month of December 1995 was approximately $34,800
and operating income (net of depreciation and depletion) was approximately
$23,400. Operating data on these properties for periods prior to December
1995 is not available.
3. INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Company is general partner in Pan Western 1986 Drilling Program, Ltd.
("1986 Program"), Pan Western 1987 Production Program, Ltd. ("1987
Program") and Pan Western 1989-A Production Program Joint Venture ("1989-
A"), whose purpose is the acquisition, drilling, development, production,
marketing and operation of oil and gas leases. As general partner, the
Company is entitled to 18.57% and 15% of the current earnings or losses for
the 1986 and 1987 Programs, respectively, and is also entitled to a "back-
in" interest upon payout. The Company is entitled to a "back-in" interest
only on 1989-A.
The summary information below does not include information on the 1989-A
since the Company has never received a back-in interest.
Summary financial information for these partnerships as of and for the
years ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total assets $ 54,045 $ 47,539
--------- ---------
Total liabilities $ 7,920 $ 30,736
Partners' capital 46,125 16,803
--------- ---------
Total liabilities and partners' capital $ 54,045 $ 47,539
--------- ---------
Revenue $ 28,126 $ 67,296
--------- ---------
Net income (loss) $ (2,603) $ (34,548)
--------- ---------
</TABLE>
During 1989, the Company's share of losses exceeded the carrying value of
its investment in the 1986 and 1987 Programs, and the equity method of
accounting was discontinued with no additional losses recorded by the
Company. However, during 1995, the total partners' capital of the 1986
Program became a deficit. Accordingly, as general partner, the Company
recorded additional losses under the equity method to the extent of the
1986 Programs' capital deficit. During 1996, the total partners' capital of
the 1986 Program became positive, and the additional losses previously
recorded by the Company were reversed. The Company's share of unrecorded
losses for the 1986 and 1987 Programs was approximately $31,255 and $25,600
at December 31, 1996 and 1995, respectively.
-9-
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S>
Proved oil and gas properties:
Leasehold costs $ 2,371,625 $ 2,468,279
Intangible drilling costs 19,769 28,318
Lease and well equipment 1,082,969 721,731
------------ ------------
3,474,363 3,218,328
------------ ------------
Other property and equipment:
Land and building 269,025 266,720
Automobiles 21,299 21,299
Office furniture, fixtures and equipment 84,608 81,027
------------ ------------
374,932 369,046
------------ ------------
3,849,295 3,587,374
Less: accumulated depreciation, depletion and amortization 918,439 663,208
------------ ------------
Net capitalized costs $ 2,930,856 $ 2,924,166
------------ ------------
Costs incurred in oil and gas property acquisitions and development
activities are as follows:
<CAPTION>
1996 1995
<S> <C> <C>
Property acquisitions $ 222,000 $ 2,246,000
Development costs 393,000 37,000
------------ ------------
Total costs incurred $ 615,000 $ 2,283,000
------------ ------------
</TABLE>
Property acquisition costs in 1996 and 1995 include approximately $59,000
and $1,267,000, respectively, representing amounts assigned to properties
acquired through the partnership transactions described in Note 2.
-10-
<PAGE>
5. LONG-TERM OBLIGATIONS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
10.00% note payable to bank due in monthly installments of $21,447,
including interest, through December 1997, with the balance of approx-
imately $682,000 due at maturity, secured by oil and gas properties $ 843,914 $1,000,000
10.00% $500,000 line-of-credit payable to bank due in monthly install-
ments of interest only through March 1997, at which time the out-
standing principal will convert to a five-year term loan, secured by oil
and gas leases and certificate of deposit held at bank. The
line-of-credit agreement prohibits the Company from incurring additional
debt without the bank's approval 349,713 -
10.00% note payable to bank due in monthly installments of $9,702,
including interest, through December 1999, with the balance of principal
and remaining accrued interest due at maturity, secured by oil and gas
properties 300,000 -
9.50% note payable to bank due in monthly installments of $2,261,
including interest, through March 2001, with the balance of approx-
imately $175,000 due at maturity, secured by real estate mortgage 210,969 -
10.00% at December 31, 1996 and 10.25% at December 31, 1995 note
payable to bank due in monthly installments of $3,233, including
interest, through January 2001, with any remaining principal due at
maturity, secured by oil and gas properties 129,774 -
10.00% note payable to bank due in monthly installments of $9,201,
including interest, through November 1997, secured by oil and
gas properties 101,237 195,614
9.75% note payable to bank due in monthly installments of $4,397,
including interest, through December 1998, with the balance of approx-
imately $9,000 due at maturity, secured by oil and gas properties 99,252 140,051
10.00% at December 31, 1996 and 10.25% at December 31, 1995 note
payable to bank due in monthly installments of $2,083 plus interest
through June 2000, secured by oil and gas properties 87,502 100,000
9.75% note payable to bank due in monthly installments of $3,302,
including interest, through December 1998, with the balance of approx-
imately $17,000 due at maturity, secured by oil and gas properties 83,535 113,350
9.50% note payable to bank due in monthly installments of $3,288,
including interest, through December 1998, with the balance of approx-
imately $6,000 due at maturity, secured by oil and gas properties 74,302 105,025
(Continued)
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
10.00% at December 31, 1996 and 10.25% at December 31, 1995 note
payable to bank due in monthly installments of $2,297, including
interest, through November 1998, with any remaining principal
due at maturity, secured by oil and gas property mortgages $ 51,445 $ 69,041
10.00% unsecured note payable to bank with principal due in
May 1997, with interest paid monthly 25,000 25,000
8.60% note payable to bank due in monthly installments of
$439, including interest, through December 2000, secured by
equipment 18,067 21,299
10.00% at December 31, 1996 and 10.25% at December 31, 1995
note payable to the bank due in monthly installments of $1,229,
including interest, through October 1997, with any remaining principal
due at maturity, secured by equipment 12,862 24,486
9.00% note payable to bank due in monthly installments of $1,860,
including interest, through June 1998, with the balance of approxi-
mately $149,000 due at maturity, secured by real estate mortgage,
prepaid in March 1996 - 167,615
Non-interest bearing note payable to Pangloss Holdings, due
January 1996 - 106,250
10.25% note payable to bank due in monthly installments of $1,593,
including interest, through September 1996, secured by oil and
gas properties - 14,328
21% note payable to Norwest Financial due in monthly installments
of $250, including interest, through August 1996 - 1,624
10.25% note payable to bank due in monthly installments of $503,
including interest, through March 1996, secured by equipment - 1,481
Capital lease obligations 23,562 -
------------ -----------
Total obligations 2,411,134 2,085,164
Less current portion 1,338,665 650,719
------------ ------------
$ 1,072,469 $ 1,434,445
------------ ------------
(Concluded)
</TABLE>
Substantially all of the Company's debt is guaranteed by the Company's
president and major stockholder. The aggregate maturities of long-term debt as
of December 31, 1996 are as follows: 1997 - $1,338,665; 1998 - $410,138; 1999
- - $252,307, 2000 - $143,517, 2001 - $249,046, and thereafter - $17,461.
-12-
<PAGE>
6. INCOME TAXES
Income tax benefit consists of the following for the years ended December
31, 1996 and 1995:
<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
1996:
Federal $ - $ - $ -
State - - -
---------- --------- ---------
$ - $ - $ -
========== ========= =========
1995:
Federal $ - $ (3,693) $ (3,693)
State - (652) (652)
---------- --------- ---------
- $ (4,345) $ (4,345)
========== ========= =========
</TABLE>
Deferred tax assets and liabilities at December 31, 1996 and 1995 are composed
of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax asset -
Net operating loss carryforward $ 242,277 $ 183,561
Less: Valuation allowance (229,247) (165,716)
----------- -----------
13,030 17,845
----------- -----------
Deferred tax liabilities:
Property basis differences - 7,319
Partnership investments
basis differences 13,030 10,526
----------- -----------
13,030 17,845
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $561,000 which will expire during the years 2009 through
2011.
The difference between the Company's effective tax rate and the statutory
Federal income tax rate results from the valuation allowance established
for net operating loss carryforwards, the effect of state income taxes,
graduated Federal income tax rates, and nondeductible travel and
entertainment expenses.
7. RELATED PARTIES
Until December 1, 1995, the Company leased office space under an operating
lease from a partnership in which it had a 50% interest. Effective December
1, 1995, the Company acquired the remaining 50% interest in the partnership
(see Note 2). During 1995, $25,800 was paid to the partnership as rent.
Through August 1995, the Company sold gas produced from certain wells it
operates to a gas marketing company owned by the president of the Company.
Such sales for the years ended December 31, 1995 were approximately
$89,000. The gas marketing company collected a 3% commission on the resale
of
-13-
<PAGE>
such gas, which was utilized to pay income and other taxes of the gas
marketing company. No funds were paid to the president of the Company in
connection with these transactions.
In 1995, the Company began paying a fee to the Company president based on
the terms of a "Guaranty Fee Agreement". Under the agreement he receives an
annual fee for guaranteeing the Company debt equal to the greater of
$15,000 or 3% of the guaranteed debt. During 1996 and 1995, this fee was
approximately $76,000 and $30,000, respectively.
The Company incurs fees for accounting and consulting services provided by
a firm in which a board member of the Company is a partner. Such amounts
incurred during 1996 and 1995 were $39,943 and $34,476, respectively.
During 1996, the Company issued 35,700 shares of its common stock to this
firm for services rendered. The value assigned to this stock, $49,980, was
based on billings received from the firm.
During 1995 the Company paid $20,100 and issued 12,205 shares of Company
stock to a company for services related to the conversion of limited
partnership interests to common stock interests (see Note 2). The chief
executive officer of this Company is a member of the Company's board of
directors.
Pursuant to an agreement signed in February 1996, a director of the Company
will provide evaluation and reservoir engineering services to the Company
in exchange for an amount equal to the net of a percentage of the net
revenue interest of a certain well and a percentage of the lease operating
expenses attributable to the same well.
8. STOCK OPTION PLANS
The Company established the Pan Western Energy Corporation 1992 Directors
Stock Option Plan (the "Directors Plan") under which non-employee directors
of the Company may be granted options to purchase shares of common stock.
The plan provides that the option price shall be the fair value of the
common stock at the date granted and that options are exercisable for 10
years and 30 days from date granted. At December 31, 1996 and 1995, 135,000
and 127,500 shares were available for grant of stock options and options
covering 15,000 and 22,500 shares which were granted in July 1993 at $1.30
per share were exercisable at December 31, 1996 and 1995, respectively.
On January 21, 1997, the Board of Directors approved the grant of options
to acquire 50,000 shares of the Company's common stock at $1.40 per share
under the Directors Plan.
The 1992 Employee Stock Option Plan (the "Employee Plan") has also been
adopted by the Company's board of directors and approved by the
shareholders. There are 100,000 options available for grant under this Plan
and no options have been granted under the Plan.
Outstanding options granted under both the Directors and Employee Stock
Option Plans are terminated if the option holder ceases to be an employee
or director of the Company.
In July 1993, the Board of Directors approved the grant of options to the
Company's president to acquire 7,500 shares of common stock at $1.30 per
share (the estimated fair value at the date granted). These options are
exercisable at any time up to ten years from date of grant. On January 21,
1997, the Board of Directors approved the grant of options to certain
executive officers to acquire 570,000 shares of the Company's common stock
at $1.40 per share. These options vest at 40% on date of grant; 30% one
year from date of grant; and the remaining 30% two years from date of
grant. These options were not granted pursuant to the existing Employee
Plan.
A summary of the status of the Company's two stock option plans as well as
the options granted outside the existing plans as of December 31, 1996 and
December 31, 1995 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year 37,500 $ 1.30 37,500 $ 1.30
Granted - - - -
Exercised/Canceled (15,000) 1.30 - -
------- ------ ------ ------
Outstanding at End of Year 22,500 $ 1.30 37,500 $ 1.30
======= ====== ====== ======
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Number
Range of Outstanding Weighted
Exercise at December 31, Average Remaining Weighted Average
Prices 1996 Contractual Life (Years) Exercise Price
-------- --------------- ------------------------ ----------------
<S> <C> <C> <C>
$ 1.30 22,500 6.55 $ 1.30
</TABLE>
All options outstanding are exercisable at December 31, 1996.
The Company applies Accounting Principals Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its stock option plans. In years
when stock options are granted the Company will disclose pro forma net
earnings and earnings per share amounts as if compensation cost had been
determined based on the fair value at the grant dates for awards stock
option consistent with the method of SFAS No. 123:
The Company will use the Black-Scholes option-pricing model to determine
the fair value of options granted.
-14-
<PAGE>
9. STOCK PURCHASE WARRANTS
In March 1996, Pangloss International, S.A. ("Pangloss") acquired 87,500
shares of the Company's common stock for $1.20 per share, and concurrently
was granted warrants to purchase 125,000 shares at $1.60 per share.
Pangloss was granted additional warrants in July 1996 to purchase 100,000
shares of the Company's common stock at $1.20 per share. These warrants
were issued in connection with a $105,000 loan from Pangloss that was
repaid in December 1996.
All of the warrants issued to Pangloss are exercisable at any time prior to
April 15, 2001.
10. STOCKHOLDERS' EQUITY
On June 20, 1996, the Company's stockholders approved amendments to the
Certificate of Incorporation to increase the authorized common stock to
25,000,000 shares, and to establish a class of preferred stock. The Board
of Directors was authorized to fix the rights and terms applicable to the
preferred stock prior to issuance.
On February 18, 1997, the Board of Directors approved a four-for-one stock
split effected in the form of a stock dividend. The record date for the
dividend is April 1, 1997. Common share, per share data, and stockholders'
equity amounts in the accompanying consolidated financial statements and
footnotes (unless otherwise indicated) have been retroactively adjusted to
reflect this stock split.
11. COMMITMENTS AND CONTINGENCIES
The Company has executed employment agreements with certain executive
officers which expire on the later of specified dates in the year 2000 or
the date to which the agreement has been extended; or, in the case of the
Company's president, as long as the president guarantees the Company's
debt. Under the terms of these agreements, the executives will receive
annual salaries aggregating $238,000. In addition, the Company's president
will receive incentive compensation equal to 10% of the Company's annual
pre-tax income in excess of $150,000. The other executive officers will
share in a bonus pool equal to 10% of the Company's net income in excess of
$100,000. In the event of the executives' termination without just cause,
as defined in the agreements, the Company must pay them these amounts for
the remaining term of the agreements.
The Company has received billings of approximately $178,000 from a law firm
which represented the Company in a lawsuit filed as plaintiff. The Company
eventually lost the suit and is disputing the amount of the law firm's
billing. The Company has not recorded a liability for approximately $88,000
of this billed amount.
12. SIGNIFICANT CUSTOMERS
There were four purchasers in 1996 which represented approximately 18%,
16%, 15% and 11% of the Company's total revenues. There were three
purchasers in 1995 which represented approximately 37%, 34% and 17% of the
Company's total revenues.
13. BUSINESS DEVELOPMENTS
During 1996, the Company acquired a license from Amoco Corporation to
utilize their patented short radius curve drilling technology. The patent
was originally issued in 1993. The Company paid $40,000 for the license and
will pay a scheduled royalty for its use in the future. The Company plans
to use the
-15-
<PAGE>
technology to develop reserves currently owned by the Company.
In addition, the Company intends to provide the technology to other
operators through a wholly owned subsidiary, Lateral Completion
Technologies, Inc., and develop reserves for other operators in return for
working and net revenue interests in those reserves. The Company is
currently pursuing financing alternatives to provide the funds needed to
fund the capital expenditures and initial operating costs of Lateral
Completion Technologies, Inc. These alternatives include a private
placement of debt or equity or a combination thereof.
14. SALE OF COMMON STOCK
The Company is currently attempting to sell 15,000 shares of its common
stock at $10 per share (75,000 shares at $2 per share after giving effect
to the stock split discussed in Note 10) through an offering pursuant to
Regulation D and Rule 504 of the Securities Act of 1933. Purchases of
common stock under this offering will be limited to 100 shares per
individual. The Company's sole purpose for this offering is to increase the
shareholder base to at least 300 in order to meet one of the requirements
imposed by NASDAQ to qualify for trading on the NASDAQ Small Cap Market.
15. REGISTRATION OF COMMON STOCK
The Company is in the process of preparing a Form-10-SB to be filed with
the Securities and Exchange Commission on or about March 15, 1997. The
purpose of this filing is to register all issued and outstanding shares of
the Company's common stock.
16. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following information summarizes the Company's net proved reserves of
oil and gas and the present values thereof for the years ended December 31,
1996 and 1995. The information presented for 1996 and 1995 is based upon
estimates prepared by Sycamore Resources, LLC, which was engaged to perform
an evaluation of the present value of estimated future net cash flows
before income tax (discounted at 10%). The information was prepared in
accordance with Statement of Financial Accounting Standards No. 69.
Prices of crude oil, condensate, and gas were those prices in effect at the
respective date. Estimated future production costs, which include lease
operating costs and severance taxes (estimated assuming existing economic
conditions will continue over the lives of the individual leases, with no
adjustment for inflation), have been deducted in arriving at the estimated
future net revenues. The present value amounts should not necessarily be
equated with fair market value of the Company's oil and gas reserves. All
reserves are located in the United States.
The reliability of any reserve estimate is a function of the quality of
available information and of engineering interpretation and judgment. These
reserves should be accepted with the understanding that subsequent drilling
activities or additional information might require their revision.
-16-
<PAGE>
The following schedules present certain data pertaining to the Company's proved
reserves at December 31, 1996 and 1995:
Estimated quantities of proved reserves:
<TABLE>
<CAPTION>
1996 1995
--------------------- ----------------------
Oil Gas Oil Gas
Bbls Mcf Bbls Mcf
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year 1,326,175 5,275,379 307,498 2,052,887
Reserves acquired through
acquisition of partnership
interests - - 222,153 306,519
Sales and transfers of
minerals in place - - (54,645) (65,778)
Revisions of previous estimates 580,861 1,590,876 (147,331) 1,660,256
Purchases of minerals in place 428,519 706,949 1,036,677 1,537,451
Production (56,871) (263,123) (38,177) (215,956)
--------- --------- --------- ---------
End of year 2,278,684 7,310,081 1,326,175 5,275,379
--------- --------- --------- ---------
Proved developed reserves,
end of year 1,254,903 3,914,395 650,397 1,977,237
--------- --------- --------- ---------
</TABLE>
Standardized measure of estimated discounted future net cash flows relating to
proved oil and gas reserves:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Future cash inflows $ 73,051,172 $ 30,050,737
Future development costs (3,958,105) (1,689,419)
Future production costs (12,031,762) (7,698,291)
------------- -------------
Future net cash flows, before income taxes 57,061,305 20,663,027
Future income taxes (21,144,475) (7,061,984)
------------- -------------
Futures net cash flows, after income taxes 35,916,830 13,601,043
10% annual discount for estimated timing
of cash flows (13,064,500) (4,990,047)
------------- -------------
Standardized measure of estimated discounted
future net cash flows $ 22,852,330 $ 8,610,996
------------- -------------
Estimated discounted future net cash flows
before income taxes $ 36,305,648 $ 13,082,029
------------- -------------
</TABLE>
-17-
<PAGE>
Changes in the standardized measure of estimated discounted future net cash
flows from proved oil and gas reserves:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Standardized measure, beginning of period $ 8,610,996 $ 1,326,317
Reserves acquired through acquisition of
partnership interests - 1,672,281
Sales of production, net of production costs (949,762) (509,914)
Net changes in prices and production costs 9,162,113 697,200
Purchases and sales of minerals in place, net 5,119,345 9,010,026
Changes in estimated future development costs (2,268,685) (1,163,068)
Revisions of previous quantity estimates 8,870,097 765,055
Accretion of discount 1,308,203 177,290
Net changes in income taxes (8,982,284) (4,024,447)
Timing and other 1,982,307 660,256
------------- ------------
$ 22,852,330 $ 8,610,996
============= ============
</TABLE>
-18-
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
Unaudited Audited
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash 162,108 232,699
Restricted cash 105,337 103,995
Receivables:
Trade, net of allowance of $11,080 181,822 283,095
Due from stockholder 0 1,594
Due from affiliated partnerships 1,187 1,187
Income tax receivable 14,950 14,950
---------- ----------
Total current assets 465,404 637,520
---------- ----------
Property and Equipment:
Oil and gas properties (successful efforts method) 3,306,120 3,474,363
Other property and equipment 375,695 374,932
---------- ----------
3,681,815 3,849,295
Less accumulated depreciation and depletion 898,216 918,439
---------- ----------
Net property and equipment 2,783,599 2,930,856
---------- ----------
Other assets 56,889 57,836
---------- ----------
Total Assets 3,305,892 3,626,212
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 399,243 472,412
Undistributed oil and gas revenues 139,710 149,276
Due to affiliated partnerships 0 7,540
Accrued liabilities 26,049 31,520
Current portion of long term debt 1,259,367 1,338,665
---------- ----------
Total current liabilities 1,824,369 1,999,413
Long-term debt 966,886 1,072,469
---------- ----------
Total liabilities 2,791,255 3,071,882
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock ($.05 par value; authorized 25,000,000
shares; no shares issued or outstanding) 0 0
Common stock ($.01 par value; authorized 25,000,000
shares; issued 4,314,810 shares) 43,148 43,148
Additional paid in capital 1,610,701 1,610,701
Accumulated deficit (920,230) (880,537)
Treasury stock (1,081,250 shares) (218,982) (218,982)
---------- ----------
Total stockholders' equity 514,637 554,330
---------- ----------
Total Liabilities and Stockholders' Equity 3,305,892 3,626,212
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
REVENUE:
Oil and gas sales 416,442 356,637
Operating income 22,346 39,645
---------- ----------
438,788 396,282
---------- ----------
OPERATING EXPENSES:
Lease operating 178,006 150,123
Salaries and wages 93,968 93,350
Depreciation, depletion and amortization 78,482 83,981
General and administrative 117,188 70,380
---------- ----------
467,644 397,834
---------- ----------
OPERATING INCOME (LOSS) (28,856) (1,552)
---------- ----------
OTHER INCOME (EXPENSE):
Loss from rental operations, net (4,361) (6,029)
(Loss) gain on sale of assets, net 43,603 123
Interest income 1,397 333
Interest expense (51,476) (49,195)
Minority interest in loss (earnings) of consolidated partnerships 0 (4,062)
---------- ----------
(10,837) (58,830)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (39,693) (60,382)
Income taxes 0 0
---------- ----------
NET INCOME (LOSS) (39,693) (60,382)
========== ==========
NET INCOME (LOSS) PER SHARE (0.01) (0.02)
========== ==========
Weighted average common shares 3,233,560 3,034,018
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Accumulated Treasury Stockholders'
Stock Capital Deficit Stock Equity
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 43,148 1,610,701 (880,537) (218,982) 554,330
Net Income (loss) (39,693) (39,693)
-------------------------------------------------------------------
Balances, March 31, 1997 43,148 1,610,701 (920,230) (218,982) 514,637
===================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (39,693) (60,382)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 78,482 83,981
(Gain) loss on sale of assets, net (43,603) (123)
Minority interest in earnings of consolidated partnerships 0 4,062
(Increase) decrease in receivables 102,867 24,766
(Increase) decrease in other assets 947 0
Increase (decrease) in accounts payable (80,709) (4,445)
Increase (decrease) in accrued liabilities (5,471) (10,349)
Increase (decrease) in undistributed oil and gas revenues (9,566) (2,591)
-------- --------
Net cash provided by (used in) operating activities 3,254 34,919
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,623) (154,050)
Purchase of certificate of deposit (1,342) (100,000)
Purchase of royalty 0 0
Proceeds from the disposal of oil and gas properties 120,000 3,250
-------- --------
Net cash provided by (used in) investing activities 111,035 (250,800)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 364 200,000
Repayment of long-term debt (185,245) (231,070)
Cash paid to acquire common stock 0 0
Proceeds from sale of common stock 0 254,296
-------- --------
Net cash provided by (used in) financing activities (184,881) 223,226
-------- --------
NET INCREASE (DECREASE) IN CASH (70,592) 7,345
CASH, BEGINNING OF PERIOD 232,699 15,683
-------- --------
CASH, END OF PERIOD 162,108 23,028
======== ========
SUPLEMENTAL CASH FLOW INFORMATION:
Interest paid 51,476 42,051
======== ========
Income taxes paid 0 0
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PAN WESTERN ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(1) Basis of Presentation. The consolidated financial statements included in
this report have been prepared by Pan Western Energy Corporation (the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting and include all normal and
recurring adjustments which are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been
audited by an independent accountant.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that
the disclosures are adequate to make the information presented not
misleading. However, these financial statements should be read in
conjunction with the Company's financial statements and notes thereto
for the years ended December 31, 1996 and 1995 included elsewhere
herein. The financial data for the interim periods presented may not
necessarily reflect the results to be anticipated for the complete year.
(2) Stockholders' Equity. On February 18, 1997, the Board of Directors
approved a four-for-one stock split effected in the form of a stock
dividend. The record date for the dividend is April 1, 1997. Common
share, per share data, and stockholders' equity amounts in the
accompanying unaudited consolidated financial statements and footnotes
have been retroactively adjusted to reflect this stock split.
(3) Sale of Common Stock. The Company is currently offering 15,000 shares of
its common stock at $10 per share (75,000 shares at $2 per share after
giving effect to the stock split discussed in note 2) pursuant to
Regulation D under the Securities Act of 1933.
(4) Registration of Common Stock. On April 7, 1997, the Company filed a Form
10-SB with the Securities and Exchange Commission. The purpose of this
filing is to register all issued and outstanding shares of the Company's
common stock and develop a public market for such common stock.
(5) Earnings per common share. Net earnings per common share for the periods
presented has been computed based upon the weighted average number of
shares outstanding of 3,233,560 and 3,034,018 for the three months ended
March 31, 1997 and 1996 respectively.
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard No. 128 ("SFAS No.
128, Earnings Per Share") which is effective for annual and interim
periods ending after December 15, 1997.
5
<PAGE>
Based on the methodology of SFAS No. 128, earnings per share for the
three months ended March 31, 1997 and 1996 would have been the same as
that reported in the accompanying Consolidated Statements of Operations.
6
