SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-9268
GEOKINETICS INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-1690082
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5555 San Felipe, Suite 780
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 850-7600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not 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]
Issuer's revenues for its most recent fiscal year were $813,024.
As of December 31, 1996, 4,953,288 shares of the Registrant's Common Stock
were outstanding, and the aggregate market value of the Common Stock held by
non-affiliates was approximately $2,585,581 based on the last reported sales
price of such stock on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: None.
<PAGE>
GEOKINETICS INC.
FORM 10-KSB/A
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
Item 6. Management's Discussion and Analysis or Plan of Operation. 2
Item 7. Financial Statements
Independent Auditors' Report......................... F-1
Consolidated Financial Statements
Consolidated Financial Statements................. F-2
Consolidated Statements of Operations............. F-4
Consolidated Statements of Stockholders' Equity
(Deficit)......................................... F-5
Consolidated Statements of Cash Flows............. F-6
Notes to the Consolidated Financial Statements.... F-7
1
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
At December 31, 1996, the Company's financial position primarily reflects (i)
the Company's ongoing oil and gas operations and (ii) the startup costs relating
to the seismic operations being conducted by Quantum. The financial requirements
of the oil and gas business and the startup costs incurred in diversifying the
Company's business activities have required the Company to utilize a substantial
portion of it's current assets and incur additional indebtedness in order to
acquire additional operating assets. The Company expects that it will be
required to raise substantial additional funds during 1997 from the sale of
equity and debt securities in order to finance the Company's expanding seismic
operations.
The Company has expended a significant amount of working capital on Quantum's
start-up costs. As of the fiscal year ended December 31, 1996, the Company had
incurred approximately $661,070 in direct costs associated with Quantum's
operations. On March 6, 1996, the Company obtained a loan of $5,000,000 from an
unaffiliated lender in order to finance Quantum's initial operations.
As of December 31, 1996 the Company is reporting a $1,620,000 asset relating to
deferred tax benefits. This asset consists of the anticipated utilization of the
Company's accumulated net operating loss for federal income tax purposes, as a
reduction of future taxable income. The value of the deferred tax benefits
reflects the amount that the Company believes to be realizable at this time. The
Company is confident of the utilization of this asset due to the anticipated
revenues to be generated from the commencement of operations in Quantum
Geophysical. As the Company's operations expand and additional revenues are
generated, the Company will review its valuation of the deferred tax benefits
and make adjustments when necessary.
OIL AND GAS OPERATIONS
The Company (through its subsidiaries, HOC Operating Co., Inc. and Geokinetics
Production Co., Inc.) continues to conduct its oil and gas operations by
actively acquiring, exploring, exploiting and developing producing and
non-producing oil and gas properties, with the goal of increasing cash flow, oil
and gas reserves, and value for the long-term benefit of its stockholders.
Reference is made to the Company's descriptions of its business and properties
which are detailed in Item 1 and Item 2 of this Report, respectively. In
acquiring and developing oil and gas prospects, the Company continues to attempt
to limit its cost of development and, where possible, attempt to realize carried
working interests in such prospects in order to generate sufficient revenues to
cover development and fixed costs.
2
<PAGE>
Seismic Operations
During 1996, the Company continued to expend significant amounts of working
capital on Quantum's start-up. Additionally, on March 6, 1996, the Company
completed a loan transaction which ensured the Company's ability to finance
Quantum's initial operations. The Company is confident that Quantum will begin
to provide 3D seismic acquisition services to the oil and gas industry during
calendar year 1997.
LIQUIDITY AND CAPITAL SOURCES
OIL AND GAS OPERATIONS
The oil and gas industry is a highly capital intensive business, especially in
the initial stages of development of a new venture. The Company requires capital
principally to fund the following expenses: (i) purchase of leases and other
interests in oil and gas producing and nonproducing properties; (ii) capital
expenditures under agreements for geological, geophysical and seismic costs, and
drilling and completion costs of wells; and (iii) general and administrative
expenses. The amount of available capital will affect the scope of the Company's
operations and the speed of its growth. The capital expenditures required by the
Company to establish oil and gas production are generally incurred prior to the
commencement of production revenues. As a result, the Company expects to operate
with a working capital deficiency during fiscal 1996.
INCREASED CURRENT ASSETS AND INCREASED CASH
At December 31, 1996 the Company's current assets were $1,224,254 compared with
$871,252 at December 31, 1995. This increase partially reflects the Company's
continued building of its portfolio of oil and gas properties and an increased
cash position. The carrying value of the Company's inventory of oil and gas
leases at December 31, 1996 was $597,822 compared to $582,202 at December 31,
1995. Cash on hand at December 31, 1996 totaled $413,935 compared with $16,905
as of December 31, 1995. The Company's increase in cash partially reflects the
proceeds the Company received from the closing of a $5,000,000 loan during 1996,
associated with the start up of the Company's seismic operations.
INCREASED PROPERTY AND EQUIPMENT
At December 31, 1996, the Company's property and equipment accounts were
$3,881,648 compared with $897,840 at December 31, 1995. This increase reflects
the Company's acquisition of 3D seismic acquisition equipment associated with
the start-up of Quantum.
3
<PAGE>
INCREASED OTHER ASSETS
At December 31, 1996, the Company's other assets were $1,898,374 compared with
$901,339 at December 31, 1995. This increase partially reflects the increase in
the Company's deferred tax asset from $800,000 at December 31, 1995 to
$1,620,000 at December 31, 1996. The Company also established a deposits account
of $180,357 during 1996 which is associated with equipment to be acquired in the
future for the Company's continuing seismic operations.
RESULTS OF OPERATIONS
Operating revenue during the year ended December 31, 1996 was $812,850 compared
with $1,211,609 at year end December 31, 1995. This decrease partially reflects
the decrease in the sale of oil and gas leases in 1996 of $4,011 when compared
to the sale of oil and gas leases of $529,737 during 1995. Operating expenses
totaled $2,810,025 during the year ended December 31, 1996 compared with
operating expenses of $2,275,235 at the year ended December 31, 1995. This
increase partially reflects the non-recovery of advances and the impairment of
equipment and vehicles totaling $718,911 during the year ended December 31,
1996. During the year ended December 31, 1996, the Company experienced a net
loss of $1,772,817.
INCREASED CURRENT LIABILITIES AND LONG TERM DEBT
At December 31, 1996, the Company's current liabilities were $3,045,760 compared
with $1,504,807 at December 31, 1995. This increase reflects the Company's need
to continue to borrow additional funds in order to finance the working capital
demands of Quantum's initial operations and its continuing acquisition of oil
and gas prospects. Management expects that the Company will be required to
increase additional indebtedness as the Company continues to increase its
portfolio of oil and gas properties and expand its seismic operations.
At December 31, 1996, the Company's long term debt was $4,860,123 compared with
$420,246 at December 31, 1995. This increase is the result of the Company
closing on a loan of $5,000,000 on March 6, 1996 to finance the start-up of
Quantum's 3D seismic acquisition services operations.
PRIVATE PLACEMENT AND STOCKHOLDERS EQUITY
During the fourth quarter of fiscal 1995, the Company conducted a private
placement of (i) an aggregate of 332,968 shares of the Company's Common Stock at
a purchase price of $1.50 per share, and (ii) warrants at a purchase price of
$.01 per warrant to purchase up to an aggregate 332,968 additional shares of the
Company's Common Stock (the "Private Placement"). As of December 31, 1995, the
Company completed approximately 75% of the
4
<PAGE>
Private Placement. In January, 1996, the Company completed the Private
Placement, receiving an additional $125,833 in net proceeds.
The number of issued and outstanding shares of the Company's Common Stock at
December 31, 1996 increased to 4,953,288 compared with 4,869,955 at December 31,
1995. This increase to the shares issued is directly attributed to the
completion of the Private Placement.
TAX NET OPERATING LOSS CARRYFORWARDS
At December 31, 1996, the Company had approximately $6,440,026 of tax net
operating loss ("NOL") carryforwards and $246,000 in tax audit carryforwards
that expire in 1998 through 2011. Section 382 of the Internal Revenue Code of
1986, as amended, limits the availability of the losses and credits remaining
unused on the date of a change of ownership of more than 50% of the Company's
Common Stock . The large numbers of shares of Common Stock issued to Mr. Haber
and Mr. Hale make it more likely that this limitation may be triggered by
changes in ownership of the Company's Common Stock subsequent to the August 1,
1994 transaction. This limitation, if applied, would limit the utilization of
such carryforwards in each taxable year to an amount equal to the product of the
federal long-term tax-exempt bond rate prescribed by the Internal Revenue
Service times the fair market value of all of the Company's Common Stock at the
time of the ownership change. The Company believes, however, that the issuances
of Common Stock relating to the August 1, 1994 transaction, including the
post-closing issuances, have not triggered the limitation under Section 382;
however, it is unknown whether future issuances of the Company's securities will
trigger such limitation.
The Company expects that it will be required to raise substantial additional
funds during 1997 from the sale of equity and debt securities in order to
finance the proposed operations of Quantum.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GEOKINETICS INC.
Date: October 27, 1997 By:/s/JAY D. HABER
Jay D. Haber, Chief Executive Officer
(Principal Executive Officer)
By: /s/ PAUL MILES
Paul Miles
(Controller)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities* and on the dates indicated:
SIGNATURE TITLE DATE
/s/JAY D. HABER Director and Chief October 27, 1997
Jay D. Haber Executive Officer
/s/THOMAS J. CONCANNON Vice President and October 27, 1997
Thomas J. Concannon Chief Financial Officer
/s/STEVEN A. WEBSTER Director October 27, 1997
Steven A. Webster
/s/William R. Ziegler Director October 27, 1997
William R. Ziegler
/s/CHRISTOPHER M. HARTE Director October 27, 1997
Christopher M. Harte
6
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
GEOKINETICS INC. AND SUBSIDIARIES
ANNUAL CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
TABLE OF CONTENTS
GEOKINETICS INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
INDEPENDENT AUDITORS' REPORT.................................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS............................................F-2
CONSOLIDATED STATEMENTS OF OPERATIONS..................................F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)..............F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.........................F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
September 24, 1997
To the Board of Directors and Stockholders
Geokinetics Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Geokinetics Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Geokinetics
Inc. and Subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Tsakopulos Brown Schott & Anchors
F - 1
<PAGE>
CONSOLIDATED BALANCE SHEETS
GEOKINETICS INC. AND SUBSIDIARIES
ASSETS
December 31, December 31,
1996 1995
---------- ----------
CURRENT ASSETS
Cash .............................................. $ 413,935 $ 16,905
Accounts receivable ............................... 199,150 259,370
Oil and gas leases held for resale ................ 597,822 582,202
Prepaid expenses .................................. 13,347 12,775
---------- ----------
Total Current Assets ........................... 1,224,254 871,252
PROPERTY AND EQUIPMENT, net (successful efforts
method for oil and gas properties) ................ 3,881,648 897,840
OTHER ASSETS
Deferred loan cost ................................ 76,317 --
Deferred tax asset ................................ 1,620,000 800,000
Restricted investments ............................ 21,700 101,339
Deposits on software and equipment ................ 180,357 --
---------- ----------
Total Other Assets ............................. 1,898,374 901,339
---------- ----------
TOTAL ASSETS ............................... $7,004,276 $2,670,431
========== ==========
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statemants
F - 2
<PAGE>
CONSOLIDATED BALANCE SHEETS
GEOKINETICS INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, December 31,
1996 1995
----------- -----------
CURRENT LIABILITIES
Current maturities of long-term debt ........... $ 331,825 $ --
Accounts payable - trade ....................... 721,535 542,510
Accrued liabilities ............................ 434,526 198,890
Customer deposits .............................. 10,000 --
Notes payable .................................. 1,028,733 25,000
Due to officers ................................ 152,223 101,722
Advances for lease bank ........................ 360,500 600,500
Site restoration costs payable ................. 6,418 36,185
----------- -----------
Total Current Liabilities ................... 3,045,760 1,504,807
LONG-TERM LIABILITIES
Long-term debt, net of current maturities ...... 4,860,123 420,246
----------- -----------
TOTAL LIABILITIES ....................... 7,905,883 1,925,053
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.20 par value, authorized,
15,000,000 shares at December 31, 1996
and 1995; issued and outstanding, 4,953,288
at December 31, 1996 and 4,869,955 at
December 31, 1995 ........................... 990,657 973,991
Additional paid-in capital ..................... 3,924,345 3,815,179
Retained deficit ............................... (5,816,609) (4,043,792)
----------- -----------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) ..................... (901,607) 745,378
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) ....... $ 7,004,276 $ 2,670,431
=========== ===========
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statemants
F - 3
<PAGE>
CONSOLIDATED
STATEMENTS OF OPERATIONS
GEOKINETICS INC. AND SUBSIDIARIES
For the Years Ended
December 31, December 31,
1996 1995
----------- -----------
REVENUES
Oil and gas sales ............................ $ 560,481 $ 408,141
Operator overhead fees ....................... 248,358 273,731
Sale of oil and gas leases ................... 4,011 529,737
----------- -----------
Total Revenues ............................ 812,850 1,211,609
EXPENSES
General and administrative ................... 1,297,474 1,092,848
Non-recovery of advances ..................... 494,460 --
Pre-operating expenses ....................... 327,580 265,328
Lease operating expenses ..................... 288,992 322,170
Impairment of equipment and vehicles ......... 224,451 --
Depletion, depreciation and amortization ..... 91,608 113,283
Cost of oil and gas leases sold .............. 61,924 342,702
Delay rentals ................................ 22,086 25,749
Lease abandonments ........................... 1,450 14,796
Workover/recompletion costs .................. -- 98,359
----------- -----------
Total Expenses ............................ 2,810,025 2,275,235
----------- -----------
Loss from Operations ......................... (1,997,175) (1,063,626)
OTHER INCOME (EXPENSE)
Interest income .............................. 10,545 4,777
Interest expense ............................. (606,187) (104,473)
----------- -----------
Total Other Expense ....................... (595,642) (99,696)
----------- -----------
Net Loss Before Income Tax Expense .... (2,592,817) (1,163,322)
INCOME TAX EXPENSE
Deferred income tax benefit .................. (820,000) (800,000)
----------- -----------
NET LOSS ....................................... $(1,772,817) $ (363,322)
=========== ===========
Loss per common share .......................... $ (0.36) $ (0.08)
=========== ===========
Weighted average common shares and
equivalents outstanding ..................... $ 4,949,635 $ 4,496,720
=========== ===========
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statemants
F - 4
<PAGE>
Consolidated Statements
of Stockholders' Equity (Deficit)
GEOKINETICS INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
--------------------------------------------------------------------------------
Common Shares Additional Paid Accumulated
Issued Common Stock In Capital Deficit Total
--------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ................. 4,434,920 $886,984 $ 3,537,450 $(3,680,470) $ 743,964
Net Loss ................................... -- -- -- (363,322) (363,322)
Post closing agreement - issuance
of common stock August 31, 1995 .......... 185,400 37,080 (37,080) -- --
Private placement offering ................. 249,635 49,927 314,809 -- 364,736
--------- -------- ----------- ----------- -----------
Balance at December 31, 1995 ............... 4,869,955 973,991 3,815,179 (4,043,792) 745,378
Net Loss ................................... -- -- -- (1,772,817) (1,772,817)
Private placement offering ................. 83,333 16,666 109,166 -- 125,832
--------- -------- ----------- ----------- -----------
Balance at December 31, 1996 ............... 4,953,288 $990,657 $ 3,924,345 $(5,816,609) $ (901,607)
========= ======== =========== =========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statemants
F - 4
<PAGE>
Consolidated Statements of Cash Flows
GEOKINETICS INC. AND SUBSIDIARIES
FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
INFLOWS
CASH RECEIVED FROM CUSTOMERS ................ $ 879,059 $ 623,564
CASH RECEIVED FROM SALE OF LEASES ........... 4,011 529,737
INTEREST AND DIVIDENDS RECEIVED ............. 10,798 4,524
----------- -----------
893,868 1,157,825
OUTFLOWS
CASH PAID TO SUPPLIERS AND EMPLOYEES ........ 2,349,037 1,549,174
CASH PAID FOR OIL AND GAS LEASES ............ 101,080 377,946
INTEREST PAID ............................... 472,588 95,331
CASH PAID FOR SITE RESTORATION COSTS ........ 29,767 33,989
----------- -----------
2,952,472 2,056,440
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES ... (2,058,604) (898,615)
CASH FLOWS FROM INVESTING ACTIVITIES
INFLOWS
REDEMPTION OF CERTIFICATE OF DEPOSIT ........ 79,639 --
OUTFLOWS
CASH PAYMENTS FOR THE PURCHASE OF PROPERTY .. 3,255,773 90,302
PURCHASE OF CERTIFICATE OF DEPOSIT .......... -- 101,339
----------- -----------
3,255,773 191,641
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES ... (3,176,134) (191,641)
CASH FLOWS FROM FINANCING ACTIVITIES
INFLOWS
PROCEEDS FROM LONG-TERM DEBT ................ 5,000,000 --
PROCEEDS FROM SHORT-TERM DEBT ............... 798,732 --
PROCEEDS FROM PRIVATE PLACEMENT OFFERING .... 125,833 364,736
ADVANCES FROM OFFICERS ...................... 15,501 101,722
LEASE BANK BORROWINGS ....................... -- 532,500
----------- -----------
5,940,066 998,958
OUTFLOWS
PAYMENTS ON LONG-TERM DEBT .................. 228,298 --
PAYMENT OF LOAN COST ........................ 80,000 --
----------- -----------
308,298 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,631,768 998,958
----------- -----------
NET INCREASE (DECREASE) IN CASH .................. 397,030 (91,298)
CASH, BEGINNING OF YEAR .......................... 16,905 108,203
----------- -----------
CASH, END OF YEAR ................................ $ 413,935 $ 16,905
=========== ===========
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
GEOKINETICS INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE ORGANIZATION
Geokinetics Inc. and Subsidiaries (the Company) is engaged in the
acquisition, operation and development of oil and gas properties in the
United States. The Company is generally the operator of wells in which
it owns an interest.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Geokinetics Inc. and its wholly-owned subsidiaries, HOC Operating Co.,
Inc. (HOC), Geokinetics Production Co., Inc. (GPCI) and Quantum
Geophysical, Inc. (Quantum). All inter-company items and transactions
have been eliminated in the consolidation.
BASIS OF ACCOUNTING
The consolidated financial statements of the Company have been prepared
on the accrual basis of accounting and, accordingly, reflect all
significant receivables, payables and other liabilities.
USE OF ESTIMATES IN PREPARING CONSOLIDATED FINANCIAL STATEMENTS
Management uses estimates and assumptions in preparing consolidated
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported revenues and expenses. Actual results could
vary from the estimates that were used.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and notes payable. The carrying amounts
reported in the consolidated balance sheets for cash, accounts
receivable and accounts payable approximate fair values due to the short
maturity of those instruments. The fair value of debt was determined
based upon the present value of expected cash flows considering expected
maturities and using interest rates currently available to the Company
for long-term borrowings with similar terms. The carrying amount of debt
reported in the consolidated balance sheets approximates fair value.
F - 5
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OIL AND GAS LEASES HELD FOR RESALE
The Company has acquired certain oil and gas leases for the purpose of
selling the leases for cash consideration and, in some cases,
participating in the future development of additional reserves. The
leases are recorded at cost. Such leases held for resale are
periodically reviewed to determine if they have been impaired. If
impairment exists, a loss is recognized by providing an impairment
allowance. Abandonments of oil and gas leases held for resale are
charged to expense.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives of the respective assets. Repairs and
maintenance, which are not considered betterments and do not extend the
useful life of property, are charged to expense as incurred. When
property and equipment are retired or otherwise disposed of, the asset
and accumulated depreciation are removed from the accounts and the
resulting gain or loss is reflected in income.
The Company uses the successful efforts method of accounting for oil and
gas producing activities. Costs to acquire mineral interests in oil and
gas properties, to drill and equip exploratory wells that find proved
reserves, and to drill and equip development wells are capitalized.
Costs to drill exploratory wells that do not find proved reserves,
geological and geophysical costs and costs of carrying and retaining
unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value and a loss is recognized
at the time of impairment by providing an impairment allowance.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage
values, are depreciated and depleted by the unit-of-production method.
On the sale or retirement of a complete unit of a proved property, the
cost and related accumulated depreciation, depletion and amortization
are eliminated from the property accounts, and the resultant gain or
loss is recognized. On the retirement or sale of a partial unit of
proved property, the cost is charged to accumulated depreciation,
depletion and amortization with a resulting gain or loss recognized in
income.
On the sale of an interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the property had
been assessed individually.
F - 6
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED LOAN COST
The deferred loan cost is the unamortized balance of bank fees that were
incurred to obtain long-term financing with a guaranty from the Farmers
Home Administration. These costs are amortized over the life of the term
loan using the effective interest rate method. The amortized amount for
the year ended December 31, 1996 was $3,683.
RESTRICTED INVESTMENTS AND SITE RESTORATION COSTS
Restricted investments represent investments carried at cost which
approximates market. Such investments are to be used in the future to
fund site restoration as required by the state of Utah. Site restoration
costs are based upon an estimate of the cost of restoration prepared by
the Utah State agency responsible for site restoration. Expenditures
made for site restoration are subtracted from the estimate.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1996 and 1995, respectively.
INCOME TAX
The Company follows Statement of Financial Accounting Standards No. 109
entitled "Accounting for Income Taxes" which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the consolidated
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are computed using the liability method based on
the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Deferred income tax is provided in the accompanying consolidated
financial statements as a result of differences related to reporting of
depreciation and depletion for income tax purposes and consolidated
financial statement purposes.
F - 7
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Statement established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets. There was
no material effect on the financial statements from the adoption because
the Company's prior impairment recognition practice was consistent with
the major provisions of the Statement. Under provisions of the
Statement, impairment losses are recognized when expected future cash
flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying
value of property, plant and equipment and intangibles in relation to
the operating performance and future undiscounted cash flows of the
underlying business. The Company adjusts the net book value of the
underlying assets if the sum of expected future cash flows is less than
book value.
LOSS PER COMMON SHARE
Loss per common share is computed based on the weighted average number
of common shares outstanding during the respective years. Stock warrants
and common stock subscribed have not been included in the calculation as
their effect would be antidilutive.
NOTE 2. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, December 31,
1996 1995
---------- ----------
Field operating equipment ........................ $2,669,169 $ --
Proved oil and gas properties .................... 1,032,509 1,030,843
Vehicles ......................................... 253,025 --
Buildings ........................................ 128,106 --
Furniture and equipment .......................... 26,854 26,854
---------- ----------
4,109,663 1,057,697
Less accumulated depletion, depreciation
and amortization ........................... 251,465 159,857
---------- ----------
3,858,198 897,840
Land ............................................. 23,450 --
---------- ----------
Net Property and Equipment ........... $3,881,648 $ 897,840
========== ==========
F - 10
<PAGE>
NOTE 3. ACCRUED LIABILITIES
Accrued liabilities are as follows:
December 31, December 31,
1996 1995
-------- --------
Royalties payable .......................... $245,685 $154,025
Accrued interest payable ................... 157,538 27,623
Payroll taxes payable ...................... 21,718 8,980
Other ...................................... 9,585 8,262
-------- --------
$434,526 $198,890
======== ========
NOTE 4. NOTES PAYABLE
A summary of notes payable follows:
December 31, December 31,
1996 1995
---------- -------
Note to an unrelated corporation dated January
8, 1996 with principal and interest at
10% (18% default rate) originally due
February 5, 1996; after default, note
extended to July 31, 1996 and then to was
October 1, 1997; secured by certain oil
and gas leases .............................. $ 306,708 $ --
Notes representing refinancing of defaulted
lease bank notes; dated March 31, 1997
with interest at 4% plus prime due
monthly and principal and unpaid accrued
interest due on June 30, 1997; secured by
certain oil and gas leases .................. 697,025 --
Note in default dated December 18, 1990 due
December 1, 1992 payable to unrelated
25,000 corporations with interest
accruing 10% per annum; secured by
certain oil and gas leases .................. l 25,000
---------- -------
$1,028,733 $25,000
========== =======
F - 11
<PAGE>
NOTE 5. LEASE BANK
The Company has a revolving credit facility to provide funds to acquire,
package and sell oil and gas properties. Total borrowings under this
facility (Lease Bank) are guaranteed by the Company and may not exceed
$1,200,000. Funds are provided from individual investors. Notes issued
under this agreement are payable upon demand one year from the date of
the individual notes. If there is no demand, the notes automatically
renew on a quarterly basis. In no event will the notes extend beyond
December 31, 1999. Interest is payable quarterly based on the prime rate
as of the first day of each quarter plus 4.0%. In addition to interest,
the depositors will receive either (a) a proportionate share of a .25%
after prospect payout overriding royalty interest in prospects acquired
through the Lease Bank and sold by the Company or (b) a Common Stock
Purchase Warrant for each full year of deposit numerically equal to the
amount of deposit with a purchase price per share equal to twenty-five
percent over the average of the daily closing high bid and low asked
quotation for the sixty (60) day period immediately preceding the yearly
anniversary date for which such warrant is issued.
F - 12
<PAGE>
NOTE 6. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---------- --------
<S> <C> <C>
Note to a financial institution dated March 1, 1996
payable in 120 monthly installments of
principal and interest adjusted quarterly
based on interest at 1.5% prime plus through
March 1, 2006 when all unpaid principal and
accrued interest is due (payments at
December 31, 1996 were $65,385 including
principal and interest at 9.75%), secured by
first security interest in accounts receivable,
inventory, property and equipment, oil and
gas leases, intangibles, life insurance policies
on key officers, guaranty of the Company
and a $4,000,000 guaranty of the Farmers
Home Administration of the United States
Department of Agriculture ........................ $4,771,702 $ --
8% notes dated March 15, 1995 payable to
individuals for purchase of oil and gas
interests with interest payable quarterly,
principal and unpaid accrued interest due
September 30, 1999; collateralized by
guarantee agreement with the Company ............. 420,246 420,246
---------- --------
5,191,948 420,246
Less Current Maturities ................................ 331,825 --
---------- --------
$4,860,123 $420,246
========== ========
</TABLE>
A summary of long-term debt principal maturities follows:
FOR THE YEARS ENDING DECEMBER 31, Amount
----------------
1997 $ 331,825
1998 365,152
1999 823,635
2000 445,629
2001 492,292
Thereafter 2,733,415
----------------
$ 5,191,948
================
F - 13
<PAGE>
NOTE 7. NON-RECOVERY OF ADVANCES
The Company has been unsuccessful in its efforts to recover advances
disbursed to certain vendors who did not render the anticipated
services. Management has concluded that the advances should be written
off at December 31, 1996 due to the uncertainty of the outcome of
further efforts at attempting to recover the funds.
NOTE 8. IMPAIRMENT OF EQUIPMENT AND VEHICLES
As a result of improper unauthorized actions exercised by former Company
personnel, an accumulation of costs in excess of the amount originally
expected to acquire field equipment and vehicles was experienced during
1996. Management has physically examined the acquisitions and determined
their fair market value based on current market prices and on recent
arms-length transactions involving similar assets. The write-down to
fair market value resulted in a charge to income of $224,451 for the
year ended December 31, 1996.
NOTE 9. INCOME TAX
Income tax benefit is deferred tax arising from temporary differences
between income for financial reporting and income for tax purposes.
For the Years Ended
December 31, December 31,
1996 1995
----------- -----------
Income tax benefit at statutory rate ......... $ 2,591,850 $ 1,722,608
Valuation allowance .......................... (971,850) (922,608)
----------- -----------
Deferred Tax Asset ..................... $ 1,620,000 $ 800,000
=========== ===========
Deferred tax asset, beginning of year ........ $ 800,000 $ --
Deferred tax asset, end of year .............. 1,620,000 800,000
----------- -----------
Deferred Tax Benefit ................... $ (820,000) $ (800,000)
=========== ===========
F - 14
<PAGE>
NOTE 9. INCOME TAX (CONTINUED)
Deferred tax assets at December 31, 1996 and 1995 are comprised
primarily of net operating loss carryfoward and differences in reporting
pre-operating expenses and amortization. A valuation allowance has been
provided for deferred tax assets that the Company has not yet determined
to be more likely than not to be realizable at this time. The Company
will continue to review this valuation allowance and make adjustments
when deemed appropriate.
At December 31, 1996, the Company had net operating loss carryforwards
of $6,440,026 and tax credit carryforwards of $245,769 that expire in
1998 through 2011.
NOTE 10. RELATED PARTY TRANSACTIONS
The President of the Company has made advances totaling $152,223 to the
Company at December 31, 1996. The advances are payable upon demand.
Interest is payable quarterly based on the prime rate as of the first
day of each quarter plus 4%. Included in accrued interest at December
31, 1996 is $31,149 interest payable on the officer advances.
The father of the Vice-President of the Company is a participant in the
Lease Bank with a note balance of $110,500 at December 31, 1996.
Included in long-term debt are notes payable totaling $47,357 to a
member of the board directors who resigned on July 18, 1997. Interest of
$3,799 and $4,744 was paid to this director in 1996 and 1995,
respectively, on the notes payable. In addition to the notes, this
former director holds 33,119 stock warrants to purchase common stock of
the Company at an exercise price of $1.50 per warrant.
Another former member of the board of directors who resigned on July 18,
1997 holds options to purchase 147,764 shares of common stock at prices
ranging from $1.00 to $1.75 per share. The options expire in July 1999
and were all outstanding as of December 31, 1996.
NOTE 11. ACQUISITION OF WHOLLY-OWNED SUBSIDIARY
A new subsidiary corporation was formed under the name of Quantum
Geophysical, Inc. (Quantum) and all of its capital stock was issued to
Geokinetics Inc. The articles of incorporation were filed with the State
of Texas on November 17, 1994. Quantum was formed to provide 3-D
geophysical services. Business operations are expected to commence in
October 1997.
F - 15
<PAGE>
NOTE 11. ACQUISITION OF WHOLLY-OWNED SUBSIDIARY (CONTINUED)
Since the inception of Quantum through December 31, 1996, the Company
has expensed $592,908 for non-recoverable pre-operating costs. It is the
Company's policy to expense non-recoverable pre-operating costs as
incurred. In addition, interest expense of $403,492 and $12,500 for the
years ended December 31, 1996 and 1995, respectively, has been incurred.
NOTE 12. POST-CLOSING ADJUSTMENT AGREEMENT
Effective August 1, 1994, an agreement and plan of merger was executed
under which Geokinetics Inc. acquired HOC Operating Co., Inc. (HOC) and
Geokinetics Production Co., Inc. (GPCI). The transaction involved the
issuance of shares of Geokinetics Inc. to the current President and
Vice-President. Based on a post-closing review of the relative values of
the Company's assets and the properties acquired by the Company from the
President and Vice-President, the Company agreed to issue an aggregate
of 185,400 additional shares of common stock to the President and
Vice-President on August 31, 1995.
NOTE 13. STOCK OPTION PLAN
The 1995 Stock Option Plan (the "Plan") was approved by shareholders of
the Company on August 9, 1995 with an effective date of August 1, 1994.
The purpose of the Plan is to promote the interests of the Company and
its shareholders by providing the officers and other key employees with
additional incentive and the opportunity through stock ownership to
increase their proprietary interest in the Company and their personal
interest in its continued success. Five hundred thousand shares of
common stock have been authorized for grant under the Plan. Pursuant to
the Plan, the Company will grant stock options, stock options with stock
appreciation rights attached, incentive stock options and incentive
stock options with stock appreciation rights attached.
Stock options may be granted for the purchase of common stock at a price
not less than 75% of the fair market value of the stock on the date of
grant. Incentive stock options may be granted for the purchase of common
stock at a price not less than the fair market value of the stock on the
date of grant.
At December 31, 1996, 146,500 stock options under the Plan are
outstanding. 90,000 have been granted pursuant to the employment
agreements the Company entered into with officers of the Company on
August 1, 1994.
F - 16
<PAGE>
NOTE 14. PRIVATE PLACEMENT OFFERING
In December 1995, the Company completed a private offering of 332,968
shares of its common stock for the purpose of raising funds for
operations. Net proceeds received from the private offering, after
deduction of associated expenses, were $125,833 and $364,736 in 1996 and
1995, respectively. The 332,968 shares were sold at $1.50 per share and
with 332,968 accompanying warrants sold at $.01 per warrant.
NOTE 15. OUTSTANDING OPTIONS AND WARRANTS
Outstanding options and warrants issued in connection with notes
payable, the private placement offering and the 1995 Stock Option Plan
are as follows:
Shares Exercise Price
---------- ----------------
Outstanding at December 31, 1995 ........ 1,079,793 $0.875-$1.875
Employee stock options forfeited ........ (11,500) $0.875-$1.875
Employee stock options granted .......... 117,500 $1.03125-$1.7875
Warrants issued ......................... 513,333 $1.50-$2.26
----------------
Outstanding at December 31, 1996 ........ 1,699,126 $0.875-$2.26
==========
NOTE 16. COMMITMENTS
OPERATING LEASES
The Company leases its office space under a lease which expires July 30,
1998. The lease provides for a base rental of $24,104 per year. In
addition, the Company pays for its share of the basic operating costs of
the building. The Company's share of these costs has averaged $41,357
for the past three years. Rental expense under this lease recorded in
the consolidated financial statements amounted to $60,338 and $59,581
for the years ended December 31, 1996 and 1995. Aggregate future minimum
rentals under the lease agreements including the base rent and the
average operating cost follows:
FOR THE YEARS ENDING DECEMBER 31, Amount
----------------
1997 $ 65,461
1998 46,368
----------------
$ 111,829
================
F - 17
<PAGE>
NOTE 16. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS
Effective August 1, 1994, the Company entered into employment agreements
with officers of the Company. The compensation payable under these
agreements consists of: (1) annual base salaries, (2) an incentive cash
bonus from profits derived from the Company's sales of oil and gas
prospects, (3) the Company's agreement to grant options to purchase
shares of common stock under a stock option plan adopted by the Company
for the benefit of its directors, officers and employees and (4)
eligibility to participate in the Company's employee benefits plans
which may be adopted. The employment agreements have a term of three
years and are terminable by the Company upon its good faith
determination that there has been a willful violation of the terms of
the agreements.
Pursuant to the employment agreements, options covering 15,000 shares
are to be issued for each year of service during the employment term.
90,000 and 60,000 stock options outstanding at December 31, 1996 and
1995, respectively, under the 1995 Stock Option Plan were granted in
accordance with provisions in the employment agreements.
NOTE 17. MAJOR CUSTOMERS
Revenues from major customers which exceeded ten percent of total
revenues are as follows:
For the Years Ended
December 31, December 31,
1996 1995
----------------- -----------------
Customer A $ -- $ 510,649
================= =================
Customer B $ 137,885 $ 235,419
================= =================
F - 18
<PAGE>
NOTE 18. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of unsecured trade
receivables. In the normal course of business, the Company provides
credit terms to its customers. Accordingly, the Company performs ongoing
credit evaluations of its customers and maintains allowances for
possible losses which, when realized, have been within the range of
management's expectations.
The Company's customer base consists primarily of oil and gas companies.
Although the Company is directly affected by the well-being of the oil
and gas industry, management does not believe significant credit risk
exists at December 31, 1996.
The Company has cash in bank and short-term investments which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and short-term investments.
NOTE 19. SUBSEQUENT EVENTS
On July 18, 1997, the Company entered into a Securities Purchase and
Exchange Agreement (the Purchase Agreement) with an investment limited
liability company (Investment Group). Pursuant to the Purchase
Agreement, the Company received $5,500,000 in cash and the exchange of
certain indebtedness in the principal amount of $500,000 owed by the
Company for the issuance of the following securities to the Investment
Group: (i) 5,500,000 newly-issued shares of the Company's common stock,
par value $.20 per share, (ii)187,500 newly-issued shares of the
Company's Series A preferred stock (convertible into an aggregate of
2,500,000 shares of common stock and (iii) shadow warrants to purchase
up to an additional 7,104,103 shares of common stock at a price of $.20
per share. As a result of the Purchase Agreement, certain changes to the
membership of the Company's board of directors and officers were made
effective July 18, 1997.
Pursuant to a Letter Agreement, the Investment Group invested an
additional $1,000,000 in cash for 100,000 shares of the Company's
newly-issued Series B preferred stock on July 24, 1997. The Series B
preferred stock is automatically convertible into an aggregate of
1,333,333 shares of common stock on January 1, 1998.
The Investment Group will oversee its investments in the Company
pursuant to an Investment Monitoring Agreement agreed to by both
parties. The Company will pay the Investment Group $25,000 annually
under the Investment Monitoring Agreement.
F - 19
<PAGE>
NOTE 19. SUBSEQUENT EVENTS (CONTINUED)
On July 18, 1997, the Company acquired all of the outstanding capital
stock of Signature Geophysical Services, Inc. (SGS), a Michigan
corporation, from Gallant Energy, Inc. (GEI), a Texas corporation,
pursuant to the terms of a Stock Purchase Agreement (the SGS Agreement)
among the Company, SGS, GEI and the sole shareholder of GEI. SGS, based
in Houston, Texas, is engaged in the business of providing 2-D and 3-D
seismic surveys of oil and gas properties, focusing on the Permian Basin
and the U.S. Gulf Coast, with special emphasis on coastal swamp
operations. Pursuant to the SGS Agreement, the Company acquired 500
shares of the outstanding common stock of SGS in exchange for 400,000
newly-issued shares of the Company's common stock. The Company also
entered into an Employment Agreement with the sole shareholder of GEI
granting options to purchase up to 400,000 shares of the Company's
common stock at an exercise price of $.75 per share depending on the
financial performance of SGS during the period from July 18, 1997 to
September 30, 1999.
NOTE 20. CASH FLOWS
A reconciliation of net loss to net cash used by operating activities is
summarized as follows:
For the Years Ended
December 31, December 31,
1996 1995
----------- ---------
Net Loss ......................................... $(1,772,817) $(363,322)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depletion, depreciation and amortization ......... 91,608 113,283
Deferred income tax benefit ...................... (820,000) (800,000)
Amortization of deferred loan cost ............... 3,684 --
(Increase) decrease in current assets
Accounts receivable ........................ 60,220 (58,309)
Oil and gas leases held for resale ......... (15,620) (161,903)
Prepaid expenses ........................... (572) (226)
Increase (decrease) in current liabilities
Accounts payable ........................... 179,024 297,233
Accrued liabilities ........................ 235,636 108,618
Site restoration costs payable ............. (29,767) (33,989)
Customer deposits .......................... 10,000 --
----------- ---------
Net Cash Used by Operating Activities ...... $(2,058,604) $(898,615)
=========== =========
F - 20
<PAGE>
NOTE 21. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial
instruments are summarized as follows:
December 31, 1996 December 31, 1995
----------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Cash ....................... $ 413,935 $ 413,935 $ 16,905 $ 16,905
Accounts receivable ........ 199,150 199,150 259,370 259,370
Accounts payable ........... 721,535 721,535 542,510 542,510
Indebtedness ............... 6,733,404 6,733,404 1,147,468 1,147,468
NOTE 22. SUPPLEMENTAL OIL AND GAS INFORMATION
Information with respect to the Company's oil and gas producing
activities is presented in the following tables. Estimates of reserve
quantities, as well as future production and discounted cash flows, were
determined by Raymond T. Garcia, Petroleum Evaluation Engineer, as of
December 31, 1996.
OIL AND GAS RELATED COSTS
The following table sets forth information concerning costs related to
the Company's oil and gas property acquisition, exploration and
development activities in the United States during the years ended
December 31, 1996 and 1995:
For the Years Ended
December 31, December 31,
1996 1995
-------- --------
Property acquisition costs ................. $ -- $ 90,302
Exploration costs, net ..................... -- --
Development costs, net ..................... -- --
F - 21
<PAGE>
NOTE 22. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth the Company's results of operations from
oil and gas producing activities:
For the Years Ended
December 31, December 31,
1996 1995
--------- ---------
Revenues ......................................... $ 560,481 $ 408,141
Production costs and taxes ....................... (288,992) (420,529)
Depletion, depreciation and amortization ......... (91,608) (113,283)
--------- ---------
Results of operations from oil and gas
producing activities ....................... $ 179,881 $(125,671)
========= =========
In the presentation above, no deduction has been made for direct costs
such as corporate overhead or interest expense. No income taxes are
reflected due to the fact that the Company is not currently in a
tax-paying position. The depletion, depreciation and amortization rate
per barrel of oil equivalent of production was $2.33 and $3.19 for the
years ended December 31, 1996 and 1995, respectively.
F - 22
<PAGE>
NOTE 22. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
OIL AND GAS RESERVES (UNAUDITED)
The following table sets forth the Company's net proved oil and gas
reserves at December 31, 1996 and 1995 and the changes in net proved oil
and gas reserves for the year then ended and for the three months then
ended. Proved reserves represent the estimated quantities of crude oil
and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. The reserve
information indicated below requires substantial judgement on the part
of the reserve engineers, resulting in estimates which are not subject
to precise determination. Accordingly, it is expected that the estimates
of reserves will change as future production and development information
becomes available and that revisions in these estimates could be
significant.
Oil (BBLS) Gas (MCF)
----------------- ---------------
Proved reserves:
Balance at December 31, 1995....... 327,000 2,458,000
Change in previous estimates. 228,000 1,067,000
Production................... (22,000) (87,000)
----------------- ---------------
Balance at December 31, 1996....... 533,000 3,438,000
================= ===============
Oil (BBLS) Oil (BBLS)
----------------- ---------------
Proved developed reserves at December 31:
1995......................... 257,000 1,101,000
================= ===============
1996......................... 323,000 1,061,000
================= ===============
All of the Company's reserves are located in Texas.
F - 23
<PAGE>
NOTE 22. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The standardized measure of discounted future net cash flows from the
Company's proved oil and gas reserves is presented in the following
table:
December 31, December 31,
1996 1995
------------ -----------
Future cash inflows ............................. $ 23,069,000 $ 9,884,000
Future production costs and taxes ............... (5,315,000) (2,873,000)
Future development costs ........................ (1,750,000) (1,093,000)
Future income tax expense ....................... -- --
------------ -----------
Net Future Cash Flows ..................... 16,004,000 5,918,000
Discounted at 10% for timing of cash flows ...... (8,913,000) (2,632,000)
------------ -----------
Discounted future net cash flows from proved
reserves at December 31 ................... $ 7,091,000 $ 3,286,000
============ ===========
The following table sets forth the changes in the standardized measure
of discounted future net cash flows from proved reserves:
For the Years Ended
December 31, December 31,
1996 1995
---------- -----------
Balance at beginning of year ................... $3,286,000 $ 2,812,000
Sales, net of production costs and taxes ....... 171,000 (12,000)
Net changes in prices, production costs and
previous estimates ....................... 3,634,000 117,000
Purchase of reserves in place .................. -- 369,000
---------- -----------
Balance at end of year ......................... $7,091,000 $ 3,286,000
========== ===========
F - 23
<PAGE>
NOTE 22. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
Estimated future net cash flows represent an estimate of future net
revenues from the production of proved reserves using current sales
prices, along with estimates of the production costs, ad valorem and
production taxes and future development (and abandonment) costs
necessary to produce such reserves. The average prices used at December
31, 1996 and 1995 were $24.25 and $18.03, respectively, per barrel of
oil and $2.98 and $1.62, respectively, per mcf of gas. No deduction has
been made for depletion, depreciation or any indirect costs such as
general corporate overhead or interest expense.
Operating costs and ad valorem and production taxes are estimated based
on current costs with respect to producing oil and gas properties.
Future development costs are based on the best estimate of such costs
assuming current economic and operating conditions.
Income tax expense is computed based on applying the appropriate
statutory tax rate to the excess of future cash inflows less future
production and development costs over the current tax basis of the
properties involved, less applicable carryforwards, for both regular and
alternative minimum tax (AMT). On such bases, no regular tax or AMT
results.
The future net revenues information assumes no escalation of costs or
prices, except for gas sales made under terms of contracts which include
fixed and determinable escalation. Future costs and prices could
significantly vary from current amounts and, accordingly, revisions in
the future could be material.
F - 25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 413,935
<SECURITIES> 202,057
<RECEIVABLES> 199,150
<ALLOWANCES> 0
<INVENTORY> 597,822
<CURRENT-ASSETS> 1,224,254
<PP&E> 3,881,648
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,004,276
<CURRENT-LIABILITIES> 3,045,760
<BONDS> 0
0
0
<COMMON> 990,657
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,004,276
<SALES> 564,492
<TOTAL-REVENUES> 812,850
<CGS> 0
<TOTAL-COSTS> 2,810,025
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 606,187
<INCOME-PRETAX> (2,592,817)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,772,817)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> 0
</TABLE>
