SCHEDULE 14C INFORMATION
Proxy Statement Pursuant to Section 14(c) of the Securities and
Exchange Act of 1934
(Amendment No. _____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14c-5(d)(2))
[ ] Definitive Information Statement
LYRIC ENERGY, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the
Registrant)
Payment of Filing Fee (check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g)
and 0-11.
1) Title of each class of securities to which transaction
applies:
Common Stock of Natural Gas Technologies, Inc.,
$.001 par value
Series 1994-A Preferred Stock of Natural Gas
Technologies, Inc., $4.00 par value
Series 1994-B Preferred Stock of Natural Gas
Technologies, Inc., $4.00 par value
2) Aggregate number of securities to which transaction
applies:
Common Stock: 3,819,400
Series 1994-A Preferred Stock: 9,597
Series 1994-B Preferred Stock: 66,365
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined):
The underlying value of the transaction is $1,232,821,
which is the book value of Natural Gas Technologies,
Inc. as of January 31, 1997, the latest practicable
date. There is no market for the securities of Natural
Gas Technologies, Inc.
4) Proposed maximum aggregate value of transaction:
$1,232,821
5) Total fee paid: $ 246.56
[ X ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously.
Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its
filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement Number:
3) Filing party:
4) Date filed:
LYRIC ENERGY, INC.
1013 West 8th Avenue
Amarillo, Texas 79101
INFORMATION STATEMENT AND
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER ___, 1997
To the shareholders of Lyric Energy, Inc.:
A Special Meeting of the shareholders of Lyric Energy, Inc. (the "Company")
will be held at 16775 Addison Road, Suite 300, Dallas, Texas 75248, at 2:00
P.M. (CST) on Monday, October ____, 1997, or at any adjournment or
postponement thereof, to act upon the following:
(1) To consider and act upon a one share for 240.597 share (1 for
240.597) reverse stock split of the Company's $.01 par value common
stock;
(2) To consider and act upon an Amendment to the Company's Articles of
Incorporation to authorize 10,000,000 shares of no par value
preferred stock, 9,597 of which shall be designated as Series 1994-A
Preferred Stock, 66,360 of which shall be designated as Series
1994-B Preferred Stock and the remainder to be reserved for future
issuance in the discretion of the Board of Directors;
(3) To consider and act upon an Amendment to the Company's Articles of
Incorporation to change the name of the Company to Natural Gas
Technologies, Inc.;
(4) To consider and act upon an Amendment to the Company's Articles of
Incorporation to eliminate the liability of Directors and Officers
in certain circumstances;
(5) To consider and act upon an Amendment to the Company's Articles of
Incorporation to reduce the voting requirement for certain
fundamental corporate actions; and
(6) To consider such other business as may properly come before the
meeting.
Details relating to this matter are set forth in the attached Information
Statement. All shareholders of record as of the close of business on
___________________, 1997 will be entitled to notice of, and to vote at, such
meeting or at any adjournment or postponement thereof.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Brent Wagman
Chairman of the Board
September _____, 1997
INFORMATION STATEMENT
LYRIC ENERGY, INC.
1013 West 8th Avenue
Amarillo, Texas 79101
(806) 376-6142
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD OCTOBER _____, 1997
This Information Statement is furnished in connection with the special
meeting of Lyric Energy, Inc. (the "Company"), a Colorado corporation, to be
held at 2:00 P.M. on October ____, 1997 at 16775 Addison Road, Suite 300,
Dallas, Texas 75248, or at any adjournment or postponement thereof. The
Company anticipates that this Information Statement will be first mailed or
given to all shareholders of the Company on or about _____________, 1997. The
Company is not soliciting proxies. Approval of the proposed Amendments to the
Company's Articles of Incorporation, including the authorization of preferred
stock, requires the affirmative vote of two-thirds of all issued and
outstanding shares of $.01 par value common stock ("Common Stock"). The
approval of the reverse stock split requires the affirmative vote of a
majority of all votes present at the Special Meeting in person or by proxy.
Abstentions and broker non-votes will be treated as negative votes.
This Information Statement is being distributed on behalf of the Company, but
all of the expenses involved in preparing, assembling and mailing this
Information Statement and the material enclosed herewith will be paid by
Natural Gas Technologies, Inc. ("NGT") pursuant to an agreement between the
Company and NGT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
VOTING SHARES AND PRINCIPAL SHAREHOLDERS
The close of business on ___________________, 1997, has been fixed by the
Board of Directors of the Company as the record date for the determination of
shareholders entitled to notice of and to vote at the Special Meeting. At
such date, there were outstanding 250,000,000 shares of the Company's $.01 par
value common stock (hereinafter referred to as the "Common Stock"), each of
which entitles the holder thereof to one vote per share on each matter which
may come before the meeting. The Company has no other class of voting
securities outstanding.
A majority of the issued and outstanding shares of the Common Stock entitled
to vote, represented in person or by proxy, constitutes a quorum at any
shareholders' meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 1997, the Common Stock
ownership of each person known by the Company to be the beneficial owner of
five percent or more of the Company's Common Stock ("Principal Shareholders"),
all Directors and Officers individually and all Directors and Officers of the
Company as a group. Except as noted, each person has sole voting and
investment power with respect to the shares shown. There are no contractual
arrangements or pledges of the Company's securities, known to the Company,
which may at a subsequent date result in a change of control of the
Company.
Amount of Beneficial Amount of Beneficial
Ownership Before Ownership After
Reverse Split Reverse Split
and Share Exchange(1) and Share Exchange
Name and Address Common Percent of Common Percent of
of Beneficial Owner Stock Class(2) Stock Class(3)
Natural Gas 203,041,517(5) 81% ---(4) ---
Technologies, Inc.
16775 Addison Road
Suite 300
Dallas, TX 75248
Brent A. Wagman(5) --- --- 1,357,226(6) 31%
Chairman of the Board
16775 Addison Road
Suite 300
Dallas, TX 75248
Warren Donohue(5) --- --- 362,500 9%
Director
16775 Addison Road
Suite 300
Dallas, TX 75248
G. E. Stahl 3,577,402 1% 14,820 0.4%
President, Director
1013 West 8th Avenue
Amarillo, TX 79101
All Officers and 3,577,402 1% 1,734,546 40%
Directors as a
Group (three persons)
__________________________
(1) Rule 13d-3 under the Exchange Act, involving the determination of
beneficial owners of securities, includes as beneficial owners of
securities, among others, any person who directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise has,
or shares, voting power and/or investment power with respect to such
securities; and, any person who has the right to acquire beneficial
ownership of such security within sixty days through means, including but
not limited to, the exercise of any option, warrant or conversion of a
security. The Company has no options or warrants outstanding.
(2) Based upon 250,000,000 shares issued and outstanding prior to the
Reverse Split described in Item 1 - "Acquisition of Central and Share
Exchange Transaction."
(3) Based upon 4,221,575 shares issued and outstanding after the reverse
split and the Share Exchange described in Item 1 - "Acquisition of
Central and Share Exchange Transaction." The actual manner of shares
issued and outstanding may be slightly different due to rounding after
the reverse split.
(4) All shares of Lyric held by NGT will be distributed to NGT
shareholders in the Share Exchange.
(5) Mr. Wagman and Mr. Donohue are directors of NGT and Mr. Wagman is also
President and Chief Executive Officer of NGT and therefore may also be
considered beneficial owners of the Company's shares owned by NGT
pursuant to Rule 13d-3.
(6) Includes 194,726 shares held by Wagman Petroleum, Inc. and 212,500
shares held by Long Boat Trust. Mr. Wagman may be deemed the beneficial
owner of all such shares. Also includes 100,000 shares underlying a
currently exercisable option for NGT shares which will be exchanged for
an equivalent option for Lyric shares.
DESCRIPTION OF BUSINESS AND PROPERTIES OF THE COMPANY
Lyric Energy, Inc. ("Lyric" or the "Company") was incorporated in Colorado
on April 25, 1980. On February 3, 1981, the Company completed a registered
public offering of 20,000,000 shares of its Common Stock, and received gross
proceeds of $2,000,000 therefrom. The Company was an active oil and gas
producing company from its inception until July 31, 1991.
For the fiscal year ending April 30, 1991 the net loss was $360,791 and for
1990 and 1989 was $290,561 and $266,799, respectively. The principal cause of
the losses was the interest being accrued but not paid on the Company's bank
note with the Amarillo National Bank (the "Bank"). The original principal of
the Bank note was $1,815,869. By April 30, 1991 principal and unpaid interest
had grown to $3,209,761. The Company was unable to pay the interest.
Effective July 31, 1991 the Company entered into an agreement with the Bank
whereby the Company assigned to the Bank interest in certain oil and gas
producing properties having a present worth discounted at 10% of $297,600, and
(ii) 3,800,000 shares of the Company's Common Stock and the Bank canceled all
past due notes including accrued interest through July 31, 1991. In addition
the Company agreed to assign to the Bank small overriding royalty interests
in any wells the Company subsequently drilled on one proved undeveloped oil
property in Moore County, Texas and on any oil and gas subsequently drilled by
the Company in the Thalia area of Foard County, Texas. The Company did not
drill any such wells.
Other oil and gas leases owned by the Company on July 31, 1991, were assigned
to other operators or expired by their own terms for failure to develop or
failure to produce. The Company agreed to continue to operate the Okmulgee
oil and casinghead gas producing properties consisting of the properties in
the Creek Indian designated unit as designated by the Oklahoma Corporation
Commission for a six month period. At the end of that six month period the
Company agreed with the Bank that the Company would, if the production
warranted, effectuate a production payment with the Bank providing that the
Bank would receive 75% of the Company's revenue after expenses from the Creek
Indian Unit until the Bank received $100,000 or alternately the Company would
sell the properties in the unit and give to the Bank the proceeds of such
sale. The Company subsequently sold the Okmulgee oil and casinghead gas
producing properties to an unrelated third party and paid the proceeds to the
Bank in accordance with this agreement.
After assigning to the Bank the oil and gas producing properties described
above, the Company still had interests in some oil and gas properties. All of
those oil and gas properties subsequently were either plugged and abandoned or
ceased producing and expired by their own terms for failure to develop or
failure to produce. One property in Moore County, Texas, was sold to an
unrelated third party in exchange for an obligation by that party to plug and
abandon the wells at the appropriate time and relieve the Company of that
obligation and a modest amount of cash which was not sufficient to completely
pay the outstanding obligations of that property at the time of sale. The
amount of such unpaid invoices were owed to Stahl Petroleum Company, a company
owned and controlled by the President of the Company, which waived the payment
of the balance due.
As a consequence of the foregoing transactions, the Company had no source of
cash flow or income and no properties with any appreciable value.
The Company is currently engaged in the business of attempting to consummate
an acquisition of an operating company in order to carry on the business of
the operating company. The Company has a letter of intent to acquire Natural
Gas Technologies, Inc. ("NGT"), which currently owns 81 percent of the
Company's Common Stock. See "Share Exchange Transaction."
Lyric's Office Facilities
The Company's offices are located at 1013 West 8th Avenue, Amarillo, Texas
79101, in space which the Company shares with Stahl Petroleum Company. Stahl
Petroleum Company is wholly-owned and controlled by G.E. Stahl. The Company
does not pay Stahl Petroleum Company for secretarial and accounting services,
office rent, miscellaneous expenses or any other services or material.
COMPETITION
Upon acquisition by the Company of NGT, the Company will be engaging in the
oil and gas business. Competition in the oil and gas business is intense,
particularly with respect to the acquisition of producing properties, proved
undeveloped acreage and leases. Major and independent oil and gas companies
actively bid for desirable oil and gas properties and for the equipment and
labor required for their operation and development. Many of the Company's
competitors will have financial resources and exploration and development
budgets that are substantially greater than those of the Company, and these
may adversely affect the Company's ability to compete.
REGULATION AND TAXATION
The Company's oil and gas business will be subject to various federal, state
and local laws and governmental regulations which may be changed from time to
time in response to economic or political conditions. Matters subject to
regulation include discharge permits for drilling operations, drilling bonds,
reports concerning operations, the spacing of wells, unitization and pooling
of properties, taxation and environmental protection. From time to time,
regulatory agencies have imposed price controls and limitations on production
by restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas.
The Company's operations could result in liability for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. The Company could be liable
for environmental 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 have a material adverse effect on the
Company's financial condition and results of operations. The Company intends
to maintain insurance coverage for its operations, including limited coverage
for sudden environmental damages, but does not believe that insurance coverage
for environmental damages that occur over time will be available at a
reasonable cost. Moreover, the Company does not believe that insurance
coverage for the full potential liability that could be caused by sudden
environmental damages will be available at a reasonable cost. Accordingly,
the Company may be subject to liability or may lose substantial portions of
its properties in the event of certain environmental damages. The Company
could incur substantial costs to comply with environmental laws and
regulations.
The Oil Pollution Act of 1990 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.
The recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. For instance, legislation has been
introduced in Congress that would reclassify certain 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 enacted, it could have a significant
impact on the operating costs of the Company, as well as the oil and gas
industry in general. Initiatives to further regulate the disposal of oil and
gas wastes are also pending in certain states, and these various initiatives
could have a similar impact on the Company.
EMPLOYEES
The Company has one part-time, non-compensated employee, its President. The
Company's President devotes a modest amount of time to the Company's business.
The Company utilizes the secretaries and bookkeepers employed by Stahl
Petroleum Company.
LEGAL PROCEEDINGS
Except as set forth below, Lyric knows of no pending or threatened legal
proceedings to which it is a party other than routine litigation for which it
has no material financial exposure and no such proceedings are known to Lyric
to be contemplated by governmental authorities.
On August 1, 1997, the 47th District Court for Potter County, Texas
rendered a judgment against Lyric and G.E. Stahl for approximately $60,000 in
the case of Crouch Enterprises, Inc. dba Crouch Petroleum Company v. G.E.
Stahl, Stahl Petroleum Company and Lyric Energy, Inc. Liability for the
judgment is joint and several. Mr. Stahl and Lyric intend to appeal the
judgment. Stahl Petroleum Company, a Company owned and controlled by G.E.
Stahl, has agreed to indemnify Lyric against all losses and expenses arising
from this lawsuit. Accordingly, Lyric does not believe it will suffer any
adverse effect as a result of the judgment.
NGT knows of no pending or threatened legal proceedings to which NGT is a
party other than routine litigation for which NGT has no material financial
exposure. No such proceedings are known to NGT to be contemplated by
governmental authorities.
PLAN OF OPERATION
The Company is currently focusing on the proposed transaction with NGT
described below. In the event that transaction does not proceed, the Company
will focus on the identification and evaluation of other prospective merger
or acquisition "target" entities including private companies, partnerships or
sole proprietorships.
ACQUISITION OF CONTROL AND SHARE EXCHANGE TRANSACTION
The Company has entered into a letter of intent dated January 2, 1997 and
modified March 17, 1997 (the "Letter of Intent") with Natural Gas
Technologies, Inc. ("NGT") for a share exchange transaction ("Share
Exchange"). The Letter of Intent become binding by the March 17, 1997
amendment. The reason for the Share Exchange is to carry out the Company's
Plan of Operation to acquire an operating company. Prior to entering into the
Letter of Intent, the Company and NGT were unrelated and NGT held no shares of
the Company.
Pursuant to the Letter of Intent, NGT loaned the Company $100,000 pursuant
to a non-interest bearing Convertible Promissory Note (the "Note"). The Note
had a maturity date of December 31, 1997 and automatically converted into
203,041,517 shares of the Company's Common Stock upon (i) the Company coming
into current compliance with the Securities Exchange Act of 1934, as amended,
and (ii) the Company obtaining a waiver from Amarillo National Bank of certain
non-dilution rights in favor of the Bank. The Note converted by its terms on
April 10, 1997, which resulted in NGT obtaining a controlling interest in
Lyric. Previously, no single person or voting group controlled the Company.
G.E. Stahl was the sole Director and approved the transaction in that
capacity. The source of the $100,000 was a loan to NGT from Brent Wagman and
Warren Donohue, both officers and directors of NGT.
The Share Exchange will commence after the approval of the matters on the
agenda at the Special Meeting. By virtue of the shares acquired by NGT upon
conversion of the Note, NGT holds sufficient votes to assure shareholder
approval of all of the matters on the agenda.
The Share Exchange will take place in two stages. The first stage will
occur immediately after the Special Meeting and will consist of the exchange
of approximately 2,691,000 shares of the authorized but unissued post-reverse
split shares of the Company's Common Stock for 3,405,900 shares of NGT common
stock, which constitutes approximately 85 percent of the equity interests in
NGT. The NGT shares to be exchanged in the first stage are held by certain
officers, directors, affiliates and sophisticated investors. The Company will
control NGT upon completion of the first stage.
The second stage will occur upon the approval by NGT shareholders of the
exchange of the remaining NGT shares pursuant to an S-4 Registration Statement
and Proxy Statement which registers the exchange of all of the remaining
equity interests in NGT into shares of the authorized but unissued
post-reverse split Common Stock of the Company and further provides for the
distribution of the 843,908 post-reverse split shares of Common Stock issued
to NGT upon conversion of the Note to the shareholders of NGT immediately
prior to the Share Exchange. It is also contemplated that the shares issued
in the first stage of the Share Exchange will be registered for resale by such
registration statement. NGT has outstanding 9,597 shares of Series 1994-A
Preferred Stock and 66,360 shares of Series 1994-B Preferred Stock. These
preferred shares are non-voting and will be converted upon the second stage of
the Share Exchange into the same number of Series 1994-A and Series 1994-B
preferred shares of the Company. These shares are to be authorized and
designated at the Special Meeting. As of the date hereof, the Series 1994-A
shares of NGT have accrued an aggregate of $9,765 in dividends and the Series
1994-B shares of NGT have accrued an aggregate of $22,785 in dividends. These
amounts will become accumulated but unpaid dividends of the respective series
of preferred stock of the Company to be issued in the exchange. The Company
intends to surrender the NGT preferred shares it acquires in the Share
Exchange. Upon completion of the Share Exchange, the current shareholders of
the Company will hold approximately five percent of the total outstanding
shares of the Company and the shareholders of NGT will hold the remaining 95
percent, assuming conversion of the preferred shares to be issued in the Share
Exchange to common shares.
The material terms of the Note and the Share Exchange were negotiated and
agreed to by the Company and NGT prior to NGT obtaining control of the
Company. The terms were the result of arms' length negotiations between the
Company and NGT. In light of the independence of the companies at the time of
the negotiations and the Company's lack of assets and operations, the Board of
Directors determined that an independent valuation or fairness opinion would
offer very little support to the valuation of the transaction. Factors
considered in determining the amount of the Note and the percentage of shares
held by either party subsequent to all conversions were (i) funds necessary to
pay off the Company's debts, (ii) expenses to bring the Company's reports
current, (iii) the amount of debt to be forgiven, (iv) the market for the
Company's shares, (v) the inability of NGT to utilize the Company's loss
carryforward, and (vi) the relative value of the two businesses as determined
by each company's Board of Directors.
The Share Exchange is expected to be accounted for as a purchase. The Share
Exchange is structured as a tax-free reorganization and should not have any
tax consequences for the shareholders of the Company or NGT.
Under Colorado law, the Share Exchange may be effected by resolution of the
Board of Directors of the Company. Approval of the shareholders of the
Company is not required and Colorado law does not grant dissenter's rights to
the shareholders of the Company.
The Share Exchange remains conditional upon the completion of final
documentation therefor, but is probable to occur. The Reverse Split and the
other matters under consideration at the Special Meeting are not conditional
upon the completion of the Share Exchange and will be effected upon approval
at the Special Meeting.
As indicated above, NGT loaned the Company $100,000 pursuant to the Note
which has been converted according to its terms. The Company used the portion
of the $100,000 proceeds from this transaction to pay $48,811 in accounts
payable plus an additional $35,000 for past uncompensated services to Stahl
Petroleum Company, which is owned and controlled by G. E. Stahl, the Company's
President. Other than these transactions, none of the Officers or Directors
of the Company have an interest in the Share Exchange or any matter to be
acted upon at the Special Meeting except interests arising solely from their
ownership of Securities in the Company and NGT. See "Security Ownership of
Certain Beneficial Owners and Management."
BUSINESS AND PROPERTY OF NGT
Glossary of Oil and Gas Terms
The terms defined below are used throughout this section.
Bcf. One billion cubic feet.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to oil or other liquid hydrocarbons.
BOE. Barrels of oil equivalent. Oil equivalents are determined using the
ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
Disposal well. A well employed for the reinjection of salt water produced
with oil into an underground formation.
Estimated net proved reserves. The estimated quantities of oil, gas and gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
Exploratory well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
Gross acres. An acre in which a working interest is owned.
Injection well. Well employed to inject water or polymer into an oil bearing
formation in order to increase reservoir pressure.
MBbl. One thousand barrels of oil or other liquid hydrocarbons.
MMBbl. One million barrels of oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
Mcf. One thousand cubic feet.
MMcf. One million cubic feet.
Net acres. The sum of the fractional working interests owned in gross acres.
Pay. A geological deposit in which oil and gas is found in commercial
quantities.
PV-10 Value. The present value of estimated future gross revenue to be
generated from the production of estimated net proved reserves, net of
estimated production and future development costs, using prices and costs in
effect as of the date indicated (unless such prices or costs are subject to
change pursuant to contractual provisions), without giving effect to
non-property related expenses such as general and administrative expenses,
debt service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is producing oil or gas or that is capable of
production.
Proved developed reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved undeveloped reserves. Reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
Shut-in. To close down a producing well temporarily.
Stripper. A well which produces very little oil and therefore provides very
little if any profit margin.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
or oil and gas, regardless of whether such acreage contains estimated net
proved reserves.
Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and to share
in the production. Working interest is computed as a percentage of the
interest remaining after payment of royalties.
Business of NGT
Natural Gas Technologies, Inc. is an energy company engaged in the
exploration, development, acquisition and production of crude oil and natural
gas. All of NGT's properties and its subsidiary's properties and operations
are currently located in the State of Texas. As of July 31, 1997, NGT had
estimated net proved reserves of approximately 1.544 MMBbls of oil and 196,404
Mcf of natural gas, or an aggregate of 1.577 MMBOE with a PV-10 Value of
$11.42 million.
From April 30, 1997 through July 31, 1997, NGT acquired estimated net proved
reserves of .383 MMBOE at an average cost of approximately $1.52 per BOE.
Average daily production increased from 15 BOE per day in the last fiscal year
ended April 30, 1997 to over 85 BOE per day as of July 31, 1997. This major
increase was due to the development drilling and acquisitions of several
properties in the last quarter of fiscal 1997. The Company added a net of
0.853 MMBOE of estimated net proved reserves in its last fiscal year
representing an increase of 255% for the year at an average cost of $8.12 per
BOE.
NGT's Business Strategy
NGT's objective is to build shareholder value through consistent growth in
per share reserves, production and the resulting cash flow and earnings. To
accomplish this, NGT has targeted properties which are expected to produce
secondary recoveries of oil and gas through the use of new technologies,
waterfloods or additional drilling. These types of properties can usually be
acquired on more favorable terms than properties in primary production,
although lease operating costs for these properties are higher upon
acquisition than properties in primary production. From April 30, 1995 to
April 30, 1997, NGT's production declined from an average of 33.7 BOE per day
to 15 BOE per day. This was mainly due to a lack of available capital for
well reworks. Since January 31, 1997, NGT has been acquiring additional
properties and reworking its existing properties using cash invested by two of
NGT's directors and through issuances of NGT's common stock.
NGT has contracted with Wagman Petroleum, Inc. ("WPI") to operate its
properties. WPI is approximately 45 percent owned by Brent A. Wagman, NGT's
President. Mr. Wagman is also a director and president of WPI. See "Certain
Relationships and Related Transactions."
Petroleum Blending
In October 1996, NGT acquired a non-exclusive license to practice a patent for
a blending process for manufacturing automobile fuel from natural gasoline and
octane enhancers (the "Patent"). Natural gasoline is the portion of natural
gas which is liquid at room temperature and pressure. The octane of natural
gasoline is too low and the vapor pressure too high for use alone in standard
automobile engines. The blending process incorporates other hydrocarbons used
as octane enhancers and vapor pressure stabilizers so the fuel can be used in
standard gasoline engines. A variety of hydrocarbons can be used in the
blend, including toluene, xylene and ethanol. The blended fuel meets all
current requirements for use as unleaded gasoline, but has not been certified
by the Environmental Protection Agency for marketing as an alternative, clean
burning fuel pursuant to the mandates of the Clean Air Act of 1990, as
amended. NGT believes that the fuel will qualify for such certification, but
certification will require independent tests which have yet to be performed,
and there can be no assurance that qualification will be forthcoming.
NGT is currently negotiating to purchase a blending facility for the fuel.
NGT intends to use a majority-owned subsidiary to purchase the blending
facility and commence manufacturing. These activities will require
significant additional capital for the subsidiary, which is expected to be
raised from the public or private sale of NGT securities, bank loans and
private equity investments in the subsidiary. There can be no assurance that
such capital will be available on terms acceptable to NGT, and accordingly,
there can be no assurance that NGT will ever successfully market this or any
other alternative fuel.
NGT acquired its non-exclusive license right to manufacture and market an
alternative fuel using the process described in the Patent by an Assignment
dated October 11, 1996 from Mobile Americlean Ltd. I, a Florida limited
partnership ("MAL"). MAL in turn acquired its right by assignment of a
license agreement between Interstate Chemical, Inc., a Kentucky corporation
("ICI"), the patent holder, and Interstate I, a Kentucky limited partnership
("ILP"), the original licensee. ICI and ILP executed an Agreement of License
and Assignment dated December 29, 1989 (the "Original License Agreement")
granting ILP an exclusive license to practice the patent in Mobile, Alabama.
The Original License Agreement provided that the license was non-transferable
and provided for a royalty of three percent of gross sales. In 1990, ICI and
ILP negotiated a new license agreement (the "New License Agreement") which
provided for a non-exclusive, perpetual and transferable license to ILP to
practice the Patent anywhere in the world. The royalty rate was also reduced
to a variable percentage of gross sales based on the gross margin received by
ILP. The revised royalty is three percent of gross sales at a gross margin
greater than $.15 per gallon, two percent of gross sales at a gross margin of
$.10 to $.15 per gallon and one percent of gross sales at a gross margin of
less than $.10 per gallon.
Prior to execution of the New License Agreement, ICI became insolvent and its
board of directors and executive officers resigned. MAL obtained the written
consent of a majority of ICI's stockholders for ratification of the New
License Agreement and assignment thereof to MAL. MAL received an opinion from
its counsel that such shareholder consent gives MAL the right to manufacture
the blended gasoline covered by the New License Agreement and the right to
assign that right to NGT.
Counsel for NGT has advised NGT that such shareholder approval may not be
legally effective. Nonetheless, NGT has concluded that in light of the poor
financial condition of ICI and the apparent lack of alternatives to ICI for
the royalty revenue, ICI is not likely to challenge the validity of the New
License Agreement. In the event of such a challenge, NGT feels that it would
be able to continue manufacturing an alternative fuel product by varying the
process so as not to infringe upon the Patent. However, in light of the legal
uncertainty concerning NGT's right to manufacture under the New License
Agreement, there can be no assurance that NGT will be able to go forward with
its petroleum blending operation.
Market and Dividend Information for NGT
There is currently no public trading market for NGT's common or preferred
shares. As of July 28, 1997, there were 135 holders of record of NGT's common
shares, eight holders of NGT's Series 1994-A Preferred Shares and 19 holders
of NGT's Series 1994-B Preferred Shares. To date, NGT has paid no dividends
on its common or preferred shares.
NGT's Office Facilities
NGT leases approximately 2,000 square feet of office space in Dallas, Texas,
for its executive offices. NGT also has a month-to-month agreement for yard
space in Abilene, Texas, where it stores excess pipe, valves and fittings.
NGT believes that its current facilities are adequate for its anticipated
needs during the next twelve months.
NGT's Oil and Gas Properties
NGT's exploration, development and acquisition activities are focused in two
areas of Texas: North Texas and Central-West Texas. Set forth below is
information concerning each of NGT's and its wholly-owned subsidiary's major
areas of operations based upon the estimated net proved reserves as of July
31, 1997.
Oil Gas MBOE
(MBBls) (Mcf) Amount Percent
North Texas Region 883 0 883 56
Central West Texas
Region 501 40 508 32
Other Areas 160 156 186 12
PV-10 Value
(In Thousands) Percent
North Texas Region 6,834 60
Central West Texas
Region 3,083 27
Other Areas 1,503 13
North Texas Region. NGT acquired Interior Energy, Inc., a Texas corporation
("Interior") in April 1997. Interior owns two fields with an aggregate of 75
wells located in the north Texas county of Wilbarger. Both properties had
been shut-in for the past few years by the previous operators. Interior owns
100 percent of the working interest in both fields. The larger property is
known as the East Milham Sand Unit covering approximately 1,026 acres. This
property contains approximately 45 wells including the disposal and injection
wells. It was originally drilled in the late 1920's by several major oil
companies. The producing formation is a sand that varies in thickness from 5
feet to over 35 feet. The property was unitized and waterflooded in the early
1960's. Records indicate that the water "broke through" or channeled through
the oil prematurely leaving behind a large amount of oil. Core analysis of
the sand indicates that there were three feet of sand which had permeability
in excess of 900 millidarcies which created an excellent path for the water to
channel through. An independent engineering report prepared by Pearl
Petroleum Engineering Consulting Service of Abilene, Texas ("PPE") estimates
that in excess of 1 MMBbls of oil should still be recoverable using polymers
to block water channels and change the flood pattern. NGT is currently in the
process of permitting new injection wells and setting up a pilot flood in the
south section of the field. This project accounts for over 30 percent of the
operating expenses incurred by NGT in its last fiscal year.
The other property is known as the Waggoner M lease. This property has
multiple pays and produced over 300,000 barrels of oil while in primary
production. A study by Ryder Scott in 1958 regarding the feasibility of
waterflooding the property showed the property to be a very good candidate for
secondary recovery. The operators at the time chose not to implement the plan
and records indicate that they completed wells into other pays instead. NGT
plans to implement waterflooding as recommended in the Ryder Scott report in
late summer 1997. Currently only one well is producing out of the 30 on the
property. No reserves have been assigned to this property at this time. If
the waterflood is successful, NGT hopes to recover as much as 150,000 barrels
of oil from the property, but there can be no assurance of any significant
recovery.
Central West Texas Region. As of July 31, 1997, NGT had acquired all of the
working interest in the Wilde #1 well and lease located in Runnels County,
Texas, just north of Norton, Texas. The purchase of this property included
six other adjacent leases totaling 1,208 acres. The principal interest here
is the Lower Palo Pinto Limestone. This formation produced extensively during
the 1960's and under primary recovery produced over 3,000,000 barrels of oil.
The formation produces large volumes of water along with the oil. The Wilde
#1 well was completed in this formation in December 1996 and had an initial
daily production rate of 80 barrels of oil and 60 barrels of water. Research
and engineering by independent sources indicated that the field was plugged
while many of the wells were still producing at rates of over 10 barrels of
oil per day. Information has also been found which suggests that the field
may be a good candidate for pressure maintenance or waterflood. PPE also
located ten undeveloped locations similar to the Wilde #1 location. NGT has
drilled an injection well and two exploratory wells in this field since
acquiring it. Both development wells found the Lower Palo Pinto Limestone to
be productive. At this time, both wells are being completed into deeper
payzones which were discovered. The Lange #1 well tested with a potential of
1,420 mcf per day absolute open flow and is currently shut-in awaiting a
pipeline. The second well swab tested 30-45 barrels of oil per day from the
deeper pay.
Other Areas. NGT owns working interests in approximately 30 wells located on
various leases in Coke, Runnels and Coleman counties in Texas. The depths of
these wells range from 2,100 feet to 5,600 feet. These wells are classified
as strippers and represent a small part of the NGT's total reserves.
New Acquisitions. In July 1997 NGT acquired a lease on the Miller Ranch
located in Crockett County, Texas. The lease gives NGT three years to drill
the first well and up to five years to fully develop a 1,280 acre lease.
Additionally, the lease gives NGT an option on approximately 8,700 acres owned
by the Miller Ranch adjacent to the leased acreage. The option exercise price
is $100 per acre. The property is located in the Ozona Canyon Sand gas field.
U.S. Department of Energy reports production from wells in this field average
.7 Bcf of gas from the Canyon Sand formation, although there can be no
assurance that this property will produce at that rate. Management believes
approximately 6,000 acres of the property may be productive from the Canyon
Sand. Additionally, Amoco Oil Company currently operates several wells
producing from the Ellenburger formation at approximately 13,000 feet deep.
These wells have cumulative production from .1 Bcf to over 19 Bcf of gas per
well. NGT's lease covers all depths. Although there are direct offset
drilling locations on the lands covered by the option, NGT has assigned no
reserves to this property since the exercise of the option would require
additional capital and no source for such capital has been identified.
Estimated Net Proved Reserves
The Company has employed PPE to evaluate approximately 83 percent of its PV-10
Values acquired since January 31, 1997 and NGT has evaluated the remainder.
The following table reflects summary information with respect to the estimates
of NGT's net proved oil and gas reserves for each of the years in the
three-year period ended April 30, 1997.
As of April 30
1995 1996 1997
RESERVE DATA:(1)
Oil (MBBls). . . . . . . . . . . 319 298 1,161
Gas (Mcf). . . . . . . . . . . . 296 211 156
MBOE . . . . . . . . . . . . . . 368 333 1,187
PV-10 Value (thousands). . . .$2,784 $2,708 $8,812
(1) No values were used or included for the Miller Ranch prospect or the
Waggoner M leases. Values for year ending April 30, 1997 used $19 per barrel
of oil and $1.80 per Mcf of gas. The years ending April 30, 1996 and 1995
used $17.00 per barrel of oil and $1.80 Mcf of gas.
Production, Price and Cost History
The following table summarizes the average net daily volumes of oil and gas
produced from properties in which NGT held an interest during the periods
indicated.
As of April 30
1995 1996 1997
OPERATING DATA:
Net production:
Oil . . . . . . . . . . . .7,140 6,004 3,833
Gas (Mcf) . . . . . . . . 30,951 17,210 10,316
MBOE. . . . . . . . . . . 12,299 8,872 5,552
Average net daily production:
Oil . . . . . . . . . . . . . 20 16 11
Gas (Mcf) . . . . . . . . . . 85 47 28
MBOE. . . . . . . . . . . . . 34 24 16
Average sales price:
Oil (per Bbl) . . . . . . . . 17.21 17.53 20.71
Gas (per Mcf) . . . . . . . . .1.47 1.55 2.12
Additional per BOE data:
Average lifting cost. . . . . .9.49 12.89 17.73
(1)
(1) 28 percent of the operating costs were associated with failed attempts to
re-establish production at four of NGT's leases which had been shut-in for an
extended time. Those properties are currently scheduled for plugging and the
reserves previously carried on the books have been written off in the last
fiscal year. See "NGT Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Productive Wells
The following table sets forth information regarding the number of productive
wells in which NGT held a working interest as of the end of each of the past
three fiscal years and as of July 31, 1997. Productive wells are either
currently producing wells or shut-in wells capable of commercial production.
One or more completions in the same bore hole are counted as one well. A well
is categorized under state reporting regulations as an oil well or a gas well
based upon the ratio of gas to oil produced when it first commenced
production, and such designation may not be indicative of current production.
Year Ended April 30,
1995 1996 1997 July 31, 1997
Gross Net Gross Net Gross Net Gross Net
Oil. . . . .23 10.7 20 10.7 90 83.1 95 88.1
Gas. . . . . 3 2.1 3 2.1 2 1.1 3 2.1
__ ____ __ ____ __ ____ __ ____
Total 26 12.8 23 12.8 92 84.2 98 90.2
Drilling Activities
The table below sets forth the number of new wells drilled in which NGT held a
working interest for the last three
fiscal years and as of July 31, 1997.
Year Ended April 30,
1995 1996 1997 July 31, 1997
Gross Net Gross Net Gross Net Gross Net
Development
Oil . . . . 0 0 0 0 0 0 2 2
Gas . . . . 0 0 0 0 0 0 1 1
Dry . . . . 0 0 0 0 0 0 1 1
___ ___ ___ ___ ___ ___ ___ ___
Total 0 0 0 0 0 0 4 4
Exploratory
Oil . . . . 0 0 0 0 0 0 0 0
Gas . . . . 0 0 0 0 0 0 0 0
Dry . . . . 0 0 0 0 0 0 0 0
___ ___ ___ ___ ___ ___ ___ ___
Total 0 0 0 0 0 0 0 0
Grand Total 0 0 0 0 0 0 4 4
All of NGT's drilling activities and completion activities are conducted on a
contract basis with independent operators and drilling contractors. NGT owns
no drilling equipment or workover rigs.
Leasehold and Other Interests
The following table sets forth the gross and net acres of developed and
undeveloped oil and gas leases and lease options held by NGT as of the end of
each of the last three fiscal years and as of July 31, 1997. Undeveloped
acreage includes leasehold interest which may already have been classified as
containing proved undeveloped reserves.
Developed Undeveloped
Acreage (1) Acreage (2) Total
Gross Net Gross Net Gross Net
4/30/95 1,415 551 0 0 1,415 551
4/30/96 1,415 551 0 0 1,415 551
4/30/97 2,252 1,648 1,088 1,087 3,340 2,735
7/31/97 2,452 1,845 11,300 10,036 13,752 11,881
(1) Developed acreage is acreage assigned to producing wells for the spacing
unit of the producing formation. Developed acreage in certain of NGT's
properties that include multiple formations with different well spacing
requirements may be considered undeveloped for certain formations, but
have been included only as developed acreage in the presentation above.
(2) Undeveloped acreage is lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains
estimated net proved reserves.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Overview
Natural Gas Technologies, Inc. was incorporated in April 1993 and commenced
operations in June 1993. NGT acquired interests in various oil and gas
properties in February 1994 and June 1994 and has been active in the oil and
gas industry since that time.
NGT uses the full cost method of accounting for its oil and gas producing
activities and, accordingly, capitalized all costs incurred in the
acquisition, exploration and development of proved oil and gas properties,
including the costs of abandoned properties, dry holes, geophysical costs and
annual lease rentals. In general, sales or other dispositions of oil and gas
properties are accounted for as adjustments to capitalized costs, with no gain
or loss recorded.
NGT entered into a letter of intent dated January 2, 1997, as modified on Mach
17, 1997, whereby NGT obtained on April 10, 1997 a controlling interest in
Lyric, and pursuant to which Lyric will acquire NGT in a share exchange
transaction whereby the shareholders of NGT will upon completion of the
transaction hold approximately 95 percent of the total outstanding shares of
Lyric. See "Acquisition of Control and Share Exchange Transaction."
Comparison of Years Ended April 30, 1997 and 1996
Oil and gas revenues. Oil and gas revenues decreased by $32,043, or 24%, to
$100,987 for the year ended April 30, 1997 compared with $133,030 for the 1996
period. This decrease was primarily attributable to physical depletion of
reserves and mechanical failure at one of NGT's wells.
Lease operating expenses. Lease operating expenses for the year ended April
30, 1997 were $98,455, a decrease of $15,955, or 14%, compared with $114,410
for the 1996 period. Lease operating expenses during the 1997 period were
inflated by failed attempts to reestablish production at four of NGT's leases
which had been shut-in for extended periods of time. The foregoing expenses
accounted for approximately 28% of the lease operating expenses for fiscal
1997.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization increased by $9,432, or 23%, to $50,394 for the year ended April
30, 1997 compared with $40,962 for the 1996 period. This increase was
primarily attributable to reserve purchases in the fourth quarter at a higher
cost per BOE than previously acquired reserves.
Professional fees. Professional fees increased by $34,245, or 324%, to
$44,816 for the year ended April 30, 1997 compared with $10,571 for the 1996
period. The increase was primarily due to legal and accounting services with
respect to NGT's loan and pending share exchange with Lyric, the costs of
bringing Lyric current on its Exchange Act reporting requirements and costs
associated with the Information Statement for the Special Meeting to be held
for Lyric shareholders to approve certain matters in connection with the Share
Exchange.
Management and consulting fees. Management and consulting fees increased by
$25,000, or 28%, to $115,000 for the year ended April 30, 1997 compared with
$90,000 for the 1996 period. These fees were attributable to financial
advisory services rendered.
Rent. Rent increased $3,049, or 73%, to $7,249 for the year ended April 30,
1997 compared with $4,200 for the 1996 period due to NGT's move to larger
offices.
Director Fees. Director fees of $20,833 were attributable to the amortization
expense associated with the issuance of stock in October 1993 to a Director as
compensation for his services for three years. This fee decreased from
$50,000 in the 1996 period due to the completion in the last fiscal year of
such amortization.
Travel. Travel expenses for the year ended April 30, 1997 of $7,610 were
attributable to management's meetings with business partners and
professionals. Travel expenses for the year ended April 30, 1996 were
nominal.
Other expenses. Other expenses for the year ended April 30, 1997 increased
$3,305, or 50%, to $9,896 compared with $6,591 for the 1996 period primarily
due to entertainment expenses.
Interest expense. Interest expense for the year ended April 30, 1997
increased $15,441, or 55%, to $43,648 compared with $28,207 for the 1996
period primarily due to assumption of the $3 million note in connection with
NGT's acquisition of Interior Energy, Inc.
Net loss. Net loss for the year ended April 30, 1997 increased $78,654, or
36%, to $299,485 compared with $220,831 for the 1996 period primarily due to
increased depreciation, depletion and amortization and increased professional
fees, management and consulting fees and travel and other expenses associated
with NGT's reorganization with Lyric and more aggressive acquisitions of oil
and gas properties, partially offset by lower director fees and the lack of
offering costs.
Liquidity and Capital Resources
On April 30, 1997, NGT had $816,725 in cash on hand. NGT's primary sources of
liquidity are proceeds from stock issuances, advances from related parties and
borrowings. NGT's principal cash needs are for the exploration and
development of oil and gas properties.
NGT's net cash provided by operating activities increased $201,814 to $166,568
for the year ended April 30, 1997 compared with $(35,246) in the 1996 period
primarily due to lower director fees, a related party stock issuance in the
prior period and a much larger portion of the net loss being attributable to
non-cash expenses. Net cash used in investing activities increased $804,060
to $826,286 for the year ended April 30, 1997 compared with $22,226 in the
1996 period primary due to lease and drilling costs, higher purchases of fixed
assets and the goodwill booked in the Lyric acquisition in the 1997 period.
Net cash provided by financing activities was $1,475,937 for the year ended
April 30, 1997, consisting of stock purchases and advances from related
parties, partially offset by note payments, compared with net cash provided of
$57,959 in the 1996 period attributable to advances from related parties and
note proceeds.
NGT's expenditures for the purchase of fixed assets and oil and gas properties
are the primary use of its capital resources. NGT has no current commitments
for capital expenditures, but its current business plan anticipates material
capital expenditures during the fiscal year ended April 30, 1998, subject to
the availability of capital. NGT anticipates raising capital for additional
capital expenditures through the public or private sale of securities and/or
through bank loans. The amount of future capital expenditures will depend
upon a number of factors including the impact of oil and gas prices on
investment opportunities, the availability of capital and the success of its
development activity which could lead to funding requirements for further
development.
Effects of Inflation and Changing Prices
NGT's results of operations and cash flows are affected by changing oil and
gas prices. At present, NGT does not expect that changes in the rates of
overall economic growth or inflation will significantly impact product prices
in the short-term. While gas prices seem most dependent on weather in North
America and corresponding usage, oil prices are more subject to global
economic forces and supply. NGT cannot predict the extent of any such effect.
If oil and gas prices increase, there could be a corresponding increase in the
cost to NGT for drilling and related services as well as an increase in
revenues.
Cautionary Statement with Regard to Forward Looking Information
The matters discussed in this Information Statement, when not historical
matters, are forward looking statements which involve a number of risks and
uncertainties which could cause actual events and results to differ materially
from projected or anticipated events or results. Such factors include, among
other things, the speculative nature of oil and gas exploration, the volatile
markets for oil and gas, uncertainties in production and reserve estimates,
environmental and governmental regulations, the availability of financing,
particularly equity financing, the ability of Lyric to establish a trading
market for its stock, force majeure events and other risk factors as described
from time to time in Lyric's filings with the Securities and Exchange
Commission ("SEC").
PROPOSALS BEING CONSIDERED
1. REVERSE STOCK SPLIT
The Board of Directors of the Company believes it advisable and in the best
interests of the Company to declare a one share for 240.597 share reverse
stock split (the "Reverse Split") of the Company's $.01 par value common stock
("Common Stock"). As a result of the Reverse Split, the currently outstanding
250,000,000 share of the Company will be converted into 1,039,082 shares,
subject to increases due to rounding as described below. The 250,000,000
shares of Common Stock authorized in the Company's Articles of Incorporation
will remain the same.
The Reverse Split is recommended in connection with the proposed Share
Exchange between the Company and NGT. The Reverse Split (i) will allow the
shareholders of NGT to obtain the agreed percentage of outstanding shares of
the Company and (ii) is hoped to result in a price per share of Company Common
Stock sufficient to meet the initial listing requirements for the National
Association of Securities Dealers Automated Quotation System ("Nasdaq").
The principal effect of the Reverse Split will be the decrease of the number
of issued and outstanding shares of Common Stock from 250,000,000 to
1,039,082. The Common Stock issued pursuant to the Reverse Split will be
fully paid and nonassessable. The voting rights and other rights that
accompany the Common Stock prior to the Reverse Split will not be altered by
the Reverse Split.
The certificates currently representing issued and outstanding shares of
Common Stock will be deemed to represent .00415633 (1 divided by 240.597)
times the number of shares of Common Stock after the effective date of the
Reverse Split. New shares of Common Stock will be issued in due course as
old shares are tendered to the transfer agent for exchange or transfer.
Fractional shares of post-split Common Stock which result from the division
described above will be rounded up to the next whole number of shares.
Shareholders are not required to exchange their certificate(s) of pre-split
Common Stock for post-split Common Stock. Shareholders may, however, exchange
their certificates for shares of post-split Common Stock by surrendering their
old certificates representing shares of pre-split Common Stock to the
Company's transfer agent. Upon surrender to the transfer agent of the share
certificate(s) representing shares of pre-split Common Stock and the
applicable transfer fee, which presently is $15.00 per certificate, the holder
will receive a share certificate representing the appropriate number of shares
of post-split Common Stock.
The Reverse Split is also hoped to facilitate the Company's anticipated
application for listing on the National Association of Securities Dealers
Automated Quotation System SmallCap Market ("Nasdaq"). Trading on Nasdaq is
desirable for a number of reasons, including the likelihood of generating
interest in the Company's Common Stock by more investors and securities
brokers and better access to equity capital. The initial listing requirements
for the Nasdaq SmallCap Market have recently been proposed to be amended, and
Nasdaq plans to apply these new requirements once approved by the SEC
retroactively to companies which apply for listing after such new requirements
were submitted to the SEC for approval. The new requirements include:
1. $4,000,000 in net tangible assets. Net tangible assets are total
assets exclusive of goodwill minus total liabilities.
2. At least 300 shareholders and at least 1,000,000 shares held by
persons other than officers, directors and ten percent shareholders (the
"public float").
3. A minimum bid price of $4.00 and a market value of at least
$5,000,000 for the public float.
4. A minimum of three market makers.
Management believes that upon approval of the Reverse Split and consummation
of the Share Exchange, the Company will meet all of the financial
requirements. Nonetheless, there can be no assurance that the Company will
meet the minimum bid price requirement, or that the Company's application will
be approved by Nasdaq.
The following table illustrates the effects of the proposed Reverse Split and
Share Exchange on the authorized and outstanding number of shares of Common
Stock.
Number of Shares Prior to After After
of Common Stock Reverse Split Reverse Split Share Exchange (1)
Authorized 250,000,000 250,000,000 250,000,000
Outstanding 250,000,000 1,039,082(2) 4,221,575
Treasury 0 0 0
Reserved(1) 0 0 76,922(3)
Available for
Future Issuance 0 248,960,918 245,701,503
Percent of
Authorized
Available for
Future Issuance 0% 99.6% 98.3%
(1) Does not include additional shares which may be issued as a result of
property acquisitions by NGT or equity investments in NGT prior to the
share exchange or additional shares which may be issued by the Company
in connection with an offering of the Company's securities.
(2) Does not include additional shares which will be issued as a result of
rounding. It is estimated that approximately 2,000 additional shares
will be outstanding as a result of such rounding.
(3) Reserved for issuance upon conversion of the Series 1994-A and Series
1994-B Preferred Stock which will be issued in the Share Exchange. See
"Authorization of Preferred Stock."
2. AUTHORIZATION OF PREFERRED STOCK
The Board of Directors has recommended that the Articles of Incorporation be
amended to authorize 10,000,000 shares of no par value preferred stock. 9,597
of such shares will be designated in the amendment as Series 1994-A and 66,360
of such shares will be designated in the amendment as Series 1994-B. The
purpose of this amendment is (I) to authorize and designate preferred shares
to be exchanged for the outstanding preferred shares of NGT and (ii) to add
flexibility to the Company's ability meet its future capital needs. The
Company has no current plans to issue shares of preferred stock other than the
shares of Series 1994-A and 1994-B to be issued in the Share Exchange. The
full text of the amendment, including the designations of rights and
preferences of the Series 1994-A and Series 1994-B Preferred Shares, is set
forth in Exhibit A attached to this Information Statement.
The terms and conditions of the Series 1994-A Preferred Stock are as follows:
Dividend: 9.25% per annum cumulative cash dividend payable quarterly.
Because all dividends on the NGT Series 1994-A preferred shares have been
accrued, the shares of Series 1994-A Preferred Stock will also be entitled to
the amount of the accrued but unpaid dividend, on the NGT Series 1994-A
shares. This amount is currently $1.02 per share.
Preference: The holders of the Series 1994-A Preferred Stock will be
entitled to a preference over all other equity holders in liquidation equal to
the $4.00 original purchase price of the NGT shares plus all accumulated
but unpaid dividends.
Voting Rights: None.
Conversion: Convertible at the option of the holder into 1.1 shares of
Common Stock for each share of Series 1994-A Preferred Stock.
Redemption: The Company may redeem the Series 1994-A Preferred Shares
upon ninety days written notice at $.05 per share anytime after the Common
Stock trades in a public market and closes at $7.00 or more for twenty
consecutive trading days. Notwithstanding the foregoing, the shares will
automatically redeem for $.05 per share on June 30, 1999. Upon redemption,
all accumulated but unpaid dividends will be paid.
The terms and conditions of the Series 1994-B Preferred Stock are as follows:
Dividend: 9.25% per annum cumulative cash dividend payable quarterly.
Because all dividends on the NGT Series 1994-B preferred shares have been
accrued, the shares of Series 1994-B Preferred Stock will also be entitled to
the amount of the accrued but unpaid dividend on the NGT Series 1994-B shares.
This amount is currently $1.11 per share for 16,365 of such shares and $0.09
per share for 50,000 of such shares.
Preference: The holders of the Series 1994-B Preferred Stock will be
entitled to a preference over the common shareholders in liquidation of $4.00
(equal to the purchase price of the shares) plus all accumulated but unpaid
dividends. The shares of Series 1994-B Preferred Stock are however
subordinate in preference to the Series 1994-A Preferred Stock.
Voting Rights: None.
Conversion: Convertible at the option of the holder into one share of
Common Stock for each share of Series 1994-B Preferred Stock.
Automatic Conversion: Each share of Series 1994-B Preferred Stock will
automatically convert into one share of Common Stock after the Common Stock
trades in a public market and closes at or above $7.00 per share for ten
consecutive trading days. Conversion will not however occur until all
accumulated but unpaid dividends are paid.
The additional shares of authorized preferred stock may be issued from time to
time in one or more series and each such series will have such designations,
rates of dividend, redemption prices, voting rights, liquidation preferences,
sinking fund provisions, conversion or exchange rights and other special
rights as the Board of Directors may fix prior to the time of issuance of such
series. The Board of Directors will be empowered to authorize the Company to
issue some or all of the additional preferred stock at such time or times, to
such persons and for such consideration as it may deem desirable without a
further vote of the stockholders and without offering such preferred stock to
the holders of the Common Stock of the Company. If additional shares of
preferred stock are issued, the interests of the holders of Common Stock could
be diluted with respect to earnings per share, liquidation rights, net asset
value per share and market value per share.
3. OTHER PROPOSALS TO AMEND THE ARTICLES OF INCORPORATION OF THE COMPANY
The Board of Directors believes it advisable and in the best interests of the
Company to amend its Articles of Incorporation (I) to change the name of the
Company to Natural Gas Technologies, Inc.; (ii) to eliminate the personal
liability of the Company's Directors and Officers to the Company and its
shareholders for monetary damages as a result of certain breaches of fiduciary
duty pursuant to the Colorado Business Corporation Act; and (iii) to reduce
the voting requirement for certain fundamental corporate actions pursuant to
the Colorado Business Corporation Act. The full text of the foregoing
amendments is set forth in Exhibit A attached to this Information Statement.
A. NAME CHANGE
The purpose of the proposed amendment to the Company's Articles of
Incorporation to change the name of the Company to Natural Gas Technologies,
Inc. is to reflect that after the Share Exchange, the principal business of
the Company, through it wholly-owned NGT subsidiary, will be the business of
NGT. This amendment should not have any adverse effect on the shareholders of
the Company.
B. EXONERATION OF OFFICERS AND DIRECTORS
The Colorado Business Corporation Act (the "BCA") permits a Colorado
corporation to amend its Articles of Incorporation to eliminate or limit the
personal liability of Directors and Officers to the corporation or its
shareholders for damages for breach of fiduciary duty as a Director or
Officer. No such amendment may, however, eliminate or limit the liability of
a Director or Officer for (i) any breach of the Director's or Officer's duty
of loyalty to the corporation or to its shareholders; (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) the payment of distributions in violation of Section
7-108-403 of the BCA or (iv) any transaction from which the Director or
Officer directly or indirectly derived an improper personal benefit. The
elimination of liability also does not apply to any acts or omissions
occurring prior to the date when such provision becomes effective.
The Board of Directors has recommended this proposal in response to (i) the
increasing hazard of litigation and its related expenses directed against
Directors and Officers, (ii) the general difficulty of obtaining Directors'
and Officers' liability insurance, (iii) the dramatic increases in premiums
for such insurance coverage and (iv) the potential inability to continue to
attract and retain qualified Directors and Officers in light of these
circumstances. Although none of the Company's current Directors or Officers
have indicated that they will no longer serve absent changes to its Articles
of Incorporation, the Company is concerned that it may encounter difficulty in
attracting qualified individuals to serve as Directors or Officers, a concern
the Company believes it shares with many other companies. In order to ensure
that the Company will be able to attract and retain experienced individuals to
serve as Directors and Officers, and as a matter of fairness, the Board of
Directors believes that the Company should provide the maximum possible
protection to its Directors and Officers consistent with applicable law.
In general, in performing their duties, Directors and Officers of a Colorado
corporation are obligated as fiduciaries to exercise their business judgment
and act in what they determine in good faith, after appropriate consideration,
to be in the best interests of the corporation and its shareholders.
Decisions made on that basis are ordinarily protected by the so-called
"business judgment rule" from being second guessed by a court in a lawsuit
challenging such decisions. The business judgment rule is thus meant to
protect Directors and Officers from personal liability to the corporation
or its shareholders when their business decisions are subsequently challenged.
However, for various reasons, including the expense of defending lawsuits, the
frequency with which unwarranted litigation is brought against Directors and
Officers and the inevitable uncertainties with respect to the outcome of
applying the business judgment rule to particular facts and circumstances,
Directors and Officers often rely for protection, as a practical matter, on
insurance procured by the corporation they serve.
Recent changes in the market for Directors' and Officers' liability insurance
have resulted in the unavailability for Directors and Officers of many
corporations of any meaningful liability insurance coverage. Insurance
carriers have in certain cases declined to renew existing Directors' and
Officers' liability policies, or have increased premiums to such an extent
that the cost of obtaining such insurance becomes prohibitive. Moreover,
current policies often exclude coverage for areas where the service of
qualified independent Directors and Officers is most needed. These
limitations on the scope of insurance coverage, along with high deductibles
and low limits of liability, have tended to undermine meaningful Directors and
Officers' liability insurance coverage. The company does not currently carry
Directors' and Officers' liability insurance coverage. The premium rates for
such insurance coverage are currently cost-prohibitive for the Company.
Without the amendment to the Company's Articles of Incorporation, the
Company's Directors and Officers have a fiduciary duty of care in their
service as Directors and Officers which subjects them to monetary liability to
the Company and its shareholders for breach of the duty of care. The duty of
care requires a Director and Officer to use that amount of care in the
performance of his duties which ordinarily careful and prudent men would use
in similar circumstances. The amendment would have the effect of eliminating
the liability of Directors and Officers of the Company for monetary damages
for breach of fiduciary duty except for (i) any breach of the Director's or
Officer's duty of loyalty to the corporation or to its shareholders; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) the payment of distributions in violation of
Section 7-108-403 of the BCA or (iv) any transaction from which the Director
or Officer directly or indirectly derived an improper personal benefit. The
amendment will not eliminate or limit the right of the Company or any
shareholder to seek an injunction or any other non-monetary relief in the
event of a breach of a Director's or Officer's duty of care. In addition, the
amendment applies only to claims against a Director or Officer arising out of
his or her role as a Director or Officer and many not relieve a Director or
Officer from liability unrelated to his fiduciary duty of care, such as
certain liabilities imposed on the Director or Officer under the federal
securities laws.
The Board of Directors acknowledges that current and future Directors and
Officers could benefit from the approval of the foregoing amendment and, in
this connection, the Directors and Officers may be considered to have a
conflict of interest and have a personal interest in approval of the amendment
at the potential expense of the shareholders of the Company.
The Company's Directors and Officers have no insurance coverage for derivative
claims or third party claims. The Company's Directors and Officers may be
forced to personally absorb the liabilities and expenses of future derivative
and third party claims. Alternatively, in certain instances, the Directors
and Officers may obtain some protection under the Company's obligations under
Colorado law and the Company's Articles of Incorporation and Bylaws to
indemnify them with respect to these liabilities and expenses. The Company's
indemnification obligation, however, will not necessarily absorb all
liabilities and expenses to which the Directors and Officers may be exposed.
Corporate indemnification is not an adequate substitute for liability
insurance because the Directors and Officers cannot be assured that the
Company's financial circumstances will always enable the Company to provide
indemnification.
The amendment is not being proposed in response to any resignation, threatened
resignation or refusal to serve by any Director or Officer of the Company or
by any person the Company desires to serve as a Director or Officer.
Moreover, management is unaware of any pending or threatened litigation
against any Director or Officer wherein a claim is made for breach of
fiduciary duty.
C. REDUCTION IN VOTING REQUIREMENTS
The BCA provides that for corporations in existence on June 30, 1994, unless
otherwise provided in the corporation's articles of incorporation, the vote of
two-thirds of all the votes entitled to be cast by each voting group are
required to approve (I) amendment to the corporation's articles of
incorporation; (ii) a plan of merger or share exchange; (iii) sale, lease,
exchange or other disposition of all or substantially all of the property of a
corporation otherwise than in the usual and regular course of business; or
(iv) the dissolution of a corporation or the revocation of a dissolution. A
corporation such as the Company in existence prior to June 30, 1994 and which
has only a single voting group consisting of all of the common shareholders
requires the vote of two-thirds of all issued and outstanding shares for any
of the foregoing matters unless the articles of incorporation provide that the
voting requirements for such corporation shall be the same as for corporations
formed on or after July 1, 1994.
The Board of Directors has proposed to adopt an amendment to the Articles of
Incorporation which reduces the voting requirement for the foregoing corporate
actions to that which would be required to take the action if the action were
to be taken by a corporation formed on or after July 1, 1994. Following
adoption of this amendment, approval of each of the above corporate action
will require the following votes:
Action Vote Required for Approval
Amendment to the Company's Votes cast for matter exceed the
Articles of Incorporation votes cast against the matter at a
meeting at which a quorum is present.
Plan of merger or share Majority of all votes entitled to be
exchange cast.
Sale, lease, exchange or Majority of all votes entitled to be
other disposition of all or cast.
substantially all of the
property of the Company.
Dissolution or revocation of Majority of all votes entitled to be
dissolution cast.
Due to the dispersion of the Company's shareholders, it is difficult, if not
impossible under ordinary circumstances for the Company to locate and obtain
the vote of two-thirds of the outstanding shares without a material
expenditure for the solicitation of proxies. The Board of Directors believes
that it is in the best interests of the Company to reduce the voting
requirement to the votes indicated above so that a minority of the Company's
shareholders, through inaction or otherwise, will not be able thwart the will
of the majority. The Board of Directors believes that reduction of the voting
requirement will (i) give the Company more flexibility to adapt its business
structure to changing needs and business strategies over time and (ii) reduce
the time and costs associated with proxy solicitation. Other than as
described in this Information Statement, the Board of Directors has no plans
at this time to recommend any of the actions for which the voting requirement
is being reduced.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On rare occasions the Company's common stock is traded on the over-the-counter
market and quotes for the Common Stock are reported in the National Quotation
Bureau's "Pink Sheets." There is no established market for the Company's
Common Stock.
The following table sets forth the range of high and low bid quotations, as
reported by National Quotation Bureau:
Quarter Ended High Low
July 31, 1994 None None
October 30, 1994 None None
January 31, 1995 None None
April 30, 1995 None None
July 31, 1995 None None
October 30, 1995 None None
January 31, 1996 None None
April 30, 1996 None None
July 31, 1996 None None
October 30, 1996 None None
January 31, 1997 $.035 $ 0
April 30, 1997 $.035 $0.001
The foregoing bid quotations reflect inter-dealer prices, without mark-up,
mark-down or commissions, and may not necessarily represent actual
transactions.
As of July 28, 1997, there were approximately 4,155 holders of record of
the Company's Common Stock.
No cash dividends have been declared with respect to the Common Stock since
its inception, and the Company has no present intention to pay such dividends
in the foreseeable future.
CHANGES IN ACCOUNTANTS
On July 9, 1997, the Company engaged Robert Early & Company, P.C. as the
Company's new independent auditors for the period ending April 30, 1997 and on
a going forward basis. At approximately the same time, the Company informed
its previous auditors, Wilson, Haag & Co., P.C., that they would not be
retained as the Company's auditors for fiscal 1997 and future periods. The
change in auditors was not brought about as the result of any disagreement
with the Company's former auditors, or as a result of any adverse opinion or
disclaimer of opinion as there were none. There also had not been any
disagreement with the former auditors relative to any uncertainty, audit scope
or accounting principles. The sole reason for the change was the familiarity
of the new auditor with the accounting practices and financial statements of
NGT. The change was recommended and approved by the Board of Directors as a
whole.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Described below are any transactions, or series of similar transactions,
for the Lyric's and NGT's last two fiscal years, or any currently proposed
transaction, or series of similar transactions, to which the Lyric or NGT was
or is to be a party, in which any of Lyric's or NGT's Officers, Directors or
ten percent shareholders had, or will have, a direct or indirect material
interest.
Lyric Transactions
On December 1, 1982 the Registrant loaned Mr. Wesley Masters, a former
Director, $7,551 pursuant to a note bearing interest at 10% per annum. As of
April 30, 1996, $17,681 was due on such obligation. Such amount was applied
against an obligation of the Company to a trust controlled by Mr. Masters and
the remainder of that obligation of the Company was forgiven in January 1997.
In 1983, the Company loaned Mr. L. K. Hayhurst a total of $8,874 pursuant to
two notes bearing interest at 10% per annum. As of April 30, 1996, $12,752
was due on such notes. In January 1997, the Company forgave the obligations
under those notes in consideration of Mr. Hayhurst's past uncompensated
services to the Company as Director.
As of April 30, 1996, Stahl Petroleum Company, over a period of time had
loaned to Registrant $43,692.34, for Registrant's working capital and legal
expenses. That amount was repaid out of the proceeds from conversion of the
$100,000 loan to the Company from NGT.
In April 1997, Stahl Petroleum Corporation was paid $35,000 for past services
out of the proceeds from the $100,000 loan to the Company from NGT.
The Company believes that the foregoing transactions were on terms at least as
favorable as those which it could have obtained from unaffiliated parties.
In addition to the foregoing, Messrs. Stahl, Wagman and Donahue could benefit
from the proposal to amend the Articles of Incorporation to eliminate the
liability of directors in certain circumstances. See "Exoneration of Officers
and Directors."
Messrs. Wagman and Donahue are each shareholders of NGT as well as Officers
and/or Directors of the Company and NGT. They will participate in the Share
Exchange to the extent of their share holdings in NGT. See "Security
Ownership of Certain Beneficial Owners and Management" and "Acquisition of
Control and Share Exchange Transaction."
NGT Transactions
Wagman Petroleum, Inc. ("WPI"), which is approximately 45 percent owned by
NGT's President and Chief Executive Officer, Brent Wagman, operates
essentially all of the properties in which NGT has interests. As operator,
WPI incurs expenses for drilling, reworking and normal lease operating
expenses and then bills these expenses to the working interest owners. WPI
collects a portion of NGT's gas production revenues and offsets such amounts
against amounts that are due from NGT. At April 30, 1997 and 1996, NGT owed
WPI $134,982 and $5,206, respectively, in accounts payable. The bulk of the
April 30, 1997 balance is due to drilling and reworking on the properties that
NGT has acquired and reworking interests previously held which occurred during
March and April 1997.
In July 1994, Brent Wagman, Ray Parker and Sonja Fletcher, all Directors of
NGT at the time, agreed to return without consideration an aggregate of
500,000 shares of NGT common stock issued to them for their efforts in
organizing NGT. This transaction was done in order to reduce the number of
outstanding common shares in connection with an anticipated public offering of
NGT common shares. Such offering never occurred.
In June 1994, WPI agreed to exchange 518,334 shares of NGT common stock for
194,376 shares of NGT Series 1994-B Preferred Stock, also in connection with
NGT's desire to reduce the number of outstanding common shares.
Through March 31, 1997, NGT reimbursed WPI for rent, postage, travel and other
office expenses. Office rent reimbursement to WPI totaled $4,200 for each of
fiscal 1997 and 1996. WPI also advanced funds to NGT for other expenses
during March 1997. These advances were reflected in a demand note effective
April 30, 1997 for $79,067 which bears interest at 5% per annum.
In July 1996, NGT repaid a note payable to WPI with a balance of $396,988,
accrued interest of $24,681 and other liabilities owed to WPI in the amount of
$89,997 through the issuance of 354,994 shares of NGT common stock. In
connection with such transaction, WPI also agreed to forgive the then-accrued
but undeclared dividends on its 194,376 shares of Series 1994-B Preferred
Stock and all future dividends on such shares until NGT had a class of
securities registered under the Exchange Act. In recognition of that
forgiveness, NGT voluntarily converted its shares of Series 1994-B Preferred
Stock into 194,376 shares of NGT common stock without receipt of accumulated
dividends in May 1997.
In July 1996, NGT issued 26,661 shares of NGT common stock to Brent Wagman as
payment for $53,332 in unreimbursed expenses and cash advances.
In February 1997, Brent Wagman loaned $50,000 and Warren Donohue loaned
$50,000 to NGT pursuant to demand notes bearing interest at 5% per annum.
These funds were used to loan $100,000 to Lyric pursuant to the Convertible
Note. In April 1997, these notes were converted as partial payment for
112,500 shares of NGT common stock issued to each of Mr. Wagman and Mr.
Donohue for $7.00 per share.
In May 1997, NGT purchased the remaining one half working interest in the
Wilde #1 well and lease located in Runnels County, Texas, from Brent A. Wagman
in consideration for a $200,000 demand note bearing interest at 5% per annum
with principal and interest due two years from issuance and an option
exercisable for two years to purchase 100,000 shares of NGT common stock at
$7.00 per share.
NGT believes that the foregoing transactions were on terms at least as
favorable as those which it could have obtained from third parties.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 1998 Annual Meeting
of Shareholders must be received by the Company on or before November 10, 1997
in order to be eligible for inclusion in the Company's Proxy Statement and
form of Proxy. To be so included, a proposal must also comply with all
applicable provisions of Rule 14a-8 under the Securities Exchange Act of 1934.
OTHER MATTERS
The Board of Directors does not know of any other matters to be brought before
the Meeting.
By Order of the Board of Directors
BRENT WAGMAN
Chairman of the Board
August 15, 1997
INDEX TO PRO FORMA FINANCIAL INFORMATION AND FINANCIAL STATEMENTS
PAGE
LYRIC ENERGY, INC.
Report of Independent Certified
Public Accountants
Independent Auditor's Report
Balance Sheets - April 30, 1997 and 1996
Statements of Operations - Years Ended
April 30, 1996 and 1995
Statements of Changes in Deficiency in
Assets - Years Ended April 30,
1997 and 1996
Statements of Cash Flows - Years
Ended April 30, 1997 and 1996
Notes to Financial Statements -
April 30, 1997 and 1996, including pro forma
combined financial information as of April 30, 1997
(Note 4)
NATURAL GAS TECHNOLOGIES, INC.
Report of Independent Certified Public
Accountants
Balance Sheets - April 30, 1997 and 1996
Statements of Operations - For the Years
Ended April 30, 1997 and 1996
Statement of Changes in Stockholders'
Equity - For the Years Ended April
30, 1997 and 1996
Statement of Cash Flows - For the
Years Ended April 30, 1997 and
1996
PAGE
Notes to Financial Statements -
April 30, 1997 and 1996
Supplementary Information Relating
to Oil and Gas Producing Activities -
For the Years Ended April 30, 1997
and 1996 (Unaudited)
LYRIC ENERGY, INC.
(A Development Stage Enterprise)
AUDITED FINANCIAL STATEMENTS
For the Years Ended
April 30, 1997 and 1996
ROBERT EARLY & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
LYRIC ENERGY INC.
Dallas, Texas
We have audited the accompanying balance sheets of Lyric Energy, Inc. (a
development stage enterprise) as of April 30, 1997 and the related statements
of operations, changes in shareholders' equity/(deficiency), and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
Lyric Energy, Inc. as of April 30, 1996, were audited by other auditors whose
report dated January 10, 1997, on those statements included an explanatory
paragraph that described substantial doubt about the Company's ability to
continue as a going concern.
We conducted our audit 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 financial statements referred to above present fairly, in
all material respects, the financial position of Lyric Energy, Inc. as of
April 30, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Lyric Energy, Inc. will continue as a going concern. As discussed in Note 8
to the financial statements, Lyric has been relatively inactive during the
past three years due to an lack of operating assets and working capital and a
significant deficiency in assets and equity. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 8.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Robert Early & Company, P.C.
Abilene, Texas
July 18, 1997
2500 S. Willis-Suite 200-Abilene, TX 79605-(915) 691-5790
INDEPENDENT AUDITOR'S REPORT
The board of Directors and Stockholders
Lyric Energy, Inc.:
We have audited the accompanying balance sheet of Lyric Energy, Inc. as of
April 30, 1996, and the related statements of operations, changes in
stockholders' equity/(deficiency) and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lyric Energy, Inc. as of
April 30, 1996, and results of its operations and its cash flows for the year
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 8 to the
financial statements, the Company has been relatively inactive during the past
two years due to a lack of operating assets and working capital and a
significant deficiency in assets. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
WILSON, HAAG & CO., P.C.
January 10, 1997 (except for certain
information in note 3 as to which
the date is March 17, 1997)
Amarillo, Texas
LYRIC ENERGY, INC.
(A Development Stage Enterprise)
Balance Sheets
April 30, 1997 and 1996
1997 1996
Assets
Cash $ - $ 1,453
____________ ____________
____________ ____________
Liabilities and Stockholders' Equity/(Deficiency)
Liabilities
Accounts payable trade including $48,811 due to
related parties $ - $ 65,860
Accrued interest payable to related parties - 119,258
Advances and amounts due related parties - 88,907
Judgement payable to a related party - 250,000
____________ ____________
Total Current Liabilities - 524,025
Stockholders' Equity/(Deficiency)
Common stock, $.01 stated value (250,000,000
shares authorized, 250,000,000 and
46,958,483 outstanding) 2,500,000 469,584
Additional paid-in capital 224,222 1,690,545
Retained (deficit) (2,724,222) (2,682,701)
____________ ____________
Total Stockholders' Equity/(Deficiency) - (522,572)
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ - $ 1,453
____________ ____________
____________ ____________
The accompanying notes are an integral part of these financial statements.
LYRIC ENERGY, INC.
(A Development Stage Enterprise)
Statements of Operations
For the years ended April 30, 1997 and 1996
Cumulative
During the
Development
Stage 1997 1996
General and administrative expenses $ (35,536) $ (35,593) $ (906)
Interest expense to related parties (1,482) (5,928) (8,891)
____________ ____________ ____________
NET (LOSS) $ (37,018) $ (41,521) $ (9,797)
____________ ____________ ____________
____________ ____________ ____________
Net loss per weighted average share $ (0.00) $ (0.00) $ (0.00)
____________ ____________ ____________
____________ ____________ ____________
Weighted average shares outstanding 74,582,792 58,084,045 46,958,483
____________ ____________ ____________
____________ ____________ ____________
The accompanying notes are an integral part of these financial statements.
LYRIC ENERGY, INC.
(A Development Stage Enterprise)
Statement of Changes in Stockholders' Equity/(Deficiency)
For the years ended April 30, 1997 and 1996
Date of Common Stock
Transaction Shares Amount
BALANCES, April 30, 1995 46,958,483 $ 469,584
Net (loss) - -
___________ ____________
BALANCES, April 30, 1996 46,958,483 469,584
Capital contributed by related
parties through cancellation 12/15/96 &
of debts 01/15/97 - -
Stock issued for Cash
(conversion from note) 04/10/97 203,041,517 2,030,416
Net (loss) - -
___________ ____________
BALANCES, April 30, 1997 250,000,000 $ 2,500,000
___________ ____________
___________ ____________
The accompanying notes are an integral part of these financial statements.
LYRIC ENERGY, INC.
(A Development Stage Enterprise)
Statement of Changes in Stockholders' Equity/(Deficiency) (Contd.)
For the years ended April 30, 1997 and 1996
Deficit
Accumulated
Additional Accumulated During the
Paid-In Earnings Development
Capital (Deficit) Stage
BALANCES, April 30, 1995 $ 1,690,545 $(2,672,904) $ -
Net (loss) - (9,797) -
____________ ____________ ____________
BALANCES, April 30, 1996 1,690,545 (2,682,701) _
Capital contributed by related
parties through cancellation
of debts 464,093 -
Stock issued for Cash
(conversion from note) (1,930,416) -
Net (loss) - (41,521) (37,018)
_____________ ____________ ____________
BALANCES, April 30, 1997 $ 224,222 $(2,724,222) $ (37,018)
_____________ ____________ ____________
_____________ ____________ ____________
The accompanying notes are an integral part of these financial statements.
LYRIC ENERGY, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
For the years ended April 30, 1997 and 1996
Cumulative
During the
Development
Stage 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (37,018) $ (41,521) $ (9,797)
Adjustments to reconcile net income/
(loss) to net cash provided by
operations:
Increase/(decrease) in:
Accounts payable (64,487) (65,860) 1,947
Accrued expenses 1,482 5,928 8,891
____________ ____________ ____________
NET CASH (USED) BY OPERATING ACTIVITIES (100,023) (101,453) 1,041
____________ ____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 100,000 100,000 -
____________ ____________ ____________
Increase/(decrease) in cash for
period (23) (1,453) 1,041
Cash, Beginning of period 23 1,453 412
____________ ____________ ____________
Cash, End of period $ - $ - $ 1,453
____________ ____________ ____________
____________ ____________ ____________
Supplemental Disclosures:
Cash payments for:
Interest $ - $ - $ -
Income taxes - - -
Cancellation of related party and
other indebtedness $ 458,166 $ 458,166 $ -
Stock issued for conversion of note
payable $ 100,000 $ 100,000 $ -
The accompanying notes are an integral part of these financial statements.
LYRIC ENERGY, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
April 30, 1997 and 1996
GENERAL:
Lyric Energy, Inc. (the Company) is a publicly traded entity formerly involved
in the exploration and development of oil and gas reserves. At April 30, 1996
and since then, the Company has not held any interests in oil and gas
properties. The Company was incorporated on April 25, 1980 and began
operations then. The Company has been essentially dormant since April 1994.
During the year ended April 1996, the Company began seeking a merger partner
and this pursuit has been its primary activity since that time.
Development Stage Enterprise -- The Company returned to the development stage
in November 1996 with the transfer of its final operating responsibility to
others and, thereby, reducing its activities to the sole pursuit of
identifying, evaluating, structuring, and completing a merger with or
acquisition of a privately owned entity.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles.
Loss per Share -- Loss per share is calculated by applying the treasury stock
method using weighted average shares outstanding. Weighted average shares are
presented on the face of the statement of operations. The 203,041,517 shares
issued to Natural Gas Technologies, Inc.(discussed below) were considered to
be outstanding effective April 10, 1997.
Cash Flows -- The Company considers cash to be its only cash equivalent for
purposes of presenting its Statement of Cash Flows.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2: RELATED PARTY TRANSACTIONS
As of December 31,1996, the Company was obligated to repay an advance from a
related party (ML&C Trust) consisting of an unsecured 10% demand note payable
of $88,907. ML&C Trust is controlled by a significant shareholder of the
Company. Interest expense of $5,928 and $8,891 was incurred on this advance
during the years ended April 30, 1997 and 1996, respectively. In January
1997, the Company received a capital contribution through the release of its
obligation to repay this advance. The amount of the contribution included all
interest which had accrued under the terms of the note.
The Company had a $250,000 judgement payable to a related party (Dynamic
Investing, Inc.) at November 30, 1996. The underlying judgement occurred in
1993. Dynamic Investing, Inc. is owned by the president of the Company. In
December 1996, the Company received a capital contribution through the release
of this judgement from the related party at no cost to the Company.
The Company had a total of $501,261 owed to related parties arising from the
advance, accrued interest, and judgment described above as well as other
amounts received to cover general expenses. Essentially all of this
indebtedness was contributed as additional paid in capital during December
1996 and January 1997.
NOTE 3: MERGER AGREEMENT WITH NATURAL GAS TECHNOLOGIES, INC.
On January 2, 1997, the Company entered into a Letter of Intent (LOI), amended
subsequently via a supplemental letter dated March 17,1997, with Natural Gas
TechnoIogies, Inc., a Texas corporation. In accordance with the LOI, NGT
loaned the Company $100,000 pursuant to a non-interest bearing, convertible
note dated February 4, 1997 (Note), and the loaned funds were placed in
escrow. The Note was converted on April 10, 1997 into 203,041,517 common
shares, which were all of the remaining authorized but unissued common shares
of the Company. Conversion occurred after the Company had filed all of the
required reports pursuant to the Securities Exchange Act of 1934, as amended,
and after the Company had obtained a waiver from a bank of the Company's
commitment in connection with a compromise and settlement agreement related to
a bank debt forgiveness in July 1991. This commitment was the maintenance of
the bank's ownership interest at a constant 8.9976% through issuance of
additional common stock as needed. Upon conversion, loaned funds were
released from escrow to the Company for use in satisfying all existing debts
and encumbrances and settling all claims against it.
The LOI further provides for a share exchange transaction whereby the
shareholders of NGT are to be issued additional shares in the Company such
that these shareholders will own a total of 95 percent of the total issued and
outstanding common shares of the Company and NGT would become a wholly owned
subsidiary of the Company. This ratio of ownership between NGT shareholders
and the previous shareholders is for NGT shareholders and for transactions
effective April 1, 1997 and prior. Subsequent transactions in NGT shares are
not included in this ratio and must be approved as to value by the Board of
Directors of the Company. The share exchange will occur after the Company
holds a shareholder meeting for the purpose of (I) approving a reverse split
of the Company's common stock which will result in additional common shares
being made available in order to issue shares in the shares exchange; (ii)
authorizing 10,000,000 shares of no par value preferred stock (Approximately
25,000 of these will be designated for exchange with NGT preferred
shareholders in the share exchange and the remaining 9,975,000 will be
reserved for future issuance at the discretion of the Board of Directors.);
and (iii) approving certain other amendments to the Company's Articles of
Incorporation.
NOTE 4: PRO FORMA COMBINED FINANCIAL INFORMATION
The following table sets forth the pro forma combined balance sheet and
results of combined operations of the Company and NGT as though the entities
had been combined for the entire year. These combined statements presume that
the Company will acquire 100% of the outstanding common and preferred shares
of NGT in exchange for the issuance of previously unissued shares. This
issuance, coupled with the conversion of the note as described above into
Company shares will cause NGT shareholders as of April 2, 1997 to own 95% of
the Company. NGT is to return the shares it received in the note conversion
to the Company for distribution to NGT stockholders as part of the share
exchange. This transaction qualifies as a purchase for accounting purposes.
However, the transaction also is considered to be a reverse merger whereby NGT
will be considered to be the acquirer for accounting purposes. As such, there
are no adjustments to the carrying value of NGT assets and liabilities to
reflect current fair values and the Company has no assets and liabilities that
require adjustment.
As mentioned above, a portion of the transaction agreement calls for the
Company to reverse split its outstanding shares after the note conversion by a
factor of one share for 240.597 shares. The following table presents
summarized audited balance sheets for the two entities at April 30, 1997 and
the pro forma results of the combination. Estimated adjustments to the
balance sheet required as a direct result of the acquisition plan and the
transactions contemplated therein consist solely of the adjustments required
due to the reverse stock split and the issuance of new shares by the Company
to the NGT shareholders. There are no balance sheet eliminations due to
consolidation because there are no intercompany balances.
The second table presents pro forma results of operations for the combined
entities. The adjustments consist of the elimination of the non-recurring
transactions of the Company during the year.
Pro Forma Combined Balance Sheet
Lyric NGT
Assets
Current assets - 820,132
Fixed assets (net of depreciation
and depletion - 8,558,348
Other assets - 474,260
____________ ____________
Total Assets $ - $ 9,852,740
____________ ____________
____________ ____________
Liabilities and Equity
Liabilities:
Current liabilities - 425,305
Notes payable - 3,000,000
Redeemable Preferred A stock - 38,388
Minority interest in subsidiary - 28,427
Stockholders' equity:
Preferred B stock - 265,440
Common stock 2,500,000 4,014
Additional paid in capital 224,222 7,322,860
Deferred services and stock
receivable - (319,000)
Retained (deficit) (2,724,222) (912,694)
____________ ____________
Total stockholders' equity - 6,360,620
____________ ____________
Total Liabilities and
Stockholders' Equity $ - $ 9,852,740
____________ ____________
____________ ____________
Pro Forma Results of Operations
Lyric NGT
Revenues $ - $ 100,987
____________ ____________
LOE and production taxes - 103,646
Depreciation, depletion and
amortization - 50,394
Management and consulting costs 35,000 80,000
Legal and professional - 44,816
Other expenses 593 49,668
____________ ____________
Total operating expenses 35,593 328,524
____________ ____________
(Loss from Operations) (35,593) (227,537)
Interest income - 715
Interest expense (5,928) (43,648)
____________ ____________
Net (Loss) $ (41,521) $ (270,470)
____________ ____________
____________ ____________
Net (Loss) per share
Pro Forma Combined Balance Sheet (Contd.)
Adjust- Pro Forma
ments Combined
Assets
Current assets - 820,132
Fixed assets (net of depreciation
and depletion - 8,558,348
Other assets - 474,260
____________ ____________
Total Assets $ - $ 9,852,740
____________ ____________
____________ ____________
Liabilities and Equity
Liabilities:
Current liabilities - 425,305
Notes payable - 3,000,000
Redeemable Preferred A stock - 38,388
Minority interest in subsidiary (28,427) -
Stockholders' equity:
Preferred B stock - 265,440
Common stock (2,461,898) 42,116
Additional paid in capital (233,897) 7,313,185
Deferred services and stock
receivable - (319,000)
Retained (deficit) 2,724,222 (912,694)
____________ ____________
Total stockholders' equity 28,427 6,389,047
____________ ____________
Total Liabilities and
Stockholders' Equity $ - $ 9,852,740
____________ ____________
____________ ____________
Pro Forma Results of Operations (Contd.)
Adjust- Pro Forma
ments Combined
Revenues $ - $ 100,987
____________ ____________
LOE and production taxes - 103,646
Depreciation, depletion and
amortization - 50,394
Management and consulting costs (35,000) 80,000
Legal and professional - 44,816
Other expenses (593) 49,668
____________ ____________
Total operating expenses (35,593) 328,524
____________ ____________
(Loss from Operations) 35,593 (227,537)
Interest income - 715
Interest expense 5,928 (43,648)
____________ ____________
Net (Loss) $ 41,521 $ (270,470)
____________ ____________
____________ ____________
Net (Loss) per share $ (.07)
____________
____________
NOTE 5: INCOME TAXES
As of April 30, 1997 and 1996, Lyric had accumulated deficits of $2,724,222
and $2,682,701. However, operating loss carry-forwards for income tax
purposes vary from these amounts due to differences in the tax treatment of
various items. These loss carry-forwards, which may provide future benefits,
expire as shown in the following table. Investment tax credits are accounted
for on the flow through method. A merger or acquisition will, in all
likelihood, limit the availability of these net operating losses as deductions
against future taxable income of a combined entity.
Amount of
Operating Loss Investment
Year of Carry- Year of Tax Credit
Expiration Forwards Expiration Carry-Forwards
2001 $ 139,783 1998 $ 6,000
2002 201,086 2001 1,000
____________
2003 238,676 $ 7,000
____________
____________
2004 257,086
2005 354,420
2006 305,119
2007 839,730
2008 220,172
2009 78,986
2010 78,980
2011 37,018
____________
$ 2,751,056
____________
____________
The provision for income tax is as follows:
1997 1996
Current
Federal $ - $ -
Deferred
Federal (935,359) (922,773)
Less allowance 935,359 922,773
____________ ____________
Total $ - $ -
____________ ____________
____________ ____________
A reconciliation of income tax at the statutory rate to the Company's
effective rate at April 30, 1997 and 1996 indicates that the expected
statutory rate for each of these years is 0%. The effective tax rate is also
0%.
The deferred tax asset and liabilities are comprised of the following at April
30, 1997 and 1996:
1997 1996
Assets Liabilities Assets Liabilities
Net operating losses
carried forward $ 935,359 - 922,773 -
Less valuation
allowance (935,359) - (922,773) -
___________ ____________ __________ ____________
Gross deferred tax
assets and
liabilities $ - $ - $ - $ -
___________ ____________ __________ ____________
___________ ____________ __________ ____________
Due to the way future utilization of tax benefits is analyzed under SFAS 109,
an allowance for the full amount of the benefits that may arise from operating
loss carry-forwards has been made and no asset has been recorded as a result
at April 30, 1997.
NOTE 6: CONTINGENCY
The Company has been contesting a suit to recover legal fees and court costs
pertaining to a previous action. This case was tried and on April 23, 1997,
the court awarded a judgment totaling approximately $59,905, including
interest. The Company was not the sole defendant in this case, although the
liability is joint and several, and the judgment is expected to be appealed.
Additionally, Lyric has obtained an indemnification agreement against loss
from Stahl Petroleum Company, another defendant in the suit and previously a
related party. Management anticipates that this action will have no effect on
the Company.
NOTE 7: SUBSEQUENT EVENTS
All subsequent events relate to transactions incurred by NGT. The notes of
NGT's financial statements should be read in conjunction with these notes for
a description of subsequent events.
NOTE 8: GOING CONCERN
The Company has been relatively inactive during the past three years due to a
shortage of operating assets and working capital. Additionally, the Company
has been operating under significant debt load. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company reentered the development stage in November 1996 when it
transferred its last operations to another operator and reinforced its search
for a merger or acquisition target in order to carry on the operations of the
target Company. The Company signed a Letter of Intent to merge with Natural
Gas Technologies, Inc. (NGT) in January 1997. In April 1997, NGT acquired an
81% ownership interest in the Company in a first step toward a merger. The
ability of the Company to continue as a going concern is dependent on the
completion of this transaction. There are no adjustments of financial
statement information required should the Company be unable to continue as a
going concern.
NATURAL GAS TECHNOLOGIES, INC.
and SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended
April 30, 1997 and 1996
ROBERT EARLY & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
NATURAL GAS TECHNOLOGIES, INC.
Abilene, Texas
We have audited the accompanying consolidated balance sheets of Natural Gas
Technologies, Inc. and Subsidiaries as of April 30, 1997 and 1996 and the
related consolidated statements of operations, changes in shareholders'
equity/(deficit) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 financial position of Natural
Gas Technologies, Inc. and Subsidiaries as of April 30, 1997 and 1996, and the
results of their operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Robert Early & Company, P.C.
Abilene, Texas
July 18, 1997
2500 S. Willis-Suite 200-Abilene, TX 79605-(915) 691-5790
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Balance Sheets
April 30, 1997 and 1996
1997 1996
Assets
Current Assets:
Cash $ 816,725 $ 506
Accounts receivable 3,407 -
____________ ____________
Total Current Assets 820,132 506
____________ ____________
Fixed Assets:
Oil and gas properties (full cost method,
$637,496 has been excluded from amortization
as an unproved cost) 8,632,425 1,473,333
Accumulated depreciation and depletion (114,077) (64,926)
Equipment not in service 40,000 -
____________ ____________
Total fixed assets 8,558,348 1,408,407
____________ ____________
Other Assets:
Patent and product license (net of amortization
of $2,000) 358,000 -
Investment in Wagman Petroleum, Inc. stock 14,464 14,464
Security deposit 3,049 -
Goodwill (net of amortization of $1,667) 98,333 -
Organizational costs (net of amortization of
$1,496 and $1,114) 414 796
____________ ____________
Total Other Assets 474,260 15,260
____________ ____________
TOTAL ASSETS $ 9,852,740 $ 1,424,173
____________ ____________
____________ ____________
Liabilities and Stockholders' Equity
Liabilities
Accounts payable (primarily to related
party) $ 291,031 $ 38,205
Accrued interest 40,109 80
Advances and amounts due officers 1,136 -
Note payable to related party 79,067 -
Current portion of notes payable 13,962 18,794
____________ ____________
Total Current Liabilities 425,305 57,079
Notes payable (net of current portion) 3,000,000 15,434
____________ ____________
TOTAL LIABILITIES 3,425,305 72,513
____________ ____________
Redeemable Preferred stock, 1994 Series A
$4.00 par value (500,000 shares authorized,
9,597 outstanding) 38,388 38,388
Minority interest in consolidated subsidiary 28,427 -
Stockholders's Equity
Preferred stock, 1994 Series B $4.00 par
value (500,000 shares authorized, 66,360
and 210,736 outstanding) 265,440 842,944
Common stock, $.001 par value (10,000,000
shares authorized, 4,014,390 and
2,805,014 outstanding) 4,014 2,806
Additional paid-in capital 7,322,860 1,181,564
Deferred services and director fees (160,000) (100,833)
Receivable for stock issued to officers (159,000) -
Retained (deficit) (912,694) (613,209)
____________ ____________
Total Stockholders' Equity 6,360,620 1,313,272
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,852,740 $ 1,424,173
____________ ____________
____________ ____________
The accompanying notes are an integral part of these financial statements.
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Statements of Operations
For the years ended April 30, 1997 and 1996
1997 1996
Oil and gas revenues $ 100,987 $ 133,030
Other income 5 3,915
____________ ____________
Total Revenues 100,992 136,945
____________ ____________
Expenses:
Production taxes 5,191 4,608
Lease operating expenses 98,455 114,410
Depreciation, depletion and amortization 50,394 40,962
Professional fees 44,816 10,571
Management and consulting fees 115,000 90,000
Rent 7,249 4,200
Printing and distribution 1,015 2,092
Director fees 20,833 50,000
Taxes 3,658 1,885
Travel 7,610 250
Offering costs - 4,000
Other expenses 9,896 6,591
Minority interest in loss of consolidated
subsidiary (6,573) -
____________ ____________
Total Expenses 357,544 329,569
____________ ____________
(Loss) from Operations (256,552) (192,624)
Interest income 715 -
Interest expense (43,648) (28,207)
____________ ____________
NET (LOSS) (299,485) (220,831)
Less unpaid preferred stock dividend
claims for the year 9,604 9,604
____________ ____________
Net (loss) attributable to common
shareholders $ (309,089) $ (230,435)
____________ ____________
____________ ____________
(Loss) per share data:
Primary $ (0.11) $ (0.09)
____________ ____________
____________ ____________
Primary, attributable to common shares (0.10) (0.10)
____________ ____________
____________ ____________
Fully diluted $ (0.10) $ (0.08)
____________ ____________
____________ ____________
Fully diluted, attributable to common
shareholders (0.11) (0.09)
____________ ____________
____________ ____________
The accompanying notes are an integral part of these financial statements.
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Statement of Changes in Stockholders' Equity
For the years ended April 30, 1997 and 1996
Preferred Stock
Series 1994-A Series 1994-B
Shares Amount Shares Amount
BALANCES, April 30, 1995 9,597 $ 38,388 210,736 $ 842,944
Stock issued for:
Related party liabilities - - - -
Oil and gas interests - - - -
Liabilities to third parties - - - -
Promotional services - - - -
Net (loss) - - - -
__________ __________ __________ __________
BALANCES, April 30, 1996 9,597 38,388 210,736 842,944
Stock issued for:
Cash - - - -
Deferred promotional
services - - - -
Oil and gas interests - - - -
Stock of Interior Energy,
Inc. - - - -
Patent license - - 50,000 200,000
Conversion of preferred to
common - - (194,376) (777,504)
Net (loss) - - - -
__________ __________ __________ __________
BALANCES, April 30, 1997 9,597 $ 38,388 66,360 $ 265,440
__________ __________ __________ __________
__________ __________ __________ __________
The accompanying notes are an integral part of these financial statements.
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Statement of Changes in Stockholders' Equity (Contd.)
For the years ended April 30, 1997 and 1996
Common Stock
Shares Amount
BALANCES, April 30, 1995 2,190,130 $ 2,190
Stock issued for:
Related party liabilities 381,655 382
Oil and gas interests 22,624 23
Liabilities to third parties 10,605 11
Promotional services 200,000 200
Net (loss) - -
___________ ____________
BALANCES, April 30, 1996 2,805,014 2,806
Stock issued for:
Cash 225,000 225
Deferred promotional
services 200,000 200
Oil and gas interests 120,000 120
Stock of Interior Energy,
Inc. 370,000 370
Patent license 100,000 100
Conversion of preferred to
common 194,376 193
Net (loss) - -
___________ ____________
BALANCES, April 30, 1997 4,014,390 $ 4,014
___________ ____________
___________ ____________
The accompanying notes are an integral part of these financial statements.
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Statement of Changes in Stockholders' Equity (Contd.)
For the years ended April 30, 1997 and 1996
Additional Deferred Accumulated
Paid-In Services & Earnings
Capital Other (Deficit)
BALANCES, April 30, 1995 $ 332,712 $ (70,833) $ (392,378)
Stock issued for:
Related party liabilities 622,605 - -
Oil and gas interests 45,226 - -
Liabilities to third parties 21,221 - -
Promotional services 159,800 (80,000) -
Net (loss) - 50,000 (220,831)
____________ ____________ ____________
BALANCES, April 30, 1996 1,181,564 (100,833) (613,209)
Stock issued for:
Cash 1,574,775 (159,000) -
Deferred promotional
services 159,800 (160,000) -
Oil and gas interests 839,880 - -
Stock of Interior Energy,
Inc. 2,589,630 - -
Patent license 199,900 - -
Conversion of preferred to
common 777,311 - -
Net (loss) - 100,833 (299,485)
____________ ____________ ____________
BALANCES, April 30, 1997 $ 7,322,860 $ (319,000) $ (912,694)
____________ ____________ ____________
____________ ____________ ____________
The accompanying notes are an integral part of these financial statements.
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Statements of Cash Flows
For the years ended April 30, 1997 and 1996
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (299,485) $ (220,831)
Adjustments to reconcile net income/(loss) to
net cash provided by operations:
Depreciation, depletion and amortization 50,394 40,962
Amortization of directors fees 20,833 50,000
Recognition of deferred services as
consulting fees 80,000 80,000
Stock issued to related party as interest
payment - 24,681
(Increase)/decrease in:
Accounts receivable (3,407) -
Security deposit (3,049)
Increase/(decrease) in:
Accounts payable 252,826 21,975
Accrued expenses 40,029 (32,033)
Minority interests 28,427 -
____________ ____________
NET CASH (USED) BY OPERATING ACTIVITIES 166,568 (35,246)
____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for drilling costs and oil & gas
leases (679,042) -
Purchase of lease and well equipment (47,244) (22,226)
Goodwill acquired in Lyric Energy
acquisition (100,000) -
____________ ____________
NET CASH (USED) BY INVESTING ACTIVITIES (826,286) (22,226)
____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,416,000 -
Advances from related parties 80,203 23,730
Note proceeds - 35,000
Note payments (20,266) (771)
____________ ____________
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,475,937 57,959
____________ ____________
Increase/(decrease) in cash for period 816,219 487
Cash, Beginning of period 506 19
Cash, End of period $ 816,725 $ 506
____________ ____________
____________ ____________
Supplemental Disclosures:
Cash payments for:
Interest $ 2,525 $ 772
Income taxes - -
Stock issued for:
Professional services $ - $ 80,000
Prepaid professional services 160,000 80,000
Oil and gas properties 840,000 49,157
Acquisition of Interior Energy, Inc. 2,603,043 -
Reductions of accounts, notes, and
interest payable - 644,218
Acquisition of patent license and
related equipment 400,000 -
Assumption of debt related to oil and gas
properties 3,000,000 -
The accompanying notes are an integral part of these financial statements.
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Notes to Consolidate Financial Statements
April 30, 1997 and 1996
GENERAL:
Natural Gas Technologies, Inc. (NGT or "the Company") was incorporated on
April 26, 1993 and began operations in June 1993. NGT acquired interests in
various oil and gas properties in February and June 1994 and has been active
in this industry since then. The nature of the oil and gas industry lends
itself to uncertainties and risks. During the years presented, NGT's
producing interests were primarily concentrated in Central West Texas. During
the year ended April 1997, the Company has acquired oil and gas properties
with significant reserves. (See Note 6.) The Company has also acquired a
license for a patented blending procedure for automotive fuel. (See Note 8.)
Subsequent to April 30, 1997, NGT has drilled on a portion of its properties
with good success and has arranged to acquire additional properties.
In April 1997, NGT acquired 100% ownership of Interior Energy, Inc. (IEI) in
exchange for 370,000 shares of common stock and a cash payment of $500,000.
The primary purpose of this acquisition was to obtain a significant set of oil
leases in North Texas, the sole asset of this entity. Also in April 1997, the
Company acquired ownership of 81% of Lyric Energy, Inc. (Lyric) by converting
a $100,000 loan to unissued Lyric stock. Lyric is a publicly traded entity
that has been essentially dormant for the last three years. These
transactions are being accounted for as purchases and are described in further
detail at Note 2.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of NGT conform with generally accepted
accounting principles and to general practices within the oil and gas
industry. Policies that materially affect the determination of financial
position, changes in financial position, and results of operations are
summarized as follows:
Fiscal year end--The Company utilizes a fiscal year ending on April 30.
Consolidation--The accompanying consolidated financial statements include the
accounts of the Company and both of its subsidiaries, IEI and Lyric.
Intercompany transactions and balances have been eliminated in consolidation.
Federal Income Taxes--For Federal income tax purposes, NGT reports its
operations on the accrual basis of accounting. Depreciation is calculated
using the MACRS percentages. First year expensing under Section 179 is
utilized when it is available and has been determined to be advantageous. For
the year ending April 30, 1997, NGT is filing a consolidated tax return with
IEI for the period after acquisition to April 30, 1997. Lyric will file a
separate return.
Statement No. 109 (SFAS 109) "Accounting for Income Taxes" requires that a
liability approach to providing for deferred taxes be used. That is, deferred
taxes must be established for all temporary differences between the book and
tax bases of assets and liabilities. (See Note 11.)
Oil and Gas Properties--The Company records its oil and gas producing
activities under the full cost method of accounting, and accordingly,
capitalizes all costs incurred in the acquisition, exploration, and
development of proved oil and gas properties, including the costs of abandoned
properties, dry holes, geophysical costs, and annual lease rentals. In
general, sales or other dispositions of oil and gas properties are accounted
for as adjustments to capitalized costs, with no gain or loss recorded until
the proceeds from dispositions exceed the Company's basis in the full cost
pool.
Depletion and amortization are computed on a composite units-of-production
method based on estimated proved reserves. All leasehold, equipment, and
intangible costs associated with oil and gas properties are currently included
in the base for computation and amortization unless the property has not been
evaluated and no estimated reserves have been included for the property in the
Company's total reserves. Approximately 17% of the Company's proved reserves
were estimated by Company personnel based on previous work done by a petroleum
engineer. The remainder of the Company's reserves were reviewed and estimated
by a registered petroleum engineer. Included in these properties reviewed by
the engineer were significant acquisitions during the current year. All of
the Company's reserves are located within the United States.
Earnings per Share--Primary earnings per share are computed on the basis of
weighted average number of common shares actually outstanding. Fully diluted
earnings per share are computed based on the increased number of shares that
would be outstanding assuming that preferred shares outstanding at the first
of the year were converted at the first of the year. Preferred shares issued
during the year are assumed to be converted on the date of issuance.
The following table presents a reconciliation of the weighted average number
of shares actually outstanding with the number of shares used in the
computation of fully diluted earnings/(loss) per share:
1997 1996
Primary
Weighted average number of shares actually
outstanding 2,860,393 2,398,254
_________ _________
_________ _________
Fully diluted
Weighted average number of shares actually
outstanding 2,860,393 2,398,254
Preferred shares 31,027 221,293
_________ _________
2,891,420 2,619,547
_________ _________
_________ _________
At the end of each of the years presented, the Company had contractually or
otherwise committed to issue common and/or preferred shares but the stock
certificates had not actually been issued. These shares have been included as
issued in the outstanding shares presented in the balance sheet and the
statement of changes in stockholders' equity. They have also been included in
weighted average earnings per share as of the effective date of the agreement
rather than the date certificates were ultimately issued.
Cash and Cash Flows--The Company considers cash to be its only cash equivalent
for purposes of presenting its Statement of Cash Flows. The Company had cash
at two banks at April 30, 1997. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. At April 30, 1997,
the Company had a total balance of $806,702 on deposit with Texas Central
Bank, N.A.
Amortization--Goodwill, which represents the excess of the cost of acquiring
Lyric over the fair value of its net assets at the date of acquisition, is
being amortized on the straight line method over five years.
The Company is also amortizing organization costs on the straight line method
over five years.
During the year ended April 1997, the Company acquired a patent license. This
license is discussed in more detail at Note 8. The cost attributed to the
license is being amortized over the remaining term of the patent (fifteen
years).
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Environmental Issues--The oil and gas industry is regulated in Texas by the
Texas Railroad Commission (RRC) and Texas Natural Resources Conservation
Commission. Leases are operated under permits from the RRC. Failure to
comply with regulations could result in interruption or termination of the
operations. Additionally, upon cessation of use, the wells require plugging
and site cleanup. Costs of voluntary termination and remediation have been
estimated to be insignificant on a well by well basis and are expected to be
recorded as incurred.
New Accounting Pronouncements--During the year ended April 1997, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (SFAS 121) issued by the Financial Accounting Standards
Board (FASB). This standard establishes guidelines regarding when impairment
losses on long-lived assets, which includes plant and equipment and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. No material effects on NGT's financial position or
results of operations were incurred on adoption of this standard.
Also, during the year ended April 1997, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) issued by the FASB. This standard establishes a fair
value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from non-employees
in exchange for equity instruments. The Company does not currently have any
stock based compensation plans in place and no disclosures or cost has been
made due to this fact. The Company will, should it enter into any such
plans, disclose the plan's effects in the notes in accordance with the
provisions of SFAS 123. The Company has recorded all stock transactions with
non-employees on a fair value basis has not realized any material effects on
its financial position or results of operations in adopting this standard.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) which
is effective for the Company's fiscal year beginning April 1, 1997 (financial
statements issued after December 15, 1997). SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS). Some of the changes made to current EPS standards include (I)
eliminating the presentation of primary EPS and replacing in with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (ii) eliminating the modified treasury
stock method and the three present materiality provisions, and (iii) revising
the contingent share provisions and the supplemental EPS data requirements.
SFAS 128 also requires dual presentation of basic and diluted EPS on the face
of the income statement, as well as a reconciliation of the numerators and
denominators used in the two computations of EPS. Basic EPS is defined by SFAS
128 as net income from continuing operations divided by the average number of
common shares outstanding without consideration of any common stock
equivalents which may be dilutive to EPS. Implementation of SFAS is not
expected to have any material effect on the Company's EPS.
Advertising Costs--All advertising costs are expensed as incurred.
NOTE 2: INVESTMENTS IN STOCKS AND ACQUISITIONS OF SUBSIDIARIES
In 1994, NGT acquired approximately 2% of the outstanding shares of Wagman
Petroleum, Inc. (WPI) from unrelated parties in exchange for NGT common
shares. As discussed at Note 4, WPI is considered a related party. WPI is
not a subsidiary. There is no market for these shares. Their value has been
determined based on an estimate of the future value of WPI at the time of
acquisition. The Company intends to hold this investment for the foreseeable
future.
In January 1997, NGT loaned $100,000 to Lyric Energy, Inc. This loan was made
pursuant to a letter of intent to convert the loan into Lyric stock. The
conversion of the loan to stock was contingent upon Lyric bringing its public
filings up to date, clearing old liabilities, and obtaining waivers for
certain restrictive covenants. Lyric had been essentially dormant for the two
years ended April 1996 and was seeking merger candidates. The contingencies
noted in the letter of intent and in a due diligence review were all removed
and on April 10, 1997, Lyric effectively issued 203,041,517 common shares to
NGT for the conversion of the note. This resulted in NGT owning approximately
81% of the outstanding Lyric shares. Lyric is in the process of filing an
information statement with the Securities and Exchange Commission and, upon
acceptance of the filing, will hold a stockholders' meeting to approve a
reverse split, authorize preferred shares, and approve a share exchange with
NGT shareholders in order to merge the two companies. Upon completion of the
merger, Lyric will change its name to Natural Gas Technologies, Inc. Lyric is
currently publicly traded on the bulletin board system. This transaction has
been being accounted for as a purchase. As previously noted, Lyric has been
primarily dormant. Only the results of operations of this entity after the
date of acquisition are included in the accompanying financial statements.
The total cost of acquiring Lyric, as indicated above, was $100,000 which
exceeded the fair value of its net assets by $100,000. This amount has been
recognized as goodwill and is being amortized on the straight-line method over
five years.
On April 1, 1997, NGT paid $500,000 and issued 370,000 shares of common stock
for all of Interior Energy, Inc.'s (IEI) outstanding shares. NGT acquired IEI
subject to a note payable to third parties for $3,000,000 that arose from the
purchase of the Waggoner M and East Milham Sand Unit leases. As part of the
purchase, NGT assumed full liability for the balance of the note. Prior to
the acquisition of these leases, IEI had been dormant since the early 1980s.
This business combination has also been accounted for as a purchase. The
total cost of acquiring IEI was $6,090,000 including the note assumption.
This amount was attributed to the fair value of the oil properties and there
was no excess to be recognized as goodwill. The accompanying financial
statements include the activities of IEI since the date of acquisition.
Activities prior to that date have been eliminated.
The following summarized pro forma (unaudited) information assumes that both
of these acquisitions occurred on May 1, 1996. There is no impact on the
amounts which would be presented if the acquisition had occurred on May 1,
1995 because neither IEI or Lyric were carrying on activities that would be
continuing had the entities been combined during the year ended April 1996.
There were no extraordinary items to be considered.
Net revenues $ 106,316
____________
____________
Net income (319,048)
____________
____________
Earnings per share:
Primary (0.10)
____________
____________
Fully diluted (0.10)
____________
____________
NOTE 3: STOCK TRANSACTIONS
During 1993, NGT issued 150,000 common shares and options to purchase 100,000
additional shares of restricted stock at an exercise price of $4 per share to
Warren Donahue of Volvo America as compensation for his agreeing to serve as a
director of NGT for three years. These options were to commence six months
following the close of a public offering and expire four years after
commencement. Deferred Director Fees of $150,000 was recorded as a result of
this transaction. No additional costs were recorded for the options due to
the relationship of the exercise price to the stock price at the time of
issuance.
During the year ended April 1995, NGT authorized 1,000,000 preferred shares
and designated it as Series 1994-A (Preferred A) and Series 1994-B (Preferred
B). Both of these series have a 9.25% cumulative annual dividend. Preferred
A shares are convertible to common shares on a 1.1 for 1 basis and may be
called by the Company at five cents per share if the trading price of the
common shares exceeds seven dollars for twenty consecutive trading days. They
also are subject to a mandatory redemption at par five years from the
effective date of issuance. Preferred B shares automatically convert to
common on a one for one basis if the trading price of the common shares
exceeds five dollars per share for ten consecutive trading days. All of the
outstanding preferred shares became convertible at the option of the holder at
May 1, 1996.
During the year ended April 1996, NGT approved a request by its president and
WPI to issue 26,661 and 354,994 common shares, respectively, in exchange for
the complete liquidation of unreimbursed expenses, advances, accrued interest,
and the note balance due to WPI. WPI also waived its right to unpaid and
future dividends on the Preferred B shares which it held as part of the
exchange for common shares. Additionally, NGT negotiated an agreement to pay
off certain legal fees connected with an aborted offering via the issue of
10,605 common shares. It also finalized an agreement with a third party
regarding specific oil and gas interests that was effective May 1, 1995
through the issue of 22,624 common shares and the assumption of $17,000 of
unpaid lease operating expenses.
In February 1996, NGT entered into an agreement for the provision of public
relations, identification of funding sources, merger candidates, etc. services
with a third party. These services were to be rendered over a primary period
ending in December 1996 with provisions for extensions as approved by both
parties. The agreement called for a cash payment of $25,000 and 500,000
shares of stock. The shares were to be issued on a milestone basis with
200,000 shares issued at the commencement of the agreement. One-half of the
original shares were for services to be rendered after April 30, 1996, were
recorded as Deferred Services at that date, and have been included in expenses
during the year ended April 1997. An additional 200,000 shares were issued
during April 1997 in anticipation of meeting additional milestones after the
fiscal year end and have been reported as Deferred Services at April 30, 1997.
The remaining 100,000 shares called for under this agreement are to be issued
after the achievement of specified events. The agreement calls for all of
these shares to be registered in any registration pursued by NGT.
During the year ended April 1997, the Company issued 225,000 common shares to
its directors on the basis of $7 per share. Of the total $1,575,000 to be
received, the directors did not pay $159,000 until June 1997, after the year
end. Due to the relationship of this receivable to stock issuance, it has
been presented as an offset in Stockholder's Equity until collected.
Additionally, the Company issued 120,000 common shares to Ray L, Inc., valued
at $7 per share, and assumed a Ray L, Inc. liability to WPI of $18,000, for
oil and gas leases in Runnels County, Texas. A license to use patented
processes and facilities (see Note 8) was acquired for 50,000 Preferred B
shares and 100,000 common shares. The Company also issued 370,000 common
shares for the stock of Interior Energy and 200,000 common shares for deferred
services.
NOTE 4: TRANSACTIONS WITH RELATED PARTIES
Through March 31, 1997, NGT reimbursed WPI for rent, postage, travel and other
office expenses. The Company's president owns approximately 45% of the
outstanding stock of WPI and also serves as its president. Office rent
reimbursement to WPI totaled $4,200 for both 1997 and 1996. Other reimbursed
costs are not material. Additionally, WPI operates essentially all of the
properties in which NGT has interests. As operator, WPI incurs expenses for
drilling, reworking, and normal lease operating expenses and then charges them
out to the respective interest owners. Currently, WPI collects a portion of
NGT's gas production revenues and offsets them against amounts that are due
from NGT. At April 30, 1997 and 1996, NGT owed WPI $134,982 and $5,206,
respectively, for accounts payable. The bulk of the balance at 4/30/97 is due
to drilling and reworking on the properties that NGT has recently acquired and
reworking interests previously held which occurred during March and April
1997. WPI also advanced funds to NGT for other expenses during March 1997.
These advances were reduced to a demand note for $79,067 effective April 30,
1997. This note bears interest at 5% per annum.
During the year ended April 1996, a note payable to WPI with a balance of
$396,988, accrued interest of $24,681, and other liabilities owed to WPI in
the amount of $89,997 were repaid through the issuance of 354,994 common
shares. As part of this transaction, WPI also waived its rights to unpaid
past and future dividends on the Preferred B shares it held. Additionally
during the year ended April 1996, the Company's president accepted 26,661
shares as payment for unreimbursed expenses and cash advances in lieu of cash
repayments.
During the year ended April 1997, the Company's directors acquired stock (as
discussed at Note 3), loaned funds to the Company, and were reimbursed for
business expenses. During February 1997, the directors loaned $100,000 based
on a demand note bearing interest at 5% per annum. In April 1997, this note
was converted as partial payment for the stock issued to them as described at
Note 3. Interest expense of $1,014 was incurred during the period this note
was outstanding.
NOTE 5: NOTES PAYABLE
During February 1996, the Company borrowed $35,000 from a bank in order to
finance certain reworking expenses. This note bears interest at 10.5% and is
due in twenty-four installments of $1,625 per month including interest. NGT
gave its interest in the wells being reworked as collateral for this note. At
April 30, 1997 and 1996, this note had balances of $13,962 and $34,228,
respectively. The final maturity date is February 1998.
In April 1997, as part of its acquisition of IEI, NGT assumed liability for a
note payable to EXP, Inc. with an original face amount of $3,475,000. This
note originated with the purchase of the Waggoner M and East Milham Sand Unit
leases by IEI. The note is due March 1, 1999 with no specified payments due
prior to maturity although prepayment is allowed. It bears interest at 8%
per annum simple interest and had a balance of $3,000,000 at April 30, 1997.
Interest expense accrued on this note at April 30, 1997 totaled $40,110.
The Company also had notes payable to its directors and WPI during the year
and as of April 30, 1997. (See Note 3.)
NOTE 6: OIL AND GAS PROPERTIES
NGT acquired interests in oil and gas properties from WPI during February 1994
which were recorded at predecessor cost in accordance with related party
transaction requirements. Effective in July 1994, the Company acquired
additional interests in these same properties from unrelated third parties in
exchange for stock. These interests are all located in Central West Texas.
During March 1997, IEI acquired the leases making up two proved properties in
Wilbarger County, Texas. These leases both have produced oil for a number of
years. One of these leases, the Waggoner M lease (M lease), is currently only
producing at the minimum level required to keep the lease from expiring for
lack of activity. The other leases comprise the East Milham Sand Unit
(EMSU). The EMSU has had limited production in recent years. However,
engineering studies have indicated that these leases should still have
significant reserves available using secondary production methods such as
enhanced water flooding. Engineering estimates have indicated reserves under
the EMSU at 885,466 barrels with future net cash flows projected at
$11,255,610 and a discounted net present value of $6,850,800. No current
study has been done for the M lease, although older estimates and production
records indicate that it should have producible reserves in the 150,000 barrel
range. These leases also contained removable equipment valued at $785,523 at
the time of acquisition. Interior Energy was acquired April 1, 1997 by NGT
for stock, cash, and debt assumption valued at $6,090,000, as discussed at
Note 2. All of this value is attributed to the properties described in this
paragraph in these consolidated financial statements. Management has
allocated $500,000 of this price to the unevaluated reserves on the M lease.
After subtracting this amount and equipment on the M lease valued at $137,496,
the balance has been allocated to the EMSU and its equipment. The M lease is
expected to be reworked and brought into production within the year ended
April 1998.
In April 1997, NGT acquired a 50% interest in five leases from Ray L, Inc. in
northern Runnels County, Texas (the Norton prospect) in exchange for the
assumption of a liability to WPI of $18,000 and issuance of 120,000 shares of
common stock valued at $840,000. This prospect consists of inner drilling in
a field that had never been fully developed during 20 years of production.
The field was essentially plugged and abandoned due to high costs of disposing
of significant quantities of salt water and low prices for oil. Management
has obtained engineering studies that indicate that current technology will
allow improved recovery of oil in the undrilled locations. The Company
completed two wells subsequent to April 1997 that have confirmed engineering
estimates for the known producing zones. However, geology studies had
indicated a deeper zone with hydrocarbon potential and the wells were drilled
on down to test the deeper zone. Drill stem tests indicated that this deeper
zone contains producible gas quantities. Management has not decided whether
to produce the deeper zone first or to produce out of the shallower,
previously known zone first. Engineering estimates have indicated that this
prospect should contain reserves of 303,941 barrels of oil in the previously
known zone. No estimates of the gas reserves contained by the deeper zone have
been made at this time. The Company has also drilled a service well to deal
with the water problem. Future net cash flows are estimated at $3,058,657
with a net present value of $1,189,141.
Recovery of the Company's newly acquired reserves will require significant
capital expenditures. Although the Company is not committed to make these
expenditures by contract or other agreement, realization of the benefits of
these reserves in the near future will require the Company to obtain
significant external financing or to sell portions of its reserves in order to
fund development of other reserves. There is no assurance that such capital
will be obtained or that there will be buyers for properties offered for sale.
NOTE 7: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at April 30, 1997 and 1996:
1997 1996
Oil and gas properties:
Leasehold and capitalized IDC $ 7,770,155 $ 1,443,830
Lease and well equipment 862,270 29,503
Blending tower 40,000 -
____________ ____________
8,672,425 1,473,333
Less accumulated depletion (114,077) (64,926)
____________ ____________
$ 8,558,348 $ 1,408,407
____________ ____________
____________ ____________
Depletion totaled $49,151 and $40,580 for the years ended April 1997 and 1996,
respectively. Equipment costs totaling $40,000 were idle and were not being
depreciated. This $40,000 consisted of a blending tower acquired with the
patent license. Costs associated with the M lease totaling $637,496 were
considered to be out of service and were excluded from the depletion
calculation. The M lease is expected to be placed in service during the 1998
fiscal year. The blending tower will be utilized as that aspect of the
Company's business is developed. The timetable has not be set, but it is
anticipated that utilization will occur within the 1998 fiscal year. There
are further discussions of the oil and gas properties at Note 6 and the
blending license below.
NOTE 8: ACQUISITION OF PATENT LICENSE
During October 1996, the Company acquired a license to a patented blending
process for the blending of automobile fuel. Although this process has not
been tested on a large scale, the Company has had chemical engineers review
the process and has reviewed the results of limited operations of the original
license holder. These reviews have indicated that the concept is viable and
that this fuel blend should be producible at a cost which will provide an
acceptable margin for the Company while competing well with existing gasoline
products. The license carries a royalty burden on a sliding scale based on
the gross margin. The royalty is a percentage of gross sales at specified
margins: 3% when margins are greater than $.15 per gallon, 2% when margins are
$.10 to $.15 per gallon, and 1% at margins less than $.10 per gallon The
Company hopes to have this portion of its business operational during the 1998
fiscal year and is in the process of negotiating for the possible purchase of
a facility for the blending process. The Company issued 50,000 shares of
Preferred B and 100,000 shares of common stock with a total value of $400,000
as the acquisition price for this license. Although the stock was not issued
until April 1997, the value assigned to the stock was based on the value of
the stock in October 1996 when the seller assigned his rights to the license
to the Company.
The license was acquired after three years of efforts to obtain clear title by
the seller. Ownership has been in dispute due to claims by various entities,
including creditors, against the patent owner, who is insolvent, and against
the original licensee, a limited partnership that failed due to mismanagement
(as reported by the seller, who prevailed in obtaining the rights to transfer
the license). It is not clear that the Company has an incontestable right to
this license. However, Management has concluded that the Company should be
able to operate under this license without repercussion as long as it pays the
required royalty.
NOTE 9: REDEEMABLE STOCK
As discussed at Note 3, the Company's Preferred A shares carry a mandatory
redemption requirement. They must be redeemed at par at the end of five
years. Effectively, both preferred stock series may be converted to common
stock by the Company upon the attainment of specific circumstances as
described at Note 3. In accordance with generally accepted accounting
principles, the shares carrying the mandatory redemption feature have been
reported separately from stockholders' equity. The redemption date for these
shares is July 1, 1999.
NOTE 10: ACCUMULATED DIVIDENDS ON PREFERRED STOCK
As discussed in Note 3, NGT has issued preferred stock that contains a
provision for cumulative dividends at the rate of 9.25%. These dividends have
remained undeclared and unpaid since issuance. The amounts accumulated during
the years ended April 1997 and 1996 totaled $9,604 and $85,748, respectively.
However, WPI waived its right to receive dividends on its preferred shares as
part of the agreement to receive common shares in exchange for debt in 1996.
WPI converted its Preferred B shares into common shares during April 1997.
The waiver reduced the effective cumulative amounts to $9,604 for both 1996
and 1997. Total accumulated unpaid dividends at April 30, 1997 was $26,899.
The statement of operations presents net loss available to common shareholders
after increasing the actual net loss for the accumulated dividend arrearage.
NOTE 11: INCOME TAXES
As of April 30, 1997 and 1996, NGT had accumulated deficits of $912,694 and
$613,209. However, operating loss carry-forwards for income tax purposes vary
from these amounts due to differences in the tax treatment of various items.
These loss carry-forwards, which should provide future benefits, expire as
shown in the following table.
Amount of
Year of Operating Loss
Expiration Carry-Forward
2009 $301,283
2010 90,343
2011 222,200
2012 278,368
________
$892,194
________
________
The provision for income tax is as follows:
1997 1996
Current
Federal $ - $ -
State - -
Deferred
Federal (222,455) (132,473)
State (29,433) (16,774)
Less allowance 251,888 149,247
____________ ____________
Total $ - $ -
____________ ____________
____________ ____________
A reconciliation of income tax at the statutory rate to the Company's
effective rate at April 30, 1997 and 1996 indicates that the expected
statutory rate for each of these years is 0%. The effective tax rate is also
0%.
The following temporary differences gave rise to the deferred tax assets and
liabilities at April 30, 1997 and 1996:
1997 1996
Excess of financial accounting depletion
over tax depletion $ 68,228 $ 2,088
Amortization of goodwill on subsidiary
acquisition 1,667 -
The deferred tax asset and liabilities are comprised of the following at April
30, 1997 and 1996:
1997 1996
Assets Liabilities Assets Liabilities
Depreciation and
depletion $ 25,137 $ - $ - $ 769
Goodwill 614 - - -
Net operating losses
carried forward 226,147 - 150,017 -
Less valuation
allowance (251,898) - (149,248) -
___________ ________ __________ __________
Gross deferred tax
assets and
liabilities $ - $ - $ 769 $ 769
___________ ________ __________ __________
___________ ________ __________ __________
Net deferred tax
liability $ - $ -
________ __________
________ __________
Due to the way future utilization of tax benefits is analyzed under SFAS 109,
an allowance for the full amount of the benefits that may arise from operating
loss carry-forwards has been made and no asset has been recorded as a result
at April 30, 1997 or 1996.
NOTE 12: OPERATING LEASE
On April 1, 1997, NGT leased office space in Addison, Texas and relocated its
offices. This lease had an initial term of seventeen months beginning on that
date. The lease called for a security deposit of $3,049 and monthly lease
payments in advance. Under this lease, rent of $3,049 was included in
expenses for 1997. Minimum future rental payments total $48,790 with $36,593
and $12,197 due during the years ended April 1998 and 1999, respectively.
NOTE 13: FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments (all of which are
held for non-trading purposes) are as follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Short-term bank debt $ (13,962) $ (13,962) $ (34,228) $ (34,228)
Related party short
term debt (79,067) (79,067) - -
Long-term debt (3,000,000) (2,850,154) - -
Redeemable preferred
stock (38,388) (62,878) (38,388) (56,903)
The carrying amount approximates fair value of cash and short term instruments
such as accounts receivable, accounts payable, and accrued expenses payable.
Accordingly, they have not been presented in the table above. The fair value
of short-term debt is believed to approximate its carrying amount due to its
proximate maturity. The fair value of long-term debt and redeemable preferred
stock is based on current rates at which the Company could borrow funds with
similar remaining maturities. (Redeemable preferred stock fair value includes
accumulated dividends and assumes that they will remain unpaid until maturity
in 1999.) Although the fair value of the long-term debt is lower than the
carrying value due to the difference in interest rate assumptions, the Company
cannot settle the obligation at less that current face value plus accrued
interest.
The Company owns approximately 2% of the common stock of Wagman Petroleum,
Inc. a privately held entity. There is no market for WPI's stock, and it is
impracticable to estimate the fair value of the Company's investment. The
investment is carried on the balance sheet at original cost, $14,464.
NOTE 14: CONTINGENCY
Lyric Energy, one of the Company's subsidiaries, has been contesting a suit to
recover legal fees and court costs pertaining to a previous action. This case
was tried and on April 23, 1997, the court awarded a judgment totaling
approximately $59,905, including interest. The Company was not the sole
defendant in this case, although the liability is joint and several, and the
judgment is expected to be appealed. Additionally, Lyric has obtained an
indemnification agreement against loss from Stahl Petroleum Company, another
defendant in the suit and previously a related party. Management anticipates
that this action will have no effect on the Company.
NOTE 15: SUBSEQUENT EVENTS
Subsequent to April 1997, NGT has leased 1,280 acres in Crockett County,
Texas. This lease provides for a three-year period to drill the first well
and five years to fully develop the acreage. The lease also provides for an
option to lease an additional 8,700 acres which must be exercised within 90
days of completing the first well. This combined area sits within an area
known as the Ozona Canyon Sand Gas Field, is between two significant producing
areas, and is expected to prove up significant reserves upon drilling. This
project has included geological and engineering review and research regarding
the history of the area and is considered to be sound in anticipated
activities and reasonable in regard to expected costs and results.
During May 1997, NGT arranged to acquire the remaining 50% working interest in
the Norton Prospect from its president for a note payable of $200,000 and an
option to purchase 100,000 shares of common stock at $5.00 per share.
Also, in June, the Company entered into an arrangement which required a
non-refundable deposit of $100,000 to be paid for an option to participate in
a project to rework approximately 175 oil wells in Reagan and Crockett
Counties, Texas with an initial purchase price of approximately $1,800,000.
Upon detailed review of the project and the results of work on four wells,
Management determined that the asking price was excessive and elected not to
exercise its option. As a result, the deposit was forfeited.
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARIES
Supplementary Information Relating
To Oil and Gas Producing Activities
For the years ended April 30, 1997 and 1996
(Unaudited)
The following tables identify the Company's estimated quantities of proved
developed reserves of crude oil and natural gas related to its oil and gas
interests. These supplemental disclosures of oil and gas producing activities
are unaudited due to the nature of reserve estimates and their computation.
Amounts presented are the activity for the years ended April 30, 1997 and 1996
and balances as of April 30, 1997 and 1996. During both fiscal 1996 and 1997,
some properties were reevaluated resulting in revisions to their reserve
estimates. As is generally well known, there are risks involved in
exploration for and production of oil and gas reserves. Reserves represent
quantitative estimates of the recoverable amounts of oil and gas that exist in
the ground and of the timing and costs of producing them. There are many ways
in which reserve estimates can be over or under the actual amounts of oil and
gas that are recovered. The estimated proved oil and gas reserves included
are located entirely within the United States.
Quantities of Reserves
Oil Gas
Proved and Developed Reserves (Barrels) (MCF)
Balances, April 30, 1995 318,740 296,310
Acquisitions 11,859 -
Revisions of estimates (26,292) (68,052)
Production (6,004) (17,210)
__________ ____________
Balances, April 30, 1996 298,303 211,048
Acquisitions 957,518 -
Revisions of estimates (110,739) (82,410)
Extensions and discoveries 19,473 38,082
Production (3,833) (10,316)
__________ ____________
Balances, April 30, 1997 1,160,722 156,404
__________ ____________
__________ ____________
Reserve quantities acquired during the year are from the Norton prospect and
the East Milham Sand Unit properties acquired in March and April 1997.
Revisions to reserve estimates represent changes in previous estimates of
proved reserves resulting from new information normally obtained from
development drilling, production history, and maintenance efforts, or
resulting from changes in economic factors. Revisions to estimates during
1997 arose primarily from going back into wells that had been marginally
productive during a time when the Company was short of funds to work on them.
When rework efforts indicated that the wells had significant problems and that
relatively significant costs would be required, Management elected to shut
down these wells on properties whose leases are being held by production from
other wells. In reviewing the reserves on these properties, it was decided
that the reserves should be revised until such time as it has been determined
that it will be feasible and economical to repair these wells. Extensions and
discoveries in 1997 consist primarily of successful reworking efforts where
some wells were recompleted in different producible zones that had not been
included in reserves previously.
Capitalized Costs Relating to Oil and Gas Producing Activities
1997 1996
Unproved properties (not being amortized) $ 637,496 $ -
Proved properties (being amortized)
Evaluated proved properties 7,994,929 1,473,333
___________ ____________
Total Capitalized Costs 8,632,425 1,473,333
Accumulated Depletion (114,077) (64,926)
___________ ____________
Net Capitalized Costs $8,518,348 $ 1,408,407
___________ ____________
___________ ____________
Capitalized Costs Not Being Amortized
Property
Acquisition
Costs
During 1997 $ 637,496
No capitalized costs from prior periods are not being amortized.
Costs Incurred in Acquisition, Exploration, and Development of Properties
1997 1996
Property acquisition
Purchase of reserves in place $ 6,335,997 $ 45,248
Unevaluated properties 637,496 -
Exploration - -
Development 185,600 77,670
____________ ____________
$ 7,159,093 $ 122,918
____________ ____________
____________ ____________
Results of Operations for Oil and Gas Producing Activities
Sales of oil and gas $ 100,987 $ 133,030
Production costs (including severance
taxes) (103,646) (119,018)
Depletion (49,151) (36,993)
Income taxes - -
____________ ____________
Results of operations from producing
activities (excluding corporate
overhead) $ (51,810) $ (22,981)
____________ ____________
____________ ____________
All sales were to unaffiliated enterprises. Depletion is calculated based on
equivalent barrels of oil assuming that gas reserves and production are
converted to oil on the basis of 6 mcf per equivalent barrel of oil. During
1997 and 1996, depletion cost was $8.85 and $4.17 per equivalent barrel,
respectively. The significant difference between the two years is primarily
due to the addition of significant properties toward the end of the current
year at costs that were materially higher, on a per barrel basis, than was
recorded for previously held properties.
Standardized Measure of Discounted Future Net Cash Flows
1997 1996
Future cash inflows $ 22,335,245 $ 5,451,124
Future production and development costs (6,169,360) (743,276)
Future income taxes (2,778,125) (1,080,308)
_____________ ____________
Future net cash flows 13,387,760 3,627,540
10% annual discount for estimated timing
of cash flows (4,575,955) (919,028)
_____________ ____________
Standardized measure of discounted
future net cash flows $ 8,811,805 $ 2,708,512
_____________ ____________
_____________ ____________
Principal Sources of Changes in the Standardized Measure
of Discounted Future Net Cash Flows
1997 1996
Standardized measure - beginning of
year $ 2,708,512 $ 2,784,501
Acquisition of reserves in place 8,159,397 45,248
Sales, net of production costs (25,540) (98,251)
Extensions and discoveries 268,045 -
Changes in estimated future development
costs 2,325,764 -
Revisions of quantity estimates (1,767,609) (247,017)
Accretion of discount 351,857 365,674
Net change in income taxes (920,718) 62,173
Changes in production timing and other (2,702,584) (258,803)
Changes in sales prices 414,681 54,987
____________ ____________
Standardized measure - end of year $ 8,811,805 $ 2,708,512
____________ ____________
____________ ____________
