UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the fiscal year ended April 30, 2000
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-22661
VECTOR ENERGY CORPORATION
(Name of small business issuer in its charter)
Texas 76-0582614
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11757 Katy Freeway, Suite 950, Houston, Texas 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 589-2526
Securities registered pursuant to Section 12(b) of the Exchange Act:
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class Name of Each Exchange
On Which registered
Common Stock, no par value None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___.
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 the 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. __.
State issuer's revenues for its most recent fiscal year. $1,245,563
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days. $5,037,662 as of July 31, 2000.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 21,816,517 shares of common
stock, no par value, were outstanding as of July 31, 2000.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (Check one) Yes ___ No _X_ .
<PAGE>
PART I ...................................................................2
ITEM 1. BUSINESS .....................................................2
General ...............................................................2
Competitive Conditions ................................................4
Dependence upon one or a few major customers ..........................4
Governmental and Environmental Regulations ............................5
Employees and Consultants .............................................5
ITEM 2. PROPERTY .....................................................6
Properties Acquired ...................................................6
Other Assets ..........................................................7
Production Information ................................................8
Reserve Information ...................................................8
Oil and Gas Wells .....................................................9
Oil and gas leaseholds ...............................................10
Office Facilities ....................................................10
ITEM 3. LEGAL PROCEEDINGS ...........................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .........10
PART II .................................................................11
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ...11
General ..............................................................11
Liquidity and Capital Resources ......................................12
ITEM 7. FINANCIAL STATEMENTS ........................................13
Annual Financial Statements ..........................................13
Financial Statements of Businesses Acquired ..........................13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ....................................13
PART III ................................................................13
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ..13
ITEM 10. EXECUTIVE COMPENSATION ......................................15
Summary Compensation Table ...........................................15
Options Granted in 2000 ..............................................15
Options Exercised During 2000 and Year End Option Values (1) ............16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ..............................................17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..............18
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ............................18
This Form 10-KSB includes 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. All statements other than
statements of historical facts included in this Form 10-KSB, including
without limitation the statements under Business, Properties and Management's
Discussion and Analysis of Financial Condition and Results of Operations
regarding the nature of the Company's oil and gas reserves, productive wells,
acreage, and drilling activities, the adequacy of the Company's financial
resources, current and future industry conditions and the potential effects
of such matters on the Company's business strategy, results of operations and
financial position, are forward-looking statements. Although the Company
believes that the expectations reflected in the forward-looking statements
contained herein are reasonable, no assurance can be given that such
expectations will prove to have been correct. Certain important factors that
could cause actual results to differ materially from expectations (Cautionary
Statements), including without limitation fluctuations of the prices received
for the Company's oil and natural gas, uncertainty of drilling results and
reserve estimate, competition from other exploration, development and
production companies, operating hazards, abandonment costs, the effects of
governmental regulation and the leveraged nature of the Company, are stated
herein in conjunction with the forward-looking statements or are included
elsewhere in this Form 10-KSB. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements.
<PAGE>
PART I
Item 1. Business
General
Vector Energy Corporation (the Company) was incorporated under the laws of
the State of Texas on June 18, 1998 as a wholly owned subsidiary of Sunburst
Acquisitions II, Inc. (Sunburst). The Company was formed for the purpose of
completing a reverse merger with Sunburst in order to change Sunburst's name
to Vector Energy Corporation and its state of incorporation from Colorado to
Texas. This merger was completed on June 19, 1998
Sunburst was incorporated under the laws of the State of Colorado on
March 17, 1997 as a shell company. Sunburst's business plan was to seek,
investigate, and if warranted, acquire one or more properties or businesses,
and to pursue other related activities intended to enhance shareholder value.
Sunburst elected to voluntarily file a registration statement on Form 10-SB
in order to become a reporting company under the Securities Exchange Act of
1934 and continued to file periodic reports required under the Exchange Act.
On May 8, 1998, Sunburst entered into an asset acquisition transaction in
which it acquired substantially all of its operating assets. The transaction
consisted of an Asset Purchase Agreement executed by the Company and Old
Vector Corporation (formerly Vector Energy Corporation), a Texas corporation
(Old Vector) under which Old Vector transferred substantially all of its
assets to Sunburst, including its rights to two asset purchase agreements
with Lisbon Development Company, L.L.C., a Texas limited liability company
(Lisbon), and Taurus Operating, Inc., a Texas corporation (Taurus) dated
March 23, 1998 and March 31, 1998, respectively.
Other than the rights to the above mentioned asset purchase agreements with
Lisbon and Taurus, Old Vector's assets acquired by Sunburst consisted of
non-operated working interests and royalty interests in approximately 80
producing oil and gas wells located primarily in Oklahoma and Kansas.
Sunburst also acquired from Old Vector a wholly owned subsidiary of Old
Vector, Vector Exploration, Inc., a Texas Corporation (Vector Exploration),
which then became a wholly owned subsidiary of Sunburst. Old Vector assigned
its rights to the asset purchase agreement with Lisbon to Vector Exploration
prior to Sunburst's acquisition of Old Vector. In exchange for these assets
and the rights under the asset purchase agreements, Old Vector received
100,001 shares of Common Stock.
The Company, through its newly acquired wholly owned subsidiary Vector
Exploration, exercised the rights under the asset purchase agreement with
Lisbon by which Vector Exploration acquired 13 oil and gas wells located in
East Texas and North Louisiana. These assets are currently held in the
Company's wholly owned subsidiary Vector Exploration. In exchange for these
assets, Vector Exploration delivered to Lisbon 30,000 shares of the Company's
class AA 6% cumulative convertible preferred stock (Class AA Preferred Stock)
and assumed $6.1 million in secured debt and $511,465 in accounts payable,
net of accounts receivable and cash acquired. The secured debt assumed by
the Company is a credit facility secured by the production on the acquired
producing properties that allows the Company access to a line of credit of up
to $10 million with a national bank. These liabilities, just as the assets,
are held by the Company's wholly owned subsidiary Vector Exploration. The
Class AA Preferred Stock was convertible into Common Stock and voted at a
rate of 100 for each share of Class AA Preferred Stock. All Class AA
Preferred Stock has been converted into common stock.
2
<PAGE>
The Company also exercised its rights under the asset purchase agreement with
Taurus which were assigned directly to the Company, and acquired the East
Westbrook Properties located in Mitchell County, Texas. In exchange for this
asset, the Company issued to Taurus 213,123 shares of Common Stock.
In connection with the above transaction, the Company additionally issued
2,480,026 shares of Common Stock, a warrant to purchase an additional 300,000
shares of Common Stock at $.10 per share, and 500,000 shares of the Company's
class B preferred stock (Class B Preferred Stock) to subscribers in exchange
for an aggregate consideration of $773,002 in cash and services. The Class B
Preferred Stock is not convertible, but has 100 votes for every share of
Class B Preferred.
On November 4, 1998, the Company entered into an asset acquisition
transaction by which the Company acquired the right, title, and interest in
certain oil, gas, and mineral leases and working interests in approximately
fifteen producing oil and gas wells located in Oklahoma, Texas and Louisiana.
The transaction consisted of a purchase and sale agreement with Texas Energy
and Environmental, Inc. and Cougar Oil and Gas, Inc. (collectively the
Sellers).
Pursuant to the asset acquisition transaction, the Company issued 1,226,667
of its common stock to the Sellers, issued a $120,000 non-interest bearing
note payable to the Sellers, and assumed $690,522 of the Sellers' bank debt
and $750,000 of other liabilities of the Sellers. In addition the Sellers
were entitled to receive up to 500,000 additional shares of the Company's
common stock based on the value of the proved developed producing reserves
attributed to the properties acquired, as determined by an independent
engineering evaluation on September 30, 1999. The purchase and sale
agreement also required the Company to expend a minimum of $500,000 in
capital investment on the properties acquired, within nine months. If such
capital investment was not made, the Sellers were entitled to receive an
additional 500,000 shares of the Company's common stock. Five hundred
thousand shares of common stock were issued to the Sellers on August 23, 1999.
The Company does not believe any additional shares will be issued to the
Sellers under this agreement.
In conjunction with the asset acquisition transaction, the Company executed
an amended and restated credit agreement with its lender whereby its
borrowing base was increased by $800,000. On November 4, 1998, the Company
drew down the additional $800,000 and used the proceeds to repay the bank
debt and certain of the other liabilities assumed in the asset acquisition
transaction.
In addition, the Company borrowed $500,000 from a stockholder under a
six-month promissory note. Such note bears interest at 10% per annum and is
subordinate to the Company's credit agreement. The holder of the promissory
note received warrants to purchase 100,000 shares of the Company's common
stock at $.10 per share. Such warrants expire ten years from the date
granted. On May 17, 1999 the Company issued 100,000 shares of common stock
to the holder of the promissory note in order to exercise certain provisions
extending the term of the note. The note also provides that the Company will
use its best efforts to raise additional equity capital, and any capital so
raised shall be used to repay the promissory note.
On March 7, 2000, the Company closed a purchase and sale agreement with a
company, which is a debtor in possession in a Chapter 11 Bankruptcy. Under
the agreement, the Company acquired all of the Bankrupt Debtor's interest in
a block located in the Offshore Texas, Mustang Island Area for 550,000 shares
of common stock valued at $550,000. In accordance with the agreement, the
Company immediately repurchased 16,667 shares of common stock at $3.00 per
share, for a total of $50,000, for payment of administrative expenses in the
Bankruptcy proceeding. Under the terms of the agreement, in the event that
the daily rate of production from the properties
3
<PAGE>
acquired averages at least 5,000 Mcf per day over a complete calendar month
the seller has the right to put 150,000 shares of common stock to the Company
at $3.00 per share. If the seller fails to exercise such right, the Company
has the right to call 150,000 shares of common stock at $3.00 per share. In
addition, the Company may be required to issue a maximum of 370,000
additional shares of common stock to the seller based upon the required
future development costs associated with the properties acquired, as
determined by an independent engineering firm. In addition, the Company
purchased $120,000 in secured debt from three of the seller's secured
creditors for face value.
Vector Energy Corporation and its wholly owned subsidiary, Vector Exploration,
Inc., are primarily engaged in the exploration, production, acquisition and
development of oil and gas properties. These operations are conducted in the
United States.
Competitive Conditions
The exploration, development and production of oil and gas is subject to
intense competition. The principal methods of competition in the industry
for the acquisition of oil and gas leases and producing properties are the
payment of cash bonus payments at the time of acquisition of leases, delay
rentals, location damage supplement payments, and stipulations requiring
exploration and production commitments by the lessee. Producing properties
are frequently offered for sale through an open competitive bidding process.
Companies with greater financial resources, existing staff and labor forces,
equipment for exploration, and vast experience are in a better position than
the Company to compete for such leases and producing properties. In addition,
the ability of the Company to market any oil and gas which it might produce
could be severely limited by its inability to compete with larger companies
operating in the same area, which may be drilling or able to offer any oil
and gas produced at a price lower than that of the Company.
The availability of a ready market for oil and gas depends upon numerous
factors beyond the Company's control, including the extent of domestic
production and imports of oil and gas, proximity and capacity of pipelines,
and the effect of federal and state regulation of oil and gas sales, as well
as environmental restrictions on the exploration and usage of oil and gas
prospects which will become even more intense in the future. The Company has
a minimal competitive position in the oil and gas industry.
Raw materials requisite to the transaction of the Company's business include
such items as drilling rigs and other equipment, casing pipe, drilling mud
and other supplies. Such items are commonly available from a number of
sources and the Company foresees no shortage or difficulty in acquiring any
raw materials relevant to the conduct of its business.
Dependence upon one or a few major customers
The Company currently markets the oil and gas production from its operated
properties to fourteen customers, one of which represents sales in excess of
10% of the Company's total oil and gas revenues. This one customer
represents approximately 46% of the Company's total oil and gas revenues.
The availability of oil and gas purchasers is such, however, that any customer
discontinuing purchases from the Company could almost assuredly be replaced
by another buyer.
4
<PAGE>
Governmental and Environmental Regulations
Governmental Regulations
Domestic development, production and sale of oil and gas are extensively
regulated at both the federal and state levels. Legislation affecting the
oil and gas industry is under constant review for amendment or expansion,
frequently increasing the regulatory burden. Also, numerous departments and
agencies, both federal and state, have issued rules and regulations binding
on the oil and gas industry and its individual members, compliance with which
is often difficult and costly and some of which carry substantial penalties
for failure to comply. State statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning wells. Texas and
other states in which the Company conducts operations also have statutes and
regulations governing conservation matters, including the unitization or
pooling of oil and gas properties and establishment of maximum rates of
production from oil and gas wells.
Environmental Regulations
The Company's operations are subject to extensive and developing federal,
state and local laws and regulations relating to environmental, health and
safety matters; petroleum; chemical products and materials; and waste
management. Permits, registrations or other authorizations are required for
the operation of certain of the Company's facilities and for its oil and gas
exploration and production activities. These permits, registrations or
authorizations are subject to revocation, modification and renewal.
Governmental authorities have the power to enforce compliance with these
regulatory requirements, the provisions of required permits, registrations or
other authorizations, and lease conditions, and violators are subject to
civil and criminal penalties, including fines, injunctions or both. Failure
to obtain or maintain a required permit may also result in the imposition of
civil and criminal penalties. Third parties may have the right to sue to
enforce compliance.
Some risk of costs and liabilities related to environmental, health and
safety matters is inherent in the Company's operations, as it is with other
companies engaged in similar businesses, and there can be no assurance that
material costs or liabilities will not be incurred. In addition, it is
possible that future developments, such as stricter requirements of
environmental or health and safety laws and regulations affecting the
Company's business or more stringent interpretations of, or enforcement
policies with respect to, such laws and regulations, could adversely affect
the Company. To meet changing permitting and operational standards, the
Company may be required, over time, to make site or operational modifications
at the Company's facilities, some of which might be significant and could
involve substantial expenditures. There can be no assurance that material
costs or liabilities will not arise from these or additional environmental
matters that may be discovered or otherwise may arise from future
requirements of law.
Employees and Consultants
The Company has five full time employees including the officers of the
Company. The Company may hire additional personnel as required by its
operations and may also engage the services of geological and engineering
consultants from time to time to assist in its operations. The Company has
recently employed two engineering consultants on a part time basis and
contracts for field supervision with Taurus Operating, Inc. of Midland, Texas.
5
<PAGE>
Item 2. Property
Properties Acquired
Lisbon Properties
The Company acquired the Lisbon Properties on May 8, 1998, through its wholly
owned subsidiary Vector Exploration, Inc. The properties consist of oil and
gas working interests, ranging from approximately 50% to 100%, in eleven
wells and leases in eight fields located in Gregg and Harrison Counties,
Texas and Claiborne, Lincoln, Webster and Bossier Parishes, Louisiana. The
primary target zones consist of the Cotton Valley, Travis Peak, Petit, Gray
Sand, Haynesville, Burgess Simmons, Vaughn and Hall formations. The Company
currently operates nine of the eleven wells. Currently there are eleven
wells producing on the properties. The aggregate amount of daily production
equals approximately 300 Mcf per day (net) of natural gas and 9 barrels per
day (net) of oil and condensate. The Company believes that these fields in
East Texas and North Louisiana provide an opportunity for continued growth
and have significant remaining undeveloped reserve potential.
East Westbrook Properties
The East Westbrook Properties consist of approximately a 98% working interest
in 980 acres in Mitchell County, Texas that were formerly part of the East
Westbrook Unit. The East Westbrook Unit encompasses approximately 1,200
acres and is part of the Westbrook Field which encompasses over 18,000 acres
and has produced in excess of 99.1 million barrels of oil since its discovery
in 1920. The East Westbrook Unit is located on the northeast corner of the
Midland Basin Platform and on the west flank of the Eastern Shelf. The East
Westbrook Unit is bordered on the west, south, and north by waterflood
projects. All of these waterfloods have been infill drilled and have
produced large volumes of oil. Twenty wells have been completed on the
properties, five of which have recent production. The Company operates all
of the wells on this property. Historically the East Westbrook Unit has been
poorly managed and was placed in the hands of a promoter who went into
bankruptcy. The wells were not properly maintained, no water was injected
and the facility was allowed to deteriorate. Taurus acquired the property
and spent nearly $1 million putting the wells back on line, cleaning out the
wells, and replacing worn equipment. In addition, the Company performed
workovers on two of the wells. In order to complete the work that needs to be
done to bring the property up to full production, Vector estimates that an
additional $8.1 million needs to be spent.
Old Vector Properties
The Company acquired the Old Vector Properties on May 8, 1998. The
properties consist of non-operated working and royalty interests in
approximately eighty wells and units located primarily in Oklahoma and
Kansas. The most significant property holdings are focused in the south
central, central, and northwestern regions of Oklahoma within well
established producing oil and gas fields, and in a waterflood project located
in Kingman County, Kansas. Because of the Company's small interest in any
particular well or unit, the Company has little or no influence over the
operation of the properties or their further development.
6
<PAGE>
Texas Energy & Environmental, Inc. Properties
The Company acquired the Texas Energy & Environmental, Inc. properties on
November 4, 1998. These properties consist of fourteen wells located in
Oklahoma, Texas and Louisiana. All wells are Company operated. These wells
currently produce approximately 850 Mcf per day (net) and 6 barrels of oil
per day (net). The Company's working interest in these wells varies from
approximately 50% to 100%.
Mustang Island Block
On March 7, 2000, the Company closed a purchase and sale agreement with a
company which is a debtor in possession in Chapter 11 Bankruptcy. Under the
agreement, the Company acquired all of the Bankrupt Debtor's interest in a
Block located in the Offshore Texas, Mustang Island Area. The Company
currently estimates that this property contains in excess of 15 Bcf of net
proved reserves.
New Properties
The Company continues to pursue the evaluation of a number of oil and gas
properties. During their respective careers, management has made numerous
contacts in the oil and gas industry and has accumulated knowledge concerning
location, current ownership, and other information with respect to
properties. Based on this experience and knowledge, management believes that
the Company will be able to continue to acquire properties. However,
additional financing will be required to pursue particular properties.
Other Assets
The Company became involved in the development of a consumer to business
internet business known as EZServ in August of 1999 through a consulting
arrangement with IT Development. The technology is now largely complete, and
experimental marketing has been conducted in Houston, Texas. The Company has
the right to have all of the assets of the business placed in a new company,
of which the Company will own one-third. The Company is seeking independent
venture capital for this business and does not anticipate providing any
funding.
In April of 2000, the Company executed a contract with a Turkish company to
assist in the development of a natural gas distribution system in Ezurum,
Turkey. The Company also has the option to provide a fiber optic system in
the same city. The Company is currently seeking strategic partners for this
project and anticipates that this project will funded independently.
7
<PAGE>
Production Information
The table below sets forth the net quantities of oil and gas production (net
of all royalties, overriding royalties, and production due to others), the
average sales prices, and the average production costs attributable to the
Company's properties for the years ended April 30, 2000 and 1999.
<TABLE>
<CAPTION>
Year Ended Year Ended
April 30, 2000 April 30, 1999
<S> <C> <C>
Net Production
Oil (BBLS) 8,860 16,341
Gas (MCF) 391,006 415,296
Average Sales Prices
Oil (per BBL) $ 21.60 $ 11.69
Gas (per MCF) $ 2.57 $ 1.81
Average Production Cost (1)
Per Equivalent MCF of Gas (2) $ 1.68 $ 1.65
</TABLE>
[FN]
<F1>
(1) Production costs include lease operating expenses, severance taxes,
transportation, treatment, marketing, and other direct expenses
<F2>
(2) Oil production is converted to MCF using its estimated energy
equivalent of six MCF per BBL
</FN>
Reserve Information
Oil and gas reserve information for the properties owned by the Company have
been prepared internally by the Company.
RESERVE CALCULATIONS BY PETROLEUM ENGINEERS INVOLVE THE ESTIMATION OF
FUTURE NET RECOVERABLE RESERVES OF OIL AND GAS AND THE TIMING AND AMOUNT OF
FUTURE NET REVENUES TO BE RECEIVED THEREFROM. THOSE ESTIMATES ARE BASED ON
NUMEROUS FACTORS, MANY OF WHICH ARE VARIABLE AND UNCERTAIN. RESERVE
ESTIMATORS ARE REQUIRED TO MAKE NUMEROUS JUDGEMENTS BASED UPON PROFESSIONAL
TRAINING, EXPERIENCE, AND EDUCATIONAL BACKGROUND. THE EXTENT AND SIGNIFICANCE
OF THE JUDGEMENTS IN THEMSELVES ARE SUFFICIENT TO RENDER RESERVE ESTIMATES
INHERENTLY IMPRECISE. SINCE RESERVE DETERMINATIONS INVOLVE ESTIMATES OF
FUTURE EVENTS, ACTUAL PRODUCTION, REVENUES AND OPERATING EXPENSES MAY NOT
OCCUR AS ESTIMATED. ACCORDINGLY, IT IS COMMON FOR THE ACTUAL PRODUCTION AND
REVENUES LATER RECEIVED TO VARY FROM EARLIER ESTIMATES. ESTIMATES MADE IN THE
FIRST FEW YEARS OF PRODUCTION FROM A PROPERTY ARE GENERALLY NOT AS RELIABLE AS
LATER ESTIMATES BASED ON LONGER PRODUCTION HISTORY. RESERVE ESTIMATES BASED
UPON VOLUMETRIC ANALYSIS ARE INHERENTLY LESS RELIABLE THAN THOSE BASED ON
LENGTHY PRODUCTION HISTORY. ALSO, POTENTIALLY PRODUCTIVE GAS WELLS MAY NOT
GENERATE REVENUE IMMEDIATELY DUE TO LACK OF PIPELINE CONNECTIONS AND
POTENTIAL DEVELOPMENT WELLS MAY HAVE TO BE ABANDONED DUE TO UNSUCCESSFUL
COMPLETION TECHNIQUES. HENCE, RESERVE ESTIMATES MAY VARY FROM YEAR TO YEAR.
Within the next twenty-four months it is the Company's intention to have all
then existing reserves reviewed by outside independent third party engineers.
It is likely that such a review will result in substantially different
reserve estimates than would result from an internal review. Such estimates
may be substantially lower than those made by the Company's engineering staff
and could result in material write downs in reserve values.
8
<PAGE>
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, natural gas, and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions.
Proved developed oil and gas reserves are those reserves expected to be
recovered through existing wells with existing equipment and operating
methods.
The tables below set forth the estimated proved and proved developed reserves
of crude oil (including condensate) and natural gas, all of which are located
within the continental United States, associated with the properties owned by
the Company for the years ended April 30, 2000 and 1999.
<TABLE>
<CAPTION>
Proved Reserves at Year End
Developed Undeveloped Total
<S> <C> <C> <C>
Oil (BBLs) (in thousands)
April 30, 2000 381 3,476 3,857
April 30, 1999 173 3,390 3,563
Gas (MCF) (in thousands)
April 30, 2000 24,378 7,398 31,776
April 30, 1999 13,211 487 13,698
</TABLE>
<TABLE>
<CAPTION>
Changes in Proved Reserves
MCF BBLS
(In Thousands)
<S> <C> <C>
Estimated Quantity, May 1, 1998 - -
Acquisitions 24,542 603
Production (415) (16)
Changes in Estimates (10,429) 2,976
-------- -------
Estimated Quantity, April 30, 1999 13,698 3,563
Acquisitions 23,823 344
Sales of Reserves in Place (2,331) (24)
Production (391) (9)
Changes in Estimates (3,023) (17)
-------- -------
Estimated Quantity, April 30, 2000 31,776 3,857
======== =======
</TABLE>
Oil and Gas Wells
The Company owns interests in productive oil and gas wells (including
producing wells and wells capable of production), as follows:
<TABLE>
<CAPTION>
April 30, 2000 April 30, 1999
-------------- --------------
Gross(1) Net Gross(1) Net
Wells Wells Wells Wells
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Oil Wells 72 4.28 79 7.95
Gas Wells 49 10.56 49 10.59
-------- ----- -------- -----
Total 121 14.84 128 18.54
======== ===== ======== =====
</TABLE>
[FN]
<F1>
(1) One or more completions in the same well are counted as
one well
</FN>
9
<PAGE>
Oil and gas leaseholds
The table below sets forth the Company's ownership interest in leasehold
acreage. The oil and gas leases in which the Company has an interest are
generally held by production. The leases may be surrendered at any time by
the cessation of production.
<TABLE>
<CAPTION>
April 30, 2000 April 30, 1999
------------------------------ ------------------------------
Developed(1) Undeveloped Develope(1) Undeveloped
Acreage Acreage Acreage Acreage
------------- ------------- ------------- -------------
Gross Net Gross Net Gross Net Gross Net
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Louisiana 6,523 3,539 8,320 5,073 6,573 3,574 12,570 8,061
Texas 6,753 2,835 2,480 1,551 5,573 1,659 1,500 1,088
Kansas 4,037 52 0 0 4,037 52 0 0
Oklahoma 14,468 841 200 100 14,468 841 200 100
------ ----- ------ ----- ------ ----- ------ -----
Total 31,781 7,267 11,000 6,724 30,651 6,126 14,270 9,249
</TABLE>
[FN]
<F1>
(1) Acres spaced or assigned to productive wells
</FN>
Office Facilities
The Company's Houston, Texas office consists of approximately 7,500 square
feet and has been subleased through July of 2002 for $9,582 per month
Item 3. Legal Proceedings
The Company is involved from time to time in various claims, lawsuits and
administrative proceedings incidental to its business. In the opinion of
management, the ultimate liability thereunder, if any, will not have a
materially adverse effect on the financial condition or results of operations
of the Company. The Company currently has accounts payable in the amount of
$1,170,222. A significant portion of these accounts are now past due and are
subject to becoming matters for litigation at any time.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter.
10
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
On June 29, 1998, the Company began trading its common stock on the NASDAQ
OTC Electronic Bulletin Board under the symbol VECT. The following table
shows, for the period indicated, the high and low closing bid prices of the
Company common stock as reported by NASDAQ. Any market for the common stock
should be considered sporadic, illiquid and highly volatile. Prices reflect
inter-dealer quotations, without adjustment for retail markup, markdowns or
commissions, and may not represent actual transactions.
The stock's trading range since listing on NASDAQ is as follows:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1999 Fiscal Year
1st Quarter $ 1.88 $ 1.25
(Since commencement on
June 29, 1998)
2nd Quarter 1.75 0.75
3rd Quarter 3.00 0.88
4th Quarter 2.50 0.88
2000 Fiscal Year
1st Quarter $ 2.25 $ 0.75
2nd Quarter 4.44 1.22
3rd Quarter 1.28 0.31
4th Quarter 1.09 0.40
2001 Fiscal Year
1st Quarter $ 0.63 $ 0.26
</TABLE>
As of July 31, 2000, there were approximately 187 holders of record of the
Company's common stock. The Company has not paid any dividends on its common
stock and no dividends are anticipated in the foreseeable future. In
addition, the ability of the Company to declare or pay dividends on its
common stock is currently subject to certain restrictions contained in its
credit facility with a bank.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
General
On May 8, 1998, the Company entered into an asset acquisition transaction in
which it acquired its initial operating assets. Prior to this time the
Company had no employees or operations.
11
<PAGE>
In exchange for its initial operating assets, the Company issued 313,124
shares of common stock, 30,000 shares of the Company's class AA 6% cumulative
convertible preferred stock and assumed $6.1 million in secured debt and
$511,465 in accounts payable, net of accounts receivable and cash acquired.
The secured debt assumed by the Company is a credit facility secured by the
production on the acquired producing properties that allows the Company
access to a line of credit of up to $10 million with a national bank.
In connection with the above transaction, the Company additionally issued
2,480,026 shares of common stock, a warrant to purchase an additional 300,000
shares of common stock at $.10 per share, and 500,000 shares of the Company's
class B preferred stock to subscribers in exchange for an aggregate
consideration of $773,002 in cash and services.
On November 4, 1998, the Company entered into an additional asset acquisition
transaction in which the Company issued 1,226,667 shares of common stock and
a $120,000 non-interest bearing note and assumed $690,522 in bank debt and
$600,954 in accounts payable. Subsequently, the Company issued an additional
500,000 shares of common stock under this agreement. The Company does not
believe any further shares will be issued to the Sellers under this agreement.
On March 7, 2000, the Company closed a purchase and sale agreement under
which the Company issued 550,000 shares of common stock. In accordance with
the agreement, the Company immediately repurchased 16,667 shares of common
stock at $3.00 per share. In addition, the Company may be required to issue
a maximum of 370,000 additional shares of common stock to the seller.
Liquidity and Capital Resources
The secured debt assumed by the Company is a $10,000,000 revolving credit
note which terminates on March 15, 2001. Interest on the note is payable
monthly at a floating rate, which was 9.59% and 8.565% at April 30, 2000 and
1999, respectively. The borrowing base under the note is determined
periodically based upon the collateral value assigned to the mortgaged
properties, and is currently $6,829,596. Principal payments were scheduled
at $10,000 per month and increasing to $75,000 per month beginning on
February 15, 1999 and $125,000 per month beginning May 15, 1999. In
addition, the note placed certain restrictions on the use of the revenues
from the mortgaged properties, required the Company to satisfy the net
accounts payable assumed by May 31, 1999 and required the expenditure of
$300,000 on the development of the mortgaged properties by April 14, 1999.
The Company does not anticipate that the borrowing base under the note can be
increased without incurring development costs which are significantly greater
than those required under the terms of the note.
On February 23, 1999, the Company entered into an agreement with its lender
to amend the revolving credit note. Such amendment modified the principal
payments under the note to $75,000 per month beginning April 15, 1999 and
increasing to $125,000 on May 15, 1999. In addition, the amendment deferred
a portion of the interest payment due in February for a period of one month.
In addition, certain of the deadlines relating to the settlement of
liabilities assumed and expenditures for the development of the mortgaged
properties were extended or modified. The Company is currently negotiating a
restructure of this agreement with its lender. It is anticipated that such
restructure will involve the reduction of the debt by $3 million in exchange
for stock and a new amortization schedule and maturity date. The exact terms
of this restructure have not yet been finalized.
12
<PAGE>
Currently, the Company's oil and gas revenues are sufficient to satisfy its
oil and gas operating expenses and a portion of the interest payments. The
Company's general and administrative expenses, development costs and the
remainder of the interest payments are being funded primarily from the
proceeds from the sale of stock. The Company believes that the planned
development of its properties will result in an increase in oil and gas
revenues which will be sufficient to its meet operating, general and
administrative, interest and debt service requirements. However, there can
be no assurance that this will occur. It is anticipated that an additional
$2,000,000 in equity funding will be required to meet the current needs of
the Company. Any inability of the Company to raise additional capital will
limit the development of most of its oil and gas properties and may prevent
the Company from meeting its cash requirements.
Item 7. Financial Statements
Annual Financial Statements
The Report of the Independent Certified Public Accountants appearing at page
F-3 and the Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing at pages F-4 through F-19 hereof are
incorporated herein by reference.
Financial Statements of Businesses Acquired
The financial statements appearing under Item 7 set forth in the Company's
Form 8-K/A, filed on July 27, 1998, are incorporated herein by reference.
The financial statements appearing under Item 7 set forth in the Company's
Form 8-K/A, filed on January 29, 1999, are incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act
The Directors and Executive Officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position Tenure
----------------------- --- ----------------------- -----------
<S> <C> <C> <C>
Samuel M. Skipper 41 Director May 8, 1998
Chairman of the Board
Chief Executive Officer
Stephen F. Noser 54 Director May 8, 1998
President
Secretary
Assistant Treasurer
Randal B. McDonald, Jr. 43 Chief Financial Officer May 8, 1998
Treasurer
Assistant Secretary
</TABLE>
13
<PAGE>
All Directors of the Company will hold office until the next annual meeting
of shareholders. The Executive Officers of the Company, who are appointed by
the Board of Directors, hold office until their successors are chosen and
qualified, or until their death, resignation or removal. The Company
presently has no audit, nominating or executive committee or committees
performing substantially similar functions. There are no family relationships
among the Directors and Officers of the Company. The Company currently has
no employment agreement with any of the Officers or Directors.
Sam Skipper, CEO/Chairman. Since 1990, Mr. Skipper has assisted in the
consolidation of private and public companies and the entry of such companies
into the public markets. From 1996 until the present, Mr. Skipper has been
Managing Director of Metropolitan Capital, a boutique investment banking firm
specializing in the marketing and financing of small public companies. From
1995 to 1996, Mr. Skipper served as CEO/President of Basic Natural Resources,
an oil and gas company which later merged into Synaptix. In 1992, he was the
founder, CEO, President and Chairman of ImageTrust, Inc., a public company
which was in the diagnostic health care business. In 1990, he served as
Founder and Vice President of Corporate Development of Diagnostic Health
Corporation (DHC) where he assisted the company in the identification and
closing of several acquisitions until DHC's acquisition by HealthSouth
Corporation in 1994.
Stephen Noser, President. Mr. Noser has been President or Managing Director
of Vector Energy since 1991. Prior to that time, he served in various
management and legal capacities within the oil and gas industry. He was
Vice President and General Counsel of MCO Resources, Inc. ($60 million in
assets and listed on the American Stock Exchange) from 1987 to 1988. He was
Associate General Counsel and then General Counsel of Inexco Oil Company
($500 million in assets and listed on the New York Stock Exchange) from 1983
to 1986. He also served on Inexco's Board of Directors and as a member of
the company's operating committee. Both at Inexco and MCO, Mr. Noser had
primary responsibility for all SEC reporting requirements and preparation of
all registration statements. From 1977 to 1983, he served in various legal
capacities within the American Natural Resources System. From 1974 to 1977,
he served as an attorney for Mitchell Energy & Development Corp. Mr. Noser
holds a B.A. from the University of St. Thomas and a J.D. degree from the
University of Houston. He is a member of the Texas and Houston Bar
Associations.
Randal McDonald, Chief Financial Officer. Mr. McDonald has nineteen years
experience in the field of public accounting. Since 1993, he has provided
general financial consulting and litigation support services to a variety of
companies. Such services have included preparation and review of public and
private offering documents, preparation of pro forma financial statements
utilized in raising capital, and services as interim chief financial officer.
From 1979 to 1985, he was with KPMG Peat Marwick's Houston office,
specializing in public oil and gas companies. During 1986, he served a one
year rotational assignment in KPMG Peat Marwick's world headquarters
developing their audit software. During 1987, he served as Chief Financial
Officer for IBS Technologies, Ltd., a publicly traded computer software
company. From 1988 to 1992, he was with Arthur Andersen's Denver office,
specializing in public oil and gas companies. Mr. McDonald holds a B.B.A. in
accounting from the University of Texas at Austin and is a licensed CPA in
Texas and Colorado.
In Addition, the Company employs Mr. Gary Countryman as a full time
consultant. Mr. Countryman served as a vice-president of the Company from
its inception until December, 1999. Mr. Countryman has been a consulting
petroleum engineer since 1987. Since 1996, he has devoted substantial time
to the activities of Vector Energy. Prior to 1987, Mr. Countryman served in a
variety of capacities for Conoco, Inc. From 1984 to 1986, he was the
Managing Director in charge of Conoco's operations in Egypt where he managed
a $200 million annual budget and set the organization in place to develop one
billion barrels of reserves. From 1980 to 1984, he was Manager of
14
<PAGE>
Operations. From 1978 to 1980, he served as Manager of Conoco's operations
in Dubai. From 1975 to 1977, he served as Division Manager in
Midland, Texas. From 1971 to 1976, he served as assistant division manager
in Oklahoma City. From 1961 to 1976, he served in Conoco's research and
development department with special emphasis on water flood operations.
Mr. Countryman holds an M.S. in Management from the Massachusetts Institute
of Technology, and an M.S. and B.S. in Petroleum Engineering from the
University of California at Berkeley. He is a member of Phi Beta Kappa,
the American Petroleum Institute and the society of Petroleum Engineers.
The Company's three officers and directors failed to file Form 5, Annual
Statement of Beneficial Ownership of Securities, on a timely basis with the
Securities and Exchange Commission. Such forms were due on or before the
45th day after the end of the Company's fiscal year and were filed
concurrently with the Company's Form 10KSB. Transactions which were
required to be reported included options to purchase shares of the Company's
common stock granted to each of the officers and directors and one
acquisition of common stock by a single officer.
Item 10. Executive Compensation
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation Awards
-------------------------------
Annual Compensation(1) Restricted
Name and Year --------------------------- Stock (2) All
Principal Position End Salary($) Bonus($) Other($) Awards($) Options(#) Other($)
----------------------- ---- --------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Samuel M. Skipper 2000 72,000 - - - 500,000 -
Chief Executive Officer 1999 72,000 - - - - -
Stephen F. Noser 2000 72,000 - - - 500,000 -
President 1999 72,000 - - - 250,000 -
Randal B. McDonald, Jr. 2000 72,000 - - - 200,000 -
Chief Financial Officer 1999 72,000 - - - - -
</TABLE>
[FN]
<F1>
(1) Includes deferred compensation of $66,000 in 2000 payable to Mr. Skipper
<F2>
(2) Includes 150,000 shares of common stock issued to Mr. McDonald
</FN>
Options Granted in 2000
Mr. Skipper and Mr. Noser were each granted options to purchase 500,000
shares of common stock during the year ended April 30, 2000. Mr. McDonald
was granted options to purchase 50,000 shares of common stock during the year
ended April 30, 2000.
15
<PAGE>
Options Exercised During 2000 and Year End Option Values (1)
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
At Fiscal Year End (#) At Fiscal Year End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
------------------ ------------------------------ ----------------------
<S> <C> <C>
Samuel M. Skipper 500,000 50,000
- -
Stephen F. Noser 750,000 50,000
- -
Randal B. McDonald, Jr. 50,000 5,000
- -
</TABLE>
[FN]
<F1>
(1) Since no options were exercised, no shares were acquired or value
realized upon the exercise of options
</FN>
At the present time, the Company has no retirement, pension or profit sharing
programs for the benefit of its Directors or employees. However, at its
discretion, the Company may adopt one or more of such programs in the future.
Pursuant to its bylaws and the Texas Business Corporation Act, the Company
shall indemnify each Director and Officer against expenses, judgements,
fines, and amounts paid in settlement actually and reasonably incurred by him
in connection with any action, suit or proceeding which he may be made a
party by reason of his being or having been made a Director or Officer of the
Company, unless he failed to meet certain standards of conduct.
16
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of outstanding shares as of July 31, 2000 by each person who is
known by the Company to own beneficially five percent or more of the
outstanding shares, the Company's Directors and Executive Officers,
and all Directors and Executive Officers as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature % of
of Beneficial Owner Title of Class Position or Title Of Beneficial Ownership Class
------------------- ----------------------- --------------------- ----------------------- -------
<S> <C> <C> <C> <C>
Samual M. Skipper Common Stock Director (1) 2,130,017 9.5%
11757 Katy Freeway Chairman of the Board
Suite 950, Houston, Class B Preferred Stock CEO 250,000 50.0%
Texas, 77079
Stephen F. Noser Common Stock Director (2)(3) 1,100,003 4.9%
11757 Katy Freeway President
Suite 950, Houston, Class B Preferred Stock Secretary 250,000 50.0%
Texas, 77079 Assistant Treasurer
Randal B. McDonald Common Stock CFO (4) 200,000 0.2%
11757 Katy Freeway Treasurer
Suite 950, Houston, Assistant Secretary
Texas, 77079
Charles Plumb Common Stock N/A (5) 1,279,667 5.9%
PO Box 691187
Houston, Texas
77269
Lisbon Development Common Stock N/A 1,337,280 6.1%
Company, L.L.C.
1330 Post Oak Blvd.
Suite 2222, Houston,
Texas, 77056
Fortune Capital Common Stock N/A 1,337,281 6.1%
Investment, Ltd.
1330 Post Oak Blvd.
Suite 2222,
Houston,Texas,
77056
Lasco Energy Common Stock N/A 1,137,904 5.2%
Partners, LP
1100 Louisiana
Suite 3150
Houston, Texas
77002
All Officers Common Stock N/A (2)(6) 3,430,020 14.8%
And Directors Class B Preferred Stock 500,000 100.0%
</TABLE>
[FN]
<F1>
(1) Includes 500,000 shares of common stock issuable upon the exercise of
stock options
<F2>
(2) Includes 50,000 shares of common stock indirectly owned by Mr. Noser because
of his 50% ownership in Old Vector Corporation, which owns 100,000 shares
of common stock.
<F3>
(3) Includes 750,000 shares of common stock issuable upon the exercise of
stock options.
<F4>
(4) Includes 50,000 shares of common stock issuable upon the exercise of stock
options.
<F5>
(5) Includes 373,667 shares of common stock indirectly owned by Mr. Plumb
because of his control of Texas Energy and Environmental, Inc.
<F6>
(6) Includes 1,350,000 shares of common stock issuable upon the exercise of
stock options.
</FN>
17
<PAGE>
Item 12. Certain Relationships and Related Transactions
The Company sublet office space from a corporation owned and controlled by the
president of the Company and his family for $2,283 per month. Subsequent to
year end, such lease terminated and the Company vacated the office space.
The Company is obligated under a 10% promissory note payable to the brother of
the Company's president. The note matured November 4, 1999 and is unsecured,
except that the holder has received up 300,000 shares of the Company's common
stock due to nonpayment. The balance of principal and accrued interest at
April 30, 2000 was $500,000 and $74,521, respectively and at April 30, 1999
was $500,000 and $24,384, respectively.
The Company's chairman and chief executive officer has executed a limited
quaranty agreement covering certain deferred interest on the Company's secured
line of credit.
The Company's chairman and chief executive officer made unsecured advances to
the Company totaling $145,992 during the year ended April 30, 2000.
Item 13. Exhibits and Reports on Form 8-K
Exhibits not incorporated herein by reference to a prior filing are designated
by an asterisk (*) and are filed herewith.
Exhibit 2.01 Asset Purchase Agreement between Registrant and
Vector
Exhibit 2.02 Lisbon Agreement
Exhibit 2.03 Taurus Agreement
Exhibit 2.04 Agreement and Plan of Merger Between Sunburst
Acquisitions II, Inc. and Vector Energy Corporation
Exhibit 3.01 Articles of Incorporation of Vector Energy Corporation
Exhibit 3.02 By-Laws of Vector Energy Corporation
Exhibit 4.01 Certificate of Designation, Preferences, Rights and
Limitations of Class AA 6% Cumulative Convertible Preferred
Stock and Class B Preferred Stock of Vector Energy Corporation
Exhibit 4.02 Certificate of Designation, Preferences, Rights and
Limitations of Class C 5% Cumulative Convertible Preferred
Stock of Vector Energy Corporation
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Comiskey & Company *
Exhibit 27 Financial Data Schedule *
No reports were filed on Form 8-K during the Company's fourth fiscal quarter
ended April 30, 2000.
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VECTOR ENERGY CORPORATION
(Registrant)
By /S/ Samuel M. Skipper
--------------------------------
Samuel M. Skipper
Chairman of the Board and
Chief Executive Officer
Date: August 14, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By /S/ Stephen F. Noser
--------------------------------
Stephen F. Noser
President and Director
Date: August 14, 2000
By /S/ Randal B. McDonald, Jr.
---------------------------------
Randal B. McDonald, Jr
Chief Financial Officer
Principal Accounting and
Financial Officer
Date: August 14, 2000
19
<PAGE>
Vector Energy Corporation
FINANCIAL STATEMENTS
April 30, 2000
F-1
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.....................F-3
CONSOLIDATED BALANCE SHEETS.....................................F-4 to F-5
CONSOLIDATED STATEMENTS OF INCOME......................................F-6
CONSOLIDATED STATEMENTS OF CASH FLOW...................................F-7
STATEMENTS OF STOCKHOLDERS' EQUITY.............................F-8 to F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.....................F-11 to F-19
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Vector Energy Corporation
We have audited the accompanying consolidated balance sheetS of Vector Energy
Corporation as of April 30, 2000 and 1999, and the related consolidated
statements of income, cash flows and changes in shareholders' equity 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vector Energy
Corporation, Inc. as of April 30, 2000 and 1999, and the consolidated results
of its operations, its cash flows and changes in its shareholders' equity for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in Note 11, the
Company has incurred substantial losses leading to a significant working
capital deficit. These and other conditions have created substantial doubt
about the Company's ability to continue as a going concern. Management's
assessment of these conditions and its plans to alleviate them are also
described in Note 11. The accompanying financial statements do not include
any adjustments which might be necessary if the Company is unable to continue.
Denver, Colorado
June 30, 2000
/s/ Comiskey & Company
PROFESSIONAL CORPORATION
F-3
<PAGE>
Vector Energy Corporation
CONSOLIDATED BALANCE SHEETS
April 30, 2000 and 1999
<TABLE>
<S> <C> <C>
April 30, 2000 April 30, 1999
-------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 106,018 $ 25,665
Revenue accounts receivable 299,666 225,365
JIB accounts receivable 94,565 41,628
Advances to employees - 51,908
-------------- --------------
Total current assets 500,249 344,566
-------------- --------------
PROVED OIL AND GAS PROPERTIES, USING THE
FULL COST METHOD OF ACCOUNTING 16,093,311 14,696,056
Less accumulated depreciation, depletion,
amortization and impairment 446,562 237,908
-------------- --------------
Net oil and gas properties 15,636,749 14,458,148
-------------- --------------
OTHER ASSETS
Other property and equipment, less accumulated
depreciation of $27,024 and $12,255 at
April 30, 2000 and 1999, respectively 51,521 51,386
Long term accounts receivable 197,235 77,236
Deferred loan costs - net 298,084 243,479
Organization costs - net - 9,588
Other assets 6,926 16,709
-------------- --------------
Total other assets 553,766 398,398
-------------- --------------
TOTAL ASSETS $ 16,690,764 $ 15,201,112
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
Vector Energy Corporation
CONSOLIDATED BALANCE SHEETS
April 30, 2000 and 1999
<TABLE>
<S> <C> <C>
April 30, 2000 April 30, 1999
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of Credit $ 6,729,596 $ 6,880,000
Notes payable 674,813 596,988
Accounts payable - trade 1,170,222 1,570,125
Royalties payable 239,218 242,069
Working interest revenues payable 143,745 51,092
Taxes payable 102,994 81,241
Advances from related party 145,992 -
Accrued payroll 79,279 17,995
Accrued dividends payables 5,468 184,688
Accrued interest 107,320 101,956
-------------- --------------
Total current liabilities 9,398,647 9,726,154
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock class AA, 6% cumulative
convertible;$100 par value per share, 30,000
shares authorized; 0 and 30,000 shares issued
and outstanding at April 30, 2000 and 1999,
respectively - 3,000,000
Preferred stock class B, noncumulative
nonconvertible; $1 par value per share,
500,000 shares authorized; 500,000 shares
issued and outstanding - 50,000
Preferred stock class C, 5% cumulative
convertible; $100 par value per share,
10,000 shares authorized; 0 and 1,250 shares
issued and outstanding at April 30, 2000 and
1999, respectively - 95,000
Common stock, no par value; 100,000,000
shares authorized; 19,244,757 and
5,709,863 shares issued and outstanding
at April 30, 2000 and 1999, respectively 2,358,716 2,128,680
Additional paid-in capital 16,041,810 2,791,670
Retained earnings (11,158,409) (2,590,392)
-------------- --------------
Total stockholders' equity 7,292,117 5,474,958
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,690,764 $ 15,201,112
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
Vector Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
Years Ended April 30, 2000 and 1999
<TABLE>
<S> <C> <C>
Year Ended Year Ended
April 30, 2000 April 30, 1999
-------------- --------------
REVENUES
Oil sales $ 191,013 $ 191,023
Gas sales 1,006,006 753,540
Production byproducts 47,213 24,391
Interest income 1,331 5,240
-------------- --------------
Total revenues 1,245,563 974,194
-------------- --------------
EXPENSES
Production taxes 36,186 44,623
Lease operating expense 711,490 803,200
Depletion of oil and gas properties 208,654 237,908
Interest expense 952,705 574,373
General and administrative expense 7,754,365 1,719,794
-------------- --------------
Total expenses 9,663,400 3,379,898
-------------- --------------
NET LOSS $ (8,417,837) $ (2,405,704)
============== ==============
NET LOSS PER COMMON SHARE
Basic $(0.84) $(0.54)
======= =======
WEIGHTED AVERAGE NUMBER SHARES OUTSTANDING 10,005,755 4,482,523
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
Vector Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 30, 2000 and 1999
<TABLE>
<S> <C> <C>
Year Ended Year Ended
April 30, 2000 April 30, 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,417,837) $ (2,405,704)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depletion of oil and gas properties 208,654 237,908
Amortization expense 443,858 133,836
Depreciation expense 14,769 12,255
Stock issued for consulting fees 6,643,251 733,125
Stock issued for loan default fee 237,500 -
(Increase)decrease in accounts receivable (225,873) 270,602
(Increase)decrease in employee advances 51,908 (51,908)
(Increase)decrease in other assets (85,223) (16,709)
Increase(decrease) in accounts payable (69,165) 392,431
Increase(decrease in royalties and
revenues payable 131,733 (109,925)
Increase(decrease) in other
current liabilities 106,401 201,192
-------------- --------------
Net cash used by operating activities (960,022) (602,897)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and gas properties - (693,002)
Cash acquired in property acquisitions - 258,938
Development costs incurred (146,779) -
Sale of oil and gas properties 493,645 -
Property and equipment, other (14,904) (63,641)
-------------- --------------
Net cash provided from (used by)
investing activities 331,962 (497,705)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of notes payable 149,587 500,000
Note repayments (71,762) (81,211)
Draw on line of credit 149,596 109,478
Payment on line of credit (300,000) -
Advances from related party 145,992 -
Issuance of preferred stock Class C - 95,000
Repurchase of common stock (50,000) -
Issuance of common stock 685,000 503,000
-------------- --------------
Net cash provided by financing activities 708,413 1,126,267
-------------- --------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 80,353 25,665
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 25,665 -
-------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 106,018 $ 25,665
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-7
<PAGE>
Vector Energy Corporation
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended April 30, 2000 and 1999
<TABLE>
Preferred Stock Common Stock
---------------------- --------------------- Total
Price Number Number Retained Paid Stockholders'
per share of shares Amount of shares Amount Earnings in capital Equity
--------- --------- ------------ ---------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock outstanding in the public
public shell, May 8, 1998 $ - 80,000 $ 8,000 609,116 $ 2,220 $ - $ - $ 10,220
Issued for services
preferred class B
on May 8, 1998 0.10 500,000 50,000 50,000
Private placement for cash
on May 8, 1998 2.01 250,003 503,000 503,000
Issued for services
on May 8, 1998 0.10 2,230,023 220,002 220,002
Issued for acquisition of
properties on May 8, 1998 3.00 313,124 939,372 939,372
Issued for acquisition of
properties, preferred
class AA on May 8, 1998 100.00 30,000 3,000,000 3,000,000
Issued to bank in acquisition
on May 8, 1998 3.00 100,001 300,000 300,000
Conversion of previous
preferred class A to
common on June 10, 1998 (80,000) (8,000) 48,010 8,000 -
Issued for acquisition of
properties on July 1, 1998 1.25 79,920 99,900 99,900
Private placement of class C
preferred on July 17, 1998 76.00 1,250 95,000 95,000
Issued for services
on July 17, 1998 1.75 10,000 17,500 17,500
Issued in settlement of
accounts payable from
various vendors
in July thru October 1998 2.96 12,657 18,115 19,331 37,446
Issued for acquisition of
properties on July 24, 1998 1.75 36,094 361 62,804 63,165
Issued for consulting services
On August 19, 1998 1.69 25,000 250 41,937 42,187
Issued for consulting services
on September 28, 1998 1.25 261,000 2,610 323,600 326,250
Issued for acquisition of
properties on Nov. 4, 1998 1.50 1,226,667 12,267 1,827,734 1,840,001
Issued in settlement of
accounts payable
on December 21, 1998 3.00 474 5 1,418 1,423
</TABLE>
The accompanying notes are an integral part of the financial statements
F-8
<PAGE>
Vector Energy Corporation
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended April 30, 2000 and 1999
<TABLE>
Preferred Stock Common Stock
---------------------- --------------------- Total
Price Number Number Retained Paid Stockholders'
per share of shares Amount of shares Amount Earnings in capital Equity
--------- --------- ------------ ---------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued for consulting services
on January 21, 1999 0.88 405,000 4,050 350,325 354,375
Issued in settlement of
accounts payable
in February, 1999 3.00 12,774 128 38,193 38,321
Issued for consulting services
in March, 1999 1.41 90,000 900 126,288 126,188
Net loss (2,405,704) (2,405,704)
Preferred stock dividends (184,688) (184,688)
--------- --------- ------------ ---------- ---------- ------------- ----------- --------------
Balances as of
April 30, 1999 531,250 $ 3,145,000 5,709,863 $2,128,680 $ (2,590,392) $ 2,791,670 $ 5,474,958
Issued as loan extension fee
in May, 1999 1.13 100,000 1,000 111,500 112,500
Issued in settlement of
accounts payable
in May, 1999 1.13 28,809 288 32,122 32,410
Issued to third party as loan
collateral fee in June, 1999 1.25 279,000 2,790 311,085 313,875
Issued in settlement of
Accounts payable
in June, 1999 1.13 2,000 20 2,230 2,250
Issued for consulting services
in July, 1999 1.88 280,000 2,800 522,200 525,000
Issued for deferred payroll
in July, 1999 1.23 55,020 550 67,280 67,830
Conversion of previous
Preferred Class C to
Common, in August, 1999 (625) (47,500) 15,625 47,500 - -
Issued for consulting services
in August, 1999 1.31 8,000 80 10,420 10,500
Contingent consideration for
Acquisition of properties
in August, 1999 2.38 500,000 5,000 1,182,500 1,187,500
Issued for consulting services
in September, 1999 1.54 2,294,000 22,940 3,430,665 3,453,605
Issued in settlement of
Accounts payable
in September, 1999 2.38 61,334 613 145,055 145,668
</TABLE>
The accompanying notes are an integral part of the financial statements
F-9
<PAGE>
Vector Energy Corporation
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended April 30, 2000 and 1999
<TABLE>
Preferred Stock Common Stock
---------------------- --------------------- Total
Price Number Number Retained Paid Stockholders'
per share of shares Amount of shares Amount Earnings in capital Equity
--------- --------- ------------ ---------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued to bank as loan
Amendment fee
In September, 1999 1.25 50,000 500 62,000 62,500
Issued for loan default fee
In November, 1999 1.19 200,000 2,000 235,500 237,500
Issued for consulting services
in November, 1999 0.72 228,000 2,280 161,458 163,738
Issued for consulting services
in December, 1999 0.42 156,904 1,569 63,924 65,493
Conversion of previous
Preferred Class C to
Common, in January, 2000 (625) (47,500) 15,625 47,500 - -
Issued for consulting services
in January, 2000 0.44 200,000 2,000 85,500 87,500
Issued for consulting services
in February, 2000 0.46 2,700,000 27,000 1,204,220 1,231,220
Conversion of previous
Preferred Class AA to
Common, in March, 2000 (30,000) (3,000,000) 3,000,000 30,000 2,970,000 -
Issued for accrued dividends
On preferred stock
In March, 2000 0.37 890,271 8,903 320,497 329,400
Issued for consulting services
in March, 2000 1.00 1,000,000 10,000 990,000 1,000,000
Issued for acquisition of
properties in March, 2000 1.00 550,000 5,500 554,500 550,000
Repurchase of common stock
In March, 2000 3.00 (16,667) (167) (49,833) (50,000)
Issued for consulting services
in April, 2000 0.63 250,000 2,500 153,750 156,250
Sales of common stock
for cash 1.02 673,973 6,740 678,200 685,000
Net loss ( 8,417,837) (8,417,837)
Preferred stock dividends (150,180) (150,180)
--------- --------- ------------ ---------- ---------- ------------- ------------ -------------
Balances as of
April 30, 2000 500,000 $ 50,000 19,244,757 $2,358,716 $(11,158,409) $16,041,810 $ 7,292,117
========= ============ ========== ========== ============= ============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-10
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements
April 30, 2000 and 1999
1. Business and Organization
Vector Energy Corporation, a Texas corporation (together with its subsidiary,
Vector Exploration, Inc., collectively, "the Company") was formed on June 18,
1998 as a result of an agreement and plan of reorganization more fully
described in Note 3. The Company is primarily engaged in the acquisition,
development, production and exploration of oil and natural gas properties in
the United States.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentrations of Credit Risk
Although the Company's accounts receivable are exposed to credit loss, the
Company does not believe such risk to be significant. Most of the Company's
accounts receivable are a broad and diverse group of oil and gas companies,
and accordingly, do not represent a significant credit risk. In addition,
the Company has accounts receivable from parties holding working interests in
the Company's properties, and as such, may be collected via offset from future
obligations to the parties.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and gas
properties. All costs associated with property acquisition, exploration, and
development activities are capitalized in a single, United States cost center.
Internal costs directly identified with the acquisition, exploration and
development activities of the Company are also capitalized. Capitalized costs
are amortized on the unit-of-production basis using proved oil and gas
reserves. Capitalized costs are limited to the present value of estimated
future net revenues less estimated future expenditures using a discount factor
of ten percent. Sales and abandonments of oil and gas properties are treated
as reductions of the capitalized cost pool. At April 30, 2000 and 1999, there
were no costs of unproved properties or major development projects included in
the capitalized cost pool.
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121") - Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of, the Company assesses the need for an
impairment of capitalized costs of oil and gas properties on a combined basis,
with separate consideration given to unproved properties and major development
projects, of which there were none at April 30, 2000 and 1999. If impairment
is indicated based upon undiscounted future cash flows, then an impairment is
recognized to the extent that net capitalized costs exceed discounted expected
future cash flows. No impairment was considered necessary for the years ended
April 30, 2000 and 1999.
Other Property and Equipment
Other property and equipment of the Company consists primarily of computer
equipment, vehicles and furniture and fixtures, which are depreciated over
estimated useful lives, ranging from three to seven years, on a straight-line
basis.
F-11
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2000 and 1999
Income Taxes
Deferred income taxes are provided to reflect the future tax consequences of
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements, using enacted tax rates.
Loss Per Share
Loss per share has been calculated using the weighted average number of shares
outstanding. Outstanding warrants and other potentially dilutive securities
have been excluded from the calculation of loss per share, as their effect
would be anti-dilutive.
Organizational Costs
Certain organizational costs incurred by the Company have been capitalized
and are being amortized over a sixty-month period.
Transactions in the Company's Stock
Transactions in the Company's common stock are recorded at the fair value of
the stock issued in the transaction, or at the value of the goods and services
received, whichever is the more readily determinable amount.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
The following is a summary of all significant noncash investing and financing
activities and payments made for interest and income taxes for the years ended
April 30, 2000 and 1999:
<TABLE>
<S> <C> <C>
Year Ended Year Ended
April 30, 2000 April 30, 1999
-------------- --------------
Noncash activities:
Common stock issued for compensation $ 67,830 $ 1,137,502
Common stock isued for consulting fees $ 6,643,251 $ -
Commmon stock issued for deferred loan cost $ 488,875 $ -
Properties acquired for stock and
assumption of liabilities $ 1,737,500 $ 14,003,094
Stock issued in settlement of
accounts payable $ 245,821 $ 77,190
Cash Payments:
Interest $ 709,841 $ 466,431
Income Taxes $ - $ -
</TABLE>
3. Acquisitions of Oil and Gas Properties
On May 8, 1998, the Company acquired various working and royalty interests in
wells located in Texas, Louisiana and Oklahoma. To effect the transaction,
the Company issued 30,000 shares of class AA preferred stock, valued at
$3,000,000, and 313,124 shares of common stock, valued at $939,372. In
addition, the Company assumed $6,100,000 in bank debt and $511,465 in accounts
payable, net of accounts receivable and cash acquired. The Company has
capitalized $251,704 in expenses incurred in conjunction with this
transaction. Subsequently, the Company issued 116,014 shares of common stock,
valued at $163,065, for additional working interests in certain of the
properties acquired.
F-12
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2000 and 1999
On November 4, 1998, the Company acquired various working interests in wells
located in Louisiana, Texas and Oklahoma. To effect the transaction, the
Company issued 1,226,667 shares of common stock, valued at $1,840,000, and a
$120,000 non-interest bearing note payable to the sellers. In addition, the
Company assumed $690,522 in bank debt and $600,954 in accounts payable. The
Company has capitalized $15,145 in expenses incurred in conjunction with this
transaction. The purchase and sale agreement also provides that the sellers
may receive up to 500,000 additional shares of common stock based on the value
of proved developed producing reserves attributable to the properties
acquired, as determined by an independent engineering evaluation as of
September 30, 1999. The Company was also required to expend a minimum of
$500,000 in capital investment on the properties acquired within nine months or
the Sellers would be entitled to receive an additional 500,000 shares' of
common stock. Subsequently, the Company exchanged the working interests
acquired in certain properties in Texas and $30,000 for additional working
interests in the properties acquired in Louisiana. On August 23, 1999, the
Company issued 500,000 shares of common stock valued at $1,187,500 to the
Sellers under the terms of the purchase and sale agreement. The Company does
not beleive that any additional shares will be issued to the Sellers.
On March 7, 2000, the Company closed a purchase and sale agreement with a
company, which is a debtor in possesion in a Chapter 11 Bankruptcy. Under the
agreement, the Company acquired all of the Bancrupt Debtor's interest in a
block located in the Offshore Texas, Mustang Island Area for 550,000 shares
of common stock valued at $550,000. In accordance with the agreement, the
Company immediately repurchased 16,667 shares of common stock at $3.00 per
share, for a total of $50,000, for payment of administrative expenses in the
Bancruptcy proceeding. Under the terms of the agreement, in the event that
the daily rate of production from the properties acquired averages at least
5,000 Mcf per day over a complete calendar month the seller has the right
to put 150,000 shares of common stock to the Company at $3.00 per share. If
the seller fails to exercise such right, the Company has the right to call
150,000 shares. of common stock at $3.00 per share. In addition, the Company
may be required to issue a maximum of 370,000 additional shares of common
stock to the seller based upon the required future development costs associated
with properties acquired, as determined by an independent engineering firm.
In addition, the Company purchased $120,000 in secured debt from three of the
sellers secured creditors for face value.
4. Oil and Gas Producing Activities
Set forth below is certain information regarding the aggregate capitalized
costs of oil and gas properties, as of April 30, 2000 and 1999, and costs
incurred in oil and gas property acquisition, development and exploration
activities for the years ended April 30, 2000 and 1999:
<TABLE>
<S> <C> <C>
April 30, 2000 April 30, 1999
-------------- --------------
Capitalized Costs:
Proved properties $ 16,083,311 $ 14,696,056
Unproven properties 0 0
Accumulated dapreciation, depletion and
amortization (446,562) (237,908)
-------------- --------------
$ 15,636,749 $ 14,458,148
============== ==============
Year Ended Year Ended
April 30, 2000 April 30, 1999
-------------- --------------
Costs Incurred:
Property acquisitions
Proved properties $ 1,737,500 $ 14,005,343
Unproven properties 0 0
Development costs 146,779 360,713
Exploration costs 0 0
-------------- --------------
$ 1,884,279 $ 14,696,056
============== ==============
</TABLE>
F-13
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2000 and 1999
The following presents the results of operations of oil and gas producing
activities for the period ended April 30, 2000 and 1999:
<TABLE>
<S> <C> <C>
Year Ended Year Ended
April 30, 2000 April 30, 1999
-------------- --------------
Oil and Gas sales $ 1,244,232 $ 968,954
Production costs (747,676) (847,823)
Exploration 0 0
Depreciation, depletion and amortization (208,654) (237,908)
Impairment of oil and gas properties 0 0
-------------- --------------
Operating Income (Loss) 287,902 (116,777)
Income tax 0 0
-------------- --------------
Net Income (Loss) $ 287,902 $ (116,777)
============== ==============
5. Notes Payable
Total debt at April 30, 2000 and 1999 consists of the following:
<S> <C> <C>
Line-of-credit $ 6,729,596 $ 6,880,000
Other 674,813 596,988
Less current portion 7,404,409 7,476,988
------------- -------------
$ 0 $ 0
============= =============
</TABLE>
Line of Credit
The Company has a $10 million revolving credit note with the First Union
National Bank which terminates on March 15, 2001. Interest on the note is
payable monthly at a floating rate which was 9.59% and 8.5650% at April 30,
2000 and 1999, respectively. The borrowing base under the note is determined
periodically based upon the collateral value assigned to the mortgaged
properties, and was $6,729,596 and $6,880,000 at April 30, 2000 and 1999,
respectively. The borrowing base may be redetermined at the Bank's sole
discretion. Principle payments were scheduled at $125,000 per month beginning
in December, 1999. In addition, the note places certain restrictions on the
use of the revenues from the mortgaged properties. The Company does not
anticipate that the borrowing base under the note can be increased without
incurring development costs.
The line-of-credit with First Union National Bank has the following financial
covenants: The Company is required to submit to the bank audited financial
statements in accordance with GAAP, and have nothing indicative of an ongoing
concern in the audit report. The Company's debt service ratio (ratio of
EBITDA to consolidated debt service) shall not be less than 1.25 to 1.00 at
all times throughout the remaining term of the loan. The Company's interest
coverage ratio (ratio of EBITDA to consolidated interest expense) shall not
be less than 3.00 to 1.00 at all times throughout the remaining term of the
loan. The Company shall maintain a positive current ratio (current assets to
current liabilities). The current ratio should not exceed 1.00 to 1.00 at any
time during the loan (excluding any past due payables through May 31, 1999,
only).
The bank waived default of all financial covenants through November 30, 1999.
However, the Company has not made any of the scheduled principal payments,
which were due beginning in December, 1999, with the execption of $10,000
per month which has been paid since June, 2000. The Company's failure to meet
the scheduled principal payments constitutes an event of default under the
note agreement. However, the bank has not issued a notice of default, and
the Company is currently in negotiation' with the bank to restructure the loan.
Accordingly, the Company has reflected thel entire line of credit amount as a
current liability.
F-15
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2000 and 1999
Other notes payable
The Company is obligated under a 10% promissory note payable to the brother
of the Company's president. In conjunction with the issuance of the note,
the Company issued a warrant to purchase 100,000 shares of the Company's
common stock at $0.10 per share. Such warrant expires on October 30, 2008.
The note had an original maturity date of April 30, 1998, which was extended by
the Company until October 30, 1999 by the issuance of 100,000 shares of common
stock to the holder. Under the terms of the note, the Company issued an
additional 200,000 shares of common stock to the holder due to its failure
to pay the balance by the extended maturity date. The balance of principal and
accrued interest at April 30, 2000 was $500,000 and $74,521. respectively and
at April 30, 1999 was $500,000 and $24,384, respectively.
The Company is obligated under an unsecured non-interest bearing promissory
note, payable in equal monthly installments of $10,000 per month. Interest
has been accrued on this obligation at 8%. The outstanding balance on this
note at April 30, 2000 and 1999 was $45,000 and $84,000, respectively.
The Company is obligated under unsecured installment notes, which were issued
to various vendors in settlement of accounts payable. The notes, which bear
interest at rates ranging from 0% to 13.6%, call for monthly payments totaling
$13,684 and $3,288 at April 30, 2000 and 1999, respectively. The outstanding
principal balances totaled $129,813 and $12,988 at April 30, 2000 and 1999,
respectively.
6. Income Taxes
The Company has available at April 30, 1999 an approximate $2,400,000 unused
operating loss carryforward that may be applied against future taxable
income, and that expires in the year 2018. The tax benefit of unused
operating loss carryforwards of approximately $816,000 has been offset by a
full valuation allowance.
7. Stockholder's Equity
Preferred Stock
The Company has 20,000,000 authorized shares of preferred stock of which
30,000 shares are designated as Class AA Cumulative Convertible Preferred
Stock(Class AA Preferred Stock), par value $100.00 per share. The holders of
the Class AA Preferred Stock are entitled to receive a 6%, or $6.00 per share
cumulative cash dividend payable quarterly. The 6% Class AA Preferred
Stock is redeemable in whole, but not in part, at the option of the
Corporation by unanimous resolution of its Board of Directors at any time
after December 31, 1998, at $100 per share, plus all dividends accrued and
unpaid up to the date fixed for redemption. The Class AA Preferred Stock may
also be converted at the option of each holder, into 100 fully paid and
non-assessable shares of the Corporation's common stock, no par value per share.
Each share of Class AA Preferred Stock is entitled to cast a number of votes
equal to the number of shares of common stock into which the Class AA Preferred
Stock is convertible. As of April 30, 1999, 30,000 shares of the Class AA
Preferred Stock was issued and outstanding. On March 1, 2000, all of the
outstanding Class AA Preferred Stock was converted into common stock. As of
April 30, 1999, dividends totaling $180,000 ($6.00 per share) had been
accrued, but remained unpaid. Simultaneously with the conversion of the Class
AA Preferred Stock, the Company issued 890,271 shares of common stock in
settlement of accured and unpaid dividends totaling $329,400 ($10.98 per
share).
The Company is authorized to issue 500,000 shares of Class B Preferred Stock,
par value $1.00 per share. Class B Preferred Stock is subordinate to Class AA
6% Preferred Stock in priority, both of which are senior to any and all
capital stock. The holders of Class B Preferred Stock are not entitled to
receive any dividends. As of April 30, 2000 and 1999 500,000 shares of the
Class B Preferred Stock were issued and outstanding. The Class B Preferred
Stock is redeemable in whole, but not in part, at the option of the Corporation
by resolution of the Corporation's Board of Directors at anytime at $1.00 per
share. Each share of Class B Preferred Stock has the voting rights equal to
100 shares of the Company's common stock. The holders of Class B shares are
entitled to elect at least two directors to the Board of Directors of the
Corporation. The holders of Class B Preferred Stock voting as a class will
have the right to remove without cause at any time and replace any director
such holders have elected.
F-15
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 1999
The Company is authorized to issue out of the 20,000,000 authorized shares of
preferred stock, 10,000 shares of Class C Cumulative Convertible Preferred
Stock (Class C Preferred Stock). Class C Preferred Stock has a par value of
$100.00 per share and is entitled to receive cumulative cash dividends at the
annual rate of 5%, or $5.00 per share, payable quarterly at the rate of $1.25
per share. Class C Preferred Stock is redeemable in whole, but not in part
by unanimous resolution of the Board of Directors at any timeafter
July 31, 1999, at the rate of $100.00 per share plus all dividends accrued
and unpaid at such date. Class C Preferred Stock has no voting rights.
Class C Preferred Stock is subordinate to all other shares of preferred stock
in priority. The Class C Preferred Stock may be converted into common stock
at the option of the shareholder at the rate of 25 common shares to one share
of Class C Preferred Stock. At any time on or after July 31, 1999, each
holder of shares of the 5% Preferred Stock may, at such holders option,
tender any or all such shares for redemption at the rate of $100.00 per share
plus all dividends accrued and unpaid up to the redemption date. As of
April 30, 1999, 1,250 shares of Class C Preferred Stock were issued and
outstanding. On August 4, 1999, 625 shares of Class C Preferred Stock were
converted into common stock and, on January 16, 2000, the remaining 625 shares
of Class C Preferred Stock were converted into common stock. As of
April 30, 1999, dividends of $4,687.50 ($3.75 per share) had been accrued, but
remained unpaid.
Common Stock
The Company has 100,000,000 shares of authorized common stock, of which
19,244,757 and 5,709,863 shares wereissued and outstanding at April 30, 2000
and 1999, respectively.
Stock Options and Warrants
In December 1998, The Company granted options to certain key employees of the
Company to purchase 500,000 shares of The Company's common stock at the
purchase price of $1.00 per share. These options may be exercised at any
time from May 1, 1999 until their expiration on May 1, 2009 and are
non-transferable. In March 2000, the Company granted options to certain
key employees of the Company to purchase 1,242,000 shares of the Company's
common stock at the purchase price of $0.50 per share. These options may be
exercised at any time from April 1, 2000 until thier expiration on
March 2, 2005. The options, which were issued at a price equal to or
exceeding the market value of the underlying stock on the date of the grant,
are not intended to qualify as incentive stock options under Internal Revenue
Code Section 422. The Company has applied Accounting Principles Board No. 25
Accounting for Stock Issued to Employees, and related interpretations in
accounting for these options.
The Company has considered the effect of recognizing compensation cost
pursuant to the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock Based Compensation (SFAS No. 123). Using a
Black Scholes option pricing model, net loss would have been increased to the
pro forma amounts as follows for the years ended April 30, 2000 and 1999:
<TABLE>
<S> <C> <C>
2000 1999
------ -----
Assumptions Used:
Expected Life (Years) 3 3
Stock Volatiltiy 66% 47%
Dividends None None
Risk Free Interest Rate 6.75% 6.50%
Net Loss:
As reported $(8,417,837) $ (2,405,704)
Proforma $(8,419,907) $ (2,595,704)
</TABLE>
Also outstanding at April 30, 2000 and 1999 are a warrants for the purchase
of 400,000shares of the Company's common stock at a purchase price of $0.10
per share. The warrants expire in May and November of 2008.
F-16
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2000 and 1999
8. Significant Customers
The Company currently markets the oil and gas production from its properties
to fourteen customers, one of which represents sales in excess of 10% of the
Company's total oil and gas revenues. This one customer represents
approximately 46% of the Company's total oil and gas revenues. During the
year ended April 30, 1999, the Company marketed the oil and gas production
from its properties to twelve customers, three of which represented sales in
excess of 10% of the Company's total oil and gas revenues. The three
customers combined represented approximately 53% of the Company's total oil
and gas revenues. The availability of oil and gas purchasers is such,
however, that any customer discontinuing purchases from the Company could
almost assuredly be replaced by another buyer.
9. Related Party Transactions
During the years ended April 30, 2000 and 1999, the Company sublet office
space from a related party for $2,283 per month. Subsequent to year end,
such lease terminated and the Company vacated the office space.
During the year ended April, 30, 2000, an officer and director of the Company
made unsecured advances totaling $145,992 to the Company.
10. Risk Management
The Company's market risk exposures relate primarily to commodity prices and
interest rates. Therefore, the Company periodically uses commodity price
swaps to hedge the impact of natural gas price fluctuations and uses
interest rate swaps to hedge interest rates on floating rate debt. The
Company does not engage in activities using complex or highly leveraged
instruments. These instruments are generally put in place to limit risk of
adverse natural gas price or interest rate movements, however, these
instruments usually limit future gains from favorable natural gas prices or
lower interest rates. Recognition of realized gains or losses in the
Statement of Operations are deferred until the underlying physical product
is purchased or sold. Unrealized gains or losses on derivative financial
instruments are not recorded. The cash flow impact of derivative and other
financial instruments is reflected as cash flows from operating activities
in the Statement of Cash Flows.
11. Going Concern
As shown in the financial statements, the Company incurred a net losses of
approximately $8,400,000 and $2,400,000 for the years ended April 30, 2000
and 1999, respectively. Current liabilities exceeded current assets by
approximately $8,898,000 and $9,382,000 at April 30, 2000 and 1999,
respectively. Amounts outstanding and payable to creditors are in arrears
and the Company is in negotiations with creditors to obtain extensions and
settlements of outstanding amounts. Of the $7,292,117 and $5,659,646 in
shareholders' equity at April 30, 2000 and 1999, respectively, $15,636,749
and $14,458,148, respectively is attributable to the Company's investment in
oil and gas properties. Such properties, as discussed in Note 4, generated
a loss from operations for the year ended April 30, 1999. Although the
properties generated operating income for the year ended April 30, 2000,
Management anticipates that significant additional expenditures will be
necessary to develop the properties, which consist of only proved reserves,
before significant positive operating cash flows will be achieved. These
factors are an indication that the Company may be unable to continue in
existence.
Management's plans to alleviate these conditions include the renegotiation of
certain trade payables, settlements of debt amounts with stock, deferral of
certain time payments, and sales of properties, as considered necessary by
management. In addition, management is pursuing business partnering
arrangements for the acquisition and development of additional properties as
well as debt and equity funding through private placements.
The accompanying financial statements are prepared as if the Company will
continue as a going concern. They contain none of the adjustments, including
adjustments to recorded assets and liabilities, which might be necessary if
the Company were unable to continue.
F-17
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continued)
April 30, 2000 and 1999
12. Oil and Gas Reserves Information (Unaudited)
The estimates of proved oil and gas reserves utilized in the preparation of
the financial statements were estimated internally by the Company in
accordance with guidelines established by the Securities and Exchange
Commission and the Financial Accounting Standards Board, which require that
reserve reports be prepared under existing economic and operating conditions
with no provision for price and cost escalation except by contractual
agreement. All of the Company's reserves are located in the continental
United States.
Future prices received for production and future production costs may vary,
perhaps significantly, from the prices and costs assumed for purposes of
these estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that prices and costs will remain
constant. There can be no assurance that actual production will equal the
estimated amounts used in the preparation of reserve projections.
In accordance with the Securities and Exchange Commission's guidelines, the
Company's internal petroleum engineers' estimates of future net cash flows
from the Company's proved properties and the present value thereof are made
using oil and natural gas sales prices in effect as of the dates of such
estimates and are held constant throughout the life of the properties.
Average prices used in estimating the future net cash flows were $25.71 per
barrel of oil and $2.89 per Mcf of gas and $14.73 per barrel of oil and $1.85
per Mcf of natural gas for at April 30, 2000 and 1999, respectively.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of
development expenditures. Oil and gas reserve engineering must be recognized
as a subjective process of estimating underground accumulations of oil and
gas that cannot be measured in an exact way, and estimates of other engineers
might differ materially from those shown below. The accuracy of any reserve
estimate is a function of the quality of available data and engineering and
geological interpretation and judgment. Results of drilling, testing and
production after the date of the estimate may justify revisions.
Accordingly, reserve estimates are often materially different from the
quantities of oil and gas that are ultimately recovered. Reserve estimates
are integral in management's analysis of impairments of oil and gas
properties and the calculation of depreciation, depletion and amortization on
those properties.
Within the next twenty-four months it is the Company's intention to have all
then existing reserves reviewed by independent third party engineers. It is
likely that such a review will result in substantially different reserve
estimates than would result from an internal review. Such estimates may be
substantially lower than those made by the Company's engineering staff and
could result in material write downs in reserve values.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
-------- --------
(in thousands)
<S> <C> <C>
Proved Reserves:
Estimated Quantities - April 30, 1998 - -
Acquisitions 603 24,542
Production (16) (415)
Revisions 2,976 (10,429)
-------- --------
Estimated Quantities - April 30, 1999 3,563 13,698
Acquisitions 344 23,823
Sales of Reserves in Place (24) (2,331)
Production (9) (391)
Revisions (17) (3,023)
-------- --------
Estimated Quantities - April 30, 2000 3,857 31,776
======== ========
Proved Developed Reserves:
April 30, 2000 381 24,378
April 30, 1999 173 13,211
</TABLE>
F-18
<PAGE>
Vector Energy Corporation
Notes to Consolidated Financial Statements (Continues)
April 30, 2000 and 1999
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves:
<TABLE>
<S> <C> <C>
As of April 30,
2000 1999
---------- ----------
(in thousands)
Future cash inflows $ 190,898 $ 77,841
Future production costs (34,850) (17,850)
Future development costs (14,443) (10,064)
---------- ----------
Future net cash flows 141,605 49,927
10% annual discount for
estimating timing of
cash flows (67,092) (28,708)
---------- -----------
Standardized measure of
discounted future
net cash flows $ 74,513 $ 21,219
========== ==========
</TABLE>
<TABLE>
<S> <C> <C>
Year Ended April 30,
2000 1999
---------- ----------
(in thousands)
Standardized measure of discounted
Future net cash flows, beginning
of year $ 21,219 $ -
Changes due to operations:
Sales, net of production costs (497) (121)
Net changes in prices, net of
production costs 18,916 3,442
Development costs incurred 147 691
Revisions of quantity estimates (616) (1,479)
Acquisitions 37,306 18,310
Sales of reserves (1,270) -
Changes in production rates,
timing and other 1,654 2,702
Accretion of discount 2,022 1,432
---------- ----------
Standardized measure of discounted
Future net cash flows, end of year $ 74,513 $ 21,219
========== ==========
</TABLE>
F-19
