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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, 1999
[ ] 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)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code: (918) 582-4957
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
None None
</TABLE>
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 No X
----- -----
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 10-KSB
or any amendment to this Form 10-KSB. [ ]
As of December 31, 1999, 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 10-KSB 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 10-KSB 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 10-KSB
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 10-KSB 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 10-KSB, 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 that was engaged in the acquisition, development and production
of oil and gas in the United States. The Company was incorporated in 1981 under
the laws of the State of Oklahoma with the objective of exploring for,
developing, producing and managing oil and gas reserves. Early efforts of the
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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.
As of December 31, 1999, the Company owned and operated producing oil
and gas properties located in the states of Texas and Oklahoma and owned 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 averaged
approximately 81 Bbls of oil and 1,968 Mcf of gas. Total daily production from
both operated and non-operated wells, net to the Company's interest, averaged
approximately 103 Bbls of oil and 1,575 Mcf of gas from a total of 70 net wells
during the year ended December 31, 1999.
As a result of the transactions with Cambrian Capital Corporation and
IntelliReady, Inc. described in "Item 13. Subsequent Events." The Company is no
longer in the oil and gas exploration and production business.
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.
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 or during the year ended December 31, 1999.
See "Item 13. Subsequent Events." for details of the disposition of
substantially all of the Company's oil and gas properties occurring subsequent
to December 31, 1999.
BUSINESS STRATEGY
The Company's business strategy had been 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 described in "Item 13. Subsequent Events."
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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 0.5% 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 bids higher 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
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Stock which was valued at approximately $1,267,000 based upon the estimated
value of the partnerships' oil and gas reserves as determined by an independent
petroleum reservoir engineer. The consideration paid also included $8,392 in
cash and the assumption by the Company of approximately $611,000 in partnership
debt. This acquisition was negotiated on behalf of the Company by its President,
Sid Anderson. 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 six 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.
Through December 31, 1999, the Company maintained its own land,
geological, petroleum engineering and accounting staff which participated in
evaluating prospective acquisitions. In an effort to reduce general and
administrative costs during 1999, the Company terminated the employment of two
staff personnel and accepted the resignation of one executive officer.
Development Activities. During 1999, the Company concentrated its
acquisition efforts on proved producing properties which demonstrated 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 found
appropriate. The Company pursued an active workover and recompletion program on
the properties it had acquired and intended to continue its workover and
recompletion program in the future as properties previously acquired warranted.
The expenditures required for the Company's workover and recompletion program
have historically been from borrowings and internally generated funds. During
1998, the Company spent approximately $750,000 on the development of properties
that it owned and operated. During 1999, the Company spent approximately
$788,000 on development properties that it owned and operated. The results of
development work undertaken during 1999 proved insufficient to significantly
increase the Company's cash flow. Development funds were 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."
The Company did no exploratory drilling during calendar year 1999.
Because of the Company's inability to raise sufficient capital to
acquire and develop oil and gas properties, the Company entered into the
transactions described in "Item 13. Subsequent Events."
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PRODUCTION
As of December 31, 1999, the Company owned and operated producing oil
and gas properties located in the states of Texas and Oklahoma and owned royalty
interests in 14 non-operated wells located in the state of Ohio. The Company
continuously evaluated the profitability of its oil, gas and related activities
and had 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 operated 104 producing wells and owned 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, 1999 and 1998.
The following summarizes the Company's principal areas of oil and gas
production activities:
<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 Garfield, OK 97.98% 78.94% 14
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 2 to the Company's
Consolidated Financial Statements elsewhere in this Form 10-KSB.
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HORIZONTAL DRILLING
During calendar year 1997, the Company had 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. Because the Company was
unable to access capital to exploit this technology, the Company did not renew
its license agreement with Amoco.
See "Item 13. Subsequent Events."
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.
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Changes in oil and natural gas prices significantly affect the revenues
and cash flow of the Company and the value of its oil and gas properties.
Significant declines in the prices of oil and natural gas could have a material
adverse effect on the business and financial condition of the Company. The
Company is unable to predict accurately whether the price of oil and natural gas
will rise, stabilize or decline in the future.
Substantially all of the Company's crude oil and condensate production
is sold at posted prices under short term contracts, as is customary in the
industry. The most significant purchasers of the Company's oil and gas
production during the year ended December 31, 1999 were GPM Gas Corporation,
Conoco Oil Company, Amoco Production Company, Mega II, LLC., and Sun Oil Company
which accounted for approximately 40%, 17%, 10%, 10% and 9% of the Company's
total oil and gas revenues, respectively. 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. 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 faced 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.
Decreases in worldwide energy production and increases in energy
consumption have brought about decreases in energy supplies in during the last
year. As a result, there have been recent increases in oil and gas prices.
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.
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REGULATION
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies,
both federal and state, have issued rules and regulations applicable to the oil
and gas industry and its individual members, some of which carry substantial
penalties for the failure to comply. The regulatory burden on the oil and gas
industry increases its cost of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
Exploration and Production. Exploration and production operations of
the Company are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilling and
producing, and the plugging and abandoning of wells. The Company's operations
are also subject to various conservation matters. These include the regulation
of the size of drilling and spacing units or proration units, the density of
wells which may be drilled, and the unitization or pooling of oil and gas
properties or interests. In this regard, some states allow the forced pooling or
integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases. In addition, state conservation laws
establish maximum 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
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jurisdiction. The purchase of shares in the Company by citizens of foreign
countries who are not deemed to be reciprocal under such Act could have an
impact on the Company's ownership of federal leases.
The Company's operations are subject to extensive federal, state and
local laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials into the environment.
Permits are required for various of the Company's operations, and these permits
are subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines, injunctions or both. It is
possible that increasingly strict requirements will be imposed by environmental
laws and enforcement policies thereunder. The Company is also subject to laws
and regulations concerning occupational safety and health. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in the aggregate to the Company's overall operations by reason of
environmental or occupational safety and health laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
Natural Gas Sales and Transportation. Federal legislation and
regulatory controls have historically affected the price of the gas produced by
the Company and the manner in which such production is marketed. The
transportation and sale for resale of gas in interstate commerce are regulated
pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy
Act of 1978 (the "NGPA") and Federal Energy Regulatory Commission ("FERC")
regulations promulgated 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.
See "Item 13. Subsequent Events" for a description of the current
status of the company's debt arrangement.
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OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formations, producing facilities or
other property, or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risk. The
Company carries insurance against certain of these risks but, in accordance with
standard industry practice, the Company is not fully insured for all risks,
either because such insurance is unavailable or because the Company elects not
to obtain insurance coverage because of cost. Although such operational risks
and hazards may to some extent be minimized, no combination of experience,
knowledge and scientific evaluation can eliminate the risk of investment or
assure a profit to any company engaged in oil and gas operations.
EMPLOYEES
As of December 31, 1999 the Company employed a total of two full time
employees at its offices in Tulsa, Oklahoma both of whom are accounting,
financial and administrative personnel, and both 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.
During 1999, in an effort to reduce general and administrative
expenses, the Company terminated the employment of two individuals and accepted
the resignation an executive officer of the Company.
See "Item 13. Subsequent Events."
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. 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, 2000 and 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. 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 Sycamore
Resources report of January 1, 2000 includes all of the Company's oil and gas
properties exclusive of royalty interests in Ohio hereinafter referenced. The
Williamson report
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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 quantities of the Company's proved reserves of oil and natural gas
presented below include only those amounts which the Company reasonably expects
are recoverable in the future from known oil and gas reservoirs under existing
economic and operating conditions. Proved developed reserves are limited to
those quantities which are recoverable commercially at current prices and costs,
under existing regulatory practices and with existing technology. Accordingly,
any changes in prices, operating and development costs, regulations, technology
or other factors could significantly increase or decrease estimates of the
Company's proved developed reserves. The Company's proved undeveloped reserves
include only those quantities which the Company reasonably expects to recover
from the drilling of new wells based on geological evidence from offsetting
wells. The risks of recovering these reserves are higher from both geological
and mechanical perspectives than the risks of recovering proved developed
reserves.
Set forth below are estimates of the Company's net proved reserves and
proved developed reserves and the estimated future net revenues from such
reserves and the present value thereof based upon the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69. "Disclosures about Oil and Gas Producing Activities." Estimated future
net cash flows from proved reserves are determined by using estimated quantities
of proved reserves and the periods in which they are expected to be developed
and produced based on economic conditions at the date of the report. The
estimated future production is priced at current prices at the date of the
report. The resulting estimated future cash inflows are then reduced by
estimated future costs to develop and produce reserves based on cost levels at
the date of the report. No deduction has been made for depletion, depreciation
or income taxes or for indirect costs, such as general corporate overhead.
Present values were computed by discounting future net revenues at 10% per
annum.
The following tables set forth estimates of the proved oil and natural
gas reserves of the Company as of January 1, 2000, as evaluated by Sycamore
Resources, LLC.
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Oklahoma 86,013 294,832 380,845 725,430 962,720 1,688,150
Texas 324,185 149,686 473,871 7,236,057 7,695,406 14,931,463
---------- ---------- ---------- ---------- ---------- ----------
Total 410,198 444,518 854,716 7,961,487 8,658,126 16,619,613
========== ========== ========== ========== ========== ==========
</TABLE>
The following table sets forth amounts as of December 31, 1999
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, 2000 were $24.21 per barrel
for oil and $2.00 per Mcf for gas.
12
<PAGE> 13
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
------------------------------
(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 $17,823 $20,635 $38,458
Present value of estimated future net cash
flows from proved reserves before income
taxes (discounted at 10%) $ 9,723 $ 9,231 $18,954
</TABLE>
The estimation of oil and gas reserves is a complex and subjective
process which is subject to continued revisions as additional information
becomes available. Reserve estimates prepared by different engineers from the
same data can vary widely. Therefore, the reserve data presented herein should
not be construed as being exact. Any reserve estimate depends in part on the
quality of available data, engineering and geologic interpretation, and thus
represents only an informed professional judgment. Subsequent reservoir
performance may justify upward or downward revision of such estimate.
Estimates of the Company's proved reserves have 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, see Note 12 to the Company's
Consolidated Financial Statements - Supplementary 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, 1999.
<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, 1999, the Company held no undeveloped acres.
13
<PAGE> 14
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
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
PRODUCTION:
Gas (Mcf) 575,019 374,983 250,409
Oil (Bbl) 37,567 46,140 45,135
AVERAGE SALES PRICES:
Gas (per Mcf) $ 1.88 $ 1.47 $ 1.88
Oil (per Bbl) 16.51 12.96 19.85
AVERAGE LEASE OPERATING
COSTS PER BOE $ 5.33 $ 5.94 $ 6.86
</TABLE>
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.
See "Item 13. Subsequent Events" for a discussion of the Company's
disposition of all of its oil and producing properties.
ITEM 3. LEGAL PROCEEDINGS
During 1999, the Company was a party to various legal proceedings. In
spite of cost cutting measures including personnel and salary reductions, the
Company was unable to consistently pay a portion of its operating expenses which
was the direct result of record low oil and natural gas prices during all or
portions of calendar years 1997, 1998 and 1999. At this time, the Company has or
is in the process of settling legal proceedings resulting from non-payment of
unsecured creditors' claims (also see "Item 13. Subsequent Events"). To
management's knowledge, no further legal proceedings from unsecured creditors
are contemplated. In addition, the Company is party to a foreclosure action on
the real estate it currently owns and occupies as its corporate headquarters. A
contract for the sale of the building has been entered into with an unrelated
third party and the sale is expected to close on or before September 8, 2000.
Proceeds from the sale should be sufficient to pay off the mortgage secured by
the real estate. No director, officer or affiliate of the Company, no owner of
record or beneficial owner of more than five percent of the securities of the
Company, or any associate of any such director, officer or security holder, nor
stockholders of IntelliReady is a party adverse to the Company or has a material
interest adverse to the Company in reference to the various legal proceedings.
14
<PAGE> 15
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, 1999 to a vote of the security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until May 15, 2000, shares of the Company's Common Stock were are
traded on the Nasdaq OTC Electronic Bulletin Board ("OTC:BB") under the symbol
"PWEC". The Company's common stock was delisted from OTC:BB on May 15, 2000
because of the Company's failure to comply with Rule 15c2-11. The Company is in
the process of taking the steps necessary to get its common stock listed again
on OTC:BB. It is anticipated this process will be completed by the end of the
third quarter of 2000. High and low prices reported below are from the OTC:BB
and reflect inter-dealer prices, without retail mark-ups, markdowns, 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 10-SB which
became effective on June 26, 1997.
<TABLE>
<CAPTION>
Calendar Period High Low
--------------- ------ ----
<S> <C> <C>
Fourth Quarter, 1999 1/2 3/16
Third Quarter, 1999 1 3/16 3/16
Second Quarter, 1999 1/4 3/16
First Quarter, 1999 1 1/4 3/16
</TABLE>
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.
The selected financial information for each of the Company's fiscal
years ended December 31, 1999 and 1998 is derived from the audited consolidated
financial statements of the Company appearing elsewhere in this Form 10-KSB. The
selected financial information should be read together with management's
discussion and analysis set forth below and the Company's audited consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Form 10-KSB.
15
<PAGE> 16
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales $ 1,698,960 $ 1,153,829
Operating income 65,530 77,666
----------- -----------
Total revenue 1,764,490 1,231,495
----------- -----------
Lease operating costs 711,623 645,048
Depreciation, depletion, and
amortization 750,280 985,546
Impairment loss -0- 448,000
Interest expense 947,434 455,295
Salaries and wages 376,236 477,374
General and administrative 496,791 530,513
Other expense, net 32,963 7,113
----------- -----------
Total costs and expenses 3,315,328 3,548,889
----------- -----------
Net loss $(1,550,838) $(2,317,394)
=========== ===========
Net loss per common share, basic and diluted $ (0.43) $ (0.66)
=========== ===========
Weighted average common shares outstanding, basic and diluted 3,621,873 3,509,035
BALANCE SHEET DATA:
Working capital (deficit) ($8,752,420) ($ 760,976)
Property and equipment, net 5,672,100 5,837,205
Total assets 6,570,984 6,503,758
Current portion of long-term
debt and notes payable 8,427,917 195,428
Long-term debt -0- 7,114,238
Stockholder's equity (3,580,513) (2,029,675)
</TABLE>
RESULTS OF OPERATIONS
The Company follows the "successful efforts" method of accounting for
its oil and gas properties whereby costs of productive wells and productive
leases are capitalized and depleted on a unit-of-production basis over the life
of the remaining proved reserves. Depletion of capitalized costs is provided on
a well-by-well basis. Exploratory expenses, including geological and geophysical
expenses and annual delay rentals, are charged to expense as incurred.
Exploratory drilling costs, including the cost of stratigraphic test wells, are
initially capitalized, but charged to expense if and when the well is determined
to be unsuccessful.
16
<PAGE> 17
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 volume
of oil and gas sold, (iii) the level of lease operating expenses, (iv) the level
of exploratory activities, and (v) the level of and interest rates on
borrowings. Total sales volumes and the level of borrowings are significantly
impacted by the degree of success the Company experiences in its efforts to
acquire oil and gas properties and its ability to maintain or increase
production from existing oil and gas properties through its development and
production enhancement activities. The following table reflects certain
historical operating data for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES VOLUMES:
Oil (Bbls) 37,567 46,140
Natural gas (Mcf) 575,019 374,983
Oil equivalent (Boe) 133,404 108,637
AVERAGE SALES PRICES:
Oil (per Bbl) $ 16.51 $ 12.96
Natural gas (per Mcf) 1.88 1.47
OPERATING EXPENSES PER BOE
OF NET SALES:
Lease operating $ 5.33 $ 5.94
Depreciation, depletion and 5.62 9.07
amortization
Impairment reserve -0- 4.12
General, administrative and other 13.89 13.53
</TABLE>
Relatively modest changes in either oil or gas prices significantly
impact the Company's results of operations and cash flow and could significantly
impact the Company's borrowing capacity. Prices received by the Company for
sales of oil and natural gas have fluctuated significantly from period to
period. The Company's ability to maintain current borrowing capacity and to
obtain additional capital on attractive terms is substantially dependent on oil
and gas prices. Domestic spot oil prices have ranged from a low of approximately
$8 per barrel in December, 1998 to a high of approximately $40 per barrel in
October 1991, with a December 31, 1999 price of approximately $24.21 per barrel.
The fluctuations in oil prices during these periods reflect market uncertainty
regarding OPEC's ability to control the production of its member countries, as
well as concerns related to the global supply and demand for crude oil. Since
the end of the Gulf War in early 1991, crude oil prices experienced weakness,
primarily as a result of OPEC's inability to maintain disciplined production
quotas by member countries and the uncertainty associated with Iraq's return to
the crude oil export market. During the latter part of 1999, however, crude oil
prices began to rise as a result of OPEC's ability to establish and coordinate
production quotas within its membership.
Natural gas prices received by the Company fluctuate generally with
changes in the spot market price for gas. Spot market gas prices had shown a
generally declining trend in recent years because of lower worldwide energy
prices as well as excess deliverability of natural gas in the United States.
Domestic spot natural gas prices have ranged from a low of approximately $0.90
per Mcf
17
<PAGE> 18
in January 1992 to a high of approximately $4.44 per Mcf in December 1996, with
a December 31, 1999 price of approximately $2.00 per Mcf. Environmental concerns
coupled with recent increases in the use of natural gas to produce electricity
and expected shortages of supplies during the winter of 2000-2001, have combined
to improve prices. As part of continued deregulation of natural gas, U.S.
pipelines have been made more accessible to both buyers and sellers of natural
gas and, as a result, natural gas will be able to more effectively compete for
market share with other end-use energy forms.
The Company's principal source of cash flow was the production and sale
of its crude oil and natural gas reserves, which are depleting assets. Cash flow
from oil and gas sales depends upon the quantity of production and the price
obtained for such production. An increase in prices permits the Company to
finance its operations to a greater extent with internally generated funds. A
decline in oil and gas prices reduces the cash flow generated by the Company's
operations, which in turn reduces the funds available for servicing debt,
acquiring additional oil and gas properties and exploring for and developing new
oil and gas reserves.
In addition to the foregoing, the results of the Company's operations
vary due to seasonal fluctuations in the sales prices and volumes of natural
gas. In recent years, natural gas prices have been generally higher in the fall
and winter. Due to these seasonal fluctuations, results of operations for
individual annual and quarterly periods may not be indicative of results which
may be realized on an annual basis.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
Total revenues for the year ended December 31, 1999 increased 43% to
$1,764,490 from $1,231,495 for the year ended December 31, 1998. Oil and gas
revenues increased from $1,153,829 for the year ended December 31, 1998 to
$1,698,960 for the year ended December 31, 1999. These increases were
attributable to the net effect of increases in gas production and increases in
the average oil and gas prices received during the year ended December 31, 1999
as compared to the year ended December 31, 1998. Average prices received by the
Company were $16.51 per Bbl of oil and $1.88 per Mcf of gas during fiscal 1999
compared to $12.96 per Bbl of oil and $1.47 per Mcf of gas received during
fiscal 1998.
Oil production for the year ended December 31, 1999 was 8,573 Bbls less
than production volumes experienced during the prior year ended December 31,
1998. Gas production for the year ended December 31, 1999 was 200,036 Mcf higher
than production volumes experienced during the prior year ended December 31,
1998. The gas production increase was primarily attributable to the purchase of
11 wells in Sherman County, Texas. Production from these wells during 1999
averaged 973 Mcf daily. These wells were purchased by the Company in August,
1998. The decrease in oil production during the year ended December 31, 1999 as
compared with the year ended December 31, 1998 was primarily a result of
decreased production experienced as a result of natural decline in production
from all wells and unsuccessful workovers completed in the last quarter of 1999.
Operating income decreased from $77,666 during the year ended December
31, 1998 to $65,530 during the year ended December 31, 1999. The decline is
attributable to a reduction in the number of wells on which the administrative
overhead and field supervision charges made to third party working interest
owners is being charged. The Company charged third party working interest owners
these overhead fees on a monthly basis on wells that the Company operated.
Lease operating expenses increased from $645,048 during 1998 to
$711,623 during the year ended December 31, 1999. Lease operating expense is
comprised of the expenses incurred in the
18
<PAGE> 19
operation of oil and gas wells, production taxes, compression and dehydration
fees and transportation costs. Expenses incurred in the operation of oil and gas
wells increased from $568,981 in fiscal 1998 to $607,949 during fiscal 1999.
Normal lease operating expenses during the year ended December 31, 1999 were
$38,568 greater as compared to the previous year is due primarily to the
expenses incurred in working over one well operated by the Company. Production
taxes during 1999 amounted to $103,612 compared to $75,407 in the prior year.
The increase in taxes is a direct result of increased revenue from oil and gas
sales experienced during the year ended December 31, 1999.
Compensation expense decreased from $477,374 during fiscal 1998 to
$376,236 during fiscal 1999. This decrease is primarily attributable to staff
reductions that occurred during 1999. These decreases amounted to $41,000 during
the year ended December 31, 1999. During the year ended December 31, 1998 the
president of the Company was granted 221,468 options which he subsequently
exercised. As a result of this transaction, the Company recorded additional
compensation expense in the amount of $104,090 in 1998.
Depreciation, depletion and amortization expense for the year ended
December 31, 1999 was $750,280 compared to $985,546 for the prior year.
Depletion of oil and gas assets is based on a unit of production method and
support equipment is depreciated over its estimated useful life. The decrease is
attributable to natural production declines of oil during 1999 on a
substantially increased amount of proved producing reserves and reduced
depletion in 1999 on properties that were impaired on December 31, 1998. The
primary reason for the increase in reserves is the higher year end prices used
to calculate the proved producing reserves at December 31, 1999.
There was no impairment expense for the year ended December 31, 1999.
General and administrative expenses for the year ended December 31,
1999 decreased to $496,791 from $530,513 for the prior year primarily reflecting
decreases in late charges, loan fees, meals and entertainment, printing and
copying, and contract labor. Late charges declined by $5,503, loan fees declined
by $79,450, meals and entertainment expense declined by $3,214, printing and
copying expense declined by $10,660, and contract labor declined by $7,025.
These declines were offset by increases in legal fees which increased by $4,566,
professional services which increased by $40,485, telephone expense which
increased by $3,803, and transportation and travel expenses which increased by
$5,139. In addition, bad debt expense increased by $28,618 during the year ended
December 31, 1999. The reduction in loan fees was a result of the absence of
fees on the loan refinancing which took place during 1998. The increase in
professional services is primarily attributable to reservoir engineering fees
paid to a new reservoir engineer who was used to prepare the year-end and
mid-year reserve reports as required under the Company's loan agreement with
Cambrian Capital Corporation.
Interest expense increased from $455,295 for fiscal 1998 to $947,434
during fiscal 1999. This increase is primarily attributable to interest expense
on the debt to Cambrian Capital Corporation associated with the producing
property acquisition which was completed in August, 1998.
Other expense increased from $7,113 in 1998 to $32,963 in 1999. This
increase is comprised primarily of losses incurred from rental operation of the
building the Company owned and occupied as its corporate headquarters.
See "Item 13. Subsequent Events."
19
<PAGE> 20
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements related primarily to the development
of oil and gas properties. In general, because the Company's oil and gas
reserves are depleted by production, the success of its business strategy was
dependent upon a continuous acquisition and exploration and development program
that was significantly impaired as a result of the Company's inability to secure
capital needed for acquisitions and development.
See "Item 13. Subsequent Events."
Capital Expenditures. The timing of most of the Company's capital
expenditures was discretionary. Currently there are no material long-term
commitments associated with the Company's capital expenditure plans.
Consequently, the Company has a significant degree of flexibility to adjust the
level of such expenditures as circumstances warrant. The Company primarily used
internally generated cash flow and proceeds from the sale of oil and gas
properties to fund capital expenditures, other than significant acquisitions,
and to fund its working capital needs. Since the Company's internally generated
cash flows was insufficient to meet its debt service or other obligations, there
was no internally generated funds to provide for development opportunities.
Substantially all of the Company's capital expenditures have been made
to acquire oil and gas properties. During the year ended December 31, 1998, the
Company acquired 11 wells in Sherman County, Texas from Exxon Corporation. 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 loan
proceeds.
As of December 31, 1999, the Company had a working capital deficit of
$8,752,420 compared to a working capital deficit of $760,976, as of December 31,
1998. During the year ended December 31, 1999 the Company experienced a net
increase in cash of $57,189 primarily as a result of proceeds of borrowings.
Financing Arrangements. The Company has historically financed its
acquisitions of oil and gas properties primarily through borrowings and issuance
of common stock. At December 31, 1999, the Company had a total indebtedness to
two principal lenders in the aggregate amount of $8,427,917. 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, NA, New York prime rate plus 2% ( 10.5%
at December 31, 1999). 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 were 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 has been
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, was
to be used to further develop the Company's existing oil and gas properties.
However, this amount was not funded since the Company did not certain
performance goals including specified oil and gas production and reserve levels.
All borrowing activity under Tranche A was to be completed by December 31, 1998.
The date of this requirement was subsequently extended, through a letter
agreement with the lender, to June 30, 1999. Borrowing under Tranche B of the
development loan was to have been completed by June 30, 2000. 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
20
<PAGE> 21
addition, the Company was required to make minimum quarterly principal
reductions until September, 2000 at which time a total minimum principal
reduction of $1,858,000 was to have been made. The initial principal reduction,
in the amount of $90,000, was required to be made in the fourth quarter ended
December 31, 1998. This principal reduction was not made. In connection with
this financing, the Company granted the lender 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 the lender 200,000 warrants
exercisable at $2.00 per share until June 30, 2003.
The credit facility described above 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 remained 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 allowed the Company to more fully
develop those properties. As a result of the above financing transactions, the
Company recorded 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 is being amortized to interest expense using the level yield method and
results in an effective interest rate of 16% on amounts borrowed under Tranches
A and B. The amount amortized to interest expense during the year ended December
31, 1999 and 1998 was $105,297 and $17,792, respectively. 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.
The credit agreement was restructured May 11, 1999 through a letter
agreement with the lender to waive covenant compliance violations at December
31, 1998 and amend various provisions of the credit agreement including changing
the minimum principal repayment schedule to allow for a minimum principal
reduction in the amount of $120,000 for the year ended December 31, 1999. Of
this amount, a minimum of $60,000 was to be paid by September 30, 1999 with the
remainder being paid prior to December 31, 1999. None of the scheduled payments
were made.
Effective June 30, 1999, Triassic and the Company entered in the Second
Amendment to the Credit Agreement (the "Second Agreement") which extended the
date for borrowings under Tranche A of the development loan to August 31, 1999,
increased the amount available under Tranche A to $2,276,000, decreased the
amount available under Tranche B to $3,999,000, reduced the allowable monthly
amount to be used for payment of general and administrative expenses from
$60,000 to $40,000, requires any general and administrative expenses above
$40,000 to be funded by cash equity contributions to the Company, and changed
the provisions for release of funds to pay operating expenses.
The Company owns the office building in Tulsa, Oklahoma in which its
executive offices are located. The Company financed the acquisition of this
building through borrowing from a bank. At December 31, 1999, the Company was
indebted to this bank in the principal amount of $190,800. This loan bears
interest at the rate of 9.5% per year, and requires monthly payments of $2,261,
with approximately $175,000 due at maturity in March 2001. The Company has
granted a mortgage on
21
<PAGE> 22
the building to secure this debt. During 1999, the Company borrowed $50,000 from
a bank to provide additional working capital to the Company. The note is secured
by a second mortgage on the office building. The note is a balloon note that was
due March 31, 2000 and bears interest at the rate of 9.5% per annum. Payments
were not made when required and the loans are currently in default.
All borrowings under the credit facility agreement were in default at
December 31, 1999 and, therefore, the outstanding amounts are currently due at
that date. For additional information regarding the indebtedness of the Company
at December 31, 1999 and 1998, see Notes 1 and 4 to the Company's audited
consolidated financial statements elsewhere in this Form 10-KSB and "Item 13.
Subsequent Events."
YEAR 2000 READINESS.
The inability of computers, software and other equipment using
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 issue. Such systems may
be unable to accurately process certain date-based information. To mitigate any
adverse impact this may cause, the Company established a company wide Year 2000
Project to address the issue of computer programs and embedded computer chips
which may be unable to correctly function with the Year 2000. In addition, the
Company updated information systems by purchasing software upgrades for
approximately $500.
The Company did not experience any significant business disruptions or
malfunctions in its operation or business systems during the transition from
1999 to 2000. Based on operations since January 1, 2000, the Company does not
expect any significant impact to its business as a result of Year 2000 issues.
It is possible, however, that the full impact of the date transition has not
been fully recognized. For example, it is possible that date related issues such
as quarterly or year-end processing problems may occur. The Company believes
that any such problems are likely to be minor and correctable. In addition, the
Company could still be negatively affected if its customers or suppliers are
adversely affected by similar date related issues. The Company is currently not
aware of any significant Year 2000 or similar problems that have arisen for its
customers and suppliers.
The Company has expended approximately $500 on Year 2000 readiness
efforts through year-end 1999. These expenditures included identifying and
remediating potential Year 2000 problems, and the associated program
administration and labor incurred.
SEASONALITY.
The results of operations of the Company are somewhat seasonal due to
seasonal fluctuations in the price for crude oil and natural gas. Recently,
crude oil prices have been generally higher in the third calendar quarter and
natural gas prices have been generally higher in the first calendar quarter. Due
to these seasonal fluctuations, results of operations for individual quarterly
periods may not be indicative of results which may be realized on an annual
basis.
INFLATION AND PRICES
In recent years, inflation has not had a significant impact on the
Company's operations or financial condition. The generally downward pressure on
oil and gas prices during most of such periods has been accompanied by a
corresponding downward pressure on costs incurred to acquire,
22
<PAGE> 23
develop and operate oil and gas properties as well as the costs of drilling and
completing wells on properties.
OFFICE FACILITIES
The Company owns the office building in Tulsa, Oklahoma in which its
executive offices are located. The Company occupies approximately 2,862 square
feet of space in this building with the remaining 5,724 square feet available
for rental to third parties. At present, approximately 2,862 square feet are
unoccupied. The building is subject to a mortgage in the current principal
amount of $196,800 payable in monthly installments of $2,261 until March 2001 at
which time the balance of approximately $175,000 will be due. Also, the Company
has granted a mortgage on the building to secure this debt. During 1999, the
Company borrowed $50,000 from a bank in Tulsa, OK to provide additional working
capital to the Company. The note is secured by a second mortgage on the office
building. The note is a balloon note that was due March 31, 2000 and bears
interest at the rate of 9.5% per annum. Payments were not made when required and
the loans are currently in default. In addition, the Company is party to a
foreclosure action on the real estate it currently owns and occupies as its
corporate headquarters. A contract for the sale of the building has been entered
into with an unrelated third party and the sale is expected to close on or
before September 8, 2000. Proceeds from the sale should be sufficient to pay off
the mortgage secured by the real estate. Except for this office building, the
Company owns no material properties other than its oil and gas properties.
See "Item 3. Legal Proceedings" and "Item 13. Subsequent Events."
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements required to be filed in this Report begin at
Page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two fiscal years ended December 31, 1999 and 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, 1999.
23
<PAGE> 24
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sid L. Anderson 53 Chairman of the Board, President and Chief Executive
Officer
Clayton E. Woodrum 60 Executive Vice President, Secretary and Director
Vincent R. Kemendo 46 Vice President and Chief Financial Officer
B. E. Livingston, II.* 45 Vice President - Operations
*(Mr. Livingston resigned his position with the Company effective November 1, 1999)
B. E. (Bud) Livingston 74 Director
Frederick A. Bendana 49 Director
Jimmac G. Lofton 42 Director
</TABLE>
The Company's Directors will serve until the next annual meeting of
shareholders and until their successors are elected and qualified. Officers are
elected at 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.
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 a
former Director of the Oklahoma Independent Petroleum Association and member of
its Natural Gas Committee. He is currently a member of the Executive Advisory
Board for the College of Business Administration at the University of Tulsa, a
former Regent and Chairman of the Rogers University Board of Regents, and
currently serves as a Trustee on Oklahoma State University - Tulsa's Board of
Trustees. Mr. Anderson is former Chairman and Trustee of the Tulsa Industrial
Authority as well as Chairman and Director of the Oklahoma Investment Forum and
currently serves as Treasurer and Trustee of the University Center Tulsa Trust
Authority.
Clayton E. Woodrum. Mr. Woodrum has been a principal in the financial
consulting firm of Woodrum, 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.
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.
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<PAGE> 25
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. Mr. Livingston resigned his position with the company effective
November 1, 1999.
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. 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 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.
Jimmac G. Lofton. Mr. Lofton was selected as a Director in 2000 to fill
a vacancy created by the resignation from the board of Tony Ciciola. Mr. Lofton
is currently Branch Manager and Vice President for Raymond James & Associates,
Inc. in Boca Raton, Florida. Prior to joining Raymond James, Mr. Lofton was
Branch Manager with JW Charles Securities in West Palm Beach, Florida. Mr.
Lofton received his Bachelor of Arts degree from the University of Florida in
1980 with majors in Economics and English. Mr. Lofton is active in various civic
organizations including the Jupiter Tequesta Athletic Association, Florida
Alumni Association and the Securities Industry Association.
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,
25
<PAGE> 26
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,
1999 (the "Named Officers"); (2) the stock options and stock appreciation rights
granted to the Named Officers for the years shown; and (3) long-term payouts and
other compensation to the Named Officers for the years shown.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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, 1999 150,000 5,000 30,097(2) -- -- -- 10,000(5)
Chairman, 1998 150,000 6,250 170,171(3) -- 221,468 -- --
President and CEO 1997 150,000 6,250 85,130(4) -- 330,000 -- --
B. E. Livingston, II* 1999 60,000 -- -- -- -- -- 1,500(5)
Vice President of 1998 48,000 2,500 -- -- -- -- 353
Operations 1997 48,000 2,000 -- -- 80,000 -- 353
*(Mr. Livingston resigned his position with the effective Company November 1, 1999)
Vincent R. Kemendo 1999 52,000 2,167 -- -- -- -- 3,120(5)
Vice President of 1998 40,000 2,167 -- -- -- -- --
Finance 1997 40,000 1,667 -- -- 80,000 -- --
</TABLE>
(1) Except as noted, none of the executive officers listed received
perquisites or other personal benefits that exceeded the lesser of
$50,000 or 10 percent of the salary and bonus for such officers.
(2) Includes a $11,250 guarantee fee paid to Mr. Anderson (see "Employment
Agreements") and a total of $18,847 paid by the Company to or on behalf
of Mr. Anderson for country club dues and automobile allowance (see
"Employment Agreement").
(3) Includes a $35,080 guaranty fee paid to Mr. Anderson (see "Employment
Agreements"), a total of $104,090 which represents the excess of market
price, reduced for a marketability discount, over the option exercise
price, and a total of $31,001 paid by the Company to or on behalf of
Mr. Anderson for country club dues and automobile allowance.
(4) Includes a $63,754 guaranty fee paid to Mr. Anderson (see "Employment
Agreements") and a
26
<PAGE> 27
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.
(5) Represents the Company's matching portion of 401(k) contributions made
by the Company pursuant to the Company's retirement plan which was
adopted January 1, 1999.
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 the 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 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, 1999, there were no issuances of
stock options by the company.
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 $104,090, representing the excess of market price, reduced for a
marketability discount, over the option 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.
27
<PAGE> 28
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. During
1999, an executive of the Company resigned and 80,000 of these options were
cancelled. 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.
AGGREGATED OPTION EXERCISES IN THE FISCAL
YEAR ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1999 OPTION VALUES
<TABLE>
<CAPTION>
OPTION EXERCISES
DURING YEAR
ENDED DECEMBER 31, 1999 NUMBER OF SECURITIES
----------------------- UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1999 AT DECEMBER 31, 1999
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ----------- -------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sid L. Anderson None None 0 337,500(1) $ -- $ --
Clayton E. Woodrum None None 0 97,500(2) -- --
Buddie E. Livingston II None None 0 80,000(3) -- --
Vincent R. Kemendo None None 0 80,000(4) -- --
B. E. (Bud) Livingston None None -- 15,000(5) -- --
</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.
28
<PAGE> 29
(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." Pursuant to the
agreement with the lender reflected in "Item 13. Subsequent Events", warrants to
the lender were cancelled and the lender agreed to purchase 402,430 shares of
the Company's common stock for $250,000.
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, who resigned November 1, 1999, 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 were to
receive base salaries of $48,000 and $40,000 per year, respectively. In
September, 1998 the base salaries of Messrs. Livingston and Kemendo were
increased to $60,000 and $52,000 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
29
<PAGE> 30
and Kemendo are eligible to participate in the Company's incentive compensation
bonus plan. See "Bonus Plan". The Company has the right to terminate each of
these employment agreements upon written notice and, unless the agreement has
been terminated for cause, as defined, the Company is obligated to pay the
terminated individual the compensation payable for the remainder of the term of
his agreement, including any incentive compensation, vacation pay or accrued
employee benefits. Messrs. Livingston and Kemendo each have the right to
terminate their employment agreements with the Company upon 30 days written
notice to the Company in which event the Company is only obligated to compensate
the individual up to the date of termination. Each of the Employment Agreements
also contain certain provisions restricting Messrs. Livingston and Kemendo from
engaging in business activities in competition with the Company.
ITEM 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, 1999, 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, 1999, 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) 1,746,468 44.11%
Clayton E. Woodrum(3) 115,350 3.10%
Vincent R. Kemendo(2)(5) 142,500 3.85%
B.E. (Bud) Livingston(2)(6) 15,000 *
Frederick A. Bendana(7) 500 *
Jimmac G. Lofton(9) * *
Pangloss International, S.A.(4) 481,250 12.51%
Cambrian Capital Partners LLC(8) 400,000 9.95%
All Executive Officers and 2,019,818 48.65%
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,
30
<PAGE> 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.
(2) Includes (a) with respect to Mr. Anderson, 337,500 shares issuable to
him upon exercise of presently exercisable options; (b) with respect to
Mr. Kemendo, 80,000 shares issuable to him upon exercise of presently
exercisable options; and (c) 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 97,500 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 and Kemendo 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.
(8) Includes 400,000 shares issuable to Cambrian Capital Partners LP upon
exercise of presently exercisable common stock purchase warrants. The
address for Cambrian Capital Partners LP is Two Houston Center, Suite
3150, 909 Fannin, Houston, Texas 77010.
(9) The address for Mr. Lofton is 1200 North Federal Highway, Suite 100,
Boca Raton, Florida 33432.
See "Item 13. Subsequent Events." for a discussion of an arrangement
which may result in a change of 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 1999, 1998, and 1997,
fees paid to Mr. Anderson under this Agreement were approximately $11,250,
$35,080, and $64,000, respectively.
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<PAGE> 32
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 1999,
1998, and 1997 were $4,934, $10,407, and $11,359, 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 for business advisory services
with a firm affiliated with this board member. Such amounts incurred in 1999,
1998 and 1997 were $36,000, $36,000 and $37,424, respectively.
Pursuant to an agreement signed in February 1996, B. E. (Bud)
Livingston, a former 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 various services to the Company. Such amounts incurred in
1999, 1998, and 1997 were $19,560, $7,114, and $9,237, 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.
ITEM 13. SUBSEQUENT EVENTS.
DISPOSITION OF OIL AND GAS PROPERTIES. During the fourth quarter of 1999, the
Company retained Albrecth & Associates, Inc., Houston, Texas, to dispose of the
Company's oil and gas properties. Albrecth & Associates, Inc. specializes in the
disposition of oil and gas properties and is one of the leaders in this
specialized field. No offer to purchase the properties was received prior to
December 31, 1999 that was sufficient to pay the Company's secured and unsecured
creditors and efforts to sell the properties were discontinued.
On June 14, 2000, the Company entered into a series of agreements with entities
that are related to each other through common ownership. The Company initially
executed an agreement with its major lender, Triassic Energy Partners, L.P.
("Triassic"), transferring substantially all of the Company's oil and gas
properties to Devonian Energy Partners, L.P. ("Devonian") in lieu of a
foreclosure proceeding. The oil and gas properties transferred to Devonian
served as collateral for the repayment of approximately $8.9 million (including
amounts advanced to pay unsecured creditors as discussed below) of non-recourse
secured debt owed to Triassic by the Company. This debt was assumed by Devonian
and the Company was released from its debt obligation to Triassic. The Company
expects to recognize a gain of approximately $3.7 million on this extinguishment
of the Triassic debt. Further, as part of the transaction, Triassic agreed to
make up to $590,000 available to the Company under the existing credit facility
to pay unsecured creditors. In addition, Cambrian Capital Partners, L.P.
("Cambrian") agreed to purchase from the Company the greater of
32
<PAGE> 33
402,430 shares or 10% of the Company's outstanding common stock for $10,000.
However, if the Company settles all outstanding unsecured liabilities by August
31, 2000 and completes a merger with another corporation before December 31,
2000, Cambrian will pay the Company additional consideration for this stock
equal to the lesser of $250,000 or the $590,000 made available by Triassic under
the credit facility less the payments made to the unsecured creditors. As of
August 31, 2000, the Company had settled substantially all of the accounts
payable included on the December 31, 1999 balance sheet. The effective date of
the transaction described above was July 31, 2000.
INTELLIREADY, INC. TRANSACTION. In July of 2000, IntelliReady, Inc. approached
the Company concerning a possible merger of the Company and IntelliReady, Inc.
IntelliReady, Inc. is a structured wiring company that provides home and
commercial automation services to its clients. IntelliReady, Inc. currently
operates in the Denver Metropolitan Area but expects to expand its operation
into an additional metropolitan market by the end of calendar year 2000.
IntelliReady, Inc. has recently raised $1,500,000 in equity through a Regulation
D, Rule 506 offering pursuant to the Securities Act of 1933. IntelliReady, Inc.
intends to use the proceeds of the offering to rapidly expand its operations to
include providing bundled digital services and to open offices in several
additional cities. Pursuant to the proposed terms of the merger which include,
among other provisions, that the Company owns certain assets at the closing
date, IntelliReady, Inc. will merge into a newly created, wholly owned
subsidiary of the Company in exchange for approximately 95% of the Company's
common stock. The Company's board of directors approved the merger on August 29,
2000. Although this transaction was scheduled to close by August 31, 2000 and
that date was not formerly extended, the Company and IntelliReady, Inc. are
continuing to effect a merger of the companies.
NON-RENEWAL OF AMOCO LICENSE. Because of the Company's inability to generate
sufficient cash flows to sustain its operations at pre-1999 levels, the company
elected not to renew its licensing arrangement with Amoco. This decision was
made in part based on the Company's inability to secure the capital necessary to
implement the technology covered by the licensing agreement.
SALE OF COMPANY OWNED OFFICE BUILDING. On May 15, 2000, the Company entered into
a contract with an unrelated party to sell the office building owned by the
Company and used as its corporate headquarters. The contract price for the
building is $275,000 less a 5% commission to be paid to the real estate agency
handling the sale. Proceeds, if any, from the sale will be used to pay a first
mortgage on the building of approximately $190,000 and a second mortgage on the
building of approximately $50,000. Excess proceeds, if any, will be used by the
Company as working capital. The Closing Date for the transaction is September 7,
2000.
PAN WESTERN COMMON STOCK DELISTED FROM OVER-THE-COUNTER:BULLETIN BOARD
("OTC:BB"). The Company's common stock was delisted from OTC:BB on May 15, 2000
because of the Company's failure to comply with Rule 15c2-11. The Company is in
the process of taking the steps necessary to get its common stock listed again
on OTC:BB. It is anticipated this process will be completed by September 30,
2000.
33
<PAGE> 34
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: September 11, 2000
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.
<TABLE>
<S> <C>
By: /s/ Sid L. Anderson Date: September 11, 2000
Chairman of the Board, President, and
Chief Executive Officer
By: /s/ Clayton E. Woodrum Date: September 11, 2000
Executive Vice President and Director
(Principal Financial Officer)
By: /s/ Vincent R. Kemendo Date: September 11, 2000
Vice President - Finance and Chief
Financial Officer (Principal Accounting
Officer)
By: /s/ Bud E. Livingston Date: September 11, 2000
Director
By: /s/ Frederick A. Bendana Date: September 11, 2000
Director
By: /s/ Jimmac G. Lofton Date: September 11, 2000
Director
</TABLE>
34
<PAGE> 35
PAN WESTERN ENERGY
CORPORATION
Consolidated Financial Statements
Years Ended December 31, 1999 and 1998, and
Independent Auditors' Report
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pan Western Energy Corporation:
We have audited the accompanying consolidated balance sheets of Pan Western
Energy Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' deficiency, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Pan Western Energy Corporation
and subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1, significant issues
relating to the Company's operations have occurred. These issues, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Note 1 also contains a discussion of management's plans relating to the
Company's future operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
September 5, 2000
<PAGE> 37
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash $ 63,052 $ 5,863
Restricted cash 137,584 262,080
Receivables:
Trade, net of allowance of $39,698 and $11,080 326,167 183,680
Due from stockholder 28,272 24,261
Prepaid expenses and other assets 106,595 20,463
Assets held for sale 237,214 --
------------ ------------
Total current assets 898,884 496,347
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties (successful efforts method) 8,200,792 7,413,860
Other property and equipment 113,592 380,736
------------ ------------
8,314,384 7,794,596
Less accumulated depreciation, depletion and amortization (2,642,284) (1,957,391)
------------ ------------
Net property and equipment 5,672,100 5,837,205
------------ ------------
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION -- 170,206
------------ ------------
$ 6,570,984 $ 6,503,758
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 857,850 $ 767,045
Undistributed oil and gas revenues 195,768 148,517
Due to affiliated partnerships 25,590 7,540
Due to stockholder 15,945 --
Accrued liabilities 128,234 138,793
Current portion of long-term obligations 8,427,917 195,428
------------ ------------
Total current liabilities 9,651,304 1,257,323
NET PROFITS OVERRIDING ROYALTY 500,193 161,872
LONG-TERM OBLIGATIONS -- 7,114,238
------------ ------------
Total liabilities 10,151,497 8,533,433
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' DEFICIENCY:
Preferred stock ($.05 par value; authorized 25,000,000 shares; none issued) -- --
Common stock ($.01 par value; authorized 25,000,000 shares; issued 4,703,123 shares) 47,031 47,031
Additional paid-in capital 1,999,372 1,999,372
Accumulated deficit (5,407,934) (3,857,096)
Treasury stock (1,081,250 shares) (218,982) (218,982)
------------ ------------
Total stockholders' deficiency (3,580,513) (2,029,675)
------------ ------------
$ 6,570,984 $ 6,503,758
============ ============
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE> 38
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
REVENUE:
Oil and gas sales $ 1,698,960 $ 1,153,829
Operating income 65,530 77,666
----------- -----------
Total revenue 1,764,490 1,231,495
----------- -----------
OPERATING EXPENSES:
Lease operating 711,623 645,048
Salaries and wages 376,237 477,374
Depreciation, depletion and amortization 750,280 985,546
Impairment loss -- 448,000
General and administrative 496,791 530,513
----------- -----------
Total operating expenses 2,334,931 3,086,481
----------- -----------
OPERATING LOSS (570,441) (1,854,986)
----------- -----------
OTHER INCOME (EXPENSE):
Loss from rental operations, net (19,288) (16,640)
Gain on sale of assets, net -- 3,486
Interest income 1,475 6,041
Interest expense (947,434) (455,295)
Miscellaneous expense (15,150) --
----------- -----------
Total other income (expense) (980,397) (462,408)
----------- -----------
NET LOSS $(1,550,838) $(2,317,394)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.43) $ (0.66)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 3,621,873 3,509,035
=========== ===========
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE> 39
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
STOCK CAPITAL DEFICIT STOCK DEFICIENCY
<S> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1998 $ 44,487 $ 1,837,253 $(1,539,702) $ (218,982) $ 123,056
Issuance of stock 2,544 162,119 -- -- 164,663
Net loss -- -- (2,317,394) -- (2,317,394)
----------- ----------- ----------- ----------- -----------
BALANCES,
DECEMBER 31, 1998 47,031 1,999,372 (3,857,096) (218,982) (2,029,675)
Net loss -- -- (1,550,838) -- (1,550,838)
----------- ----------- ----------- ----------- -----------
BALANCES,
DECEMBER 31, 1999 $ 47,031 $ 1,999,372 $(5,407,934) $ (218,982) $(3,580,513)
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE> 40
PAN WESTERN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,550,838) $(2,317,394)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization 750,280 985,546
Amortization of debt discount 105,297 17,792
Impairment loss -- 448,000
(Gain) loss on sale of assets, net -- (3,486)
Bad debt expense 28,618 --
Stock issued for services -- 49,500
Compensation expense on stock options granted -- 104,090
Write-off of other assets 15,162 --
Changes in assets and liabilities:
Receivables (175,116) (24,189)
Prepaid expenses and other assets 916 (113)
Other assets 34,820 13,750
Accounts payable and due to affiliated partnerships 108,855 519,230
Accrued liabilities and due to stockholder 5,386 123,105
Undistributed oil and gas revenues 47,251 (5,473)
----------- -----------
Net cash used in operating activities (629,369) (89,642)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (789,213) (4,913,086)
Proceeds from the disposal of oil and gas properties -- 8,079
----------- -----------
Net cash used in investing activities (789,213) (4,905,007)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,575,016 7,444,422
Repayments of long-term debt (223,741) (2,429,868)
Change in restricted cash 124,496 82,067
Proceeds from sale of common stock -- 11,073
Payment of debt issuance costs -- (121,868)
----------- -----------
Net cash provided by financing activities 1,475,771 4,985,826
----------- -----------
NET INCREASE (DECREASE) IN CASH 57,189 (8,823)
CASH, BEGINNING OF YEAR 5,863 14,686
----------- -----------
CASH, END OF YEAR $ 63,052 $ 5,863
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 883,452 $ 319,397
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE> 41
PAN WESTERN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Pan Western Energy Corporation (the "Company") was organized
effective September 2, 1981, under the laws of the State of Oklahoma. The
primary purpose of the Company was the acquisition, drilling, development,
production and operation of oil and gas properties. See Business
Developments section of Note 1 for subsequent events.
BUSINESS DEVELOPMENTS - During the years ended December 31, 1999 and 1998,
the Company incurred net losses of $1,550,838 and $2,317,394, respectively,
and in 1999 and 1998 had operating cash flow deficiencies of $629,369 and
$89,642, respectively. At December 31, 1999 and 1998, the Company had
working capital deficits of $8,752,420 and $760,976, respectively, and
stockholders' deficiency of $3,580,513 and 2,029,675, respectively.
During the fourth quarter of 1999, the Company retained Albrecth &
Associates, Inc. to dispose of the Company's oil and gas properties. No
offer to purchase the properties was received prior to December 31, 1999
that was sufficient to pay the Company's secured and unsecured creditors
and efforts to sell the properties were discontinued.
On June 14, 2000, the Company entered into a series of agreements with
entities that are related to each other through common ownership. The
Company initially executed an agreement with its major lender, Triassic
Energy Partners, L.P. ("Triassic"), transferring substantially all of the
Company's oil and gas properties to Devonian Energy Partners, L.P.
("Devonian") in lieu of a foreclosure proceeding. The oil and gas
properties transferred to Devonian served as collateral for the repayment
of approximately $8.9 million (including amounts advanced to pay unsecured
creditors as discussed below) of non-recourse secured debt owed to Triassic
by the Company. This debt was assumed by Devonian and the Company was
released from its debt obligation to Triassic. The Company expects to
recognize a gain of approximately $3.7 million on this extinguishment of
the Triassic debt. Further, as part of the transaction, Triassic agreed to
advance up to $590,000 to the Company under the existing credit facility to
pay unsecured creditors. In addition, Cambrian Capital Partners, L.P.
("Cambrian") agreed to purchase from the Company the greater of 402,430
shares or 10% of the Company's outstanding common stock for $10,000.
However, if the Company settles all outstanding unsecured liabilities by
August 31, 2000, and completes a merger with another corporation before
December 31, 2000, Cambrian will pay the Company additional consideration
for this stock equal to the lesser of $250,000 or the $590,000 made
available by Triassic under the credit facility less the payments made to
the unsecured creditors. As of August 31, 2000, the Company had settled
substantially all of the accounts payable included in the accompanying
December 31, 1999 balance sheet. The effective date of all of the
transactions described above was July 31, 2000.
These issues, among others, raise substantial doubt about the Company's
ability to continue as a going concern.
- 6 -
<PAGE> 42
In July 2000, IntelliReady, Inc. and the Company initiated discussions
concerning a possible merger of the Company and IntelliReady, Inc.
IntelliReady, Inc. is a structured wiring company that provides home and
commercial automation services to its clients. IntelliReady, Inc. intends
to use the proceeds of a recent equity offering to expand its operations to
include providing bundled digital services and to open offices in several
cities. Pursuant to the proposed terms of the merger which include, among
other provisions, that the Company owns certain assets at the closing date,
IntelliReady, Inc. will merge into a newly created, wholly owned subsidiary
of the Company. As a result of this transaction, IntelliReady, Inc.
stockholders will acquire approximately 95% of the Company's outstanding
common stock. The Company's board of directors approved the merger on
August 29, 2000. Although this transaction was scheduled to close by August
31, 2000 and that date was not formally extended, the Company and
IntelliReady, Inc. are continuing to negotiate a merger of the companies.
In the event that the merger of the Company and IntelliReady, Inc. is not
completed, management intends to pursue other merger opportunities.
On May 15, 2000, the Company entered into a contract with an unrelated
party to sell the office building owned by the Company and used as its
corporate headquarters. The contract for the building stipulates a sales
price of $275,000 less a 6% commission to be paid to the real estate agent
handling the sale. Proceeds from the sale will be used to pay first and
second mortgages on the building aggregating approximately $240,000. The
first mortgage holder has filed foreclosure action due to non-payment of
principal and interest when due. At December 31, 1999, the net carrying
value of the office building is presented as asset held for sale in the
accompanying balance sheet.
The Company's common stock was delisted from the Over-the-Counter Bulletin
Board ("OTC:BB") on May 15, 2000 because of the Company's failure to comply
with certain OTC:BB and Securities and Exchange Commission reporting
requirements. The Company is in the process of taking the steps necessary
to get its common stock relisted on OTC:BB.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Lateral Completion Technologies, Inc. ("LCT"), a wholly
owned subsidiary formed in 1996. LCT is inactive.
RESTRICTED CASH - Restricted cash consists of cash held in a restricted
account by the lender as a provision of the Credit Agreement (see Note 4)
and in 1998 a certificate of deposit that serves as collateral on a line of
credit with a bank.
INVESTMENTS IN AFFILIATED PARTNERSHIPS - Investments in affiliated oil and
gas partnerships in which the Company owns less than a majority interest
are accounted for using the equity method, with amounts stated at original
cost, adjusted for the Company's share of undistributed earnings or losses.
The equity method was suspended in 1989 as the Company's share of losses
exceeded the carrying value of its investments at that time.
OIL AND GAS PROPERTIES - The Company follows the successful efforts method
of accounting for oil and gas producing activities. Costs to acquire
mineral interests in oil and gas properties, to drill and equip exploratory
wells that find proved reserves, and to drill and equip development wells
are capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed.
- 7 -
<PAGE> 43
Capitalized costs of producing oil and gas properties are depreciated and
depleted by the unit-of-production method on a property-by-property basis.
Support equipment is depreciated over its estimated useful life.
On the sale or retirement of a complete unit of a proved property, the cost
and related accumulated depreciation, depletion, and amortization are
eliminated from the property accounts, and the resultant gain or loss is
recognized. On the retirement or sale of a partial unit of proved property,
the cost is charged to accumulated depreciation, depletion, and
amortization with a resulting gain or loss recognized in income.
OTHER PROPERTY AND EQUIPMENT - Other property and equipment is stated at
cost and is depreciated using accelerated methods over the estimated useful
lives of the respective assets, which range from 5 to 27.5 years.
OTHER ASSETS - At December 31, 1998, other assets consisted primarily of a
license for drilling technology and loan fees which were being amortized
over 14 and 4 years, respectively.
In 1996, the Company acquired a license from Amoco Corporation to utilize
its patented short radius curve drilling technology. The Company paid
$40,000 for the license but was unable to secure the capital necessary to
implement the technology. The Company has not renewed the licensing
arrangement and expensed the unamortized licensing fee in 1999.
As a result of the settlement of the Triassic debt as discussed above, the
prepaid loan fees were reclassified to current assets as of December 31,
1999.
NET PROFITS OVERRIDING ROYALTY - In connection with the Credit Agreement
entered into on July 1, 1998 (see Note 4), the Company granted a 25% net
profits overriding royalty (subsequently increased to 30%) on all the
Company's production. Payments on this royalty commence upon maturity of
the Credit Agreement or prepayment of all principal and interest due under
the Credit Agreement. The Company has recorded a liability for the
estimated present value of the amounts due on the net profits overriding
royalty.
PREFERRED STOCK - The board of directors is authorized to fix the rights
and terms applicable to the preferred stock prior to issuance.
OPERATING INCOME - Operating income represents income earned by the Company
as operator of oil and gas properties and as general partner for certain
limited partnerships. Operating income consists primarily of administrative
overhead fees, field supervision charges and compressor charges.
INCOME TAXES - The Company recognizes deferred tax liabilities and assets
for the tax effects of (a) temporary differences between tax bases and
financial reporting bases of assets and liabilities, and (b) operating loss
and tax credit carryforwards. The Company records a valuation allowance for
the amount of net deferred tax assets when, in management's opinion, it is
more likely than not that such assets will not be realized.
- 8 -
<PAGE> 44
LONG-LIVED ASSETS IMPAIRMENT - The Company reviews the carrying value of
long-lived assets and certain identifiable intangibles to be held and used
by the Company for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment reserve is provided if the carrying amount cannot be recovered
through future cash flows generated by the asset. Fair value of oil and gas
assets was estimated using future net cash flows discounted at 10%. Future
net cash flows were based on estimated reserves valued at current market
prices, escalated at 3% per year less estimated future development and
operating costs. Based on these fair value estimates, an impairment charge
of $448,000 was recorded in December 1998. No impairment charge was
required in 1999. Assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
STOCK-BASED COMPENSATION - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost for stock options, if any, is measured as the
excess of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. The
Company follows the disclosure requirements of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation."
FAIR VALUE OF FINANCIAL INSTRUMENTS - For accounts receivable and accounts
payable, the carrying amount approximates fair value because of the short
maturity of those instruments. The fair value of the Company's long-term
debt is estimated to approximate carrying value based on the borrowing
rates currently available to the Company for bank loans with similar terms
and maturities.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per common share is
computed by dividing net income (loss) applicable to common stockholders by
the weighted average number of shares of common stock outstanding during
the period.
Diluted earnings per common share is computed by dividing net income
applicable to common stockholders by the weighted average number of shares
of common stock and common stock equivalents outstanding during the year.
Outstanding stock options and warrants have not been included in the 1999
and 1998 computations since their effect was antidilutive.
2. INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Company is general partner in Pan Western 1986 Drilling Program, Ltd.
("1986 Program") and Pan Western 1987 Production Program, Ltd. ("1987
Program"), whose purpose is the acquisition, drilling, development,
production, marketing, and operation of oil and gas leases. As general
partner, the Company is entitled to 11.25% 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.
- 9 -
<PAGE> 45
Summary financial information for these partnerships as of and for the
years ended December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Total assets $56,311 $48,572
======= =======
Total liabilities $ 2,429 $ 2,516
Partners' capital 53,882 46,056
------- -------
Total liabilities and partners' capital $56,311 $48,572
======= =======
Revenue $11,792 $ 9,946
======= =======
Net income $ 7,825 $ 6,007
======= =======
</TABLE>
During 1989, the Company's share of losses exceeded the carrying value of
its investment in the 1986 and 1987 Programs, and the equity method of
accounting was discontinued with no additional losses recorded by the
Company. The Company's share of unrecorded accumulated losses for the 1986
and 1987 Programs was approximately $29,792 and $30,732 at December 31,
1999 and 1998, respectively. The 1986 and 1987 Programs made distributions
to the partners during 1998 totaling $4,800 and $11,853, respectively, of
which $720 and $1,333, respectively, were paid to the Company. The 1986 and
1987 Programs made no distributions to the partners during 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Proved oil and gas properties:
Leasehold costs $ 5,482,262 $ 5,482,262
Intangible drilling and development costs 1,480,884 952,993
Lease and well equipment 1,237,646 978,605
----------- -----------
8,200,792 7,413,860
----------- -----------
Other property and equipment:
Land and building -- 269,425
Office furniture, fixtures and equipment 92,293 90,012
Automobiles 21,299 21,299
----------- -----------
113,592 380,736
----------- -----------
8,314,384 7,794,596
Less: accumulated depreciation, depletion and amortization (2,642,284) (1,957,391)
----------- -----------
Net property and equipment $ 5,672,100 $ 5,837,205
=========== ===========
</TABLE>
- 10 -
<PAGE> 46
Costs incurred in oil and gas property acquisitions and development
activities are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Property acquisitions $ -- $4,160,500
Development costs 788,259 750,314
---------- ----------
Total costs incurred $ 788,259 $4,910,814
========== ==========
</TABLE>
As discussed in Note 1, on June 14, 2000, the Company entered into an
agreement to transfer title to substantially all of its oil and gas
properties in settlement of the loans secured by such properties.
Also, as discussed in Note 1, on May 15, 2000, the Company entered into a
contract with an unrelated party to sell the office building owned by the
Company and used as its corporate headquarters.
4. LONG-TERM OBLIGATIONS
On December 31, 1997, the Company negotiated a $1,587,928 loan with
SpiritBank, N.A. ("Spirit") for the purpose of consolidating debt owed to
Spirit and various other banks. The proceeds were used to refinance
existing loans with Spirit and to establish an escrow account that, on
January 2, 1998, was used to pay the remaining principal and accrued
interest on loans with various other banks.
On July 1, 1998, the Company entered into a credit agreement (the "Credit
Agreement") with Triassic Energy Partners, L.P. ("Triassic") for a total
facility of $7,420,000. The Credit Agreement was amended and restated on
August 1, 1998 to increase the total facility to $12,795,000.
The Credit Agreement allowed for a refinancing loan of up to $2,320,000, an
acquisition loan of up to $4,200,000 and a development loan of up to
$6,275,000. The refinancing loan was available solely for the purpose of
refinancing existing bank and other indebtedness. The consolidating loan
with Spirit was repaid with a portion of the proceeds from the refinancing
loan. The acquisition loan was used to acquire certain oil and gas
properties. The development loan consists of Tranche A, in the amount of
$1,525,000, and Tranche B, in the amount of $4,750,000. Tranche A was used
for specific development projects on the Company's existing oil and gas
properties and no advances were available after December 31, 1998. The
Second Amendment discussed below extended the date and increased the amount
available under Tranche A. Tranche B is to be used solely for the further
development of the Company's oil and gas properties and will be advanced by
Triassic provided that certain conditions related to production and reserve
levels are met. All borrowings under Tranche B must be completed by June
30, 2000. At December 31, 1999, the Company had $2,320,000, $4,149,953, and
$2,084,138 outstanding under the refinancing loan, the acquisition loan and
Tranche A of the development loan.
Prior to the First Amendment discussed below, the Credit Agreement required
minimum principal reductions due in quarterly payments. Cumulative required
minimum principal reductions were $90,000 by December 1998, $1,150,000 by
December 1999 and $1,858,000 by September 2000, with the balance
outstanding due at the maturity date of July 1, 2002. The Company did not
make the minimum principal reductions due in 1998 or in the first quarter
of 1999 and obtained a waiver of such payments from Triassic through the
First Amendment. The Company did not make all the revised minimum principal
reduction payments required by the First Amendment, and at December 31,
1999, the Company is in default with the amounts outstanding under the
Credit Agreement classified as current liabilities in the accompanying
financial statements. The Company has the right to prepay in whole or in
part without penalty or premium. The Credit Agreement has a mandatory
prepayment provision that requires the Company to pay to Triassic all
proceeds received on the sale of any assets. Such proceeds shall be
- 11 -
<PAGE> 47
immediately applied by Triassic as principal repayment with any remaining
proceeds applied to interest. The provision also requires Triassic's
consent for any sale of assets.
Effective May 11, 1999, Triassic and the Company entered into the First
Amendment to the Credit Agreement (the "First Amendment") which waived
covenant compliance violations at December 31, 1998 and amended various
provisions of the Credit Agreement. The Amendment allows a working capital
deficit not exceeding $810,000 until December 31, 1999, after which the
Company shall maintain a positive working capital; reduced the cumulative
minimum principal reduction requirements to $120,000 by December 1999 and
$1,858,000 by September 2000; and reduced the quarterly oil and gas
production requirements.
Effective June 30, 1999, Triassic and Company entered into the Second
Amendment to the Credit Agreement (the "Second Amendment") which extended
the date for borrowings under Tranche A of the development loan to August
31, 1999, increased the amount available under Tranche A to $2,276,000,
decreased the amount available under Tranche B to $3,999,000, reduced the
allowable monthly amount to be used for payment of general and
administrative expenses from $60,000 to $40,000, requires any general and
administrative expenses above $40,000 to be funded by cash equity
contributions to the Company, and changed the provisions for release of
funds to pay operating expenses.
The Credit Agreement, as amended, contains various covenants, including
maintenance of positive working capital; minimum quarterly production
requirements; prompt development of properties; preparation of reports; and
providing various field, production and operations reports to Triassic. At
December 31, 1999, the Company was not in compliance with these covenants.
The Credit Agreement prohibits the Company from incurring additional debt
without Triassic's approval; prohibits declaration or payment of dividends
or distributions; and prohibits the issuance of stock or other securities
of any class to anyone other than Triassic.
Under the terms of the Credit Agreement, all proceeds from the sale of oil
and gas produced from the properties is deposited directly into a project
account maintained by Triassic. Monthly, the Company requests a release of
funds from Triassic to pay operating expenses and other permitted
expenditures. At December 31, 1999 and 1998, $137,584 and $146,651,
respectively, was on deposit in the project account and is included in
restricted cash.
Interest on borrowings under the Credit Agreement is payable monthly at the
Citibank, N.A. New York, prime lending rate plus 2% (10.5% and 9.75% at
December 31, 1999 and 1998, respectively).
Borrowings under the Credit Agreement are collateralized by substantially
all assets of the Company and are secured by a first mortgage on all
existing oil and gas properties of the Company.
In connection with this financing, the Company granted a 25% net profits
overriding royalty (subsequently increased to 30%) on all of the Company's
production. Payments on this royalty commence upon maturity or prepayment
of all interest and principal due under the Credit Agreement. The Company
recorded 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 granted to Triassic. This
discount is being amortized to interest expense using the level yield
method and results in an effective interest rate of 16% on 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.
- 12 -
<PAGE> 48
In addition, the Company issued Triassic 200,000 warrants on July 1, 1998,
and an additional 200,000 warrants on August 1, 1998, when the Credit
Agreement was amended and restated. These warrants are exercisable at $2
per share until June 30, 2003.
Long-term obligations consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
10.5% Credit Agreement, due July 1, 2002, secured by substantially all assets
including oil and gas properties, net of unamortized discount of $377,104 and
$144,080 at December 31, 1999 and 1998, respectively. This note is currently
in default. $ 8,176,987 $ 7,000,342
9.50% note payable to bank due in monthly installments of $2,261, including
interest, through March 2001, with the balance of approximately $175,000 due
at maturity, secured by real estate mortgage. This note is currently
in default and the noteholder has filed foreclosure action. 193,470 196,800
10.5% (prime plus 2% note payable to bank, interest due monthly through April
2000 and monthly installments of $1,072, including interest, through March
2003 with the balance of approximately $25,000 due at maturity, secured by a
second mortgage on real estate. This note is currently in default. 51,210 --
8.28% note payable to bank with principal and interest due on
March 29, 1999, secured by a certificate of deposit. -- 101,100
8.60% note payable to bank due in monthly installments of $439,
including interest, through December 2000, secured by equipment. 6,250 10,028
Capital lease obligations -- 1,396
----------- -----------
Total obligations 8,427,917 7,309,666
Less current portion (8,427,917) (195,428)
----------- -----------
Total $ -- $ 7,114,238
=========== ===========
</TABLE>
With the exception of the Credit Agreement, Company debt is guaranteed by
the president and major stockholder.
- 13 -
<PAGE> 49
5. INCOME TAXES
Deferred tax assets and liabilities at December 31, 1999 and 1998, consist
of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforward $ 1,866,652 $ 1,252,662
Impairment of oil and gas properties 179,200 179,200
Less: Valuation allowance (2,033,406) (1,419,041)
----------- -----------
12,446 12,821
Deferred tax liability -
Partnership investments basis differences 12,446 12,821
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $4,666,000 which, if unused, will expire during the years
2009 through 2019.
The Company's income tax provision for the years ended December 31, 1999
and 1998 differs from the amount computed by applying the statutory federal
income tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Tax provision at the federal statutory rate $(527,285) $(787,899)
State income tax benefit (93,050) (139,041)
Change in valuation allowance 614,365 918,505
Nondeductible expenses 5,394 5,940
Other 576 2,495
--------- ---------
Total $ -- $ --
========= =========
</TABLE>
6. RELATED PARTIES
The Company pays a fee to the Company president based on the terms of a
"Guaranty Fee Agreement". Under the agreement he receives an annual fee for
guaranteeing the Company debt equal to the greater of $15,000 or 3% of the
guaranteed debt. During 1999 and 1998, this fee was approximately $16,000
and $35,000, respectively.
The Company incurs fees for accounting and consulting services provided by
a firm in which a board member of the Company is a partner. Such amounts
incurred during 1999 and 1998 were $4,934 and $10,407, respectively. The
Company also incurs fees for business advisory services by a firm
affiliated with this board member. Such amounts incurred for 1999 and 1998
were $36,000 and $36,000, respectively.
- 14 -
<PAGE> 50
Pursuant to an agreement signed in February 1996, a director of the Company
will provide evaluation and reservoir engineering services to the Company
in exchange for an amount equal to a percentage of the net revenue interest
of a certain well less a percentage of the lease operating expenses
attributable to that well. The Company did not utilize the engineering
services during 1999 or 1998 and no amounts were expensed under this
agreement. In addition, a company affiliated with this director provides
well operation services to the Company. Expenses incurred by the Company
for these services in 1999 and 1998 were $19,560 and $7,114, respectively.
7. STOCK OPTION PLANS
The Company established the Pan Western Energy Corporation 1992 Directors
Stock Option Plan (the "Directors Plan") under which non-employee directors
of the Company may be granted options to purchase shares of common stock.
The Directors Plan provides that the option price shall be the fair value
of the common stock at the date granted. Options are exercisable for 10
years and 30 days from date granted. At December 31, 1999 and 1998, options
covering 117,500 shares were available for grant, and options covering
32,500 shares were granted and exercisable. Of the options outstanding at
December 31, 1999, 7,500 were granted in July 1993 at $1.30 per share, and
25,000 were granted in January 1997 at $1.40 per share.
The 1992 Employee Stock Option Plan (the "Employee Plan") has also been
adopted by the Company's board of directors and approved by the
shareholders. There are 100,000 options available for grant and no options
have been granted under the Plan.
Outstanding options granted under both the Directors and Employee Stock
Option Plans are terminated if the option holder ceases to be an employee
or director of the Company.
In July 1993, the board of directors approved the grant of options to the
Company's president to acquire 7,500 shares of common stock at $1.30 per
share (the estimated fair value at the date granted). These options are
exercisable at any time up to ten years from the date of grant. On January
21, 1997, the board of directors approved the grant of options to certain
executive officers to acquire 570,000 shares of the Company's common stock
at $1.40 per share (the estimated fair value at the date granted). During
1999, an executive officer of the Company resigned and 80,000 of these
options were canceled. These options vest at 40% on date of grant; 30% one
year from date of grant; and the remaining 30% two years from date of
grant. These options were not granted pursuant to the existing Employee
Plan.
In February 1998, the board of directors approved the grant of options to
the Company's president to acquire 221,436 shares of common stock at $0.05
per share. The Company recognized compensation expense of $104,090 in
connection with the grant of these options based on the excess of market
price, reduced for a marketability discount, over the option exercise
price. These options were not granted pursuant to the existing Directors or
Employee Plans and were exercised in June 1998.
- 15 -
<PAGE> 51
A summary of the status of the Company's stock option plans and the options
granted outside the existing plans as of December 31, 1999 and 1998, and
changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year 610,000 $ 1.40 642,500 $ 1.40
Granted -- -- 221,436 0.05
Exercised -- -- (221,436) (0.05)
Canceled (80,000) (1.40) (32,500) (1.38)
-------- -------- -------- --------
Outstanding at End of Year 530,000 $ 1.40 610,000 $ 1.40
======== ======== ======== ========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER
RANGE OF OUTSTANDING WEIGHTED
EXERCISE AT DECEMBER 31, AVERAGE REMAINING WEIGHTED AVERAGE
PRICES 1999 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
-------- --------------- ------------------------ ----------------
<S> <C> <C> <C>
$ 1.30 15,000 3 $ 1.30
$ 1.40 515,000 7 $ 1.40
</TABLE>
At December 31, 1999, 530,000 of the options outstanding are exercisable.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for the stock options. Had compensation cost been determined
based on the fair value at the grant dates for awards consistent with the
method described in SFAS No. 123, the Company's net loss and net loss per
share for the years ended December 31, 1999 and 1998 would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net loss - as reported $(1,550,838) $ (2,317,394)
=========== =============
Net loss - pro forma $(1,590,354) $ (2,391,265)
=========== =============
Net loss per share - as reported $ (0.43) $ (0.66)
=========== =============
Net loss per share - pro forma $ (0.44) $ (0.68)
=========== =============
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted average
assumptions were used for options granted in 1997: no dividend yield,
expected lives of six years, and risk free interest rate of 6.25%.
Volatility was not considered since the Company's common stock has been
publicly traded for only a short period of
- 16 -
<PAGE> 52
time, during which time trading volumes were minimal. The estimated fair
value of options granted during 1997 was $0.43 per share.
8. STOCK PURCHASE WARRANTS
As part of the Credit Agreement (see Note 4), the Company issued 400,000
warrants to the Lender, including 200,000 warrants issued when the Credit
Agreement was amended and restated on August 1, 1998. These warrants are
exercisable at any time at $2 per share and expire on June 30, 2003.
Management determined that these warrants had no fair value at the date of
issuance.
In March 1996, Pangloss International, S.A. ("Pangloss") acquired 87,500
shares of the Company's common stock for $1.20 per share, and concurrently
was granted warrants to purchase 125,000 shares at $1.60 per share.
Pangloss was granted additional warrants in July 1996 to purchase 100,000
shares of the Company's common stock at $1.20 per share. These warrants
were issued in connection with a $105,000 loan from Pangloss that was
repaid in December 1996. All of the warrants issued to Pangloss are
exercisable at any time prior to April 15, 2001.
9. STOCKHOLDERS' EQUITY
During 1997, the Company issued 33,000 shares of its common stock in
connection with a $300,000 borrowing. The shares were valued at $2 per
share, which was the estimated fair value at the date of issuance and
$66,000 was expensed as a loan fee. During 1998, the Company borrowed an
additional $300,000 from the same lender and issued an additional 33,000
shares of its common stock. The shares were valued at $1.50 per share,
which was the estimated fair value at the date of issuance, and $49,500 was
expensed as a loan fee.
10. EMPLOYEE BENEFIT PLAN
Effective January 1, 1999, the Company established a retirement plan, the
Pan Western Corporation Retirement Plan (the "401(k) Plan"), which
incorporates the provisions of Section 401(k) of the Internal Revenue Code.
The 401(k) Plan covers substantially all employees who meet certain
eligibility requirements as to age and length of service. The Company has
elected to match 100 percent of all of the employees' contributions up to
8%. Contributions to the plan during the year ended December 31, 1999 were
approximately $19,500.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation primarily relating to claims by
unsecured creditors and foreclosure action filed by the first mortgage
holder on the Company's office building. Management believes that the
proceeds the Company will receive from the pending sale of its office
building will be adequate to pay off the outstanding mortgages on that
facility. Further, management believes that the suits filed by unsecured
creditors will be settled for amounts which, when aggregated with payments
made to remaining unsecured creditors, will not exceed the $590,000 advance
available under the Triassic credit facility. See Note 1 - Business
Developments for a further discussion of these matters.
The Company has executed employment agreements with certain executive
officers, which expire on the latter of specified dates in the year 2000 or
the date to which the agreement has been extended; or, in the case of the
Company's president, as long as the president guarantees the Company's
debt. Under the terms of these agreements, the executives will receive
annual salaries aggregating $202,000. In addition, the Company's president
will receive incentive compensation equal to 10% of the Company's annual
pre-tax income in excess of $150,000. The other executive officers will
share in a bonus pool
- 17 -
<PAGE> 53
equal to 10% of the Company's net income in excess of $100,000. In the
event of the executives' termination without cause, as defined in the
agreements, the Company must pay them these amounts for the remaining term
of the agreements.
12. SIGNIFICANT CUSTOMERS
There were five purchasers in 1999, which represented approximately 40%,
17%, 10%, 10% and 9% of the Company's total revenues. There were five
purchasers in 1998, which represented approximately 16%, 16%, 14%, 13% and
11% of the Company's total revenues.
13. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following information summarizes the Company's net proved reserves of
oil and gas and the present values thereof for the years ended December 31,
1999 and 1998. The information presented is based upon estimates prepared
by Sycamore Resources, LLC in 1999 and Williamson Petroleum Consultants,
Inc. in 1998, who were engaged to perform evaluations of the present value
of estimated future net cash flows before income tax (discounted at 10%).
The information was prepared in accordance with Statement of Financial
Accounting Standards No. 69.
Prices of crude oil, condensate, and gas were those prices in effect at
December 31, 1999 and 1998. Estimated future production costs, which
include lease operating costs and severance taxes (estimated assuming that
existing economic conditions will continue over the lives of the individual
leases, with no adjustment for inflation), have been deducted in arriving
at the estimated future net revenues. The present value amounts should not
necessarily be equated with fair market value of the Company's oil and gas
reserves. All reserves are located in the United States.
The reliability of any reserve estimate is a function of the quality of
available information and of engineering interpretation and judgment. These
reserves should be accepted with the understanding that subsequent drilling
activities or additional information might require their revision.
The following schedules present certain data pertaining to the Company's
proved reserves at December 31, 1999 and 1998:
Estimated quantities of proved reserves:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
OIL GAS OIL GAS
Bbls Mcf Bbls Mcf
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year 634,605 21,145,550 1,349,623 6,251,797
Sales and transfers of minerals
in place -- -- -- --
Revisions of previous estimates 257,677 (3,950,927) (669,574) (1,569,194)
Purchases of minerals in place -- -- 696 16,837,930
Production (37,567) (575,019) (46,140) (374,983)
----------- ----------- ----------- -----------
End of year 854,715 16,619,604 634,605 21,145,550
=========== =========== =========== ===========
Proved developed reserves,
end of year 410,197 7,961,485 486,751 11,326,719
=========== =========== =========== ===========
</TABLE>
- 18 -
<PAGE> 54
Standardized measure of estimated discounted future net cash flows relating
to proved oil and gas reserves:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Future cash inflows $ 50,398,242 $ 33,399,287
Future development costs (3,035,260) (3,133,517)
Future production costs (8,904,547) (5,765,018)
------------ ------------
Future net cash flows, before income taxes 38,458,435 24,500,752
Future income taxes (12,535,864) (6,736,821)
------------ ------------
Future net cash flows, after income taxes 25,922,571 17,763,931
10% annual discount for estimated timing of cash flows (13,146,451) (9,437,359)
------------ ------------
Standardized measure of estimated discounted future
net cash flows $ 12,776,120 $ 8,326,572
============ ============
Estimated discounted future net cash flows before income taxes $ 18,954,508 $ 11,484,354
============ ============
</TABLE>
Changes in the standardized measure of estimated discounted future net cash
flows from proved oil and gas reserves:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Standardized measure, beginning of period $ 8,326,572 $ 5,688,782
Sales of production, net of production costs (987,337) (508,781)
Net changes in prices and production costs 8,986,085 (3,490,236)
Purchases and sales of minerals in place, net -- 8,551,430
Changes in estimated future development costs 98,257 (1,148,942)
Revisions of previous quantity estimates (1,993,196) (1,979,540)
Accretion of discount 1,148,435 857,477
Net changes in income taxes (3,020,605) (271,791)
Timing and other 217,910 628,173
------------ ------------
$ 12,776,121 $ 8,326,572
============ ============
</TABLE>
- 19 -
<PAGE> 55
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(1) (2)
<S> <C> <C> <C> <C>
1999
Revenues $ 231,427 $ 341,762 $ 440,468 $ 750,833
Operating loss (289,099) (196,070) (75,382) (9,890)
Net loss (477,414) (411,436) (298,662) (363,326)
Basic and diluted net loss per share (0.13) (0.11) (0.08) (0.11)
1998
Revenues $ 297,459 $ 193,462 $ 255,491 $ 485,083
Operating loss (83,444) (217,389) (279,789) (1,274,364)
Net loss (143,663) (280,139) (409,886) (1,483,706)
Basic and diluted net loss per share (0.04) (0.08) (0.11) (0.43)
</TABLE>
(1) Operating results for the fourth quarter of 1999 include
adjustments aggregating approximately $242,000 relating to an
adjustment to depreciation, depletion and amortization expense
based on the January 1, 2000 reserve report.
(2) Operating results for the fourth quarter of 1998 include
adjustments aggregating approximately $1,072,000 relating to an
impairment loss and an adjustment to increase depreciation,
depletion and amortization expense based on the January 1, 1999
reserve report.
******
- 20 -
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
