<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--------
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---------
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22349
PAN WESTERN ENERGY CORPORATION
(Exact name of registrant as specified in charter)
Oklahoma 73-1130486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 South Boulder Avenue Tulsa, Oklahoma 74119
(Address of principal executive offices) (Zip Code)
(918) 582-4957
Registrants telephone number, including area code
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--------- --------
As of November 9, 1998, 3,621,873 shares of the Registrants Common Stock, $0.01
par value, were outstanding.
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TABLE OF CONTENTS
Part I. Financial Information.
Item 1.
Consolidated Balance Sheets (Unaudited) as of September 30,
1998 and as of December 31, 1997.
Consolidated Statements of Operations (Unaudited) for the
three and nine months ended September 30, 1998 and September
30, 1997.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) for the nine months ended September 30, 1998.
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 1998 and September 30, 1997.
Notes to Unaudited Consolidated Financial Statements for the
nine months ended September 30, 1998 and September 30, 1997.
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Part II. Other Information.
2
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ITEM 1. FINANCIAL STATEMENTS
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
---------------- --------------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash 227,820 14,686
Restricted cash 113,940 344,147
Receivables:
Trade, net of allowance of $11,080 135,927 178,313
Due from stockholder 13,552 4,252
Due from affiliated partnerships 0 1,187
Prepaid expenses and other 49,040 20,350
--------------- --------------
Total current assets 540,279 562,935
--------------- --------------
Property and Equipment:
Oil and gas properties (successful efforts method) 7,456,187 2,955,683
Other property and equipment 350,883 378,419
--------------- --------------
7,837,070 3,334,102
Less accumulated depreciation and depletion 1,215,652 974,668
--------------- --------------
Net property and equipment 6,621,418 2,359,434
--------------- --------------
Deferred loan costs 52,267 0
Other assets 55,162 64,912
--------------- --------------
Total Assets 7,269,126 2,987,281
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable 600,074 247,815
Undistributed oil and gas revenues 134,098 153,990
Due to affiliated partnerships 0 7,540
Accrued liabilities 65,189 15,688
Current portion of long term debt 996,177 769,564
--------------- --------------
Total current liabilities 1,795,538 1,194,597
Net profits overriding royalty payable 77,160 0
Long-term debt, net of discount of $76,151 at
September 30, 1998 6,030,986 1,669,628
--------------- --------------
Total liabilities 7,903,684 2,864,225
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock ($.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 12/31/97 - 4,448,665 shares;
9/30/98 - 4,703,123) 47,031 44,487
Additional paid in capital 1,910,784 1,837,253
Accumulated deficit (2,373,390) (1,539,702)
Treasury stock (1,081,250 shares of common stock) (218,982) (218,982)
--------------- --------------
Total stockholders' equity (634,557) 123,056
--------------- --------------
Total Liabilities and Stockholders' Equity 7,269,126 2,987,281
=============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ---------------------------------------
1998 1997 1998 1997
---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas sales 237,659 323,000 685,266 1,071,432
Operating income 17,833 19,243 61,146 79,271
---------------- ----------------- ----------------- ------------------
255,491 342,243 746,412 1,150,703
---------------- ----------------- ----------------- ------------------
OPERATING EXPENSES:
Lease operating 198,814 112,069 407,303 454,171
Salaries and wages 82,071 87,000 281,016 273,368
Depreciation, depletion and amortization 107,325 80,132 236,983 237,097
General and administrative 147,071 141,383 401,735 353,355
---------------- ----------------- ----------------- ------------------
535,281 420,584 1,327,036 1,317,991
---------------- ----------------- ----------------- ------------------
OPERATING INCOME (LOSS) (279,789) (78,341) (580,624) (167,288)
---------------- ----------------- ----------------- ------------------
OTHER INCOME (EXPENSE):
Loss from rental operations, net (4,792) (5,641) (11,179) (12,290)
(Loss) gain on sale of assets, net 640 1,460 3,935 45,737
Interest income 1,544 1,487 4,551 4,593
Interest expense (127,489) (53,610) (250,371) (157,459)
---------------- ----------------- ----------------- ------------------
(130,097) (56,304) (253,064) (119,419)
---------------- ----------------- ----------------- ------------------
INCOME (LOSS) BEFORE INCOME TAXES (409,886) (134,645) (833,688) (286,707)
Income taxes 0 0 0 0
---------------- ----------------- ----------------- ------------------
NET INCOME (LOSS) (409,886) (134,645) (833,688) (286,707)
================ ================= ================= ==================
NET INCOME (LOSS) PER SHARE -
Basic And Diluted (0.11) (0.04) (0.24) (0.09)
================ ================= ================= ==================
Weighted Average Common Shares -
Basic And Diluted 3,621,873 3,345,166 3,465,331 3,298,012
================ ================= ================= ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(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, 1997 44,487 1,837,253 (1,539,702) (218,982) 123,056
Issuance of stock 2,544 73,531 76,075
Net Income (loss) (833,688) (833,688)
-----------------------------------------------------------------------------------------
Balances, September 30, 1998 47,031 1,910,784 (2,373,390) (218,982) (634,557)
=========================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (833,688) (286,707)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 236,983 260,100
(Gain) loss on sale of assets, net (3,935) (45,737)
(Increase) decrease in receivables 34,272 106,875
(Increase) decrease in prepaid expenses and other assets (19,433) (65,788)
Increase (decrease) in accounts payable 344,719 (202,378)
Increase (decrease) in accrued liabilities 49,501 (13,728)
Increase (decrease) in undistributed oil and gas revenues (19,892) (32,040)
--------------- -----------------
Net cash provided by (used in) operating activities (211,473) (279,402)
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,580,428) (9,866)
Purchase of certificate of deposit (4,370) (4,145)
Proceeds from the disposal of oil and gas properties 7,155 130,000
--------------- -----------------
Net cash used in investing activities (4,577,642) 115,989
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 6,815,290 301,464
Repayment of long-term debt (1,824,115) (510,923)
Proceeds from sale of common stock 11,073 205,889
--------------- -----------------
Net cash provided by financing activities 5,002,249 (3,571)
--------------- -----------------
NET INCREASE (DECREASE) IN CASH 213,134 (166,984)
CASH, BEGINNING OF PERIOD 14,686 232,699
--------------- -----------------
CASH, END OF PERIOD 227,820 65,715
=============== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 191,673 144,667
=============== =================
Income taxes paid 0 0
=============== =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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PAN WESTERN ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(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, 1997 and 1996. 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 was 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 completed a private placement of 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) which was
issued pursuant to Regulation D under the Securities Act of 1933 in April,
1997.
Effective March 21, 1997, the Company amended and restated its Certificate
of Incorporation which has 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 the responses received, the
Company has issued 25,845 shares of Common Stock and has received
$11,888.91 in proceeds for these shares.
On September 1, 1997, the Company issued 33,000 shares of its Common Stock
to an individual as additional consideration for executing a promissory
note with the Company in the amount of $300,000. The note bears interest at
10% per annum and matures on July 3, 1998. The note is secured by a second
mortgage on the Company's oil and gas
7
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properties located in Coal County, Oklahoma. This note was paid with the
proceeds of the credit facility entered into by the Company on July 1, 1998
as more frilly described in Note 6.
On May 15, 1998, the Company issued 33,000 shares of its Common Stock to an
individual as additional consideration for executing a promissory note with
the Company in the amount of $300,000. The note bears interest at 10% per
annum and matures on July 3, 1998. The note is secured by a mortgage on the
Company's oil and gas properties located in Borden County, Texas. This note
was paid with the proceeds of the credit facility entered into by the
Company on July 1, 1998 as more fully described in Note 6.
On June 23, 1998, the Company issued 221,468 shares of its Common Stock to
the President of the Company pursuant to an exercise of options previously
granted to him.
(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 was to register all issued and outstanding shares of the Company's
common stock and develop a public market for such common stock. The Company
was notified by the Securities and Exchange Commission that this filing was
declared effective on June 26, 1997.
(5) Loss per common share. Net loss per common share for the periods presented
has been computed based upon the weighted average number of shares
outstanding of 3,465,331 and 3,298,012 for the nine months ended September
30, 1998 and 1997, respectively and 3,621,873 and 3,345,166 for the three
months ended September 30, 1998 and 1997, 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.
The Company has adopted SFAS No. 128 and has restated earnings per share
for all periods presented in accordance with that statement. Outstanding
stock options and warrants have not been included in the calculation for
the periods ended September 30, 1998 and September 30, 1997 since their
effect on net loss per share is antidilutive.
(6) Credit Facility. On July 1, 1998, the Company entered into a $7,420,000
credit facility agreement. The terms of the credit facility include a
maturity of 4 years from the date of execution and an interest rate based
on the Citibank, N.A., New York prime rate plus 2% (10.5% at September 30,
1998). The credit facility is secured by a first mortgage on all existing
oil and gas properties of the Company. The credit facility consists of a
refinancing loan in the amount of $2,320,000 and a development loan
consisting of two separate tranches. The refinancing loan proceeds are to
be used to extinguish the existing debt on the Company's oil and gas
properties, to pay the expenses associated with the transaction and to
reduce the accounts payable of the Company. Tranche A of the development
loan, in the amount of $1,350,000 is to be used for specific development
projects on the
8
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Company's existing oil and gas properties. Tranche B of the development
loan, in the amount of $3,750,000, is to be used to further develop the
Company's existing oil and gas properties. However, this amount will not be
funded unless the Company attains certain performance goals including
specified oil and gas production and reserve levels. All borrowing activity
under tranche A and tranche B of the development loan must be completed by
December 31, 1998 and June 30, 2000, respectively. Under the terms of the
credit facility, all proceeds from the sale of oil and gas produced from
the properties are to be used to pay all oil and gas operating expenses and
interest on the outstanding loan and a general and administrative
allowance, and any remaining proceeds are to be applied to principal on the
outstanding loan. In addition, the Company is required to make minimum
quarterly principal reductions until July, 2000 at which time a total
minimum principal reduction of $725,000 must have been made. In connection
with this financing, the Company granted a 25% net profits overriding
royalty on all of the Company's production. Payments on this royalty
commence upon maturity or prepayment of all interest and principal relating
to the credit facility. In addition, the Company issued 200,000 warrants
exercisable at $2.00 per share until June 30, 2003.
(7) The credit facility described in Note 6 was amended and restated on August
1, 1998 to increase the total facility to $12,795,000. The increase
consisted of a new acquisition loan in the maximum amount of $4,200,000, an
increase in the Tranche A development loan to a maximum of $1,525,000 and
an increase in the Tranche B development loan to a maximum of $4,750,000.
The interest rate and maturity on the amended credit facility remains
unchanged from the original agreement. The restated credit agreement
increased the net profits overriding royalty percentage from a maximum of
25% to a maximum of 30% and required the Company to issue an additional
200,000 warrants exercisable at $2.00 per share until June 30, 2003. The
acquisition tranche proceeds allowed the Company to purchase 11 wells in
Sherman County, Texas from Exxon Corporation and the increase in the
development loan tranches will allow the Company to more fully develop
those properties.
As a result of the above financing transactions, the Company will record a
discount on the amounts borrowed under Tranches A and B to recognize the
favorable interest rate received on these borrowings as a result of the net
profits overriding royalty interest granted to the lender. This discount
will be amortized to interest expense using the level yield method and will
result in an effective interest rate of 16% in amounts borrowed under
Tranches A and B. In management's opinion, the interest rate on other
borrowings under the credit facility is comparable to the rate available to
the Company on similarly structured loans from other lenders. In addition,
based upon an analysis performed by management, no value was assigned to
the warrants issued under the original and amended credit facility.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
DISPOSITION OF OIL AND GAS PROPERTIES.
The Company closed the sale of all of its oil and gas properties located in
the state of Kansas effective February 1, 1997. This sale included 7 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 33,010 barrels of oil. The sales price received by the Company was
$120,000 which resulted in a gain on sale of approximately $44,000 in the nine
months ended September 30, 1997.
PURCHASE OF OIL AND GAS PROPERTIES.
In August, 1998, the Company purchased 11 wells in Sherman County, Texas
from Exxon Corporation. The average daily gross production from these 11 wells
is approximately 1,000 mcf per day.
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 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 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 development and
enhancement activities. The following table reflects the average prices received
and the amounts produced by the Company for the periods presented.
10
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Average price:
Oil (per Bbl) $ 12.20 $ 18.80 $ 14.12 $ 20.09
Gas (per Mcf) $ 1.62 $ 1.68 $ 1.70 $ 1.81
Production:
Oil (Bbl) 8944.00 11337.00 28533.00 35363.00
Gas (Mcf) 79434.00 62233.00 184810.00 194260.00
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997.
The net loss of the Company increased by $275,241 from a loss of $134,645
experienced for the third quarter ended September 30, 1997 to a loss of $409,886
for the third quarter ended September 30, 1998. The increased loss experienced
is due primarily to a decline in the Company's oil production and the average
prices received for both oil and gas production coupled with an increase of
$27,193 in depreciation, depletion and amortization expense and an increase of
$73,879 in interest expense resulting from the restructuring of the Company's
debt as more fully described in Notes 6 and 7 to the financial statements
attached hereto.
Oil and gas sales were $237,659 for the third quarter of 1998 as compared
to $323,000 for the third quarter of 1997. This represents a decrease of $85,341
which is due primarily to sharply lower prices, on a lesser amount of
production, received by the Company for its oil production during the third
quarter ended September 30, 1998. Oil production for the third quarter of 1998
experienced a decline of 21% as compared to the third quarter of 1997 and the
average price received by the Company for its oil production declined from
$18.80 during the third quarter of 1997 to $12.20 during the third quarter of
1998. The decrease in oil production was primarily a result of the inability of
the Company to continue its normal operations maintenance program during the
month of July due to cash flow constraints, and the natural production decline
expected by the Company on its existing properties. In addition, one well which
produced approximately 15 barrels of oil per day developed a hole in the casing
and was shut down. An unsuccessful repair attempt was made during third quarter,
1998 and a second repair attempt is scheduled for the fourth quarter of 1998.
Gas production for the third quarter of 1998 experienced a 28% increase when
compared to the third quarter of 1997 from 62,233 mcf to 79,434 mcf. This
increase is a result of the inclusion of one month of production from eleven
Sherman County, Texas wells which were purchased from Exxon Corporation in July,
1998. The production from these wells amounted to 30,143 mcf. If the results of
the Sherman County, Texas wells are excluded, the Company would have experienced
a gas production decline of 21% which is primarily due to the aforementioned
cash flow constraints as well as the natural production
11
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decline experienced on all wells. The average gas price received during the
third quarter of 1998 was $1.62 as compared to $1.68 for the third quarter of
1998.
Operating income declined by $1,410 during the three months ended September
30, 1998 to $17,833 as compared to $19,243 experienced during the three months
ended September 30, 1997. The decrease is primarily attributable a slight
reduction in the number of wells operated by the Company and the reduced
overhead expenses being charged to those wells.
Lease operating expenses, including production taxes, for the three months
ended September 30, 1998 increased by $86,745 to $198,814 from $112,069
experienced during the three month period ended September 30, 1997. Production
taxes declined by $4,978 from $20,918 experienced during the quarter ended
September 30, 1997 to $15,940 experienced during the quarter ended September 30,
1998. This decline is attributable to the lower taxable value of the Company's
production during the quarter ended September 30, 1998 as compared to the
quarter ended September 30, 1997. Other lease operating expense increased by
$91,723 from $91,151 during the third quarter ended September 30, 1997 to
$182,874 experienced during the quarter ended September 30, 1998. This increase
is primarily attributable to increased field maintenance operations being
conducted after the proceeds of the debt refinancing were received in August,
1998.
Depreciation, depletion and amortization increased by $27,193 to $107,325
for the three month period ended September 30, 1998 as compared to $80,132
during the three month period ended September 30, 1997. This increase is due
primarily to the inclusion of depreciation, depletion and amortization on the
Sherman County, Texas properties purchased in August, 1998.
Salaries and wages expense decreased by $4,929 from $87,000 during the
three months ended September 30, 1997 to $82,071 during the three months ended
September 30, 1998. The decrease is attributable to the exclusion of the payroll
amount attributable to two employees which left the Company. One of these
employees was replaced by a person working on contract.
General and administrative expenses increased by $5,688 from $141,383
during the three months ende d September 30, 1997 to $147,071 during the three
months ended September 30, 1998. Legal fees increased by approximately $3,300,
loan fees increased by approximately $11,600, postage expense increased by
approximately $2,165, telephone and communications expense increased by
approximately $3,200, contract labor expense increased by $6,000 and travel and
entertainment expense increased by approximately $8,400. These increases were
partially offset by declines of approximately $20,000 in investment banking
fees, approximately 3,400 in filing fees, and approximately $4,500 in printing
and copying expense.
Other income (expense) increased from an expense of $56,304 experienced
during the quarter ended September 30, 1997 to an expense of $130,097 during the
quarter ended September 30, 1998. Interest expense for the quarter ended
September 30, 1998 increased by $73,879 to $127,489 as compared to $53,610 for
the quarter ended September 30, 1997. The increase in interest expense was
attributable to the increased loan balances experienced during the third quarter
ended September 30, 1998 as well as the inclusion of amortization of the
interest
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expense attributable to the discount of debt associated with net profits
overriding royalty interest granted to the lender that refinanced the Company's
debt in August, 1998. The interest expense attributable to this debt discount
amounted to approximately $1,009 during the three months ended September 30,
1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997.
The net loss of the Company increased by $546,981 from a loss of $286,707
experienced for the nine months ended September 30, 1997 to a loss of $833,688
for the nine months ended September 30, 1998. The increased loss experienced is
due primarily to substantially lower oil and gas sales revenues, increased
operating expenses, increased interest expense and a reduced gain on sale of
assets.
Oil and gas sales were $685,266 for the nine months ended September 30,
1998 as compared to $1,071,432 for the nine months ended September 30, 1997.
This represents a decline of $386,166 which was primarily attributable lower
production volumes for both oil and gas and substantially lower oil prices. Oil
production for the nine months ended September 30, 1998 declined by 19% while
the average price received decreased to $14.12 as compared to $20.09 for the
nine month period ended September 30, 1997. The decrease in oil production was
primarily a result of the inability of the Company to continue its normal
operations maintenance program due to cash flow constraints, and the natural
production decline expected by the Company on its existing properties. In
addition, one well which produced approximately 15 barrels of oil per day
developed a hole in the casing and was shut down during the second quarter of
1998. Gas production for the nine months ended September 30, 1998 experienced a
5% decline when compared to the nine months ended September 30, 1997 while the
average price received for gas production declined from $1.81 received during
the nine months ended September 30, 1997 to $1.70 received during the nine
months ended September 30, 1998. The decline in gas production, if the
production of the wells purchased from Exxon in August, 1998 is excluded,
amounts to approximately 20% This decline was primarily a result of the
aforementioned cash flow constraints which existed up until the debt refinancing
took place as well as the natural production decline experienced on all wells.
Operating income declined by $18,125 during the nine months ended September
30, 1998 to $61,146 as compared to $79,271 experienced during the nine months
ended September 30, 1997. This decline is primarily attributable operator
overhead charges being charged to a lower number of Company operated wells.
Lease operating expenses, including production taxes, for the nine months
ended September 30, 1998 decreased $46,868 to $407,303 from $454,171 experienced
during the nine month period ended September 30, 1997. Approximately $24,934 of
this decrease is due to reduced production taxes paid by the Company during the
nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. The remainder of the decline is a result of the reduced
field maintenance operations being conducted by the Company because of
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<PAGE>
cash flow constraints experienced up until the aforementioned debt refinancing
took place in July, 1998. In addition, lease operating expenses for the nine
months ended September 30, 1997 included expenses incurred in completing minor
workovers on several wells the Company operates.
Depreciation, depletion and amortization declined to $236,983 for the nine
months ended September 30, 1998 as compared to $237,097 during the nine months
ended September 30, 1997. For the nine months ended September 30, 1998, the
increased depreciation, depletion and amortization expense attributable to the
purchase of the Sherman County, Texas properties in August, 1998 was offset by
the reduced depreciation, depletion and amortization expense on the other
properties owned by the Company resulting from the reduced production levels
experienced.
Salaries and wages expense increased by $7,648 from $273,368 during the
nine months ended September 30, 1997 to $281,016 during the nine months ended
September 30, 1998. The increase is primarily attributable to the inclusion of
expenses relating to a bonus received by the President of the Company. This
increase was partially offset by the loss of two employees during the nine
months ended September 30, 1998, only one of which was replaced by a person
working on a contract basis.
General and administrative expenses increased by $48,380 from $353,355
during the nine months ended September 30, 1997 to $401,735 during the nine
months ended September 30, 1998. Expenses which realized significant increases
included insurance expense with an increase of approximately $11,450, loan fees
with an increase of approximately $46,000, professional services expense with an
increase of approximately $27,700 and telephone and communications expense with
an increase of approximately $3,600. Expenses which experienced significant
declines include accounting and audit expense with a decrease of approximately
$6,800, legal fees with a decrease of approximately $13,200, and investment
banking fees with a decrease of approximately $20,000.
Other income (expense) increased from an expense of $119,419 experienced
during the nine months ended September 30, 1997 to an expense of $253,064 during
the nine months ended September 30, 1998. Interest expense for the nine months
ended September 30, 1997 amounted to $157,459 as compared to $250,371 for the
nine months ended September 30, 1998. This increase is attributable to the
higher level of total debt as of September 30, 1998 as compared to September 30,
1997 as well as the inclusion of amortization of the interest expense
attributable to the discount of debt associated with net profits overriding
royalty interest granted to the lender that refinanced the Company's debt in
August, 1998. The interest expense attributable to this debt discount amounted
to approximately $1,009 during the nine months ended September 30, 1998. In
addition, as described above in the section entitled Disposition of Oil and Gas
Properties, the Company sold its oil and gas properties located in the state of
Kansas effective February 1, 1997. The sales price received by the Company was
$120,000 which resulted in a gain on sale of approximately $44,000 during the
nine months ended September 30, 1997 as compared to a gain on sale of assets of
approximately $3,900 during the nine months ended September 30, 1998.
14
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY.
The Company's capital requirements relate to the acquisition, development
and operation of oil and gas producing properties. In general, since most of the
reserves the Company has acquired and intends to acquire are substantially
depleted by production, the success of its business strategy is dependent upon a
continuous acquisition, development and exploration program. 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 September 30, 1998, the Company had a working capital
deficit of $1,255,259 as compared to a working capital deficit of $1,438,487 as
of September 30, 1997. During the nine month period ended September 30, 1998 the
Company experienced an increase in cash of $213,134 primarily as a net result of
a decrease in accounts receivable, an increase in accounts payable and the net
effect of the increase in debt outstanding and the capital expenditures and
property acquisition made with the debt proceeds as described below.
On July 1, 1998, the Company entered into a $7,420,000 credit facility
agreement. The terms of the credit facility include a maturity of 4 years from
the date of execution and an interest rate based on the Citibank, N.A., New
York prime rate plus 2% (10.5% at September 30, 1998). The credit facility is
secured by a first mortgage on all existing oil and gas properties of the
Company. The credit facility consists of a refinancing loan in the amount of
$2,320,000 and a development loan consisting of two separate tranches. The
refinancing loan proceeds are to be used to extinguish the existing debt on the
Company's oil and gas properties, to pay the expenses associated with the
transaction and to reduce the accounts payable of the Company. Tranche A of the
development loan, in the amount of $1,350,000 is to be used for specific
development projects on the Company's existing oil and gas properties. Tranche B
of the development loan, in the amount of $3,750,000, is to be used to further
develop the Company's existing oil and gas properties. However, this amount will
not be funded unless the Company attains certain performance goals including
specified oil and gas production and reserve levels. All borrowing activity
under tranche A and tranche B of the development loan must be completed by
December 31, 1998 and June 30, 2000, respectively. Under the terms of the credit
facility, all proceeds from the sale of oil and gas produced from the properties
are to be used to pay all oil and gas operating expenses and interest on the
outstanding loan and a general and administrative allowance, and any remaining
proceeds are to be applied to principal on the outstanding loan. In addition,
the Company is required to make minimum quarterly principal reductions until
July, 2000 at which time a total minimum principal reduction of $725,000 must
have been made. In connection with this financing, the Company granted a 25% net
profits overriding royalty on all of the Company's production. Payments on this
royalty commence upon maturity or prepayment of all interest and principal
relating to the credit facility. In addition, the Company issued 200,000
warrants exercisable at $2.00 per share until June 30, 2003. This credit
facility was amended and restated on August 1, 1998 to increase the total
facility to $12,795,000. The increase consisted of a new acquisition loan in the
maximum amount of $4,200,000, an increase in the Tranche A
15
<PAGE>
development loan to a maximum of $1,525,000 and an increase in the Tranche B
development loan to a maximum of $4,750,000. The interest rate and maturity on
the amended credit facility remains unchanged from the original agreement. The
restated credit agreement increased the net profits overriding royalty
percentage from a maximum of 25% to a maximum of 30% and required the Company to
issue an additional 200,000 warrants exercisable at $2.00 per share until June
30, 2003. The acquisition tranche proceeds allowed the Company to purchase 11
wells in Sherman County, Texas from Exxon Corporation and the increase in the
development loan tranches will allow the Company to more fully develop those
properties. As a result of the above financing transactions, the Company will
record a discount on the amounts borrowed under Tranches A and B to recognize
the favorable interest rate received on these borrowings as a result of the net
profits overriding royalty interest granted to the lender. This discount will be
amortized to interest expense using the level yield method and will result in an
effective interest rate of 16% in amounts borrowed under Tranches A and B. In
management's opinion, the interest rate on other borrowings under the credit
facility is comparable to the rate available to the Company on similarly
structured loans from other lenders. In addition, based upon an analysis
performed by management, no value was assigned to the warrants issued under the
original and amended credit facility.
Effective March 21, 1997, pursuant to a Written Consent to Action by a
Majority (53.6%) of the Shareholders of the Company in lieu of a meeting and the
unanimous written Consent to Action by the Directors of the Company in lieu of a
meeting, the Company amended and restated both its Certificate of Incorporation
and its Bylaws. Prior to its amendment and restatement, the Company's
Certificate of Incorporation granted preemptive rights to shareholders with
respect to the issuance of Common Stock by the Company. Subsequent to this
action, the Company informed all shareholders of their right to exercise their
preemptive rights by informing the Company that they wished to do so by April
30, 1997. Based upon the responses received, the Company has issued 25,845
shares of Common Stock and has received $11,888.91 in proceeds for these shares.
In April, 1997, the Company completed an offering of 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 to the unaudited consolidated financial
statements) which was issued pursuant to Regulation D under the Securities Act
of 1933. Purchases under this offering were limited to 100 shares (500 shares
after giving effect to the stock split) per individual.
On April 7, 1997, the Company filed a Form 10-SB with the Securities and
Exchange Commission. The purpose of this filing was to register all issued and
outstanding shares of the Company's Common Stock and develop a public market
for such Common Stock. The Company was notified by the Securities and Exchange
Commission that this filing was declared effective on June 26, 1997.
On September 1, 1997, the Company issued 33,000 shares of its Common Stock
to an individual as additional consideration for executing a promissory note
with the Company in the amount of $300,000. The note bears interest at 10% per
annum and matures on April 30, 1998. The note is secured by a second mortgage on
the Company's oil and gas properties located in
16
<PAGE>
Coal County, Oklahoma. The Company currently anticipates that the maturity of
this note will be extended until June 30, 1998. This note was paid with the
proceeds of the credit facility entered into by the Company on July 1, 1998 as
more fully described above.
On May 15, 1998, the Company issued 33,000 shares of its Common Stock to an
individual as additional consideration for executing a promissory note with the
Company in the amount of $300,000. The note bears interest at 10% per annum and
matures on July 3, 1998. The note is secured by a mortgage on the Company's oil
and gas properties located in Borden County, Texas. This note was paid with the
proceeds of the credit facility entered into by the Company on July 1, 1998 as
more fully described above.
On June 23, 1998, the Company issued 221,468 shares of its Common Stock to
the President of the Company pursuant to an exercise of options previously
granted to him.
17
<PAGE>
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
See Item 4 below.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Effective March 21, 1997, pursuant to a Written Consent to Action by a
Majority (53.6%) of the Shareholders of the Company in lieu of a meeting and the
unanimous written Consent to Action by the Directors of the Company in lieu of a
meeting, the Company amended and restated both its Certificate of Incorporation
and its Bylaws. Prior to its amendment and restatement, the Company's
Certificate of Incorporation granted preemptive rights to shareholders with
respect to the issuance of Common Stock by the Company.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
On May 21, 1998 the Company filed a report on Form 8-KSB presenting
the terms of a commitment letter it had signed with Cambrian Capital Corporation
of Houston, Texas.
18
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAN WESTERN ENERGY CORPORATION
(Registrant)
Date: November 18, 1998 /s/ SID L. ANDERSON
------------------------------
Sid L. Anderson
President and Director
(Principal Executive Officer)
Date: November 18, 1998 /s/ CLAYTON E. WOODRUM
----------------------
Clayton E. Woodrum
Executive Vice President and Director
(Principal Financial Officer)
Date: November 18, 1998 /s/ VINCENT R. KEMENDO
------------------------
Vincent R. Kemendo
Vice President - Finance
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 341,760
<SECURITIES> 0
<RECEIVABLES> 147,007
<ALLOWANCES> 11,080
<INVENTORY> 0
<CURRENT-ASSETS> 540,279
<PP&E> 7,837,070
<DEPRECIATION> 1,215,652
<TOTAL-ASSETS> 7,269,126
<CURRENT-LIABILITIES> 1,795,538
<BONDS> 6,030,986
0
0
<COMMON> 47,031
<OTHER-SE> (681,588)
<TOTAL-LIABILITY-AND-EQUITY> 7,269,126
<SALES> 237,659
<TOTAL-REVENUES> 255,491
<CGS> 198,814
<TOTAL-COSTS> 535,281
<OTHER-EXPENSES> 2,608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,489
<INCOME-PRETAX> (409,886)
<INCOME-TAX> 0
<INCOME-CONTINUING> (409,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (409,886)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
