As Filed with the Securities and Exchange Commission on June 11, 1999
Registration No. 333-47699
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
POST-EFFECTIVE AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
-------------------------
FAN ENERGY INC.
--------------------------------------------
(Name of small business issuer in its charter)
Nevada 1311 77-0140428
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification No.)
organization)
George H. Fancher Jr.
1801 Broadway, Suite 720 1801 Broadway, Suite 720
Denver, Colorado 80202 Denver, Colorado 80202
(303) 296-6600 (303) 296-6600
---------------- ---------------
(Address and telephone number of (Name, address and telephone
principal executive offices and number of agent for service)
address of principal place of business)
With Copies to:
Alan W. Peryam, LLC
1120 Lincoln Street, Suite 1000
Denver, Colorado 80203
(303) 866-0900
Approximate date of proposed sale to the public: As soon as practicable
following the date on which the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities To Be Registered(1) Registered Per Share Offering Price Fee
- ------------------------------ ------------ ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value........... 3,000,000 shares(1) $0.25 $ 750,000 $ 221.25
Common Stock, $0.001 par value........... 2,700,000 shares(2) $0.25 $ 675,000 $ 199.125
--------- ----- -------
Total 5,700,000 XXX $ 1,375,000 $ 420.375(3)
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(1) To be offered by the Registrant.
(2) To be offered by Selling Securityholders. Includes 1,800,000
shares of Common Stock purchased in a private placement and
900,000 shares of Common Stock issuable upon exercise of
outstanding warrants acquired in a private placement.
(3) The Registration Fee was paid previously.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRA TION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
(ii)
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<TABLE>
<CAPTION>
Fan Energy Inc.
Cross Reference Sheet
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
Item
Number Form SB-2 Item Number Caption or Location in Prospectus
- ------ --------------------- ---------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front of Registration Statement and Outside
Front Cover of Prospectus Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of
of Prospectus Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factors
6. Dilution Comparative Data
7. Selling Security Holders Principal and Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
12. Description of Securities Description of Securities
13. Interests of Named Experts and Counsel Experts, Legal Matters
14. Disclosure of Commission Position on Plan of Distribution
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis or Plan
Plan of Operation of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Dividend Policy and Related Stockholder Matters
Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Experts
Accountants on Accounting and Financial
Disclosure
</TABLE>
(iii)
<PAGE>
[RED HERRING INFORMATION]
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission becomes effective. This preliminary
prospectus is not an offer to sell these securities nor does it seek to buy
these securities in any jurisdictions where the offer or sale is not
permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE __, 1999
Initial Public Offering
Prospectus
[logo] FAN ENERGY INC.
A minimum of 400,000 shares
up to a Maximum of 3,000,000 shares
of Common Stock @ $0.25 per share
This is an initial public offering of common stock of Fan Energy, Inc. The
Selling Securityholders identified in this prospectus may also resell up to
2,700,000 shares using this prospectus. Fan will not receive any proceeds from
sales by Selling Securityholders.
Fan is making this offering on a "best efforts" basis, and no one has
committed to purchase any of the shares. The directors and officers of Fan may
purchase up to 400,000 of the shares offered in order to complete the minimum
offering. No public market currently exists and the offering price may not
reflect the market price of our shares after the offering.
The shares will not be listed in the NASDAQ stock market. Fan will seek to
have the shares included in the OTC Bulletin Board maintained by the National
Association of Securities Dealers, Inc. following completion of the offering.
These are speculative securities and investors will experience significant
dilution. See "Risk Factors" beginning on page ___.
Per Total Total
Share Minimum Maximum
Public Offering Price ........................... $0.25 $100,000 $750,000
Underwriting Discounts and Commissions .......... $0.025 $ 10,000 $ 75,000
Proceeds, before expenses, to Fan Energy ........ $0.25 $ 90,000 $725,000
Proceeds, before expenses, to the Selling
Securityholders ............................. $0.25 $675,000 $675,000
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. It is a criminal offense to represent
otherwise.
We explain the terms and conditions of our offering under "Plan of
Distribution" beginning on page ___.
Prospectus dated _______________, 1999
<PAGE>
INSIDE FRONT COVER
We have registered 2,700,000 shares which may be sold from time to time
using this prospectus by nine persons who hold the shares. See "Principal and
Selling Securityholders." 1,800,000 of these shares are issued and outstanding
and the balance are issuable upon exercise of outstanding stock purchase
warrants. See "Description of Securities." Shares could be sold by the holders
directly, through agents, dealers or underwriters, in the over-the-counter
market, or otherwise, including privately negotiated transactions by the
holders, on terms and conditions determined at the time of any such sale by the
Selling Securityholder. No broker, dealer or other person has undertaken to
purchase or sell any of the securities to be offered by the Selling
Securityholders. Expenses of any such sales of common stock will be borne by the
parties as they may agree. See "Plan of Distribution."
Certain persons participating in the offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the shares.
Specifically, persons acting as underwriters may bid for, and purchase, shares
of common stock in the open market, should a market develop. For a description
of these activities, See "Plan of Distribution."
We intend to furnish our stockholders with annual reports containing
audited financial statements.
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This prospectus contains certain "forward-looking statements" which involve
substantial risks and uncertainties. When used in this prospectus the
forward-looking statements are often identified by the use of such terms and
phrases as "anticipates," "believes," "intends," "estimates," "plans,"
"expects," "seeks," "scheduled," "foreseeable future" and similar expressions.
The "safe harbor" for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995 specifically does not apply to
statements made in connection with an initial public offering. Although the
Company believes the understandings and assumptions on which the forward-looking
statements in this prospectus are based are reasonable, the Company's actual
results, performances and achievements could differ materially from the results
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors."
Prospectus Summary
The following is a summary of the information included in this prospectus.
You should also read the detailed information, including, Risk Factors and
financial statements, which follow this summary. There is no assurance that Fan
will ever generate a profit from oil and natural gas operations.
The Company
Fan Energy Inc. is an independent energy company engaged in the exploration
and acquisition of crude oil and natural gas reserves. Fan's predecessor was
originally formed as an Idaho corporation in the early 1900s, and it was not
successful in exploring mining properties. In 1988 the predecessor was merged
into a newly-formed Nevada corporation which was inactive thereafter, with no
assets or liabilities through the end of 1996. In early 1997 the corporation was
reactivated when the holder of a majority of the outstanding shares transferred
control of the inactive corporation. The transferee elected new directors and
officers and caused the Company to effect a 10-into-1 reverse stock split.
Thereafter, the Company raised capital through the sale of its securities and
acquired interests in two oil and gas properties for cash and common stock. The
name of the corporation was changed to Fan Energy Inc. in December 1997.
Fan holds an undivided 20% interest in a 3,525 acre oil and natural gas
prospect located in Sweetwater County, Wyoming. One exploratory well has been
drilled on the prospect which has been completed as a commercial oil well.
Following testing Fan determined the well will not produce commercial quantities
of natural gas. The operator of the well, Fancher Oil Company, owned by the
Company's Chairman, plans two to three additional exploratory wells on this
prospect in 1999. Production from the first well began in June 1999.
Fan also holds an undivided 25% working interest in two exploratory
prospects located in Yolo and Solano Counties in the Sacramento Basin near
Sacramento, California which has been held for sale since approximately December
31, 1998. The prospects total approximately 18,137 acres. In 1998, we
participated in drilling five exploratory wells on the property, only one of
which was completed as a producer. The successful well has provided our only
revenue from our operations to date. See "Business--Properties."
We anticipate that as many as four to eight additional natural gas wells
may be drilled to depths from 2,000 to 8,000 feet on our prospects over the next
one to three years, depending upon whether drilling is successful, future oil
and natural gas prices, availability of capital and other factors. Until and
unless such wells are drilled and completed as successful producers (of which
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there can be no assurance) or we acquire or develop other oil or natural gas
production or reserves, we will have only minimal production, no cash flow, and
limited oil or natural gas reserves.
Business Strategy
Our intended strategy is to develop and increase oil and natural gas
reserves, production and revenue and includes the following key elements.
o Utilize State-of-the-Art Technologies. Certain of our officers, directors
and consultants have experience in utilizing 3-D Seismic data and related
"state-of-the-art" technologies for analyzing oil and natural gas drilling
and development opportunities. We intend to continue to analyze and review
oil and natural gas prospects which we hold or acquire based on analysis of
3-D Seismic data and related technologies. Our efforts will be focused on
improving drilling success rates and accelerating the development of oil
and natural gas reserves.
o Develop Drillsite Inventory. Our interests in the California and Wyoming
prospects include an inventory of up to approximately 18 potential
exploratory and development oil and natural gas wells. This estimate is
based on our review of the completed 3-D Seismic and the two successful
wells drilled on the prospects. We may also elect to participate in the
drilling of three or more exploratory wells on nearby Wyoming prospects
where we have the right to acquire a 20% working interest. We believe that
our present cash resources, proceeds from this offering and anticipated
proceeds from the exercise of outstanding warrants will enable us to pay
our anticipated share of drilling and completion costs only for two to
three exploratory wells on the these prospects.
o Acquire Interests in Producing Oil and Natural Gas Properties. We will
continue to evaluate potential acquisitions of interests in producing and
nonproducing oil and natural gas properties in the United States and Canada
which may become available on terms which we believe will be attractive and
which have the potential to add to our reserves and production through the
application of lower risk exploitation and exploration techniques. These
acquisitions would be subject to the availability of properties deemed
suitable by the Board of Directors, availability of financial resources,
location and other factors.
Our executive offices are located at 1801 Broadway, Suite 720, Denver,
Colorado 80202, where we share offices with George H. Fancher Jr., the Company's
Chairman. The telephone number is (303) 296-6600. We also share an office at
14555 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85254 with Arizona
Corporate Management, Inc., a business owned by William E. Grafham, President.
The phone number is (602) 483-8848.
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The Offering
Common Stock Offered: A minimum of 400,000 shares (referred
By the Company to elsewhere as the "minimum
offering"), and up to 3,000,000 shares
(referred to elsewhere as the "maximum
offering")
By the Selling Securityholders Up to 2,700,000 shares, including up
to 900,000 shares issuable upon
exercise of outstanding warrants held
by nine persons. The Selling
Securityholders have agreed not to
sell or otherwise transfer securities
held by them for at least 120 days
from the date of this Prospectus and
until 30 days after Fan completes its
offering; thus, the offering by Fan
will not be concurrent with sales by
Selling Securityholders. See "Risk
Factors-Potential Sales by Selling
Securityholders" and "Plan of
Distribution."
Shares outstanding prior to
Offering 10,051,704 shares of common stock.
After Minimum Offering 10,451,704 shares of common stock
(assuming no outstanding warrants are
exercised).
After Maximum Offering 13,051,704 shares of common stock
(assuming no outstanding warrants are
exercised).
Use of proceeds We will use the proceeds from the sale
of shares to fund our anticipated
drilling obligations. We expect at
least $75,000 in net proceeds from
completion of the minimum offering and
up to as much as $710,000 if all the
shares are sold. We will receive no
proceeds from sale of any shares by
Selling Securityholders.
Our officers and directors may
purchase up to 400,000 shares,
although they are not obligated to do
so. We refer you to the following
sections of this prospectus: "Plan of
Distribution" and "Use of Proceeds"
where more detailed information is
provided.
Risk factors The audit report of the independent
accountants contains a "going concern"
qualification. You should not invest
in shares unless you can afford the
loss of your entire investment. Please
review carefully the entire prospectus
and consider, among other things, the
"Risk Factors," which contain a
detailed discussion of these risks.
Trading We plan to request one or more
broker-dealers which are members of
the NASD to apply to have the shares
listed on the OTC Bulletin Board
Market maintained by the NASD at the
conclusion of the offering. No present
arrangements have been made for shares
to be listed on the OTC Bulletin
Board.
5
<PAGE>
Summary Financial Information
The following summary financial information for the periods stated
summarizes certain information from our financial statements included elsewhere
in this prospectus. You should read this information in conjunction with
Management's Plan of Operations and the Financial Statements and the related
Notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Cumulative
Amounts From Three Months Ended
January 1, 1997 March 31,
to March 31, ------------------
1999 1998 1999
--------------- ---- ----
Unaudited Unaudited
<S> <C> <C> <C>
Statement of Operations Data:
Revenue ..................................................... $ 20,662 $ -- $ 20,662
Costs and expenses .......................................... 1,719,802 21,646 64,017
Net(loss) ................................................... (1,699,140) (21,646) (43,355)
Net loss per share .......................................... (0.27) (0.003) (0.004)
Net cash provided by (used in) operating activities ......... (193,241) 27,459 7,274
<CAPTION>
December 31, March 31,
1998 1999
------------ ---------
<S> <C> <C>
Balance Sheet Data: Unaudited
Working capital ............................................. $ 14,139 $ (85,231)
Total assets ................................................ 706,459 789,202
Total liabilities ........................................... 1,736 127,834
Stockholders' equity ........................................ 704,723 661,368
</TABLE>
6
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RISK FACTORS
Some of the statements contained in this prospectus under "Prospectus
Summary," "Risk Factors," "Management's Plan of Operations" and "Business" are
"forward looking." They include statements that involve risks and uncertainties
that might adversely affect Fan's operating results in the future in a material
way. Such risks and uncertainties include:
o The availability of capital resources;
o Whether the offering can be completed;
o Whether Fan is successful in exploring for oil and natural gas; and
o Management participation on a part time basis.
Many of these risks are beyond Fan's control. The actual results may differ
materially from those suggested by the forward-looking statements for various
reasons, including those discussed below.
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in the shares.
Fan has been operating its business only since 1998.
Fan was substantially reorganized and entered a new line of business in
late 1997. Through December 31, 1998 the only business conducted by Fan was to
acquire undivided minority interests in three natural gas exploratory prospects
and to participate in drilling six exploratory wells, of which four were
unsuccessful. We plan initially to conduct limited operations, primarily by
continuing to participate as a minority owner in the exploration of our two
prospects, one of which is being held for sale. Our oil and natural gas
exploration and development business is subject to all the risks inherent in the
establishment by a new business enterprise, particularly including a shortage of
cash, minimal cash flow and lack of substantial capitalization. We do not
anticipate that we will receive any substantial cash flow from our initial
exploratory activities until at least several additional successful wells have
been drilled, completed and placed on production. Fan presently lacks sufficient
capital resources to drill a sufficient number of wells to establish significant
cash flow. We anticipate that various complications and delays may be
encountered in connection with our oil and gas drilling activities.
Fan is a development stage company and has generated operating losses since
inception. Fan's auditors have issued a qualified audit report. Fan requires
additional financing in order to continue its business operations.
Fan has incurred the following operating losses: approximately $199,000 for
the year ended December 31, 1997, $1,457,000 for the year ended December 31,
1998 and $43,000 in the first quarter ended March 31, 1999. At the end of the
first quarter, we had a working capital deficit of approximately $86,000. The
auditors' reports for Fan's financial statements for the periods ending December
31, 1997 and 1998 were qualified as to whether Fan has sufficient operating
capital to enable it to continue as a going concern. We intend to use our
available cash resources and proceeds of this offering and the proceeds, if any,
from the exercise of outstanding stock purchase warrants to continue to
participate in the exploratory drilling of our Wyoming oil and natural gas
prospects. We intend to participate in drilling at least three additional wells
during 1999, but we will require additional capital resources to do so. Our
7
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anticipated share of the expenses of drilling three wells and completing any
successful wells exceeds our present cash resources. Therefore, there can be no
assurance that we will have sufficient funds available to complete our intended
exploratory drilling. If we complete the sale of at least the minimum shares
being offered, and if outstanding stock purchase warrants which expire in 1999
are exercised, we would have sufficient funds available to complete the initial
portion of our exploratory drilling plan in 1999 and participate in drilling the
three wells. There can be no assurance that required additional financing will
be obtained or that any other financing would be available to us from other
sources.
If Fan completes only the minimum offering described in this prospectus,
Fan will need additional financing in late 1999.
We will be looking to the following sources for operating capital during
the balance of 1999:
o The net proceeds from this offering;
o Proceeds, if any from the exercise of outstanding stock purchase
warrants, which would total as much as $295,000 if all warrants are
exercised;
o Up to $150,000 in proceeds available to us from a line of credit from
a bank which is secured by the guarantee of our Chairman; and
o Net cash flow of around $8,000 to $10,000 per month from the sale of
hydrocarbons produced from our two existing wells.
To pay our ongoing operating expenses through the end of 1999 and to participate
in the drilling of three wells on our Wyoming prospect will require capital of
approximately $370,000. Thus, we will need to secure additional financing by the
end of 1999 in order to grow our business. If Fan is unable to secure additional
financing, Fan may have to:
o Forfeit its interest in wells proposed to be drilled;
o Assign its interest in exploratory prospects to other participants on
such terms as can be negotiated; or
o Sell a portion of our interest in existing producing property and use
the sale proceeds to fund Fan's participation in new projects.
It is important to remember:
o Acquiring commercial drilling and producing oil and natural gas
properties requires substantial capital;
o Fan may need to raise additional funds through public or private
financings or borrowings;
o Fan may not be able to raise sufficient additional funds to carry out
its intended business;
o If Fan cannot obtain sufficient additional capital resources, our
operations and financial condition will suffer;
o Any capital resources which are available may not be available on
terms that are advantageous to us;
o If Fan issues additional equity or other securities raise funds, the
ownership interest of stockholders at that time will be diluted; and
o Any additional securities issued to raise capital may have better
rights, preferences are privileges than your common stock.
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This offering will be made primarily by officers and directors of Fan.
We are making the offering described in this prospectus on a direct
participation basis by our officers and directors. None of such persons has any
recent experience in the sale of securities in such an offering. For this reason
we cannot offer assurance that the offering will be successfully completed and
it is unlikely that all shares offered will be sold. In addition, because we do
not have an underwriter to assist in this offering, it may be more difficult for
us to complete the offering and to establish a liquid public trading market
following the offering. We intend to seek assistance in the offering from one or
more brokers or dealers who are members of the National Association of
Securities Dealers, Inc. However, no broker or dealer has committed to assist in
this offering. Our officers and directors or their associates may purchase
shares in this offering in order to help us to complete the sale of at least the
minimum offering. However, such persons are not obligated to purchase any
shares. For a description of our plans to complete the offering see "Plan of
Distribution."
Selling Securityholders may sell shares.
We have also registered 1,800,000 outstanding shares of common stock and
900,000 shares of common stock underlying exercisable stock purchase warrants
for resale by the holders. A potential conflict of interest exists between our
offering, described in this prospectus, and the sale of shares by selling
security holders. The nine persons who hold these securities have each agreed
not to sell or transfer (i.e., to "lock-up") their Fan common stock until the
later of:
o 120 days following the date of this prospectus; or
o Until 30 days after Fan has completed or discontinued its offering,
whichever is later.
No concurrent offering by the Selling Security Holders and Fan is therefore
expected. However, the fact that these shares will become available for sale may
adversely affect the willingness of brokers or dealers to seek to have Fan's
stock listed in the OTC Bulletin Board market for public trading or to make a
market in Fan's common stock following the offering. Also, the availability of
such shares for sale may adversely affect any public trading market which may
develop following the offering. The Selling Security Holders may sell their
shares after their lock-up agreements expire whether or not Fan completes the
minimum offering.
Fan is in the early stages of its planned development activities.
Fan's strategy includes:
o The use of 3-D Seismic and other state-of-the-art technology to
maximize the potential of our properties;
o The drilling of additional exploratory wells in our Wyoming prospect;
and
o Drilling additional exploratory and development wells in the area,
assuming that our evaluation of our initial well is favorable. This
well is now producing oil only, as testing in May 1999 established
that it would likely not produce natural gas, the intended objective,
in commercial quantities. Our success in this project will be
materially dependent upon whether our initial few exploratory wells
are commercially productive wells and whether we can acquire interests
in additional exploratory prospects on favorable terms. We can offer
no assurance as to whether we will drill enough productive wells to
establish significant oil or natural gas reserves and generate
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positive cash flow in the future. If we drill a significant number of
nonproductive wells, Fan's business, financial condition and results
of our operations would be adversely affected.
As a result of the early stage of our business activities, we do not yet
know whether our exploration activities will be successful.
We will have limited management participation.
Our officers and directors are presently compensated primarily with common
stock of Fan and are not employed on a full time basis. Each of our officers and
directors are expected to devote only a portion of their time to our business
and affairs and all such persons presently have other business affairs to which
they each devote most of their time. The success of Fan in developing reserves
of oil and natural gas and cash flow from oil and gas production will be
primarily dependent upon the active participation of George H. Fancher Jr.,
Fan's Chairman and William E. Grafham, the President of Fan. Both of Messrs.
Fancher and Grafham have substantial experience in the oil and gas business, but
both also have significant and demanding outside personal business interests,
the effect of which will be to minimize the amount of time that either has to
devote to Fan's business or affairs. Mr. Fancher, the Chairman and Chief
Operating Officer, plans to devote about 10% of his available business time to
Fan's business. Mr. Grafham expects to devote only such as may be required for
Fan's business. This limited time of availability of management may adversely
affect our ability to identify and acquire interests in other oil and gas
properties or to efficiently oversee the day-to-day development of our existing
exploratory endeavors. We do not have key man life insurance on the lives of,
nor any employment agreement with, any of our officers or directors.
Certain directors have conflicts of interest with Fan.
Fan's directors and officers are all involved in other business and have
other interests in the oil and gas business which may present conflicts of
interest with respect to Fan's business. Mr. Fancher is involved on a full time
basis for his own account as an independent oil and gas producer. Mr. Fancher
often permits others to participate (i.e., acquire a working interest) in his
oil and gas projects. Mr. Fancher has represented to Fan that oil or natural gas
prospects which he offers to third parties for participating, in which Mr.
Fancher, in his sole discretion, believes to be appropriate for Fan, will be
offered to Fan on terms no less available to Fan than are available to any third
party. Also, oil and gas business opportunities generated by others and made
available to Mr. Fancher for his participation, which he in his sole discretion,
believes to be appropriate for Fan, will be made available to Fan on the same
terms as are offered to Mr. Fancher. Mr. Fancher may or may not participate in
such ventures for his own account. Fan will participate in an oil and gas
prospect made available by Mr. Fancher only if a majority of Fan's directors,
other than Mr. Fancher, approve the investment. Each of the other directors has
existing personal interest in various aspects of the oil and gas business and
each intends to continue such activities on his own behalf. However, each of the
directors has represented that any business opportunity in the oil or natural
gas business involving property located within 50 miles of any existing property
in which Fan holds an interest will be first offered to Fan before the director
or officer pursues the opportunity for his own benefit.
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Fan lacks a significant operating history.
Fan has a limited operating history upon which investors may base their
evaluation of our future prospect. The financial results from Fan's recent
historical periods are not expected to be indicative of future results. We can
make no assurance that Fan will experience growth of revenue, oil and natural
gas reserves or production. Any future growth of Fan's oil and natural gas
reserves from production and operations would place significant demands on Fan's
financial, operational and administrative resources.
Fan is subject to the risk of volatile oil and natural gas prices.
Prices available for future production of oil and natural gas will
determine many aspects of Fan's future financial viability, including:
o Revenue;
o Results of operations, profitability and growth; and
o The carrying value of oil and natural gas reserves acquired or
developed by Fan.
Historically, the markets for oil and natural gas have been volatile and such
volatility may continue or recur in the future. Various factors beyond the
control of Fan will effect the prices of oil and natural gas, including the
worldwide and domestic supplies of oil and natural gas, the ability of members
of the Organization of Petroleum Exporting Countries to agree to and maintain
oil price and production controls, political instability or armed conflict in
oil or natural gas producing regions, the price and level of foreign imports,
the level of consumer demand, the price, availability and acceptance of
alternative fuels, the availability of pipeline capacity, weather conditions,
domestic and foreign government regulations and taxes and the overall economic
environment.
Any significant decline in the price of oil or natural gas will adversely
affect Fan and could require an impairment in the carrying value of any reserves
which Fan may develop in the future.
Fan does not control its oil and gas properties.
Fan does not initially expect to be the Operator of any of its oil or
natural gas prospects. All of Fan's oil and natural gas properties presently
consist of minority undivided interest in properties operated by another party.
For the most part Fan does not have the right to determine the means, timing or
expenditures made in connection with operations, although Fan, or any other
owner of an undivided interest, may propose certain exploration activities and
become the Operator for that activity if the operator declines to act. Thus, Fan
will be unable to control material aspects of commercialization of its principal
assets and will be dependent upon the expertise, experience, ability, diligence
and financial condition of those who operate the various properties. An
Operator's failure to properly perform could adversely affect Fan.
Fan will experience drilling and operating risks.
Oil and natural gas drilling activities are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered. We can make no assurance that wells in which we have an interest
will be productive or that we will recover al or any portion of our drilling or
other exploratory costs. Drilling for oil or natural gas may involve
unprofitable efforts, not only from dry wells but from wells that are productive
11
<PAGE>
but do not produce sufficient net revenue to return a profit after drilling,
operating and other costs. The costs of drilling, completing and operating wells
is often uncertain. Our drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, many of which are beyond our control,
including the following:
o Economic conditions;
o Title problems;
o Compliance with governmental and tribal requirements;
o Water shortages;
o Weather conditions;
o Shortages and delays in equipment or services.
Our future drilling activities may not be successful and, if unsuccessful, such
failure may have a material adverse affect on our future results of operations
and ability to participate in other projects.
Our operations are also subject to hazards and risks inherent in
drilling for and producing and transporting oil and natural gas, including such
hazards as:
o Fires; o Natural disasters;
o Explosions; o Encountering formations with abnormal
o Blowouts; pressures;
o Pipeline ruptures; o Cratering;
o Spills
Any of these types of hazards and risks can result in the loss of
hydrocarbons, environmental pollution, personal injury claims and other damages
to properties. As protection against such operating hazards, Fan intends to
maintain insurance coverage against some, but not all of these potential risks.
We also may elect to self insure in circumstances in which we believe that the
cost of insurance, although available, is excessive relative to the risks
presented. The occurrence of an event that is not covered, or not fully covered,
by third party insurance could have a material adverse affect on Fan's business,
financial condition and results of operations.
Fan must comply with significant government regulation.
Oil and natural gas operations are subject to extensive federal, state and
local laws and regulations relating to the exploration for, and development,
production and transportation of, oil and natural gas, as well as safety
matters, which may changed from time to time in response to economic conditions.
Matters subject to regulation by federal, state and local authorities include:
o Permits for drilling operations; o Road and pipeline construction;
o Reports concerning operations; o The spacing of wells;
o Unitization and pooling of properties; o Taxation; and
o Environmental protection o Production rates.
There can be no assurance that delays will not be encountered in the preparation
or approvals of such requirements or that the results of such regulations will
not require us to alter our development plans. Any delays in obtaining approvals
or material alterations to our development plans could have a material adverse
12
<PAGE>
effect on our operations. From time to time regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and natural gas below actual production capacity in order to conserve
supplies of oil and natural gas. Fan believes it is and will continue to be in
substantial compliance with all applicable laws and regulations. However, the
requirements imposed by such laws and regulations are frequently changed and
subject to interpretation. We are unable to predict the ultimate cost of
compliance with these requirements or their effect on our operations.
Significant expenditures may be required to comply with governmental laws and
regulations and may have a material adverse affect on our financial condition
and future results of operations.
Fan must comply with environmental regulations.
Exploratory and other oil and natural gas wells must operated in compliance
with complex and changing environmental laws and regulations adopted by federal,
state and local government authorities. The implementation of new, or the
modification of existing, laws and regulations could have a material adverse
affect on properties in which Fan may have an interest. Discharge of oil,
natural gas or other pollutants to the oil, soil or water may give rise to
significant liabilities of Fan to government and third parties and may require
Fan to incur substantial cost of remediation. Fan may be required to agree to
indemnify sellers of properties purchased by Fan against certain liabilities for
environmental claims associated with those properties. We can give no assurance
that existing environmental laws or regulations, as currently interpreted, or as
they may be reinterpreted in the future, or future laws or regulations will not
materially adversely affect our results of operations and financial conditions.
Development of oil and natural gas reserves.
Fan's future success will depend upon its ability to find, develop or
acquire oil and natural gas reserves that are economically recoverable. Once
established, Fan's proved reserves would decline as they are depleted by
production unless Fan continues to successful explore and acquire additional
proved oil and natural gas reserves. Fan must continue its exploratory drilling
or otherwise acquire proved reserves to continue to increase its reserves and
its production. Our strategic plan includes increasing our reserve base through
exploratory drilling, development and exploitation of our existing properties
and acquiring other producing properties if we have sufficient capital
resources. We can give no assurance that our planned development and
exploitation projects will result in significant additional reserves or that we
will have success drilling productive wells with reserves greater than finding
and development costs.
Fan's existing stockholders will continue to have control.
Upon completion of the minimum offering, directors and executive officers
of Fan will own approximately 43.8% of its outstanding common stock
(approximately 35.1% if all shares offered are sold). As a result, these
stockholders, as a group, will probably be able to continue to control the
outcome of stockholder votes, including votes concerning the following:
o The election of directors;
o The adoption or amendment of provisions in Fan's Certificate of
Incorporation or Bylaws; and
o The approval of mergers and other significant corporate transactions.
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<PAGE>
These factors may also have the effect of delaying or preventing a change in the
management or voting control of Fan, including transactions that would otherwise
could involve payment of a premium for prevailing market prices to holders of
common stock.
Fan will face substantial competition.
Fan will be competing with may other companies, nearly all of which will
have substantially larger financial resources, operations, staffs and
facilities. Fan will continue to face intense competition from both major and
independent oil and natural gas companies when it seeks to acquire desirable
producing properties or new leases for future exploration and to market its oil
and natural gas production. These competitors have financial and other resources
substantially in excess of those available to Fan. The effects of this highly
competitive environment will likely have a material adverse effect on Fan.
Acquiring interests in other properties involves substantial risks.
Fan intends to evaluate and to acquire interest in oil and natural gas
properties in areas where various members of management have experience or
knowledge, and which in management's judgement will provide attractive
investment opportunities for the addition of production and oil and gas
reserves. To acquire producing properties or undeveloped exploratory acreage
will acquire an assessment of a number of factors including:
o Value of the gas properties and likelihood of future production;
o Recoverable reserves;
o Operating costs;
o Potential environmental and other liabilities;
o Drilling and production difficulties; and
o Other factors beyond Fan's control
Such assessments will necessarily be inexact and uncertain. Fan intends to
perform such reviews in a manner which it believes at the time to be generally
consistent with industry practices. Such reviews, however, may not reveal all
existing or potential problems, nor would it permit a buyer to become
sufficiently familiar with such properties to assess fully the deficiencies or
benefits. For instance, inspections may not be performed on every well, and
structural or environmental problems may not be observable even when an
inspection is undertaken. Fan would generally expect to assume preexisting
liabilities, including environmental liabilities, and generally would acquire
interests in new properties on an "as is" basis. With respect to its two
acquisitions of properties to date, Fan has no material commitments to make
capital expenditures to comply with existing environmental or similar
requirements. We can make no assurance that any future acquisitions will be
beneficial, and any unsuccessful acquisition would have a material adverse
affect on Fan.
Fan's corporate charter includes certain anti-takeover provisions.
Fan's Certificate of Incorporation authorizes the Board of Directors to
issue up to 5,000,000 shares of preferred stock without stockholder approval and
to set the rights, preferences and other designations, including voting rights,
of those shares as the Board of Directors may determine. These provisions,
together with the matters described in "Risk Factors--Control by Existing
Stockholders," may discourage transactions involving actual or potential changes
14
<PAGE>
of control of Fan, including transactions that otherwise could involve payment
of a premium over prevailing market prices to holders of common stock. Fan has
no plans, arrangements, commitments or understandings relating to potential
issuance of preferred stock. Fan also is subject to provisions of the Nevada
General Corporation Law that may make some business combinations more difficult.
See "Description of Capital Stock--Certain Provisions of the Fan's Charter and
Bylaws," and "--Nevada Law Provisions."
Absence of dividends on common stock.
We have never declared or paid cash dividends on our common stock and we do
not anticipate that we will pay dividends in the future. Fan anticipates that
future earnings, if any, will be retained for development of our business.
There is a large number of shares available for future sale.
If the minimum offering is completed, Fan will have a total of 10,451,704
shares outstanding, or 13,051,704 shares if all shares offered are sold. Of the
outstanding shares, the shares offered hereby, 2,623,533 presently outstanding
shares will be freely tradeable without restriction or registration under the
Securities Act of 1933, as amended (the "Securities Act"), by persons other than
"affiliates" of Fan, as defined under the Securities Act. The remaining
5,148,171 outstanding shares of common stock will be "restricted securities" as
that term is defined by Rule 144 as promulgated under the Securities Act, of
which 1,800,000 "restricted" outstanding shares, and up to 900,000 additional
restricted shares of common stock issuable upon exercise of outstanding
warrants, will be registered for resale. See "Principal and Selling
Securityholders." Upon completion of the minimum offering, Fan will also have
options outstanding to purchase an aggregate of 910,000 shares of common stock.
Prior to the offering, there has been no public market for the common stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of the common stock in any market which may develop. Nevertheless,
sales of substantial amounts of such shares in any public market, or the
perception that such sales could occur, could materially and adversely affect
the market price of the common stock and could impair Fan's future ability to
raise capital through an offering of its equity securities.
Investors will face immediate and substantial dilution.
Purchasers of common stock in the offering will experience an immediate and
substantial dilution in net tangible book value per share of approximately $0.18
(72%) if only the minimum offering is completed, or $0.15 (60%) if all shares
offered by Fan are sold.
Offering price determination.
The offering price was arbitrarily determined. The offering price of the
common stock was established by Fan based on such factors as Fan's capital
requirements, financial condition and prospects, percentage ownership to be held
by investors following the offering, management and the general condition of
securities markets and the oil and gas market at the time of the offering. The
15
<PAGE>
offering price does not necessarily bear any relationship to Fan's assets, book
value, earnings history or other established criteria of value. The public
offering price of the common sock should not be considered an indication of the
actual value of Fan's securities.
Fan's stock has not been publicly traded and its stock price following the
offering is likely to be volatile.
There has been no public market for Fan's common stock prior to this
offering. The initial public offering price of the common stock has been
determined by Fan based on several factors that may not be indicative of future
market prices. The common stock may not be traded or listed on any public
market. If public trading does develop, it may be terminated with little notice.
The market price of the common stock and price at which Fan may sell securities
in the future could be subject to large fluctuations for a number of reasons,
including the following:
o Changes and variations in Fan's operating results;
o Litigation;
o Market conditions;
o The prices of oil and natural gas;
o Liquidity of Fan and its ability to raise additional funds;
o The number of market makers for Fan's common stock; and
o Other similar factors.
If Fan's operating results should be below the expectations of public
market analysts or investors in one or more future periods, it is likely that
the price of the common stock would be materially adversely affected. In
addition, the stock market has experiences significant price and volume
fluctuations that have particularly effected market prices of equity securities
of many energy companies, particularly emerging and new companies. General
market fluctuations may also adversely affect the market price of the common
stock.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The Commission's regulations generally define a penny stock to be an
equity security that has a price of less than $5.00 per share, subject to
certain exceptions, including having:
o An equity security listed on NASDAQ or issued by an issuer that has:
o Net tangible assets of at least $2 million, if such issuer has
been in continuous operation for three years;
o Net tangible assets of at least $5 million, if such issuer has
been in continuous operation for less than three years; or
o Average annual revenues of at least $6 million, if such issuer
has been in continuous operation for less than three years).
None of such exceptions are applicable to Fan. Unless an exception is available,
the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith.
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<PAGE>
In addition, unless and until the securities of Fan are listed for trading
on NASDAQ or Fan has $2 million in net tangible assets, trading in Fan's
securities will be subject to Rule 15c2-6 promulgated under the Securities
Exchange Act of 1934 for non-NASDAQ and nonexchange listed securities. Under
this rule, broker-dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to the sale of such securities. Securities
would be exempt from this rule if the market price is at least $5.00 per share.
Because the common stock would be characterized as penny stock, the market
liquidity for Fan's securities could be adversely affected. In such an event,
the regulations on penny stocks could limit the ability of broker-dealers to
sell Fan's securities and the ability of purchasers in this offering or other
stockholders to sell their securities in the secondary market.
Fan's corporate charter makes certain limitations on director liability.
Fan's Restated Articles of Incorporation ("Restated Articles of
Incorporation") provide, as permitted by Nevada law, that a director of Fan
shall not be personally liable to Fan or its stockholders for monetary damages
for breach of fiduciary duty as a director, with certain exceptions. These
provisions may discourage stockholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by stockholders on behalf of Fan against directors. In addition, Fan's
Restated Articles of Incorporation and bylaws provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Nevada law.
17
<PAGE>
USE OF PROCEEDS
The estimated net proceeds from sale of the shares, after deduction of
assumed 10% selling commissions and the estimated expenses of this offering,
will be approximately $710,000 if all shares offered are sold and $75,000 if
only the minimum offering is completed. Fan anticipates that the proceeds will
be applied and allocated over the next 12 months following this offering in
approximately the amounts set forth below:
Minimum Maximum
Shares Sold Shares Sold
----------- -----------
General and Administrative Expenses
(Officer and employee compensation and benefits,
facilities, furniture and equipment, and
professional expenses) ..................... $ -- $ 10,000
Oil and natural gas drilling expenses(1) ........ 75,000 700,000
-------- --------
Total ................................... $ 75,000 $710,000
======== ========
- -----------------
(1) We plan to participate in the drilling of at one and perhaps as many as
eight wells on our Wyoming prospect in 1999 at expected drilling costs
to Fan of approximately $80,000 per well.
Pending their use for the foregoing purposes, Fan may invest the proceeds
in whole or in part in short term government or higher rated investment grade
securities.
The foregoing represents Fan's best estimate of its use of the net proceeds
of this offering based on present planning and business conditions. Fan may
change its use of the proceeds as unanticipated events or occurrences, such as
increased expenses, successful or unsuccessful drill targets or acquisition
opportunities, may cause Fan to redirect its priorities and reallocate the use
of proceeds.
Any funds received by Fan upon exercise of outstanding warrants will be
added to working capital.
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<PAGE>
COMPARATIVE DATA
As of March 31, 1999, Fan had a net tangible book value of approximately
$658,000 or $0.065 per share. If all shares offered by Fan are sold, after
deducting underwriting commissions and other offering expenses, the pro forma
net tangible book value of Fan would be approximately $1,321,000 or $0.101 per
share, which represents an immediate increase of approximately $0.036 per share
to present stockholders and an immediate dilution of approximately $0.15 per
share (60%) per share to the investors in this offering. If only the minimum
offering is sold, after deducting commissions and other offering expenses, the
pro forma net tangible book value as of March 31, 1999, would be approximately
$736,000 or $0.07 per share, which represents an immediate increase of
approximately $0.005 per share to present stockholders and an immediate dilution
of approximately $0.18 per share (72%) to the persons purchasing shares pursuant
to the offering being made hereby.
The following data illustrates the per share dilution to the investors
purchasing the shares being offered hereby:
Minimum Maximum
Offering Sold Offering Sold
------------- -------------
Offering price ........................................ $ 0.25 $ 0.25
Net tangible book value:
Before offering ................................... 0.065 0.065
After offering .................................... 0.070 0.101
Increase attributable to payment by investors ....... 0.005 0.036
Dilution to investors(1)............................... 0.18 0.15
- ---------------
(1) Dilution is determined by subtracting pro forma net tangible book value
per share after the offering from the amount paid per share by
investors in this offering. Dilution will be increased by the amount of
our operating losses for the period from March 31, 1999 to the
completion of the offering.
The following tables compare the respective investments of current
stockholders and of investors in this offering assuming the maximum and minimum
shares offered are sold:
<TABLE>
<CAPTION>
Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Minimum Offering Shares common stock common stock Consideration
- ---------------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
New investors...................... 400,000 3.8% $ 0.25 $ 160,000
Existing stockholders.............. 10,051,705 96.2% 0.19 1,943,000(1)
---------- ------ ---------
10,450,705 100.0% $ 2,103,000
========== ===== =========
<CAPTION>
Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Maximum Offering Shares common stock common stock Consideration
- ---------------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
New investors...................... 3,000,000 23.0% $ 0.25 $ 1,200,000
Existing stockholders.............. 10,051,705 77.0% 0.19 1,943,000(1)
---------- ------ ---------
13,051,705 100.0% $ 3,143,000
=========== ===== =========
</TABLE>
- --------------------
19
<PAGE>
(1) Includes $300,000, the net cost incurred by Mr. Fancher in connection
with acquisition and exploration of our California properties in excess
of the cash payment by Fan to Mr. Fancher for his interest in the
properties. See "Certain Transactions." Does not include the value of
services for which 250,000 shares were issued in 1997 and 215,000
shares were issued in 1998. Also, does not include consideration paid
to Fan's predecessor prior to 1996 for 135,004 shares now held by
approximately 500 stockholders.
The dilution figures and other comparative data contained herein do not
take into account the possible exercise of outstanding warrants or options.
DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS
Fan's common stock is not presently traded on any public market. It is
anticipated that the common stock may be listed on the NASD's OTC Bulletin Board
Market following the completion of the offering.
Dividend Policy. Fan has never declared nor paid any dividends on its
common stock, Fan does not anticipate that dividends will be paid on its common
stock in the foreseeable future. Fan presently intends to follow a policy of
retaining earnings, if any, to expand Fan's oil and natural gas business. Any
future determination to pay dividends on the common stock will depend on Fan's
results of operations, financial condition and capital requirements. No
assurance can be given that any holder of common stock will ever receive
dividends in respect of the holder's shares of common stock.
Stockholders. As of the date hereof, Fan had 522 holders of record of
common stock.
MANAGEMENT'S PLAN OF OPERATION
In the following discussion we are providing an analysis of our financial
condition and the Plan of Operation during the next quarter and the balance of
the fiscal year. This discussion should be read in conjunction with our
financial statements and the notes thereto. Certain matters discussed below are
based on potential future circumstances and developments which we anticipate or
expect, but which cannot be assured. Such forward-looking statements include,
but are not limited to, our plans to conduct drilling operations, trends in the
results of our operations, anticipated rates of production, natural gas and oil
prices, operating expenses and our anticipated capital requirements and capital
resources. The actual results which we achieve in our operations could differ
materially from the matters discussed in the forward-looking statements.
We generated our first revenue in the first quarter of 1999, when we began
to sell natural gas produced from the first of two successful exploratory wells
which we drilled in 1998. The producing natural gas well in the Bali prospect in
the Sacramento Basin of central California and our interest in the surrounding
unexplored acreage is being held for sale. Pending any sale of those properties,
we will continue to receive revenue from production from this well. In late 1998
we participated in drilling a successful well in the Horsethief Canyon prospect,
in which we hold a 20% working interest, and incurred approximately $160,000 in
drilling and completion costs, of which $74,000 was expended in the first
quarter. As of the date of this report, the Operator has completed testing the
well. The testing disclosed that it is unlikely that commercial amounts of
natural gas will be produced from this well. We anticipate at least one and as
many as 17 additional wells may be drilled on the prospect, of which at least
the first will be drilled in summer 1999. Our anticipated drilling and
completion expenses on the next well is anticipated to be approximately $80,000.
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<PAGE>
We also have the option to acquire a 20% working interest in three additional
exploratory natural gas drilling prospects generated by Fancher Resources, LLC
near the Horsethief Canyon prospect. Our participation in drilling those
prospects will be determined by availability of capital resources.
Because we decided to discontinue further exploration of our Bali and Fiji
prospects, we took a non-cash impairment charge totaling approximately $1.25
million at the end of 1998. As a result of this charge, the book value of our
oil and natural gas properties was reduced to the approximate amount of the
present value of the oil and natural gas reserves on these properties as
estimated by an independent petroleum engineer.
We had general and administrative expenses of $41,400 in the first quarter,
compared to $21,600 in the prior year, reflecting more expenses incurred by
being a public reporting company and administering our interests in two oil and
natural gas prospects. We expect around $110,000 of such expenses for the
balance of the fiscal year. Other capital costs associated with participation in
acquiring, exploring and drilling of the Horsethief Canyon and nearby prospects
will be at least $250,000 and could be as much as $700,000, depending on such
factors as the success of initial drilling efforts, decisions by the Operator to
conduct additional exploratory drilling and related factors.
At March 31, 1999 we had approximately $23,000 in cash and receivables of
around $19,000. In March our President loaned us $20,500, which he may use to
exercise options during the second or third quarter. We anticipate that our
revenue from the production of the one producing natural gas well on the Bali
prospect will be approximately $7,500 to $9,000 monthly during the remainder of
1999, depending upon the production rates and applicable natural gas prices. On
June 1 we completed an arrangement for a $150,000 line of credit which is
secured by the personal guarantee of our Chairman. This loan will be used to
repay amounts owed Fancher Resources, LLC and other accounts payable and to fund
some operating expenses. We will require additional capital resources in order
for us to complete the 1999 drilling and exploration activities described above
and to pay our ongoing operating expenses.
In May 1998 we commenced a public offering in which we offered up to a
maximum of 3,000,000 common shares at $1.00 per share. No shares were sold and
expenses incurred in connection with the offering during 1998 were expensed at
year end. We have decided to revise the offering and reduce the offering price
to $0.25 per share, which offering is expected to recommence during the second
quarter of 1999. We also extended to July 31, 1999 the expiration date for
outstanding warrants entitling the holders to purchase up to 1,180,000 shares of
common stock. We reduced the exercise price for these warrants to $0.25 per
share. We are anticipating that at least a portion of these outstanding warrants
will be exercised by the warrant holders. If all the warrants are exercised, of
which there is no assurance, we would receive approximately $295,000 by July 31,
1999, the date when the warrants will expire unless they are again extended. If
all the warrants should be exercised, the proceeds to Fan would enable Fan to
pay its anticipated operating expenses and to participate in the drilling of at
least two exploratory wells in 1999. If Fan completes the sale of at least
400,000 shares, the anticipated minimum amount of the offering, Fan would
receive gross proceeds of approximately $100,000. We can make no assurances as
to whether any of the warrants will be exercised or whether we will be able to
successfully complete any portion of our anticipated offering.
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<PAGE>
Unless a substantial portion of the outstanding warrants are exercised or
at least the minimum offering in the anticipated offering is completed or we
sell our interests in the Bali and Fiji prospects, we do not believe that our
available cash will be sufficient to pay all of our anticipated general and
administrative expenses, capital lease costs and anticipated drilling expenses
over the next 12 months. As a result we may be unable to participate in drilling
any additional exploratory or development wells on the Horsethief Canyon
prospect or other nearby prospects. If we are able to raise additional capital
we will use the proceeds to pay our ongoing operating expenses and to
participate in additional drilling. To fund the anticipated near term capital
shortfall, we may accept loans from management or other affiliates, in addition
to the line of credit referred to above. Assuming sufficient capital resources
become available, we will continue to seek to acquire interests in other oil or
natural gas properties.
We do not have any employees and instead we use consultants for matters
pertaining to drilling, property evaluations and administration. We do not
presently contemplate hiring employees during the next 12 months.
Year 2000 Considerations. We have considered the impact of Year 2000 issues
on our computer system and applications and developed a remediation plan.
Because we are a small company and use computer systems and applications owned
by our consultants, we do not anticipate that we will incur any material costs
in remediating potential Year 2000 problems. We did not incur any expenses for
such purposes in 1998 or during the first quarter. Fan's consultants have
confirmed to Fan that Year 2000 issues on their systems will be detected and
remediated by the middle of 1999. We are unable to assess whether Year 2000
issues may affect others in the oil and gas industry with whom we may have
operating agreements or other arrangements, such as oil or gas purchasers,
pipeline Operators, drilling contractors, governmental agencies or others.
Problems experienced by such other entities could adversely affect our business.
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<PAGE>
BUSINESS AND PROPERTIES
General
Fan is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas reserves. Since
reestablishing its business in 1997 Fan has accomplished the following:
o Acquired a 25% working interest in two exploration prospects, totaling
approximately 30,000 acres in the Sacramento Basin of California,
o Helped to review 3-D Seismic on most of the acreage,
o Participated in five exploratory wells, one of which is now producing,
o Acquired a 20% working interest in a prospect in the Green River Basin
in Wyoming, and
o Participated in drilling one well, completed as an apparent producer,
now awaiting pipeline hookups.
Fan intends to develop oil and natural gas properties in regions with known
producing horizons, significant available undeveloped acreage and considerable
opportunities to increase reserves, production and ultimate recoveries through
exploratory and development drilling and acquisition of producing properties.
Our present activities are focused in the Green River Basin in Wyoming and the
Sacramento Basin in central California where our exploration prospects are
located.
Fan holds an approximately undivided 20% interest in a 5,760 acre prospect
located in Sweetwater County, Wyoming, designated as the "Horsethief" prospect.
One exploratory well has been drilled on the prospect which has been completed
as an apparent commercial oil and gas well. As of the date of this prospectus
the well was being tested pending completion of a natural gas pipeline before
production will be commenced. The operator of the well, Fancher Oil, LLC, owned
by Fan's Chairman, plans to drill two or three development wells on this
prospect in 1999. Depending upon the success of the initial drilling, the market
for natural gas, the availability of capital and other factors, as many as 8 to
18 wells may be drilled to fully test and exploit this prospect in the next one
to three years. Fan also has the right to participate with up to a 20% working
interest in three additional prospects which Fancher Resources, LLC intends to
explore in the vicinity of this prospect which could result in the drilling of
up to three additional exploratory wells in 1999.
Fan also holds an undivided 25% working interest in exploratory prospects
located in Yolo and Solano Counties in the Sacramento Basin near Sacramento,
California which have been held for sale since late 1998. The prospects total
approximately 25,520 gross acres. In 1998 the operator of the prospects, a
nonaffiliated independent oil and gas company, and Fan together completed a
three dimensional seismic ("3-D Seismic") survey and identified several
potential drilling sites. The initial three exploratory wells on one of the
prospects and the first exploratory well on the other prospect, in which Fan had
a 6.25% working interest, were plugged and abandoned as dry holes in 1998. The
fifth well, on the second prospect, was placed on production early in 1999. Fan
is seeking to sell its interest in these two prospects.
Fan intends to use its present cash assets, the proceeds from sale of the
Sacramento Basin prospects and from this offering, and the anticipated proceeds
from the exercise of outstanding stock purchase warrants to meet the capital
requirements for exploration and development of its current properties and to
acquire similar types of interests in other oil and natural gas properties in
the United States and Canada.
23
<PAGE>
Fan presently has only limited reserves of oil or natural gas, limited
production and no significant cash flow. It is anticipated that only limited
revenue will develop from the first two wells. Unless Fan's exploratory drilling
program is successful, and Fan participates in the development of additional
reserves and production in Wyoming, cash flow will not be significant. Fan does
not serve as the Operator in its two present prospects. Because it is not the
Operator, Fan is not generally in a position to make determinations with respect
to where and when exploratory or other wells will be drilled, the timing of the
drilling, the conduct of day-to-day activities and related management of the
exploitation of the properties. However, in the Sacramento Basin prospects Fan,
or any other owner of an undivided working interest, is authorized to propose
certain exploration activities and to become the operator for that activity if
the Operator declines to act.
Business Strategy
Fan's intended strategy, which includes the following key elements, is to
develop and increase oil and natural gas reserves, production and revenue for
Fan.
o Utilize State-of-the-Art Technologies. Certain of our officers,
directors and consultants have experience in utilizing 3-D
Seismic data and related "state-of-the-art"technologies for
analyzing oil and natural gas drilling and development
opportunities. We intend to continue to analyze and review oil
and natural gas prospects in which we hold or may acquire an
interest based on acquisition and analysis of 3-D Seismic data
and related technologies, including "amplitude versus offset" or
"AVO" seismic analysis, in an effort to improve drilling success
rates and accelerate the development of oil and natural gas
reserves.
o Develop Drillsite Inventory. Our interests in the Horsethief
prospect in the Green River Basin of southwestern Wyoming include
an inventory of up to approximately 20 potential exploratory and
development natural gas wells, based on the initial well, which
was completed as an apparently successful producer, 3-D Seismic
review and comparisons to results of nearby drilling. Fan
believes that the present cash resources, proceeds from this
offering and anticipated proceeds from the exercise of
outstanding warrants will enable Fan to pay its anticipated share
of drilling and completion costs for at least two exploratory
wells on the these prospects.
o Acquire Interests in Oil and Natural Gas Properties. Fan will
continue to evaluate potential acquisitions of interests in oil
and natural gas properties in the United States and Canada which
may become available on terms which management believes will be
attractive and which have the potential to add to Fan's reserves
and production through the application of lower risk exploitation
and exploration techniques. Fan will evaluate and may acquire
interests in producing oil and natural gas properties which may
become available on terms acceptable to Fan. Such acquisitions
will be subject to the availability of properties deemed
suitable, availability of financial resources, location and other
factors.
24
<PAGE>
Principal Properties
Fan holds interests in two wells and exploratory prospects in two
geographical areas.
Green River Basin. The Horsethief Canyon Prospect is a Frontier sandstone
natural gas exploration prospect on the eastern flank of the Rock Springs Uplift
of the Green River Basin in southwestern Wyoming. There are a number of gas
fields that produce from the Frontier formation in the vicinity of this
prospect. The Marianne Field, located 4 miles to the south, provided the analogy
for the Horsethief Canyon Prospect. The average well in the Marianne Field had
an initial production rate of 1640 MCFD with an ultimate recovery of 2.47
billion cubic feet of gas.
The primary formations of interest in the Horsethief Canyon Prospect are
the Second and Third Frontier sands at a depth of approximately 5500 feet. The
Second Frontier in the prospect area has two geologic zones which are present
over a significant portion of the leasehold which are referred to as the "2D"
and "2E" zones. These sands are present in four nonproducing wells drilled on
the leasehold acreage in the 1970s and early 1980s. Based on log calculations of
these wells and production tests on one of these wells, Fan believes this
formation will yield commercial quantities of gas, using modern completion and
production techniques. The Third Frontier formation is also considered to be
potentially productive in the prospect area based on log and formation tests of
these wells.
In October 1998, Fan entered into an agreement with Fancher Resources, LLC,
in which Fan acquired a twenty percent (20%) working interest in approximately
3,525 acres including seismic options, farmins and trades, hereinafter referred
to as the Horsethief Canyon Prospect. Subsequently, a 5,760 acre Federal
Exploratory Unit was formed and a 3D Seismic exploration program was completed.
Fan then participated in the drilling of an initial well centrally located in
the prospect acreage. The well was completed as an apparent oil and natural gas
producer in the 2D and 2E zones of the Second Frontier formation and was tested
in spring 1999 while awaiting the installation of surface facilities and
pipeline connection. The testing revealed that it is unlikely that natural gas
will be produced in commercial quantities. The drilling confirmed the results of
the 3-D Seismic and analysis of the older wells in the area. Production of oil
begins in June 1999. A reserve study prepared by an independent petroleum
engineer projected this well to produce 1.2 BCF of natural gas and 60,000 bbls
of oil over its lifetime. We intend to participate in drilling an offset well in
the summer of 1999 to determine if there is commercially productive natural gas
on this prospect.
Presently, there are two proposed development locations to the west of the
discovery well which are expected to find similar sands in a structurally higher
position as encountered in the initial well, based on subsurface geology and the
3-D Seismic survey. These locations were classified as "probable" in the above
reserve study. Drilling is scheduled to commence in June or July 1999. Fancher
Oil LLC ("Fancher") is the designated Operator of this project and has between
27.5% and 55% working interest in the Federal Exploratory Unit. Fan's working
interest in these development wells will range from 10% to 20%, depending on the
location of the well. Fan also has the right, but not the obligation, to
participate for up to 20% of Fancher's working interest in any additional
acreage or farmins that may be acquired by Fancher in the area of mutual
interest (AMI) established for this prospect.
Sacramento Basin. The Sacramento Basin is an asymmetrical trough roughly
160 miles long, 50 miles wide and up to 30,000 feet deep. Sacramento, California
is located in the southern portion of the basin. The majority of the reserves in
the basin are natural gas which occurs in sandstone reservoirs of Late
Cretaceous, Paleocene and Eocene geologic ages. The productive sands are very
porous and permeable, ranging in depth from 2000 to 8000 feet. It is generally
assumed that the gas was generated from deeply buried Cretaceous shales during
25
<PAGE>
the early to mid Tertiary period when such shales reached depths of 12,000' or
greater. Over time the gas migrated upward along geologic structures through
faults and continuous sands where porosity and permeability allowed such
migration. Most reservoirs appear to be water driven and are capable of
producing at relatively high rates until the water production becomes excessive,
resulting in termination of production of natural gas.
The primary formations of interest in the Fiji and Bali Prospects include
the Winters formation, the deepest and least explored, which ranges in depth
from 6,000 to 8,000 feet. The Starkey formation is immediately above the Winters
formation at depths ranging from 4,000 to 6,000 feet. The Mokelumme formation at
a depth of 3,000 to 4,000 feet and the Domengine formation from 2,000 to 3,000
feet are the other areas of interest.
In August 1997, Fan entered into an agreement with George H. Fancher Jr.
pursuant to which the Company agreed to acquire Mr. Fancher's undivided 25%
working interest in two exploratory gas prospects in the Sacramento Basin of
central California. Fan completed this transaction in early November 1997 at
which time Mr. Fancher assigned to Fan his interest in two Participation
Agreements with Slawson Exploration Company, Inc. (the "Operator"), an
unaffiliated independent oil and gas producing company. See "Certain
Relationships and Related Party Transactions." Mr. Fancher reserved a 0.625% net
overriding royalty interest in the properties conveyed to Fan. The Operator has
a 11.5% working interest in both prospects and also holds a 3.5% overriding
royalty interest in any properties acquired in the AMI (as described below).
Four nonaffiliated independent oil and natural gas producing entities hold the
balance of the working interest in the two prospects.
Under the Participation Agreements, Fan will hold a 25% net working
interest (approximately a 18.75% net revenue interest) in oil and natural gas
leases and other property interests obtained by the Operator in two prospects,
designated the "Fiji" prospect and the "Bali" prospect, included in an area of
mutual interest defined in each Participation Agreement ("AMI"). The two AMIs
total approximately 70 square miles and the Operator obtained oil and gas leases
or lease options totaling approximately 30,000 net acres on the two prospects.
Fan paid 33.75% of leasehold acquisition costs, oil and gas lease rentals and
renewals, and costs incurred in connection with acquisition of 3-D Seismic data
within the two AMI's surrounding the two prospects, for Four 25% working
interest in the prospects. Each of the other four working interest owners (other
than the Operator) also is required to pay a portion of expenses larger than its
working interest. Through December 31, 1998 the Operator had incurred
approximately $3.7 million for land acquisition and 3-D Seismic data expenses,
of which Fan and its predecessor had paid approximately $1.25 million.
The Operator holds title to all leasehold agreements, including oil and gas
leases, farmin agreements or other leasehold acquisitions, beneficially for Fan
and other participants in the prospects until such time as production is
established. Therefore Fan does not anticipate that it will be a record holder
of most of the acreage in which it holds an undivided beneficial interest. The
Operator is also entitled to an additional fee from Fan of $2,500 per well
commenced in either prospect. Fan is entitled, at its sole election, to decline
to participate in any particular well proposed to be drilled by the Operator. If
Fan should elect not to participate in a proposed well, it shall forfeit all of
its interest in the leasehold and any agreements relating to the lands within in
the revenue sharing unit for the proposed well. After the land acquisition and
3-D Seismic acquisition was completed, the Operator operates the exploration,
development and exploitation activities under the terms of a standard Operating
Agreement. Fan will generally be obligated to pay its 25% share of the
expenditures incurred by the Operator in operating activities, including
drilling expenses and similar expenditures and will be entitled to receive
approximately 18.75% (the net revenue interest) of any production which might be
obtained from the prospects (after provisions for land owner and overriding
royalties).
26
<PAGE>
Acreage
The following table sets forth, as of March 31, 1999, the gross and net
acres of oil and natural gas leases which Fan beneficially holds or has the
right to acquire.
<TABLE>
<CAPTION>
Prospect Area Developed Undeveloped
---------------------- ---------------------
Gross Net Gross Net
<S> <C> <C> <C> <C>
Green River Basin:
Horsethief Prospect ............................. -- -- 3,525 705
Sacramento Basin:
Bali Prospect ................................... 160 40 11,389 2,847
Fiji Prospect ................................... - 0 - - 0 - 6,748 1,687
------ ------ ------ ------
Total ..................................... 160 40 18,137 4,534
</TABLE>
Reserves
As of March 31, 1999, Fan had interests in two productive wells (.45 net
wells) in two areas. The wells are operated by others under arrangements
standard in the industry. The following is information about the reserves
attributable to Fan's properties at December 31, 1998, as estimated by an
independent petroleum engineer.
<TABLE>
<CAPTION>
Discounted
Net Gas Net Oil Present Value
------- ------- -------------
Prospect (MMCF) (MBO) ($M)(1)
- --------
<S> <C> <C> <C>
Sacramento Basin .............................................. 380 (2) - 467.9
Green River Basin ............................................. 187.3(3) 9.5 211.5
----- --- -----
Total ................................................ 567.3 9.5 $679.4
</TABLE>
- ----------------
(1) Present value of future net revenue, discounted at 10% before any
related income taxes. Assumed product prices used were prices in effect
in the areas at December 31, 1998 without escalation, net of heat
content adjustments, gathering costs and compression charges, or $2.07
per mcf in the Sacramento Basin, $1.65 per mcf in the Green River Basin
and $12 per barrel for oil in Wyoming. All prices were assumed to
remain flat over the productive lives of the wells. Operating costs
utilized were the actual costs for the wells without escalation.
(2) Includes one well which commenced production in January 1999 and one
proved undeveloped (undrilled) well.
(3) Includes one proved nonproducing well. Does not include two potential
wells assumed to be "probable" of future successful development.
27
<PAGE>
Drilling Activity
The following table summarizes Fan's oil and gas drilling activities to
date.
<TABLE>
<CAPTION>
Productive Nonproductive
------------------------- --------------------------
Exploratory Wells Drilled Gross Wells Net Well Gross Wells Net Well
- ------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Sacramento Basin, California......................... 1 .25 4 .8125
Green River Basin, Wyoming........................... 1 .20 -- --
</TABLE>
Acquisitions of Other Properties
Fan does not presently intend to operate oil and gas properties, but
instead will focus upon acquiring and holding properties which management
believes have a good potential to develop significant oil or natural gas
production and reserves. Fan presently has not identified any such properties
for acquisition and it is not likely that additional properties will be acquired
until Fan has attained additional capitalization, either with the proceeds of
this offering, the exercise of outstanding warrants or from other sources.
Fan may evaluate and pursue acquisitions of interests in producing,
exploratory or development oil and gas properties that meet our selection
criteria, including properties held by persons or entities with whom members of
our management may have an affiliation or other relationship. The successful
acquisition of such properties would require an assessment of potential reserves
of oil or natural gas, future oil and natural gas prices, operating costs,
potential environmental and other liabilities and other factors beyond our
control. Such an assessment is necessarily inexact and its accuracy would be
inherently uncertain. Fan intends that upon any such acquisition, management
will perform a review of the subject properties generally consistent with
industry practices. Such a review, however, would not reveal all existing or
potential problems, nor would it permit a buyer to become sufficiently familiar
with the properties to assess fully their deficiencies or potential value.
Inspections of the properties may not be performed and problems with existing
properties may not be observable even in those cases where an inspection is
undertaken. Fan may assume existing liabilities, including environmental
liabilities, upon any such acquisition and would likely acquire interests in
such properties on an "as is" basis.
Fan's Chairman, George H. Fancher Jr., who has substantial experience as an
operator of exploration and development of oil and gas properties for his own
account, is the operator of our Wyoming prospect and may be the operator of
properties in which Fan acquires an interest. In such event, charges to Fan for
such services will not exceed usual and customary charges to unaffiliated
persons and will be at a rate no higher than operating charges made to any other
participant in a given project.
Marketing of Production
The price to be received by Fan for any oil and natural gas production
which may be established on our properties will depend upon numerous factors
beyond our control, including:
o Seasonality,
o The condition of the national and international economies,
o The availability of foreign imports,
28
<PAGE>
o Political conditions in other oil and natural gas producing countries,
o Domestic governmental regulations, legislation and policies,
o Decreases in the prices of oil or natural gas generally.
These factors could have an adverse affect on the value of any reserves and
on our cash flow from any production which we establish. In February 1999, the
price paid by natural gas purchasers in the Sacramento Basin of central
California was approximately $1.80 per mcf and in the Green River Basin of
southeastern Wyoming was approximately $1.50 per mcf. Such prices could be
higher or lower at the time that any production from Fan's exploratory
activities is available for sale, depending upon the above factors and other
unforseen circumstances.
Competition
Fan operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies, many
of which have substantially larger financial resources, operations, staffs and
facilities. Fan faces intense competition from both major and independent oil
and natural gas companies when it seeks to acquire desirable producing
properties or production. Fan expects that the inventory of unproved drilling
locations in the two prospects in which Fan has an interest will be the primary
source of new reserves, production and cash flow during the next year. There can
be no assurance that either will yield substantial economic returns. Failure of
the two prospects to yield significant quantities of economically attractive
reserves in production could have a material adverse impact on Fan's future
financial condition and could result in a writeoff of a significant portion of
its investment in the oil and gas properties.
Fan's competitors include major integrated oil and natural gas companies
and numerous independent oil and natural gas companies, individuals and drilling
and income programs. Most of our competitors are larger, well established
companies with substantially larger operating staffs and greater capital
resources than Fan's and which, in many instances, have been engaged in the
energy business for a much longer time. Such competitors may be able to pay more
for productive oil and natural gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit. Fan's ability to acquire
additional properties and to discover reserves in the future will be dependent
upon our ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
Regulation
Regulation of Oil and Natural Gas Production. Fan's oil and natural gas
exploration, production and related operations are subject to extensive rules
and regulations promulgated by federal, state and local authorities and
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases our cost of doing business and affects our profitability. Although we
believe Fan is in substantial compliance with all applicable laws and
regulations, because such rules and regulations are frequently amended or
reinterpreted, we are unable to predict the future cost or impact of complying
with such laws.
29
<PAGE>
The states of California and Wyoming and many other states require permits
for drilling operations, drilling bonds and reports concerning operations and
impose other requirements relating to the exploration and production of oil and
natural gas. Such states also have statues or regulations addressing
conservation matters, including provisions for the unitization or pooling of oil
and natural gas properties, the establishment of maximum rates of production
from wells, and the regulation of spacing, plugging and abandonment of such
wells.
Federal Regulation of Natural Gas. The Federal Energy Regulatory Commission
("FERC") regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by Fan, as well
as the revenues which may be received by Fan for sale of such production. Since
the mid-1980's, FERC has issued a series of orders that have significantly
altered the marketing and transportation of natural gas. These orders mandate a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sale,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders was to increase competition within all phases of the natural gas
industry. Certain aspects of these orders may be modified as a result of various
appeals and related proceedings and it is difficult to predict the ultimate
impact of the orders on Fan and others. Generally, the orders eliminate or
substantially reduce the interstate pipelines' traditional role as wholesalers
of natural gas in favor of providing only storage and transportation service,
and has substantially increased competition and volatility in natural gas
markets.
The price which Fan may receive for the sale of oil and natural gas liquids
would be affected by the cost of transporting products to markets. FERC has
implemented regulations establishing an indexing system for transportation rates
for oil pipelines, which, generally, would index such rates to inflation,
subject to certain conditions and limitations. Fan is not able to predict with
certainty the effect, if any, of these regulations on any future operations.
However, the regulations may increase transportation costs or reduce well head
prices for oil and natural gas liquids.
Environmental Matters. Fan's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may:
o Require the acquisition of a permit or other authorization before
construction or drilling commences and for certain other activities;
o Limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness and other protected areas; and
o Impose substantial liabilities for pollution resulting from
operations.
The permits required for various of Fan's operations are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce their regulations, and violations are
subject to fines or injunctions, or both. In the opinion of management, Fan is
in substantial compliance with current applicable environmental laws and
regulations, and Fan has no material commitments for capital expenditures to
30
<PAGE>
comply with existing environmental requirements. Nevertheless, changes in
existing environmental laws and regulations or in interpretations thereof could
have a significant impact on Fan, as well as the oil and natural gas industry in
general.
Fan may agree to indemnify sellers of properties purchased by Fan against
certain liabilities for environmental claims associated with such properties. No
assurance can be given that existing environmental laws or regulations, as
currently interpreted or reinterpreted in the future, or future laws or
regulations will not materially adversely affect Fan's results of operations and
financial condition or that material indemnity claims will not arise against Fan
with respect to properties acquired by Fan.
The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sites. It is
not uncommon for the neighboring land owners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize the imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting
Fan's operations impose clean-up liability relating to petroleum and petroleum
related products. In addition, although RCRA classifies certain oil field wastes
as "non-hazardous," such exploration and production wastes could be reclassified
as hazardous wastes thereby making such wastes subject to more stringent
handling and disposal requirements.
Fan has acquired leasehold interests in numerous properties that for many
years have produced oil and natural gas. Although the previous owners of these
interests may have used operating and disposal practices that were standard in
the industry at the time, hydrocarbons or other wastes may have been disposed of
or released on or under the properties. In addition, some of Fan's properties
may be operated in the future by third parties over whom Fan has no control.
Notwithstanding Fan's lack of control over properties operated by others, the
failure of the operator to comply with applicable environmental regulations may,
in certain circumstances, adversely impact Fan.
NEPA. The National Environmental Policy Act ("NEPA") is applicable to many
of Fan's planned activities and operations. NEPA is a broad procedural statute
intended to ensure that federal agencies consider the environmental impact of
their actions by requiring such agencies to prepare environmental impact
statements ("EIS") in connection with all federal activities that significantly
affect the environment. NEPA is a procedural statute only applicable to the
federal government, and none of Fan's Sacramento Basin acreage is located on
federal land. The Bureau of Land Management's issuance of drilling permits and
the Secretary of the Interior's approval of plans of operation and lease
agreements all constitute federal action within the scope of NEPA. Consequently,
unless the responsible agency determines that Fan's drilling activities will not
materially impact the environment, the responsible agency will be required to
prepare an EIS in conjunction with the issuance of any permit or approval.
ESA. The Endangered Species Act ("ESA") seeks to ensure that activities do
not jeopardize endangered or threatened animal, fish and plant species, nor
destroy or modify the critical habitat of such species. Under ESA, exploration
and production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA provide for
criminal penalties for willful violations of the Act. Other statutes that
31
<PAGE>
provide protection to animal and plant species and that may apply to Fan's
operations include, but are not necessarily limited to, the Fish and Wildlife
Coordination Act, the Fishery Conservation and Management Act, the Migratory
Bird Treaty Act and the National Historic Preservation Act. Although Fan
believes that its operations are in substantial compliance with such statutes,
any change in these statutes or any reclassification of a species as endangered
could subject Fan to significant expense to modify its operations or could force
Fan to discontinue certain operations altogether.
Office Facilities
Fan currently uses approximately 750 square feet of office space in
Scottsdale Arizona which it shares with Arizona Corporate Management, Inc., a
company owned by William E. Grafham, President, and shares offices with its
Chairman, George H. Fancher Jr. in Denver, Colorado. Fan pays $2,000 per month,
on a month- to-month basis, for each office for rent and related services. See
"Certain Transactions."
Employees
As of the date of this Prospectus, Fan had no employees. Fan's five
directors and four part time consultants provide management and other services.
32
<PAGE>
MANAGEMENT
The following table sets forth the names and ages of the current directors
and executive officers of Fan and the principal offices and positions held by
each person. Each director and officer has served since 1997 except Mr. Cloudy,
who became a director April 9, 1998. Each director serves until the next annual
meeting of stockholders.
<TABLE>
<CAPTION>
Names of Executive
Officers and Directors Age Position
---------------------- --- --------
<S> <C> <C>
George H. Fancher Jr. .................. 59 Chairman of the Board, Chief
Operating Officer and Director
William E. Grafham...................... 61 President, Chief Executive Officer and
Director
Jeffrey J. Scott........................ 36 Vice President and Director
Rex L. Utsler .......................... 53 Vice President and Director
George A. Cloudy ....................... 64 Director
Albert A. Golusin....................... 44 Secretary and Treasurer
</TABLE>
George H. Fancher Jr. Mr. Fancher has been a self employed independent oil
producer, operator and consultant in the Rocky Mountain Area since 1969, and has
conducted business as Fancher Oil Company since 1980. He was employed by Chevron
as a Petroleum Engineer, in Casper, Wyoming, and Denver, Colorado from 1962
until 1966. In 1966, he joined Ball Brothers Research Corporation in Boulder,
Colorado, followed by two years with an independent oil company before forming
Smith-Fancher, independent producers in the Rocky Mountain and Mid-Continent
regions. In 1980, he formed Fancher Oil Company and has operated as a sole
proprietor since that time.
George Fancher has been a director of the Independent Petroleum Association
of America (IPAA), the Independent Petroleum Association of Mountain States
(IPAMS) and the Rocky Mountain Oil and Gas Association (RMOGA). He is a
registered Petroleum Engineer and a member of the Society of Petroleum
Engineers. He has served on the Crude Oil Policy Committee, Improved Oil
Recovery Task Force Committee, and Public Lands Committee of the IPAA. He is
also a member of the Liaison Committee of Cooperating Oil and Gas Associations,
and currently is the past Chairman of the Rocky Mountain Producers Advisory
Group and until 1998 was on the Board of Directors of the Petroleum Technology
Transfer Council (PTTC).
William E. Grafham. Mr. Grafham has an investment banking background having
worked for two major national Canadian Brokerage houses from 1963 until 1977. In
1977 he established operating companies representing West German partnerships
investing in natural resources. Offices were set up in Calgary, Alberta; Denver,
Colorado; and Vancouver, BC. The Calgary and Vancouver operating companies were
eventually merged into larger entities; while the main assets of the Denver
operation were sold in 1988.
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<PAGE>
Since 1988 Mr. Grafham, a private investor, has participated in the
formation of a number of businesses investing in technology, oil and gas,
precious metals and mining, and real estate. Most of these investments have
resulted in the companies going public, with involvements in a number of
countries. Mr. Grafham has been active as a director in various companies during
the last five years. He is currently a director or officer of the following
publicly-traded companies which trade on Canadian exchanges:
<TABLE>
<CAPTION>
Company Public Exchange Type of Business
<S> <C> <C>
Jerez Energy International, Inc. Alberta Stock Exchange Oil and gas
Walking Bear Resources Inc. Alberta Stock Exchange Oil and gas
Tellis Gold Mining Company Inc. Vancouver Stock Exchange Technology
</TABLE>
Jeffrey J. Scott. Mr. Scott is currently President and Chief Operating
Officer and a director of Calgary-based Jerez Energy International Inc. Jerez is
a public Canadian international oil and gas exploration and development company
focused in West Africa. He has held this position since May 1995. Mr. Scott is
also Vice President of Operations of Postell Energy Co. Ltd., a privately held
Canadian oil and gas company. He has held this position since 1986. Mr. Scott is
a graduate of the University of Calgary and has been active in the oil and gas
industry since 1979 and has experience in the areas of production, operations
and management. He is also a director of Petro Well Energy Services, Inc., a
public company which owns oil service rigs.
Rex L. Utsler. Mr. Utsler has over twenty years of executive management
experience in the energy and retail services industries. From 1971 to 1980, Mr.
Utsler was employed by Western Crude Oil Inc., a large independent crude oil
transportation and marketing company in various senior management and executive
positions. In 1980, he founded Bountiful Corporation, a company that specialized
in the purchasing, transportation and marketing of crude oil and served as
president and chief executive officer from 1980 to 1988. Mr. Utsler has been
President of Grease Monkey Holding Corporation, a public company specializing in
automotive services, since September 1998. Mr. Utsler also served as President
and Chief Executive Officer of Grease Monkey Holding Corporation from 1991 to
1997.
George A. Cloudy. Mr. Cloudy has been engaged in the oil exploration
business since 1956. After graduating from Montana School of Mines with an
engineering geology degree, petroleum option, he worked for G.S.I., a division
of Texas Instruments as a geophysicist from 1956 until 1965.
In 1965 he was a co-founder of Digicon Inc., now Veritas DGC. From 1965 to
1994 he served in various capacities as Vice President, North and South America;
Executive Vice President, Europe, Africa and the Far East; President, Digicon
Geophysical Corp., and Vice President of Research. He was a director from
1965-1991. He served as chief geophysicist and exploration coordinator of Oil
Quest Inc. from 1995 to 1997. He is now an individual investor.
Mr. Cloudy is a member of the Society of Exploration Geophysicists, a
registered geologist (California) and a registered professional geophysicist,
Alberta, Canada (APEGGA).
Albert A. Golusin. Mr. Golusin has been a Certified Public Accountant since
1981. From 1985 to 1992, Mr. Golusin was the Controller of a public company
called N-W Group, Inc. which later became Glenayre Electronics. He was
responsible for assisting in the public reporting to regulatory agencies in the
34
<PAGE>
United States and Canada for the company. From 1993 to the present, Mr. Golusin
has consulted to companies in the process of becoming publicly traded. He shares
an office with Arizona Corporate Management, Inc. in Scottsdale, Arizona.
Consultant
Adrian H. Goodisman. Mr. Goodisman has 13 years of exploration and
production experience primarily in the U.S. and Western Canada, as well as
international experience in the UK, Egypt, Australia and Japan. He is a
petroleum engineer and has gained technical excellence in field exploitation,
acquisition/divestment's, reserve determinations and economic evaluations. He
has a Bachelor of Science (honors) degree in mathematics from the University of
Salford, UK and a Master of Science degree in petroleum engineering from the
University of Texas at Austin. Mr. Goodisman is also actively involved with the
Society of Petroleum Engineers (SPE) and is presently on the SPE National
Membership Committee, and a director of the Gulf Coast (Houston) Section. For
the 1995/96 year, he served as Chairman of the Board of Directors for the SPE
Canadian Section.
EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
compensation paid by Fan for services rendered in all capacities for the two
fiscal years ended December 31, 1997 and 1998 (there was no compensation in
prior years) of the chief executive officer at December 31, 1998 and all
officers and directors, as a group.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
---------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Positions at 12/31/98 Salary Bonus Compensation Options Compensation
- --------------------- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
William E. Grafham, President
1997 ............................. - 0 - - 0 - - 0 - 200,000 None
1998 ............................. - 0 - - 0 - 10,000(1) -- None
All officers and directors,
as a group (five persons)
1997 ............................. $10,027(2) - 0 - $30,000(3) 800,000 - 0 -
1998 ............................. $30,000(2) - 0 - $43,000(4) 100,000 - 0 -
</TABLE>
- ------------------
(1) Includes 50,000 shares of common stock, valued at $10,000, issued for
services as an officer and director.
(2) Paid to Albert A. Golusin, Secretary, for services as a consultant.
(3) Includes 150,000 shares of common stock, valued at $30,000, issued to three
persons for services as officers, directors and representatives of Fan.
(4) Includes 215,000 shares of common stock, valued at $43,000, issued to five
persons for services as officers, directors and representatives of Fan.
35
<PAGE>
Fan has an agreement to pay Albert A. Golusin a monthly retainer of $2,500,
as a consultant, for part time accounting, financial reporting and corporate
secretarial services. In addition, Mr. Golusin received 15,000 shares of common
stock on July 1, 1998 for services he provided to Fan through June 30, 1998.
Value of Options at December 31, 1998
<TABLE>
<CAPTION>
Aggregate Fiscal Year End Option Values
-------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End
Exercisable/Unexercisable Exercisable/Unexercisable(1)
-------------------------- ---------------------------
<S> <C> <C>
William E. Grafham...................... 200,000/ - $ -- / --
All officers and directors
as a group............................. 850,000/50,000 $ -- / --
</TABLE>
- ----------------------
(1) Because there is no trading market, the estimated value is based on the
last price paid for common stock of Fan of $0.20 of Fan's common stock,
less the exercise price of the options.
Option Grants in the Last Two Fiscal Years
Fan granted options during 1997 and 1998 to the following officers and
directors:
<TABLE>
<CAPTION>
Percent of Total
Number of Shares Options Granted Exercise Price Expiration
Name Underlying Options During Year ($/sh) Date
- ---- ------------------ ------------- -------- -----
<S> <C> <C> <C> <C> <C>
1997:
William E. Grafham................... 100,000(1) 12.3% $0.22 07/02/02
President 100,000(2) 12.3% $0.35 10/30/07
George H. Fancher Jr. ............... 250,000(2) 30.1% $0.35 10/30/07
Rex L. Utsler ....................... 100,000 12.3% $0.35 10/30/07
Jeffrey J. Scott .................... 150,000 18.5% $0.35 10/30/07
Albert A. Golusin ................... 30,000(1) 3.7% $0.20 07/02/07
70,000 8.6% $0.35 10/30/07
1998:
George A. Cloudy .................... 100,000(1) 100% $0.50 04/30/08
</TABLE>
- ----------------------
(1) These options become exercisable as to one-half of the shares six
months from the date of grant (July 1, 1997 for Messrs. Grafham and
Golusin, and April 9, 1998 for Mr. Cloudy) and as to the balance, six
months thereafter. All other options are presently exercisable.
(2) The options are nonstatutory ("nonqualified") options. All other
options are intended to be incentive stock options under Section 422A
of the Internal Revenue Code of 1986.
36
<PAGE>
Stock Option Plan
Fan adopted the 1997 Statutory and Non-Statutory Incentive Stock Option
Plan ("Plan") which authorizes Fan to grant incentive stock options within the
meaning of Section 422A of the Internal Revenue Code of 1986, as amended, and to
grant nonstatutory stock options. The Plan relates to a total of 1,000,000
shares of common stock. Options relating to 910,000 shares have been issued and
are outstanding and all are presently exercisable. The options are exercisable
at $0.20 per share for 30,000 shares, $0.22 per share for 100,000 shares, $0.35
per share for 680,000 shares and $0.50 per share for options to purchase 100,000
shares granted to George A. Cloudy in April 1998 at the time he joined the Board
of Directors. The outstanding options must be exercised within 10 years from the
date of grant and no later than three months after termination of employment or
service as a director, except that any optionee who is unable to continue
employment or service as a director due to total and permanent disability may
exercise such options within one year of termination and the options of an
optionee who is employed or disabled and who dies must be exercised within one
year after the date of death.
The Plan requires that the exercise prices of options granted must be at
least equal to the fair market value of a share of common stock on the date of
grant, provided that for incentive options if an employee owns more than 10% of
Fan's outstanding common stock then the exercise price of an incentive option
must be at least 110% of the fair market value of a share of Fan's common stock
on the date of grant, and the maximum term of such option may be no longer than
five years. The aggregate fair market value of common stock, determined at the
time the option is granted, for which incentive stock options become exercisable
by an employee during any calendar year is limited to $100,000.
The Plan is to be administered by Fan's Board of Directors or a committee
thereof which determines the terms of options granted, including the exercise
price, the number of shares of common stock subject to the option, and the terms
and conditions of exercise. No option granted under the Plan is transferrable by
the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by such
optionee.
Compensation of Directors
Fan does not pay cash compensation to directors. Four of the directors were
issued 50,000 shares of restricted common stock on July 1, 1998 as compensation
for services furnished as an officer or director through June 30, 1998. Fan has
granted each of the four directors options to purchase shares of common stock at
$0.35 per share, as shown in the table above. The options were granted under the
Plan and must be exercised within 10 years from the date of grant. George A.
Cloudy received an option to purchase up to 100,000 shares at $0.50 per share in
April 1998. The option became exercisable as to half of the shares six months
after the date of grant and the balance will become exercisable one year from
the date of grant.
37
<PAGE>
PRINCIPAL AND SELLING SECURITYHOLDERS
The following table sets forth, as of May 15, 1999, and as adjusted to
reflect the sale of the shares of common stock offered by Fan pursuant to this
Prospectus, certain information with respect to the beneficial ownership of
Fan's common stock by (i) each director and officer, of Fan (ii) each person
known to Fan to be the beneficial owner of 5% or more of the outstanding shares
of common stock, with such person's address, (iii) each person whose shares have
been registered for resale in the Registration Statement of which this
Prospectus is a part (the "Selling Securityholders"), and (iv) all of the
directors and executive officers as a group. Unless otherwise indicated, the
person or entity listed in the table is the beneficial owner of the shares and
has sole voting and investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
Shares beneficially
owned after offering
--------------------
Percent
------------------
Shares beneficially Shares Minimum Maximum
Name of Beneficial Owner owned prior to offering (being offered Offering Offering
or Name of Officer or Director Number Percent for sale Number Sold Sold
- ---------------------------------------------- ------ ------- ------------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
William E. Grafham, Director ....................... 843,568(2) 8.3% -- 643,568 6.2% 4.9%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI
George H. Fancher Jr., Director .................... 3,050,000(3) 30.3% -- 3,000,000 28.7% 23%
1801 Broadway, Suite 720
Denver, Colorado 80202
Rex L. Utsler, Director ............................ 300,000(4) 3.0% -- 350,000 3.3% 2.7%
Jeffrey J. Scott, Director ......................... 250,000(5) 2.5% -- 200,000 1.9% 1.5%
George A. Cloudy, Director ......................... 200,000(6) 2.0% -- -- -- --
Albert A. Golusin, Secretary and Treasurer ......... 215,000(7) 2.1% -- 185,000 1.8% 1.4%
David Grafham ...................................... 650,000 6.5% -- 650,000 6.2% 5.0%
1307 West 8th Avenue
Vancouver, B.C.
Canada V5H 3W4
Roger Duffield ..................................... 625,000 6.2% -- 625,000 6.0% 4.8%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)
Euro Securities Ltd. ............................... 650,000 6.5% -- 650,000 6.2% 5.0%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)
Linda Kemble ....................................... 650,000 6.5% -- 650,000 6.2% 5.0%
#59 Temple Hill Dr. N.E.
Calgary, Alberta
Canada T1Y 404
38
<PAGE>
<CAPTION>
Shares beneficially
owned after offering
--------------------
Percent
------------------
Shares beneficially Shares Minimum Maximum
Name of Beneficial Owner owned prior to offering (being offered Offering Offering
or Name of Officer or Director Number Percent for sale Number Sold Sold
- ---------------------------------------------- ------ ------- ------------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Don Stewart ........................................ 738,000(9) 7.3% -- 738,000 7.1% 5.7%
P. O. Box 245
Grand Cayman, BWI(8)
Susan Scott ........................................ 415,000(11) 4.1% 300,000(13) 115,000 1.1% .1%
#2 2109 4th Avenue, N.W.
Calgary, Alberta, Canada T2N 0N6
Alex Whiteside ..................................... 405,000(10) 4.0% 405,000(12) - 0 - -- --
1530--1001 13 Avenue, S.W.
Calgary, Alberta, Canada T2R 0L5
Aldridge Holdings, Ltd. ............................ 300,000(10) 3.0% 300,000(10) - 0 - -- --
Bank Lips, Ltd. .................................... 372,000(12) 3.7% 300,000(11) 72,000 .7% .6%
Colony Investments Limited ......................... 320,000(13) 3.2% 300,000(11) 20,000 .2% .2%
EMB Management Consultants, Ltd. ................... 300,000(11) 3.0% 300,000(10) - 0 - -- --
Hartford Securities ................................ 300,000(11) 3.0% 300,000(10) - 0 - -- --
Charles Maddin ..................................... 300,000(11) 3.0% 300,000(10) - 0 - -- --
Wadeco, Inc. ....................................... 345,000(14) 3.4% 195,000(15) 150,000 1.4% 1.1%
All officers and directors as a group (6 persons) .. 4,858,568(15) 48.3% -- 4,578,568 43.8% 35.1%
</TABLE>
- ----------------------
(1) All securities are owned directly and beneficially unless otherwise noted.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options and warrants currently exercisable or exercisable within 60 days
of March 1, 1998 are deemed outstanding for computing the percentage of the
person or entity holding such securities but are not outstanding for
computing the percentage of any other person or entity.
(2) Includes 300,000 shares of common stock underlying presently exercisable
options and warrants.
(3) Includes 250,000 shares underlying presently exercisable stock purchase
warrants and options. In addition, Fan will be required to issue and
deliver to Mr. Fancher an additional 500,000 shares of common stock if Fan
receives gross revenue from its interest in the Bali and Fiji prospects at
least equal to all direct costs incurred in acquiring the prospects, and
drilling the wells, including cash amounts paid to Mr. Fancher at the time
of acquisition. See "Certain Transactions."
39
<PAGE>
(4) Includes 200,000 shares of common stock underlying presently exercisable
stock purchase options and warrants.
(5) Includes presently exercisable options to purchase up to 150,000 shares.
(6) Includes 100,000 shares underlying presently exercisable stock purchase
warrants.
(7) Includes 100,000 shares of common stock underlying presently exercisable
options and stock purchase warrants.
(8) Euro Securities Ltd. is controlled by Euro Bank, a bank in Georgetown,
Grand Cayman Island, British West Indies, of which Don Stewart is a
director. Mr. Stewart has no other relationship with, or control over, Euro
Securities Ltd.
(9) Includes 88,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(10) Includes 135,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(11) Includes 100,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(12) Includes 172,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(13) Includes 120,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(14) Includes 65,000 shares of common stock underlying presently exercisable
stock purchase warrants.
(15) Includes 100,000 shares underlying presently exercisable stock purchase
warrants and 900,000 shares of common stock underlying presently
exercisable options
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On October 31, 1997 Fan sold 2,000,000 shares and 1,000,000 warrants to 11
non-United States persons or entities pursuant to Regulation S adopted under the
Securities Act for $1,000,000 and paid finder's fees to three finders and
related offering costs of $47,894 and issued warrants to purchase an additional
180,000 shares in connection with the offering. William E. Grafham, Fan's
President, a citizen of Canada and a resident of Grand Cayman, BWI, purchased
200,000 shares and 100,000 warrants in the offering for $100,000. The shares are
restricted from transfer except in accordance with applicable United States'
laws and the purchasers each agreed to resell the securities to a "U.S. Person"
as defined in Regulation S, only in accordance with applicable laws. All of the
common stock and the shares underlying the warrants, other than the shares and
warrants held by Mr. Grafham, have been registered for resale by the holders.
Fan has reduced the exercise price for the warrants to $0.25 per share ($295,000
upon exercise of all warrants) and extended the expiration to July 31, 1999.
On November 11, 1997 Fan completed the acquisition of a 25% working
interest in the Fiji and Bali natural gas exploration and development prospects
in California from George H. Fancher Jr., subject to a net .625% overriding
royalty interest retained by Mr. Fancher. The prospects together totaled over
30,000 acres and are located in the southern part of the Sacramento Basin. See
"Business--Principal Properties." Fan paid $907,951 in cash and issued 2,250,000
shares at a deemed value of $300,000 for the property. Mr. Fancher acquired the
interests in the properties early in 1997 and incurred approximately $1,208,000
for acquisition of his interest in the properties and payment of his portion of
exploration and leasehold costs and expenses before transfer to Fan. Fan also
paid $6,247 to Mr. Fancher representing interest on a portion of Mr. Fancher's
cost between the time that the agreement to acquire the properties was made and
the date of completion of the transaction As additional consideration, Fan also
agreed to issue 500,000 additional restricted shares to Mr. Fancher if the gross
revenue received by Fan from the prospects is at least equal to all direct costs
of Fan associated with acquiring the interest in the prospects and exploration,
drilling and other related expenses by December 31, 1999. At December 31, 1998
Fan had incurred direct costs of approximately $1,275,000, including the
payments to Mr. Fancher. Prior to the acquisition, Mr. Grafham and consultants
retained by Fan reviewed the available geologic data on the properties and
negotiated the purchase price based on the perceived value of the properties as
40
<PAGE>
assembled by the Operator, the acquisition and exploration expenditures on the
properties and the lack of a public market for Fan's shares. Mr. Fancher agreed
to become a director of Fan following completion of the transaction.
Fan paid $8,000 in 1997 and $24,000 in 1998 to Arizona Corporate
Management, Inc., a corporation owned by William E. Grafham, as reimbursement
for office and related expenses and for rent. Fan has a month-to-month agreement
to pay $2,000 per month to the corporation for office space, use of certain
office equipment and for limited administrative services. Fan also has an
arrangement with George H. Fancher Jr., pursuant to which Fancher Oil Company
was paid $2,000 in 1997 and $24,000 in 1998 and will be paid $2,000 per month in
the future for office facilities, use of certain office equipment and limited
administrative and technical support. In March 1999, William E. Grafham loaned
Fan $20,500 without interest.
On June 1, 1999 Fan entered into a Loan Agreement under which a bank agreed
to extend a $150,000 one year revolving line of credit to Fan. The loan is
unsecured, except that it is guaranteed by George H. Fancher Jr., Fan's
Chairman. Fan has agreed to indemnify Mr. Fancher against any losses he may
incur as a result of the guarantee. Also, Fan has agreed with Mr. Fancher that
Fan will not permit security interests or liens to attach to any of its property
interests while the loan is outstanding and that proceeds of any sale of
properties will be applied to reduce any outstanding balance owed to the lender.
On July 1, 1998, Fan issued 215,000 shares to five officers, directors and
consultants for services rendered through June 30, 1998.
On October 1, 1998, the Board of Directors, with Mr. Fancher abstaining,
approved a transaction in which Fan acquired an undivided 20% working interest
(16% net revenue interest) in Fancher Resources, LLC's approximately 3,525 acre
Horsethief exploration prospect located in Sweetwater County, in the Green River
Basin of southwestern Wyoming. Fan agreed to pay 24% of all costs incurred in
acquiring the initial well and in acquiring, processing and interpreting the 3-D
Seismic data and drilling of the initial well through the casing point for a 20%
working interest, which was equivalent to the rate paid by the nonaffiliated
participate in the project. Under the agreement Fan reimbursed Fancher
Resources, LLC $131,000 as acreage acquisition and seismic survey expenses and
approximately $104,000 as Fan's share of drilling and completion costs in the
initial exploratory well. Fancher Resources, LLC holds a 55% working interest in
the prospect and earns operating fees, standard in the area, from the other
working interest owners. Fan also has the right to participate on an equivalent
basis in four other exploratory oil and natural gas prospects being assembled by
the operator in the area near the Horsethief prospect.
On June 2, 1997 Fan sold 2,500,000 shares and warrants to purchase an
additional 2,500,000 shares at $0.20 per share for $500,000 to eight purchasers
in private transactions with non-United States residents. In August 1998,
holders of 2,065,000 of the warrants exercised the warrants for $413,000 in
proceeds, and 435,000 warrants expired unexercised.
On December 1, 1996 Jean Boyd, then a director and an officer, was issued
636,700 shares of common stock at a deemed value of $0.001 per share in
satisfaction of an obligation of $6,367 owed to her for expenses advanced by her
on behalf of the corporation in previous years.
41
<PAGE>
PLAN OF DISTRIBUTION
Shares of Common Stock Offered by Fan
The offering of shares of common stock is being conducted on a 400,000
share minimum (the "minimum offering"), 3,000,000 share maximum (the "maximum
offering") direct participation basis at an offering price of $0.25 per share.
The six persons who are Fan's officers and directors will offer the shares of
common stock on behalf of Fan. They will not be compensated, directly or
indirectly, in connection with participation in the sale of the shares. In
addition, Fan may engage one or more brokers or dealers which are members of the
National Association of Securities Dealers, Inc. ("NASD') and which are
registered as such with the United States Securities and Exchange Commission to
act as nonexclusive agents (the "Selected Dealers") on behalf of Fan to offer
and sell the shares. Any Selected Dealer would be paid a commission of 10% of
the purchase price of common stock sold by them. No broker-dealer or other
person has made any commitment to purchase or sell any or all of the shares of
common stock offered by Fan. It is not anticipated that any Selected Dealer
would sell more than 10% of the shares of common stock. The officers and
directors and any Selected Dealers will use their best efforts to identify
purchasers for the shares during the offering period. Fan will agree to
indemnify each Selected Dealer against certain liabilities, including certain
liabilities or claims under the Securities Act or to contribute to payments the
Selected Dealer may be required to make in respect thereof.
All proceeds from subscriptions for shares offered and sold by Fan or a
Selected Dealer will be deposited promptly with The Bank of Denver, Denver,
Colorado, as Escrow Agent, pursuant to an Escrow Agreement between Fan and the
Escrow Agent. Funds received from subscriptions will be transmitted to the
Escrow Agent no later than noon of the business day following receipt by Fan and
any Selected Dealer. Unless Fan has completed at least the minimum offering and
deposited the proceeds with the Escrow Agent within 120 days from the date of
this Prospectus (which date may be extended for up to an additional 60 days
without notice by Fan), subscriptions will be refunded promptly to subscribers
in full without deduction therefrom or interest thereon. During the 120-day
offering period and any extension, no subscriber will be entitled to a refund of
any subscription.
Fan may sell shares of common stock to interested subscribers if they
reside in a state in which the shares may be sold and in which Fan or a Selected
Dealer is permitted to sell the shares. Fan is not obligated to sell any shares
to any person. Additionally, officers, directors and present stockholders of Fan
and affiliates or persons associated with such persons may purchase all or any
portion of the 400,000 share minimum offering, including making purchases of
amounts necessary to complete the minimum offering within the offering period.
Such persons would purchase the shares on the same terms as purchases by the
public provided that shares purchased by officers or directors or their
affiliates would be taken for investment and would not be resold except in
compliance with applicable securities laws. The proceeds from this offering will
not be utilized, directly or indirectly, to enable anyone to purchase shares of
common stock offered by Fan. To the extent that officers, directors, current
stockholders and their affiliates or associates purchase shares offered, the
number of shares in the minimum offering required to be purchased by the general
public will be reduced by a like amount and under such circumstances the control
of Fan by the present stockholders would be increased. The officers and
directors and any Selected Dealers may be deemed to be "underwriters" as such
term is defined under the Securities Act.
42
<PAGE>
Selected Dealers or others may engage in transactions that stabilize,
maintain or otherwise affect the price of the common stock in any market which
may develop following the offering, including bidding for, or purchasing shares
of common stock in the open market, in stabilization transactions or otherwise.
Any of these activities, if undertaken, could stabilize or maintain the market
price of the common stock above independent market levels and could be
discontinued at any time.
Sale of Shares by Selling Securityholders
Once Fan has completed or discontinued the primary offering, the Selling
Securityholders may commence a secondary offering of shares held by them. There
will be no concurrent offerings. The Selling Securityholders described in the
table on page 38 above hold a total of 1,800,000 shares of outstanding common
stock and warrants entitling them to purchase up to 900,000 additional shares.
The outstanding shares and the shares to be issued upon exercise of the warrants
are restricted securities as defined in Rule 144 adopted under the Securities
Act while held by the Selling Securities.
Each of the Selling Securityholders has agreed not to sell or otherwise
transfer his or her shares for at least 120 days from the date of this
Prospectus and until Fan has concluded its offering (the "Lockup Period").
Thereafter, the Selling Securityholders (or their pledgees, donees, transferees,
or other successors in interest) from time to time may sell all or a portion of
the Shares "at the market" to or through a market maker or into an existing
trading market, if a market then exists, in private sales, including direct
sales to purchasers, or otherwise at prevailing market prices or at negotiated
or fixed prices. The Selling Securityholders may offer and sell shares following
the Lockup Period regardless of the outcome of the offering by Fan. By way of
example, and not by way of limitation, the Shares may be sold by one or more of
the following methods:
o A block trade in which a broker or dealer so engaged will attempt to
sell the Shares as agent but may purchase and resell a portion of the
block as principal to facilitate the transaction;
o Purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this Prospectus;
o An exchange distribution in accordance with the rules of such
exchange; and
o Ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
In effecting sales, brokers or dealers engaged by the seller may arrange
for other brokers or dealers to participate. Brokers or dealers will receive
commissions or discounts from the seller in amounts to be negotiated with the
Selling Securityholder immediately prior to the sale. It is anticipated that the
per share selling price for the Shares sold when a public market exists will be
at or between the "bid" and "asked" prices of Fan's common stock, if any, as
quoted in the over-the-counter market immediately preceding the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act, in connection
with such sales. A copy of this Prospectus will be delivered by the Selling
Securityholder to each purchaser or as otherwise required at the time of sale.
Expenses of any such sale will be borne by the parties as they may agree.
In addition, any securities covered by the Prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than pursuant to the Prospectus.
43
<PAGE>
The Selling Securityholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Shares
against certain liabilities, including liabilities arising under the Securities
Act. Any commissions paid or any discounts or concessions allowed to any such
broker-dealer which purchases Shares as principal or any profits received on the
resale of such Shares may be deemed to be underwriting discounts and commissions
under the Securities Act.
In order to comply with certain state securities laws, if applicable, the
Shares may be sold in only states where the Shares have been registered or
qualified for sale or an exemption from registration or qualification is
available and is complied with.
The Shares offered hereby will be sold by the Selling Securityholders (or
their pledgees, donees, transferees or other successors in interest) acting as
principals for their own account. Fan will receive none of the proceeds from
such sales.
No underwriting arrangements exist as of the date of this Prospectus for
any Selling Securityholders to sell its shares. Upon being advised of any
underwriting arrangements that may be entered into by a Selling Securityholder
after the date of this Prospectus, we will prepare a supplement to this
Prospectus to disclose such arrangements.
Certain Provisions of the Articles of Incorporation, Bylaws and Nevada Law
Fan has the authority to issue shares of new classes of preferred stock and
to determine the rights, preferences, privileges, designations and limitations
of such stock, including the dividend rights, dividend rate, conversion rights,
voting rights, terms of redemption and other terms or conditions of such stock.
This authority could make it more difficult for a person to engage in, or
discourage a person from engaging in, a change in control transaction without
the cooperation of management.
Fan's Articles of Incorporation contain a provision, authorized under
Nevada law, which limits the liability of directors or officers of Fan for
monetary damages for breach of fiduciary duty as an officer or director other
than for intentional misconduct, fraud or a knowing violation of law or for
payment of a dividend in violation of Nevada law. Such provision limits recourse
for money damages which might otherwise be available to Fan or stockholders for
negligence by individuals while acting as officers or directors. The Restated
Articles of Incorporation do not provide for the elimination of or any
limitation on the personal liability of directors for:
o Any breach of the director's duty of loyalty to Fan or its
stockholders,
o Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o Unlawful corporate distributions, or
o Any transaction from which such director derives an improper personal
benefit.
Although this provision would not prohibit injunctive or similar actions
against directors or officers, the practical effect of such relief would be
limited.
44
<PAGE>
The Articles of Incorporation and Bylaws also contain provisions requiring
Fan to indemnify officers, directors and certain employees for certain
liabilities incurred in connection with actions taken on behalf of Fan,
including expenses incurred in defending against such liabilities. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of Fan pursuant to the
foregoing provisions, or otherwise, Fan has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Anti-Takeover Statutes
The Nevada General Corporation Law ("Nevada GCL") contains two provisions,
described below as "Combination Provisions" and the "Control Share Act," that
may make more difficult the accomplishment of unsolicited or hostile takeover
transactions.
Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Stockholders. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),
except those which are approved by the board of directors before the interested
stockholder first obtained a 10% interest in the corporation's stock. There are
additional exceptions to the prohibition, which apply to combinations if they
occur more than five years after the interested stockholder's date of acquiring
shares. The Combination Provisions apply unless the corporation elects against
their application in its original articles of incorporation or an amendment
thereto, or in its bylaws. Fan's Articles of incorporation and Bylaws do not
currently contain a provision rendering the Combination Provisions inapplicable.
Nevada Control Share Act. Nevada's Control share Acquisition Act (the
"Control Share Act") imposes procedural hurdles on and curtails greenmail
practices of corporate raiders. The Control Share Act temporarily
disenfranchises the voting power of "control shares" of a person or group
("Acquiring Person") purchasing a "controlling interest" in an "issuing
corporation" (as defined in the Nevada GCL) not opting out of the Control Share
Act. In this regard, the Control Share Act will apply to an "issuing
corporation" unless, before an acquisition is made, the articles of
incorporation or bylaws in effect to the 10th day following the acquisition of a
controlling interest provide that it is inapplicable. Fan's Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.
Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of Fan and its
stockholders at the time of the occurrence of a transaction governed by the
Control Share Act (assuming that Fan's Articles of Incorporation or Bylaws have
not theretofore been amended to include opting out provisions) would determine
whether the Control Share Act is applicable.
45
<PAGE>
The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
Interest, " and (2) acquired within 90 days immediately preceding that date. A
"Controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with 1/5)
of all voting power of the corporation. The Acquiring Person may not vote any
control shares without first obtaining approval from the stockholders not
characterized as "interested stockholders" (as defined in the act).
The Fan Articles of Incorporation and Bylaws do not include provisions
which make the Control Share Act inapplicable.
The Control share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the 10th day following the acquisition of
a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. Fan's Articles of Incorporation and Bylaws do not address this
matter.
Shares Available for Future Sale
Upon completion of this offering, Fan will have 10,451,704 shares of common
stock outstanding if the minimum offering is completed and 13,051,704
outstanding if the maximum offering is completed assuming no exercise of (1)
outstanding warrants for the purchase of up to 1,180,000 shares or (2)
outstanding stock options for the purchase of 910,000 shares. All shares sold in
this offering and 2,623,533 presently outstanding shares will be freely
transferable by persons other than "affiliates" of Fan (as that term is defined
under the Securities Act), without restriction or further registration under the
Securities Act.
The remaining outstanding shares of common stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exception from registration is available, including the exemption contained in
Rule 144. See "Risk Factors-Shares Eligible for Future Sale."
In general, under Rule 144 a person who has beneficially owned shares for
at least one year is entitled to sell into a public market, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of their then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
issuer. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least two years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above.
46
<PAGE>
DESCRIPTION OF SECURITIES
Authorized Stock
The authorized capital stock of Fan consists of 95,000,000 shares of common
stock, $0.001 par value per share, and 5,000,000 shares of preferred stock,
$0.001 par value per share. All of the issued and outstanding capital stock of
Fan is fully paid and nonassessable. The following summary descriptions of Fan's
preferred stock and common stock are qualified in their entirety by reference to
Fan's Restated Articles of Incorporation, which were filed as exhibits to the
Registration Statement of which this Prospectus is a part and which are
available from Fan upon request. See "Additional Information."
Common Stock
There are 10,051,704 shares of common stock outstanding and held by 522
stockholders of record. The holders of common stock are entitled to receive
ratable dividends when and as declared by the Board of Directors from funds
legally available therefor and to one vote for each share held of record on each
matter submitted to a vote of stockholders. In the event of a liquidation,
dissolution or winding-up, holders of common stock are entitled to share ratably
in all assets remaining after payments to creditors and other payments required
by law. Holders of common stock have no preemptive rights and no rights to
convert their common stock into any other securities. The outstanding shares of
common stock are fully paid and nonassessable.
Preferred Stock
There are no shares of preferred stock outstanding. Fan may issue from time
to time in one or more series with such distinctive designations, rights,
preferences and limitations as the Board of Directors shall determine. The Board
of Directors has the authority to determine the rate of dividend, redemption
features, amounts payable upon liquidation, sinking fund provisions, conversion
features and voting powers.
Warrants
General. The following is a brief summary of the material provisions of the
outstanding stock purchase warrants.
As of May 15, 1999, Fan had outstanding 1,180,000 warrants held by 10
persons. Each warrant entitles the holder thereof to purchase at any time in
whole or in part over a one year period from the date the warrant was issued,
one share of common stock at an exercise price of $0.25 per share, subject to
adjustment referred to below which expire July 31, 1999. The exercise price and
number of shares of common stock purchasable upon the exercise of the warrants
are subject to adjustment upon the occurrence of certain events, including stock
dividends, stock splits, combinations and reclassification of the common stock,
or sale by Fan of shares of its common stock or other securities convertible
into common stock at a price below the then applicable exercise price of the
warrants. The holder of a warrant may exercise a warrant by surrendering the
certificate representing the warrant to Fan at its offices in Scottsdale,
Arizona and accompanied by payment of the exercise price. Warrants are issuable
in minimum increments of 1,000 shares and no fractional shares will be issued
upon exercise of the warrants.
47
<PAGE>
The Warrants are, and shares of common stock of Fan issued upon exercise of
the warrants shall be, nontransferable without the prior written consent of Fan
and may be transferred only in accordance with the Securities Act. The shares of
common stock which would be issued upon exercise of the outstanding warrants
have been registered for resale by the holders. See "Principal and Selling
Securityholders."
Transfer Agent and Warrant Agent
Atlas Stock Transfer Corp., Salt Lake City, Utah, is the transfer agent for
the common stock.
LEGAL MATTERS
The validity of the issuance of the shares of common stock being offered
hereby by Fan and by the Selling Securityholders have been passed upon for Fan
by Alan W. Peryam, LLC, Denver, Colorado. Alan W. Peryam was a director of Fan
between March 17, 1997 and May 15, 1997.
EXPERTS
The balance sheet of Fan as of December 31, 1998 and the statements of
operations, stockholders' equity and cash flows for the fiscal years ended
December 31, 1997 and 1998 and cumulative amounts from January 1, 1997 to
December 31, 1998 have been included herein in reliance upon the report of
Wheeler Wasoff, P.C., Denver, Colorado, independent certified public
accountants, given upon the authority of such firm as experts in accounting and
auditing. The Board of Directors of Fan replaced Fan's prior auditor December
24, 1997 due to the relocation of Fan's executive offices to Denver, Colorado.
The report of Mr. Schvaneveldt, the prior auditor for Fan's financial statements
for each of the two fiscal years ending December 31, 1996, was qualified as to
Fan's ability to continue as a going concern. There have been no disagreements
between Fan and the former accountant.
ADDITIONAL INFORMATION
Fan has filed with the SEC a Registration Statement on Form SB-2
("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act") with respect to the Securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the SEC. For further information with respect to Fan
and the securities offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules thereto, which may be examined at the
SEC's offices without charge, or copies of which may be obtained from the SEC
upon payment of the prescribed fees. Statements made in this Prospectus as to
the contents of any contract, agreement or document are not necessarily
complete, and in each instance reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement,
and each such statement is qualified in its entirety by such reference. Fan is a
reporting company registered under the Securities Exchange Act of 1934, as
amended ("1934 Act") and in accordance therewith files reports and other
information with the SEC. All of such reports and other information may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 and at regional offices of the
SEC located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, Suite 1300, New York, New York 10048. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. The address of such site is http:\\www.sec.gov.
48
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report F-2
Balance Sheets
December 31, 1998 and March 31, 1999 (unaudited) F-3
Statements of Operations
Years ended December 31, 1997 and 1998 and
Three Months ended March 31, 1998 and 1999 (unaudited) F-4
Statement of Stockholders' Equity
Years ended December 31, 1997 and 1998 and
Three Months ended March 31, 1999 (unaudited) F-5
Statements of Cash Flows
Years ended December 31, 1997 and 1998 and
Three Months ended March 31, 1998 and 1999 (unaudited) F-6 - F-7
Notes To Financial Statements F-8 - F-24
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders FAN ENERGY INC.
We have audited the accompanying balance sheet of Fan Energy Inc. (a development
stage company) as of December 31, 1998 and the related statements of operations,
stockholders' equity and cash flows for the two years then ended and cumulative
amounts from January 1, 1997 to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fan Energy Inc. as of December
31, 1998 and the results of its operations and its cash flows for the two years
then ended and cumulative amounts from January 1, 1997 to December 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses from its initial
operations and has not earned revenues from its principal operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Wheeler Wasoff, P.C.
WHEELER WASOFF, P.C.
Denver, Colorado
March 10, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31, March 31,
1998 1999
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash ................................................. $ 15,875 $ 23,149
Accounts receivable, net ............................. -- 19,454
----------- -----------
Total Current Assets ............................. 15,875 42,603
OIL AND GAS PROPERTIES, net (Note 3) ..................... 690,584 743,256
DEFERRED OFFERING COSTS .................................. -- 3,343
----------- -----------
$ 706,459 $ 789,202
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade ............................. $ 1,736 $ 107,334
Due to shareholder ................................... -- 20,500
---------- -----------
Total Current Liabilities ........................ 1,736 127,834
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY (Note 4)
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 - 10,051,704 shares .... 10,052 10,052
Additional paid-in capital ........................... 2,249,956 2,249,956
(Deficit) accumulated during the developmental stage . (1,655,785) (1,699,140)
Additional paid-in capital stock options ............. 100,500 100,500
--------- -----------
704,723 661,368
--------- -----------
$ 706,459 $ 789,202
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Cumulative
Three Months Ended Amounts from
Years Ended December 31, March 31, Jan. 1, 1997 to
1997 1998 1998 1999 March 31, 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Oil and gas production ........................... $ -- $ -- $ -- $ 20,662 $ 20,662
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Lease operating expenses ......................... -- -- -- 1,208 1,208
Depreciation, depletion and amortization ......... -- -- -- 21,410 21,410
General and administrative ....................... 192,985 198,851 21,646 41,399 433,235
Impairment of oil and gas properties ............. -- 1,257,702 -- -- 1,257,702
Interest ......................................... 6,247 -- -- -- 6,247
------------ ------------ ------------ ------------ ------------
199,232 1,456,553 21,646 64,017 1,719,802
------------ ------------ ------------ ------------ ------------
NET (LOSS) ......................................... $ (199,232) $ (1,456,553) $ (21,646) $ (43,355) $ 1,699,140
============ ============ ============ ============ ============
NET (LOSS) PER COMMON SHARE -
Basic and Diluted ................................. $ (.07) $ (.17) $ (.003) $ (.004) $ (.27)
============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
Basic and Diluted ................................. 3,011,287 8,567,537 7,771,704 10,051,704 6,263,000
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1999 (Unaudited)
Deficit Additional
Accumulated Paid-In
Common Stock Additional During the Capital
---------------------- Paid-In Development Stock
Shares Amount Capital Stage Options
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ................................... 771,704 $ 772 $ 503,876 $ (504,648) $ --
Reclassification of deficit pursuant to quasi
reorganization ............................................ -- -- (504,648) 504,648 --
Sale of common stock and warrants pursuant to
private placement, at $.20 per unit .................... 2,500,000 2,500 497,500 -- --
Cost of private placement offering ......................... -- -- (430) -- --
Issuance of common stock for services, valued at
$.20 per share ......................................... 250,000 250 49,750 -- --
Sale of common stock and warrants pursuant to
private placement, at $.50 per unit .................... 2,000,000 2,000 998,000 -- --
Costs of private placement offering ........................ -- -- (52,439) -- --
Issuance of common stock for property, valued at
$.133 per share ........................................ 2,250,000 2,250 297,750 -- --
Issuance of common stock warrants for offering costs
Issuance of stock options .................................. -- -- 4,545 -- --
Net (Loss) ................................................. -- -- 2,332 -- 100,500
-- -- -- (199,232) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ................................. 7,771,704 7,772 1,796,236 (199,232) 100,500
Issuance of common stock for services, valued at
$.20 per share .......................................... 215,000 215 42,785 -- --
Exercise of common stock warrants for cash, at
$.20 per share .......................................... 2,065,000 2,065 410,935 -- --
Net (Loss) ................................................. -- -- -- (1,456,553) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ................................. 10,051,704 10,052 2,249,956 (1,655,785) 100,500
Net (Loss) ................................................. -- -- -- (43,355) --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1999 (unaudited) ........................ 10,051,704 $ 10,052 $ 2,249,956 $(1,699,140) $ 100,500
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Cumulative
Three Months Ended Amounts from
Years Ended December 31, March 31, Jan. 1, 1997 to
1997 1998 1998 1999 March 31, 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) .......................................... $ (199,232) $(1,456,553) $ (21,646) $ (43,355) $(1,699,140)
Adjustments to reconcile net (loss) to net cash
(used) provided by operating activities
Depreciation, depletion and amortization ............ -- -- -- 21,410 21,410
Impairment of oil and gas properties ................ -- 1,257,702 -- -- 1,257,702
Stock options ....................................... 102,832 -- -- -- 102,832
Stock for services .................................. 50,000 43,000 -- -- 93,000
Changes in assets and liabilities
Increase (decrease) in accounts payable ......... 5,315 (3,579) 49,105 48,673 50,409
(Increase) in accounts receivable ................ -- -- -- (19,454)
Other ........................................... (10,383) 10,383 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by operating activities .... (51,468) (149,047) 27,459 7,274 (193,241)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for oil and gas properties ................ (975,491) (672,795) (93,026) -- (1,648,286)
----------- ----------- ----------- ----------- -----------
Net cash (used) in investing activities ............. (975,491) (672,795) (93,026) -- (1,648,286)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock warrants ..... -- 413,000 -- -- 413,000
Proceeds from sale of common stock .................. 1,500,000 -- -- -- 1,500,000
Cash paid for offering costs ........................ (48,324) -- (25,226) -- (48,324)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing activities ..... 1,451,676 413,000 (25,226) -- 1,864,676
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ......................... 424,717 (408,842) (90,793) 7,274 23,149
CASH, BEGINNING OF PERIODS .............................. -- 424,717 424,717 15,875 --
----------- ----------- ----------- ----------- -----------
CASH, END OF PERIODS .................................... $ 424,717 $ 15,875 $ 333,924 $ 23,149 $ 23,149
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997 and 1998 and Three
Months Ended March 31, 1998 and 1999 (Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1997 and 1998, the Company paid cash for
interest of $6,247 and $0, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
During the year ended December 31, 1997, the Company:
o issued 2,250,000 shares of common stock, valued at $300,000 ($.133 per
share), as partial consideration for unproved oil and gas properties.
o issued 680,000 options to purchase common stock to officers, directors and
consultants, valued at $102,832.
o issued 250,000 shares of common stock for services, valued at $50,000 ($.20
per share).
o issued 180,000 warrants to purchase shares of common stock as partial
consideration for finder's fees in conjunction with the private placement
sale of common stock, valued at $4,545.
During the year ended December 31, 1998, the Company issued 215,000 shares of
common stock for services, valued at $43,000 ($.20 per share).
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 1 - ORGANIZATION
Fan Energy Inc. (the "Company") is an independent energy company engaged
in the development, exploration and acquisition of crude oil and natural
gas reserves in the western United States. Originally formed as an Idaho
corporation in the early 1900s, the Company's predecessor was not
successful in the exploration of mining properties. In 1988 the
predecessor was merged into a newly-formed Nevada corporation as Eastern
Star Mining, Inc. and it was inactive thereafter, with no assets or
liabilities through the end of 1996. In early 1997, the corporation was
reactivated when the holder of a majority of the outstanding common
stock transferred control of the inactive corporation. The transferee
elected new directors and officers and caused the Company to effect a
10-into-1 reverse stock split. The name of the corporation was changed
to Fan Energy Inc. in December 1997.
Effective with the change in control and reactivation, the Company
undertook development stage activities as defined by Statement of
Financial Accounting Standards (SFAS) No. 7 and is considered a
development stage company effective January 1, 1997. Its principal
activities have been raising capital through the sale of its securities,
acquiring undivided minority interests in two oil and natural gas
exploratory prospects in California for cash and common stock and one
prospect in Wyoming, and commencing the drilling of exploratory and
development wells on these properties. As of December 31, 1998 the
Company has not earned any production revenue from its oil and gas
activities.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 costs until such properties are evaluated as
either proved or unproved. The net capitalized costs are subject to a
ceiling limitation. Gains or losses upon disposition of oil and gas
properties are treated as adjustments to capitalized costs, unless the
disposition represents a significant portion of the Company's proved
reserves.
F-8
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A separate cost center is maintained for expenditures applicable to each
country in which the Company conducts exploration and/or production
activities.
Depletion and amortization of the full-cost pool is computed using the
units-of-production method based on proved reserves as determined
annually by the Company and independent engineers. An additional
depletion provision in the form of a valuation allowance is made if the
costs incurred on oil and gas properties, or revisions in reserve
estimates, cause the total capitalized costs of oil and gas properties
in the cost center to exceed the capitalization ceiling. The
capitalization ceiling is the sum of (1) the present value of future net
revenues from estimated production of proved oil and gas reserves
applicable to the cost center plus (2) the lower of cost or estimated
fair value of the cost center's unproved properties less (3) applicable
income tax effects. The valuation allowance was $1,257,702 at December
31, 1998 and March 31, 1999.
IMPAIRMENT
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 be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Oil and gas
properties accounted for using the full cost method of accounting, a
method utilized by the Company, are excluded from this requirement, but
will continue to be subject to the ceiling test limitations.
DEFERRED OFFERING COSTS
Deferred offering costs at December 31, 1997 consisted of costs incurred
in connection with a proposed public offering of the Company's common
stock. As the offering was not successful, costs incurred of $57,029
were charged to operations in 1998. During the three months ended March
31, 1999 the Company incurred $3,343 of costs in connection with a
proposed public offering of the Company's common stock (Note 7).
F-9
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
At December 31, 1998, the Company had a net operating loss carryforward
of approximately $850,000 that may be offset against future taxable
income through 2018.
The Company has fully reserved the tax benefits of these operating
losses because the likelihood of realization of the tax benefits cannot
be determined.
The tax benefit of the loss carryforward has been offset by a valuation
allowance of the same amount. Of the total tax benefit $113,000 is
attributable to 1998.
Temporary differences between the time of reporting certain items for
financial and tax reporting purposes consist primarily of compensation
expense related to the issuance of stock options and exploration and
development costs on oil and gas properties.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principle 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.
F-10
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The oil and gas industry is subject, by its nature, to environmental
hazards and cleanup costs. At this time, management knows of no
substantial costs from environmental accidents or events for which it
may be currently liable. In addition, the Company's oil and gas business
makes it vulnerable to changes in wellhead prices of crude oil and
natural gas. Such prices have been volatile in the past and can be
expected to be volatile in the future. By definition, proved reserves
are based on current oil and gas prices and estimated reserves. Price
declines reduce the estimated quantity of proved reserves and increase
annual amortization expense (which is based on proved reserves).
(LOSS) PER COMMON SHARE
(Loss) per common share is computed based on the weighted average number
of common shares outstanding during each period. Convertible equity
instruments such as stock warrants and options are not considered in the
calculation of net loss per share, as their inclusion would be
antidilutive.
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.
SHARED BASED COMPENSATION
In October 1995 SFAS No. 123" Accounting for Stock-Based Compensation"
was issued. This standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument.
This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to
continue to measure compensation using the intrinsic value approach
under Accounting Principles Board (APB) Opinion No. 25. The Company has
elected to utilize APB No. 25 for measurement; and will, pursuant to
SFAS No. 123, disclose supplementally the pro forma effects on net
income and earnings per share of using the new measurement criteria.
During the years ended December 31, 1997 and 1998, the Company issued
warrants and/or options to purchase shares of its common stock (Note 4).
F-11
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. On occasion, the Company has
cash in banks in excess of federally insured amounts.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash. The Company maintains
cash accounts at one financial institution. The Company periodically
evaluates the credit worthiness of financial institutions, and maintains
cash accounts only in large high quality financial institutions, thereby
minimizing exposure for deposits in excess of federally insured amounts.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates
the realization of assets and extinguishment of liabilities in the
normal course of business.
As previously discussed, the Company is in the development stage and has
not realized revenues from its planned operations. As such, the Company,
as of December 31, 1998 has incurred net operating losses since
reactivation as a development stage company of $1,655,785 and does not
have sufficient working capital to fund its planned operations during
the next twelve months. Additional funding will be required to complete
the Company's planned drilling program, put successful wells into
production and finance general and administrative expenses. These
circumstances raise substantial doubt about the Company's ability to
continue as a going concern. In order to meet the Company's continuing
financing needs, management of the Company intends to raise working
capital through the sale of common stock or other securities, or through
other financing.
F-12
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's financial statements do not include any adjustments
related to the realization of the carrying value of assets or the
amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
The ability of the Company to continue operations as a going concern is
dependent upon its success in obtaining capital through sale of common
stock or other securities and ultimately achieving profitable
operations.
NEW TECHNICAL PRONOUNCEMENTS
In June 1997 SFAS No. 130, "Reporting Comprehensive Income" was issued
effective for fiscal years beginning after December 31, 1997, with
earlier application permitted. The Company has adopted SFAS No. 130
effective with the fiscal year ended December 31, 1998. Adoption of SFAS
No. 130 has not had an impact on the Company's financial statements.
In June 1997 SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" was issued effective for fiscal years beginning
after December 31, 1997, with earlier application permitted. The Company
has adopted SFAS No. 131 effective with the fiscal year ended December
31, 1998.
In February 1998 SFAS No. 132, "Employers' Disclosure about Pensions and
Other Postretirement Benefits", was issued effective for fiscal years
beginning after December 15, 1997, with earlier application encouraged.
The Company has adopted SFAS No. 132 effective with the fiscal year
ending December 31, 1998. Adoption of SFAS No. 132 has not had any
impact on the Company's financial statements.
In June 1998 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued for fiscal years beginning after June
15, 1999. Adoption of SFAS No. 133 is not expected to have a material
impact on the Company's financial statements.
F-13
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1998 SFAS No. 134, "Accounting for Mortgage Broker
Securities", was issued. SFAS No. 134 is not expected to have an impact
on the Company's financial statements.
In February 1999 SFAS No. 135 regarding miscellaneous technical
corrections of accounting principles was issued. Adoption of SFAS 135 is
not expected to have an impact on the Company's financial statements.
NOTE 3 - OIL AND GAS PROPERTIES
In 1997, the Company acquired a 25% undivided working interest in two
natural gas exploration and development prospects located in the
southern part of the Sacramento Basin in California. The Company paid
$907,951 in cash and issued 2,250,000 shares of common stock, valued at
$300,000 ($.133 per share), for the properties. The total value of cash
paid and stock issued approximates the transferor's historical basis in
the property of $1,207,951. As additional consideration, the Company
agreed to issue 500,000 additional restricted shares to the transferor
if the gross revenue received by the Company from the prospects is at
least equal to all direct costs of the Company associated with acquiring
the interest in the prospects and drilling and other related expenses by
December 31, 1999. The Company paid to the transferor interest in the
amount of $6,247 (8% per annum) for funds advanced by the transferor on
the property from the date of the acquisition agreement (August 27,
1997) to the closing of the agreement (November 11, 1997). Concurrently
with the closing, the transferor became a director and officer of the
Company.
In 1998 the Company acquired a 20% working interest in certain Wyoming
oil and gas leases held by an entity controlled by the chief operating
officer/director of the Company, for $131,000 which includes seismic
costs incurred to the date of purchase.
The Company may be subject to various possible contingencies, which are
primarily from interpretations of federal and state laws and regulations
affecting the oil and gas industry. Although management believes it has
complied with the various laws and regulations, new rulings and
interpretations may require the Company to make adjustments.
F-14
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
Capitalized costs associated with oil and gas producing activities as of
December 31, 1998 and March 31, 1999 are as follows:
1998 1999
Proved properties $ 1,012,485 $1,086,567
Unproved properties 935,801 935,801
------------ -----------
1,948,286 2,002,368
Less valuation allowance (1,257,702) (1,257,702)
Less accumulated depreciation,
depletion and amortization - (21,410)
------------ -------------
Net capitalized costs $ 690,584 $ 743,256
============ ===========
Information relating to the Company's costs incurred in its oil and gas
operations during the years ended December 31, 1997 and 1998 and three
months ended March 31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Property acquisition - Unproved properties $ 1,214,866 $172,919 $ -
Exploration costs 60,625 368,699 -
Development costs - 131,177 74,082
------------ -------- -----------
$ 1,275,491 $672,795 $ 74,082
============ ======== ===========
</TABLE>
Property acquisition costs include costs incurred to purchase, lease, or
otherwise acquire a property. Exploration costs include the costs of
geological and geophysical activity, dry holes, and drilling and
equipping exploratory wells. Development costs include costs incurred to
gain access to prepare development well locations for drilling and to
drill and equip development wells.
As of December 31, 1998, the Company had not earned any revenue from its
oil and gas activities and none of its properties had produced oil or
gas. During the three months ended March 31, 1999 revenue was earned
from initial oil and gas production from one property.
F-15
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
OIL AND GAS RESERVES (UNAUDITED)
The following unaudited reserve estimates presented as of December 31,
1998 was prepared by an independent petroleum engineer. There are many
uncertainties inherent in estimating proved reserve quantities and in
projecting future production rates and the timing of development
expenditures. In addition, reserve estimates of new discoveries that
have little production history are more imprecise than those of
properties with more production history. Accordingly, these estimates
are expected to change, as future information becomes available.
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.
At December 31, 1998 proved reserves were as follows:
GAS OIL
(MMCF) (MBBL)
Beginning of year - -
Proved developed producing 190.0 -
Proved developed non-producing 187.3 9.5
Proved undeveloped 190.0 -
----- ----
End of year 567.3 9.5
===== ====
STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The standardized measure of discounted future net cash flows is based on
estimated quantities of proved reserves and the future periods in which
they are expected to be produced and on year-end economic conditions.
Estimated future gross revenues are priced on the basis of year-end
prices. Estimated future gross revenues are reduced by estimated future
development and production costs, as well as certain abandonment costs
and by estimated future income tax expense. Future income tax expenses
have been computed considering the tax basis of the oil and gas
properties plus available carryforwards and credits.
F-16
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
The standardized measure of discounted future net cash flows should not
be construed to be an estimate of the fair market value of the Company's
proved reserves. Estimates of fair value would also take into account
anticipated changes in future prices and costs, the reserve recovery
variances from estimated proved reserves and a discount factor more
representative of the time value of money and the inherent risks in
producing oil and gas. Significant changes in estimated reserve volumes
or product prices could have a material effect on the Company's
financial statements.
The following table presents the standardized measure of the discounted
future net cash flows attributable to the Company's proved oil and gas
reserves as of December 31, 1998:
(in 000's)
Future cash inflows $1,210
Future production costs (224)
Future development costs (101
Future income tax expense (221)
-------
Future net cash flows 664
10% annual discount for estimated timing of
cash flows (206)
Net operating loss carryforward 221
-------
Standardized measure of discounted future
net cash flows $ 679
=======
F-17
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
The following table presents the principal sources of the changes in the
standardized measure of discounted future net cash flows for the year
ended December 31, 1998:
(in 000's)
Standardized measure of discounted future net cash flows,
beginning of year $ -
Discoveries 679
Standardized measure of discounted future net cash flows,
end of year $ 679
=====
Proved reserves were discovered in the fourth quarter of 1998, price
variations were nominal, therefore there is no change in standardized
measure due to price change.
NOTE 4 - STOCKHOLDERS' EQUITY
COMMON STOCK
In 1997, the Company completed the sale of common stock and warrants
pursuant to a private placement as follows:
o 2,500,000 units, at a price of $.20 per unit, consisting of
2,500,000 shares of common stock and warrants to purchase 2,500,000
shares of common stock at an exercise price of $.20 per share before
June 2, 1998. Proceeds to the Company were $500,000, before costs of
the offering of $430.
o 2,000,000 units, at a price of $.50 per unit, consisting of
2,000,000 shares of common stock and warrants to purchase 1,000,000
shares of common stock at an exercise price of $.60 per share before
October 31, 1998 (extended to July 31, 1999). Proceeds to the
Company were $1,000,000 before costs of the offering of $52,439.
F-18
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
In 1997 the Company issued shares of common stock for non-cash
consideration, as follows:
o 250,000 shares for services, of which 150,000 shares are to officers
and directors, valued at $50,000 ($.20 per share).
o 2,250,000 shares to an officer/director as partial compensation for
the acquisition of oil and gas prospects, valued at $300,000 ($.133
per share).
In 1998 the Company issued shares of common stock, as follows:
o 215,000 shares for services to officers and directors, valued at
$43,000 ($.20 per share which amount was reduced from $.50 per share
by the Board of Directors).
o 2,065,000 shares for $413,000 cash ($.20 per share) for exercise of
common stock warrants.
QUASI REORGANIZATION
Effective January 1, 1997, the stockholders of the Company approved a
plan of informal quasi reorganization. Pursuant to the plan, the
Company's accumulated deficit of $504,648 as of the date of
reorganization was eliminated and charged to additional paid-in capital.
WARRANTS
In 1997, the Company issued warrants to purchase 180,000 shares of
common stock at an exercise price of $.50 per share through October 31,
1998 (extended to July 31, 1999) as partial consideration for a finders
fee in conjunction with the private placement sale of $.50 units
described above. The warrants are valued at $4,545, using the
Black-Scholes option pricing model.
F-19
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1998 the status of outstanding warrants is as follows:
Issue Shares Exercise Expiration
Date Exercisable Price Date
October 31, 1997 1,000,000 $.60 July 31, 1999
October 31, 1997 180,000 $.50 July 31, 1999
At December 31, 1998 the per share weighted-average grant date fair
value and per share weighted average exercise price of outstanding
warrants granted during 1997 are $.01 and $.58, respectively.
STOCK OPTION PLAN
In July 1997 the Company adopted its 1997 Statutory and Nonstatutory
Incentive Stock Option Plan (the Plan) allowing for the issuance of
incentive stock options and nonstatutory stock options to purchase an
aggregate 1,000,000 shares of common stock to directors, officers,
employees and consultants of the Company. The Plan is administered by
the Board of Directors.
The Plan provides that incentive stock options be granted at an exercise
price equal to the fair market value of the common shares of the Company
on the date of the grant and must be at least 110% of fair market value
when granted to a 10% or more shareholder. The term of all stock options
granted under the Plan may not exceed ten years, and no later than three
months after termination of employment, except the term of incentive
stock options granted to a 10% or more shareholder which may not exceed
five years.
F-20
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
The status of outstanding options granted pursuant to the 1997 Plan was
as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number Exercise Fair Exercise
of Shares Price Value Price
<S> <C> <C> <C> <C>
Options Outstanding - January 1, 1997 - - - -
Granted 810,000 $.33 $.20 $.20 - .35
-------
Options Outstanding - December 31, 1997
(680,000 exercisable) 810,000 $.33 $.20
Granted 100,000 $.50 $ - $.50
-------
Options Outstanding - December 31, 1998
(860,000 exercisable) 910,000 $.35 $.18
=======
</TABLE>
The weighted average contractual life of options outstanding at December
31, 1998 was 9.5 years.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share
for 1998 would have been increased to the pro forma amounts indicated
below:
Net (loss) applicable to common stockholders - as reported $(1,456,553)
===========
Net (loss) applicable to common stockholders - pro forma (1,461,206)
==========
(Loss) per share - as reported (.17)
====
(Loss) per share - pro forma (.17)
====
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: dividend yield of 0%;
expected volatility of 0%; discount rate of 5.25%; and expected life of
10 years.
At December 31, 1998 the number of options exercisable was 860,000 and
the weighted average exercise price of these options was $.34.
F-21
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
In 1997, the Company recognized as compensation expense $100,500 for
670,000 options issued October 30, 1997 to Officers/Directors, pursuant
to APB No. 25, and $2,332 for 10,000 options issued to non-employees,
pursuant to SFAS No. 123. Those options were issued at an exercise price
of $.15 per share less than the then private placement cost of common
stock.
STOCK SPLIT
Effective January 1, 1997 the Company effected a 10-into-1 reverse stock
split. The Company did not change the authorized number of common shares
or par value of the common stock. All information in these notes and the
accompanying financial statements gives retroactive effect to the
10-into-1 reverse stock split.
NOTE 5 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 1997 and 1998 the Company paid an
aggregate $10,000 and $48,000, respectively, to entities controlled by
Officers/Directors of the Company for office space and administrative
services in Scottsdale, Arizona ($8,000 - 1997, and $24,000 - 1998) and
Denver, Colorado ($2,000 - 1997, and $24,000 - 1998), at the rate of
$2,000 per month.
In November 1997 the Company entered into a one-year agreement with its
Secretary/Treasurer to provide financial and other services to the
Company for $2,500 per month. During 1997 the Company paid the
Secretary/Treasurer $10,027 for services provided and issued 50,000
shares of common stock, valued at $10,000 ($.20 per share). During 1998
the Secretary/Treasurer was paid $30,000 under the agreement, which was
converted to a month to month basis.
In 1998, the Company acquired a 20% working interest in certain
undeveloped oil and gas properties for $131,000 from an entity
controlled by the chief operating officer/director of the Company. (See
Note 3)
During the three months ended March 31, 1998 and 1999 the Company
incurred an aggregate $12,000 and $12,000 for office and administrative
services, respectively, to related entities; and incurred $7,500 and
$7,500, respectively, for services provided by the Company's
Secretary/Treasurer. In March 1999 an officer/director of the Company
advanced $20,500 to the Company for working capital.
F-22
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 6 - SEGMENT REPORTING
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" was issued, which amends the requirements for a
public enterprise to report financial and descriptive information about
its reportable operating segments. Operating segments, as defined in the
pronouncement, are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
Company in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on the
basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The Company has adopted
SFAS No. 131 for the year ended December 31, 1998.
The Company has one reportable segment, oil and gas producing
activities. The Company has concentrated its oil and gas exploration and
development activities in the western United States, primarily in
California and Wyoming. All activities in this segment have been with
industry partners.
As of December, 1998, the Company had not earned any revenue from its
oil and gas activities. However the Company has discovered proved
reserves from its 1998 drilling program. The Company's total assets of
$706,459 at December 31, 1998 and operating expenses of $199,232 and
$1,456,553 for the years ended December 31, 1997 and 1998, respectively,
are attributable to this segment.
During the three months ended March 31, 1999 the Company earned $20,662
from its oil and gas activities. The Company's total assets of $789,200
at March 31, 1999 and operating expenses of $64,017 for the three months
then ended are attributable to the reportable segment.
NOTE 7 - PROPOSED STOCK OFFERING
The Company's Board of Directors approved the filing of a Registration
Statement on Form SB-2 with the Securities and Exchange Commission
relating to an initial public offering of a minimum 400,000 shares and a
maximum 3,000,000 shares of the Company's common stock at a price of
$.25 per share, on a "best efforts" basis by the officers and directors
of the Company.
F-23
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
(Information as of and for the three months
ended March 31, 1998 and 1999 is unaudited)
NOTE 8 - UNAUDITED FINANCIAL STATEMENTS
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management all adjustments (consisting solely of normal recurring
adjustments) necessary to a fair presentation of the financial
statements for these interim periods have been made. The results of the
interim periods are not necessarily indicative of the results to be
obtained or a full fiscal year.
F-24
<PAGE>
- -------------------------------------------------------------------------------
No person has been authorized to give
any information or to make any
representation in connection with the
offering being made hereby not
contained in this Prospectus, and, if
given or made, such information or FAN ENERGY INC.
representation must not be relied upon
as having been authorized. This
Prospectus does not constitute an
offer to sell or solicitation of an
offer to buy any of the securities
offered hereby in any jurisdiction in A minimum of 400,000
which it is unlawful to make such up to a maximum of 3,000,000
offer or solicitation in such Shares of common stock
jurisdiction. Neither the delivery of
this Prospectus nor any sale made
hereunder shall under any
circumstances create an implication
that information contained herein is
correct as of any time subsequent to
the date hereof.
-------------------------
-------------
Prospectus
-------------
Page No.
PROSPECTUS SUMMARY........................3
RISK FACTORS..............................7
USE OF PROCEEDS..........................18
COMPARATIVE DATA.........................19
DIVIDEND POLICY AND
RELATED STOCKHOLDER MATTERS...........20
MANAGEMENT'S PLAN OF OPERATION...........20
BUSINESS AND PROPERTIES..................23
MANAGEMENT...............................33
PRINCIPAL AND SELLING
SECURITYHOLDERS.......................38 ______, 1999
CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS............40
PLAN OF DISTRIBUTION.....................42
DESCRIPTION OF SECURITIES................47
LEGAL MATTERS............................48
EXPERTS..................................48
ADDITIONAL INFORMATION...................48
GLOSSARY OF OIL AND NATURAL GAS TERMS....49
FINANCIAL STATEMENTS .................. F-1
Until _________, 1999 (90 days from
the date of this Prospectus) all
dealers effecting transactions in the
registered securities, whether or not
participating in this distribution,
may be required to deliver a
prospectus. This is in addition to the
obligation of dealers to deliver a
prospectus when acting as underwriters
and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article ELEVENTH of the Registrant's Restated Articles of Incorporation
provides that no director or officer of the Registrant shall be personally
liable to the Registrant or any of its stockholders for damages for breach of
fiduciary duty as a director or officer, except that such provision will not
eliminate or limit the liability of a director or officer for any act or
omission which involves intentional misconduct, fraud or a knowing violation of
law or for the payment of any dividend in violation of Section 78.300 of the
Nevada Revised Statutes.
Section 78.751 of the Nevada Revised Statutes permits the Registrant to
indemnify its directors, officers, employees and agents if such person acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, has no reasonable cause to believe his conduct was
unlawful.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, the
corporation must provide indemnification against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense.
Article TWELFTH of the Registrant's Restated Articles of Incorporation
provides as follows:
TWELFTH: The corporation shall, to the fullest extent permitted by
Nevada law as in effect from time to time, indemnify any person against
all liability and expense (including attorneys' fees) incurred by reason
of the fact that he is or was a director or officer of the corporation
or, while serving as a director or officer of the corporation, he is or
was serving at the request of the corporation as a director, officer,
partner or trustee of, or in any similar managerial or fiduciary
position of, or as an employee or agent of, another corporation,
partnership, joint venture, trust, association, or other entity.
Expenses (including attorneys' fees) incurred in defending an action,
suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding to the fullest
extent and under the circumstances permitted by Nevada law. The
corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, fiduciary or agent of the
corporation against any liability asserted against and incurred by such
person in any such capacity or arising out of such person;'s position,
whether or not the corporation would have the power to indemnify against
such liability under the provisions of this Section TWELFTH. The
indemnification provided by this Section TWELFTH shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under these Articles of Incorporation, any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise, and shall inure
to the benefit of their heirs, executors and administrators. The
provisions of this Section TWELFTH shall not be deemed to preclude the
corporation from indemnifying other persons from similar or other
expenses and liabilities as the Board of Directors or the stockholders
may determine in a specific instance or by resolution of general
application.
Article VI, Section 1 of the Registrant's Bylaws provides that the
Registrant shall provide indemnification to Registrant's officers, directors and
employees to the fullest extent permitted under the Nevada General Corporation
Law.
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<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
Expenses (none of which will be paid or reimbursed by the Selling
Stockholders to the Registrant) payable in connection with the issuance and
distribution of the securities being registered hereby are as follows:
Securities and Exchange Commission Registration Fee............ $ _____
NASD Fees ..................................................... _____*
Accounting Fees and Expenses................................... 2,000*
Legal Fees and Expenses........................................ 10,000*
Printing, Freight and Engraving................................ 1,000*
Escrow Fees ................................................... 2,000
Miscellaneous.................................................. *
--------
Total................................................... $15,000*
- ------------------
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
The following is information with respect to all unregistered securities
sold by the Registrant within the past three years:
(a) On December 15, 1996 the Registrant issued 636,700 shares of common
stock, valued at $6,367 to an officer and director of the Registrant in
satisfaction of an obligation owed by the Registrant to the officer for expenses
of $6,367 advanced on behalf of the Registrant by such person. The issuance of
the shares was exempt from registration under Section 4(2) of the Securities
Act, as the person to whom the shares were issued, the President and a director
of the Registrant, had full knowledge of the business and affairs of the
Registrant, certificates representing the shares were marked with a restrictive
legend and the shares were taken for investment.
(b) On June 2, 1997 the Registrant issued 2,500,000 shares of its common
stock and 2,500,000 stock purchase warrants to eight non-U.S. citizens for
$500,000 in a private transaction. Each of the warrants entitles the holder to
purchase one additional share of common stock of the Registrant at an exercise
price of $0.20 per share on or before June 2, 1998. No underwriter was involved
in the transaction and there were no underwriting discounts or commissions. The
issuance of the securities was exempt from registration under Rule 504 adopted
under Regulation D of the Securities Act. Form D was filed by the Registrant.
(c) On August 29, 1997 the Registrant issued 2,250,000 shares of its common
stock to George H. Fancher Jr. in connection with the acquisition by the
Registrant of oil and gas properties. Upon issuance of the shares, certificates
representing the shares were delivered to an escrow agent pending completion of
the acquisition transaction. The acquisition transaction was completed on or
about November 11, 1997 at which time the shares were delivered to Mr. Fancher.
In the transaction, the Registrant received an assignment of Mr. Fancher's
undivided interest in two natural gas exploration and development prospects
located in the southern part of the Sacramento Basin in California. The
Registrant paid $907,951 in cash and issued the 2,250,000 shares of common
stock, valued at $300,000, for the properties. The total of the cash and the
stock is intended to be equal to Mr. Fancher's cost in acquiring and developing
the property prior to transfer to the Registrant. No underwriter was involved in
the transaction. The issuance of the securities to Mr. Fancher was exempt under
Section 4(2) of the Securities Act. Mr. Fancher acquired the securities for
investment, certificates representing the securities were marked with a
restrictive legend and stop transfer instructions were placed with the
Registrant's stock transfer agent.
(d) On September 15, 1997 the Registrant issued 250,000 shares of its
common stock to six persons for services valued by the Registrant at $50,000. Of
the six persons, one is a Canadian attorney who received 25,000 shares for
II-2
<PAGE>
service as a director of the Registrant and for preparation of documentation for
the Registrant in connection with the acquisition of oil and gas properties and
advise to the officers concerning certain aspects of the acquisition. A second
person, also a director at the time of issuance of the shares, was also the
Secretary and Treasurer of the Registrant and received 50,000 shares. He
provided financial and accounting services to the Registrant and maintained its
books and records. Two of the persons, each of whom received 50,000 shares, have
substantial experience in the oil and natural gas business and served as
consultants to the Registrant in connection with the acquisition of the natural
gas exploration properties. They reviewed in detail the geologic and related
data available concerning the properties and advised the officers concerning the
advisability of the acquisition. A third consultant also received 50,000 shares,
and agreed in August 1997 to become a director of the Registrant at the time
that the acquisition of the oil and gas properties was completed, he assisted
the Registrant to prepare and document its financing and exploration plan and to
evaluate and budget the plan of development of the natural gas exploration
properties. Of the three consultants, two became directors in November 1997 and
the third agreed to provide ongoing consulting services to the Registrant. The
sixth person, who received 25,000 shares, is an employee of a business owned by
the President of the Registrant and an administrative assistant to the
President. This person provided office, administrative and stenographic services
to the Registrant. Each of the persons to whom the shares were issued had full
knowledge of the business and affairs of the Registrant, each signed a written
investment letter which acknowledged the receipt of information concerning the
Registrant and each agreed to hold the shares issued for investment purposes,
the certificates representing the shares each bear a restrictive legend and stop
transfer instructions were entered with the Registrant's stock transfer agent.
No underwriter was involved in the transactions. Based on the foregoing facts,
the issuance of the securities was exempt from registration pursuant to Section
4(2) of the Securities Act and/or Rule 506 adopted thereunder.
(e) On October 31, 1997 the Registrant issued 2,000,000 shares of its
common stock and warrants to purchase 1,000,000 shares of common stock to 10
non-U.S. citizens for $1,000,000. Each of the warrants entitles the holder to
purchase one additional share of common stock at an exercise price of $0.60 per
share on or before October 31, 1998. The Registrant issued cash finder's fees
totaling $45,000 and issued warrants entitling the holders to purchase up to
180,000 shares of common stock at $0.50 per share to three nonaffiliated,
non-U.S. citizen finders in connection with the transaction. The Registrant's
President, William E. Grafham, participated in the private placement and
purchased 200,000 shares and 100,000 warrants for $100,000. The issuance of the
securities was exempt from registration pursuant to Regulation S adopted under
the Securities Act. Each of the purchasers agreed that no sale of any of the
securities would be made to any U.S. Person, as defined in Regulation S, except
in compliance with the Securities Act.
(f) In September 1998, the Registrant issued 2,065,000 shares of its common
stock to eight persons upon exercise of outstanding warrants originally issued
June 2, 1997 (see Item 26(b) above). The warrants were exercised at $0.20 per
share for total proceeds of $413,000. 435,000 unexercised warrants expired at
the end of August 1998. No underwriter was involved in the transaction and there
were not underwriting discounts or commissions. The issuance of the securities
was exempt from registration under Section 4(2) of the Securities Act. Each of
the persons exercising warrants acquired the securities for investment,
certificates representing the securities were marked with a restrictive legend
and stop transfer instructions were placed with the Registrant's stock transfer
agent.
(g) Effective July 1, 1998, the Registrant issued 215,000 shares of its
common stock to four officers and directors of the Registrant in consideration
for services, valued at $43,000, provided to the Registrant through June 30,
1998. No underwriter was involved in the transaction. The issuance of securities
to the individuals were exempt under Section 4(2) of the Securities Act. Mr.
Fancher acquired the securities for investment, certificates representing the
securities were marked with a restrictive legend and stop transfer instructions
were placed with the Registrant's stock transfer agent.
II-3
<PAGE>
Item 27. Exhibits.
The following is a list of all exhibits filed as part of this Registration
Statement.
Exhibit No. Description and Method of Filing
(1) Form of Selected Dealer Agreement.
(3.1) Restated Articles of Incorporation of Eastern Star Mining, Inc., as
filed with the Nevada Secretary of State February 7, 1997.*
(3.2) Certificate of Amendment of Articles of Incorporation of Eastern Star
Mining, Inc. , as filed with the Nevada Secretary of State May 19,
1997.*
(3.3) Certificate of Amendment of Articles of Incorporation of Eastern Star
Mining, Inc. , as filed with the Nevada Secretary of State May 28,
1997.*
(3.4) Certificate of Amendment of Articles of Incorporation of Eastern Star
Holdings, Inc. , as filed with the Nevada Secretary of State December
10, 1997.*
(3.5) Bylaws of Registrant adopted December 31, 1997.*
(4.1) Form of Amended Fund Escrow Agreement.
(4.2) Form of Subscription Agreement.
(5.1) Opinion dated April 27, 1998, of Alan W. Peryam, LLC regarding
legality of the securities being registered.*
(10.1) Letter Agreement dated August 27, 1997 between Registrant and George
H. Fancher Jr. d/b/a Fancher Oil Company.*
(10.2) Agreement With Arizona Corporate Management, Inc. dated November 1,
1998.*
(10.3) 1997 Incentive and Nonstatutory Stock Option Plan. *
(10.4) Letter regarding conflicts of interest dated March __, 1998 between
Registrant and George H. Fancher Jr.*
(10.5) Form of Subscription Agreement for certain officers and
consultants.*
(10.6) Agreement with Albert Golusin.*
(10.7) Form of Lockup Agreement for Selling Securityholders.
(10.8) Agreement dated May 6, 1999 with George H. Fancher Jr.
(10.9) Loan Agreement dated June 1, 1999 with US Bank National Association.
(23) Consent of Wheeler Wasoff, P.C., Independent Certified Public
Accountants.
(23.3) Consent dated April 27, 1998 of Alan W. Peryam, LLC.
II-4
<PAGE>
(24) Power of Attorney.*
(27) Financial Data Schedule.
- ------------------
*Previously filed.
Item 28. Undertakings
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and
(iii)Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its legal counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Post-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, in the City and County of Denver, State of Colorado on June 11,
1999.
FAN ENERGY INC.
By /s/ William E. Grafham
-----------------------------------------------
William E. Grafham, Chief Executive Officer
By /s/ George H. Fancher Jr.
-----------------------------------------------
George H. Fancher Jr., Director, Principal
Financial Officer
By /s/ Albert A. Golusin
-------------------------------------------
Albert A. Golusin, Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:
Signature Title Date
/s/ William E. Grafham Director June 11, 1999
- ---------------------------------------
William E. Grafham*
/s/ George H. Fancher Jr. Director June 11, 1999
- ---------------------------------------
George H. Fancher Jr.
/s/ Jeffrey J. Scott Director June 11, 1999
- ---------------------------------------
Jeffrey J. Scott*
/s/ Rex L. Utsler Director June 11, 1999
- ---------------------------------------
Rex L. Utsler, Director*
/s/ George A. Cloudy Director June 11, 1999
- ---------------------------------------
George A. Cloudy
June 11, 1999
*By /s/ George H. Fancher Jr.
- ---------------------------------------
George H. Fancher Jr.
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description and Method of Filing Page No.
- ------- -------------------------------- -------
<S> <C> <C>
(1) Form of Selected Dealer Agreement.* N/A
(3.1) Restated Articles of Incorporation of Eastern Star Mining, Inc., as filed with N/A
the Nevada Secretary of State February 7, 1997.*
(3.2) Certificate of Amendment of Articles of Incorporation of Eastern Star Mining, N/A
Inc. , as filed with the Nevada Secretary of State May 19, 1997.*
(3.3) Certificate of Amendment of Articles of Incorporation of Eastern Star Mining, N/A
Inc. , as filed with the Nevada Secretary of State May 28, 1997.*
(3.4) Certificate of Amendment of Articles of Incorporation of Eastern Star N/A
Holdings, Inc., as filed with the Nevada Secretary of State December 10,
1997.*
(3.5) Bylaws of Registrant adopted December 31, 1997.* N/A
(4.1) Form of Amended Fund Escrow Agreement.
(4.2) Form of Subscription Agreement
(5.1) Opinion dated April 27, 1998, of Alan W. Peryam, LLC regarding legality of
the securities being registered.*
(10.1) Letter Agreement dated August 27, 1997 between Registrant and George H. N/A
Fancher Jr. d/b/a Fancher Oil Company.*
(10.2) Agreement With Arizona Corporate Management, Inc. dated November 1, N/A
1998.*
(10.3) 1997 Incentive and Nonstatutory Stock Option Plan. * N/A
(10.4) Letter regarding conflicts of interest dated March __, 1998 between Registrant N/A
and George H. Fancher Jr.*
(10.5) Form of Subscription Agreement for certain officers and consultants.* N/A
(10.6) Agreement with Albert Golusin.* N/A
(10.7) Form of Lockup Agreement for Selling Securityholders.
(10.8) Agreement dated May 6, 1999 with George H. Fancher Jr.
(10.9) Loan Agreement dated June 1, 1999 with US Bank National Association.
(23) Consent of Wheeler Wasoff, P.C., Independent Certified Public Accountants.
(23.3) Consent dated April 27, 1998 of Alan W. Peryam, LLC.
(24) Power of Attorney.* N/A
(27) Financial Data Schedule.
- ------------------
</TABLE>
*Previously filed.
AMENDED FUND ESCROW AGREEMENT
THIS AGREEMENT is made and entered into effective as of _____ __, 1998 by
and among the following:
(a) FAN ENERGY INC. (the "Company"), a Nevada corporation, whose
address is 1801 Broadway, Suite 720, Denver, Colorado 80202;
(b) THE BANK OF DENVER, a state-chartered bank (the "Escrow Agent"),
whose address is 1534 California Street, Denver, Colorado 80202; and
(c) Each selected broker-dealer which participates in the offering by
the Company as an authorized agent of the Company and who signs a copy of
this Agreement (a "Selected Dealer").
RECITALS
A. Pursuant to a pOST-eFFECTIVE Registration Statement No. 333-47699,
including a Prospectus dated ______, 1999 (the "Prospectus"), the Company
intends to offer and sell up to 3,000,000 shares of its common stock, $0.001 par
value (the "Shares"). The Shares will be offered on a 400,000 Share minimum,
3,000,000 Share maximum "best efforts, part or none" basis at a price of $0.25
per Share. The minimum purchase is 400,000 shares for $10,000; however, the
Company reserves the right to accept a lesser minimum purchase.
B. The Company may enter into appropriate agreements with one or more
entities which are brokers-dealers, registered as such and which are members of
the National Association of Securities Dealers, Inc. ("Selected Dealers") and
any Selected Dealer who participates in the offering by the Company shall become
a party to this Agreement and subject to the terms and conditions hereof.
C. Pursuant to the terms of the Prospectus, this Agreement is being made to
escrow for certain periods commencing upon the date of the Prospectus
("Effective Date") and for the benefit of subscribers in the offering, the gross
proceeds from the sale of the Shares and this Agreement supersedes a similar
agreement dated effective may 14, 1998; and
D. The Company desires to enter into this Agreement with the Escrow Agent
for the purpose of fulfilling the escrow requirements as described in the
Prospectus.
NOW THEREFORE, in consideration of the forgoing recitals, the mutual
promises and covenants contained herein and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
parties agree as follows:
1. The Company and each Selected Dealer shall deliver to the Escrow Agent,
by noon on the first business day following receipt, all proceeds from the sale
of the Shares being offered, together with the original, executed Subscription
Agreement in the form attached hereto as Exhibit A. A copy of the Subscription
Agreement shall be retained by the Company, or, if the deposit is made by a
<PAGE>
Selected Dealer, the Selected Dealer shall retain a copy and promptly transmit a
copy of the Subscription Agreement to the Company. Funds deposited with the
Escrow Agent shall be by check or bank draft only; wire transfers shall not be
permitted without the prior approval of the Escrow Agent.
2. All funds or remittances delivered to the Escrow Agent pursuant hereto
shall be deposited immediately by the Escrow Agent in a noninterest-bearing
escrow accounted designated substantially as follows: The Bank of Denver, Fan
Energy Inc., Escrow Account (the "Escrow Account"). The Escrow Account shall be
created and maintained subject to the customary rules and regulations of the
Escrow Agent pertaining to such accounts.
3. During the Escrow Period (as hereinafter defined), none of the amounts
deposited in the Escrow Account shall become the property of the Company or any
other entity, or subject to the debts of the Company or any other entity, and,
except as expressly provided herein with respect to payments by the Escrow Agent
to the Company and others, the Escrow Agent shall make or permit no
disbursements from the Escrow Account. The Escrow Agent, in its sole discretion,
shall be entitled to place a hold on any funds deposited into the Escrow Account
for up to 10 business days to ensure that such funds are cleared and collected
prior to an any disbursement by the Escrow Agent.
4. The Escrow Period shall begin on the Effective Date and, subject to the
provisions of paragraph 6 below, shall terminate on the earlier to occur of:
(a) The date which is 120 days after the Effective Date (provided that
upon the written notification from the Company to the Escrow Agent
delivered to the Escrow Agent on or prior to such date, the Company may
extent the offering for up to an additional sixty (60) days), provided that
if on or prior to such date, there has been deposited with the Escrow Agent
at least $100,000 from subscribers representing the purchase of 400,000
shares of Company common stock in the offering, then the offering may be
extended by the Company until the earlier to occur of the time specified in
subparagraph 4(b) or (c) below; or
(b) The date on which $750,000 has been delivered to the Escrow Agent
representing the purchase by subscribers of 3,000,000 shares of
Company common stock and all checks have cleared and been collected,
but not longer than one hundred and eighty (180) days from the
Effective Date; or
(c) The date specified in a written notice delivered to the Escrow Agent
from the Company stating the election of the Company to terminate the
offering.
5. In the event that proceeds of at least $100,000 are received and
collected in the Escrow Account prior to the events specified in paragraph 4(a),
(b) or (c) above, the Escrow Agent shall immediately provide written notice to
the Company and to any participating Selected Dealer that cleared and collected
funds deposited in the Escrow Account total at least $400,000. Upon the written
2
<PAGE>
request from the Company and any participating Selected Dealer delivered to the
Escrow Agent following sending of the notice by the Escrow Agent, the Escrow
Agent shall disburse the amount of collected funds then held in the Escrow
Account as set forth below and the escrow arrangements for deposit and
collection of subscriptions from investors in the offering shall continue. All
collected funds accumulated in the Escrow Account at the time of this Closing
shall be disbursed and paid by the Escrow Agent as follows:
(a) To any Selected Dealer who has (i) become subject to the terms of
this Fund Escrow Agreement by signing a counterpart hereof and (ii) who has
transmitted subscriber's funds and Subscription Agreement to the Escrow
Agent in accordance with the terms of this Agreement, a commission equal to
10% of all amounts deposited in the Escrow Account by such Selected Dealer
and collected by the Escrow Agent.
(b) To the Company, the remainder of all collected amounts deposited
in the Escrow Account less amounts, if any, due and payable to the Escrow
Agent for unpaid fees or expenses as provided for herein. The Company shall
make appropriate arrangements with its stock transfer agent for the
issuance and delivery to persons who purchased Shares in the offering of
certificates representing Shares purchased, at the time of receipt of
proceeds from the Escrow Agent or within two business days thereof.
However, the Escrow Agent shall have no obligation or responsibility to
assure the issuance or delivery of the certificates.
6. After conclusion of the first closing as described in paragraph 5 above,
the Escrow Account shall continue through one or more additional closings until
the occurrence of the earlier of the events specified in paragraph 4(b) or (c)
above, provided that no more than one such closing shall be held in any week. At
each such closing, disbursements shall be made in the same manner as provided in
paragraph 5 above.
7. In the event the Escrow Period terminates pursuant to paragraph 4(a) or
(c) because less than $100,000 was delivered to the Escrow Agent or collected in
the Escrow Account, then the Escrow Agent, as promptly as possible, shall remit
directly to those persons on whose behalf the funds were deposited and whose
funds were collected (such persons shall be deemed to be the persons whose
names, addresses and subscription amounts are set forth on Subscription
Agreements delivered to the Escrow Agent at the time of each deposit into
escrow), the amount paid by each such person (and collected by the Escrow Agent)
without interest and without any deductions whatsoever. The amount paid or
payable to each subscriber pursuant to this paragraph shall be deemed to be the
property of such subscriber free and clear of any and all claims of the Company
or any of its creditors or of any Selected Dealer, and the respective agreement
to purchase the Shares made and entered pursuant to the Prospectus and the
Subscription Agreement thereupon shall be deemed to be canceled, without any
further liability of said subscriber to pay for the Shares purchased. The Escrow
Agent shall be required to make such payment only to the person named in the
Subscription Agreement at the address specified therein. Any funds payable to
subscribers of Shares which the Escrow Agent cannot disburse to said subscriber
because the address given in the Subscription Agreement is defective or which
the Escrow Agent cannot disburse for any other reason to said purchaser shall be
3
<PAGE>
retained by the Escrow Agent and dealt with in accordance with applicable
Colorado law. At such time as the Escrow Agent shall have made all payments and
remittances provided for in this paragraph, the Escrow Agent shall be completely
discharged and released of any and all further liabilities and responsibilities
hereunder.
8. The Company shall give the Escrow Agent appropriate written notice of
any extension of the offering period as described in paragraph 4(a).
9. The Escrow Agent, in its actions pursuant to this Agreement, shall be
fully protected and indemnified by the Company in every reasonable exercise of
its discretion (but not for its negligence or misconduct) and shall have no
obligations hereunder to the Company, or to any other party, except as expressly
set forth herein and for matters relating to the Escrow Agent's negligence or
misconduct.
10. As compensation for services of the Escrow Agent under this Agreement,
the Company shall pay the Escrow Agent a fee of $2,000 at the time the agreement
dated May 14, 1998 is executed, which fee shall cover the services of the Escrow
Agent regardless of whether this Agreement terminates pursuant to paragraph
4(a), (b) or (c) above. The Company shall pay an additional fee of $7.00 per
check issued by the Escrow Agent hereunder in the event that the Escrow Agent is
required to remit amounts to subscribers in accordance with paragraph 7 above.
11. The Escrow Agent shall have no obligation to invest any of the
deposited funds or to pay interest thereon.
12. The Escrow Agent shall not issue any certificates of deposit, stock
certificates, or any other instrument or document representing any interest in
the deposited funds, but written notice acknowledging receipt of the deposited
funds will be delivered by facsimile on Friday of every week by the Escrow Agent
to the Company. Facsimile notice shall be addressed as set forth on the
signature pages of this Agreement. The Escrow Agent shall give the Company
prompt written notice when funds deposited in the Escrow Account total $100,000.
The Escrow Agent shall make an accounting to the Company and any participating
Selected Dealer when and if it pays Escrow Funds to the Company or any other
specified recipient pursuant to paragraphs 5, 6 or 7 hereof. The Escrow Agent
shall not be responsible for fees and other costs and expenses in conjunction
with the issuance or transfer of securities.
13. The Company and any participating Selected Dealer agree to provide to
the Escrow Agent all information necessary to facilitate the administration of
this Agreement, and the Escrow Agent may relay upon the information so provided.
In performing any of its duties hereunder, the Escrow Agent shall not incur any
liability to anyone for any claims, damages, losses, costs or expenses, except
for its willful misconduct or gross negligence, and it shall, accordingly, not
incur any such liability with respect to (a) any action taken or omitted to good
faith upon written advice of counsel given with respect to any questions
relating to the duties and responsibilities of the Escrow Agent under this
Agreement, or (b) any action taken or omitted in reliance upon any instrument,
including the written advice provided for herein, not only as to its due
4
<PAGE>
execution and the validity and effectiveness of its provisions, but also as to
the truth and accuracy of any information contained therein, which the Escrow
Agent shall in good faith believe to be genuine, to have been signed or
presented by a proper person or persons, and to conform with the provisions of
this Agreement.
14. The Company hereby agrees to indemnify and hold harmless the Escrow
Agent against any and all losses, claims, damages, liabilities, costs and
expenses, including reasonable costs of investigation and attorneys' fees and
disbursements which may be imposed upon the Escrow Agent or incurred by the
Escrow Agent hereunder, or the performance of its duties hereunder, including
any litigation arising from this Agreement or involving the subject matter
hereof, except for those incurred by the Escrow Agent as a result of its gross
negligence or willful misconduct.
15. If at any time a dispute shall exist as to the duties of the Escrow
Agent and the terms hereof, or if funds deposited hereunder are not withdrawn on
or before thirty (30) days after the Escrow Period set forth in paragraph 4, the
Escrow Agent may, in its discretion, deposit said funds with the Clerk of the
District Court for the City and County of Denver, State of Colorado, and may
interplead the parties hereto as to the rights, if any, in such funds. Upon so
depositing such funds and filing its complaint in interpleader, the Escrow Agent
shall be completely discharged and released from all further liability or
responsibility under the terms hereof. The parties hereto, for themselves, their
successors and assigns, do hereby consent to the jurisdiction of said Court and
do hereby appoint the Clerk of said Court as their agent for service of all
process in connection with the proceeding mentioned in this paragraph.
16. All notices, demands, or requests required or authorized hereunder
shall be deemed given sufficiently if in writing and sent by certified mail,
return receipt requested and postage prepaid, with a copy also sent by
facsimile, to the person or his address and facsimile number set forth on the
signature page hereof.
17. The Escrow Agent is hereby expressly authorized and directed to
disregard any and all notices or warnings given by any of the parties hereto,
other than those notices and warnings specifically called for in this Agreement,
or by any other person or corporation, excepting only orders or process of
court, and is hereby expressly authorized to comply with and obey any and all
orders, judgments, or decrees of any court. In the event that Escrow Agent obeys
or complies with any such order, judgment, or decree of any court, it shall not
be liable to any of the parties hereto or to any other person, firm, or
corporation by reason of such compliance, notwithstanding that any such order
judgment or decree may be subsequently reversed, modified, annulled or set aside
or vacated, or found to have been entered without jurisdiction.
18. The Escrow Agent shall have no duty to know or determine performance or
nonperformance of any provision of any agreement between the other parties
hereto, and the original, or a copy, of any such agreement deposited with the
Escrow Agent shall not bind such agent in any manner. The Escrow Agent assumes
no responsibility for the validity or sufficiency of any documents or paper or
payments deposited or called for hereunder except as may be expressly and
specifically set forth in this Agreement in clear and unambiguous language, and
the duties and responsibilities of the Escrow Agent are limited to those
expressly and specially stated in this Agreement in such language.
5
<PAGE>
19. This Agreement shall be governed and interpreted by the laws of the
state of Colorado and shall be binding upon the parties hereto and their
respective successors and assigns. This Agreement may be executed in
counterparts.
20. This Agreement may be executed in counterparts, any one of which need
not contain the signature of more than one party, but all counterparts taken
together will constitute one and the same Agreement.
IN WITNESS WHEREOF, the Company and the Escrow Agent and each participating
Selected Dealer have executed this Fund Escrow Agreement effective on the date
first written above.
ESCROW AGENT: COMPANY:
THE BANK OF DENVER FAN ENERGY INC.
By By
--------------------------------------- ---------------------------------
Howard Jacobsen, Senior Vice President George H. Fancher Jr., Chairman
Duly Authorized Officer 1801 Broadway, Suite 720
1534 California Street Denver, Colorado 80202
Denver, Colorado 80202 Facsimile: (303) 296-2433
Facsimile: (303) 623-3395
SELECTED DEALER:
-----------------------------------
Name
-----------------------------------
Signature of Authorized Officer
-----------------------------------
Address
-----------------------------------
-----------------------------------
-----------------------------------
Facsimile Number
6
-------------------------
Name of Subscriber
SUBSCRIPTION AGREEMENT
FAN ENERGY INC.
1999 Public Offering of Common Stock
at
$0.25 Per Share
Minimum Purchase: 40,000 Shares
Fan Energy Inc.
1801 Broadway, Suite 720
Denver, Colorado 80202
Gentlemen:
1. Subscription for Shares. The undersigned, intending to be legally bound,
hereby irrevocably subscribes to purchase from Fan Energy Inc., a Nevada
corporation (the "Company"), the number of shares of common stock, $0.001 par
value ("Shares"), set forth below at a purchase price of $0.25 per Share. This
subscription is submitted in accordance with, and subject to, the terms and
conditions described herein and in the Prospectus dated June __, 1999 relating
to the public offering and sale of the Shares, a copy of which has been
delivered to and received by the under signed. The signature of the undersigned
below confirms the subscription to purchase Shares in the public offering.
2. The number of Shares subscribed for, the total purchase price and the
method of payment are as follows:
Number of Shares _____________________________
Total Purchase Price (enclosed) $_____________________________
Method of Payment _____________________________
All checks are to be made payable to: "The Bank of Denver, Fan Energy Inc.,
Escrow Account."
3. Escrow of Funds. Payments made by all subscribers shall be delivered to
The Bank of Denver, Denver, Colorado as Escrow Agent in connection with the
offering of the Shares by the Company. This subscription is irrevocable by the
subscriber. Subscriber's funds shall be held by the Escrow Agent in accordance
with the terms of the offering as described in the Prospectus. Certificates
representing the Shares of common stock of the Company shall be issued to
subscriber and others who participate in the offering only at such time as funds
for the purchase of Shares are delivered the Company, or within two business
<PAGE>
days thereafter and only in accordance with the terms of the offering as
described in the Prospectus. Neither the Subscription Agreement nor any of the
rights of the undersigned subscriber may be transferred or assigned.
Dated: _________________, 1999
-----------------------------------------
Signature of Subscriber
-----------------------------------------
Complete Name of Subscriber
-----------------------------------------
Complete Mailing Address of Subscriber
-----------------------------------------
-----------------------------------------
Telephone Number of Subscriber
-----------------------------------------
Tax Identification Number of Subscriber
Certificates representing the Shares subscribed for shall be issued in the
name of the subscriber as set forth above unless the following is completed:
-------------------------------------------------
Names(s) in which the Shares are to be registered
--------------------------------------------------
--------------------------------------------------
Form of joint ownership (if applicable)
[If the certificates are to be registered in the name of a person other
than the subscriber who signs this Subscription Agreement, please furnish the
tax identification number for each person in whose name the Shares are to be
registered:
- -----------------------------------------------------------------------------]
2
AGREEMENT NOT TO SELL SHARES
THIS AGREEMENT NOT TO SELL SHARES ("Agreement"), made effective this ____
day of ___________, 1999, is by and between FAN ENERGY, INC., a Nevada
corporation (the "Company") and the undersigned owner of the Company common
stock (referred to herein as "Shareholder").
A. Purpose. In connection with the proposed public offering by the Company,
and in order to induce the Company to register shares held by, or shares
underlying warrants held by, the undersigned (the "Shares"), the undersigned,
being a shareholder of the Company, holding that number of Shares shown on the
signature page below, agrees as set forth below.
B. Agreement of Shareholder. The Shareholder hereby agrees and acknowledges
that he or she will benefit greatly from the Company's proposed public offering
of common stock and that as further inducement to the Company to register the
Shares for resale by the Shareholder, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Shareholder hereby agrees with the Company as follows:
1. The Shareholder will not, directly or indirectly, without the prior
written consent of the Company, sell, offer to sell, assign, hypothecate,
grant any right to purchase any interest in, or otherwise dispose of any of
the Shares owned directly, indirectly or beneficially by the Shareholder on
the effective date of the Registration Statement filed in connection with
the Company's public offering for a period (the "Lockup Period") ending on
the later of: (a) the first business day which is 120 days after the date
of the definitive Prospectus used by the Company in the public offering of
common stock of the Company, or (b) 30 days following the completion by the
Company of the public offering, as evidenced by a public announcement from
the Company that the offering has been completed.
2. The Shareholder also agrees no other transfer, including gifts or
private sales, will be made of the Shares owned by Shareholder during the
Lockup Period unless such transfer is in compliance with applicable
securities law requirements established to the satisfaction of the Company
and the prospective transferee has executed and agreed to become bound by
the terms and conditions of this Agreement.
3. The Shareholder further consents that the shareholders' stock
certificate or certificates may be marked with a legend describing the
Shareholder's agreement and that the Company may cause the Company's
transfer agent to place stop transfer orders against the Shareholder's
stock certificate during the Lockup Period.
C. Effective Time. This Agreement shall not become effective until all
persons listed on the attached Exhibit A each have signed and delivered an
Agreement Not to Sell Shares relating to all Shares owned directly or
beneficially by such persons. This Agreement by Shareholder may be enforced by
the Company and/or by any person or entity which acts as an underwriter for
compensation in the Company's public offering. The Lockup Period may only be
shortened with the prior written consent of the Company and any person or entity
which acts as an underwriter for compensation in the Company's public offering
of common stock.
<PAGE>
D. Completion of Offering. If the Registration Statement does not become
effective, or if the Company does not sell the minimum number of Shares
specified in the Registration Statement, this Agreement shall become null and
void.
E. Applicable Laws. This Agreement shall be governed by the laws of the
state of Colorado and shall be construed in accordance therewith.
F. Binding Effect. All the provisions of this Agreement by or for the
benefit of the Company shall inure to the benefit of the Company, any person or
entity which acts as an underwriter in the public offering by the Company, and
their respective successors and assigns. This Agreement shall not be assignable
by the Shareholder.
G. Entire Agreement. This writing supersedes a similar agreement made in
1998 and represents the entire agreement and understanding of the parties with
respect to the subject matter hereof. No amendment or modification of this
Agreement shall be deemed effective unless and until it has been executed in
writing by the parties to this Agreement. No term or condition of this Agreement
shall be deemed to have been waived, nor shall thereby any estoppel to enforce
any provision of this Agreement, except by written instrument that has been
executed by any party charged with such waiver or estoppel. To the extent that
this Agreement is inconsistent with the terms of any other agreement between the
Company and the Shareholder, the terms of this Agreement shall govern and
supersede such other agreement.
H. Headings. The headings in this Agreement are for convenience only; they
form no part of this Agreement and shall not affect its interpretation.
I. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective the day and year first above written.
FAN ENERGY, INC.
a Nevada corporation
ATTEST:
By
----------------------------------
William E. Grafham, President
- -----------------------------
Albert Golusin, Secretary
SHAREHOLDER:
------------------------------------
NUMBER OF SHARES:
------------------------------------
NUMBER OF WARRANTS:
------------------------------------
2
<PAGE>
EXHIBIT A
Shareholders
[List holders of 2,000,000 Shares and 1,000,000 Warrants sold by the
Company at $0.50 per unit.]
fan\agmt not to sell shares.wpd
3
AGREEMENT
THIS AGREEMENT ("Agreement") is made effective this 6th day of May, 1999,
by GEORGE H. FANCHER JR. ("Fancher") and FAN ENERGY INC., a Nevada corporation
("Fan").
RECITALS
A. Fancher is the Chairman and a substantial shareholder of Fan. The Board
of Directors of Fan has requested that Fancher guarantee a line of credit loan
made to Fan by U.S. National Bank, Denver, Colorado, in the amount of $_________
(the "Fan Loan").
B. Fancher has agreed to guarantee the repayment of the Fan Loan only if:
(i) Fan agrees that no person other than Fancher holds or will acquire any lien,
security interest, mortgage or similar interest in and to any interest in any
oil or natural gas producing or exploration property in any state and (ii) that
Fan will indemnify Fancher from any loss, damage or expense to Fancher as a
consequence of his guarantee of the Fan Loan.
C. Fancher, as a shareholder of Fan, expects to derive indirect benefit
from the Fan Loan as portion of the proceeds will be used to repay accounts owed
by Fan to Fancher and for development of Fan's oil and gas properties to the
benefit of shareholders, including Fancher.
D. As a condition for guarantying the Fan Loan, Fancher has acquired that
Fan enter into this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the matters recited above, the receipt
and sufficiency of which is mutually acknowledged, Fan hereby undertakes and
agrees as follows, intending to be legally bound:
1. Maintain Properties Free From Liens. Fan represents that no person or
entity holds any lien, security interest, mortgage or similar interests (other
than liens for taxes arising in the ordinary course, statutory materialmen and
supplier's liens for obligations not in default) with respect to any interest in
any oil or natural gas properties in which Fan holds an interest. Fan agrees it
will permit nor suffer no person or entity to acquire any lien, security,
mortgage or similar interest in any of such properties without the prior written
consent of Fancher at any time while the Fan Loan is outstanding and Fancher's
guarantee remains in place. Further, Fan agrees that while the Fancher guarantee
is in place, it will promptly pay or cause to be paid all amounts due to any
materialman, supplier or similar provider of goods or services who could, in the
absence of payment, be deemed to hold a mechanic's or similar lien with respect
to all oil or natural gas properties in which Fan holds an interest. Any
material breach of provisions of this Section 1 shall be deemed to constitute a
default of this Agreement.
2. Indemnification. In the event Fancher suffers any Adverse Consequences
(as defined below) as a result of his guarantee of the Fan Loan (the "Guaranty")
or arising out of, relating to, in the nature of or cause by the existence of
such Guaranty, then Fan shall indemnify Fancher from and against the entirety of
<PAGE>
any Adverse Consequences that Fancher may suffer through and after the date of
the claim for indemnification. For purposes of this paragraph, Adverse
Consequences shall include: the payment to U. S. National Bank by Fancher of any
amount required to be paid by Fan under the Fan Loan, all damages from
complaints, actions, suits, proceedings, hearings, investigations, claims,
demands, judgments, orders, decrees, stipulations, injunctions, damages, dues,
penalties, fines, costs, amounts paid in settlement, liabilities, obligations,
taxes, liens, losses, expenses and fees, including all reasonable attorneys'
fees and court costs.
In that event that an obligation to indemnify Fancher arises under this
Section 1, then Fan shall, immediately upon the receipt of written notice from
Fancher, pay to Fancher an amount equal to Fancher's out-of-pocket losses
incurred as a result of the Guaranty.
In the event that the Bank notifies Fancher of any Event of Default under
any document evidencing or securing the Fan Loan ("Loan Documents"), then
Fancher shall notify Fan in writing, provided, however, that no delay on the
part of Fancher in notifying Fan shall relieve Fan from any liability or
obligation hereunder unless (and then solely to the extent) Fan is thereby
damaged and materially prejudiced from adequately defending such claim. In the
event Fancher so notifies Fan, Fan shall defend Fancher against the matter, with
counsel of Fancher's choice reasonably satisfactory to Fan. Fancher may retain
separate co-counsel at his sole cost and expense. In no event shall Fan consent
to the entry of any judgment or enter into any settlement or compromise with
respect to the matter without the written consent of Fancher which consent shall
not be unreasonably withheld. Further, Fan will not consent to the entry of any
judgment with respect to the matter, or enter into any settlement or compromise
which does not include a provision whereby the plaintiff or claimant in the
matter releases Fancher from all liability with respect thereto without the
written consent of Fancher, which consent shall not be unreasonably withheld.
3. Security for Obligations of Fan. As security to Fancher for the prompt
payment of amounts which may become due to Fancher under this Agreement, Fan
shall execute and deliver to Fancher a mortgage on all of the interests of Fan
in oil and natural gas producing, nonproducing and exploratory properties in
Sweetwater County, Wyoming and Solano County, California. Such mortgage shall
create a first-in-priority security interest in favor of Fancher as security for
the prompt payment by Fan of the obligations set forth in this Agreement and
shall include a security interest in all oil or natural gas properties in
Sweetwater County, Wyoming and Solano County, California in which Fan has an
interest at the time that the mortgage is to be filed of record and recorded. If
at any time Fan is unable to make a payment of required interest or principal or
to make other payments to the Bank as required under the Loan Documents and it
appears to Fancher, in his reasonable judgment, that Fancher will be called upon
to make such payments to the Bank under the Guaranty, then Fancher shall be and
hereby is authorized, without further action, to cause to be prepared, signed by
Fancher as an officer of Fan and filed and recorded in the appropriate
governmental offices, one or more mortgages or other instruments creating
security interests to secure the obligations of Fan under this Agreement. The
form of such mortgage or other security interest shall be any form of mortgage
sufficient to create the security interest and lien described in this Agreement
and contemplated by the parties.
2
<PAGE>
4. Survival. The obligation of Fan hereunder shall survive and continue in
full force and effect until Fancher has been released by The Bank of his
obligation arising under the Guaranty.
5. Preferential Payment. Fan agrees that to the extent it or Fancher makes
any payment to the Bank in connection with the Loan Documents and all or any
part of such payment is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid by the Bank or paid over to a
trustee, receiver or any other entity, whether under any bankruptcy act or
otherwise (any such payment is hereafter referred to as a "Preferential
Payment"), then this Agreement shall continue to be effective or shall be
reinstated, as the case may be.
6. Authorization of Certain Changes. Fan authorizes Fancher, without notice
or demand and without affecting Fan's liability hereunder, from time to time, to
renew, modify, compromise, extend, accelerate or otherwise change the terms of
his Guaranty with the Bank, as Fancher may in his discretion, determine. The
provisions of this Agreement shall extend and be applicable notwithstanding such
renewals, extensions and modifications.
7. Waiver by Fan. Fan waives and agrees not to assert the benefit of any
statute of limitations affecting its liability hereunder or the enforcement
hereof; demand, diligence, presentment for payment, protest and demand, and
notice of extension, dishonor, protest, demand, nonpayment and acceptance;
notice of the existence, creation or incurring of new or additional indebtedness
of Fan to the Bank; the benefits of any laws limiting the liability of a surety;
any defense arising by reason of any disability or other defense of Fan or by
reason of the cessation from any cause whatsoever (other than payment in full)
of the liability of Fan for the sums identified in the Loan Documents; any
defense that may arise by reason of the incapacity, lack of authority, death or
disability of Fan, or the failure of Fancher to file or enforce a claim against
the estate (either in administration, bankruptcy, or other proceeding) of Fan or
others; any defense based upon an election of remedies by Fancher, which
destroys or otherwise impairs the right of Fan to proceed against Fan for
reimbursement.
8. Attorneys' Fees. Fan agrees to pay all attorneys' fees and all other
costs and expenses which may be incurred by Fancher in enforcing Fan's
obligations hereunder.
9. Enforceability. Should any one or more provisions of this Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
10. Entire Agreement. This Agreement sets forth the entire agreement of Fan
and Fancher with respect to the subject matter hereof and supersedes all prior
oral and written agreements and representations by one party to the other. No
modification or waiver of any provision of this Agreement or any right of
Fancher hereunder and no release of Fan from any obligation hereunder shall be
effective unless in a writing executed by Fancher. There are no conditions, oral
or otherwise, on the effectiveness of this Agreement.
11. Governing Law. This Agreement shall be governed by and construed
according to the laws of the state of Colorado.
3
<PAGE>
IN WITNESS WHEREOF these presents are executed as of the day and year first
above written.
FAN ENERGY INC.
By /s/ William E. Grafham
---------------------------------
William E. Grafham, President
/s/ George H. Fancher Jr.
------------------------------------
George H. Fancher Jr.
/s/
------------------------------------
Social Security Number
4
LOAN AGREEMENT
BETWEEN
U.S. BANK NATIONAL ASSOCIATION
AND
FAN ENERGY, INC.
The undersigned, jointly and severally if more than one (herein called
"Borrower"), hereby warrants, covenants and agrees with U.S. BANK NATIONAL
ASSOCIATION (herein called "Bank"), as follows:]
1. BORROWING. In consideration of the mutual promises herein contained and in
reliance upon the representations and warran6ties herein subject to the terms
and conditions hereon, Bank does hereby commit or loan to Borrower, and Borrower
acknowledges the following described indebtedness to Bank currently outstanding
or which may be hereafter advanced:
$150,000.00 Revolving Line of Credit
2. REPAYMENT: Borrower promises and agrees to repay the Loan and all other
Indebtedness (as hereinafter defined) of Borrower to Bank with interest in
accordance with the terms and conditions of the promissory note or notes (herein
called the "Note") executed by Borrower herewith and any extensions or renewals
thereof, it being agreed that all Indebtedness not evidenced by such Note shall
be payable by Borrower to Bank upon demand.
3. COLLATERAL. Unsecured
4. GUARANTOR: George H. Fancher, Jr.
5. AFFIRMATIVE COVENANTS. So long as any part of the Indebtedness to Bank
remains unpaid, Borrower will:
(a) Furnish Bank with annual personal financial statements of guarantor;
(b) Furnish Bank within 30 days of filing, a complete copy of guarantor's
annual income tax return including all schedules and exhibits;
(c) Furnish Bank with quarterly company financial statements.
6. NEGATIVE COVENANTS. So long as any part of the indebtedness to Bank remains
unpaid, Borrower will not, without Bank's prior written consent:
(a) Incur any additional debt with9ut the prior written consent of the Bank.
7. ENVIRONMENTAL PROVISIONS.
(a) The Borrower shall carry on the business and operations at the property to
comply in all respects, and will remain in compliance, with all applicable
Federal, state, regional, county or local laws, statues, rules, regulations or
ordinate, concerning public health, safety or the environment including, without
limitation, (i) laws or regulations relating to releases, discharges, emissions
or disposals to air, water, land or groundwater, (ii) to the withdrawal or use
of groundwater, (iii) to the use, handling or disposal of polychlorinated
biphenyls (PCB's), asbestos or urea formaldehyde, (iv) to the treatment,
storage, disposal or management of hazardous substances (including, without
limitation, petroleum, its derivatives, by-products or other hydrocarbons), and
any other solid, liquid or gaseous substance, exposure to which is prohibited,
limited or regulated, or may or could pose a hazard to the health and safety of
the occupants of the Site and Facility or the property adjacent to or
surrounding the Site, (v) to the exposure of persons to toxic, hazardous, or
other controlled, prohibited or regulated substance, (vi) to the transportation,
storage, disposal, management or release of gaseous or liquid substances, and
any regulation, order, injunction, judgment, declaration, notice or demand
issued thereunder.
<PAGE>
(b) Bank's obligation to advance funds on any line of credit or other open ended
credit arrangement will terminate upon the occurrence of a breach of any
provision of this Section. Borrower agrees to indemnify and hold harmless Bank,
its assigns, successors, and grantees against any and all claims and losses
resulting from a breach of this Section and Borrower will pay or reimburse Bank
for all costs and expenses for expert opinions or investigations required or
requested by Bank in Bank's sole discretion, to insure compliance with this
Section. This obligation to indemnify shall survive the payment of the
indebtedness of Borrower to Bank.
8. EVENTS OF DEFAULT. Upon the occurrence of any of the following events, Bank
may, at its option and without notice of any kind whatsoever, suspend or
terminate future advances on any line of credit to Borrower and/or declare the
principal of and interest on any Note of Borrower and all Indebtedness of
Borrower then remaining unpaid to be immediately due and payable, all without
demand, presentment or other notice of any kind, which are hereby expressly
waived:
(a) Non-payment of any principal or interest on its Indebtedness to Bank or
liability to others when and as the same shall have come due and payable,
whether at maturity, by acceleration or otherwise.
(b) Failure to promptly perform and observe the covenants, terms, and
conditions hereof, in the application relative hereto, or of any agreement
or writing executed in connection with herewith or if any statement,
warranty or representation made herein, or in any agreement, application,
or writing made or executed and delivered to Bank in connection herewith is
or proves to be untrue or misleading in any material respect.
(c) Borrower's adjudication as a bankrupt, or if it makes any general
assignment for the benefit of creditors, or the institution by or against
it of any type of insolvency proceeding or of any proceeding for the
liquidation or winding up of its affairs, or the appointment of a receiver
or trustee for Borrower or for any of its assets, or the approval of a
properly filed petition for its reorganization under the Bankruptcy Act or
other similar act, or the filing of any petition by Borrower for an
arrangement under Chapter XI of the Bankruptcy Act or other similar act.
(d) Termination or dissolution of Borrower, and, if a partnership, death or
judicial declaration of incompetency of any partner or proprietor.
(e) If the Bank in good faith believes that the prospect of prompt payment
of Indebtedness in full as and when due or the full performance of
Borrower's obligation by Borrower is impaired.
(f) The occurrence of any event described in subsections (b), (c), or (d)
of the Negative Covenants Section herein with respect to any endorser or
guarantor or any other party liable for payment of Borrower's Indebtedness
to bank.
9. MISCELLANEOUS.
(a) As used herein "Indebtedness" means and includes: (i) all indebtedness
and liabilities of whatsoever kind, nature or description owed to Bank by
Borrower, whether direct or indirect, absolute or contingent, due or to
become due, whether now existing or acquired, whether joint, joint and
several, or several, and (ii) all costs and expenses incurred by Bank in
the protection, preservation, enforcement and collection of any of the
foregoing, including, without limitation, attorney's fees.
(b) In all cases where the context and construction so require, all words
used in the singular shall be deemed to have been used in the plural, and
words in the plural shall be deemed to have been used in the singular, and
words phrased in one gender shall include all genders.
(c) This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, representatives, successors, and
assigns.
(d) The laws of the State of Colorado shall govern this Agreement and all
rights and obligations hereunder, including matters of construction,
validity and performance.
<PAGE>
(e) No curse of dealing on the part of the Bank, its officers or employees,
nor any failure or delay by Bank with respect to the exercise of any right,
power or privilege by Bank under this loan agreement shall operate as a
waiver thereof, and any single or partial exercise of any such right, power
or privilege shall not preclude any later exercise thereof or any exercise
of any other right, power or privilege hereunder. No waiver or default
shall be effective unless in writing, signed by any officer of the Bank. No
waiver of any default or forbearance on the part of Bank in enforcing any
of its rights under this loan agreement shall operate as a waiver of any
other default or right or of the same default or right on a future
occasion.
Signed and sealed by Borrower this 1st day of June, 1999.
FAN ENERGY, INC.
1801 Broadway, Suite 720
Denver, CO 80202
BY: /s/ George H. Fancher Jr.
-------------------------------------
George H. Fancher, Jr.
BY: /s/ George H. Fancher Jr.
-------------------------------------
George H. Fancher, Jr., Guarantor
U.S. BANK NATIONAL ASSOCIATION
918 Seventeenth Street
Denver, Colorado 80202
BY: /s/ Charles S. Searle
--------------------------------------
Charles S. Searle
Senior Vice President
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Post Effective Amendment No. 1 to Registration
Statement No. 333-47699 of Fan Energy Inc. on Form SB-2 of our report dated
March 10, 1999 relating to the financial statements of Fan Energy Inc. appearing
in the Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Wheeler Wasoff, P.C.
Wheeler Wasoff, P.C.
Denver, Colorado
June 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTER ENDED MARCH 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 19
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43
<PP&E> 2,022
<DEPRECIATION> 1,279
<TOTAL-ASSETS> 789
<CURRENT-LIABILITIES> 128
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 651
<TOTAL-LIABILITY-AND-EQUITY> 789
<SALES> 21
<TOTAL-REVENUES> 21
<CGS> 1
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (43)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43)
<EPS-BASIC> (.004)
<EPS-DILUTED> (.004)
</TABLE>
