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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________ to _____________
Commission File Number _____________
POWER EXPLORATION, INC.
(Exact name of Registrant as specified in its charter)
Nevada 84-0811647
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5020 Collinwood, Ste. 201
Fort Worth, Texas 76107
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (817) 377-4464
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.02 PER SHARE
(Title of class)
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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 twelve (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 ninety (90) days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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 of this Form 10-KSB. [X]
The number of shares of Common Stock, par value $.02 per share, of the
Registrant outstanding on September 30, 1998 was 11,060,925. The aggregate
market value of the voting stock held by nonaffiliates (all directors, officers
and 5% or more shareholders are presumed to be affiliates) of the Registrant on
September 30, 1998, was $5,998,307 based on the average of the closing bid
and asked prices per share of the Common Stock on such date.
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TABLE OF CONTENTS
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I BUSINESS ......................................................................... 3
General ...................................................................... 3
Investment Consideration & Risk Factors....................................... 5
Key Personnel.................................................................10
Regulation....................................................................10
Business Strategy.............................................................11
Recent Developments...........................................................12
II EXPLORATION & DEVELOPMENT ACTIVITIES .............................................13
Operating Activities..........................................................13
Oil & Gas Properties..........................................................13
Title to Properties ..........................................................15
Oil & Natural Gas Reserves....................................................16
Drilling Activities...........................................................16
Products, Markets & Reserves..................................................17
III. REGULATION ...................................................................... 8
IV. ADMINISTRATION ..................................................................21
Employees.....................................................................21
Executive Officers............................................................21
V. GLOSSARY OF SELECTED OIL & NATURAL GAS TERMS ....................................23
VI. LEGAL............................................................................24
Proceedings...................................................................24
Submission of Matters to Vote of Security Holders.............................25
VII. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED
SHAREHOLDER MATTERS..............................................................25
Shareholders..................................................................26
Dividends.....................................................................26
Selected Financial Data.......................................................26
VIII. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS............................................................27
Liquidity & Capital Resources.................................................28
Inflation & Changing Prices...................................................28
Year 2000 Compliance..........................................................29
IX. AUDITED CONSOLIDATED FINANCIAL STATEMENTS .......................................30
</TABLE>
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POWER EXPLORATION, INC.
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-KSB INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMINOLOGY SUCH AS, "MAY," "BELIEVE," "EXPECT," "INTEND,"
"ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS FORM 10-KSB, INCLUDING WITHOUT
LIMITATION, THE STATEMENTS UNDER "BUSINESS," "PROPERTIES," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXPLORATION--LIQUIDITY AND CAPITAL RESOURCES" AND "MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS" LOCATED ELSEWHERE HEREIN
REGARDING THE FINANCIAL POSITION AND LIQUIDITY OF POWER EXPLORATION INC.
("POWER"), THE VOLUME OR DISCOUNTED PRESENT VALUE OF ITS OIL AND NATURAL GAS
RESERVES, ITS ABILITY TO SERVICE ITS INDEBTEDNESS, ITS STRATEGIC PLANS INCLUDING
ITS ABILITY TO LOCATE AND COMPLETE ACQUISITIONS OF OIL AND NATURAL GAS ASSETS,
ITS ABILITY TO LIST ITS STOCK ON THE OVER THE COUNTER ELECTRONIC BULLETIN BOARD
(OTC-EBB) AND OTHER MATTERS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH POWER
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS WITH RESPECT TO ANY SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM POWER'S EXPECTATIONS ("CAUTIONARY STATEMENTS")
ARE DISCLOSED IN THIS FORM 10-KSB, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION
WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-KSB. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS HEREIN INCLUDE, BUT ARE NOT LIMITED TO, THE TIMING
AND EXTENT OF CHANGES IN COMMODITY PRICES FOR OIL AND NATURAL GAS, THE NEED TO
DEVELOP AND REPLACE RESERVES, ENVIRONMENTAL RISKS, DRILLING AND OPERATING RISKS,
RISKS RELATED TO EXPLORATION AND DEVELOPMENT, UNCERTAINTIES ABOUT THE ESTIMATES
OF RESERVES, COMPETITION, GOVERNMENT REGULATION AND THE ABILITY OF POWER
EXPLORATION, INC. TO MEET ITS STATED BUSINESS GOALS. ALL SUBSEQUENT WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO POWER OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
I. BUSINESS
GENERAL
POWER is an independent oil and natural gas company that has been
engaged in the oil and natural gas business since May 16, 1997. POWER's
activities are currently conducted primarily in Texas and Australia. POWER's
business activity has stagnated due to current limited capital resources and
cash flow. The company is currently seeking financing that will provide adequate
capitalization. (See "Glossary of Selected Oil and Natural Gas Terms" for a
definition of certain oil and gas industry terms used in this Form 10-KSB.)
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During its history, POWER has changed its name several times. At
different times POWER has been known as Imperial Energy Corp., Funscape Corp.,
Oil Retrieval Systems, Inc., and Titan Energy Corp. In this report, all of these
entities shall be referred to as POWER.
POWER was originally incorporated in the State of Colorado on October
31, 1979 under the name of IMPERIAL Energy Corp. for the primary purpose of
engaging in all aspects of the exploration and development of oil, gas and
related natural resources. POWER went public pursuant to the Registration
provisions of the Securities Act of 1933. POWER prepared a Registration under
Form S-2 which became effective on August 8, 1980 and raised the sum of
$1,500,000 by selling 15,000,000 shares of no par common stock. On June 26,
1984, POWER had a 10-1 reverse split and reduced the name of authorized common
shares from 50,000,000 no-par value shares to 5,000,000 shares of $.02 par
value.
For years, POWER had a royalty interest in a small oil well in Texas
and an ownership in three small natural gas wells located in Wyoming. POWER
abandoned these wells in 1996.
On September 25, 1996, POWER entered into agreements to acquire
Funscape Corp. (a Nevada Corporation). On November 21, 1996, POWER filed
amended articles of incorporation in order to change its name to Funscape Corp.
and increased the authorized number of shares from 5,000,000 shares of $.02 par
value to 15,000,000 shares of $.02 par value. Subsequently, those agreements to
acquire Funscape (Nevada) were not consummated and were canceled.
On May 16, 1997 POWER acquired Oil Retrieval Systems, Inc. and its
portable swabbing technology, assets and liabilities from Rife Oil Properties,
Inc. for 2,500,000 shares of POWER's restricted common stock. On May 14,
1997 POWER changed its name from Imperial Energy to Oil Retrieval Systems,
Inc. (Colorado).
On June 11, 1997 Oil Retrieval Systems, Inc. acquired 650 oil wells,
each approximately 800' to 1000' deep, situated on 4,500 acres of leases in the
Corsicana Field, Texas from Rife Oil Properties for 2,000,000 shares of
restricted common stock and a promissory note for $1,300,000, bearing 6%
interest per annum and due on November 11, 1997. The note was secured by
1,000,000 shares of newly-issued common stock of ORS and held by an attorney as
Trustee. The note for $1,300,000 plus $43,381 in accrued interest was satisfied
on December 15, 1997 by agreement of the parties, with the shares of restricted
common stock which were held in escrow.
On June 15, 1997 pursuant to Shareholder approval, POWER amended its
articles of incorporation and changed its name from Oil Retrieval Systems to
Titan Energy Corp., Inc.
On June 17, 1997 POWER acquired 100% of the issued and outstanding
shares of Oil Seeps, Inc. (a Texas Corporation). Through this acquisition POWER
obtained a Petroleum Exploration Concession (#ATP 615) in the State of
Queensland, Australia, situated on a 12,904,618 acre block. Oil Seeps, Inc. was
acquired for 400,000 shares of restricted common stock.
During July and August 1997, POWER offered $1,250,000 of 12%
Convertible Debentures, in accordance with Regulation D of the Securities Act of
1933, receiving net proceeds of $870,000. The debentures bore interest at 12%
per annum and were due and payable on July 31, 1998 with interest payable
quarterly. The principal amount of the debentures was convertible at the holders
option anytime after 28 days from the closing date into shares of POWER's common
stock at a conversion price for each share of Issuer common stock equal to the
lower of (a) 80% of the closing bid price of the common stock for the business
day immediately preceding the date of receipt by POWER of a notice of conversion
or (b) 80% of the average of the closing bid price of the common stock for the 5
business days immediately preceding the closing date.
As of September 30, 1998, these debentures and accrued interest have been
completely converted into 1,674,074 shares of common stock.
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On October 22, 1997, POWER sold an additional $250,000 12% Series B
Senior Subordinated Convertible Redeemable Debentures, in accordance with
Regulation S of the Securities Act of 1933. This resulted in gross proceeds of
$200,000 and net proceeds of $176,000.
The Series B debentures bore interest at 12% per annum and were due and
payable on November 30, 1998, if not converted earlier. Interest was payable
quarterly. The principal amount of the debentures was convertible at the
holder's option anytime after 28 days from the closing date into shares of
POWER's common stock at a conversion price for each share of Issuer common stock
equal to the lower of (a) 80% of the closing bid price of the common stock for
the business day immediately preceding the date of receipt by POWER and notice
of conversion or (b) 80% of the average of the closing bid price of the common
stock for the 5 business days immediately preceding the closing date. These
debentures were converted after September 30, 1998; POWER exchanged the $250,000
liability for $150,000 in cash plus 650,000 shares of its common stock. Costs of
$24,000 incurred in connection with the issuance of these debentures are being
amortized over the life of the debentures.
On August 11, 1997, POWER entered into a Letter of Intent with
privately held Power Exploration Company, Inc. ("Power Co") of Tyler, Texas
concerning the acquisition of and/or participation in acquiring Oil and Gas
Leases. On December 2, 1997 POWER entered into a formal agreement with Power Co,
Techstar Exploration, LLC and Roemer-Swanson Energy Corp. to acquire oil and gas
leases in the prolific East Texas Basin for future exploration purposes. Through
this venture, POWER acquired 1,888 net acres under lease. In addition, POWER
participated in a joint venture to drill the Champion G8 well with
Roemer-Swanson Energy, Blackstone Energy, and Kensington Exploration. While the
well produced some intriguing shows, it was eventually classified as a dry hole.
POWER's total investment in the G8 well amounted to $81,716.
On May 7, 1998, POWER secured a Five Hundred Thousand dollar
($500,000.00) line of credit from Benchmark Equity Group. The majority
shareholder provided shares of its stock as collateral. Additionally, POWER
executed a Loan Agreement and Security Agreement. On October 8, 1998, POWER
issued 500,000 shares of its common stock in satisfaction of this loan and
accrued interest.
On July 24, 1998 POWER's shareholders voted to amend the corporation's
Articles of Incorporation to change its name from TITAN Energy Corporation to
Power Exploration, Inc. This followed the decision by the board, which was
ratified by shareholders, to acquire certain assets of Power Co. for a total of
two million common shares. Separately, the company's shareholders voted to
change the company's domicile from the state Colorado to the state of Nevada.
As of September 30, 1998, POWER had not completed the acquisition of
the certain assets of Power Co., and the 2,000,000 shares of stock are held in
trust. It is expected that a letter of agreement will be signed and the
acquisition completed during the first quarter of 1999.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
Financing
POWER has devised a two-stage financing program to achieve its goals
and financial forecasts. In the first stage, POWER will require approximately $3
million and in the second stage will require an additional $7 million. The
financing is expected to be secured through joint venture participations for
specific purposes.
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The use of proceeds from the initial financing effort will be allocated
among the various projects described above, as follows: $1.2 million for the
Corsicana Project; $800,000 for the Australian project; $500,000 for working
capital associated with Oil Retrieval Systems, Inc.; and $500,000 for general
and administrative purposes of POWER.
(See "Management's Discussion and Analysis of Financial Position and Results
of Operations -- Liquidity and Capital Resources.")
History of Losses
POWER had net losses of $628,961 and $2,695,817, for the years
ended September 30, 1997 and 1998, respectively. POWER may continue to incur net
losses and, to the extent that natural gas and crude oil prices remain low, such
losses may be substantial.
Need for Additional Financing for Growth
The growth of POWER's business will require substantial capital
initially, and there is no assurance that any such required additional capital
will be available. POWER's ability to meet any future debt service obligations
will be dependent upon POWER's future performance, which will be subject to oil
and natural gas prices, POWER's level of production, general economic conditions
and financial, business and other factors affecting the operations of POWER,
many of which are beyond its control. There can be no assurance that POWER's
future performance will not be adversely affected by such changes in oil and
natural gas prices and/or production nor by such economic conditions and/or
financial, business and other factors. In addition, there can be no assurance
that POWER's business will generate sufficient cash flow from operations or that
future bank credit will be available in an amount to enable POWER to service its
indebtedness or make necessary expenditures. In such event, POWER would be
required to obtain such financing from the sale of equity securities or other
debt financing. There can be no assurance that any such financing will be
available on terms acceptable to POWER. Should sufficient capital not be
available, POWER may not be able to continue to implement its business strategy.
There is also no assurance that POWER will not pursue, from time to
time, opportunities to acquire oil and natural gas properties and businesses
that may utilize the capital currently expected to be available for its present
operations. The amount and timing of POWER's future capital requirements, if
any, will depend upon a number of factors, including drilling costs,
transportation costs, equipment costs, marketing expenses, staffing levels and
competitive conditions, and any purchases or dispositions of assets, many of
which are not within POWER's control. Failure to obtain any required additional
financing could materially adversely affect the growth, cash flow and earnings
of POWER. In addition, POWER's pursuit of additional capital could result in the
incurrence of additional indebtedness or potentially dilutive issuances of
additional equity securities. (See "Management's Discussion and Analysis of
Financial Position on Results of Operations -- Liquidity and Capital
Resources.")
Concentration of Production
POWER's existing proved producing oil and natural gas reserves and its
production therefrom are located in a single field which consists of 4,500 acres
and contains 650 wells. Accordingly, to the extent
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that POWER experiences any operating difficulties in connection with such wells
or that the estimated proved reserves attributable thereto are less than those
that are currently estimated to exist, POWER could be adversely affected.
Geographic Restrictions
There are no geographic restrictions that would prevent POWER from
acquiring or seeking to acquire any rights or interest in any properties.
Inability to Develop Additional Reserves
POWER's future success as an oil and natural gas producer, as is
generally the case in the industry, depends upon its ability to find, develop
and acquire additional oil and natural gas reserves that are economically
recoverable. Except to the extent that POWER conducts successful development
activities or acquires properties containing proved reserves, POWER's proved
reserves will generally decline as reserves are produced. There can be no
assurance that POWER will be able to locate additional reserves or that POWER
will drill economically productive wells or acquire properties containing proved
reserves. (See "-- Oil and Natural Gas Reserves.")
Acquisition Risks
POWER's business strategy includes focused acquisitions of producing
oil and natural gas properties. Any such future acquisitions will require an
assessment of the recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other similar
factors. It generally is not feasible to review in detail every individual
property involved in an acquisition. Ordinarily, review efforts are focused on
the higher-valued properties. However, even a detailed review of all properties
and records may not reveal existing or potential problems; nor will it permit
POWER to become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections are not always performed on every
well, and potential problems, such as mechanical integrity of equipment and
environmental conditions that may require significant remedial expenditures, are
not necessarily observable even when an inspection is undertaken. Even if
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of such problems. There can
be no assurance that oil and natural gas properties acquired by POWER will be
successfully integrated into POWER's operations or will achieve desired
profitability objectives.
Drilling Risks
POWER's drilling involves numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will be encountered. POWER
must incur significant expenditures for the identification and acquisition of
properties and for the drilling and completion of wells. The cost of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, weather conditions and shortages or delays in
the delivery of equipment. In addition, any use by POWER of 3-dimensional
seismic and other advanced technology requires greater pre-drilling expenditures
than traditional drilling strategies. There can be no assurance as to the
success of POWER's future drilling activities.
Uncertainty of Estimates of Oil and Natural Gas Reserves
Numerous uncertainties are inherent in estimating quantities of proved
oil and natural gas reserves, including many factors beyond the control of
POWER. This Form 10-KSB contains an estimate of POWER's proved oil and natural
gas reserves and the estimated future net cash flows and revenue therefrom based
upon reports of POWER's independent petroleum engineers (Ultra Engineering).
Such reports rely upon various assumptions, including assumptions required by
the Securities and Exchange Commission (the "Commission"), as to constant oil
and natural gas prices, drilling and operating expenses, capital
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expenditures, taxes and availability of funds and such reports should not be
construed as the current market value of the estimated proved reserves. The
process of estimating oil and natural gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
engineering and economic data for each reservoir. As a result, such estimates
are inherently an imprecise evaluation of reserve quantities and the future net
revenue therefrom. Actual future production, revenue, taxes, development
expenditures, operating expenses and quantities of recoverable oil and natural
gas reserves may vary substantially from those assumed in the estimate. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Form 10-KSB. In addition,
POWER's reserves may be subject to downward or upward revision, based upon
production history, results of future exploration and development, prevailing
oil and natural gas prices and other factors. (See "-- Oil and Natural Gas
Reserves.")
Geographic Concentration of Operations
Virtually all of POWER's current operations are located in Texas and
Australia. Because of this concentration, any regional events that increase
costs or competition, reduce availability of equipment or supplies, reduce
demand or limit production will impact POWER more adversely than if POWER were
geographically diversified.
Certain Industry and Marketing Risks
POWER's operations are subject to the risks and uncertainties
associated with drilling for, producing and transporting of oil and natural gas.
POWER's future ability to market its natural gas and oil production will depend
upon the availability and capacity of natural gas gathering systems and
pipelines and other transportation facilities. Federal and state regulation of
oil and natural gas production and transportation, general economic conditions,
changes in supply and in demand all could materially adversely affect POWER's
ability to market its oil and natural gas production. (See "Business --
Products, Markets and Revenues" and "-- Regulation.")
Effects of Changing Prices
The future financial condition and results of operations of POWER
depend upon the prices it receives for its oil and natural gas and the costs of
acquiring, developing and producing oil and natural gas. Oil and natural gas
prices have historically been volatile and are subject to fluctuations in
response to changes in supply, market uncertainty and a variety of additional
factors that are also beyond POWER's control. These factors include, without
limitation, the level of domestic production, the availability of imported oil
and natural gas, actions taken by foreign oil and natural gas producing nations,
the availability of transportation systems with adequate capacity, the
availability of competitive fuels, fluctuating and seasonal demand for natural
gas, conservation and the extent of governmental regulation of production,
weather, foreign and domestic government relations, the price of domestic and
imported oil and natural gas, and the overall economic environment. A
substantial or extended decline in oil and/or natural gas prices could have a
material adverse effect on POWER's estimated value of its natural gas and oil
reserves, and on its financial position, results of operations and access to
capital. POWER's ability to maintain or increase its borrowing capacity, to
repay current or future indebtedness and to obtain additional capital on
attractive terms is substantially dependent upon oil and natural gas prices.
(See "-- Products, Markets and Revenues.")
POWER uses the full cost method of accounting for its investment in oil
and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs (net of accumulated depreciation, depletion and amortization)
less deferred taxes exceed the SEC PV-10 (present value discounted at 10% as
dictated by the SEC) of estimated future net cash flow from proved reserves of
oil and gas, and the lower of cost or fair value of unproved properties after
income tax effects, such excess costs are charged against earnings. Once
incurred, a write-down of oil and gas properties is not reversible at a later
date even if oil or gas prices increase.
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Operating Hazards and Uninsured Risks
POWER's operations are subject to the risks inherent in the oil and
natural gas industry, including the risks of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental accidents such as oil
spills, gas leaks, ruptures or discharges of toxic gases, brine or well fluids
into the environment (including groundwater contamination). The occurrence of
any of these risks could result in substantial losses to POWER due to injury or
loss of life, severe damage to or destruction of property, natural resources
and, equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. In accordance with customary industry practice, POWER maintains
insurance against some, but not all, of the risks described above. There can be
no assurance that any insurance maintained by POWER will be adequate to cover
any such losses or liabilities. Further, POWER cannot predict the continued
availability of insurance, or availability at commercially acceptable premium
levels. POWER does not carry business interruption insurance. Losses and
liabilities arising from uninsured or under-insured events could have a material
adverse effect on the financial condition and operations of POWER. From time to
time, due primarily to contract terms, pipeline interruptions or weather
conditions, the producing wells in which POWER owns an interest have been
subject to production curtailments. The curtailments range from production being
partially restricted to wells being completely shut-in. The duration of
curtailments varies from a few days to several months. In most cases POWER is
provided only limited notice as to when production will be curtailed and the
duration of such curtailments. POWER is not currently experiencing any material
curtailment on its production.
Substantial Competition
The oil and natural gas industry is highly competitive and there are
many other companies engaged in the oil and natural gas business. POWER is
likely to encounter substantial competition from major oil companies, other
independent oil and natural gas concerns and individual producers and operators
in acquiring oil and natural gas properties suitable for exploration and
development. Many of the companies with which POWER competes have substantially
greater financial, technical and other resources and may have greater experience
in the oil and natural gas business than POWER. Therefore, competitors may be
able to pay more for desirable leases and to evaluate, bid for and purchase a
greater number of properties or prospects than the financial or personnel
resources of POWER will permit. (See "-- Competition.")
Volatility of Stock Price
The market price for shares of the Common Stock has varied
significantly and may be volatile depending on news announcements or changes in
general market conditions. In particular, news announcements, quarterly results
of operations, competitive developments, litigation or governmental regulatory
action impacting POWER may adversely affect the Common Stock price. In addition,
because the number of shares of Common Stock held by the public is relatively
small, the sale of a substantial number of shares of the Common Stock in a short
period of time could adversely affect the market price of the Common Stock.
Dividend Policy
POWER has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the next year. The
company plans on paying dividends as it becomes more profitable, but until this
occurs, POWER's Common Stock is not a suitable investment for persons requiring
current income.
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Anti-Takeover Effect of Articles of Incorporation and Possible
Issuances of Preferred Stock
Certain provisions of POWER's Restated Articles of Incorporation as amended at
the July 24, 1998 stockholder's meeting (the "Articles of Incorporation") may
delay, defer or prevent a tender offer or takeover attempt that a shareholder
might consider to be in such shareholder's best interest, including attempts
that might result in a premium over the market price for the stock held by
shareholders. The Articles of Incorporation permit the Board to issue up to
10,000,000 shares of preferred stock and to establish by resolution one or more
series of preferred stock and to establish the powers, designations, preferences
and relative, participating, optional or other special rights of each series of
preferred stock. The preferred stock could be issued on terms that are
unfavorable to the holders of Common Stock, including the grant of superior
voting rights, the grant of preferences in favor of preferred shareholders in
the payment of dividends and upon liquidation of POWER and the designation of
conversion rights that entitle holders of preferred stock to convert their
shares into Common Stock on terms that are dilutive. The issuance of preferred
stock could make a takeover or change in control of POWER more difficult. POWER
however does not intend to use the provisions of the Articles of Incorporation
to delay, defer or prevent a tender offer or takeover attempt.
KEY PERSONNEL
POWER is substantially dependent upon five key individuals within its
management, Guy Pyron, M.O. Rife III, Joe Bennett, Jack Gallacher, and Mark
Zouvas. The loss of the services of any one of these individuals could have a
material adverse impact upon POWER.
REGULATION
General: POWER's operations are affected from time to time in varying
degrees by political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by changes in administrative
regulations. POWER cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business or financial condition. Matters subject to regulation include discharge
permits for drilling operations, drilling and abandonment bonds or other
financial responsibility requirements, reports concerning operations, the
spacing of wells, unitization and pooling of properties, and taxation. There can
be no assurance that new laws or regulations, or modifications of or new
interpretations of existing laws and regulations, will not increase
substantially the cost of compliance or otherwise adversely affect POWER's oil
and natural gas operations and financial condition or that material indemnity
claims will not arise against POWER with respect to properties acquired by or
from POWER. (See "-- Regulation.")
Environmental: POWER's operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution which might result from POWER's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue.
For instance, legislation has been proposed in Congress from time to
time that would reclassify certain crude oil and natural gas exploration and
production wastes as "hazardous wastes" which would make the reclassified wastes
subject to much more stringent handling, disposal and clean-up requirements. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of POWER, as well as the oil and natural gas industry in
general. Initiatives to further regulate the disposal of crude oil and natural
gas wastes are also pending in certain states, and these various initiatives
could have a similar impact on POWER. POWER could incur substantial costs to
comply with environmental laws and
Page 10 of 53
<PAGE> 11
regulations. In addition to compliance costs, government entities and other
third parties may assert substantial liabilities against owners and operators of
oil and natural gas properties for oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages, including
damages caused by previous property owners. As a result, substantial liabilities
to third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for project investment or result
in loss of POWER's properties. Although POWER maintains insurance coverage it
considers to be customary in the industry, it is not fully insured against
certain of these risks, either because such insurance is not available or
because of high premium costs. Accordingly, POWER may be subject to liability or
may lose substantial portions of properties due to hazards that cannot be
insured against or have not been insured against due to prohibitive premium
costs or for other reasons. The imposition of any such liabilities on POWER
could have a material adverse effect on POWER's financial condition and results
of operations.
The Oil Pollution Act of 1990 ("OPA") imposes a variety of regulations
on "responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on POWER. While POWER does not
anticipate incurring material costs in connection with environmental compliance
and remediation, it cannot guarantee that material costs will not be incurred.
(See "-- Regulation.")
BUSINESS STRATEGY
POWER intends to build itself as a leading independent oil and natural
gas exploration and production company by implementing the following business
strategies:
GROWTH. Achieve asset, revenue and cash flow growth as a result of the
acquisition and further development of other producing oil and natural gas
properties. POWER believes there are numerous opportunities to acquire
additional energy assets and to enhance the value of such assets through
improved operating practices and by aggressively developing reserve
potential.
ACQUIRE AND ENHANCE PRODUCING OIL AND NATURAL GAS PROPERTIES. POWER
intends to take advantage of opportunities that currently exist in the
United States to acquire producing oil and natural gas properties. POWER
plans to continue to focus its acquisition activities onshore in Texas in
order to complement its existing properties and operations; however, POWER
will review potential acquisitions in other regions of the United States if
they represent a significant concentration of energy-related assets.
EMPHASIZE EXPLORATION AND DEVELOPMENT ACTIVITIES. POWER plans to exploit
its existing oil and natural gas properties and to conduct development
evaluation and drilling on its existing and future oil and natural gas
properties. POWER intends to concentrate on enhancement opportunities from
activities such as infill drilling, recompletions, repairs and equipment
changes.
CORPORATE EFFICIENCIES. Maximize corporate efficiencies through the
development and operation of a larger asset base with the potential to
limit increases in overhead in the future.
CAPITAL MANAGEMENT. Maintain financial strength and flexibility
through effective management of debt and equity.
TECHNOLOGY. POWER intends to increase its exploration efforts, focusing on
established geological trends where POWER can employ geological,
geophysical and engineering expertise. In addition, POWER will employ new
technologies that are at its disposal; these include Electro-Seise(R),
which records and models information derived from electromagnetic wave
patterns, and Relucent(R), designed to read hydrocarbon emissions from a
mobile, microwave unit. Both technologies detect the existence of
hydrocarbons within formations. While the oil and gas industry as a whole
has embraced the use of 3-D seismic as a location tool for detecting
reservoir quality formations, it does not provide any clue as
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<PAGE> 12
to whether hydrocarbon deposits exist within those formations. The use of
Electro-Seise(R) and Relucent(R) will enhance the Company's primary
exploration efforts beyond the capabilities of conventional location tools
used by other firms. POWER will consider the application of 3-D seismic in
areas where POWER believes that it will be beneficial and cost effective.
POWER will also use advanced drilling technologies where appropriate. POWER
will utilize three different types of technologies: a drilling technique
known as under balanced drilling (UBD) used in conjunction with
horizontal-lateral drilling, waterflooding, and portable swabbing units.
UBD creates an equal pressure environment within the well bore, which is
particularly useful when pressure is depleted in older reservoir
structures. This prevents contamination of the reservoir by drilling
fluids, which would reduce production rates.
In reservoirs that can be waterflooded, the use of
alkaline-surfactant-polymer (ASP) flooding technology can unlock some of
the residual resources. ASP can boost incremental oil recovery of a known
resource in a mature field by up to 30% of the original oil in place (OOIP)
at costs that are more economical than seeking new reserves.
ORS, the company's swabbing rig manufacturing unit produces a truck-mounted
portable swabbing unit which eliminates the need to rig up work-over units
and run tubing, rods, downhole pumps, packers and surface pump jacks, thus
requiring only one person to drive and operate. The units are completely
self-contained with the capacity of up to 80 barrels of oil, enabling the
operator to swab approximately 25 to 35 wells per day. The swabbing
procedure takes approximately 10 minutes per well. In comparison, using
conventional pump jacks, the same volume of fluid removal would take 14 to
24 hours and require a near constant source of electrical power.
RECENT DEVELOPMENTS
East Texas
POWER has acquired approximately 500 square miles of proprietary 3D
seismic data and approximately 16,000 miles of 2D seismic data throughout the
East Texas Basin from MB Exploration, LLC of Dallas, Texas. The proprietary 3D
seismic data included in this acquisition previously belonged to Exxon. The
acquisition entitles POWER to participate as a 20% working interest partner in
140,000 net acres in East Texas.
POWER has also acquired additional prospects to drill in the East Texas
basin. Financing for this drilling program will be provided through a series of
participation arrangements with industry and non-industry investment groups. The
first round of financing will support the exploration of four prospects, two of
which can be considered "wildcats" while the other two are classified as
developmental (located in an area where significant production already exists.)
Aggregate costs for this drilling stage should approximate $3 million.
Discovery Geo
The Company is negotiating the acquisition of Discovery Geo which has
exploration permits ATP-634, ATP-550P, and PEP-38722 located in Australia and
New Zealand. These ATP permits are some of the most highly regarded prospects in
these areas. The hydrocarbon exploration activities of these permits are
concentrated in the two major onshore oil and gas basins of both Australia and
New Zealand. At present, the permits in the Cooper/Eromanga and Taranaki Basins
produce the bulk of the onshore indigenous oil and gas production in these
areas. Power and Discovery Geo are exploring the potential benefits that could
occur from a joint participation.
Page 12 of 53
<PAGE> 13
1998 Annual Shareholders Meeting
POWER held its Annual Meeting held on July 24, 1998. The company's
shareholders voted to amend the corporation's Articles of Incorporation to
change its name from Titan Energy Corp., Inc. to Power Exploration, Inc. This
follows the decision by the board, which was ratified by shareholders, to
acquire certain assets of Power Co. for a total of two million common shares.
Separately, the company's shareholders voted to change the company's domicile
from the state of Colorado to the state of Nevada. As a result of the change in
domicile, the following persons were appointed to the board of directors of
Power Exploration., Inc.: M.O. Rife, III, Guy Pyron, Jack Gallacher, Joe B.
Bennett, and Thom Schliem. Shareholders approved the proposal to amend the
Articles of Incorporation and authorized 50 million shares of common stock at
par value of $0.02. The shareholders also approved the proposal to amend the
Articles of Incorporation and approved authorization of 10 million non-voting, 8
percent preferred stock.
II. EXPLORATION AND DEVELOPMENT ACTIVITIES
Historically, POWER has financed its exploration and development
expenditures primarily through bank borrowings, equity capital from private
sales of stock, and promoted funds from industry partners. With respect to its
acquisition activities, POWER intends to shift its emphasis to larger scale
acquisitions of producing properties with additional development and exploration
potential. Initially, POWER plans to use a combination of debt and equity
financing to fund these larger acquisitions.
POWER made exploration and development expenditures of $5,496 and
$3,886 during the fiscal year ended September 30, 1997 and the fiscal year ended
September 30, 1998, respectively. POWER made net lease acquisitions of
$5,050,000 on proved properties and $1,510,871 on unproved properties during the
fiscal year ended September 30, 1997. The acquisition of proved properties was
made through the issuance of stock. Total lease acquisitions for proved and
unproved properties was $348,130 during the fiscal year ended September 30,
1998. POWER's ability to continue to fund its exploration and development
activities depends upon cash flow and its ability to secure the necessary
financing for such activities.
OPERATING ACTIVITIES
Where possible, POWER prefers to have Rife Oil Properties, Inc. act as
operator of the oil and natural gas properties and prospects in which it owns an
interest. The operator of an oil and natural gas property supervises production,
maintains production records, employs field personnel and performs other
functions required in the production and administration of such property. The
fees for such services customarily vary from well to well, depending on the
nature, depth and location of the well being operated. Generally, the operator
of an oil and natural gas prospect is determined by such factors as the size of
the working interest held by a participant in the prospect, a participant's
knowledge and experience in the geological area in which the prospect is located
and geographical considerations. POWER's wells are drilled by independent
drilling contractors.
M.O. Rife, III, who serves as POWER's Board Chairman, owns 100% of Rife
Oil Properties, Inc., and Rife Oil is one of POWER's major stockholders. On
September 1, 1998, POWER secured an option to purchase Rife Oil Properties, Inc.
for three million shares of POWER common stock.
OIL AND GAS PROPERTIES
Glen Rose Q5
The Company is currently developing the Glen Rose Q5 prospect located
in the Manziel Field, Wood County. The "Q5" is considered a developmental
prospect by virtue of its location within the prolific Manziel field. The
Manziel Field is a highly productive structural complex that produces from all
fault blocks in the numerous Cretaceous reservoirs, which include the
Sub-Clarksville, Woodbine, Rodessa, Pittsburgh and Travis Peak. This prospect,
to date, has produced over 522,000 BO and 342 MMCF of gas from two wells.
Page 13 of 53
<PAGE> 14
The Q5 prospect totals 158 net acres, with two drilling locations and
an 82% average net revenue interest. Prospect acquisition cost is $40,000. The
estimate to drill a 9,000 ft. test covering all potential zones, including
completion costs and logging, is $500,000. A joint venture arrangement will
finance this project, which will commence drilling the test well in March of
1999.
The Pittman Prospect
The Pittman development prospect is also located in the prolific
Manziel Field in Wood County, Texas. This 220-acre prospect is a development
location 800-ft from a undeveloped 48 ft thick Paluxy oil sand drilled by Texaco
in 1975 at a structurally equivalent position. The offset well encountered
numerous deeper pay zones, but due to mechanical problems in the well,
production was never established in this 48-ft oil zone. Sixty-nine wells have
produced from the Paluxy in Manziel Field since its discovery in 1943. Total
production from the Paluxy is over 22 million BO and 1 BCF, with a average well
producing over 330,000 BO.
The estimated reserves to be recovered from this prospect are 900,000
BO with an initial production rate of 300 BOPD. Estimated cost to drill and
complete is $600,000. If productive, the prospect may allow an additional 1 to 3
wells to be drilled for the Paluxy.
Red Town Ranch
The Red Town Ranch Prospect, located in the central area of the East
Texas Basin, is a low-cost drilling opportunity to discover sizeable oil & gas
reserves by exploiting potential traps in a region known for high-volume
hydrocarbon migration and production. This prospect has two primary drilling
formations as its objective: Upper Cretaceous Woodbine Sandstone and the Lower
Cretaceous Pettet Limestone.
The Red Town Prospect, located in Leon County, consists of 1500 gross
acres (1100 net). The Company has employed the Electro-Seise(R) application on
this prospect and has assisted in identifying a drill site in the prospect. The
Company has also compared those results to a 2D seismic line, which has
confirmed our selection of a drill site.
This prospect is situated on the Elkhart field structure that has
produced 5 billion cubic feet of gas plus 23 million barrels of oil from the
Woodbine sands and more than 50 billion cubic feet of gas plus 590 million
barrels of oil from the Pettet Limestone. The proposed initial test well on the
prospect is a 6500' Woodbine test to confirm the faulted reservoir trap.
Anticipated production results from a successful well should be 250
BOPD equivalent and with estimated reserves of 300,000 BO. Estimated costs to
acquire and drill are $500,000. Drilling an initial well on the approximately
1100 acres of Red Town Prospect acreage also earns the option to lease 7000
additional acres to the southwest at reasonable terms.
The Nolan Prospect
The Nolan Prospect, located in the northwest portion of East Texas
Basin, is a 10,000' drilling opportunity to discover significant oil & gas
reserves along the Lower Cretaceous James Reef Trend. James Limestone oil & gas
production has been found along this trend in great quantities. In April 1998,
Chevron reported $2 billion in James Reef reserve discoveries in federal
offshore waters just off the Mississippi coast. In East Texas, a major James
Reef field, Fairway Field, was discovered in 1960. Production from Fairway has
totaled more than 200 million barrels of oil and 450 billion cubic feet of
natural gas.
The Nolan Prospect lies about 35 miles north of Fairway Field situated
on the same early Cretaceous shelf as indicated by digital gravity studies and
seismic mapping. The Nolan Prospect has the same reef characteristics as the
Fairway Field. Proportionally compared to the Fairway James reef, the Nolan
James reef anomaly is about 1/6th the size. Power's lease holdings in the
prospect are continuing to increase within the 3000 acre prospect anomaly
boundaries in anticipation of drilling in the near future.
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<PAGE> 15
The cost to drill a 10,000' test well on this prospect, plus costs to
acquire and complete geological surveys is approximately $850,000. As in the Red
Town prospect, the Nolan has Electro-Seise(R) data coupled with traditional 2D
seismic. Estimated production, assuming a successful well, could yield 400 BOPD
with 10 MMCFPD of gas. Reserves in this prospect could be very significant.
Polk County
Currently, the Company and its partners have assembled 12,000 net acres
of oil and gas leases in the Woodbine trend for its "Alaska" prospect located in
Polk County, Texas. The Alaska Woodbine Prospect is one of a series of down-dip
sandstone lenses that were deposited just offshore of the massive "Harris" reef,
which was responsible for millions of barrels of oil and commensurate quantities
of gas. Costs, including land, land men, bonus & brokerage, are averaging $150
per acre.
Australian Exploration
The Australian concession owned by the Company potentially represents
one of the most lucrative exploration opportunities available in today's market.
Preliminary geological analyses indicate a potentially large natural gas
reserve. Directly north of the ATP 615 concession, a 200 megawatt electricity
generation plant is converting from coal to natural gas, and has thus recently
completed a 12 inch pipeline directly across the Company's lease for
transportation of gas production to this facility. This creates a virtually
unlimited demand for natural gas, and the utility has indicated their intention
to purchase all gas produced by the Company. In addition, the governing
authorities involved are aggressive in promoting oil and gas exploration in
their region, and are thus very accommodating rather than restrictive. The
combination of all these factors creates a very favorable atmosphere for gas
exploration, greatly enhancing the potential for one of the most promising plays
of the decade.
An estimated 50 miles of 2D seismic data will be acquired, with an
approximate total cost of $750,000. Cash requirements for this program will be
staged as areas of interest are identified. Drilling costs are higher in
Australia than in the US due to the limited number of available drilling rigs
and the high cost of mobilization. Therefore, the Company will only mobilize one
rig and continue its usage throughout the first stage of drilling which will
include a total of 12 wells. The Company's financial projections assume a 50%
success rate in this 12 well program; estimated drilling and completion
requirements should total $3,000,000, with production income factored in.
Corsicana Field
On June 11, 1997 the Company acquired 650 oil wells situated on 4,500
acres of leased land in the Corsicana Field located in Corsicana, Texas. All of
the wells are approximately 800 ft. to 1,000 ft. deep with 84.5 million gross
barrels of oil in place. POWER has split the field into small AMI's (Area of
Mutual Interest) in order to facilitate fund raising for the development of the
field. Through Corsicana Drilling Partners, JV, POWER has already raised
$300,000 of the $500,000 necessary for the first AMI.
A reserve study was performed by Ultra Engineering & Consulting of
Houston, Texas. The study, which was performed as of September 30, 1998,
estimated net reserves of 21,744,477 recoverable barrels of oil. The value of
future cash flows, discounted at 10% to present value, was estimated to be
$63,868,634. At current commodity prices, the estimated future cash flow (not
discounted) is $125 million.
Production from the Corsicana Field has a virtually flat decline curve,
thereby holding the leases for the foreseeable future. The leases carry an
average net revenue interest of 80%.
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<PAGE> 16
TITLE TO PROPERTIES
As is common industry practice, little or no investigation of title is
made at the time of acquisition of undeveloped properties, other than a
preliminary review of local mineral records. Title investigations are made, and
in most cases, a title opinion of local counsel is obtained before commencement
of drilling operations. POWER believes that the methods it utilizes for
investigating title prior to the acquisition of any properties are consistent
with practices customary in the oil and gas industry and that such practices are
adequately designed to enable POWER to acquire good title to such properties.
Some title risks, however, cannot be avoided, despite the use of customary
industry practices.
POWER's properties are generally subject to customary royalty and
overriding royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens and minor encumbrances, easements and
restrictions, and may be mortgaged to secure indebtedness of POWER. POWER
believes that none of these burdens either materially detract from the value of
such properties or materially interfere with their use in the operation of
POWER's business.
OIL AND NATURAL GAS RESERVES
On September 30, 1998, POWER's oil and natural gas interests were
located in the state of Texas, as well as on the Australian continent. All
reserves are located in the state of Texas; POWER has no reserves offshore.
The following table summarizes POWER's reserves on September 30, 1998,
and was prepared in accordance with the rules and regulations of the Commission:
<TABLE>
<CAPTION>
Oil (mbbls)
-----
1998 1997
---- ----
<S> <C> <C>
Proved Developed and Undeveloped Reserves:
Beginning of Year -
Purchases of Minerals in Place 22,528.5 22,529.8
Revisions of previous estimates (779.9) -
Production (4.1) ( -1.3)
-------- --------
End of Year 21,744.5 22,528.5
======== ========
Proved Developed Reserves:
End of Year 3,785.0 4,568.6
======== ========
</TABLE>
RESERVES REPORTED TO OTHER AGENCIES
Estimates of oil and gas reserves have not been filed with or included
in reports to any federal authority or agency other than the Commission.
DRILLING ACTIVITIES
POWER has performed tests on its Corsicana field and drilled a core
well in March of 1998. Drilling is currently underway, and the field is expected
to begin generating a revenue stream by February of 1999. The use of lateral
well bores (horizontal) will limit the number of vertical wells required to
extract fluid, and thus reduce overall drilling costs for the field.
With respect to its drilling operations, POWER plans to concentrate on
lower risk, development-type properties, generally consisting of drilling in
reservoirs from which production is, or formerly was, being obtained while also
drilling some wildcat and developmental wells. The drilling of development wells
is subject to the normal risk of dry holes, or a failure to produce oil and
natural gas in commercial quantities. The degree of risk varies depending, among
other things, on the distance between the well and the nearest producing well,
other available geological information and the geological features of the area.
Page 16 of 53
<PAGE> 17
All drilling activities are subject to the risk of encountering unusual or
unexpected formations and pressures and other conditions that may result in
financial losses or liabilities to third parties or governmental entities, many
of which may not be covered by insurance. The number and type of wells drilled
by POWER will vary depending on the amount of funds available for drilling, the
cost of each well, the size of the fractional working interests acquired by
POWER in each well and the estimated recoverable reserves attributable to each
well.
The primary terms of the oil and gas leases covering the majority of
POWER's undeveloped acreage expire at various dates, generally ranging from 1 to
5 years. POWER can retain its interest in undeveloped acreage by drilling
activity that establishes commercial reserves sufficient to maintain the lease.
Certain of POWER's undeveloped acreage in Texas are being "held by production,"
for which expiration will not occur until production ceases from all wells on
the particular leases.
SALES OF PRODUCING PROPERTIES AND UNDERDEVELOPED ACREAGE
POWER evaluates properties on an ongoing basis to determine the
economic viability of the property and whether such property enhances the
objectives of POWER. During the course of normal business, POWER may dispose of
producing properties and undeveloped acreage if POWER believes that such
disposition is in its best interests.
PRODUCTS, MARKETS AND REVENUES
Oil and natural gas are the principal products currently produced by
POWER. POWER does not refine or process the oil and natural gas that it
produces. POWER sells the oil it produces under short-term contracts at market
prices in the areas in which the producing properties are located, generally at
F.O.B. field prices posted by the principal purchaser of oil in such areas.
The availability of a ready market for oil and natural gas and the
prices of oil and natural gas are dependent upon a number of factors that are
beyond the control of POWER. These factors include, among other things, the
level of domestic production and economic activity generally, the availability
of imported oil and natural gas, actions taken by foreign oil producing nations,
the availability of natural gas pipelines with adequate capacity and other
transportation facilities, the availability and marketing of other competitive
fuels, fluctuating and seasonal demand for oil, natural gas and refined products
and the extent of governmental regulation and taxation (under both present and
future legislation) of the production, refining, transportation, pricing, use
and allocation of oil, natural gas, refined products and substitute fuels.
Accordingly, in view of the many uncertainties affecting the supply and demand
for oil, natural gas and refined petroleum products, it is not possible to
predict accurately the prices or marketability of the oil and natural gas from
any producing well in which POWER has or may acquire an interest.
Oil prices have been subject to significant fluctuations over the past
decade. Levels of production maintained by the Organization of Petroleum
Exporting Countries ("OPEC") member nations and other major oil producing
countries are expected to continue to be a major determinant of oil price
movements in the future. As a result, future oil price movements cannot be
predicted with any certainty. Similarly, during the past several years, the
market price for natural gas has been subject to significant fluctuations on a
monthly basis as well as from year to year. These frequent changes in the market
price make it impossible for POWER to predict natural gas price movements with
any certainty.
POWER cannot provide assurance that it will be able to market all oil
or natural gas that POWER produces or, if such oil or natural gas can be
marketed, that favorable price and contractual terms can be negotiated. Changes
in oil and natural gas prices may significantly affect the revenues and cash
flow of POWER and the value of its oil and natural gas properties. Further,
significant declines in the prices of oil and natural gas may have a material
adverse effect on the business and financial condition of POWER. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations.")
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<PAGE> 18
In certain areas in which POWER engages in oil and natural gas
production activities, the supply of oil and natural gas available for delivery
from time to time exceeds the demand. During such times, companies purchasing
oil and natural gas in such areas reduce the amount of oil and natural gas that
they will purchase or "take." If buyers cannot be readily located for newly
discovered oil and natural gas reserves, newly completed oil and natural gas
wells may be shut-in for various periods of time. As a result, the over-supply
of oil and natural gas in certain areas may cause POWER to experience "take"
problems or may adversely affect POWER's ability to obtain contracts to market
oil and natural gas discovered in wells in which POWER owns an interest.
DELIVERY COMMITMENTS
POWER is not presently obligated to provide a fixed and determinable
quantity of oil or natural gas under any existing contract or agreement.
COMPETITION
The oil and natural gas industry is highly competitive. POWER
encounters strong competition from other independent operators and from major
oil companies in acquiring properties, in contracting for drilling equipment and
in securing trained personnel. Many of these competitors have financial
resources and staffs substantially larger than those available to POWER.
Exploration and production of oil and natural gas is also affected by
competition for drilling rigs and the availability of tubular goods and certain
other equipment. While the oil and natural gas industry has experienced
shortages of drilling rigs and equipment, pipe and personnel in the past, POWER
is not presently experiencing any shortages and does not foresee any such
shortages in the near future. POWER is unable to predict how long current market
conditions will continue.
Competition for attractive oil and natural gas producing properties,
undeveloped leases and drilling rights is also strong, and POWER cannot provide
assurance that it will be able to compete satisfactorily in the acquisition of
such properties. Many major oil companies have publicly indicated their
decisions to concentrate on overseas activities and have been actively marketing
certain of their existing producing properties for sale to independent
producers. There can be no assurance that POWER will be successful in acquiring
any such properties.
III. REGULATION
General
POWER's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and natural gas production operations and economics are or have
been affected by price control, tax and other laws relating to the oil and
natural gas industry, by changes in such laws and by changing administrative
regulations. There are currently no price controls on oil, condensate or NGLs.
To the extent price controls remain applicable after the enactment of the
Natural Gas Wellhead Decontrol Act of 1989, POWER is of the opinion that such
controls will not have a significant impact on the prices received by POWER for
natural gas produced in the near future.
Legislation affecting the oil and natural gas industry is under
constant review for amendment or expansion, frequently increasing the regulatory
burden. Also, numerous departments and agencies, both federal and state, are
authorized by statute to issue and have issued rules and regulations binding on
the oil and natural gas industry and its individual members, compliance with
which is often difficult and costly and certain of which carry substantial
penalties for the failure to comply. POWER cannot predict how existing
regulations may be interpreted by enforcement agencies or the courts, nor
whether amendments or additional regulations will be adopted, nor what effect
such interpretations and changes may have on POWER's business or financial
condition.
Page 18 of 53
<PAGE> 19
Natural Gas Regulation
Historically, interstate pipeline companies generally acted as
wholesale merchants by purchasing natural gas from producers and reselling the
natural gas to local distribution companies and large end users. Commencing in
late 1985, the Federal Energy Regulatory Commission (the "FERC") issued a series
of orders that have had a major impact on interstate natural gas pipeline
operations, services, and rates, and thus have significantly altered the
marketing and price of natural gas. The FERC's key rule making action, Order No.
636 ("Order 636"), issued in April 1992, required each interstate pipeline to,
among other things, "unbundle" its traditional bundled sales services and create
and make available on an open and nondiscriminatory basis numerous constituent
services (such as gathering services, storage services, firm and interruptible
transportation services, and standby sales and natural gas balancing services),
and to adopt a new rate making methodology to determine appropriate rates for
those services. To the extent the pipeline company or its sales affiliate makes
natural gas sales as a merchant in the future, it does so pursuant to private
contracts in direct competition with all other sellers, such as POWER; however,
pipeline companies and their affiliates were not required to remain "merchants"
of natural gas, and most of the interstate pipeline companies have become
"transporters only." In subsequent orders, the FERC largely affirmed the major
features of Order 636 and denied a stay of the implementation of the new rules
pending judicial review. By the end of 1994, the FERC had concluded the Order
636 restructuring proceedings, and, in general, accepted rate filings
implementing Order 636 on every major interstate pipeline. However, even through
the implementation of Order 636 on individual interstate pipelines is
essentially complete, many of the individual pipeline restructuring proceedings,
as well as Order 636 itself and the regulations promulgated thereunder, are
subject to pending appellate review and could possibly be changed as a result of
future court orders. POWER cannot predict whether the FERC's orders will be
affirmed on appeal or what the effects will be on its business. In recent years
the FERC also has pursued a number of other important policy initiatives which
could significantly affect the marketing of natural gas. Some of the more
notable of these regulatory initiatives include (i) a series of orders in
individual pipeline proceedings articulating a policy of generally approving the
voluntary divestiture of interstate pipeline owned gathering facilities by
interstate pipelines to their affiliates (the so-called "spin down" of
previously regulated gathering facilities to the pipeline's nonregulated
affiliate), (ii) the completion of a rule making involving the regulation of
pipelines with marketing affiliates under Order No. 497, (iii) the FERC's
ongoing efforts to promulgate standards for pipeline electronic bulletin boards
and electronic data exchange, (iv) a generic inquiry into the pricing of
interstate pipeline capacity, (v) efforts to refine the FERC's regulations
controlling operation of the secondary market for released pipeline capacity,
and (vi) a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage capacity.
Several of these initiatives are intended to enhance competition in natural gas
markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost to do business. As to all of these recent FERC
initiatives, the ongoing, or in some instances, preliminary evolving nature of
these regulatory initiatives makes it impossible at this time to predict their
ultimate impact on POWER's business.
Federal Taxation
The federal government may propose tax initiatives that affect the oil
and natural gas industry, including POWER. Due to the preliminary nature of
these proposals, POWER is unable to determine what effect, if any, the proposals
would have on product demand or POWER's results of operations.
State Regulation
The various states in which POWER conducts activities regulate the
drilling, operation and production of oil and natural gas wells, such as the
method of developing new fields, spacing of wells, the prevention and clean-up
of pollution, and maximum daily production allowables based on market demand and
conservation considerations.
Page 19 of 53
<PAGE> 20
Environmental Regulation
POWER's exploration, development and production of oil and gas,
including its operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. Such
laws and regulations can increase the costs of planning, designing, installing
and operating oil and gas wells. POWER's domestic activities are subject to a
variety of environmental laws and regulations, including, but not limited to,
the Oil Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act ("RCRA"), the Clean Air Act ("CAA")
and the Safe Drinking Water Act ("SDWA"), as well as state regulations
promulgated under comparable state statutes. POWER also is subject to
regulations governing the handling, transportation, storage and disposal of
naturally occurring radioactive materials that are found in its oil and gas
operations. Civil and criminal fines and penalties may be imposed for
non-compliance with these environmental laws and regulations. Additionally,
these laws and regulations require the acquisition of permits or other
governmental authorizations before undertaking certain activities, limit or
prohibit other activities because of protected areas or species and impose
substantial liabilities for cleanup of pollution.
Under the OPA, a release of oil into water or other areas designated by
the statue could result in POWER being held responsible for the costs of
remediating such a release, certain OPA specified damages and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in POWER being held responsible under the CWA for the cost of
remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws,
can impose joint and several and retroactive liability, without regard to fault
or the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions and entities that arrange for the disposal or treatment of,
or transport hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including, but not limited to, crude oil,
gas and natural gas liquids from the definition of hazardous substance, POWER's
operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, there can be no
assurance that the exemption will be preserved in future amendments of the act,
if any.
RCRA and comparable state and local requirements impose standards for
the management, including treatment, storage and disposal of both hazardous and
nonhazardous solid wastes. POWER generates hazardous and nonhazardous solid
waste in connection with its routine operations. From time to time, proposals
have been made that would reclassify certain oil and gas wastes, including
wastes generated during pipeline, drilling and production operations, as
"hazardous wastes" under RCRA which would make such solid wastes subject to must
more stringent handling, transportation, storage, disposal and clean-up
requirements. This development could have a significant impact on POWER's
operating costs. While state laws vary on this issue, state initiatives to
further regulate oil and gas wastes could have a similar impact.
Because oil and gas exploration and production, and possibly other
activities, have been conducted at some of POWER's properties by previous owners
and operators, materials from these operations remain on some of the properties
and in some instances require remediation. In addition, POWER has agreed to
indemnify Sellers of producing properties from whom POWER has acquired reserves
against certain liabilities for environmental claims associated with such
properties. While POWER does not believe the costs to be incurred by POWER for
compliance and remediating previously or currently owned or operated properties
will be material, there can be no guarantee that such costs will not result in
material expenditures.
Page 20 of 53
<PAGE> 21
Additionally, in the course of POWER's routine oil and gas operations,
surface spills and leaks, including casing leaks, of oil or other materials
occur, and POWER incurs costs for waste handling and environmental compliance.
Moreover, POWER is able to control directly the operations of only those wells
for which it acts as the operator. Notwithstanding POWER's lack of control over
wells owned by POWER but operated by others, the failure of the operator to
comply with applicable environmental regulations may, in certain circumstances,
be attributable to POWER.
It is not anticipated that POWER will be required in the near future to
expend amounts that are material in relation to its total capital expenditures
program by reason of environmental laws and regulations, but inasmuch as such
laws and regulations are frequently changed, POWER is unable to predict the
ultimate cost of compliance. There can be no assurance that more stringent laws
and regulations protecting the environment will not be adopted or that POWER
will not otherwise incur material expenses in connection with environmental laws
and regulations in the future.
Other Proposed Legislation
In the past, Congress has been very active in the area of natural gas
regulation. Legislative proposals are pending in various states which, if
enacted, could significantly affect the petroleum industry. POWER cannot predict
which proposals, if any, may actually be enacted by Congress or any of the state
legislatures, and what impact, if any, such proposals may have on POWER's
operations.
IV. ADMINISTRATION
EMPLOYEES
As of September 30, 1998, POWER employed 25 persons of whom 2 are
involved in field operations, 6 are involved in manufacturing, and 17 were
engaged in office and administrative activities.
EXECUTIVE OFFICERS
M.O. Rife III, Chairman; Director
Mr. Rife was born in Fort Worth, Texas in 1939. His family has been in the oil
industry for three generations. His grandfather retired from Gulf Oil as a
production superintendent and his father was an independent oil and gas operator
for over forty years. Mr. Rife attended Texas Christian University and began
working in the oil field when he was eighteen. He worked with his father for 15
years, then started his own company, RIFE OIL PROPERTIES, INC. He has been
involved in the drilling, completion and operating of over 500 wells throughout
the mid-continent Region. Currently Rife Oil Properties, Inc.
operates over 800 wells in Texas.
Guy Pyron, Chief Executive Officer, Director, Executive Committee
Mr. Pyron first became interested in the oil and gas business in the early
1970's as an investor. After drilling several wells he formed Pyron Exploration
and Drilling Corp., "PEDCO," headquartered in Dallas, Texas. From the middle
1970's through the early 1990's his Company was directly involved in drilling
and operating over 500 oil and gas wells throughout the mid-continent region.
During this time, he raised several million dollars for drilling and
exploration, and achieved an overall success ratio of 80%. Mr. Pyron's
experience includes oversight of all operations of an oil and gas company. His
drilling company built its own drilling rigs, and drilled and operated wells for
its own account as well as for numerous independent operators both large and
small. Prior to becoming involved in the oil and gas business, Mr. Pyron was a
successful real estate broker and developer in the Dallas Metroplex. During his
real estate career, he was responsible for developing large parcels of tract
homes. Mr. Pyron also was responsible for
Page 21 of 53
<PAGE> 22
raising equity capital totaling millions of dollars for real estate investment.
In 1994, Mr. Pyron sold his company and moved to Tyler, Texas where he became a
partner with long time friend and Geophysicist, Jack Gallacher. In April 1996
they, along with Geologist Stan Harris, developed 23 Cotton Valley Reef
Prospects. With financial partners from Houston, they leased more than 35,000
acres.
Jack D. Gallacher, Director
Mr. Gallacher has mapped many basins in the U.S. and Canada with seismic data
and subsurface well information. He developed sophisticated proprietary
techniques, which have contributed greatly to a very successful oil and gas
finding career of 53 years. Mr. Gallacher resided in Canada from 1950 to 1975,
where his exploration team Lakeshore Exploration Ltd. had a seventy percent
(70%) success ratio in finding commercial reef production, along with several
oil producing fields. He moved to Tyler, Texas in 1975, and pursued the East
Texas Smackover formation with a fifty percent (50%) wildcatting success ratio,
resulting in seven (7) new Smackover fields and several other sand and carbonate
fields. His companies were Orbit Oil and Gas, and Power Exploration Company,
Inc. During this later period, he conceived and sponsored the development of
several computer programs to aid in cutting the costs of exploration by
identifying the fairways where oil and gas would be found. His data library
includes some 10,000 miles of interpreted seismic data, over 50,000 well logs
and other important data used in making maps, which define prospects in these
areas. Mr. Gallacher recently created two major regional geologic studies in
East Texas that became part of a new program. One of Mr. Gallacher's studies
resulted in defining the currently active Cotton Valley Reef trend that is
attracting attention as a world class gas producing play. Along with other
partners, he raised sufficient capital to identify prospects using 2D seismic,
acquire in excess of 20,000 acres of leases, and place the program with a large
independent oil and gas firm to perform the necessary 3D seismic studies and to
drill the prospects. Drilling the first of the prospects is now in progress.
Messrs. Pyron and Gallacher are now developing and leasing prospects across
Texas, Louisiana and Mississippi under a non-exclusive contract with Cheyenne
Petroleum. This project resulted in 40,000 acres of new leases in 1997. After 3D
seismic evaluation is completed; drilling is scheduled to commence on these
prospects in the third quarter of this year.
Joe Bennett, Chief Operating Officer, Director, Executive Committee
Mr. Bennett was born in Graham, Texas in 1946. His family has been involved in
the oil industry as independent oil and gas operators in North Texas for three
generations. Mr. Bennett attended the University of Texas at Austin studying
petroleum engineering. At the age of sixteen he began working summers in the oil
field for the family business. He has over 30 years of experience in developing
exploration projects, drilling and completing wells, and all phases of
operations. From 1976 to 1980 Mr. Bennett helped organize and start up an
aircraft overhaul business that employed over 100 people. As C.O.O., he was
responsible for all operations and marketing. In 1981 Mr. Bennett became
President and CEO of Bennett Resources, Inc. As head of the family business, he
directed the development of exploration projects in Texas, Oklahoma, Kansas,
Illinois, Kentucky and Tennessee. In 1994 Mr. Bennett joined Rife Oil
Properties, Inc. as VP Operations. His primary responsibilities were to oversee
the company's stripper well acquisition program and to manage all operations of
these properties using new production technology.
Mark S. Zouvas, Chief Financial Officer, Executive Committee
Mr. Zouvas has a BA from the University of California at Berkeley (Accounting
and Real Estate). As a staff auditor with Price Waterhouse, he performed
services for clients in the banking and real estate industries. Mr. Zouvas has
been involved in several venture capital transactions over the past five years.
He is a Licensed Real Estate Broker in California and a Certified Public
Accountant.
Page 22 of 53
<PAGE> 23
FACILITIES
GENERAL
POWER leases approximately 2,500 square feet of office space in Fort
Worth, Texas, for its corporate offices. The 90-day lease is for and requires a
monthly rental payment of approximately $2,000. POWER considers this space
adequate for its present needs. In addition, Oil Retrieval Systems, Inc. located
in Fort Worth, Texas is approximately 16,982 SF with a monthly rental of $4,118.
POWER also has a satellite office in Tyler, along with a small field office and
yard in Corsicana, Texas.
OTHER
For a description of POWER's oil and natural gas properties, oil and
gas reserves, acreage, wells, production and drilling activity. (see
"Business.")
V. GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms
commonly used in the oil and natural gas industry and this Prospectus.
"AMI." Area of Mutual Interest. A federal income tax term used in
allocating geophysical and geological costs to certain properties. A
large-scale geophysical survey may indicate several areas of interest.
The cost of the survey must be allocated to each area of interest, and
when leases are obtained therein, the geophysical costs become part of
the basis of the property.
"Bbl." One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
"Boe." Barrel oil equivalents.
"COMPLETED WELL." The completion of a well or a completed well refers
to the installation of permanent equipment for the production of oil or
natural gas, or in the case of a dry hole, the reporting of abandonment
to the appropriate agency.
"DEVELOPED ACREAGE." Acreage spaced or assignable to productive wells.
"DEVELOPMENT WELL." A well drilled within the proven boundaries of an
oil or natural gas reservoir with the intention of completing the
strategraphic horizon known to be productive.
"DRY HOLE." An exploratory or development well found to be incapable of
producing either oil and natural gas in sufficient economic quantities
to justify completion of a well.
"EXPLORATORY WELL." A well drilled within no proven boundaries of an
oil or natural gas reservoir.
"GROSS ACRE." An acre in which a working interest is owned.
"GROSS WELL(S)." A gross well is a well in which a working interest is
owned. The number of gross wells is the total number of wells in which
working interests are owned.
"INFILL DRILLING." Drilling of a well between known producing wells to
better exploit the reservoir.
"Mcf." One thousand cubic feet of natural gas.
"NET ACRE(S)." A net acre is deemed to exist when the sum of fractional
ownership working interests in gross acres equals one. The total of net
acres is the sum of the fractional working interests owned in gross
acres expressed as whole numbers and percentages thereof.
Page 23 of 53
<PAGE> 24
"NET WELL(S)." A net well is deemed to exist when the sum of the
fractional ownership working interests in gross wells equals one. The
number of net wells is the sum of the fractional working interests
owned in gross wells expressed as whole numbers and percentages
thereof.
"OVERRIDING ROYALTY INTEREST." An interest in an oil and/or natural gas
property entitling the owner to a share of oil and natural gas
production free of costs of production.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES." The present value of
estimated future net revenues is an estimate of future net revenues
from a property at its acquisition date, at December 31, 1997, or as
otherwise indicated, after deducting production and ad valorem taxes,
future capital costs and operating expenses, but before deducting
federal income taxes. The future net revenues have been discounted at
an annual rate of 10% to determine their "present value." The present
value is shown to indicate the effect of time on the value of the net
revenue stream and should not be construed as being the fair market
value of the properties. Estimates have been made using constant oil
and natural gas prices and operating costs at the acquisition date, at
December 31, 1997, or as otherwise indicated. POWER believes that the
present value of estimated future net revenues before income taxes,
while not in accordance with generally accepted accounting principles,
is an important financial measure used by investors and independent oil
and natural gas producers for evaluating the relative significance of
oil and natural gas properties and acquisitions.
"PRODUCING WELL," "PRODUCTION WELL" OR "PRODUCTIVE WELL." A well that
is producing oil or natural gas or that is capable of production.
"PROVED BEHIND-PIPE." Proved reserves that are currently behind the
pipe of an existing well that are expected to be productive due to the
wells log characteristics and the analogous production of other wells
in the immediate vicinity.
"PROVED DEVELOPED RESERVES." Proved developed reserves are those
quantities of oil, natural gas and NGLs that, upon analysis of
geological and engineering data, are expected with reasonable certainty
to be recoverable in the future from known oil and natural gas
reservoirs under existing economic and operating conditions. This
classification includes: (a) proved developed producing reserves, which
are those expected to be recovered from currently producing zones under
continuation of present operating methods; and (b) proved developed
nonproducing reserves, which consist of (i) reserves from wells that
have been completed and tested but are not yet producing due to lack of
market or minor completion problems that are expected to be corrected,
and (ii) reserves currently behind the pipe in existing wells which are
expected to be productive due to both the well log characteristics and
analogous production in the immediate vicinity of the well.
"PROVED NONPRODUCING RESERVES." Proved nonproducing reserves include
proved behind-pipe reserves and proved undeveloped reserves.
"PROVED RESERVES." The estimated quantities of crude oil, natural gas
and NGLs which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.
"PROVED UNDEVELOPED RESERVES." Proved reserves that may be expected to
be recovered from existing wells that will require a relatively major
expenditure to develop or from undrilled acreage adjacent to productive
units that are reasonably certain of production when drilled.
"UNDEVELOPED ACREAGE." As defined by the Commission, undeveloped
acreage is considered to be lease acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and natural gas regardless of whether such
acreage contains proved reserves. in connection herewith.
Page 24 of 53
<PAGE> 25
"WORKING INTEREST." The operating interest that gives the owner the
right to drill, produce and conduct operating activities on the
property and to a share of production, subject to all royalties,
overriding royalties and other burdens and to all costs of exploration,
development and operations and all risks
VI. LEGAL PROCEEDINGS
A former employee of Oil Retrieval Systems, Inc. (a subsidiary of the
Company) has filed a sexual harassment complaint with the City of Fort Worth.
The Company agreed to engage in mediation which resulted in the Company paying
$20,000 in exchange for a full and final release from the employee.
In other legal matters, the Company has filed an administrative claim
with the Bankruptcy Court to recover $30,000 from Southern Equipment.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last 3 months of the fiscal year ended September 30, 1998,
the only matters submitted by POWER to a vote of its shareholders through the
solicitation of proxies or otherwise were those submitted at the Stockholder's
Annual Meeting held on July 24, 1998. The company's shareholders voted to amend
the corporation's Articles of Incorporation to change its name from Titan Energy
Corporation to Power Exploration, Inc. This follows the decision by the board,
which was ratified by shareholders, to acquire certain assets of Power
Exploration Company, Inc. for a total of two million common shares. Separately,
the company's shareholders voted to change the company's domicile from the state
Colorado to the state of Nevada. As a result of the change in domicile, the
following persons were appointed to the board of directors of Power
Exploration., Inc.: M. O. Rife, III, Guy Pyron, Jack Gallacher, Joe B. Bennett,
and Thom Schliem. Shareholders approved the proposal to amend the Articles of
Incorporation and authorized 50 million shares of common stock at par value of
$0.02. The shareholders also approved the proposal to amend the Articles of
Incorporation and approved authorization of 10 million non-voting, 8 percent
cumulative preferred stock.
VII. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
POWER's Common Stock is currently quoted on the Electronic Bulletin
Board under the symbol "PWRX," but there is limited trading in the Common Stock.
The following table sets forth the high and low bid prices from October 1, 1997
through September 30, 1998, based upon quotations periodically published on the
OTC. All price quotations represent prices between dealers, without retail
mark-ups, mark-downs or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal Year ended September 30, 1997
October, November, & December 7.63 5.00
January, February, & March 1.75 0.44
April, May, & June 1.75 0.43
July, August, & September 3.57 1.06
Fiscal Year ended September 30, 1998
October, November, & December 1.88 0.63
January, February, & March 1.75 0.44
April, May, & June 1.75 0.43
July, August, & September 0.95 0.40
</TABLE>
Page 25 of 53
<PAGE> 26
The bid price for the Common Stock was $0.50 on December 1, 1998. The
above quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily represent actual transactions.
POWER is attempting to comply with certain listing criteria, including
minimum equity, share price, public float and market maker requirements and
intends to apply for inclusion of its Common Stock on The Nasdaq Stock Market
National Market ("Nasdaq National Market") or Small Cap Market when POWER is
able to satisfy such requirements. POWER cannot insure that it will be
successful in any application to have the Common Stock quoted on The Nasdaq
National Market or Small Cap Market. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
SHAREHOLDERS
According to the records of POWER's transfer agent, there were 2,057
holders of record of the Common Stock on September 30, 1998 (including nominee
holders such as banks and brokerage firms who hold shares for beneficial
holders).
DIVIDENDS
POWER has not paid any cash dividends on its Common Stock, and does not
anticipate paying cash dividends on its Common Stock in the next year. POWER
anticipates that any income generated in the foreseeable future will be retained
for the development and expansion of its business. Future dividend policy is
subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, debt service, capital
requirements, business conditions, the financial condition of POWER and other
factors that the Board of Directors deems relevant.
SELECTED FINANCIAL DATA
The following table presents selected historical financial data for
POWER. The financial data should be read in conjunction with POWER's financial
statements, the notes thereto and the other financial information, including
proforma information, included elsewhere herein. In the opinion of management of
POWER, the data presented reflect all adjustments considered necessary for a
fair presentation of the results for such periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
Sept 30, 98 Sept 30, 97
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas $ 47,138 $ 22,714
Other 398,970 90,000
Total revenues 446,108 112,714
Oil & Gas Expenses:
Oil and natural gas production 505,642 155,948
Depreciation, depletion and amortization 4,394 826
Other Costs and Expenses:
General and administrative 2,171,255 547,173
Interest expense 445,633 70,295
Total Expenses 2,616,888 617,468
Income (loss) before income taxes (2,695,817) (628,961)
Income taxes 0 0
Net income (loss) (2,695,817) (628,961)
Net income (loss) per share (0.26) (0.17)
Weighted average common and common equivalent shares outstanding. 10,435,748 3,720,412
</TABLE>
Page 26 of 53
<PAGE> 27
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
Sept 30, 98 Sept 30, 97
<S> <C> <C>
Balance Sheet Data:
Current assets $ 738,635 $ 693,309
Oil and gas properties, net 6,703,781 6,560,045
Total assets 7,707,036 7,559,509
Current liabilities 1,741,025 2,170,507
Long-term debt 0 0
Stockholders' equity 5,966,011 5,389,002
</TABLE>
VIII. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Years Ended September 30, 1997 and September 30, 1998
Revenues
Oil and gas sales increased $24,424, or 108%, to $47,138 for the fiscal
year ended September 30, 1998 from $22,714 for the fiscal year ended September
30, 1997. Equipment sales increased $308,970, or 343%, to $398,970 for the
fiscal year ended September 30, 1998 from $90,000 for the fiscal year ended
September 30, 1997. Even with these large increases in revenue, income was far
short of expenses. To date, POWER has been putting the necessary components in
place to create ongoing income, and these efforts should begin to be realized
during the 1999 fiscal year.
Costs and Expenses
POWER's general and administrative expenses increased $1,624,082, or
297%, to $2,171,255 for the fiscal year ended September 30, 1998 from $547,173
for the fiscal year ended September 30, 1997. While this is a large increase,
general and administrative expenses as a percentage of net sales are essentially
flat at 487% for 1998 and 486% for 1997. The change in the dollar amount of
general and administrative expenses was due primarily to increased consulting
fees which accounted for 36% of all general and administrative expenses, and 29%
of total expenses. Other major components of general and administrative expenses
included officer's salaries at 7%, amortization at 7%, non-officer salaries at
5%, and legal fees at 5%. Separately, lease operating expenses increased
$176,338 to $228,632 for 1998 from $52,294 in 1997 resulting from the addition
of new leased properties.
Net Income (Loss)
Net loss for the fiscal year ended September 30, 1998 was $2,695,817,
or $.26 per share, compared to a loss of $628,961, or $.17 per share, for the
fiscal year ended September 30, 1997. This $2,066,856 increase was primarily the
result of the increase in general and administrative expenses as more fully
described above. Net cash used in operating activities was $877,942 for the
fiscal year ended September 30, 1998, and $231,206 for the fiscal year ended
September 30, 1997, representing an increase of 280% in cash usage. All cash
activities of the business produced a $34,457 increase in cash for the fiscal
year ended September 30, 1998, as compared to a $87,526 increase for the fiscal
year ended September 30, 1997.
DESCRIPTION OF BUSINESS
POWER, along with its wholly owned subsidiaries, is a developmental
global resource company engaged in oil and gas exploration. In addition to
exploration and development of new properties, POWER
Page 27 of 53
<PAGE> 28
redevelops currently producing oil and gas fields, and researches and develops
exploration and recovery technologies, including the manufacture of new,
cutting-edge oil recovery equipment.
POWER focuses its exploration on its significant holdings in East
Texas, Louisiana, and Australia. The Company is developing production recovery
of existing fields in Corsicana, Texas and other areas of the region where
fields have been depleted by conventional lifting methods, but where
significant, proven reserves of oil still remain. Utilizing the latest
technology, these fields can become commercially viable and provide long-term
revenue streams. POWER also has plans to utilize new technology in its primary
exploration efforts, especially related to its Australian concession and the
East Texas basin.
POWER has identified two hydrocarbon detection exploration methods that
have consistently delivered strong results. These technologies could
significantly reduce the risk associated with exploration thereby creating
greater economic potential. They have both been extensively tested and
analogized against producing fields to verify accuracy.
Additional recovery methods to be employed by POWER have also yielded
positive results in recent application tests. The first process involves the use
of a controlled, under-balanced horizontal drilling technique in retrieving
secondary production from fields whose depletion curves have flattened. This
process has been used extensively in the higher-pressure environments, like the
Austin-Chalk, however it has not been widely applied to shallow depth, depleted
reservoirs.
A supplemental process to the horizontal drilling methods described
above is the use of an alkaline-surfactant aided polymer flood. Water floods
have been the predominate method for retrieving oil from depleted fields. A
polymer flood builds a wall, which coupled with the alkaline-surfactant, helps
"push" oil from the reservoir into the well bore. The spacing and permeability
characteristics of POWER's Corsicana field are prime candidates for this
process. The presence of the horizontal well creates a larger well bore in which
fluid (oil) can enter and can increase production ten fold to that of a vertical
well.
After being a small energy company for a number of years and prior to
the acquisition of its core businesses, POWER had no meaningful financial
presence and was inactive with respect to generating income. Prior to its
acquisition of the core businesses, POWER had total assets of less than $10,000.
Net income for the year ending September 30, 1996 was $0.
LIQUIDITY AND CAPITAL RESOURCES
General
POWER's working capital deficit on September 30, 1998 was $1,002,390
compared to a deficit of $1,477,198 on September 30, 1997. This $474,808
increase in working capital resulted primarily from the reduction in debt to
related parties; this debt was eliminated through the issuance of shares of the
company's stock. POWER had a current ratio of 0.4 for the fiscal year ended
September 30, 1998, as compared to 0.8 for the fiscal year ended September 30,
1997. A comparison of other ratios that measure financial performance show no
change in the quick ratio of 0.2, net worth to assets at 0.8 and 0.7
respectively, and debt to net worth of (2.4) and (1.9) respectively. This data
all highlights POWER's need to raise additional capital, to convert some
short-term debt into long-term debt, or to incur long-term debt.
Long-Term Debt
On September 30, 1998, POWER had no long-term debt. Although 87% of
POWER's assets are comprised of oil and gas properties that are not a current
asset, all of POWER's borrowings have been short term in nature. This has
aggravated POWER's cash position and produced lower measures of financial
performance than would otherwise be possible.
Page 28 of 53
<PAGE> 29
Sale of Equity
POWER was indebted to Benchmark Equity Group, Inc. under terms of a
line of credit promissory note dated May 7, 1998 in the amount of $500,000. This
line of credit had an interest rate of 12% and a maturity date of October 7,
1998. At September 30, 1998, $500,000 was outstanding under the note. The note
was paid through the issuance of 500,000 common shares ($1.00 of debt per share)
on October 7, 1998. The note was collateralized by all fixed, real, tangible and
intangible assets owned by POWER, and the collateral was released upon the
subsequent conversion of the note.
Stock Issued for Services
During the 1998 fiscal year, POWER issued 3,339,372 shares of stock as payment.
Of these shares, 1,100,000 shares were for services rendered, 1,000,000 shares
were for the conversion of a note payable, and 1,239,372 shares were for the
conversion of debentures.
Need to Raise Additional Capital
The growth of POWER's business will require substantial capital on a
continuing basis. There is no assurance that any such required additional funds
would be available on satisfactory terms and conditions, if at all. There is
also no assurance that POWER will not pursue, from time to time, opportunities
to acquire oil and natural gas properties and businesses that may utilize the
capital currently expected to be available for its present operations. The
amount and timing of POWER's future capital requirements, if any, will depend
upon a number of factors, including drilling costs, transportation costs,
equipment costs, marketing expenses, staffing levels and competitive conditions,
and any purchases or dispositions of assets, many of which are not within
POWER's control. Failure to obtain any required additional financing could
materially adversely affect the growth, cash flow and earnings of POWER. In
addition, POWER's pursuit of additional capital could result in the incurrence
of additional debt or potentially dilutive issuances of additional equity
securities.
INFLATION AND CHANGING PRICES
The impact of inflation, as always, is difficult to assess. In 1997 and
through the first quarter of 1998, POWER has experienced a weakness in prices
received for its oil and natural gas production. POWER cannot anticipate whether
the present level of inflation will remain, however, a sudden increase in
inflation and/or an increase in operating costs or drilling costs coupled with a
continuation of low oil prices could have an adverse effect on the operations of
POWER.
YEAR 2000 COMPLIANCE
POWER's management has conducted a review of its information systems
and related data-processing activities to assess its exposure to the Year 2000
issue. As a result, POWER has upgraded the operating software on some of its
computers to a Year 2000 compliant system. POWER has purchased an upgrade to its
accounting software that is Year 2000 compliant; this upgrade will be installed
and operational on or before March 31, 1999.
POWER currently uses Year 2000 compliant engineering evaluation
software for acquisition analysis, as well as internal engineering applications.
POWER's spreadsheet and word processing software is also Year 2000 compliant.
Page 29 of 53
<PAGE> 30
POWER has potential Year 2000 exposure with regard to its third party
relationships and services including its bank and bank accounts and other vendor
and/or service providers who utilize computers. Though POWER has no control over
Year 2000 compliance implementation by these parties, POWER has inquired and
been assured that all of POWER's service providers currently are, or will be
Year 2000 compliant.
ITEM 7 FINANCIAL STATEMENTS
Page 30 of 53
<PAGE> 31
POWER EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
<PAGE> 32
POWER EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
INDEX
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 22
</TABLE>
<PAGE> 33
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
POWER EXPLORATION, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of POWER
EXPLORATION, INC. AND SUBSIDIARIES as of September 30, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity, 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 consolidated financial position of POWER
EXPLORATION, INC. AND SUBSIDIARIES as of September 30, 1998 and 1997 and the
consolidated results of its operations and its cash flows for the years then
ended 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 ____ to the
financial statements, the Company has suffered recurring losses from operations
and its limited capital resources 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 ______. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
October 30, 1998
Except for Notes 7 and 14 as to
which the date is January 11, 1999
<PAGE> 34
POWER EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 129,901 $ 95,444
Accounts Receivable 11,477 35,482
Receivable - Related Party 121,253 --
Inventory 352,462 553,154
Prepaid Expenses 123,542 9,229
------------ ------------
Total Current Assets 738,635 693,309
------------ ------------
OIL AND GAS PROPERTIES, FULL COST METHOD
Properties being amortized 5,396,496 5,050,000
Properties not subject to amortization 1,312,505 1,510,871
------------ ------------
6,709,001 6,560,871
Less: Accumulated depreciation, depletion
and amortization (5,220) (826)
------------ ------------
Net Oil and Gas Properties 6,703,781 6,560,045
------------ ------------
PROPERTY AND EQUIPMENT, Net of Accumulated
Depreciation of $46,037 and $12,634 250,774 228,706
------------ ------------
OTHER ASSETS 13,846 77,449
------------ ------------
TOTAL ASSETS $ 7,707,036 $ 7,559,509
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 416,217 $ 100,707
Customer Deposits 110,000 107,300
Advances Payable 22,500 --
Debentures Payable, net of unamortized discount
of $7,692 and $130,500 242,308 652,500
Notes Payable 900,000 --
Notes Payable - Related Party 50,000 1,310,000
------------ ------------
Total Liabilities 1,741,025 2,170,507
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.02 par value; 15,000,000 shares
Authorized, 11,060,925 and 7,721,553 shares
issued and outstanding, respectively 221,218 154,431
Additional Paid-in Capital 10,415,872 7,209,833
Accumulated Deficit (4,671,079) (1,975,262)
------------ ------------
Total Stockholders' Equity 5,966,011 5,389,002
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,707,036 $ 7,559,509
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- 2 -
<PAGE> 35
POWER EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUE
Oil and Gas Sales $ 47,138 $ 22,714
Equipment Sales 398,970 90,000
------------ ------------
446,108 112,714
------------ ------------
COST OF REVENUE
Lease Operating 228,632 52,294
Production Taxes 1,949 1,052
Depreciation, Depletion and Amortization 4,394 826
Cost of Equipment Sales 290,062 102,602
------------ ------------
525,037 156,774
------------ ------------
GROSS PROFIT (78,929) (44,060)
------------ ------------
EXPENSES
General and Administrative 2,171,255 547,173
Interest Expense 445,633 70,295
------------ ------------
TOTAL EXPENSES 2,616,888 617,468
------------ ------------
LOSS BEFORE OTHER INCOME AND
PROVISION FOR INCOME TAXES (2,695,817) (661,528)
OTHER INCOME -- 32,567
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,695,817) (628,961)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (2,695,817) $ (628,961)
============ ============
LOSS PER SHARE $ (.26) $ (.17)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,435,748 3,720,412
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- 3 -
<PAGE> 36
POWER EXPLORATION, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - September 30, 1996 1,886,851 $ 1,301,951 $ -- $(1,305,780) $ (3,829)
Adjustment to Par Value -- (1,264,214) 1,264,214 -- --
Issuance of Shares for Oil
Retrieval Systems, Inc. 2,500,000 50,000 280,000 -- 330,000
Issuance of Shares for Oil
Seeps, Inc. 400,000 8,000 1,192,000 -- 1,200,000
Adjustment to Record Subsidiaries -- -- 46,213 (40,521) 5,692
Issuance of Shares for Properties 2,000,000 40,000 3,710,000 -- 3,750,000
Issuance of Shares in Conversion of Debt 434,702 8,694 458,306 -- 467,000
Adjustment for Discount on Bonds -- -- (93,400) -- (93,400)
Issuance of Shares for Services 500,000 10,000 352,500 -- 362,500
Net Loss -- -- -- (628,961) (628,961)
----------- ----------- ----------- ----------- -----------
Balance - September 30, 1997 7,721,553 154,431 7,209,833 (1,975,262) 5,389,002
Issuance of Shares for Services 1,100,000 22,000 665,500 -- 687,500
Issuance of Shares in Conversion of Note Payable 1,000,000 20,000 1,323,381 -- 1,343,381
Issuance of Shares in Conversion of Debentures 1,239,372 24,787 696,803 -- 721,590
Issuance of Warrants -- -- 520,355 -- 520,355
Net Loss -- -- -- (2,695,817) (2,695,817)
----------- ----------- ----------- ----------- -----------
Balance - September 30, 1998 11,060,925 $ 221,218 $10,415,872 $(4,671,079) $ 5,966,011
=========== =========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- 4 -
<PAGE> 37
POWER EXPLORATION, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,695,817) $ (628,961)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Interest Expense 290,233 --
Bad Debt Expense 47,180 --
Depreciation, Depletion and Amortization 37,797 13,460
Amortization of Loan Fees 187,065 --
Amortization of Discount on Bonds Payable 72,791 93,400
Write-Down of Inventory 127,380 --
Issuance of Shares for Services 708,205 362,500
(Increase) in Receivables (23,175) (35,482)
(Increase) in Receivable - Related Party (121,253) --
(Increase) Decrease in Inventory 73,312 (223,154)
(Increase) in Prepaid Expenses (4,358) (9,229)
Increase in Accounts Payable and Accrued Expenses 397,498 100,707
Increase in Customer Deposits 2,700 107,300
Increase (Decrease) in Advances Payable 22,500 (11,747)
----------- -----------
Net Cash (Used) in Operating Activities (877,942) (231,206)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Oil and Gas Properties 200,000 --
Cost of Oil and Gas Properties (348,130) (310,871)
Purchase of Property and Equipment (55,471) (241,340)
Adjustment for Acquisition of Subsidiaries -- (9,057)
----------- -----------
Net Cash (Used) in Investing Activities (203,601) (561,268)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Borrowings 1,050,000 80,000
Repayment of Borrowings (110,000) (70,000)
Net Proceeds From Sale of Debentures 176,000 870,000
----------- -----------
Net Cash Provided by Financing Activities 1,116,000 880,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 34,457 87,526
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 95,444 7,918
----------- -----------
CASH AND CASH EQUIVALENTS - SEPTEMBER 30, $ 129,901 $ 95,444
=========== ===========
CASH PAID DURING THE YEAR FOR:
Interest Expense $ 4,581 $ --
Income Taxes -- --
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- 5 -
<PAGE> 38
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is engaged primarily in the fields of acquisition,
development, exploration for and sale of oil and gas, and the
construction and sale of oil and gas extraction equipment.
Basis of Consolidation
The consolidated financial statements include the accounts of
Power Exploration, Inc. ("Power", formerly Titan Energy Corp.,
Inc.) and its 100% owned subsidiaries, Oil Retrieval Systems,
Inc. ("ORS"), acquired May 16, 1997 and Oil Seeps, Inc.
("OSI") acquired June 17, 1997. Accordingly, all references
herein to Power or the "Company" include the consolidated
results of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents.
Inventory
Inventory, consisting of parts and materials used in the
construction of oil extraction equipment, are stated at the
lower of cost or market, cost being determined by the average
cost method.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil
and gas property acquisition, exploration, development, and
production.
Capitalization Policies: All oil and gas property acquisition,
exploration, and development costs are capitalized as
incurred. There were no internal costs directly attributable
to such activities. Net capitalized costs of unproved property
and exploration well costs are reclassified as proved property
and well costs when related proved reserves are found. Costs
to operate and maintain wells and field equipment are expensed
as incurred.
Amortization Policies: Except for cost of (1) unevaluated,
unproved properties and (2) major development projects in
progress, all capitalized oil and gas property costs, net of
prior accumulated amortization, are amortized by country using
the unit-of-production method based on proved reserves. The
amortization base includes estimated future costs to develop
proved reserves and estimated future dismantlement,
reclamation, and abandonment costs, net of equipment salvage
values.
- 6 -
<PAGE> 39
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment Policies: Costs not being amortized are
periodically assessed for impairment. Any impairment is added
to the amortization base. Net capitalized costs of oil and gas
properties, less related deferred income taxes are limited, by
country, to the sum of (1) future net revenues (using prices
and cost rates as of the balance sheet date) from proved
reserves and discounted at ten percent per annum, plus (2)
costs not being amortized, less (3) related income tax
effects. Excess costs are charged to proved property
impairment expense.
Sales and Retirements Policies: No gain or loss is recognized
on the sale of oil and gas properties unless nonrecognition
would significantly alter the relationship between capitalized
costs and remaining proved reserves for the affected
amortization base. When gain or loss is not recognized, the
amortization base is reduced by the amount of sales proceeds.
Revenue Recognition
Revenues from the sale of oil and gas production are
recognized when title passes, net of royalties. Natural gas
revenues are generally recognized under the entitlements
method of accounting for gas imbalances, i.e., monthly sales
quantities that do not match the Company's entitled share of
joint production. Entitled quantities in excess of sales
quantities are recorded as a receivable from joint venture
partners. The receivable is carried at the lower of current
market price or the market price at the time the imbalance
occurred. Sales quantities in excess of entitled quantities
are recorded as deferred revenue carried at the gas market
price received at the time the imbalance occurred.
Hedging
The Company may enter into derivative contracts to hedge the
risk of future oil and gas price fluctuations. Such contracts
may either fix or support oil or gas prices or limit the
impact of price fluctuations with respect to the Company's
sales of oil and gas. Gains and losses on such hedging
activities are recognized in oil and gas revenues when the
hedged production is sold. Hedged oil and gas prices used in
computing the year-end standardized measure of discounted
future net cash flows relating to proved oil and gas reserves
reflect the estimated effects of hedging contracts existing at
year end.
Depreciation and Amortization
Property and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful
lives.
- 7 -
<PAGE> 40
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The costs of maintenance and repairs are charged to expense
when incurred; costs of renewals and betterments are
capitalized. Upon the sales or retirement of property and
equipment, the cost and related accumulated depreciation are
eliminated from the respective accounts and the resulting gain
or loss is included in operations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and short-term debt. The carrying
amounts of cash, accounts receivable, accounts payable and
short-term debt approximate fair value due to the highly
liquid nature of these short term instruments.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances
indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be
held and used are recognized based on the fair value of the
assets and long-lived assets to be disposed of are reported at
the lower of carrying amount of fair value less cost to sell.
Income Taxes
Provisions for income taxes are based on taxes payable or
refundable for the current year and deferred taxes on
temporary differences between the amount of taxable income and
pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax
rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled
as prescribed in FASB Statement No. 109, Accounting for Income
Taxes. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision
for income taxes.
Concentration of Credit Risk
The Company places its cash in what it believes to be
credit-worthy financial institutions. However, cash balances
may exceed FDIC insured levels at various times during the
year.
- 8 -
<PAGE> 41
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Per Share of Common Stock
Per share amounts have been computed based on the average
number of common shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board
issued a new statement titled "Earnings Per Share" (SFAS No.
128). This statement is effective for both interim and annual
periods ending after December 15, 1997 and specifies the
computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common
stock or potential common stock. All prior-period EPS data
presented has been restated to conform with the provisions for
SFAS No. 128.
Potential common stock has been excluded from the computation
of earnings per share since the inclusion of options and
warrants would be antidilutive.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
a new statement titled "Reporting Comprehensive Income" (SFAS
No. 130). This statement is effective for both interim and
annual periods beginning after December 15, 1997. This
statement uses the term "comprehensive income" to describe the
total of all components of comprehensive income, including net
income. This statement uses the term "other comprehensive net
income" to refer to revenues, expenses, gains or losses that
under generally accepted accounting principles are included in
comprehensive income, but excluded from net income.
The impact of SFAS No. 130 in the financial statements, had it
been adopted as of September 30, 1998 and 1997, is not
applicable, since the Company had no other comprehensive
income.
NOTE 2 - INVENTORY
Inventory at September 30 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw Material $ 225,604 $ 414,946
Work in Process 126,858 138,208
---------- ----------
$ 352,462 $ 553,154
========== ==========
</TABLE>
- 9 -
<PAGE> 42
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Shop Equipment $ 30,852 $ --
Furniture and Office Equipment 22,887 11,340
Machinery 243,072 230,000
---------- ---------
296,811 241,340
Less Accumulated Depreciation 46,037 12,634
---------- ---------
Property and Equipment - Net $ 250,774 $ 228,706
========== =========
Depreciation Expense Recorded in
the Statement of Operations $ 33,403 $ 12,634
========== =========
</TABLE>
NOTE 4 - OIL AND GAS PROPERTIES NOT SUBJECT TO AMORTIZATION
The Company's oil and gas properties are located in the United
States and Australia. Amortization expense was $1.07 and $0.62
per Bbl production during the years ended September 30, 1998 and
1997, respectively.
The $1,312,505 and $1,510,871 cost of unproved oil and gas
leases held at September 30, 1998 and 1997, respectively, have
been excluded in computing amortization of the full cost pool.
Costs excluded from amortization consist of the following at
September 30:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Acquisition Costs $ 1,200,000 $ 1,510,871
Exploration Costs 112,505 --
----------- -----------
$ 1,312,505 $ 1,510,871
=========== ===========
</TABLE>
All excluded costs at September 30, 1998 are located in
Australia.
At September 30, 1998, a determination cannot be made about the
extent of oil reserves that should be classified as proved
reserves for this prospect. Consequently, the associated
property costs and exploration costs have been excluded in
computing amortization of the full cost pool. The Company
estimates that amortization of these costs will begin during the
calendar year 1999.
- 10 -
<PAGE> 43
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 5 - PARTICIPATION AGREEMENT
The Company had entered into a participation agreement in the
development of the Revilo Glorieta Unit situated in Scurry
County, Texas. Under this agreement, the Company received an 18%
net revenue interest in the property, with no liability for
expenses except as described below. The agreement was effective
January 15, 1997 and was terminated by the Company during the
year ended September 30, 1998.
The agreement called for the Company to furnish three oil
retrieval systems to facilitate production on the property in
order to earn its 18% net revenue interest. The Company bore no
expense in the operation of the units, except to provide
maintenance expense on the equipment.
NOTE 6 - NOTES PAYABLE
Notes payable at September 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- -----------
<S> <C> <C>
a) Note Payable - Related Party $ 50,000 $ --
b) Note Payable - Bank of Commerce 100,000 --
c) Note Payable - Business Exchange Investments, Inc. 250,000 --
d) Note Payable - Dallas Cady Family, LLP 50,000 --
e) Note Payable - Benchmark Equity Group, Inc. 500,000 --
f) Note Payable - Related Party -- 10,000
g) Note Payable - Related Party -- 1,300,000
--------- -----------
$ 950,000 $ 1,310,000
========= ===========
</TABLE>
a) The Company is indebted to M.O. Rife IV under terms of a
promissory note dated April 7, 1998 in the amount of $50,000.
Mr. Rife is the son of a principal stockholder of the
Company. Terms of the note provide for interest at a rate of
12% per annum, with an original maturity date of October 6,
1998. The maturity date of the note has been extended to
January 31, 1999.
b) The Company is indebted to the Bank of Commerce under terms
of a promissory note dated July 29, 1998 in the amount of
$100,000. Terms of the note provide for interest at a rate of
9.5% per annum, with an original maturity date of August 27,
1998. The note has been verbally extended and was paid in
full on October 22, 1998. The note has been guaranteed by a
principal stockholder of the Company.
c) The Company is indebted to Business Exchange Investment, Inc.
under terms of a promissory note dated September 15, 1998.
Terms of the note provide for interest at a rate of 10% per
annum with a maturity date of January 15, 1999. The note is
collateralized by 100% of the shares of OSI (see Note 1).
- 11 -
<PAGE> 44
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 6 - NOTES PAYABLE (continued)
d) The Company is indebted to Dallas Cady Family, LLP under terms
of a promissory note dated September 15, 1998 in the amount of
$50,000. Terms of the note provide for interest to be paid in
the form of 80,000 common stock purchase warrants with an
exercise price of $1.00 per share. The warrants have been valued
at $44,160. The maturity of the note is January 15, 1999.
e) The Company is indebted to Benchmark Equity Group, Inc. under
terms of a line of credit promissory note dated May 7, 1998 in
the amount of $500,000. Outstanding advances bear interest at
12% per annum commencing July 1, 1998. The maturity date is
October 7, 1998. At September 30, 1998, $500,000 is outstanding
under the note. The note is payable in shares of common stock of
the Company at a price of $1.00 of debt per share. The note was
paid through the issuance of 500,000 common shares on October 7,
1998.
f) At September 30, 1997, the Company was indebted to a stockholder
for $10,000 unpaid principal on an $80,000 promissory note. This
amount was repaid on November 1, 1997.
g) At September 30, 1997, the Company was indebted to the same
stockholder as in item (f) above under terms of a promissory
note in the amount of $1,300,000, dated June 11, 1997. The note
was due on November 11, 1997. The Company defaulted on payment
of the note and the note was satisfied through the issuance of
1,000,000 shares of the Company's common stock, which had been
held in trust as collateral.
NOTE 7 - DEBENTURES PAYABLE
a) During July and August 1997, the Company sold $1,250,000 of 12%
Convertible Debentures, in accordance with Regulation D of the
Securities Act of 1933, for net proceeds of $870,000.
The debentures bore interest at 12% per annum and were due and
payable on July 31, 1998, if not converted earlier. Interest was
payable quarterly.
The principal amount of the debentures is convertible at the
holders option anytime 28 days after the closing date into
shares of the Company's common stock at a conversion price for
each share of Company common stock equal to the lower of (a) 80%
of the closing bid price of the common stock for the business
day immediately preceding the date of receipt by the Company and
notice of conversion or (b) 80% of the average of the closing
bid price of the common stock for the 5 business days
immediately preceding the closing date.
Costs of $130,000 incurred in connection with the issuance of
these debentures are being amortized over the life of the
debentures. Unamortized issuance costs are charged to additional
paid-in capital as debentures are converted into common stock.
- 12 -
<PAGE> 45
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 7 - DEBENTURES PAYABLE (continued)
As of September 30, 1997, $467,000 principal amount of
debentures had been converted into 434,702 shares of common
stock.
During the year ended September 30, 1998, the remaining $783,000
principal amount of debentures was converted into 1,239,372
shares of common stock.
Accrued interest of $38,607 has been included in the above
conversions.
b) On October 22, 1997, the Company sold $250,000 of 12%
Convertible Debentures in accordance with Regulation D of the
Securities Act of 1933, for net proceeds of $176,000. Conversion
terms are similar to those of the debentures described in (a)
above.
The Company and the buyer of the debenture were in disagreement
concerning the validity of the debenture. On October 29, 1998,
the parties reached an agreement. The agreement provides that
the buyer will remit an additional amount of $150,000 to the
Company. The Company will then issue 650,000 shares of common
stock to convert the total advances of $400,000, plus all
accrued interest, into equity. This conversion occurred on
October 30, 1998.
NOTE 8 - WARRANTS
At September 30, 1998, the Company had the following common
stock purchase warrants outstanding:
a) 100,000 warrants, each of which entitles the registered
holder thereof to purchase one share of Common Stock,
exercisable at any time on or before August 31, 2002 at an
exercise price of $2.50 per share (subject to customary
anti-dilution adjustments). The exercise price exceeded the
market price of the underlying common stock on the date of
issuance. The warrants were issued in connection with the
placement of the debt described in Note 7(a).
b) 80,000 warrants, each of which entitles the registered
holder thereof to purchase one share of Common Stock,
exercisable at any time on or before August 31, 2003 at an
exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued in
connection with the debt described in Note 6(d) and have
been valued at $44,160.
- 13 -
<PAGE> 46
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 8 - WARRANTS (continued)
c) 425,000 warrants, each of which entitles the registered
holder thereof to purchase one share of Common Stock,
exercisable at any time on or before October 31,2003 at an
exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued as a
fee in connection with the debt described in Note 6(e) and
have been valued at $234,600.
d) 75,000 warrants, each of which entitles the registered
holder thereof to purchase one share of Common Stock,
exercisable at any time on or before October 31, 2003 at an
exercise price of $2.50 per share (subject to customary
anti-dilution adjustments). The warrants were issued as a
fee in connection with the debt described in Note 6(e) and
have been valued at $103,575.
e) 20,000 warrants, each of which entitles the registered
holder thereof to purchase one share of Common Stock,
exercisable at any time on or before June 1, 2003 at an
exercise price of $2.50 per share (subject to customary
anti-dilution adjustments). The warrants were issued as
payment for a consulting agreement and have been valued at
$27,620.
f) 100,000 warrants, each of which entitles the registered
holder thereof to purchase one share of Common Stock,
exercisable at anytime on or before June 1, 2003, at an
exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued as
payment of interest on a $100,000 note and have been valued
at $55,200.
g) 100,000 warrants, each of which entitles the registered
holder thereof to purchase one share of Common Stock,
exercisable at anytime on or before June 1, 2003, at an
exercise price of $1.00 per share (subject to customary
anti-dilution adjustments). The warrants were issued as
payment for a consulting agreement and have been valued at
$55,200.
The warrants issued do not confer upon the holders thereof any
voting or other rights of a stockholder of the Company.
The warrants described in items (b) through (g) above are
subject to a "cashless exercise" provision (the "Warrant
Exchange"). In connection with any Warrant Exchange, the
Holder's Warrant certificate shall represent the right to
subscribe for an acquire (I) the number of Warrant Shares
(rounded to the next highest integer) equal to (A) the number of
Warrant Shares specified by the Holder in its Notice of Exchange
(the "Total Share Number") less (B) the number of Warrant Shares
equal to the quotient obtained by dividing (i) the product of
the Total Share Number and the existing Exercise Price (as
defined) per Share by (ii) the Market Price (as defined) of a
share of Common Stock.
- 14 -
<PAGE> 47
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 9 - INCOME TAXES
The components of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
September 31,
--------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Current Tax Expense
U.S. Federal $ -- $ --
State and Local --
------------
Total Current -- --
------------ -----------
Deferred Tax Expense
U.S. Federal -- --
State and Local -- --
------------ -----------
Total Deferred -- --
------------ -----------
Total Tax Provision from Continuing Operations $ -- $ --
============ ===========
</TABLE>
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Federal Income Tax Rate (34.0)% (34.0)%
Deferred Tax Charge (Credit) -- --
Effect of Valuation Allowance 34.0% 34.0%
State Income Tax, Net of Federal Benefit -- --
-------- --------
Effective Income Tax Rate 0.0% 0.0%
======== ========
</TABLE>
At September 30, 1998, the Company had net carryforward losses
of approximately $3,287,000. A valuation allowance equal to the
tax benefit for deferred taxes has been established due to the
uncertainty of realizing the benefit of the tax carryforward.
Deferred tax assets and liabilities reflect the net tax effect
of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and amounts
used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities at September 30
are as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets (Liabilities):
Loss Carryforwards $ 1,118,000 $ 427,000
Consulting Fees 110,000 123,000
Exploration Costs (28,000) --
Depreciation (19,000) (7,000)
Less: Valuation Allowance (1,181,000) (543,000)
----------- -----------
Net Deferred Tax Assets (Liabilities) $ -- $ --
=========== ===========
</TABLE>
- 15 -
<PAGE> 48
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 9 - INCOME TAXES (continued)
Net operating loss carryforwards expire in 1999 through 2012.
Per year availability of losses incurred prior to October 1,
1997 of approximately $675,000 is subject to change of ownership
limitations under Internal Revenue Code Section 382.
Expiration dates of net operating loss carryforwards are as
follows:
<TABLE>
<S> <C> <C>
September 30, 1999 $ 351,000
2000 72,000
2001 89,000
2002 8,000
2003 18,000
2005 5,000
2007 65,000
2009 16,000
2010 3,000
2011 28,000
2012 303,000
2018 2,329,000
-----------
$ 3,287,000
===========
</TABLE>
NOTE 10 - RELATED PARTY TRANSACTIONS
During the year ended September 30, 1998:
a) The Company issued a promissory note to the son of a principal
stockholder in the amount of $50,000. (See Note 6(a)).
b) A principal stockholder guaranteed the Bank of Commerce
promissory note in the amount of $100,000. (See Note 6(b)).
c) The Company issued a promissory note to a Trust, one of the
beneficiaries of which is an officer of the Company, in the
amount of $100,000. This note has been repaid as of September
30, 1998. 100,000 Common Stock purchase warrants were issued as
payment of interest on the note. (See Note 8(f)).
d) The Company acquired an option to purchase Rife Oil Properties,
Inc., a principal stockholder of the Company. The option is for
a one year period commencing September 1, 1998. The price to be
paid for Rife Oil Properties, Inc., should the Company exercise
the option, shall be 3,000,000 shares of Company Common Stock.
e) The Company occupies space in facilities leased by the
stockholder mentioned above. The Company pays rent to the
stockholder in the amount of $2,000 per month. The space is
rented on a monthly basis.
- 16 -
<PAGE> 49
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 10 - RELATED PARTY TRANSACTIONS (continued)
f) The stockholder mentioned above has pledged 5,500,000 shares of
common stock of the Company as collateral for the Benchmark note
described in Note 6(e).
During the year ended September 30, 1997:
g) The Company purchased the Corsicana Field Prospect in Navarro
County, Texas from a stockholder. The purchase price was
2,000,000 shares of common stock and a promissory note in the
amount of $1,300,000.
h) The Company was indebted to the same stockholder in the amount
of $10,000, on a note dated January 18, 1997. This note had an
initial principal amount of $80,000.
i) The Company occupies space in facilities leased by the same
stockholder. No rent was paid on this space through September
30, 1997.
Where possible, the Company prefers to have Rife Oil Properties,
Inc. act as operator of the oil and natural gas properties and
prospects in which it owns an interest.
M.O. Rife III, the Company's Chairman, owns 100% of Rife Oil
Properties, Inc., and Rife Oil Properties, Inc. is one of the
Company's major stockholders. As mentioned in item (d) above,
and also in Note 12(e), the Company has an option to acquire
Rife Oil Properties, Inc.
NOTE 11 - CONSULTING AGREEMENTS
The Company has entered into various cancelable consulting
agreements with third parties. Compensation for services
provided under these agreements has been paid in either Common
Shares or Common Share Purchase Warrants of the Company. During
the year ended September 30, 1998, the Company issued 1,100,000
shares of Common Stock, valued at $687,500, and 120,000 Common
Share Purchase Warrants, valued at $82,820.
During the year ended September 30, 1997, the Company issued
500,000 shares of Common Stock, valued at $362,500, in payment
of consulting agreements.
- 17 -
<PAGE> 50
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 12 - COMMITMENTS AND CONTINGENCIES
a) The Company has entered into various non-cancelable operating
lease agreements for office and warehouse space and equipment.
1) Warehouse facilities located in Fort Worth, Texas. The lease
term expires on September 30, 1999 and the Company has an option
to review the lease for a two year period.
2) Office facilities located in San Antonio, Texas. The lease term
expires on November 30, 1998.
3) Office facilities located in Tyler, Texas. The lease term
expires on January 31, 2000.
4) Office facilities located in Tyler, Texas. The lease term on
January 31, 1999.
5) Various office equipment leases expiring at various times
through June 25, 2003.
Future minimum lease payments under the lease agreements for
each of the years ended September 30 are as follows:
<TABLE>
<S> <C>
1999 $ 98,485
2000 29,209
2001 17,421
2002 7,805
2003 3,048
----------
Total Minimum Lease Payments $ 154,968
==========
</TABLE>
Rent expense included in the financial statements for the year
ended September 30, 1998 totaled $83,347.
b) The Company has pledged 100% of the shares of Oil Seeps, Inc., a
wholly owned subsidiary, as collateral for a $250,000 promissory
note due on January 15, 1999. (See Note 6C).
c) The note payable to Benchmark described in Note 6(e) is
collateralized by all fixed, real, tangible and intangible
assets owned by the Company. The collateral was released upon
repayment of the note on October 7, 1998.
d) A claim had been filed against ORS by a former employee. The
employee had demanded $75,000 in exchange for a full and final
release. The claim has been settled for $20,000 through
mediation in December 1998. The settlement amount has been
accrued in the financial statements.
e) The Company has an option to acquire Rife Oil Properties, Inc.,
a principal stockholder of the Company, for 3,000,000 shares of
Company Common Stock. The option expires on August 31, 1999.
f) The Company has entered into discussions to acquire certain
assets of Power Exploration Company, Inc., a company owned by
certain officers and directors of the Company, for 2,000,000
shares of common stock. These shares are being held in trust
pending finalization of any acquisition and are not included in
shares issued or outstanding as of September 30, 1998.
- 18 -
<PAGE> 51
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
During the year ended September 30, 1998:
a) A note payable plus accrued interest was satisfied through the
issuance of 1,000,000 shares of common stock. Principal and
interest converted totaled $1,343,381.
b) Common stock totalling 1,239,372 shares was issued on conversion
of $783,000 of debentures, plus accrued interest.
c) Common stock warrants valued at $382,335 were issued in
connection with the placement of various debt agreements.
d) Common stock warrants valued at $82,820 were issued in
connection with various consulting agreements.
e) Common stock warrants valued at $55,200 were issued as payment
of interest on a note.
f) Common stock totalling 1,100,000 shares valued at $687,500 was
issued as payment for services.
During the year ended September 30, 1997:
g) Oil and gas properties valued at $5,050,000 were acquired in
exchange for common stock and debt.
h) Subsidiaries were acquired in exchange for common stock valued
at $1,530,000.
i) Common stock totalling 434,702 shares was issued in conversion
of $467,000 of debentures.
NOTE 14 - GOING CONCERN
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
As of September 30, 1998, the Company has a working capital
deficit of $1,002,390 and an accumulated deficit of $4,671,079.
Based upon the Company's plan of operation, the Company
estimates that existing resources, together with funds
generated from operations will not be sufficient to fund the
Company's working capital. The Company is actively seeking
additional equity financing. There can be no assurances that
sufficient financing will be available on terms acceptable to
the Company or at all. If the Company is unable to obtain such
financing, the Company will be forced to scale back operations
which would have an adverse effect on the Company's financial
condition and results of operation.
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to September 30, 1998, the Company
a) Repaid the Bank of Commerce Note. (See Note 6(b).
b) Satisfied the Benchmark note through issuance of 500,000 shares
of Common Stock. (See Notes 6(e), 10(f) and 12(c)).
c) Satisfied the Debenture described in Note 7(b) through the
issuance of 650,000 shares of Common Stock.
d) Received $250,000 pursuant to a promissory note with Trident
III, LLC, due on April 20, 1999. The note bears interest at 10%
per annum. The Company has also issued 100,000 shares of Common
Stock to Trident III.
e) Purchased various oil, gas and/or mineral leases located in
East Texas along with 3-D Seismic Data. The purchase price was
$350,000, paid $50,000 in cash and $300,000 with a
promissory note bearing interest at 6% per annum and due on
January 31, 1999. The note is collateralized by all properties
and data acquired through this purchase.
- 19 -
<PAGE> 52
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 16 - SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS
(UNAUDITED)
The following supplemental unaudited information regarding the
Company's oil and gas activities is presented pursuant to the
disclosure requirements of Statement of Financial Accounting
Standards No. 69.
<TABLE>
<CAPTION>
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Capitalized Costs Relating to Oil and Gas
Producing Activities at September 30,
Unproved Oil and Gas Properties $ 1,312,505 $ 1,510,871
Proved Oil and Gas Properties 5,396,496 5,050,000
----------- -----------
6,709,001 6,560,871
Less: Accumulated Amortization and Impairment (5,220) (826)
----------- -----------
Net Capitalized Costs $ 6,703,781 $ 6,560,045
=========== ===========
Costs Incurred in Oil and Gas Producing Activities
for the Years Ending September 30,
Property Acquisition Costs:
Proved $ 235,625 $ 5,050,000
Unproved -- 1,510,871
Exploration Costs 112,505 5,496
----------- -----------
$ 348,130 $ 6,566,367
=========== ===========
Results of Operations for Oil and Gas Producing
Activities for the Years Ended September 30,
Oil and Gas Sales $ 47,138 $ 22,714
Production (Lifting) Costs (230,581) 53,346
Amortization Expenses (4,394) (826)
----------- -----------
(187,837) (31,458)
Income Tax Expense -- --
----------- -----------
Results of Operations for Oil and Gas Producing
Activities (excluding corporate overhead and
financing costs) $ (187,837) $ (31,458)
=========== ===========
</TABLE>
- 20 -
<PAGE> 53
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 16 - SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS
(UNAUDITED) (continued)
Reserve Information and Related Standardized Measure of
Discounted Future Net Cash Flows
The following supplemental unaudited presentation of proved
and proved developed reserve quantities and related
standardized measure of discounted future net cash flow
provides estimates only and does not purport to reflect
realizable values or fair market values of the Company's
reserves. Volumes reported for proved reserves are based on
reasonable estimates. These estimates are consistent with
current knowledge of the characteristics and production
history of the reserves. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of producing oil
and gas properties. Accordingly, significant changes to these
estimates are expected as future information becomes
available. All of the Company's reserves are located in the
United States.
Proved reserves are those estimated reserves of crude oil
(including condensate and natural gas liquids) and natural
gas that geological and engineering data demonstrate with
reasonable certainly to be recoverable in future years from
known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to
be recovered through existing wells, equipment, and operating
methods.
The standardized measure of discounted future net cash flows
is computed by applying year-end prices of oil and gas (with
consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production
of proved oil and gas reserves, less estimated future
expenditures (based on year-end costs) to be incurred in
developing and producing the proved reserves, less estimated
related future income tax expenses (based on year-end
statutory tax rates, with consideration of future tax rates
already legislated), and assuming continuation of existing
economic conditions. Future income tax expenses give effect
to permanent differences and tax credits but do not reflect
the impact of continuing operations including property
acquisitions and exploration. The estimated future cash flows
are then discounted using a rate of ten percent a year to
reflect the estimated timing of the future cash flows.
- 21 -
<PAGE> 54
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 16 - SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS
(UNAUDITED) (continued)
<TABLE>
<CAPTION>
Oil Oil
( mbbls ) ( mbbls )
---------- ---------
1998 1997
---------- ---------
<S> <C> <C>
Proved Developed and Undeveloped Reserves:
Beginning of Year 22,528.5 --
Purchases of Minerals in Place -- 22,529.8
Revisions of Previous Estimates (779.9)
Production (4.1) (1.3)
---------- ---------
End of Year 21,744.5 22,528.5
========== =========
Proved Developed Reserves:
End of Year 3,785.0 4,568.6
========== =========
Standardized Measure of Discounted Future
Net Cash Flows at September 30,:
Future Cash Inflows $ 315,295,000 $ 405,515,000
Future Production Costs (171,519,000) (189,256,000)
Future Development Costs (18,135,000) (18,135,000)
Future Income Tax Expenses (49,693,000) (78,686,000)
------------ -------------
Future Net Cash Flows (75,948,000) 119,438,000
10% Annual Discount for Estimated Timing
of Cash Flows 37,063,000 55,703,000
------------ -------------
Standardized Measure of Discounted Future
Net Cash Flows Relating to Proved Oil and
Gas Reserves $ 38,885,000 $ 63,735,000
============ =============
</TABLE>
The following reconciles the change in the standardized measure
of discounted future net cash flows from proved reserves during
the years ended September 30,:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Beginning of Year $ 63,735,243 $ --
Revenue from oil and gas production, net
Of production costs 187,837 31,458
Net changes in prices and production and
Development costs (36,097,791) --
Revisions of previous quantity estimates ( 2,395,456) --
Purchases of minerals in place -- 105,285,699
Net change in income taxes 16,566,826 (41,550,456)
Other 3,111,655 (31,458)
------------ ------------
End of Year $ 38,885,005 $ 63,735,243
============ ============
</TABLE>
- 22 -
<PAGE> 55
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.
POWER EXPLORATION, INC.
By /s/ Mark S. Zouvas
------------------------------------------
Mark S. Zouvas, Chief Financial Officer
January 12, 1999
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS OF POWER EXPLORATION, INC. AND SUBSIDIARIES AS AUDITED BY
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C., NEW YORK, NEW YORK AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 129,901
<SECURITIES> 0
<RECEIVABLES> 132,730
<ALLOWANCES> 123,542
<INVENTORY> 352,462
<CURRENT-ASSETS> 738,635
<PP&E> 7,005,812
<DEPRECIATION> 51,257
<TOTAL-ASSETS> 7,707,036
<CURRENT-LIABILITIES> 1,741,025
<BONDS> 0
0
0
<COMMON> 221,218
<OTHER-SE> 5,744,793
<TOTAL-LIABILITY-AND-EQUITY> 7,707,036
<SALES> 446,108
<TOTAL-REVENUES> 446,108
<CGS> 290,062
<TOTAL-COSTS> 525,037
<OTHER-EXPENSES> 2,616,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 445,633
<INCOME-PRETAX> (2,695,817)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,695,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,695,817)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.24)
</TABLE>
