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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended : December 31, 1998
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[ ] TRANSITION REPORT UNDER 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
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(Exact name of small business issuer 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
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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__________
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10KSB
or any amendment to this Form 10KSB. [ ]
As of December 31, 1998, 3,621,873 shares of the Registrants Common Stock, $0.01
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Cautionary Statement Regarding Forward-Looking Statements. In the interest
of providing the Company's shareholders with certain information regarding the
Company, including management's assessment of the Company's future plans and
operations, certain statements set forth in this Form 10KSB 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 Form
10KSB statements in "Item 1. Description of Business, Item 6. Management's
Discussion and Analysis or Plan of Operation and Item 2. 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 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 Form 10KSB 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 Form 10KSB 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 Form 10KSB, and the Company does not intend to update any forward-looking
statements to reflect events occurring or circumstances existing hereafter.
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
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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. In
addition, in August, 1998, the Company purchased 11 wells in Sherman County,
Texas from Exxon Corporation. During the remainder of 1998, the average daily
gross production from these 11 wells was approximately 848 mcf per day.
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
104 wells operated by the Company in these states currently averages
approximately 167 Bbls of oil and 1,470 Mcf of gas. Total daily production from
both operated and non-operated wells, net to the Company's interest, averaged
approximately 126 Bbls of oil and 1,027 Mcf of gas from a total of 70 net wells
during the year ended December 31, 1998.
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 is currently reviewing several potential drilling prospects.
These prospects are considered to be developmental in nature and management
currently believes that the Company will participate in a developmental drilling
project during 1999. It is management's opinion that the Company will need to
participate in some amount of development drilling in the future to bolster its'
reserve base and future cash flow.
DISPOSITIONS
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 year
ended December 31, 1997.
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In November, 1997, the Company sold three wells and plugged two wells on
its Stillwater, Oklahoma properties. The Company received cash consideration of
$25,367 from these transactions and recorded a loss on the sale of properties in
the approximate amount of $214,400.
The Company had no producing property sales during the year ended December
31, 1998.
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 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;
. Maintaining low general and administrative expenses and increasing
economies of scale to reduce per unit Operating Costs and reserve
addition costs.
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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. In August 1998, the Company purchased 11 wells in Sherman County,
Texas from Exxon Corporation. During the remainder of 1998, the average daily
gross production from these 11 wells was approximately 848 mcf per day. The
Company purchased a 100% working interest (87.5% net revenue interest) in these
wells for a purchase price of approximately $4,200,000 which was funded by
proceeds from the amended note with Triassic Energy LLP. See "Item 6.
Management's Discussion and Analysis or Plan of Operation - Capital Resources
and Liquidity." In addition, the Company purchased a 3.125% working interest in
a well that the Company already operated from an interest owner during December,
1998. The Company paid $2,000 to acquire this interest.
During 1997, the Company acquired a .5% overriding royalty interest in a
well which the Company operates. This interest was acquired from an individual's
estate and the Company paid $500 for the interest. During 1997, the Company made
several bids on oil and gas properties however, the Company was unsuccessful in
acquiring any of these properties as higher bids than the Company's were
accepted. During the fiscal years 1996 and 1995, the Company acquired properties
with estimated oil and gas reserves of 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 financed these 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.
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
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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. 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. 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.
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.
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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.
During 1998, the Company spent approximately $553,000 on the development of
properties that it owned and operated. In addition, the Company expects to spend
at least an additional $972,000 on development activities during 1999. All of
these funds are to be made available to the Company under the terms of the
credit facility entered into on July 1, 1998. See "Item 6. Management's
Discussion and Analysis or Plan of Operation - Capital Resources and Liquidity."
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. However, the
Company is currently reviewing several drilling ventures and expects to
participate in a drilling venture within the next twelve months.
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 104 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 accounted for substantially all of
the Company's revenues for the years ended December 31, 1998 and 1997.
The following summarizes the Company's principal areas of oil and gas
production activity.
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<TABLE>
<CAPTION>
AVERAGE AVERAGE NUMBER OF
LOCATION WORKING NET REVENUE PRODUCING
FIELD NAME (COUNTY, STATE) INTEREST INTEREST WELLS
- ---------- --------------- -------- -------- -----
<S> <C> <C> <C> <C>
Flowers Stonewall, TX 100.00% 87.50% 14
Antelope Noble and 97.98% 78.94% 14
Garfield, OK
Texas Hugoton Sherman 100.00% 87.50% 11
Pegs Hills Borden, TX 100.00% 80.00% 5
Higgins West Lipscomb, TX 100.00% 82.20% 8
Kellin Lipscomb, TX 100.00% 87.50% 2
Centrahoma Coal, OK 83.02% 65.54% 12
Bowlegs Seminole, OK 100.00% 87.50% 2
Fitts Pontotoc, OK 81.97% 64.92% 13
Hardscrabble Lincoln, OK 28.16% 22.27% 5
</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 __ to the
Company's Consolidated Financial Statements elsewhere in this Form 10KSB.
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 possibly offer the technology as a service to other oil and
gas producers in the future. The Company currently plans to offer its customers
a complete package of services needed to
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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 $2,000,000 for the purchase of drilling and associated
equipment necessary to exploit the Amoco technology and approximately $750,000
for working capital for the first year of operation. The Company is attempting
to obtain the required funding through a joint venture arrangement with an
industry partner or through debt or equity financing however, to date the
Company has been unsuccessful in its attempts to obtain the funding on any terms
and no assurance can be given that such capital will be available on terms
satisfactory to the Company.
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.
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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, 1998 were Conoco Oil Company, GPM
Gas Corporation, Amoco Production Company, Mega II, LLC., and Sun Oil Company
which accounted for approximately 16%, 16%, 14%, 13% and 11% of the Company's
total oil and gas revenues, respectively. The most significant purchasers of the
Company's production during the year ended December 31, 1997 were Conoco Oil
Company, Total Petroleum, Inc., Mega II, LLC., and Sun Oil Company which
accounted for 18%, 17%, 14% and 11% of the Company's total oil and gas revenues,
respectively. No other purchaser of crude oil or natural gas during these
periods 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 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
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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 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.
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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 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,
12
<PAGE>
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
As of December 31, 1998 the Company employed a total of six full time
employees at its offices in Tulsa, Oklahoma consisting of 2 production and land
personnel, one of whom is an executive officer, and 4 financial, accounting and
administrative personnel, three of whom are executive officers. The Company also
has one full time field employee in the state of Texas. In addition, the Company
engages the services of 12 contract field personnel. The Company believes its
relations with its employees and contractors are excellent.
ITEM 2. 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. Williamson Petroleum Consultants, Inc., an
independent petroleum engineering consulting firm, has made estimates of the
Company's oil and gas reserves as of January 1, 1999 and January 1, 1998 and
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. Each of these reports cover 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
Williamson report for January 1, 1999 includes the Company's oil and gas
properties in the Texas Hugoton Field which the Company purchased in August,
1998. The Sycamore Resources report includes the Company's oil and gas
properties located in the state of Kansas which have subsequently been sold, and
none of the reports includes 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.
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
13
<PAGE>
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 tables set forth estimates of the proved oil and natural gas
reserves of the Company as of January 1, 1999, as evaluated by Williamson
Petroleum Consultants, Inc.
OIL (BBLS) GAS (MCF)
---------- ---------
DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL
--------------------- ---------- --------------------- -------
Oklahoma
Texas
Total
The following table sets forth amounts as of December 31, 1998 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, 1999 were $____ per barrel for
oil and $____ per Mcf for gas.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------------
(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 $ $ $
Present value of estimated future net cash
flows from proved reserves before income
taxes (discounted at 10%) $ $ $
</TABLE>
14
<PAGE>
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 been filed or included in
reports to the Securities and Exchange Commission but not to any other 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 __ 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, 1998.
<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>
22,341 19,527 68 53.84 36 22.74 104 76.58
</TABLE>
At December 31, 1998, the Company held no undeveloped acres.
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
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
PRODUCTION:
Gas (Mcf) 374,983 250,409 263,123
Oil (Bbls) 46,140 45,136 56,871
AVERAGE SALES PRICES:
Gas (per Mcf) $ 1.47 $ 1.88 $ 1.86
Oil (per Bbl) 12.96 19.85 20.85
AVERAGE LEASE OPERATING
COSTS PER BOE (1) $ 5.94 $ 6.86 $ 7.20
</TABLE>
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally
15
<PAGE>
include production taxes, lease overhead, maintenance and repair, labor and
utilities.
In August, 1998, the Company acquired 11 wells in Sherman County, Texas
from Exxon Corporation. These wells are primarily gas producing wells and are
located in the Texas Hugoton Filed. If these wells had been excluded from the
table above, the gas production for the year ended December 31, 1998 would have
declined to 218,899 Mcf, the average gas price for the year ended December 31,
1998 would have increased to $1.50 per Mcf, and the average lease operating
costs per Boe would have increased to $6.78 per Boe for the year ended December
31, 1998.
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 $44,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the year ended
December 31, 1998 to a vote of the security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock are traded on the Nasdaq OTC
Electronic Bulletin Board under the symbol "PWEC". High and low prices reported
below are from the OTC Electronic Bulletin Board and reflect inter-dealer
prices, without retail mark-ups, mark-downs, or commissions, and may not
necessarily represent actual transactions. From June, 1997 to March, 1998 there
was no public market for the Company's Common Stock. The Company became a public
company by virtue of filing a Form 10SB which became effective on June 26, 1997.
<TABLE>
<CAPTION>
Calendar Period High Low
--------------- ----- -----
<S> <C> <C>
Fourth Quarter, 1998 1 3/8 1/4
Third Quarter, 1998 1 3/4 1 1/8
Second Quarter, 1998 2 3/8 1 1/8
First Quarter, 1998 N/A N/A
</TABLE>
16
<PAGE>
There have been no dividends declared or paid to the owners of the common stock.
It is the Company's present policy to retain any earnings for working capital
purposes, and accordingly the Company does not expect to pay dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two fiscal years ended December 31, 1998, the Company has not
filed any Current Report on Form 8-K reporting any change in which there was a
reported disagreement on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the executive officers and directors of the
Company as of December 31, 1998.
NAME AGE POSITION
---- --- --------
Sid L. Anderson 51 Chairman of the Board, President and
Chief Executive Officer
Clayton E. Woodrum 58 Executive Vice President, Secretary and
Director
Buddie E. Livingston, II 44 Vice President - Operations
Vincent R. Kemendo 44 Vice President and Chief Financial
Officer
B. E. (Bud) Livingston 70 Director
Frederick A. Bendana 47 Director
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 the annual meeting of the Board of Directors following the annual
meeting of shareholders and serve at the discretion of the Board. 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.
17
<PAGE>
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
KPMG Peat Marwick (formerly 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.
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 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.
Frederick A. Bendana, age 47, has been nominated to serve as a Director
beginning immediately after the Meeting. Mr. Bendana has been Chairman of Ben-
Trei, Ltd since 1987. Ben-Trei, Ltd. is a global chemical fertilizer marketing,
production and investment company. From April, 1981 to 1987 Mr. Bendana was
associated with International Chemical Company
18
<PAGE>
where he held several positions before resigning as senior vice president and a
member of the executive committee. Prior to this, Mr. Bendana held positions in
both U.S. and Nicaraguan chemical companies. Mr. Bendana graduated from Rutgers
University in 1973 with a Bachelor of Science in Agricultural Economics. Mr.
Bendana is a member and has a board member of numerous educational and civic
organizations including, Rogers University Board of Regents, The University
Center at Tulsa Trust Authority, The Hispanic-American Foundation, and Tulsa
Global Alliance.
DIRECTOR AND OFFICER SECURITIES REPORTS
The Federal securities laws require the Company's Directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of any equity
securities of the Company. Copies of such reports are required to be furnished
to the Company. To the Company's knowledge, based solely on review of the copies
of such reports furnished to the Company, there were no persons subject to these
reporting requirements who failed to file the required reports on a timely basis
with respect to the Company's most recent fiscal year.
ITEM 10. 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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 COMP
POSITION YEAR ($) ($) ($)(1) ($) SARS (#) ($) ($)
- -------- ---- ------- ----- ----------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sid L. Anderson, 1998 150,000 6,250 81,584/(2)/ --- 221,468 --- ---
Chairman 1997 150,000 6,250 85,130/(3)/ --- 330,000 --- ---
and President 1996 150,000 6,250 94,347/(4)/ --- --- --- ---
Buddie E. Livingston, II 1998 52,000 2,500 --- --- --- --- 353
Vice President of 1997 48,000 2,000 --- --- 80,000 --- 353
Operations 1996 48,000 2,000 --- --- --- --- 216
Vincent R. Kemendo 1998 44,000 2,167 --- --- --- --- ---
Vice President of 1997 40,000 1,667 --- --- 80,000 --- ---
Finance 1996 40,000 1,667 --- --- --- --- ---
</TABLE>
19
<PAGE>
(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.
(2) Includes a $35,080 guaranty fee paid to Mr. Anderson (see "Employment
Agreements"), a total of $15,503 which represents the fair value of common
stock received upon exercise of options, and a total of $31,001 paid by the
Company to or on behalf of Mr. Anderson for country club dues and
automobile allowance.
(3) Includes a $63,754 guaranty fee paid to Mr. Anderson (see "Employment
Agreements") and a total of $21,376 paid by the Company to or on behalf of
Mr. Anderson for country club dues, automobile allowance and life insurance
premiums.
(4) 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.
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 awards have been made under 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, 1998, options to
purchase 32,500 shares of the Company's Common Stock at an exercise price
ranging from $1.30 to $1.40 per share had been granted and were outstanding
under this plan.
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 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
20
<PAGE>
following termination of employment with the Company. The plan is administered
by the Board of Directors. Through December 31, 1998, no options had been
granted under this plan.
During the year ended December 31, 1998, there were no issuances of stock
options under the Directors Stock Option Plan or the Employee Stock Option Plan.
There were however 32,500 Director Stock Options canceled during the year ended
December 31, 1998 due to the resignation of two Directors of the Company. In
addition, during the year ended December 31, 1998, the Company issued 221,468
stock options exercisable at $0.05 per share to the President of the Company.
These options were not issued under either of the Company's stock option plans
and were exercised on June 16, 1998. The Company recorded compensation expense
of $15,503, representing the difference between the fair market value of the
stock and the exercise price. Other than these option grants, there were no
restricted stock awards granted, no options or stock appreciation rights were
exercised, and no awards under any long-term incentive plan were made to any
officer or employee of the Company during the year ended December 31, 1998.
During the year ended December 31, 1997, the Company issued 50,000 stock
options exercisable at $1.40 per share to Directors of the Company. These stock
options were issued pursuant to the Director Stock Option Plan. In addition,
during the year ended December 31, 1997, the Company issued 570,000 stock
options exercisable at $1.40 per share to employees of the Company. These
options were not issued under either of the Company's stock option plans. Other
than these option grants, there were no restricted stock awards granted, no
options or stock appreciation rights were exercised, and no awards under any
long-term incentive plan were made to any officer or employee of the Company
during the year ended December 31, 1997.
During 1996, no restricted stock awards were granted, no stock options or
stock appreciation rights were granted, no options or stock appreciation rights
were exercised, and 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, 1998 and the value of unexercised stock options as of
December 31, 1998.
21
<PAGE>
AGGREGATED OPTION EXERCISES IN THE FISCAL
YEAR ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
OPTION EXERCISES
DURING YEAR
ENDED DECEMBER 31, 1998 NUMBER OF SECURITIES
-----------------------
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED VALUE DECEMBER 31, 1998 AT DECEMBER 31, 1998
-------------------------------------------------------------
NAME ON EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ----------- -------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sid L. Anderson 221,468 $15,503 99,000/(1)/ 238,500/(1)/ $ --- $ ---
Clayton E. Woodrum None None 24,000/(2)/ 73,500/(2)/ --- ---
Buddie E. Livingston II None None 24,000/(3)/ 56,000/(3)/ --- ---
Vincent R. Kemendo None None 24,000/(4)/ 56,000/(4)/ --- ---
B. E. (Bud) Livingston None None --- 15,000/(5)/ --- ---
Frederick A. Bendana None None --- --- --- ---
</TABLE>
(1) Reflects 7,500 options granted in July 1993 not under either of the
Company's option plans, exercisable at $1.30 per share and 330,000 options
granted in January, 1997 not under either of the Company's option plans,
exercisable at $1.40 per share.
(2) Reflects 7,500 options granted in July 1993 under the Company's Directors'
Stock Option Plan, exercisable at $1.30 per share, 10,000 options granted
in January 1997 under the Company's Directors' Stock Option Plan,
exercisable at $1.40 per share, and 80,000 options granted in January, 1997
not under either of the Company's option plans, exercisable at $1.40 per
share.
(3) Reflects 80,000 options granted in January, 1997 not under either of the
Company's option plans, exercisable at $1.40 per share.
(4) Reflects 80,000 options granted in January, 1997 not under either of the
Company's option plans, exercisable at $1.40 per share.
(5) Reflects 15,000 options granted in January, 1997 under the Company's
Directors' Stock Option Plan, exercisable at $1.40 per share
WARRANTS
As part of the credit facility the Company entered into on July 1, 1998,
the Company issued 200,000 warrants to the lender. These warrants are
exercisable at any time at $2.00 per share and they expire on June 30, 2003. In
addition, On August 1, 1999, the Company amended its credit facility with this
lender and as a part of this amendment, the Company issued the lender an
additional 200,000 warrants which are also exercisable at any time at $2.00 per
share and expire on June 30, 2003. See "Item 6. Management's Discussion and
Analysis or Plan of Operation - Financing Arrangements."
22
<PAGE>
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 pre-tax
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 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. In September,
1998 the base salaries of Messrs. Livingston and Kemendo were increased to
$60,000 and $52,000 per year, respectively.
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<PAGE>
ITEM 11. 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 December 31, 1998, the Company had 3,621,873 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 December 31, 1998, 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, (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 December 31,
1998, the Company had 295 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)(5) 1,647,468 42.7%
Clayton E. Woodrum(3) 91,350 2.5%
Buddie E. Livingston, II(2)(5) 56,000 1.5%
Vincent R. Kemendo(2)(5) 118,500 3.2%
B.E. (Bud) Livingston(2)(6) 15,000 *
Frederick A. Bendana(7) 500 *
Pangloss International, S.A.(4) 481,250 11.7%
All Executive Officers and 1,928,818 47.5%
Directors as a group (6 persons)(2)(3)
</TABLE>
* less than one percent
(1) Based upon 3,621,873 issued and outstanding shares of Common Stock at
December 31, 1998. 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 ownership of any other individual or group shown in the
table.
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<PAGE>
(2) Includes (a) with respect to Mr. Anderson, 238,500 shares issuable to him
upon exercise of presently exercisable options; (b) with respect to Mr.
Livingston, II 56,000 shares issuable to him upon exercise of presently
exercisable options; (c) with respect to Mr. Kemendo, 56,000 shares
issuable to him upon exercise of presently exercisable options; and (d)
with respect to Mr. Livingston, 15,000 shares issuable to him upon exercise
of presently exercisable options.
(3) Includes 17,850 shares held by Mr. Woodrum's spouse and 73,500 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 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.
(5) The address of Messrs. Anderson, Kemendo and Livingston, II is Suite 300,
1850 South Boulder, Tulsa, Oklahoma 74119.
(6) The address of Mr. Livingston is Highway 66 North, Turnpike Gate, Bristow,
Oklahoma 74010.
(7) The address of Mr. Bendana is 7747 South Harvard Place, Tulsa, Oklahoma
74136.
There are no arrangements known to management which may result in a change
in control
of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 1998, 1997 and 1996,
fees paid to Mr. Anderson under this Agreement were approximately $35,080,
$64,000 and $75,000, respectively.
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 1998,
1997 and 1996 were $10,407, $11,359 and $39,943, 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
partner in the firm. The Company also incurs fees
25
<PAGE>
for business advisory services with a firm affiliated with this board member.
Such amounts incurred in 1998 and 1997 were $36,000 and $37,424, respectively.
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 1997 and
1996, no amounts were paid by the Company to Mr. Livingston pursuant to this
Agreement. However, a company affiliated with this director provides well
operation services to the Company. Such amounts incurred in 1998, 1997 and 1996
were $7,114, $9,237 and $22,087, respectively.
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.
26
<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: April 13, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Sid L. Anderson
---------------------------------------------- Date: April 13. 1999
Chairman of the Board, President, and
Chief Executive Officer
By: /s/ Clayton E. Woodrum
---------------------------------------------- Date: April 13. 1999
Executive Vice President and Director
(Principal Financial Officer)
By: /s/ Vincent R. Kemendo
---------------------------------------------- Date: April 13. 1999
Vice President - Finance and Chief
Financial Officer (Principal Accounting
Officer)
By: /s/ Bud E. Livingston
---------------------------------------------- Date: April 13. 1999
Director
By: /s/ Frederick A. Bendana
---------------------------------------------- Date: April 13. 1999
Director
27
