Quarterly Report For Small Business Issuers Subject
to the 1934 Act Reporting Requirements
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-47699
FAN ENERGY INC.
--------------------------------------------
(Name of Small Business Issuer in its charter)
Nevada 77-0140428
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1801 Broadway Suite 720, Denver, Colorado 80202
- ----------------------------------------- --------
(Address of principal executive officers) (Zip Code)
Issuer's telephone number: (602) 483-8848
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 [ ].
Number of shares outstanding for each of the issuer's classes of common
equity, as of the latest practicable date.
$.01 par value common stock 7,986,704 shares as of June 30, 1998.
<PAGE>
FAN ENERGY INC.
FORM 10-QSB
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1998 and December 31, 1997 3
Statements of Operations - Quarter ended and six months ended
June 30, 1998 and June 30, 1997 4
Statements of Cash Flows - Six months ended June 30, 1998
and June 30, 1997 5
Notes to Financial Statements 6 - 7
Item 2. Management's Plan of Operation 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
June 30, 1998 December 31, 1997
(Unaudited)
<S> <C> <C>
CURRENT ASSET
Cash ...................................................................... $ 110,605 $ 424,717
---------- ----------
Total Current Asset ................................................... 110,605 424,717
UNDEVELOPED OIL AND GAS PROPERTIES ........................................ 1,495,700 1,275,491
DEFERRED OFFERING COSTS ................................................... 55,829 10,383
---------- ----------
$ 1,662,134 $ 1,710,591
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .......................................................... $ 8,068 $ 5,315
---------- ----------
Total Current Liabilities ............................................. 8,068 5,315
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value
Authorized - 5,000,000 shares
Issued - none ........................................................ -- --
Common Stock, $.001 par value
Authorized - 95,000,000 shares
Issued and outstanding - 7,986,704 shares (1998)
and 7,771,704 shares (1997) ......................................... 7,987 7,772
Additional paid-in capital ................................................ 1,903,521 1,796,236
Deficit accumulated during the development stage .......................... (357,942) (199,232)
Additional paid-in capital stock options .................................. 100,500 100,500
---------- ----------
1,654,066 1,705,276
---------- ----------
$ 1,662,134 $ 1,710,591
========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
Amounts from
Three Months Ended June 30, Six Months ended June 30, Jan. 1, 1997 to
1998 1997 1998 1997 June 30, 1998
---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES .................. $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- --------- -----------
OPERATING EXPENSES
General and
administrative expenses ... 136,268 3,341 163,463 3,341 356,448
Interest .................. -- -- -- -- 6,247
----------- ----------- ----------- --------- -----------
136,268 3,341 163,463 3,341 362,695
----------- ----------- ----------- --------- -----------
OTHER INCOME
Interest .................. 1,704 629 4,753 629 4,753
----------- ----------- ----------- --------- -----------
NET (LOSS) ................ $ (134,564) $ (2,712) $ (158,710) $ (2,712) $ (357,942)
=========== =========== =========== ========= ===========
NET (LOSS) PER
COMMON SHARE .............. $ (.02) $ -- $ (.02) $ -- $ (.04)
=========== =========== =========== ========= ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING ........ 7,986,704 7,986,704 7,986,704 7,986,704 7,986,704
=========== =========== =========== ========= ===========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
Amounts from
For the six months ended June 30, Jan. 1, 1997 to
1998 1997 June 30, 1998
---- ---- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) .......................................................... $ (158,710) $ (2,282) $ (357,942)
Adjustments to reconcile net (loss) to net
cash provided by operating activities .......................... -- -- --
Stock options ....................................................... -- -- 102,832
Stock for services .................................................. 107,500 -- 157,500
Changes in assets and liabilities
Increase in accounts payable ................................... 2,753 3,341 8,068
Increase in deferred offering costs ............................ (45,446) -- (55,829)
----------- ----------- -----------
Net cash (used) provided by operating activities .................... (93,903) 1,059 (145,371)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for unproved oil and gas properties .................. (220,209) -- (1,195,700)
----------- ----------- -----------
Net cash (used) in investing activities ............................. (220,209) -- (1,195,700)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock ............................. -- 500,000 1,500,000
Cash paid for offering costs ................................... -- (430) (48,324)
----------- ----------- -----------
Net cash provided by financing activities ........................... -- 499,570 1,451,676
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH ..................................... (314,112) 500,629 110,605
CASH, BEGINNING OF PERIODS .......................................... 424,717 -- --
----------- ----------- -----------
CASH, END OF PERIODS ................................................ $ 110,605 $ 500,629 $ 110,605
=========== =========== ===========
</TABLE>
5
<PAGE>
FAN ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
The accompanying interim financial statements of FAN Energy, Inc. (the
"Company") are unaudited. In the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the interim period.
The unaduited financial statements included herein were prepared from the
records of the Company in accordance with Generally Accepted Accounting
Principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's Registration Statement on Form SB-2
(File No. 333-47699) which became effective with the Securities and Exchange
Commission on May 14, 1998. The current interim periods reported herein should
be read in conjunction with the Company's registration statement subject to
independent audit at the end of the year.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash equivalents
all highly liquid investments with a maturity of three months or less at the
time of purchase. At June 30, 1998, there were no cash equivalents.
OIL AND GAS PROPERTIES
The Company follows the full cost method to account for its oil and gas
exploration and development activities. Under the full cost method, all costs
incurred which are directly related to oil and gas exploration and development
are capitalized and subjected to depreciation and depletion. Depletable costs
also include estimates of future development costs of proved reserves. Costs
related to undeveloped oil and gas properties may be excluded from depletable
cost until such properties are evaluated as either proved or unproved. The net
capitalized costs are subject to a ceiling limitation. A single cost center is
maintained for the company's oil and natural gas exploration, development and
production activities in the United States.
6
<PAGE>
FAN ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Undeveloped oil and gas properties consist of leases and acreage acquired by the
Company for its exploration and development activities as well as geophysical
costs. The cost of these non-producing leases is recorded at the lower cost or
fair market value. As of June 30, 1998, costs related to undeveloped oil and gas
properties consists of costs incurred in conjunction with the Company's
acquisition of the properties, dry hole costs, and geological and geophysical
(seismic) costs.
The Company has adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which requires
that long-lived assets to be held and used by reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 has not had an impact on the
Company's financial statements, as the Company has not determined that an
impairment loss needs to be recognized for applicable assets of continuing
operations.
DEFERRED OFFERING COSTS
Deferred offering costs consist of costs incurred in connection with a proposed
public offering of the Company's common stock. If the offering is successful,
costs incurred will be charged against the proceeds of the offering. If the
offering is not successful, costs incurred will be charged to operations.
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes". SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(LOSS) PER COMMON SHARE
(Loss) per common share is computed based on the weighted average number of
common shares outstanding during each period. Common shares issued from
reactivation as a development stage company, and prior to completion of the
Company's proposed initial public offering, are considered outstanding for all
periods presented.
In February 1997 SFAS No. 128, "Earnings Per Share" was issued effective for
periods ending after December 15, 1997. There is no impact on the Company's
financial statements from adoption of SFAS No. 128.
7
<PAGE>
ITEM 2. MANAGEMENT'S PLAN OF OPERATION
The following discussion is intended to provide an analysis of the Company's
financial condition and Plan of Operation and should be read in conjunction with
the Company's financial statements and the notes thereto. The matters discussed
in this section that are not historical or current facts deal with potential
future circumstances and developments. Such forward-looking statements include,
but are not limited to, the drilling plans for natural gas, trends in the
results of the Company's operations, anticipated rates of production, natural
gas prices, operating expenses and the Company's anticipated capital
requirements and capital resources. The Company's actual results could differ
materially from the results discussed in the forward-looking statements.
The Company has not generated revenue from operations during the first half of
1998 or during the previous two fiscal years. The Company plans to generate
future revenue through its participation in drilling for natural gas with others
in the Sacramento basin of central California and in other areas which may be
selected by the Company. Once sufficient financial resources are developed, as
described below, the Company intends to continue to participate in exploration
of its two natural gas prospects and to acquire interests in similar properties
in other areas. As of the date of this report, no production has been
established on any of the Company's properties.
The Company's properties presently consist of a 25% working interest in oil and
gas leases covering approximately 30,000 acres in two prospects in the
Sacramento Basin of Central California. The Company and the operator have
identified potential natural gas drilling locations in the prospects using
advanced three dimensional ("3-D") and AVO seismic technologies. The Company has
participated in drilling two unsuccessful exploratory wells on one of the
prospects during 1998 and is currently drilling a third well. The Company's
share of the cost of the first two wells which resulted in dry holes was
approximately $125,000, and has been included in investment for undeveloped oil
and gas properties on the June 30, 1998 balance sheet. The Company's estimated
share of drilling the third well is approximately $56,000. Management will
decide what future development activity on the prospect will be undertaken by
the Company based upon the results of the third exploratory well and further
evaluation of the seismic data for that prospect area. Management anticipates
that initial exploration drilling on the second prospect will commence during
the third quarter of 1998.
The estimated annual cash expenditures for general and administrative expenses
of the Company is anticipated to be approximately $135,000 and other capital
costs associated with the existing properties may approximate $400,000. During
the first half of 1998, operating expense, consisting primarily of general and
administrative expenses was approximately $164,000, including non-cash equity
compensation to officers and directors. The Company also had cash expenditures
of approximately $45,000 for deferred offering costs for the offering described
below, $65,000 for drilling costs and $155,000 for geophysical and lease
extension costs, all of which were capitalized. At June 30, 1998 and as of
August 10, 1998, the Company had approximately $ 111,000 and $6,000,
respectively, in cash, compared to $425,000 at December 31, 1997.
The Company will need to raise additional financing in the third quarter and
over the next twelve months to continue exploratory drilling and pay its general
and administrative expenses. In May 1998, the Company commenced a public
offering of a minimum of 300,000, up to a maximum of 3 million, common shares at
$1.00 per share. The offering has not been completed as of the date of this
report. Concurrent with the offering, the Company extended to September 1,1998,
the expiration date for outstanding warrants pursuant to which holders may
purchase up to 2,500,000 shares of common stock at $.20 per share. Additional
outstanding warrants, which may be exercised to purchase of up to one million
shares of common stock at $.60 per share and 180,000 shares at $.50 per share,
expire October 31, 1998. The Company anticipates that at least a portion of
outstanding warrants will be exercised by warrant holders. If all outstanding
warrants are exercised, of which there is no assurance, the Company would
receive a total of $1,190,000, $500,000 by September 1,1998 and an additional
$690,000 by October 31, 1998, the dates of expiration. No assurances can be made
as to whether any of the warrants will be exercised.
8
<PAGE>
Unless a substantial portion of outstanding warrants are exercised, or at least
the minimum offering is completed, the Company may be unable to cover
anticipated general and administrative expenses and capital lease costs over the
next twelve months, and the Company may be unable to participate in drilling
additional exploratory wells. The Company plans to use the proceeds of the
public offering and warrant exercises to participate in drilling natural gas
wells on its prospects in the Sacramento Basin over the next one to three years,
depending upon whether initial drilling is successful, future natural gas prices
and other factors. When sufficient capital resources are available, the company
will seek to acquire interests in other oil or natural gas properties.
Management of the Company will continue to seek additional financing for the
Company.
Until and unless wells are drilled and completed as successful natural gas
producers or the Company acquires or develops other oil or natural gas
production or reserves, the Company will have no production, no cash flow, and
no oil or natural gas reserves.
The Company does not have any employees and uses consultants for matters
pertaining to drilling, property evaluations and administration. The Company may
hire employees during the next twelve months depending upon its success in
developing production, cash flow and natural gas reserves
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Exchange Act of 1934.
Although the Company believes that the expectations reflected in the
forward-looking statements and the assumptions upon which the forward-looking
statements are based are reasonable, it can give no assurance that such
expectations and assumptions will prove to have been correct.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended June 30, 1998, the Registrant did not file
any reports on Form 8-K.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FAN ENERGY, INC.
Signatures Title Date
- ---------- ----- ----
/s/ George H. Fancher Jr. Chief Operating Officer; and August 14, 1998
- ------------------------- Chairman of the Board
George H. Fancher Jr.
/s/ Rex Utsler Chief Financial Officer August 14, 1998
- -------------------------
Rex Utsler
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 110,605
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 110,605
<PP&E> 1,495,700
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,662,134
<CURRENT-LIABILITIES> 8,068
<BONDS> 0
0
0
<COMMON> 7,987
<OTHER-SE> 1,646,079
<TOTAL-LIABILITY-AND-EQUITY> 1,662,134
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (158,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (158,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (158,710)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
