UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended September 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) for the transition period from to
Commission file number: 000-09419
---------
POWER EXPLORATION, INC.
---------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 84-0811647
-------- -----------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5416 Birchman Avenue, Fort Worth, Texas 76107
-----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(817) 377-4464
------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock ($0.02 None
Par Value)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
-----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X ].
The issuer's total consolidated revenues for the year ended September 30, 1999,
were $268,397
The aggregate market value of the registrant's Common Stock, $0.02 par value
(the only class of voting stock), held by non-affiliates was approximately
$1,087,019 based on the average closing bid and asked prices for the Common
Stock on January 4, 2000.
At January 1, 2000, the number of shares outstanding of the registrant's Common
Stock, $0.02 par value (the only class of voting stock), was 9,581,140.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business..........................................1
Item 2. Description of Property..........................................8
Item 3. Legal Proceedings...............................................11
Item 4. Submission of Matters to a Vote of Security-Holders.............11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........12
Item 6. Management's Discussion and Analysis or Plan of Operation.......14
Item 7. Financial Statements............................................21
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure..........................22
PART III
Item 9. Directors and Executive Officers................................23
Item 10. Executive Compensation..........................................23
Item 11. Security Ownership of Certain Beneficial Owners and Management..24
Item 12. Certain Relationships and Related Transactions..................24
Item 13. Exhibits, List and Reports on Form 8-K..........................28
<PAGE>
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. ("THE
COMPANY"), 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 THE
COMPANY 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 THE COMPANY'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 THE COMPANY TO MEET ITS STATED BUSINESS GOALS. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
As used herein, the term "Company" refers to Power Exploration, Inc., a Nevada
corporation, and its subsidiaries and predecessors, unless the context indicates
otherwise. Originally incorporated on October 31, 1979 in Colorado as Imperial
Energy Corp., the Company adopted its present name in May of 1998. During its
history, the Company has changed its name several times. At different times the
Company has been known as Imperial Energy Corp., Funscape Corp., Oil Retrieval
Systems, Inc., and Titan Energy Corp. Current management obtained controlling
ownership of the Company in October of 1999. The Company changed its domicile to
Nevada on May 31, 1998 through a merger of Titan Energy Corp., Inc., a Colorado
Corporation, with a Nevada corporation bearing the name Power Exploration, Inc.
(the "Company").
The Company, 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, the Company redevelops currently producing
oil and gas fields.
Business of the Issuer
Oil and natural gas are the principal products currently produced by the
Company. The Company does not refine or process the oil and natural gas that it
produces. The Company 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 Company focuses its exploration efforts on its significant holdings in
Texas. 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. These fields can become commercially viable and provide long-term
revenue streams utilizing the latest technology.
Recovery methods employed by the Company have 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 the Company'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.
1
<PAGE>
The Company's swabbing rig manufacturing unit, ORS, 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.
On May 16, 1997 the Company acquired Oil Retrieval Systems, Inc. and its
portable swabbing technology, assets and liabilities from Rife Oil Properties,
Inc. for 2,500,000 shares of the Company's restricted common stock.
With respect to its drilling operations, the Company 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.
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 the Company 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 the Company in each well and the estimated recoverable reserves
attributable to each well.
On June 17, 1997 the Company acquired 100% of the issued and outstanding shares
of Oil Seeps, Inc. a Texas Corporation. Oil Seeps, Inc. was acquired for 400,000
shares of restricted common stock. Oil seeps owned certain oil and gas
concessions located in Australia. These concessions allowed exploration for
petroleum products and required production on or before September 30, 1999. Due
to its lack of capital for exploration and drilling in Australia, the Company
was unable to drill a producing well on the property and the concessions expired
on September 30, 1999.
Because of the Company's focus on the acquisition and development of new and
currently producing oil and gas properties, the Company will continue to seek
acquisition possibilities.
As of September 30, 1999, the Company employed 15 persons of whom 7 are involved
in field operations and manufacturing, and 8 were engaged in office and
administrative activities.
Exploration and Development Activities
Historically, the Company has financed its exploration and development
expenditures primarily through bank borrowing, equity capital from private sales
of stock, and promoted funds from industry partners. With respect to its
acquisition activities, the Company intends to shift its emphasis to larger
scale acquisitions of producing properties with additional development and
exploration potential. Initially, the Company plans to use a combination of debt
and equity financing to fund these larger acquisitions.
2
<PAGE>
The Company made exploration and development expenditures of $3,886 and $3,293
during the fiscal year ended September 30, 1998 and the fiscal year ended
September 30, 1999, respectively. The Company made net lease acquisitions of
$348,130 for proved and unproved properties during the fiscal year ended
September 30, 1998. Total lease acquisitions for proved and unproved properties
was $450,993 during the fiscal year ended September 30, 1999. The Company'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.
Products, Markets and Revenues
Oil and natural gas are the principal products currently produced by the
Company. The Company does not refine or process the oil and natural gas that it
produces. The Company 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 the Company. 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 the Company 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 the Company to predict natural gas price movements with any
certainty.
The Company cannot provide assurance that it will be able to market all oil or
natural gas that the Company 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 the Company 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 the Company.
(See "Management's Discussion and Analysis").
In certain areas in which the Company 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
3
<PAGE>
over-supply of oil and natural gas in certain areas may cause the Company to
experience "take" problems or may adversely affect the Company's ability to
obtain contracts to market oil and natural gas discovered in wells in which the
Company owns an interest.
Competition
The oil and natural gas industry is highly competitive. The Company 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 the Company. 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 the Company will permit.
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, the
Company is not presently experiencing any shortages and does not foresee any
such shortages in the near future. the Company 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 the Company 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 the Company will be successful in
acquiring any such properties.
Regulation.
The Company'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. The Company 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 the Company's
oil and natural gas operations and financial condition or that material
indemnity claims will not arise against the Company with respect to properties
acquired by or from the Company.
The Company'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,
4
<PAGE>
wetlands and other protected areas, and impose substantial liabilities for
pollution which might result from the Company'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 the Company, 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 the Company. The Company could incur substantial
costs to comply with environmental laws and 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 the
Company's properties.
Although the Company 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, the Company 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 the Company could have a material adverse
effect on the Company'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 the Company. While the Company
does not anticipate incurring material costs in connection with environmental
compliance and remediation, it cannot guarantee that material costs will not be
incurred.
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. The Company 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 the Company's business or financial condition.
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
5
<PAGE>
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 the Company; 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.
The Company 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 the Company's business.
The federal government may propose tax initiatives that affect the oil and
natural gas industry, including the Company. Due to the preliminary nature of
these proposals, the Company is unable to determine what effect, if any, the
proposals would have on product demand or the Company's results of operations.
The various states in which the Company conducts or may conduct 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.
6
<PAGE>
The Company'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. The Company'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.
The Company 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 the Company 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 the Company 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, the Company'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. The Company 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 the Company's
operating costs. While state laws vary on this issue, state initiatives to
further regulate oil and gas wastes could have a similar impact.
7
<PAGE>
Because oil and gas exploration and production, and possibly other activities,
have been conducted at some of the Company'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, the Company has agreed to
indemnify Sellers of producing properties from whom the Company has acquired
reserves against certain liabilities for environmental claims associated with
such properties. While the Company does not believe the costs to be incurred by
the Company 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.
Additionally, in the course of the Company's routine oil and gas operations,
surface spills and leaks, including casing leaks, of oil or other materials
occur, and the Company incurs costs for waste handling and environmental
compliance. Moreover, the Company is able to control directly the operations of
only those wells for which it acts as the operator. Notwithstanding the
Company's lack of control over wells owned by the Company but operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, be attributable to the Company.
It is not anticipated that the Company 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, the Company 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 the
Company will not otherwise incur material expenses in connection with
environmental laws and regulations in the future.
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. The Company 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 the
Company's operations.
ITEM 2. DESCRIPTION OF PROPERTIES
Facilities
The Company 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. The Company considers this space
adequate for its present needs. In addition, Oil Retrieval Systems, Inc. located
in Fort Worth, Texas leases approximately 16,982 square feet for a monthly
payment of $4,118. The Company also has a satellite office in Tyler, along with
a small field office and yard in Corsicana, Texas.
General Description of Oil and Gas Properties
The Company has leasehold interests in Corsicana, Texas and in Polk County,
Texas. The Corsicana Field is comprised of 650 existing wells of which the
Company has a leasehold interest in the underground minerals. The Company also
has a leasehold interest in 2,800 net acres located in Polk County, Texas.
8
<PAGE>
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 "Onalaska" prospect located in Polk
County, Texas. The Company owns a 25% interest in these leases. The leases are
typical of oil and gas leases in that they require production of oil or gas
within a defined period of time or the leases expire. Of the 12,000 net acres
located in the Woodbine Trend in which the Company has an interest,
approximately 25% expire within the next 0ne (1) year. The balance expire within
two (2) years. If the Company fails to produce oil or gas in production
quantities on any of these leases within the term of the lease, such lease will
expire and the Company will lose its rights to seek for and produce oil and gas
on that property.
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.
Corsicana Field
On June 11, 1997 Oil Retrieval Systems, Inc. (hereafter "ORS") acquired 650 oil
wells, each approximately 800' to 1000' deep, situated on 4,500 acres of leases
in the Corsicana Field, located in Corsicana, 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. All of the wells are
approximately 800 ft. to 1,000 ft. deep with 84.5 million gross barrels of oil
in place. The Company has split the field into small AMI's (Area of Mutual
Interest) in order to facilitate fund raising for the development of the field.
All of these leases are "Production Leases." Production leases continue in
perpetuity so long as oil or gas is being produced on the property subject to
the lease. So long as the Company continues to produce oil or gas from the
leases in the Corsicana field, the leases will not expire.
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.
On October 21, 1999, Pursuant to an agreement with Rife Oil Properties, Inc.,
the Company acquired oil properties and leases located on 3,933.72 acres located
in the Corsicana shallow field located in Navarro County, Texas. All of these
leases are "Production Leases." Production leases continue in perpetuity so long
as oil or gas is being produced on the property subject to the lease. So long as
the Company continues to produce oil or gas from the leases in the Corsicana
field, the leases will not expire.
The Company is Currently Performing tests on some of its Corsicana field
properties. Three Horizontal wells have been drilled and completed. Inert gas
(15% CO2-85% N) is presently being injected into the reservoir around the
horizontal wells for repressurization. It is anticipated that these horizontal
wells will produce substantial quantities of oil in the near future. The use of
lateral well bores (horizontal) will limit
9
<PAGE>
the number of vertical wells required to produce the oil in place, and thus
reduce overall drilling costs for the field.
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%
Oil and Gas Reserves
As of September 30, 1999, the Company's oil and natural gas interests were
located in the state of Texas. The Company has no reserves offshore.
The following table summarizes the Company's reserves on September 30, 1998, and
September 30, 1999 and was prepared in accordance with the rules and regulations
of the Commission:
Oil (mbbls)
-----
1999 1998
---- ----
Proved Developed and Undeveloped Reserves:
Beginning of Year -
Purchases of Minerals in Place 21,744.5 22,528.5
Revisions of previous estimates (3,305.0) (779.9)
Production (2.2) (4.1)
End of Year 18,473.3 21,744.5
Proved Developed Reserves: End of year 1,725.5 3,785.0
Operating Activities
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, a Director of the Company, is the major shareholder of
Rife Oil Properties, Inc. 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. The Company's
wells are drilled by independent drilling contractors.
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
10
<PAGE>
operations. The Company 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 the Company to acquire good title to such properties. Some
title risks, however, cannot be avoided, despite the use of customary industry
practices.
The Company's leased 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 the Company. The
Company 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 the Company's business.
The primary terms of the oil and gas leases covering the Company's 25% interest
in undeveloped acreage located in Polk County, Texas expire at various dates,
ranging from 1 to 2 years. Approximately 25% of the leases expire within one (1)
years with the balance of the leases due to expire within two (2) years. The
Company can retain its interest in undeveloped acreage by drilling activity that
establishes commercial reserves sufficient to maintain the lease. Certain of the
Company's undeveloped acreage in the Corsicana Field located in Corsicana, 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 propreties and underdeveloped Acreage
The Company evaluates properties on an ongoing basis to determine the
economic viability of the property and whether such property enhances the
objectives of the Company. During the course of normal business, the Company may
dispose of producing properties and undeveloped acreage if the Company believes
that such disposition is in its best interests.
ITEM 3. LEGAL PROCEEDINGS
The following is the only material pending case involving the Company
TTP,LLP vs. Oil Retrieval Systems, Inc. Suit was filed in September, 1999 in the
189th Judicial District Court of Harris County, Texas, Case No. 98-46438
alleging breach of contract and seeking damages of approximately $120,000. This
relates to an alleged breach of an agreement to repurchase equipment previously
sold by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last 3 months of the fiscal year ended September 30, 1999, no matters
were submitted by the Company to a vote of its shareholders.
[THIS SPACE INTENTIONALLY LEFT BLANK]
11
<PAGE>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Market Information
The Company'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, 1998
through September 30, 1999, 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.
HIGH LOW
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
Fiscal Year ended September 30, 1999
October, November, & December 0.78 0.41
January, February, & March 2.09 0.33
April, May, & June 0.47 0.14
July, August, & September 0.24 0.10
The bid price for the Common Stock was $2.6875 on January 4, 2000. The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
Shareholders
According to the records of the Company's transfer agent, there were 2063
holders of record of the Common Stock on September 30, 1999 (including nominee
holders such as banks and brokerage firms who hold shares for beneficial
holders).
Dividends
The Company 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. The
Company 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 the Company and
other factors that the Board of Directors deems relevant
12
<PAGE>
Recent Sales of Unregistered Securities
The following is a list of all securities sold by the Company within the period
covered by this report, including, where applicable, the identity of the person
who purchased the securities, title of the securities, and the date sold.
In June, 1999, the Company issued 5,000 shares of common stock at $100.20 per
share to Benchmark Equity Group to satisfy a promissory note in the amount of
$501,000 pursuant to section 4(2) of the Securities Act of 1933 in an isolated
private transaction by the Company which did not involve a public offering.
In November, 1998, the Company issued 6,500 shares of common stock Carmax
Investments, Ltd. in exchange for $150,000 in cash and surrender of a $250,000
debenture with $30,917 in accrued interest. The shares were issued pursuant to
section 4(2) of the Securities Act of 1933 in an isolated private transaction by
the Company which did not involve a public offering.
In December, 1998, the Company issued 20,000 shares of common stock at $17.00
per share to Howard Walsch, Jr. in exchange for oil and gas properties. The
transaction was carried out pursuant to section 4(2) of the Securities Act of
1933 in an isolated private transaction by the Company which did not involve a
public offering.
In October, 1998, the Company issued 1,000 shares of common stock at $63.00 per
share to Trident III, LLC, in exchange for granting a loan to the Company. The
transaction was carried out pursuant to section 4(2) of the Securities Act of
1933 in an isolated private transaction by the Company which did not involve a
public offering.
During the period April through October, 1999, the Company issued 2,600 shares
of common stock at $20.71 per share to Trident III, LLC, in exchange for
granting extensions on a loan to the Company. The transaction was carried out
pursuant to section 4(2) of the Securities Act of 1933 in an isolated private
transaction by the Company which did not involve a public offering.
In January, 1999, the Company issued 14,000 shares of common stock at $43.00 per
share to Fontenelle, LLC, in exchange for public relations work performed on
behalf of the Company. The transaction was carried out pursuant to section 4(2)
of the Securities Act of 1933 in an isolated private transaction by the Company
which did not involve a public offering.
In February, 1999, the Company issued 4,000 shares of common stock at $75.00 per
share to Banyon Holdings, LLC, in exchange for public relations work performed
on behalf of the Company. The transaction was carried out pursuant to section
4(2) of the Securities Act of 1933 in an isolated private transaction by the
Company which did not involve a public offering.
In February, 1999, the Company issued 4,000 shares of common stock at $75.00 per
share to Cornerstone, LLC, in exchange for public relations work performed on
behalf of the Company. The transaction was carried out pursuant to section 4(2)
of the Securities Act of 1933 in an isolated private transaction by the Company
which did not involve a public offering.
13
<PAGE>
In February, 1999, the Company issued 4,000 shares of common stock at $95.00 per
share to DDW & Associates in exchange for public relations work performed on
behalf of the Company. The transaction was carried out pursuant to section 4(2)
of the Securities Act of 1933 in an isolated private transaction by the Company
which did not involve a public offering.
In September, 1999, the Company issued 4,000 shares of common stock at $18.75
per share to John Hileman in exchange for public relations work performed on
behalf of the Company. The transaction was carried out pursuant to section 4(2)
of the Securities Act of 1933 in an isolated private transaction by the Company
which did not involve a public offering.
In March, 1999, the Company issued 4,000 shares and in September, 1999 the
Company issued 1339 shares of common stock at $39.25 per share to Warren Soloski
in exchange for legal services performed on behalf of the Company. The
transaction was carried out pursuant to section 4(2) of the Securities Act of
1933 in an isolated private transaction by the Company which did not involve a
public offering.
In February, 1999, the Company issued 1,856 shares of common stock to Benchmark
Equity Group,247 shares of common stock to Jeffrey Tomz, 495 shares of common
stock to Peter Zouvas, and 990 shares of common stock to Delphi Consulting group
at $1.98 per share The shares to Benchmark Equity Group and Jeffrey Tomz were
issued in consideration of a loan made to the Company. The shares issued to
Delphi Consulting Group and Peter Zouvas were for consulting services provided
to the Company. The transactions were carried out pursuant to section 4(2) of
the Securities Act of 1933 in an isolated private transaction by the Company
which did not involve a public offering.
In November, 1999, the Company issued 100 shares of common stock at $68.75 per
share to Company emoloyees, in exchange for services performed for the Company.
The transaction was carried out pursuant to section 4(2) of the Securities Act
of 1933 in an isolated private transaction by the Company which did not involve
a public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's operations consist primarily of exploration and development of oil
and gas properties, and redevelopment of currently producing oil and gas fields.
While Oil and natural gas are the principal products currently produced by the
Company. The Company does not refine or process the oil and natural gas that it
produces. The Company 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.
Results of Operations
Revenues
The Company's oil and gas sales decreased $23,297, or 50%, to $23,841 for the
fiscal year ended September 30, 1999 from $47,138 for the fiscal year ended
September 30, 1998. Equipment sales decreased $198,239, or 50%, to $200,731 for
the fiscal year ended September 30, 1999 from $398,970 for the fiscal year ended
September 30, 1998. With these large decreases in revenue, income was far short
of expenses. To date, the Company has been putting the necessary components in
place to create ongoing income, and these efforts should begin to be realized
during the 2000 fiscal year.
14
<PAGE>
Costs and expenses
The Company's general and administrative expenses increased $774,620, or 35%, to
$2,945,875 for the fiscal year ended September 30, 1999 from $2,171,255 for the
fiscal year ended September 30, 1998. While this is a moderate increase, general
and administrative expenses as a percentage of net sales increased substantially
from 487% for 1998 to 1097.58% for 1999. The change in the dollar amount of
general and administrative expenses was due primarily to increased consulting
fees which accounted for 53% of all general and administrative expenses, and 49%
of total expenses. Other major components of general and administrative expenses
included officer's salaries at 10%, non-officer salaries at 5%, and legal fees
at3%. Separately, lease operating expenses decreased $62,281 to $166,351 for
1999 from $228,632 in 1998 resulting from decreases in production which were
caused in part by decreases in oil prices.
Net Income (Loss)
Net loss for the fiscal year ended September 30, 1999 was $3,214,670, or $21.49
per share, compared to a loss of $2,695,817, or $25.83 per share, for the fiscal
year ended September 30, 1998. This $518,853 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 $315,633 for the fiscal year
ended September 30, 1999, and $877,942 for the fiscal year ended September 30,
1998, representing a decrease of 65% in cash usage. All cash activities of the
business produced a $128,818 decrease in cash for the fiscal year ended
September 30, 1999, as compared to a $34,457 increase for the fiscal year ended
September 30, 1998.
Liquidity and Capital Resources
The Company's working capital deficit on September 30, 1999 was $1,593,001
compared to a deficit of $1,002,390 on September 30, 1998. This $590,611
decrease 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. The Company had a current ratio of 0.4 for the fiscal year
ended September 30, 1998, as compared to 0.2 for the fiscal year ended September
30,1999. 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 the Company'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, 1999, the Company had no long-term debt. Although 92% of the
Company's assets are comprised of oil and gas properties that are not a current
asset, all of the Company's borrowing have been short term in nature. This has
aggravated the Company's cash position and produced lower measures of financial
performance than would otherwise be possible.
Sale of Equity
The Company 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.
The note was paid through the issuance of 500,000 common shares ($1.00 of debt
per share) on October 7, 1998.
15
<PAGE>
On October 21, 1998, the Company borrowed $250,000 from Trident III, L.L.C. and
issued a promissory note the terms of which provide for interest payable at 10%
per annum. The note was payable April 20, 1999. The Company issued 1,000 of its
shares to Trident III, L.L.C. in connection with this loan. The note has been
extended at various time and has a current maturity date of October 30, 1999.
2,600 Shares of the Company's stock were issued to obtain the extensions. When
the note was extended to September 30, 1999, the Company agreed that if the note
was not paid by that date, it would issue 50,000 shares per day for each day the
note was outstanding subsequent to September 30, 1999. The note remains unpaid.
The note is secured by all tangible assets of the Company.
Need to Raise Additional Capital
The growth of the Company'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 the Company 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 the Company'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 the Company's control. Failure to obtain any required
additional financing could materially adversely affect the growth, cash flow and
earnings of the Company. In addition, the Company's pursuit of additional
capital could result in the incurrence of additional debt or potentially
dilutive issuances of additional equity securities.
History of Losses
The Company had net losses of $2,695,817 and $,214,670, for the years ended
September 30, 1998 and September 30, 1999 respectively. The Company 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 the Company's business will require substantial capital on a
continuing basis, and there is no assurance that any such required additional
capital will be available on satisfactory terms and conditions, if at all. There
is also no assurance that the Company 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 the Company'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 the Company's control. Failure to obtain any required
additional financing could materially adversely affect the growth, cash flow and
earnings of the Company. In addition, the Company's pursuit of additional
capital could result in the incurrence of additional debt or potentially
dilutive issuances of additional equity securities.
16
<PAGE>
The Company's ability to meet any future debt service obligations will be
dependent upon the Company's future performance, which will be subject to oil
and natural gas prices, the Company's level of production, general economic
conditions and financial, business and other factors affecting the operations of
the Company, many of which are beyond its control. There can be no assurance
that the Company'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 the Company's business will generate sufficient cash flow
from operations or that future bank credit will be available in an amount to
enable the Company to service its indebtedness or make necessary expenditures.
In such event, the Company 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 the Company.
Should sufficient capital not be available, the Company may not be able to
continue to implement its business strategy.
There is also no assurance that the Company 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 the Company'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 the Company's control. Failure to obtain any required
additional financing could materially adversely affect the growth, cash flow and
earnings of the Company. In addition, the Company's pursuit of additional
capital could result in the incurrence of additional indebtedness or potentially
dilutive issuances of additional equity securities.
Acquisition Risks
The Company'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
the Company 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 the Company will
be successfully integrated into the Company's operations or will achieve desired
profitability objectives.
Drilling Risks
The Company's drilling involves numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will be encountered. The
Company 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
17
<PAGE>
irregularities in formations, equipment failures or accidents, weather
conditions and shortages or delays in the delivery of equipment. In addition,
any use by the Company 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 the Company'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 the Company.
This Form 10-KSB contains an estimate of the Company's proved oil and natural
gas reserves and the estimated future net cash flows and revenue therefrom based
upon reports of the Company'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
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, the
Company'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.
Geographic Concentration of Operations
Virtually all of the Company's current operations are located in Texas. 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 the Company more adversely than if the Company were geographically
diversified.
Concentration of Production
The Company'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 that the Company 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, the Company could be adversely affected.
Inability to Develop Additional Reserves
The Company'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 the Company conducts successful development activities
or acquires properties containing proved reserves, the Company's proved reserves
will generally decline as reserves are produced. There can be no assurance that
the Company will be able to locate additional reserves or that the Company will
drill economically productive wells or acquire properties containing proved
reserves.
18
<PAGE>
Certain Industry and Marketing Risks
The Company's operations are subject to the risks and uncertainties associated
with drilling for, producing and transporting of oil and natural gas. The
Company'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 the
Company's ability to market its oil and natural gas production.
Effects of Changing Prices
The future financial condition and results of operations of the Company 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 the Company'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 the Company's estimated value of its natural gas and
oil reserves, and on its financial position, results of operations and access to
capital. The Company'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.
The Company 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.
Operating Hazards and Uninsured Risks
The Company'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 the Company due to
injury or loss of life, severe damage to or destruction of property,
19
<PAGE>
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, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance maintained by the Company will be
adequate to cover any such losses or liabilities. Further, the Company cannot
predict the continued availability of insurance, or availability at commercially
acceptable premium levels. The Company 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 the Company. From time to time, due primarily to contract terms, pipeline
interruptions or weather conditions, the producing wells in which the Company
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 the Company is provided only limited notice as to when production
will be curtailed and the duration of such curtailments. The Company is not
currently experiencing any material curtailment on its production.
Inflation and Changing Prices
The impact of inflation, as always, is difficult to assess. In 1997 and through
the first quarter of 1998, the Company has experienced a weakness in prices
received for its oil and natural gas production. the Company 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 the Company.
Year 2000 Compliance
The Company's management conducted a review of its information systems and
related data-processing activities to assess its exposure to the Year 2000
issue. The Company upgraded the operating software on its computers to a Year
2000 compliant system. The Company purchased upgrades to its accounting software
that was Year 2000 compliant.
The Company currently uses Year 2000 compliant engineering evaluation software
for acquisition analysis, as well as internal engineering applications. The
Company's spreadsheet and word processing software is also Year 2000 compliant.
As of January 13, 2000, the Company has not experienced any significant problems
related to the Year 2000 issue.
Events Subsequent to End of Fiscal Year
On October 5, 1999, Guy Pyron, Jack Gallegher, and Thom Schleim resigned as
directors of the Company. Mark Zouvas was elected as a Director to serve on a
three man Board of Directors with M. O. Rife III and Joe Bill Bennett.1
- --------
(1)The executive officers and directors listed in Part III, Item 9 reflect
the changes made October 5, 1999.
20
<PAGE>
On October 19,1999, the Company effected a 1 for 100 reverse split of its common
stock2
On October 21, 1999, the Company entered into an agreement with Rife Oil
Properties, Inc. to acquire certain oil properties and leases located on
3,933.72 acres located in the Corsicana shallow field located in Navarro County,
Texas, from Rife in exchange fro 8,000,000 post-reverse-split shares of common
stock and to retire certain debt owed to Rife aggregating approximately $950,000
in exchange for 1,000,000 shares of post-reverse-split common stock. This
agreement has been consummated.
On October 25, 1999, the Company adopted a Stock Benefit Plan which provides for
the issuance of up to four million (4,000,000) shares of common stock of the
Company according to the terms of the plan.
On October 27, 1999 the Company entered into two advisory agreements covering
financial and investment services to be provided to the Company on a best
efforts basis by Allen Z. Wolfson and Ronald Welborn. The agreements provide for
the Company to issue 75,000 shares of post-reverse-split common stock plus an
option to purchase 75,000 shares of post-reverse-split common stock of the
Company at an exercise price of $0.66667 per share for a period of one year, the
term of the agreement, to Allen Z. Wolfson, and the same number of shares and
options to Ronald Welborn.
On November 23, 1999, the Company entered into an agreement to borrow $25,000
from A-Z Professional Consultants, a Utah Corporation and Global Universal,
Inc., a Nevada Corporation. As consideration for making the loan, the Company
issued 150,000 post-reverse-split shares of common stock to each of the two
corporations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages contain the audited financial statements and accompanying
notes as prepared by the Company's independent auditors.
[THIS SPACE LEFT INTENTIONALLY BLANK]
- --------
(2)All references herein to number of issued and outstanding shares
reflect the 1 for 100 reverse split.
21
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-25
F-1
<PAGE>
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, 1999 and 1998 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, 1999 and 1998 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 14 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 14. 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
December 17, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
POWER EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
ASSETS 1999 1998
--------------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,083 $ 129,901
Accounts Receivable 8,563 11,477
Receivable - Related Parties 84,570 121,253
Inventory 323,486 352,462
Prepaid Expenses 230 123,542
------------ -----------
Total Current Assets 417,932 738,635
------------ -----------
OIL AND GAS PROPERTIES, FULL COST METHOD
Properties being amortized 7,134,910 5,396,496
Properties not subject to amortization - 1,312,505
------------ -----------
7,134,910 6,709,001
Less: Accumulated depreciation, depletion
and amortization (10,491) (5,220)
------------ -----------
Net Oil and Gas Properties 7,124,419 6,703,781
------------ -----------
PROPERTY AND EQUIPMENT, Net of Accumulated
Depreciation of $93,581 and $46,037 230,506 250,774
------------ -----------
OTHER ASSETS 6,037 13,846
------------ -----------
TOTAL ASSETS $ 7,778,894 $ 7,707,036
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 825,466 416,217
Accounts Payable - Related Party 389,154 -
Customer Deposits 30,000 110,000
Advances Payable 25,000 22,500
Advances Payable - Related Party 140,000 -
Debentures Payable, net of unamortized discount
of $7,692 and $130,500 - 242,308
Notes Payable 500,000 900,000
Notes Payable - Related Party 101,313 50,000
------------ -----------
Total Liabilities 2,010,933 1,741,025
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $.02 par value; 50,000,000 shares
authorized, 177,650 and 110,609 shares
issued and outstanding, respectively 3,553 2,212
Additional Paid-in Capital 13,650,157 10,634,878
Accumulated Deficit ( 7,885,749) ( 4,671,079)
------------ -----------
Total Stockholders' Equity 5,767,961 5,966,011
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,778,894 $ 7,707,036
============ ===========
</TABLE>
The Accompanying Notes are an Integral Part of
These Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
POWER EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
1999 1998
--------------- ---------
<S> <C> <C>
REVENUE
Oil and Gas Sales $ 23,841 $ 47,138
Equipment Sales 200,731 398,970
Equipment Sales 43,825 -
------------- ------------
268,397 446,108
------------ ------------
COST OF REVENUE
Lease Operating 166,351 228,632
Production Taxes 518 1,949
Depreciation, Depletion and Amortization 5,271 4,394
Cost of Equipment Sales 158,506 290,062
------------ ------------
330,646 525,037
------------ ------------
GROSS PROFIT (62,249) (78,929)
------------- ------------
EXPENSES
General and Administrative 2,945,875 2,171,255
Interest Expense 232,139 445,633
------------- ------------
TOTAL EXPENSES 3,178,014 2,616,888
------------ ------------
LOSS BEFORE OTHER INCOME AND
PROVISION FOR INCOME TAXES (3,240,263) (2,695,817)
OTHER INCOME 25,593 -
------------- ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,214,670) (2,695,817)
PROVISION FOR INCOME TAXES - -
------------- -------------
NET LOSS $(3,214,670) $(2,695,817)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (21.49) (25.83)
============= ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 149,573 104,357
============= ============
</TABLE>
The Accompanying Notes are an Integral Part of
These Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
POWER EXPLORATION, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Common Stock Additional
----------------------------- Paid-In Accumulated
Shares * Amount * Capital * Deficit Total
------------ ----------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance - September 30, 1997 77,215 $ 1,544 $ 7,362,720 $(1,975,262) $ 5,389,002
Issuance of Shares for Services 11,000 220 687,280 - 687,500
Issuance of Shares in Conversion of Note Payable 10,000 200 1,343,181 - 1,343,381
Issuance of Shares in Conversion of Debentures 12,394 248 721,342 - 721,590
Issuance of Warrants - - 520,355 - 520,355
Net Loss - - - (2,695,817) (2,695,817)
--------- ---------- ------------ ----------- -----------
Balance - September 30, 1998 110,609 2,212 10,634,878 (4,671,079) 5,966,011
Issuance of Shares for Conversion of Debenture 6,500 130 430,787 - 430,917
Issuance of Shares in Conversion of Note Payable 5,000 100 500,900 - 501,000
Issuance of Shares for Services 32,653 653 1,780,050 - 1,780,703
Issuance of Warrants - - 115,900 - 115,900
Cashless Exercise of Warrants 3,588 72 (72) - -
Issuance of Shares for Properties 20,000 400 339,600 - 340,000
Issuance of Shares for Loan Fees 1,000 20 62,980 - 63,000
Issuance of Shares for Loan Extension 2,600 52 53,798 - 53,850
Cancellation of Shares Issued for Services (4,300) (86) (268,664) - (268,750)
Net Loss - - - (3,214,670) (3,214,670)
--------- ---------- ------------- ----------- -----------
Balance - September 30, 1999 177,650 $ 3,553 $ 13,650,157 $(7,885,749) $ 5,767,961
========= =========== ============ =========== ===========
</TABLE>
* Retroactively restated to reflect 1 for 100 reverse stock split.
The Accompanying Notes are an Integral Part of
These Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
POWER EXPLORATION, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
1999 1998
---------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,214,670) $(2,695,817)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Interest Expense 120,350 290,233
Bad Debt Expense (Recovery) (3,355) 47,180
Depreciation, Depletion and Amortization 52,815 37,797
Amortization of Loan Fees 6,826 187,065
Amortization of Discount on Bonds Payable 7,692 72,791
Write-Down of Inventory - 127,380
Issuance of Shares and Warrants for Services 1,627,853 708,205
(Increase) in Receivables (40,911) (23,175)
Decrease (Increase) in Receivable - Related Party 36,683 (121,253)
Decrease in Inventory 76,156 73,312
Decrease (Increase) in Prepaid Expenses and Other Assets 131,121 (4,358)
Increase in Accounts Payable and Accrued Expenses 821,307 397,498
(Decrease) Increase in Customer Deposits (80,000) 2,700
Increase in Advances Payable 142,500 22,500
------------- ------------
Net Cash (Used) in Operating Activities (315,633) (877,942)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Oil and Gas Properties - 200,000
Cost of Oil and Gas Properties (85,909) (348,130)
Purchase of Property and Equipment (27,276) -
------------- ------------
Net Cash (Used) in Investing Activities (113,185) (203,601)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Borrowings 350,000 1,050,000
Repayment of Borrowings (200,000) (110,000)
Proceeds from Sale of Stock 150,000 -
Net Proceeds From Sale of Debentures - 176,000
------------- ------------
Net Cash Provided by Financing Activities 300,000 1,116,000
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (128,818) 34,457
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 129,901 95,444
------------- -----------
CASH AND CASH EQUIVALENTS - SEPTEMBER 30, $ 1,083 $ 129,901
============= ===========
CASH PAID DURING THE YEAR FOR:
Interest Expense $ 12,526 $ 4,581
Income Taxes - -
</TABLE>
The Accompanying Notes are an Integral Part of
These Financial Statements.
F-6
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 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.
F-7
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 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.
F-8
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting date. Actual results could differ from those
estimates.
Depreciation and Amortization
Property and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful
lives.
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.
Estimated useful lives are as follows:
Shop Equipment 5 years
Furniture and Office Equipment 5 years
Machinery 5 - 7 years
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 relatively
short maturity of these 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.
F-9
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Stock-Based Compensation
The Company has adopted the intrinsic value method of
accounting for stock-based compensation in accordance with
Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations.
Comprehensive Income
In June 1997, SFAS No. 130, "Reporting Comprehensive Income",
was issued. This statement establishes standards for the
reporting and display of comprehensive income and its
components in the financial statements. As of September 30,
1999 and 1998, the Company had no items that represent other
comprehensive income and, therefore, has not included a
schedule of comprehensive income in the financial statements.
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.
F-10
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
All share and per share data have been adjusted to
retroactively reflect the 1 for 100 reverse stock split
effected on October 19, 1999.
Impact of Recently Issued Accounting Standards
During 1998, the FASB issued No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which
changes the way public companies report information about
segments. SFAS No. 131, which is based on the selected segment
information quarterly and entity-wide disclosures about
products and services, major customers and the material
countries in which the entity holds assets and reports
revenue. This statement is effective for the Company's fiscal
year. The Company is in the process of evaluating the
disclosure requirements under this standard.
Additionally, during 1998, the America Institute of Certified
Accountants' Executive Committee issued Statement of Position
Number 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for fiscal years beginning after December 15, 1998.
Management believes that the Company is substantially in
compliance with this pronouncement and that its
complementation will not have a material effect on the
Company's financial position, results of operations or cash
flows.
NOTE 2 - INVENTORY
Inventory at September 30, consists of the following:
1999 1998
-------------- ---------
Raw Material $ 220,069 $ 225,604
Work in Process 103,417 126,858
----------- -----------
$ 323,486 $ 352,462
========== ==========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
1999 1998
------------- ------------
Shop Equipment $ 30,852 $ 30,852
Furniture and Office Equipment 24,068 22,887
Machinery 269,167 243,072
---------- ----------
324,087 296,811
Less Accumulated Depreciation 93,581 46,037
---------- ----------
Property and Equipment - Net $ 230,506 $ 250,774
========= =========
Depreciation Expense Recorded in
the Statement of Operations $ 47,544 $ 33,403
========== ==========
F-11
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
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 $2.41 and $1.07
per Bbl production during the years ended September 30, 1999 and
1998, respectively.
The $1,312,505 cost of unproved oil and gas leases held at
September 30, 1998 has been excluded in computing amortization
of the full cost pool.
Costs excluded from amortization consist of the following at
September 30:
1999 1998
------------- -----------
Acquisition Costs $ - $ 1,200,000
Exploration Costs - 112,505
-------------- -----------
$ - $ 1,312,505
============== ===========
All excluded costs at September 30, 1998 are located in
Australia.
At September 30, 1998, a determination could not 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. Amortization of
these costs began during fiscal 1999.
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.
F-12
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable at September 30 consist of the following:
1999 1998
--------------- ----------
<S> <C> <C>
a) Note Payable - Trident III, LLC $ 250,000$ -
b) Note Payable - Business Exchange
Investments, Inc. 250,000 250,000
c) Note Payable - Related Party 101,313 -
d) Note Payable - Related Party - 50,000
e) Note Payable - Bank of Commerce - 100,000
f) Note Payable - Dallas Cady Family, LLP - 50,000
g)Note Payable - Benchmark Equity Group, Inc. - 500,000
-------------- -------------
$ 601,313 $ 950,000
=========== ============
</TABLE>
a) The Company is indebted to Trident III, L.L.C. under terms of a
promissory note dated October 21, 1998 in the amount of $250,000.
Terms of the note provide for interest at a rate of 10% per
annum, with an original maturity date of April 20, 1999. The
Company issued 1,000 shares of its common stock to Trident III,
L.L.C. in connection with this loan. The loan has been extended
at various times with a current maturity date of October 30,
1999. The Company issued a total of 2,600 shares of its common
stock in consideration of these extensions. When the note was
extended to September 30, 1999, the Company agreed that if the
note was not paid on or before September 30, 1999, then it will
issue 50,000 shares per day for each day that the note is
outstanding subsequent to September 30, 1999. Concurrent with the
extension to October 30, 1999 the provision was added that if
payment of outstanding principal and interest was made by that
date, the lender would not seek to receive the 50,000 shares per
day due under the previous extension. If payment was not made on
or before October 30, then the full 50,000 shares per day from
October 1, 1999 would be due. This note remains outstanding; no
payments were made on or before October 30, 1999.
The note is secured by all of the fixed, real, tangible and
intangible assets of the Company.
b) 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
an extended maturity date of March 15, 2000. The note is
collateralized by 100% of the shares of OSI (see Note 1).
c) The Company is indebted to the M.O. Rife III, Trust A under terms
of a promissory note dated March 31, 1999 in the amount of
$101,313. Terms of the note provide for interest at a rate of
8.75% per annum and the note is due upon demand.
F-13
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 6 - NOTES PAYABLE (continued)
d) The Company was 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 note was
extended and repaid in 1999.
e) The Company was 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 had been guaranteed by a principal stockholder
of the Company.
f) The Company was 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 800 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 was January 15, 1999.
g) The Company 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. 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 was 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 5,000 common shares on October 7, 1998.
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.
F-14
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 7 - DEBENTURES PAYABLE (continued)
Costs of $130,000 incurred in connection with the issuance of
these debentures have been amortized over the life of the
debentures. Unamortized issuance costs are charged to additional
paid-in capital as debentures are converted into common stock.
As of September 30, 1997, $467,000 principal amount of
debentures had been converted into 4,347 shares of common stock.
During the year ended September 30, 1998, the remaining $783,000
principal amount of debentures was converted into 12,394 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 provided that the
buyer would remit an additional amount of $150,000 to the
Company. The Company then issued 6,500 shares of common stock to
convert the total advances of $400,000, plus accrued interest of
$30,917, into equity. This conversion occurred on October 30,
1998.
NOTE 8 - WARRANTS
At September 30, 1999, the Company had the following common
stock purchase warrants outstanding:
a) 1,000 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) 800 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.
F-15
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 8 - WARRANTS (continued)
c) 750 warrants, each of which entitles the registered holder
thereof to purchase one share of Common Stock, exercisable at
any time on or before August 20, 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.
d) 200 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.
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 (d) 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.
During the year ended September 30, 1999, the Company issued
3,588 shares of its common stock in a cashless exercise of 7,250
warrants.
NOTE 9 - INCOME TAXES
The components of the provision for income taxes is as follows:
September 31,
-----------------------
1999 1998
----------- --------
Current Tax Expense
U.S. Federal $ - $ -
State and Local - -
------------ ----------
Total Current - -
------------ ----------
F-16
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 9 - INCOME TAXES (continued)
September 31,
-----------------------
1999 1998
----------- --------
Deferred Tax Expense
U.S. Federal - -
State and Local - -
------------ ----------
Total Deferred - -
------------ ----------
Total Tax Provision from
Continuing Operations $ - $ -
============ ==========
The reconciliation of the effective income tax rate to the
Federal statutory rate is as follows:
1999 1998
------------ -------
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%
========== =========
At September 30, 1999, the Company had net carryforward losses
of approximately $6,568,000. 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,
---------------------------
1999 1998
--------------- ----------
<S> <C> <C>
Deferred Tax Assets (Liabilities):
Loss Carryforwards $ 2,233,000 $ 1,118,000
Consulting Fees 97,000 110,000
Exploration Costs ( 23,000) ( 28,000)
Depreciation ( 29,000) ( 19,000)
Less: Valuation Allowance (2,278,000) (1,181,000)
----------- -----------
Net Deferred Tax Assets (Liabilities) $ - $ -
============== =============
</TABLE>
Net operating loss carryforwards expire in 2000 through 2019.
Per year availability of losses incurred prior to October 1,
1997 of approximately $324,000 is subject to change of ownership
limitations under Internal Revenue Code Section 382.
F-17
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 9 - INCOME TAXES (continued)
Expiration dates of net operating loss carryforwards are as
follows:
September 30,
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
2019 3,632,000
-----------
$ 6,568,000
NOTE 10 - RELATED PARTY TRANSACTIONS
During the year ended September 30, 1999:
a) The Company issued a promissory note to M.O. Rife III Trust A
(the "Rife Trust"), which is a principal stockholder in the
amount of $101,313. The proceeds of the note were used to repay a
loan to the Company from the Bank of Commerce, which the
stockholder had guaranteed.
b) The Company was advanced a net of $140,000 by Rife Oil
Properties, Inc., a company owned by the beneficiary to the Rife
Trust.
c) The Company incurred a net accounts payable to Rife Oil
Properties, Inc. of $389,154.
d) The Company is owned an aggregate of $84,570 in accounts
receivable by Rife Oil Properties, Inc.
e) The Company leased its office space from the Rife Trust, with a
monthly rental of $3,325
During the year ended September 30, 1998:
f) The Company issued a promissory note to the son of a principal
stockholder in the amount of $50,000. (See Note 6(d)).
F-18
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 10 - RELATED PARTY TRANSACTIONS (continued)
g) A principal stockholder guaranteed the Bank of Commerce
promissory note in the amount of $100,000. (See Note 6(e)).
h) 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. 1,000 Common Stock purchase warrants were issued as payment
of interest on the note.
i) 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.
j) The stockholder mentioned above pledged 5,000 shares of common
stock of the Company as collateral for the Benchmark note
described in Note 6(g).
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 is the Trustee and beneficiary of M.O.R. III
Trust A is one of the Company's major stockholders.
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, 1999, the Company issued 30,000
shares of Common Stock, valued at $1,657,000, and 1,000 Common
Share Purchase Warrants, valued at $115,900.
During the year ended September 30, 1998, the Company issued
11,000 shares of Common Stock, valued at $687,500 and 1,200
common share purchase warrants, valued at 82,820, in payment of
consulting agreements.
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, 2001. - 18 -
F-19
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 12 - COMMITMENTS AND CONTINGENCIES (continued)
2) Various office equipment leases expiring at various times
through March 2004.
Future minimum lease payments under the lease agreements
for each of the years ended September 30 are as follows:
2000 $ 109,319
2001 77,790
2002 11,639
2003 8,731
2004 2,368
----------
Total minimum lease payments $ 209,847
==========
Rent expense included in the financial statements for the year
ended September 30, 1998 totaled $158,800.
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 March 15, 2000. (See Note 6(b)).
c) The Company has pledged all of its fixed, real, tangible and
intangible assets as collateral for a $250,000 promissory note
due on October 30, 1999. (See Note 6(a)).
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. The settlement amount has not been paid and
a suit is pending for breach of contract.
e) A suit has been filed against the Company alleging breach of
contract and seeking damages of approximately $120,000. This
relates to an alleged agreement to repurchase equipment
previously sold by the Company. This amount has been recorded in
the financial statements as of September 30, 1999 and 1998.
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
During the year ended September 30, 1999:
a) The Company issued 6,500 shares of common stock in conversion of
a debenture in the amount of $280,917, including accrued
interest, plus an additional $150,000.
F-20
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
(continued)
b) The Company issued 5,000 shares of common stock in satisfaction
of a note in the amount of $501,000, including accrued interest.
c) The Company issued an aggregate of 32,653 shares of common stock
for various consulting, legal and public relations services.
These shares have been valued at $1,780,703.
d) The Company issued warrants to purchase 1,000 shares of common
stock for consulting services. These warrants have been valued at
$115,900.
e) The Company issued 3,588 shares of common stock in a cashless
exercise of warrants.
f) The Company issued 20,000 shares of common stock to acquire
various oil and gas properties. These shares have been valued at
$340,000.
g) The Company issued 1,000 shares of common stock in connection
with the issuance of a promissory note. These shares have been
valued at $63,000.
h) The Company issued 2,600 shares of common stock in connection
with the extension of the due date of a promissory note. These
shares have been valued at $53,850.
i) The Company cancelled 4,300 shares of common stock which had been
issued for consulting services in the year ended September 30,
1998. These shares have been valued at $268,750.
During the year ended September 30, 1998:
j) A note payable plus accrued interest was satisfied through the
issuance of 10,000 shares of common stock. Principal and interest
converted totaled $1,343,381.
k) Common stock totaling 12,394 shares was issued on conversion of
$783,000 of debentures, plus accrued interest.
l) Common stock warrants valued at $382,335 were issued in
connection with the placement of various debt agreements.
m) Common stock warrants valued at $82,820 were issued in connection
with various consulting agreements.
F-21
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
(continued)
n) Common stock warrants valued at $55,200 were issued as payment of
interest on a note.
o) Common stock totaling 1,100,000 shares valued at $687,500 was
issued as payment for services.
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, 1999, the Company has a working capital
deficit of $1,593,001 and an accumulated deficit of $7,885,749.
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, 1999, the Company
a) Effected, on October 19, 1999 a 1 for 100 reverse split of its
common stock.
b) Consummated an agreement with Rife Oil Properties, Inc. to
acquire certain oil properties and leases from Rife in exchange
for 8,000,000 post reverse split shares of common stock and to
retire certain debt owed to Rife aggregating approximately
$950,000 in exchange for 1,000,000 shares of post reverse split
common stock.
c) Entered into two advisory agreements covering financial and
investment services to be provided to the Company on a best
efforts basis. The agreements provide for the Company to issue an
aggregate of 1,500,000 shares of post reverse split common stock
plus options to purchase an aggregate of 1,500,000 shares of post
reverse split common stock at an exercise price of $0.66667 per
share for a period of one year, the term of the agreements.
d) Entered into an agreement to repay the note payable to Trident
III, LLC (see Note 6(a)), plus accrued interest of $29,861,
through the issuance of 279,861 shares of post reverse split
common stock.
e) Entered into a consulting agreement. Services would be paid for
through the issuance of 500,000 shares of post reverse split
common stock.
F-22
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 16 - SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
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.
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
Proved Oil and Gas Properties 7,134,910 5,396,496
----------- -----------
7,134,910 6,709,001
Less: Accumulated Amortization and Impairment (10,491) (5,220)
-------------- ---------------
Net Capitalized Costs $ 7,124,419 $ 6,703,781
=========== ===========
Costs Incurred in Oil and Gas Producing Activities
for the Years Ending September 30,
Property Acquisition Costs:
Proved $ 450,993 $ 235,625
Exploration Costs 3,293 112,505
-------------- -------------
$ 454,286 $ 348,130
=========== =========
Results of Operations for Oil and Gas Producing
Activities for the Years Ended September 30,
Oil and Gas Sales $ 23,841 $ 47,138
Production (Lifting) Costs (166,869) (230,581)
Amortization Expenses (5,271) (4,394)
-------------- --------------
(148,299) (187,837)
Income Tax Expense - -
------------------------------------
Results of Operations for Oil and Gas Producing
Activities (excluding corporate overhead and
financing costs) $ (148,299) $ (187,837)
=========== ===========
</TABLE>
F-23
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 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.
<TABLE>
<CAPTION>
Oil Oil
( mbbls ) ( mbbls )
----------- ------------
<S> <C> <C>
Proved Developed and Undeveloped Reserves: 1999 1998
----------- --------
Beginning of Year 21,744.5 22,528.5
Purchases of Minerals in Place - -
Revisions of Previous Estimates (3,305.0) (779.9)
Production (2.2) (4.1)
------------ ----------
End of Year 18,437.3 21,744.5
========== ==========
Proved Developed Reserves:
End of Year 1,725.5 3,785.0
=========== ===========
F-24
</TABLE>
<PAGE>
POWER EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 16 - SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS
(UNAUDITED) (continued)
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future
Net Cash Flows at September 30,:
<S> <C> <C>
Future Cash Inflows $ 433,276,000 $ 315,295,000
Future Production Costs (135,355,000) (171,519,000)
Future Development Costs ( 37,515,000) ( 18,135,000)
Future Income Tax Expenses (104,162,000) ( 49,693,000)
------------- --------------
Future Net Cash Flows 156,244,000 75,948,000
10% Annual Discount for Estimated Timing
of Cash Flows 108,146,000 37,063,000
------------- --------------
Standardized Measure of Discounted Future
Net Cash Flows Relating to Proved Oil and
Gas Reserves $ 48,098,000 $ 38,885,000
============= =============
The following reconciles the change in the standardized
measure of discounted future net cash flows from proved
reserves during the years ended September 30,:
1999 1998
---------------- ---------
Beginning of Year $ 38,885,005 $ 63,735,243
Revenue from oil and gas production, net
of production costs 23,841 187,837
Net changes in prices and production and
development costs 92,247,186 (36,097,791)
Revisions of previous quantity estimates (23,744,147) (2,395,456)
Purchases of minerals in place - -
Discount (48,438,417) -
Net change in income taxes ( 8,018,204) 16,566,826
Other ( 2,857,514) 3,111,655
------------- -------------
End of Year $ 48,097,750 $ 38,885,005
============ ============
</TABLE>
F-25
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Issuer has a 3-person board of directors, all of which positions are
currently filled. The Directors and Executive Officers of the Issuer, their ages
and present positions held with the Issuer are:
NAME AGE POSITION HELD
M. O. Trey Rife III 60 Chairman of the Board & Director
Joe Bill Bennett 53 Chief Executive Officer & Director
Mark Zouvas 37 Secretary, Chief Financial Officer & Director
The Issuer's Directors were elected October 5, 1999 and will serve in such
capacity until the next annual meeting of the Issuer's shareholders or until
their successors have been elected and qualified. There are no familial
relationships among the Issuer's officers and directors, nor are there any
arrangements or understandings between any of the officers or directors of the
Issuer or any other person pursuant to which any officer or director was or is
to be selected as an officer or director.
M.O. Rife III, Chairman; Director. Mr. Rife was born in Fort Worth, Texas in
1939. He was elected to the Company's Board of Directors in May of 1997. Mr.
Rife will serve as a Director until the next regularly held shareholder's
meeting, or until his successor is elected and qualified. He currently serves as
the Chairman of the Board. 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. For the past twenty five
years, he has served as President and Chief Executive Officer of 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.
Joe Bennett, Director, Chief Operating Officer. Mr. Bennett was born in Graham,
Texas in 1946. He is 53 years old. He was elected to the Company's Board of
Directors in May of 1997. Mr. Bennett will serve as a Director until the next
regularly scheduled shareholder's meeting, or until his successor is elected and
qualified. He currently serves as Chief Executive Officer of the Company. He has
worked for the Company since September of 1994. Prior to being appointed Chief
Executive Officer in September, 1999, he served as a Vice-President of the
Company. 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
22
<PAGE>
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, Director, Chief Financial Officer. Mr. Zouvas is 37 years old.
He was appointed to the Board of Directors of the Company on October 5, 1999. He
serves as the Company's Chief Financial Officer, a position he has held since
September, 1997. From September 1993 to September, 1997, Mr. Zouvas worked for
Vantage Capital Management Company in Chicago, Illinois. 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 and an Accountant in California. Mr Zouvas also serves on the
Board of Directors of Tech Nature, Inc., a publicly trading company, and has so
served since May of 1999.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3, 4 and 5 furnished to the
Company, the Company is not aware of any person who at any time during the
fiscal year ended December 31, 1998 was a director, officer, or beneficial owner
of more than ten percent of the Common Stock of the Company, and who failed to
file, on a timely basis, reports required by Section 16(a) of the Securities
Exchange Act of 1934 during such fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
No compensation in excess of $100,000 was awarded to, earned by, or paid to any
executive officer of the Company during the fiscal year ending September
30,1999. The following table and the accompanying notes provide summary
information for the fiscal year concerning cash and non-cash compensation paid
or accrued by Joe Bill Bennett, the Company's chief executive officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Year Salary Bonus Compensation Award(s) Options payouts Compensation
Position ($) ($) ($) ($) SARs(#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joe Bill 1999 90,000 - - - - - -
Bennett
Chief
Executive
Officer
</TABLE>
Compensation of Directors
The Company's directors are not compensated for their services.
23
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information concerning the ownership of
the Company's Common Stock as of January 6, 2000, with respect to: (i) each
person known to the Company to be the beneficial owner of more than five percent
of the Company's Common Stock; (ii) all directors; and (iii) directors and
executive officers of the Company as a group. The notes accompanying the
information in the table below are necessary for a complete understanding of the
figures provided below. As of January 6, 2000, there were 9,581,140 shares of
Common Stock issued and outstanding.
<TABLE>
<CAPTION>
Amount and Nature of
Title of Class Name and Address of Beneficial Ownership Percent of class
-------------- ------------------- -------------------- ----------------
Beneficial Owner
<S> <C> <C> <C>
Common Stock M. O. Rife, III 0 0.0000%
($0.02) par value
Common Stock Joe Bill Bennett 26,668 0.27%
($0.02) par value 13001 Mountainview Road
Aubrey, Texas 76227
Common Stock Mark Zouvas 1,000,000 10.4%
($0.02) par value 5601 El Campo
Fort Worth, Texas 76107
Common Stock Global Universal, Inc. of 8,150,000 85%
($0.02) par value Delaware
11701 South Freeway
Burlson, Texas 76028
Common Stock Directors and Executive 1,026,668 10.7%
($0.02) par value Officers as a Group (3
individuals)
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
M. O. Rife III Trust A, which is controlled by Mr. M. O. Rife who is the
Chairman of the Board and a Director of the Issuer. Mr. Rife controls Rife Oil
Properties, Inc. which has entered into the following agreements with the
Company.
(a) The Issuer occupies office space leased from Rife Oil Properties, Inc.
Commencing October 1, 1998 and ending September 30, 1999, the Issuer paid rent
in the amount of $3,325 per month.
24
<PAGE>
(b) The M. O. Rife III, Trust A Loaned 101,313 to the Issuer pursuant to a
promissory note dated March 31, 1999 on an interest rate of 8.75%. The Note is
payable on demand.
(c) The Company was advanced a net of $140,000 by Rife Oil Properties, Inc., a
company owned by the beneficiary of the Rife Trust.
(d) The Company incurred a net accounts payable to Rife Properties, Inc., of
$389,154
(e)The Company is owed an aggregate of $84,570 in accounts receivable by Rife
Oil Properties, Inc.
(f) The Company issued a promissory note to the son of M. O. Rife III, an
officer and director of the Issuer, in the amount of $50,000. (See Note 6(d),
Notes to Financial Statements).
(g) The M. O. Rife III, Trust A, guaranteed the Bank of Commerce promissory note
in the amount of $100,000. (See Note 6(e), Notes to Financial Statements).
(h) M. O. Rife III, the Company's Chairman, owns 100% of Rife Oil Properties,
Inc. and is the Trustee and a beneficiary of the Mo. O. Rife III Trust A, which
is a major stockholder of the Company. Where possible, the Company prefers to
have Rife Properties, Inc. act as operator of the oil and natural gas properties
and prospects in which it owns an interest.
(i) The Company is indebted to the M. O. Rife III, Trust A under the terms of a
promissory note dated March 31, 1999 in the amount of $101,313. Terms of the
note provide for interest at a rate of 8.75% per annum and the note is due on
demand. Mr. M. O. Rife III, a director of the Company, is a beneficiary of the
said trust.
None of the other directors, executive officers or senior officers of the
Issuer or any subsidiary, or any associates or affiliates of any of them, is or
has been, indebted to the Issuer at any time since the beginning of the last
completed financial year of the Issuer.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibits required to be attached by Item 601 of Regulation
S-B are listed in the Index to Exhibits beginning on page 28 of this
Form 10-KSB, which is incorporated herein by reference.
(b) Reports on Form 8-K. On January 19, 1999 the Company filed a Form 8-K
disclosing the Company's change of name from Titan Energy Corp., Inc.
to Power Exploration, Inc. together with a change of domicile to the
State of Nevada. The Company also disclosed the authorization by its
Board of Directors to sell up to one million shares of its common
stock at one dollar ($1.00) per share pursuant to a private placement
memorandum. On March 4, 1999 the Company filed a form 8-K disclosing
the change of its transfer agent to Securities Transfer Corporation,
16910 Dallas Parkway Suite 100, Dallas, Texas 75248, The settlement of
a lawsuit involving a dispute over consulting services provided to the
Company, and a modification of its prior authorization to sell two
million of its shares pursuant to a private placement memorandum. The
modification changed the terms of the proposed private placement of
shares of the Company to offer to sell up to four million shares at a
price of fifty cents ($0.50) per share. On December 13, 1999 the
Company filed a Form 8-K disclosing the acquisition of certain oil
leases pursuant to an agreement with Rife
25
<PAGE>
Oil Properties, Inc. Pursuant to the agreement, the Company acquired
certain oil properties and leases located on 3,933.72 acres located in
the Corsicana shallow field located in Navarro County, Texas, from Rife
in exchange for 8,000,000 post-reverse-split shares of common stock.
Under the terms of the agreement, the Company also agreed to retire
certain debt owed to Rife aggregating approximately $950,000 in
exchange for an additional 1,000,000 shares of post-reverse-split
common stock.
[THIS SPACE INTENTIONALLY LEFT BLANK]
26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 14th day of January, 2000.
Power Exploration, Inc.
/s/Joe Bennett
- ------------------------------------------------
Joe Bennett, President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Joe Bennett Chief Executive Officer and Director January 14, 2000
- ----------------------
Joe Bennett
/s/ Mark S. Zouvas Chief Financial Officer and Director January 14, 2000
- ----------------------
Mark S. Zouvas
/s/ M. O. Rife III Chairman, Director January 14, 2000
- ----------------------
M. O. Rife, III
27
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
NO. NO. DESCRIPTION
2.1 * Plan of Reorganization and Change of Situs by which Titan Energy Corp.,
and Power Exploration, Inc. Changes Its Place of Incorporation.
2.2 * Agreement and Plan of Merger Between Power Exploration, Inc. (Nevada)
and Power Exploration, Inc. (Colorado). August 1, 1998
2.3 * Articles of Merger Between Power Exploration, Inc. (Nevada) and Power
Exploration, Inc. (Colorado). August 1, 1998
2.4 * Action by Incorporator. Election of Officers and Directors of Power
Exploration, Inc. (Nevada). May 31, 1998
2.5 ** Special Action by the Executive Committee of Power Exploration, Inc.
dated January 11, 1999 (Incorporated herein by reference from Exhibits
to the Company's Form 8-K filed January 19, 1999).
3.1 * Articles of Incorporation of Imperial Energy dated October 31, 1979.
3.2 * Amendment to Articles of Incorporation dated June 26, 1984
3.3 * Amendment to Articles of Incorporation dated September 25, 1996
3.4 * Minutes of Special Shareholders Meeting Changing Name to Oil Retrieval
Systems, Inc. dated May 14, 1997
3.5 * Amendment to Articles of Incorporation dated June 15, 1997, Changing
Name to Oil Retrieval Systems, Inc.
3.6 * By Laws of the Corporation
3.7 * Articles of Incorporation of Power Exploration, Inc. (Nevada) dated May
14, 1998
3.8 * By Laws of Power Exploration, Inc. (Nevada) Dated June 1, 1998
3.9 * Minutes of the Annual Meeting of the Board of Directors in which
Officers and Directors are Elected dated July 24, 1998
3.10 * Minutes of a Special Meeting of the Board of Directors dated July 24,
998, in which Officers and Directors are Elected
3.11 ** Special Action by the Board of Directors of Power Exploration, Inc.
dated February 19, 1999
(Incorporated herein by reference from Exhibits to the Company's Form 8-K
filed January 19, 1999).
28
<PAGE>
3.12 ** Special Action by the Executive Committee of Power Exploration, Inc.
Dated March 4, 1999 (Incorporated herein by reference from Exhibits to
the Company's Form 8-K filed January 19, 1999).
10.1 * Contract for Acquisition of Oil Leases in the Corsicana Oil Field Dated
June 11, 1997
10.2 * Contract with Power Exploration, Techstar Exploration and Roemer-
Swanson Energy to Acquire Mineral Leases in Polk County, Texas Dated
December 2, 1997
10.3 * Agreement with Business Exchange Investments, Inc. dated September 15,
1998 Regarding a $250,000 Loan
10.4 * Agreement with the Dallas Cady Family LLP for a $50,000 Loan Secured
by Two 1998 Kenworth Trucks Dated September 15, 1998
10.5 * Agreement With Trident III, LLC for a $250,000 Loan Dated October 21,
1998
10.6 * Agreement to Sale and Purchase with MB Exploration, LLC Dated
December 15, 1998
10.7 * Agreement to Sale and Purchase Agreement with MB Exploration, LLC
Dated December 15, 1998
10.8 ** Acquisition Agreement Dated December 8, 1999 between Power
Exploration, Inc. and Rife Oil Properties, Inc. (Incorporated herein by
reference from Exhibits to the Company's Form 8-K filed January 19,
1999).
10.9 31 Agreement to Extend Repayment Obligation Between Power Exploration,
Inc. and Trident III LLC Dated March 15, 1999
10.10 32 Agreement to Extend Repayment Obligation Between Power Exploration,
Inc. and Trident III LLC Dated May 1, 1999
10.11 33 Advisory Agreement entered into between Power Exploration, Inc. and
Ronald Welborn Dated October 21, 1999
21.1 * Subsidiaries of the Issuer
99.1 * Oil Lease Information Per Industry Guide for Corsicana Field Near
Dallas Texas
29
<PAGE>
99.2 * Oil Lease Information Per Industry Guide for Polk County Texas Leases
* Previously filed and incorporated herein by reference from the Form
10-KSB/A filed January 25, 1999 by the Company.
** Previously filed as indicated and incorporated herein by reference from
the referenced filings previously made by the Company
30
AGREEMENT TO EXTEND REPAYMENT OBLIGATION
This Agreement to Extend Repayment Obligation (this "Agreement"), is
entered by and between Power Exploration, Inc., a Nevada corporation (the
"Borrower"), and Trident III, LLC, a Cayman limited liability company (the
"Lender"), as of March 15, 1999. Reference is made to the 10% Promissory Note
dated October 21, 1998 made by the Borrower to the Lender (the "Note").
WHEREAS, under the terms of the Notes the Lender has the right to be repaid all
indebtedness due under the Notes as of March 15, 1999; and
Whereas, the lender has agreed to delay the effectiveness of its right to
repayment until April 30, 1999;
1. The Lender hereby agrees to delay the effectiveness of its right to
repayment under the Note (the "Repayment Obligation") until April 30, 1999;
2. In consideration of Lender's agreement to delay the effectiveness of the
Repayment Obligation Borrower shall issue to Lender 20,000 shares of
Borrower's common stock ("Borrower Stock"), for each month that the Note is
extended from March 15, 1999. These shares are to be issued on the 15th day
of the subsequent month. In the event that the Borrower fails to issue such
shares within five days of the 15th day of each such month, the Borrower
shall be obligated to issue an additional 50,000 shares of the Borrower
Stock to the Lender for each day that it is late. (For example: The 20,000
shares that are due for the time period from March 15, 1999 to April, 15,
1999 are due on April 15, 1999. If the shares are not received by the
Lender by April 20, 1999 the Borrower shall be obligated to issue an
additional 50,000 shares of the Borrower Stock to the Lender for each day
that it is late.)
IN WITNESS WHEREOF, the undersigned authorized officers of the parties have
executed this Agreement as of the date first set forth above.
TRIDENT III, LLC POWER EXPLORATION, INC.
By: /s/ Jeffrey W. Tomz By: /s/ Mark Zouvas
---------------------- --------------------
Name: Jeffrey W. Tomz Name: Mark Zouvas
Title: Director Title: CFO
31
AGREEMENT TO EXTEND REPAYMENT OBLIGATION
This Agreement to Extend Repayment Obligation (this "Agreement"), is
entered by and between Power Exploration, Inc., a Nevada corporation (the
"Borrower"), and Trident III, LLC, a Cayman limited liability company (the
"Lender"), as of May 1, 1999. Reference is made to the 10% Promissory Note
dated October 21, 1998 made by the Borrower to the Lender (the "Note").
WHEREAS, under the terms of the Notes the Lender has the right to be repaid all
indebtedness due under the Notes as of March 15, 1999; and
Whereas, the lender has agreed to delay the effectiveness of its right to
repayment until September 30, 1999;
1. The Lender hereby agrees to delay the effectiveness of its right to
repayment under the Note (the "Repayment Obligation") until September 30,
1999;
2. In consideration of Lender's agreement to delay the effectiveness of the
Repayment Obligation Borrower shall issue to Lender 40,000 shares of
Borrower's common stock ("Borrower Stock"), for the two subsequent months
that the Note is extended from March 15, 1999. (The period from March 16,
1999 through may 15, 1999 i.e., 40,000 shares has already been paid to
Trident III, LLC). the Borrower shall issue to Lender 220,000 shares of
Borrower Stock, for the extension from May 16, 1999 to September 30, 1999.
The 220,000 shares are to be issued no later than July 1, 1999. If the
Borrower fails to repay the note on or before September 30, 1999, the
Borrower shall issue the Lender 50,000 shares per day that the Note is
outstanding subsequent to September, 1999.
IN WITNESS WHEREOF, the undersigned authorized officers of the parties have
executed this Agreement as of the date first set forth above.
TRIDENT III, LLC POWER EXPLORATION, INC.
By: /s/ Jeffrey W. Tomz By: /s/ Mark Zouvas
---------------------- --------------------
Name: Jeffrey W. Tomz Name: Mark Zouvas
Title: Director Title: CFO
32
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT ( the "Agreement") is made this day of October
1999, by and between Ronald Welborn, a Texas resident ("Advisor") and Power
Exploration, Inc., a Nevada Corporation with its offices located in Fort Worth,
Texas (the "Company").
WHEREAS, Advisor and Advisors's Personnel (as defined below) have
experience in evaluating and effecting mergers and acquisitions, advising
corporate management, and in performing general administrative duties for
publicly-held companies and development stage investment ventures; and
WHEREAS, the Company desires to retain Advisor to advise and assist the
Company in its development on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and Advisor
agree as follows:
1. Engagement
The Company hereby retains Advisor, effective as of the date hereof (
the "Effective Date") and continuing until termination, as provided
herein, to assist the Company in it's acquisition of wells and other
producing properties (the "Services"). The Services are to be provided
on a "best efforts" basis directly and through Advisor's officers or
others employed or retained and under the direction of Advisor
("Advisor's Personnel"); provided, however, that the Services shall
expressly exclude all legal advice, accounting services or other
services which require licenses or certification which Advisor may not
have.
2. Term
This Agreement shall have an initial term of six (6) months (the
"Primary Term"), commencing with the Effective Date. At the conclusion
of the Primary Term this Agreement will automatically be extended on
for the same term ( the "Extension Period") unless Advisor or the
Company shall serve written notice on the other party terminating the
Agreement. Any notice to terminate given hereunder shall be in writing
and shall be delivered at least thirty (30) days prior to the end of
the Primary Term or any subsequent Extension Period.
3. Time and Effort of Advisor
Advisor shall allocate time and Advisors Personnel as it deems
necessary to provide the Services. The particular amount of time may
vary from day to day or week to week. Except as otherwise agreed,
Advisor's monthly statement identifying, in general, tasks performed
for the Company shall be conclusive evidence that the Services have
been performed. Additionally, in the absence of willful misfeasance,
bad faith, negligence or reckless disregard for the obligations or
duties hereunder by Advisor, neither Advisor nor Advisor's Personnel
shall be liable to the Company or any of its shareholders for any act
or omission in the course of or connected with rendering the Services,
including but not limited to losses that may be sustained in any
corporate act in any subsequent Business Opportunity (as defined
herein) undertaken by the Company as a result of advice provided by
Advisor or Advisors's Personnel.
4. Compensation
The Company agrees to pay Advisor a fee for the Services ("Advisory
Fee") by way of the delivery by the company of Seven Hundred Fifty
Thousand (750,000) shares of the Company's common stock as an initial
fee for the acquisition of interests from Rife Oil Properties, Inc.,
these shares
33
<PAGE>
shall be delivered within seven (7) days of the execution hereof, in
addition the Company does hereby grant to Advisor the right to purchase
up to the same number of shares (750,000) at an option price of
$0.66667 per share, such option to valid for the primary term of this
Agreement. All shares transferred are considered fully earned and
non-assessable as of the date hereof.
5. Registration of Shares
Company agrees that any shares issued to satisfy a Fee may be
registered by the Company with the Securities and Exchange Commission
under any subsequent applicable registration statement filed by the
Company at the Company's discretion. Such issuance or reservation of
shares shall be in reliance on representations and warranties of
Advisor set forth herein.
6. Costs and Expenses
All third party and out-of-pocket expenses incurred by Advisor in the
performance of the Services or for the settlement of debts shall be
paid by the Company, or Advisor shall be reimbursed if paid by Advisor
on behalf of the Company, within ten (10) days of receipt of written
notice by Consultant, provided that the Company must approve in advance
all such expenses in excess of $500 per month.
7. Place of Services
The Services provided by Advisor or Advisor's Personnel hereunder will
be performed at Advisor's offices except as otherwise mutually agreed
by Advisor and the Company.
8. Independent Contractor
Advisor and Advisor's Personnel will act as an independent contractor
in the performance of its duties under this Agreement. Accordingly,
Advisor will be responsible for payment of all federal, state, and
local taxes on compensation paid under this Agreement, including income
and social security taxes, unemployment insurance, and any other taxes
due relative to Advisor's Personnel, and any and all business license
fees as may be required. This Agreement neither expressly nor impliedly
creates a relationship of principal and agent, or employee and
employer, between Advisor's Personnel and the Company. Neither Advisor
nor Advisor's Personnel are authorized to enter into any agreements on
behalf of the Company. The Company expressly retains the right to
approve, in its sole discretion, each Asset Opportunity or Business
Opportunity introduced by Advisor, and to make all final decisions with
respect to effecting a transaction on any Business Opportunity.
9. No Agency Express or Implied
This Agreement neither expressly nor impliedly creates a relationship
of principal and agent between the Company and Advisor, or employee and
employer as between Advisor's Personnel and the Company.
10. Termination
The Company and Advisor may terminate this Agreement prior to the
expiration of the Primary Term upon thirty (30) days written notice
with mutual written consent. Failing to have mutual
34
<PAGE>
consent, without prejudice to any other remedy to which the terminating
party may be entitled, if any, either party may terminate this
Agreement with thirty (30) days written notice under the following
conditions:
(A) By the Company.
--------------
(i) If during the Primary Term of this Agreement or any
Extension Period, Advisor is unable to provide the
Services as set forth herein for thirty (30)
consecutive business days because of illness,
accident, or other incapacity of Advisor's Personnel;
or,
(ii) If Advisor willfully breaches or neglects the duties
required to be performed hereunder; or,
(iii) At Company's option without cause upon 30 days written
notice to Advisor; or
(B) By Advisor.
(i) If the Company breaches this Agreement or fails to
make any payments or provide information required
hereunder; or,
(ii) If the Company ceases business or, other than in an
Initial Merger, sells a controlling interest to a
third party, or agrees to a consolidation or merger
of itself with or into another corporation, or enters
into such a transaction outside of the scope of this
Agreement, or sells substantially all of its assets
to another corporation, entity or individual outside
of the scope of this Agreement; or,
(iii) If the Company subsequent to the execution hereof has
a receiver appointed for its business or assets, or
otherwise becomes insolvent or unable to timely
satisfy its obligations in the ordinary course of,
including but not limited to the obligation to pay
the Initial Fee, or the Advisory Fee; or,
(iv) If the Company subsequent to the execution hereof
institutes, makes a general assignment for the
benefit of creditors, has instituted against it any
bankruptcy proceeding for reorganization for
rearrangement of its financial affairs, files a
petition in a court of bankruptcy, or is adjudicated
a bankrupt; or,
(v) If any of the disclosures made herein or subsequent
hereto by the Company to Consultant are determined to
be materially false or misleading.
In the event Advisor elects to terminate without cause or this
Agreement is terminated prior to the expiration of the Primary Term or
any Extension Period by mutual written agreement, or by the Company for
the reasons set forth in A(i) and (ii) above, the Company shall only be
responsible to pay Advisor for unreimbursed expenses, Advisory Fee or
other Fee accrued up to and including the effective date of
termination. If this Agreement is terminated by the Company for any
other reason, or by Advisor for reasons set forth in B(i) through (v)
above, Advisor shall be entitled to any outstanding unpaid portion of
reimbursable expenses, if any, and for the remainder of the unexpired
portion of the applicable term (Primary Term or Extension Period) of
the Agreement.
35
<PAGE>
11. Indemnification
Subject to the provisions herein, the Company and Advisor agree to
indemnify, defend and hold each other harmless from and against all
demands, claims, actions, losses, damages, liabilities, costs and
expenses, including without limitation, interest, penalties and
attorneys' fees and expenses asserted against or imposed or incurred by
either party by reason of or resulting from any action or a breach of
any representation, warranty, covenant, condition, or agreement of the
other party to this Agreement.
12. Remedies
Advisor and the Company acknowledge that in the event of a breach of
this Agreement by either party, money damages would be inadequate and
the non-breaching party would have no adequate remedy at law.
Accordingly, in the event of any controversy concerning the rights or
obligations under this Agreement, such rights or obligations shall be
enforceable in a court of equity by a decree of specific performance.
Such remedy, however, shall be cumulative and nonexclusive and shall be
in addition to any other remedy to which the parties may be entitled.
13. Miscellaneous
(A) Subsequent Events. Advisor and the Company each agree to
notify the other party if, subsequent to the date of this
Agreement, either party incurs obligations which could
compromise its efforts and obligations under this Agreement.
(B) Amendment. This Agreement may be amended or modified at any
time and in any manner only by an instrument in writing
executed by the parties hereto.
(C) Further Actions and Assurances. At any time and from time to
time, each party agrees, at its or their expense, to take
actions and to execute and deliver documents as may be
reasonably necessary to effectuate the purposes of this
Agreement.
(D) Waiver. Any failure of any party to this Agreement to comply
with any of its obligations, agreements, or conditions
hereunder may be waived in writing by the party to whom such
compliance is owed. The failure of any party to this Agreement
to enforce at any time any of the provisions of this Agreement
shall in no way be construed to be a waiver of any such
provision or a waiver of the right of such party thereafter to
enforce each and every such provision. No waiver of any breach
of or noncompliance with this Agreement shall be held to be a
waiver of any other or subsequent breach or noncompliance.
(E) Assignment. Neither this Agreement nor any right created by it
shall be assignable by either party without the prior written
consent of the other or as stated herein.
(F) Notices. Any notice or other communication required or
permitted by this Agreement must be in writing and shall be
deemed to be properly given when delivered in person to an
officer of the other party, when deposited in the United
States mails for transmittal by certified or registered mail,
postage prepaid, or when deposited with a public telegraph
company for transmittal, or when sent by facsimile
transmission charges prepared, provided that the communication
is addressed:
36
<PAGE>
(i) In the case of the Company: Power Exploration, Inc.
5416 Birchman Avenue
Fort Worth, Texas 76107
Telephone: (817) 377-4464
Telefax: (817) 377-4686
Attention: Joe Bennett
(ii) In the case of Advisor: Ronald Welborn
11701 South Freeway
Burleson, Texas 76028
Telephone: (817) 996-3204
Telefax: (817) 293-9336
or to such other person or address designated in writing by the Company or
Advisor to receive notice.
(G) Headings. The section and subsection headings in this
Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this
Agreement.
(H) Governing Law. This Agreement was negotiated and is being
contracted for in Utah, and shall be governed by the laws of
the State of Texas, and the United States of America, not
withstanding any conflict-of-law provision to the contrary.
(I) Binding Effect. This Agreement shall be binding upon the
parties hereto and inure to the benefit of the parties, their
respective heirs, administrators, executors, successors, and
assigns.
(J) Entire Agreement. This Agreement contains the entire agreement
between the parties hereto and supersedes any and all prior
agreements, arrangements, or understandings between the
parties relating to the subject matter of this Agreement. No
oral understan dings, statements, promises, or inducements
contrary to the terms of this Agreement exist. No
representations, warranties, covenants, or conditions, express
or implied, other than as set forth herein, have been made by
any party.
(K) Severability. If any part of this Agreement is deemed to be
unenforceable the balance of the Agreement shall remain in
full force and effect.
(L) Counterparts. A facsimile, telecopy, or other reproduction
of this Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument, by one or more parties hereto and such executed
copy may be delivered by facsimile or similar instantaneous
electronic transmission device pursuant to which the signature
of or on behalf of such party can be seen. In this event, such
execution and delivery shall be considered valid, binding and
effective for all purposes. At the request of any party
hereto, all parties agree to execute an original of this
Agreement as well as any facsimile, telecopy or other
reproduction hereof.
(M) Time is of the Essence. Time is of the essence of this
Agreement and of each and every provision hereof.
37
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date above written.
The "Company" "Advisor"
Power Exploration, Inc. Ronald Welborn
A Nevada Corporation A Texas Resident
By: /s/Joe Bill Bennett By: /s/ Ronald Welborn
------------------------ --------------------
Name: Joe Bill Bennett Name: Ronald Welborn
-----------------------
Title: Chief Executive Officer
38
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1999 THAT
WERE FILED WITH THE COMPANY'S REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000316621
<NAME> Power Exploration, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-START> Oct-1-1998
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<CASH> 1083
<SECURITIES> 0
<RECEIVABLES> 93,133
<ALLOWANCES> 0
<INVENTORY> 323,486
<CURRENT-ASSETS> 417,932
<PP&E> 7,458,997
<DEPRECIATION> 104,072
<TOTAL-ASSETS> 7,778,884
<CURRENT-LIABILITIES> 2,010,933
<BONDS> 0
0
0
<COMMON> 3,553
<OTHER-SE> 5,764,408
<TOTAL-LIABILITY-AND-EQUITY> 7,778,884
<SALES> 268,397
<TOTAL-REVENUES> 268,397
<CGS> 330,646
<TOTAL-COSTS> 2,945,875
<OTHER-EXPENSES> (25,593)
<LOSS-PROVISION> 3,240,263
<INTEREST-EXPENSE> 232,139
<INCOME-PRETAX> (3,214,670)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,214,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,214,670)
<EPS-BASIC> (21.49)
<EPS-DILUTED> (21.49)
</TABLE>
