U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission File No. 333-47699
FAN ENERGY INC.
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(Name of small business issuer in its charter)
Nevada 77-0140428
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 Broadway Suite 720, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 296-6600
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
(Common Stock (Par Value $.01 Per Share)
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.[X] Yes [ ]No.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $152,832
As of December 31, 1999 the issuer had 9,451,492 shares of its $0.01 par
value common stock issued and outstanding. As there is no public trading market
for Registrant's securities, Registrant is unable to determine the aggregate
market value of the common stock, the Registrant's only class of voting stock,
held by nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Issuer Disclosure Format Yes [ ] No [X]
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PART I
This Report on Form 10-KSB and documents incorporated herein by reference
contain certain "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995 which involve substantial risks and
uncertainties. When used in this report and in other reports filed by the
Company, 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.
Although the Company believes the understandings and assumptions on which the
forward-looking statements in this report 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. Certain
factors that could cause or contribute to such differences include those
discussed in "Management's Plan of Operations" and elsewhere herein.
ITEM 1. DESCRIPTION OF BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
Fan Energy Inc. ("Fan" or the "Company") is an independent energy company
engaged in the exploration and acquisition of crude oil and natural gas
reserves. 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. Thereafter, the Company raised capital through the sale of its
securities and acquired an interest in its oil and gas properties for cash and
common stock. For a description of the transaction in which the Company acquired
the properties, see Item 2. "Description of Properties." The name of the
corporation was changed to Fan Energy Inc. in December 1997. The Company
conducted no business activities until 1998 when it participated in drilling
wells. In 1999 the Company received its first revenue from the production from
the wells in which it owns an interest, as described below.
(b) NARRATIVE DESCRIPTION OF THE BUSINESS
Fan' business is presently to acquire and develop oil and natural gas
properties. 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 and development prospects are located.
Fan holds an undivided net working equal to approximately 20% in a 5,760
acre prospect located in Sweetwater County, Wyoming. Two exploratory wells have
been drilled on the prospect, with the first well completed as an apparent oil
producer and the second as a marginally productive natural gas well. Both wells
were shut-in for the winter months of 1999 and early 2000 because of the
weather. As of the date of this report, both wells were still shut-in. The
operator of the well, Fancher Oil LLC ("Operator") expects additional wells to
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be drilling on this prospect in 2000 and thereafter. Because of the Company's
limited financial resources, it is likely that the Company would farm-out all or
a portion of its interest in these properties for development by others, with
the expectation that the Company would receive a reduced interest in future
wells, with most of the Company's share of drilling and development expenses
being paid for by other participants. The Company also has the right to
participate with a minority working interest in other prospects which the
Operator intends to explore in the vicinity of this prospect and which could
result in the drilling of other exploratory wells in 2000 or thereafter. Again,
the Company would expect to determine whether or not to participate in any given
well based on its financial condition and other factors at the time that the
well is commenced. The Company may choose to forfeit any interest in these
nearby prospects due to its limited financial resources.
The Company 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 late 1999. The
prospects now total approximately 25,520 gross acres. In 1998, the Company
participated in drilling five exploratory wells on the property, one of which
was completed as a producer. In 1998 the operator of the prospects, a
nonaffiliated independent oil and gas company, and the Company 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 the
Company 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. The Company's principal revenue is derived from its share of production
from this well. The Company is seeking to sell its interest in these two
exploratory prospects and the producing well in the Sacramento Basin.
We intend to use our present cash assets, any proceeds received from sale
of the Sacramento Basin prospects and from a securities offering, and any
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.
The Company presently has only limited reserves of oil and natural gas,
limited production and relatively limited cash flow. When the two shut-in wells
in Sweetwater County, Wyoming are again placed on production, the Company
anticipates relatively little additional cash flow from those operations. The
Company does not serve as the Operator in its two present projects. Because it
is not the Operator, the Company 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 the Company, 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. See "Item
2. Description of Properties."
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Business Strategy
Our intended strategy is to develop and increase oil and natural gas
reserves, production and revenue for the Company 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. The Company intends to continue to analyze and review
oil and natural gas prospects which the Company holds or acquires based on
analysis of 3-D Seismic data and related technologies, including "amplitude
versus offset" or "AVO" seismic analysis. The Company's efforts will be focused
on improving drilng 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, based on an initial review of the
completed 3-D Seismic and the two successful wells drilled on the prospects. The
Company also may participate in the drilling of three or more exploratory wells
on nearby prospects which it has the right to acquire a 20% working interest.
The Company believes that the present cash resources, proceeds from an
anticipated securities offering and anticipated proceeds from the exercise of
outstanding warrants will enable the Company to pay its anticipated share of
drilling and completion costs for two to three exploratory wells on the these
prospects. The Company also intends to continue to seek and acquire interests in
other drilling prospects in the United States and Canada.
o Acquire Interests in Producing Oil and Natural Gas Properties. Fan 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 the Company believes 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.
Fan will also consider other business opportunities which become available,
including opportunities outside the oil and gas business.
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 of the
Company believes, utilizing 3-D Seismic and other state-of-the-art technologies,
have a good potential to develop significant oil or natural gas production and
reserves. The Company presently has not identified any such properties for
acquisition and it is not likely that additional properties will be acquired
until the Company has attained additional capitalization, either with the
proceeds of this Offering, the exercise of outstanding warrants or from other
sources.
The Company may evaluate and pursue acquisitions of interests in producing,
exploratory or development oil and gas properties that meet the Company's
selection criteria, including persons or entities with whom members of our
management may have an affiliation or other relationship. The successful
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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 the
Company's control. Such an assessment is necessarily inexact and its accuracy
would be inherently uncertain. The Company 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. The Company may assume existing liabilities, including
environmental liabilities, upon any such acquisition and would likely acquire
interests in such properties on an "as is" basis.
The Company'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 the Company's Wyoming
prospect and may be the operator of properties in which the Company acquires an
interest. In such event, charges to the Company 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 the Company for any oil and natural gas
production which may be established on Company properties will depend upon
numerous factors beyond the Company's control, including seasonality, the
condition of the national and international economies, the availability of
foreign imports, political conditions in other oil and natural gas producing
countries, domestic governmental regulations, legislation and policies,
decreases in the prices of oil or natural gas could have an adverse affect on
the value of any reserves established by the Company and the Company's cash flow
from any production which may be established. In February 2000, the price paid
by natural gas purchasers in the Sacramento Basin of central California was
approximately $2.10 per mcf and in the Green River Basin of southeastern Wyoming
the price paid for oil produced in that area was approximately $25 per barrel
and for natural gas approximately $2.00 per mcf. Such prices could be higher or
lower at the time that any production from the Company's exploratory activities
is available for sale, depending upon the above factors and other unforseen
circumstances.
Competition
The Company 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. In seeking to acquire desirable producing properties or production,
the Company faces intense competition from both major and independent oil and
natural gas companies. The Company expects that the inventory of unproved
drilling locations in the two prospects in which the Company 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 the two prospects 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 the Company's future financial condition and could
result in a writeoff of a significant portion of its investment in the oil and
gas properties.
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The Company's competitors include major integrated oil and natural gas
companies and numerous independent oil and natural gas companies, individuals
and drilling and income programs. Many of its competitors are large, well
established companies with substantially larger operating staffs and greater
capital resources than the Company's and which, in many instances, have been
engaged in the energy business for a much longer time than the Company. Such
companies 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 the Company's financial or human
resources permit. The Company's ability to acquire additional properties and to
discover reserves in the future will be dependent upon its ability to evaluate
and select suitable properties and to consummate transactions in a highly
competitive environment.
Regulation
Regulation of Oil and Natural Gas Production. The Company'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 the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, the Company is unable to predict the future
cost or impact of complying with such laws.
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 the Company,
as well as the revenues received by the Company for sales 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 the Company 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.
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The price which the Company 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. The Company 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. The Company'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(i) require the acquisition of a permit
or other authorization before construction or drilling commences and for certain
other activities; (ii)limit or prohibit construction, drilling and other
activities on certain lands lying within wilderness and other protected areas;
and (iii) impose substantial liabilities for pollution resulting from the
Company's operations. The permits required for various of the Company'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, the Company is in substantial compliance with current
applicable environmental laws and regulations, and the Company has no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on the
Company, as well as the oil and natural gas industry in general.
The Company may agree to indemnify sellers of properties purchased by the
Company 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 the Company's results
of operations and financial condition or that material indemnity claims will not
arise against the Company with respect to properties acquired by the Company.
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 the
Company'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.
The Company 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
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disposed of or released on or under the properties. In addition, some of the
Company's properties may be operated in the future by third parties over whom
the Company has no control. Notwithstanding the Company'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 the Company.
NEPA. The National Environmental Policy Act ("NEPA") is applicable to many
of the Company'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 the Company'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 the Company'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
provide protection to animal and plant species and that may apply to the
Company'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
the Company 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 the Company to significant expense to modify its
operations or could force the Company to discontinue certain operations
altogether.
Employees
As of the date of this report, the Company had no employees. The Company's
five directors and four part time consultants provide management and other
services.
ITEM 2. DESCRIPTION OF PROPERTY.
Principal Properties
The Company holds interests in three 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
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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 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, the Company 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, the Company entered into an agreement with Fancher Oil
LLC, in which the Company 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. The Company then participated in the drilling of the H.C. Federal
#30-12, centrally located in the prospect acreage. The well was completed as an
apparent oil and natural gas producer in two zones of the Second Frontier
formation and is awaiting the installation of surface facilities and pipeline
connection. The drilling confirmed the results of the 3-D Seismic and analysis
of the older wells in the area. Production in this initial well commenced in the
summer of 1999 and the well produced approximately 613 barrels of oil, net the
Company's interest, until the well was shut-in for the winter in late 1999. A
second well, which is expected be a marginal natural gas well, was drilled and
completed in late summer 1999 and has not yet been commercially produced. A
reserve study prepared by an independent petroleum engineer projected that these
wells will produce approximately 14.6 MMCF of natural gas and 3,000 barrels of
oil over their lifetime net to Fan's interests.
[Presently, there is one proposed development location near the discovery
well which is expected to find similar sands in a structurally higher position
as encountered in the initial wells, based on subsurface geology and the 3-D
Seismic survey. This location was classified as "probable" in the reserve study
and no reserves were included in the Company's estimates. Drilling of this
additional development location may be commenced in 2000 or thereafter. 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. The Company's
working interest in future wells will range from 7% to 20%, depending on the
location of the well, and what portion of its interest the Company transfers to
others in advance of drilling. 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
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
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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, the Company 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. The Company completed this transaction
in early November 1997 at which time Mr. Fancher assigned to the Company 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 the
Company. 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, the Company is entitled to receive 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. Subsequently, leases and options covering all but approximately
14,900 acres were surrendered. The Operator is authorized to continue to acquire
additional lease acreage in the AMI. The Company is obligated to pay 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 the Company's 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, 1999 the Operator had incurred approximately $3.7
million for land acquisition and 3-D Seismic data expenses, of which the Company
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 the
Company and other participants in the prospects until such time as production is
established. Therefore the Company 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 the Company of
$2,500 per well commenced in either prospect. The Company is entitled, at its
sole election, to decline to participate in any particular well proposed to be
drilled by the Operator. If the Company 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. Once the land acquisition and 3-D Seismic acquisition is
completed, the Operator will operate the exploration, development and
exploitation activities under the terms of a standard Operating Agreement. The
Company will generally be obligated to pay its portion of the expenditures
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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).
The one successful well in which Fan holds an interest in this project
commenced production in early 1999. In the reserve study, the independent
petroleum engineer estimated that the existing well would produce approximately
182.3 MMCF and one proved development well would ultimately product
approximately 129.0 MMCF, net to Fan's interest, through approximately 2005.
Fan does not presently expect to participate in any additional exploratory
drilling activities on these prospects and is holding its interest for sale to
others, although no potential purchaser has indicated a willingness to purchase
these properties on terms which Fan would consider reasonable.
Title to Properties
Fan has the right to acquire from the Operator satisfactory title to all
interest in the two prospects where it holds an interest in accordance with
standards generally accepted in the oil and natural gas industry. Our properties
are subject to customary royalty interests, liens incident to operating
agreements, liens for current taxes and other burdens which we believe do not
materially interfere with the use of or affect the value of our properties. The
remaining acreage is held by lease rentals and similar provisions and requires
production in paying quantities prior to expiration of various time periods to
avoid lease termination.
Current Operations
The Company plans to continue to monitor development activities in the
vicinity of the Horsethief Canyon Prospect located in Sweetwater County,
Wyoming. The Company participated in two exploratory wells, one of which is
primarily an oil well producer and one is expected to produce low volumes of
natural gas. Both wells were shut-in over the winter of 1999-2000. Until a
natural gas pipeline is extended into the area of these wells, it is likely that
additional drilling activity will be curtailed. Fan will consider transferring a
portion or all of its interest in this prospect to others in return for a
carried interest in the wells.
In addition, the Company has the right to participate in three additional
prospects that Fancher Oil LLC has developed in the vicinity of the Horsethief
Canyon Prospect that could result in the drilling of additional exploratory
wells in 2000 or thereafter. These prospects are referred to as the Northeast
Marianne, Southwest Marianne and Masterson Prospects. The Company has the right,
but not the obligation, to participate for up to 20% of Fancher Oil LLC's
interest in these prospects, including acreage, farmins or trades. The primary
objective of these prospects are the Second and Third Frontier sands with the
Muddy, Dakota and Lakota formations as secondary objectives. Participation by
the Company will depend upon the Company's available capital resources and
drilling success in the initial wells.
The Company intends to concentrate its activities to the drilling and
acquisition of gas reserves primarily in the Green River Basin of southwestern
Wyoming. The Company will actively seek opportunities that can provide long
11
<PAGE>
term, good quality reserves using technology to lower the risk and improve the
recovery. There are no plans to participate in drilling any additional wells in
the California prospects.
Acreage
The following table sets forth, as of December 31, 1999, the gross and net
acres of oil and natural gas leases which the Company beneficially holds or has
the right to acquire.
Prospect Area Developed Undeveloped
- - ------------- --------------- ---------------
Gross Net Gross Net
----- --- ----- ---
Green River Basin
Horsethief Prospect ............... -- -- 3,525 705
Sacramento Basin:
Bali Prospect ..................... 160 40 11,389 2,847
--- -- ------ -----
Total ....................... 160 40 14,914 3,552
Reserves
As of December 31, 1999, the Company had interests in three productive
wells (.41 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 the Company's properties at December 31, 1999, as
estimated by an independent petroleum engineer.
Discounted
Net Gas Net Oil Present Value
------- ------- -------------
Prospect (MMCF) (MBO) ($M)(1)
- - --------
Sacramento Basin ...................... 311.3(2) - 402.1
Green River Basin ..................... 14.6(3) .3 6.1
----- --- ---
Total ........................ 325.9 .3 408.2
- - ----------------
(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, 1999 without escalation, net of heat content
adjustments, gathering costs and compression charges, or $2.06 per mcf in
the Sacramento Basin, $1.00 per mcf in the Green River Basin and $24.75 per
barrel for oil in Wyoming. All prices were assumed to remain flat over the
productive lives of the wells. Operating costs utilized were estimated
costs for the wells at a flat rate ($1,525 per well per month in California
and $5,200 per well per month in the Wyoming properties) without
escalation.
(2) Includes one well which commenced production in January 1999 and one proved
undeveloped (undrilled) well.
(3) Includes two proved nonproducing wells. Does not include one potential well
assumed to be "probable" of future successful development.
12
<PAGE>
Drilling Activity
The following table summarizes the Company's oil and gas drilling
activities for 1999.
<TABLE>
<CAPTION>
Productive Nonproductive
------------------------ ---------------------------
Exploratory Wells Drilled Gross Wells Net Well Gross Wells Net Well
- - ------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Sacramento Basin, California.................. -- -- -- --
Green River Basin, Wyoming.................... 1.0 .0775 -- --
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
No legal proceedings to which the Company is a party were pending during
the reporting period, and the Company knows of no legal proceedings pending or
threatened or judgments entered against any director or officer of the Company
in his capacity as such.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of security holders through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) PRINCIPAL MARKET OR MARKETS
The Company's common stock is not listed on any exchange and there is no
public trading market for the common stock, and there has been no market.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of March 1, 2000, the Company had 9,451,492 shares of common stock
outstanding, held by approximately 522 stockholders.
(c) DIVIDENDS
The Company has never declared or paid cash dividends on its common stock
and anticipates that future earnings, if any, will be retained for development
of its business.
(d) RECENT SALES OF UNREGISTERED SECURITIES
The following is information with respect to all unregistered securities
sold by the Company within the past three years:
13
<PAGE>
(i) On June 2, 1997 the Company 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 Company at an exercise price of $0.20
per share on or before June 2, 1999. 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 Company.
(ii) On August 29, 1997 the Company issued 2,250,000 shares of its common
stock to George H. Fancher Jr. in connection with the acquisition by the Company
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 Company 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 Company
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 Company. 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 Company's stock transfer agent. In
accordance with the terms of the acquisition, because fewer than 10 wells had
been successfully completed on the prospects, effective December 31, 1999 Mr.
Fancher surrendered 750,000 of the shares to the Company for cancellation.
(iii) On September 15, 1997 the Company issued 250,000 shares of its common
stock to six persons for services valued by the Company at $50,000. Of the six
persons, one is a Canadian attorney who received 25,000 shares for service as a
director of the Company and for preparation of documentation for the Company 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 Company and received 50,000 shares. He provided financial and
accounting services to the Company 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 Company 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 Company at the time that the acquisition
14
<PAGE>
of the oil and gas properties was completed, he assisted the Company 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 Company. The sixth person, who
received 25,000 shares, is an employee of a business owned by the President of
the Company and an administrative assistant to the President. This person
provided office, administrative and stenographic services to the Company. Each
of the persons to whom the shares were issued had full knowledge of the business
and affairs of the Company, each signed a written investment letter which
acknowledged the receipt of information concerning the Company 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 Company'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.
(iv) On October 31, 1997 the Company 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, 1999. The Company issued cash finder's fees totaling
$45,000 and issued warrants entitling the holders to purchase up to 180,000
shares of common stock to three nonaffiliated, non-U.S. citizen finders in
connection with the transaction. The Company's President, William E. Grafham,
participated in the private placement and purchased 200,000 shares and 100,000
warrants for $100,000. In 1999 we extended the expiration date of all 1,180,000
warrants to October 31, 2000, and reduced the exercise price to $0.15 per share.
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.
(v) In September 1998, the Company 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 1999. 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 Company's stock transfer
agent.
(vi) Effective July 1, 1998, the Company issued 215,000 shares of its
common stock to four officers and directors of the Company in consideration for
services valued at $43,000 which were provided to the Company through June 30,
1998. At the end of 1999 one director surrendered 50,000 of the shares to the
Company for cancellation. No underwriter was involved in the transaction. The
issuance of securities to the individuals were exempt under Section 4(2) of the
Securities Act. Each of the persons to whom the shares were issued acquired the
securities for investment, certificates representing the securities were marked
with a restrictive legend and stop transfer instructions were placed with the
Company's stock transfer agent.
15
<PAGE>
(e) PROCEEDS FROM SALE OF REGISTERED SECURITIES
In 1998 the Company registered 3,000,000 shares of common stock for a
contemplated public offering in Registration No. 333-64448 which was declared
effective May 14, 1998. The offering was discontinued in late 1998 because the
Company was unable to complete the sale of the minimum number of shares offered.
None of the registered shares were sold. In 1999, the Company re-registered the
shares with a view towards recommencement of the public offering. Due to a
deterioration in the market for public companies in the oil and gas business,
the offering was again deferred before the post-effective amendment to the
registration statement was made effective. The Company will consider
recommencement of its offering at an appropriate time in the future.
ITEM 6. 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 during the first quarter of 1999 from a
successful exploratory natural gas well in the Bali prospect in the Sacramento
Basin of central California. The well has generated $142,267 at an average price
of $2.08 per MCF during 1999 net to our interest. During the three months ended
December 31, 1999, the production from this well was sold at an average price of
$2.34. We anticipate production and gas prices on the well during 2000 to be
somewhat comparable to the production and prices received for 1999. The
producing well 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 the producing well.
In late 1998 we participated in drilling a successful oil well in the
Horsethief Canyon prospect, in which we hold a 20% working interest. The well
was not produced during the first quarter of 1999. During all of the balance of
1999, the well produced 613 barrels of oil, net to the Company's interest, which
was sold at an average price of $18 per barrel. We realized $9,552 after taxes
and fees from our 16% revenue interest in the well during the 1999. We
anticipate that this well, which was shut-in over the winter of 1999-2000, will
produce a comparable quantity of oil during 2000 and we expect that the selling
price for oil produced will reflect the general worldwide increase in the price
of this commodity.
We decided to farm out as much of our interest as was required to carry our
remaining interest to the casing point in the next wells drilled in our
Hoursethief Canyon Prospect. We therefore sold a 10% working interest in the
spacing unit in the next well for an amount which was sufficient to fund the
remaining 7.8125% working interest which we hold in the well. After the well as
16
<PAGE>
drilled we paid our proportionate share of completion costs. After testing, it
appears that this well will be a marginally productive natural gas well which
will not be produced until natural gas gathering facilities are extended into
the area of this well and the surrounding prospects. We intend to sell gas from
this well to a nearby facility which will generate electricity for sale to an
electric transmission utility in the area. We also agreed to be subject to the
balance of the farm-out agreement relating to the portion of our interest which
we sold to other participants in the prospect.
Because we decided to discontinue further exploration of our prospects in
the Sacramento Basin, 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 gas properties at December 31, 1998 was reduced to the
approximate amount of the present value of the oil and natural gas reserves on
these properties at year end 1998. Based primarily on the fact the present value
of the proved oil and natural gas reserves decreased more than are produced in
1999, we again recorded an impairment charge, totaling $300,000. We depleted our
California natural gas well by approximately $119,000 and our Wyoming properties
$6,100 totaling $125,100 during 1999. These charges, although significant, did
not affect the results of our operations for 1999.
We had general and administrative expenses totaling $129,700 during 1999,
compared to $198,900 in the prior year. The decrease was due primarily to our
lower lever of operations in 1999. We had reimbursements and fees for services
provided by our three officers totaling approximately $69,000 in 1999 consisting
primarily of reimbursement for rent and administrative services and
approximately $22,000 in services provided by our secretary. Mr. Fancher, our
chairman, agreed to write-off $22,000 in reimbursements owed to his affiliate.
The other amounts were satisfied by Fan issuing a total of 199,788 shares of our
common stock, at a deemed value of $0.225 per share.
In 1999 we had cash expenditures of approximately $5,400 for geophysical
and lease extension costs which were capitalized. Other capital costs associated
with participating and acquiring, exploring and drilling of the Horsethief
Canyon and nearby prospects were approximately $82,000 in 1999. Our share of
those expenses during 2000 are expected to be in the range of $40,000 to
$80,000, depending on such factors as the success of initial drilling efforts,
decisions by the operator to conduct other exploratory activities, weather and
related factors. In 1999 we obtained a $150,000 one year line of credit from a
bank. Our obligation was guaranteed by Mr. Fancher and we agreed to indemnify
him if he was required to pay our obligations to the bank. We made borrowings
under the line of credit to help pay our portion of costs incurred in drilling
the two wells in our Housethief Canyon prospect. As of the date of this report
all obligations to the bank have been repaid and we do not expect to take any
additional advances on our line of credit.
At December 31, 1999 we had approximately $57,000 in cash and receivables
and at March 23, 2000, we had approximately $37,000 in cash compared to around
$16,000 in cash at December 31, 1998. We anticipate that our revenue from the
production of the one producing natural gas well on our California property will
be approximately $12,000 monthly during 2000, depending upon the rates of
production and applicable natural gas prices. We also anticipate that we would
net around $1,000 each full month during which the Horsethief Canyon properties
are operated, again depending upon rates of production and applicable oil and
natural gas prices.
During the second quarter of 1999 we obtained a $150,000 line of credit
which was secured by the personal guarantee of our chairman. All draws against
this line had been repaid in full by February 29, 2000. In March 1999 our
president loaned us $20,500, which was used to repay amounts owed Fancher Oil
LLC and to satisfy other obligations. This loan, which is unsecured and for
which we are not charged interest, is still outstanding. We will require
17
<PAGE>
additional capital resources if we decide to participate in any additional
drilling of exploratory wells or to acquire interest in other properties in
2000. We presently believe that the relatively small amount of monthly revenue
which we receive from production will satisfy our ongoing operating expenses
given our relatively low level of planned activities during 2000.
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 attempted to recommence the offering during 1999 but we did not
proceed after it became apparent there was little interest for small public
companies engaged in the oil and gas business. Expenses we incurred in this
connection in 1999 were written off at year end. We have decided to again revise
the offering and recommence it at a reduced offering price during the second
quarter of 2000. The revised terms of the offering have not been determined.
During 1999 warrants to purchase up to 1,180,000 shares of common stock, due to
expire, were extended through October 31, 2000, and the exercise price for those
warrants was reduced to $0.15 per share. If all the warrants are exercised, of
which there is no assurance, we would receive approximately $177,000 by the end
of October 2000, unless the warrants are again extended. The proceeds which we
would receive, if most of the warrants are exercised, would enable us to pay our
share of drilling expenses in development wells in our Horsethief Canyon
prospect. We can make no assurances as to whether any of the warrants will be
exercised or whether we will be able to successfully raise any other capital.
Unless we raise additional capital in an offering or outstanding warrants
are exercised, or we raise capital from other sources, we do not believe that
our limited cash flow will be sufficient to pay anticipated operating expenses
and permit us to participate in drilling additional wells 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, unless we are able to successfully farm-out a portion of our
interests to others.. If we are able to raise additional capital we will use the
proceeds to pay participate in additional development 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 guaranteed by the chairman.
Assuming sufficient capital resources become available, we will continue to seek
to acquire interest in other oil or natural gas properties. Also, we may
consider other business opportunities which are offered to us outside the oil
and gas business under circumstances which we believe afford us the opportunity
to increase the value of our Company for our shareholders.
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.
ITEM 7. FINANCIAL STATEMENTS.
We are filing the following reports, financial statements and notes to financial
statements with this annual report. These reports may be found following Part IV
of this report.
18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company had no disagreements on accounting and financial disclosures
with its independent auditors during the reporting period.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. Each director has served since 1997 except Mr.
Cloudy, who became a director April 9, 1998. Each serves until the next annual
meeting of stockholders.
Names of Executive
Officers and Directors Age Position
- - ---------------------- --- --------
George H. Fancher Jr. .......... 60 Chairman of the Board, Chief Operating
Officer and Director
William E. Grafham.............. 62 President, Chief Executive Officer and
Director
Jeffrey J. Scott................ 37 Vice President and Director
Rex L. Utsler .................. 54 Vice President and Director
George A. Cloudy ............... 65 Director
Albert A. Golusin............... 45 Secretary and Treasurer
George H. Fancher Jr. Mr. Fancher has been a self employed independent oil
producer, operator and consultant in the Rocky Mountain Area since 1969, doing
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 was on the Board of Directors of the Petroleum Technology Transfer
Council (PTTC).
19
<PAGE>
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.
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:
Company Public Exchange Type of Business
------- --------------- ----------------
Jerez Energy International, Inc. Canadian Venture Exchange Oil and gas
Walking Bear Resources Inc. Canadian Venture Exchange Oil and gas
Tellis Gold Mining Company Inc. Canadian Venture Exchange Technology
Jeffrey J. Scott. Mr. Scott is currently President and Chief Operating
Officer of Calgary-based Jerez Energy International Inc. Jerez is a 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.
20
<PAGE>
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
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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
Not applicable.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
compensation paid by the Company for services rendered in all capacities to the
Company for the two fiscal years ended December 31, 1998 and 1999 (there was no
compensation in prior years) of the chief executive officer at December 31, 1999
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
1998 ........................... - 0 - - 0 - $10,000(1) -- None
1999 ........................... - 0 - - 0 - $22,452(2) None
All officers and directors,
as a group (five persons)
1998 ........................... $30,000(3) - 0 - $43,000(4) 100,000 None
1999 ........................... $ 7,500(3) - 0 - $44,953(5) -0- None
</TABLE>
- - ------------------
21
<PAGE>
(1) Includes 50,000 shares of common stock, valued at $10,000, issued for
services as an officer and director.
(2) Includes 99,788 shares of common stock issued at a deemed value of
$0.225 per share in satisfaction of $22,452 owed to en entity owned by Mr.
Grafham for rent and reimbursement expenses.
(3) Paid to Albert A. Golusin, Secretary, for services as a consultant.
(4) Includes 215,000 shares of common stock, valued at $43,000, issued to
five persons for services as officers, directors and representatives of the
Company. Subsequently, one person surrendered 50,000 of the shares for
cancellation.
(5) Includes 199,788 shares issued at a deemed value of $0.225 per shares
to two officers, one of whom is a director, in satisfaction of $44,952 in
compensation or reimbursements owed to them.
The Company had an agreement to pay Albert A. Golusin a monthly retainer of
approximately $2,500, as a consultant, for part time accounting, financial
reporting and corporate secretarial services. $7,500 in cash and $22,500 in
stock (100,000 shares) was paid to Mr. Golusin in 1999. Mr. Golusin received
15,000 shares of common stock on July 1, 1998 for services he provided to the
Company through June 30, 1998.
Value of Options at December 31, 1999
<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
$0.20 per share, the last price paid for common stock of the Company, less the
exercise price of the options.
Option Grants in the Last Two Fiscal Years
The Company granted options during 1998 and 1999 to the following officers
and directors:
<TABLE>
<CAPTION>
Percent of Total
Number of Shares Options Granted Exercise Price Expiration
Name Underlying Options During Year ($/sh) Date
- - ---- ------------------ ----------------- -------------- -----------
<S> <C> <C> <C> <C>
1998:
George A. Cloudy ............... 100,000(1) 100% $0.50 04/30/08
1999: None None None None
</TABLE>
- - ----------------------
(1) These options became exercisable in full April 9, 1999. All outstanding
options are presently exercisable.
(2) The options are nonstatutory ("nonqualified") options. All other
outstanding options are intended to be incentive stock options under Section
422A of the Internal Revenue Code of 1986.
Stock Option Plan
The Company has adopted its 1997 Statutory and Non-Statutory Incentive
Stock Option Plan ("Plan") which authorizes the Company 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. No options
22
<PAGE>
were granted in 1999. 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
the Company'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 the
Company'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 the Company'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
The Company does not pay cash compensation to directors. Three of the
directors of the Company were issued 50,000 shares of restricted common stock of
the Company on July 1, 1998 as compensation for services furnished to the
Company as an officer or director through June 30, 1999. The Company has granted
each of the directors options to purchase shares of common stock at exercises
prices of $0.35 per share for four director as to 700,000 shares and at $0.50
per share to one director as to 100,000 shares. The options were granted under
the Plan and must be exercised within 10 years from the date of grant. No
compensation was paid to directors for service as such in 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth, as of March 1, 2000, certain information
with respect to the beneficial ownership of the Company's common stock by (i)
each director and officer of the Company, (ii) each person known to the Company
to be the beneficial owner of 5% or more of the outstanding shares of common
stock, with such person's address, and (iii) 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.
23
<PAGE>
<TABLE>
<CAPTION>
Shares beneficially
Name of Beneficial Owner owned prior to offering(1)
or Name of Officer or Director Number Percent
- - ------------------------------ ------ -------
<S> <C> <C>
William E. Grafham, Director ............................................. 1,043,356(2) 11.0%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI
George H. Fancher Jr., Director .......................................... 2,300,000(3) 24.3
1801 Broadway, Suite 720
Denver, Colorado 80202
Rex L. Utsler, Director .................................................. 250,000(4) 2.7%
Jeffrey J. Scott, Director ............................................... 250,000(5) 2.7%
George A. Cloudy, Director ............................................... 100,000(6) --
Albert A. Golusin, Secretary and Treasurer ............................... 315,000(7) 3.3%
David Grafham ............................................................ 650,000 6.9%
1307 West 8th Avenue
Vancouver, B.C.
Canada V5H 3W4
Roger Duffield ........................................................... 400,000 4.2%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)
Euro Securities Ltd. ..................................................... 650,000 6.9%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)
Linda Kemble ............................................................. 650,000 6.9%
#59 Temple Hill Dr. N.E.
Calgary, Alberta
Canada T1Y 404
Don Stewart .............................................................. 738,000(9) 7.8%
P. O. Box 245
Grand Cayman, BWI(8)
Susan Scott .............................................................. 415,000(11) 4.4%
#2 2109 4th Avenue, N.W.
Calgary, Alberta, Canada T2N 0N6
Alex Whiteside ........................................................... 405,000(10) 4.3%
1530--1001 13 Avenue, S.W.
Calgary, Alberta, Canada T2R 0L5
All officers and directors as a group (6 persons) ........................ 4,258,356(12) 45.1%
</TABLE>
- - ----------------------
24
<PAGE>
(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, 1999
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.
(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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
On October 31, 1997 the Company sold 2,000,000 shares for $1,000,000 and
paid finder's fees and related offering costs of $47,894 and issued warrants to
purchase an additional 1,180,000 shares on or before October 31, 1997 to 11
non-United States persons or entities pursuant to Regulation S adopted under the
Securities Act. William E. Grafham, the Company's President, a citizen of Canada
and a resident of Grand Cayman, BWI, purchased 200,000 shares and 100,000
warrants 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. The Company reduced the exercise
price for the warrants to $0.30 per share ($354,000 upon exercise of all
warrants) and extended the expiration to July 31, 1999.
On November 11, 1997 the Company 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." The Company 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 the Company. The Company 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, the Company agreed to issue 500,000
additional restricted shares to Mr. Fancher 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 exploration,
drilling and other related expenses by December 31, 1999. At December 31, 1997
the Company had incurred direct costs of approximately $1,275,000, including the
payments to Mr. Fancher. Prior to the acquisition, Mr. Grafham and consultants
25
<PAGE>
retained by the Company reviewed the available geologic data on the properties
and negotiated the purchase price based on the perceived value of the properties
as assembled by the Operator, the acquisition and exploration expenditures on
the properties and the lack of a public market for the Company's shares. Mr.
Fancher agreed to become a director of the Company following completion of the
transaction. At the end of 1999 Mr. Fancher surrendered 750,000 shares of common
stock to Fan for cancellation. Surrender was required under terms of the
acquisition because Fan did not participate in drilling at least 10 successful
natural gas wells on the two prospects.
The Company paid $8,000 in 1997, $24,000 in 1998 and $22,452 in 1999 to
Arizona Corporate Management, Inc., a corporation owned by William E. Grafham,
as reimbursement for office and related expenses and for rent. The 1999 amount
was paid by issuing 99,788 shares for our common stock at an agreed value of
$0.225 per share. During 1999 and in previous years the Company had 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.
The Company also had an arrangement with George H. Fancher Jr., pursuant to
which Fancher Oil LLC was paid $2,000 in 1997, and $24,000 in 1998 for office
facilities, use of certain office equipment and limited administrative and
technical support in 1999. Mr. Fancher canceled an obligation of Fan to
reimburse $22,000 to Fancher Oil LLC for 1999 expenses.
On July 1, 1998, the Company issued 215,000 shares to five officers,
directors and consultants for services rendered through June 30, 1998.
On an agreement dated October 1, 1998, the Board of Directors, with Mr.
Fancher abstaining, approved a transaction in which the Company acquired an
undivided 20% working interest (16% net revenue interest) in Fancher Oil LLC's
approximately 3,525 acre Horsethief exploration prospect located in Sweetwater
County, in the Green River Basin of southwestern Wyoming. The Company 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 the Company reimbursed Fancher Oil LLC $131,000 as acreage acquisition
and seismic survey expenses and approximately $104,000 as the Company's share of
drilling and completion costs in the initial exploratory well. Fancher Oil LLC
holds a 55% working interest in the prospect and earns operating fees, standard
in the area, from the other working interest owners. The Company 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits required by Item 601 to be filed
herewith are incorporated by reference to previously filed documents:
Exhibit No. Description and Method of Filing
----------- --------------------------------
(3.1) Restated Articles of Incorporation of Eastern Star Mining,
Inc., as filed with the Nevada Secretary of State February
7, 1997.(1)
(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.(1)
26
<PAGE>
(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.(1)
(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.(1)
(3.5) Bylaws of Company adopted December 31, 1997.(1)
(10.1) Letter Agreement dated August 27, 1997 between Company and
George H. Fancher Jr. d/b/a Fancher Oil Company.(1)
(10.2) Agreement With Arizona Corporate Management, Inc. dated
November 1, 1998.(1)
(10.3) 1997 Incentive and Nonstatutory Stock Option Plan. (1)
(10.4) Letter regarding conflicts of interest dated March __, 1998
between Company and George H. Fancher Jr.(1)
(10.5) Form of Subscription Agreement for certain officers and
consultants.(1)
(10.6) Agreement with Albert Golusin.(1)
(10.7) Participation Agreement dated October 1, 1998 with Fancher
Oil LLC.(2)
(10.8) Indemnification Agreement with George H. Fancher Jr.
(27) Financial Data Schedule.
- - ------------------
(1) Incorporated by reference to Registration Statement No. 33-64448 on
Form SB-2, which became effective May 14, 1998.
(2) Incorporated by reference to Exhibit 10.7 on Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998.
(b) Reports on Form 8-K. The Registrant filed no reports on Form 8-K during
the fiscal quarter ending December 31, 1999.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FAN ENERGY INC.
Date: March 31, 1999 By /s/ George H. Fancher Jr.
---------------------------------------
George H. Fancher, Jr., Chairman and
Chief Operating Officer
Date: March 31, 1999 By /s/ Rex Utsler
---------------------------------------
Rex Utsler, Chief Financial Officer
and Treasurer
Date: March 31, 1999 By /s/ Albert Golusin
---------------------------------------
Albert A. Golusin, Principal Accounting
Officer
In accordance with the Exchange Act, the report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
Date: March 31, 1999 By /s/ George H. Fancher Jr. Director
----------------------------------
Date: March 31, 1999 By /s/ Rex Utsler Director
----------------------------------
Date: March 31, 1999 By /s/William E. Grafham Director
----------------------------------
Date: March 31, 1999 By /s/ Jeffrey J. Scott Director
----------------------------------
Date: March 31, 1999 By /s/ George A. Cloudy Director
----------------------------------
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
(1) Financial Statements:
Independent Auditor's Report ..................................... F-1
Balance Sheet December 31, 1999 .................................. F-2
Statements of Operations Years ended December 31, 1998 and
1999 and Cumulative Amounts from Inception to
December 31, 1999 ........................................... F-3
Statement of Stockholders' Equity Years Ended December 31,
1997, 1998 and 1999 ......................................... F-4
Statements of Cash Flows Years ended December 31, 1998
and 1999 and Cumulative Amounts from Inception to
December 31, 1999 ..................................... F-5 - F-8
Notes to Financial Statements .............................. F-9--F-19
(2) Schedules
None
29
<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, 1999 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, 1999. 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, 1999 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, 1999 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 significant 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 17, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
BALANCE SHEET
December 31, 1999
ASSETS
<S> <C>
CURRENT ASSET
Cash ..................................................................... $ 11,290
Accounts receivable ...................................................... 46,147
-----------
Total Current Asset .................................................... 57,437
OIL AND GAS PROPERTIES (Note 3) ............................................ 327,589
-----------
$ 385,026
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade ................................................. $ 8,397
related party ......................................... 20,500
Note payable - bank ...................................................... 20,000
-----------
Total Current Liabilities .............................................. 48,897
-----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY (Note 5)
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 - 9,451,492 shares .......................... 9,452
Additional paid-in capital ............................................... 2,317,509
Deficit accumulated during the development stage ......................... (2,091,332)
Additional paid-in capital stock options ................................. 100,500
-----------
336,129
-----------
$ 385,026
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Years ended December 31, 1998 and 1999
Cumulative
Amounts from
Jan. 1, 1997 to
1998 1999 Dec. 31, 1999
---- ---- ---------------
REVENUES
<S> <C> <C> <C>
Oil and gas sales .......................... $ -- $ 152,832 $ 152,832
------------ ------------ -----------
OPERATING EXPENSES
Lease operating expenses ................... -- 31,631 31,631
General and administrative ................. 198,851 129,673 521,509
Depletion .................................. -- 124,938 124,938
Impairment of oil and gas properties ....... 1,257,702 300,000 1,557,702
Interest (Note 3) .......................... -- 2,137 8,384
------------ ------------ -----------
1,456,553 588,379 2,244,164
------------ ------------ -----------
NET (LOSS) ................................... $ (1,456,553) $ (435,547) $ (2,091,332)
============ ============ ===========
NET (LOSS) PER COMMON SHARE - Basic
and Diluted ............................... $ (.17) $ (.04) $ (.29)
============ ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - Basic and Diluted .... 8,567,537 10,051,567 7,210,131
============ ============ ===========
</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 STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999
Common Stock Additional
-------------------- Paid-In
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balance, January 1, 1997 .......................................................... 771,704 $ 772 $ 503,876
Reclassification of deficit pursuant to quasi reorganization ...................... -- -- (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 .......................... -- -- 4,545
Issuance of stock options ......................................................... -- -- 2,332
Net (Loss) ........................................................................ -- -- --
----------- ----------- -----------
Balance, December 31, 1997 ........................................................ 7,771,704 7,772 1,796,236
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) ........................................................................ -- -- --
----------- ----------- -----------
Balance, December 31, 1998 ........................................................ 10,051,704 10,052 2,249,956
Conversion of payables to common stock by officers, valued at $.225 per share ..... 199,788 200 44,753
Forgiveness of debt by officer/director ........................................... -- -- 22,000
Return of common stock by officers/directors ...................................... (800,000) (800) 800
Net (Loss) ........................................................................ -- -- --
----------- ----------- -----------
Balance, December 31, 1999 ........................................................ 9,451,492 $ 9,452 $ 2,317,509
=========== ===========
<CAPTION>
Deficit Additional
Accumulated Paid-In
During the Capital
Development Stock
Stage Options
----------- ----------
<S> <C> <C>
Balance, January 1, 1997 .......................................................... $ (504,648) $ --
Reclassification of deficit pursuant to quasi reorganization ...................... 504,648 --
Sale of common stock and warrants pursuant to private placement, at $.20 per unit.. -- --
Cost of private placement offering ................................................ -- --
Issuance of common stock for services, valued at $.20 per share ................... -- --
Sale of common stock and warrants pursuant to private placement, at $.50 per unit.. -- --
Costs of private placement offering ............................................... -- --
Issuance of common stock for property, valued at $.133 per share .................. -- --
Issuance of common stock warrants for offering costs .......................... -- --
Issuance of stock options ......................................................... -- 100,500
Net (Loss) ........................................................................ (199,232) --
----------- -----------
Balance, December 31, 1997 ........................................................ (199,232) 100,500
Issuance of common stock for services, valued at $.20 per share ............... -- --
Exercise of common stock warrants for cash, at $.20 per share ................. -- --
Net (Loss) ........................................................................ (1,456,553) --
----------- ------------
Balance, December 31, 1998 ........................................................ (1,655,785) 100,500
Conversion of payables to common stock by officers, valued at $.225 per share ..... -- --
Forgiveness of debt by officer/director ................................
Return of common stock by officers/directors ...................................... -- --
Net (Loss) ........................................................................ (435,547) --
----------- -----------
Balance, December 31, 1999 ........................................................ $(2,091,332) $ 100,500
=========== ===========
</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 CASH FLOWS
Years ended December 31, 1998 and 1999
Cumulative
Amounts from
Jan. 1, 1997 to
1998 1999 Dec. 31, 1999
---- ---- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) .................................................. $(1,456,553) $ (435,547) $(2,091,332)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Depletion ................................................... -- 124,938 124,938
Impairment of oil and gas properties ........................ 1,257,702 300,000 1,557,702
Stock options ............................................... -- -- 102,832
Stock for services and payables ............................. 43,000 44,953 137,953
Forgiveness of payables by officer/director ................. -- 22,000 22,000
Changes in assets and liabilities
(Increase) in accounts receivable ........................ -- (46,147) (46,147)
(Decrease) increase in accounts payable .................. (3,579) 27,161 28,897
Other .................................................... 10,383 -- --
----------- ----------- -----------
Net cash (used) provided by operating activities ............ (149,047) 37,358 (163,157)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for oil and gas properties ........................ (672,795) (61,943) (1,710,229)
----------- ----------- -----------
Net cash (used) in investing activities ..................... (672,795) (61,943) (1,710,229)
----------- ----------- -----------
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
Cash paid for offering costs ................................ -- -- (48,324)
Proceeds from short-term borrowings ......................... -- 90,000 90,000
Repayments of short-term borrowings ......................... -- (70,000) (70,000)
----------- ----------- -----------
Net cash provided by financing activities ................... 413,000 20,000 1,884,676
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH ................................ (408,842) (4,585) 11,290
CASH, BEGINNING OF PERIODS ..................................... 424,717 15,875 --
----------- ----------- -----------
CASH, END OF PERIODS ........................................... $ 15,875 $ 11,290 $ 11,290
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998 and 1999
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1997, 1998 and 1999, the Company paid cash
for interest of $6,247, $0 and $2,137, 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).
During the year ended December 31, 1999, the Company issued an aggregate 199,788
shares of common stock to officers for accounts payable, valued at $44,953
($.225 per share); and an officer/director forgave $22,000 in accounts payable.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
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 N
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.
Effectivewith 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
cmencing the drilling of exploratory and development wells on these
properties. In 1999, revenue from oil and gas production was received from
two wells.
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. 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 $1,557,702 at December 31, 1999.
F-7
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes oil and gas revenues from its interests in producing
wells as oil and gas is produced and sold from these wells. The Company has
no gas balancing arrangements in place. Oil and gas sold is not
significantly different from the Company's product entitlement.
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 consist of costs incurred in connection with a
proposed public offering of the Company's common stock. During 1998 and
1999 the Company charged to operations $57,029 and $15,356, respectively,
for costs incurred for uncompleted offerings of the Company's common stock.
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, 1999, the Company had a net operating loss carryforward of
approximately $909,000 that may be offset against future taxable income
through 2019.
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 $10,000 is
attributable to 1999.
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.
F-8
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
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. No
warrants or options were issued in 1999 (Note 5).
F-9
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
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.
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 significant revenues from its planned operations. As such, the
Company, as of December 31, 1999 has incurred net operating losses since
reactivation as a development stage company of $2,091,332 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.
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 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.
In October 1998 SFAS No. 134, "Accounting for Mortgage Broker Securities",
was issued for fiscal years beginning after December 15, 1998. Adoption of
SFAS No. 134 does not have an impact on the Company's financial statements.
F-10
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1999 SFAS No. 135, "Rescission of FASB Statement No. 75 and
Technical Corrections" was issued for the fiscal years beginning after
February 15, 1999. Adoption of SFAS No. 135 is not expected to have an
impact on the Company's financial statements.
In June 1999 SFAS No. 136, "Transfers of Assets to a not-For-Profit
Organization or Charitable Trust that Raises or Holds Contributions for
Others" was issued for fiscal years beginning after December 15, 1999.
Adoption of SFAS No. 136 does not have an impact on the Company's financial
statements.
In June 1999 SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statements No.
133" was issued. Adoption of SFAS No. 137 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 derive
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-11
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Years ended December 31, 1998 and 1999
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
Capitalized costs associated with oil and gas producing activities as of
December 31, 1999 are as follows:
Proved properties $ 1,080,455
Unproved properties 929,774
-----------
2,010,229
Less: valuation allowance (1,557,702)
accumulated depletion (124,938)
-----------
Net capitalized costs $ 327,589
===========
Information relating to the Company's costs incurred in its oil and gas
operations during the years ended December 31, 1998 and 1999 is summariz
as follows:
1998 1999
Property acquisition - Unproved properties $ 172,919 $ --
Exploration costs 368,699 61,943
Development costs 131,177 --
---------- ---------
$ 672,795 $ 61,943
========== =========
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.
OIL AND GAS RESERVES (UNAUDITED)
The following unaudited reserve estimates presented as of December 31, 1998
and 1999 were prepared by an independent petroleum engineer. All of the
Company's reserves are located in the United States. 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.
F-12
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
At December 31, 1998 and 1999 proved reserves were as follows:
1998 1998 1999 1999
GAS OIL GAS OIL
(MMCF) (MBBL) (MMCF) (MBBL)
Beginning of year -- -- 567.3 9.5
Revision of previous estimates -- -- (497.9) (8.9)
Proved developed producing 190.0 -- 182.3 --
Production -- -- (69.4) (.6)
Proved developed non-producing 187.3 9.5 14.6 .3
Proved undeveloped 190.0 -- 129.0 --
----- ---- ----- ----
End of year 567.3 9.5 325.9 .3
===== ==== ===== ====
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.
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.
F-13
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
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 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Future cash inflows $1,210 $ 650
Future production costs (224) (72)
Future development costs (101) (85)
Future income tax expense, net -- --
------- ------
Future net cash flows 885 493
10% annual discount for estimated timing of cash flows (206) (91)
------- ------
Standardized measure of discounted future net cash flows $ 679 $ 402
======== ======
</TABLE>
The following table presents the principal sources of the changes in the
standardized measure of discounted future net cash flows for the years
ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Net change in sales price and production costs $ -- $ 108
Changes in estimated future development costs -- (25)
Sales and transfers of oil and gas produced, net of
production costs -- (121)
Net change due to extensions and discoveries 679 --
Net change due to purchases and sales of minerals in place -- --
Net change due to revisions in quantities -- (180)
Net change in income taxes -- --
Accretion of discount -- (68)
Other, principally revisions in estimates of timing of
production -- 9
------- ------
Net changes 679 (277)
Balance, beginning of year -- 679
------- ------
Balance, end of year $ 679 $ 402
======= ======
</TABLE>
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 for 1998.
F-14
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
The December 31, 1999 weighted average prices utilized for purposes of
estimating the Company's proved reserves and future net revenues were
$24.75 per barrel of oil and $2.06 per Mcf of natural gas. These prices are
significantly above the average annual prices during the past several
years.
NOTE 4 - NOTE PAYABLE - BANK
In 1999 the Company entered into a $150,000 revolving line of credit with a
commercial bank in Denver, Colorado. The loan, guaranteed by an
officer/director of the Company, provides for interest at the bank's
"Reference Rate" (8.5% at December 31, 1999) and matures on May 31, 2000.
At December 31, 1999 the Company had available $130,000 in unused line of
credit. Maximum borrowings under the line of credit for 1999 were $90,000,
at an average interest rate of 8.5%.
NOTE 5 - STOCKHOLDERS' EQUITY
COMMON STOCK
In 1997, the Company completed the sale of common stock and warrants
pursuant to a private placement as follows:
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 October 31, 2000 at a reduced exercise price of $.15
per share). Proceeds to the Company were $1,000,000 before costs of
the offering of $52,439.
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.
F-15
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
In 1999 the Company issued 199,788 shares of common stock to officers and
directors, for conversion of $44,952 in accounts payable ($.225 per share);
and an officer/director forgave the repayment of $22,000 in accounts
payable due to an entity controlled by him; and two directors/officers
returned an aggregate 800,000 shares of common stock to the Company for no
consideration.
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 as
partial consideration for a finders fee in conjunction with the private
placement sale of $.50 units described above. The warrants were valued at
$4,545, using the Black-Scholes option pricing model. In 1999, the exercise
price of the warrants was reduced to $.15 per share and the expiration date
was extended to October 31, 2000. There was no financial impact from the
extension of the warrants.
At December 31, 1999 the status of outstanding warrants is as follows:
Issue Shares Exercise Expiration
Date Exercisable Price Date
----- ----------- -------- ----------
October 31, 1997 1,000,000 $.15 October 31, 2000
October 31, 1997 180,000 $.15 October 31, 2000
At December 31, 1999 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 $.15, 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 exercise 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-16
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The status of outstanding options granted pursuant to the 1997 Plan was as
follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Fair Exercise
Shares Price Value Price
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Options Outstanding - January 1, 1998
(680,000 exercisable) 810,000 $ .33 $ .20
Granted 100,000 $ .50 -- $ .50
--------
Options Outstanding - December 31, 1998
(860,000 exercisable) 910,000 $ .35 $ .18
Granted -- -- --
--------
Options Outstanding - December 31, 1999
(910,000 exercisable) 910,000 $ .35 $ .18 $.20-$.50
========
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1999 was 7.7 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 and 1999 would
have changed as follows:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Net (loss) applicable to common stockholders - as reported $(1,456,553) $(435,547)
========= =======
Net (loss) applicable to common stockholders - pro forma 1,461,206) (435,547)
========= =======
(Loss) per share - as reported (.17) (.04)
=== ===
(Loss) per share - pro forma (.17) (.04)
=== ===
</TABLE>
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 made in 1997 and 1998: dividend yield of 0%;
expected volatility of 0%; discount rate of 5.25%; and expected life of 10
years.
At December 31, 1999 the number of options exercisable was 910,000 and the
weighted average exercise price of these options was $.35.
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.
F-17
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
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 6 - RELATED PARTY TRANSACTIONS
In 1998 and 1999 the Company incurred expenses of an aggregate $48,000 for
each year to entities controlled by Officers/Directors of the Company for
office space and administrative services in Scottsdale, Arizona ($24,000 -
1998 and $24,000 - 1999) and Denver, Colorado ($24,000 - 1998 and $24,000 -
1999), 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 1998, the Secretary/Treasurer was paid $30,000
under the agreement, which was converted to a month to month basis. During
1999, the Company paid the Secretary/Treasurer $7,500 for services and
issued 100,000 shares of common stock valued at $22,500 ($.225 per share).
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)
Effective December 31, 1999, an officer/director forgave $22,000 owed by
the Company to an entity controlled by him, which amount was charged to
additional paid in capital. Additionally in 1999, the Company issued 99,788
shares of common stock (valued at $.225 per share) in settlement of $22,452
owed to an entity controlled by an officer/director. Accounts payable at
December 31, 1999 includes $20,500 due to an officer/director for
non-interest bearing cash advances made to the Company.
An officer/director of the Company personally guaranteed a line of credit
with a commercial bank (see Note 4).
NOTE 7 - 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.
F-18
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Years ended December 31, 1998 and 1999
NOTE 7 - SEGMENT REPORTING
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.
The Company earned revenue from its oil and gas activities of $0 and
$152,832 for the years ended December 31, 1998 and 1999, respectively. The
Company's total assets of $385,026 at December 31, 1999 and operating
expenses of $1,456,553 and $588,379 for the years ended December 31, 1998
and 1999, respectively, are attributable to this segment.
NOTE 8 - FINANCIAL INSTRUMENTS
FAIR VALUE
The fair values of cash, accounts receivable, accounts payable and
short-term debt approximate their carrying values due to the short-term
nature of these financial instruments.
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.
F-19
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
EXHIBITS TO
FAN ENERGY INC.
INDEX TO EXHIBITS
Page or
Exhibit No. Description Cross Reference
- - ----------- ------------ ---------------
(3.1) Restated Articles of Incorporation of Eastern Star Mining,
Inc., as filed with the Nevada Secretary of State February
7, 1997.(1)
(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.(1)
(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.(1)
(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.(1)
(3.5) Bylaws of Company adopted December 31, 1997.(1)
(10.1) Letter Agreement dated August 27, 1997 between Company and
George H. Fancher Jr. d/b/a Fancher Oil Company.(1)
(10.2) Agreement With Arizona Corporate Management, Inc. dated
November 1, 1998.(1)
(10.3) 1997 Incentive and Nonstatutory Stock Option Plan. (1)
(10.4) Letter regarding conflicts of interest dated March __, 1998
between Company and George H. Fancher Jr.(1)
(10.5) Form of Subscriion Agreement for certain officers and
consultants.(1)
(10.6) Agreement with Albert Golusin.(1)
(10.7) Participation Agreement dated October 1, 1998 with Fancher
Oil LLC.(2)
(10.8) Indemnification Agreement with George H. Fancher Jr.
(27) Financial Data Schedule.
- - -----------------
(1) Incorporated by reference to Registration Statement No. 33-64448 on
Form SB-2, which became effective May 14, 1998.
(2) Incorporated by reference to Exhibit 10.7 on Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998.
AGREEMENT
THIS AGREEMENT ("Agreement") is made effective this ____ 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 $150,000
(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 required 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 a 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
--------------------------------------
William E. Grafham, President
-----------------------------------------
George H. Fancher Jr.
-----------------------------------------
Social Security Number
4
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,290
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<PP&E> 2,010,229
<DEPRECIATION> 1,682,640
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0
0
<COMMON> 9,452
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<TOTAL-COSTS> 31,631
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