SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-9675
GREAT NORTHERN GAS COMPANY
----------------------------------------------------
(Exact Name of Registrant As Specified in its Charter)
COLORADO 38-1900351
---------------------- -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
621 Seventeenth Street, Suite 2150
Denver, Colorado 80293
-------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 295-0938
Securities Registered Pursuant to Section 12(b) of the Act: None Securities
Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- KSB or any
amendment to this Form 10-KSB.
Aggregate market value of the voting stock held by non-affiliates of the
Registrant on February 10, 1997 was approximately $1,212,000 based on the most
recent price for which the stock was sold.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the last practicable date.
Outstanding
Class February 10, 1997
--------------------------- -----------------
Common Stock, $.01 Par Value 3,553,280 shares
NO DOCUMENTS INCORPORATED BY REFERENCE
Page 1 of 27 sequentially numbered pages.
<PAGE>
PART I
ITEM 1. BUSINESS
General Development of Business
Great Northern Gas Company, the Registrant (the "Company") was formed on
September 15, 1989 as a Colorado corporation. The Company is an independent oil
and gas company primarily engaged in onshore crude oil and natural gas
exploration, development and production, in the continental United States. The
Company's activities are focused on properties located on the western slope of
Colorado, Oklahoma, Southwestern Wyoming and Southeastern Utah.
During 1996, the Company purchased for $850,000 proved producing reserves in
Oklahoma.
Financial Information About Industry Segments
The Company is exclusively involved in the business of oil and gas exploration,
development and production.
Narrative Description of Business
The Company's business is the exploration for and development and production of
oil and gas, as well as the acquisition of developed and undeveloped oil and gas
properties, primarily in the United States. The Company has traditionally
generated or acquired its oil and gas prospects through acquisition of leases or
through farm-ins from other operators. During 1995 the Company began a program
of purchasing proved producing reserves.
As of February 10, 1997 the Company had two full-time employees. Current
Directors are Frank S. DiGrappa, Chairman of the Board, Executive Vice-President
and Treasurer, Thomas L. DiGrappa, Chief Operating Officer and President and
Michael J. DiGrappa. The Company engages the services of independent
accountants, geologists, engineers and land consultants from time to time to
assist in its operations.
As is typical of many oil and gas companies, the Company does not plan to own
any significant amount of drilling equipment. The Company will engage
independent drilling contractors for the drilling of any wells in which it is
the operator. The Company currently has no intention of refining or marketing
oil. The Company does not contemplate any material product research and
development or any material acquisition of plants or equipment.
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<PAGE>
ITEM 1. BUSINESS - (Continued)
Narrative Description of Business - (Continued)
Competition in the oil and gas industry is intense with many companies and
individuals attempting to acquire prospective oil and gas leases, other mineral
interests and exploration funding. Some are very large, well-established
companies with substantial operating staffs, capital resources and long earnings
records. The Company is at a competitive disadvantage in competing with these
larger entities.
The production and marketing of oil and gas is affected by a number of factors
which are beyond the Company's control and the effects of which cannot be
predicted accurately. These factors include crude oil imports, actions by
foreign oil-producing nations, the availability of adequate pipeline and other
transportation facilities, the marketing of competitive fuels and other matters
affecting the availability of a ready market, such as fluctuating supply and
demand. The oil and gas industry is currently faced with uncertain oil and gas
prices and reduced expenditures by most investors and other entities which have
typically provided funding for oil and gas exploration and development
activities. At present, the Company sells all of its production to traditional
industry purchasers who have the facilities to transport the oil and gas from
the wellsite.
Gas contracts may be generally renewed each year to allow for yearly price and
volume adjustments. Purchasers generally agree to take gas as contracted for on
a best efforts basis and the Company agrees to supply gas in the same manner.
During the years ended December 31, 1996 and 1995 there were no long-term
contracts and substantially all of the oil and gas revenues were from sales to
two purchasers.
The production and sale of crude oil and natural gas are currently subject to
extensive regulation under both federal and state authorities. In addition to
environmental and price regulations, most states have regulations which pertain
to spacing of wells, preventing waste of oil and natural gas, limiting
production rates, prorating production, preventing and cleaning-up of pollution
and similar matters. Although compliance with these laws and regulations has not
had a material adverse effect on the Company's operations, the Company cannot
predict whether such laws and regulations will have a material adverse effect on
its future operations.
Financial Information About Foreign and Domestic Operations and Export Sales
The Company currently has an immaterial investment in a Russian joint venture.
ITEM 2. PROPERTIES
Oil and Gas Properties
All of the Company's oil and gas properties, reserves and activities are located
onshore in the continental United States.
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<PAGE>
ITEM 2. PROPERTIES - (Continued)
Acreage
As of December 31, 1996 the Company held developed and undeveloped interests in
oil and gas leases as follows:
<TABLE>
<CAPTION>
Acreage
------------------------------------------------
Producing Non-producing
-------------------- --------------------
Gross(1) Net(2) Gross(1) Net(3)
------- ----- ------- -----
<S> <C> <C> <C> <C>
Colorado ............... 11,320 3,016 38,280 9,640
Oklahoma ............... 640 300 320 160
Utah ................... -- -- 1,300 1,300
Wyoming ................ 1,920 1,248 16,000 16,000
</TABLE>
(1) The number of gross acres is the total number of acres in which working
interests are owned.
(2) The number of net acres is the sum of the fractional working interests
owned by the Company in the gross acreage.
(3) Substantially all of the Company's non-producing acreage, in Colorado is
presently held by production.
Exploratory and Development Wells Drilled
During the year ended December 31, 1996 the Company participated in the drilling
of 3 wells (1 net), all of which were dry. During the year ended December 31,
1995 the Company did not drill any wells.
Reserve Information
Information relating to the oil and gas properties of the Company, including
unaudited reserve information, is set forth in Note 7 of the Notes to Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its properties are the subject.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for their approval.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
(1) (I) Traded in the U.S.. During 1996, the Company's Common
Stock was listed on the Pacific Stock Exchange under the
symbol "GTG".
(ii) Price Range of High and Low Bid Prices of Common Shares
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Quarter High Low High Low
<C> <C> <C> <C> <C>
1st ................ $ 1.00 $ 1.00 $ 1.25 $ 1.00
2nd ................ $ 1.00 $ 1.00 $ 1.25 $ 1.00
3rd ................ $ 1.12 $ 1.12 $ 1.00 $ 1.00
4th ................ $ 1.38 $ 1.38 $ 1.00 $ 1.00
</TABLE>
The foregoing prices represent interdealer quotations without retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
(b) Holders
At February 10, 1997 there were approximately 450 shareholders of
record of the Company's Common Stock.
(c) No Common Stock dividends have been declared or paid by the Company.
- 5 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected financial information for the Company. Such
information is based upon, and should be read in conjunction with, the Financial
Statements of the Company and the notes thereto included elsewhere in this
report.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Oil and gas sales ....... $ 740,889 $ 304,876 $ 420,189 $ 598,649 $ 421,655
Total revenues .......... 871,955 503,018 3,694,865 666,990 439,753
Total assets ............ 4,078,404 4,315,218 5,035,326 1,469,410 1,300,968
Net oil and gas
properties ............ 2,123,732 1,498,753 1,275,234 1,226,320 993,697
Stockholders' equity .... 3,718,121 4,064,573 4,502,032 1,320,598 1,143,674
Net earnings (loss) ..... (21,581) (9,972) 2,474,931 176,973 52,425
Earnings (loss) per share
of Common Stock ....... * * .54 .04 .01
Weighted average
shares of Common Stock
outstanding ........... 3,822,364 4,069,692 4,582,175 3,859,727 3,851,556
</TABLE>
*less than $.01 per share
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1996 the Company had working capital of $1,729,455 compared to
working capital of $2,732,609 at December 31, 1995. The $1,003,154 decrease in
working capital is primarily due to additions to property and equipment of
$989,508 and the purchase of 310,412 shares of Common Stock during the year. Net
cash provided by operating activities was $212,924 for 1996 compared to net cash
used in operating activities of $89,381 for 1995. Such increase is related to an
increase in cash flows resulting from an increase in prices received for natural
gas, revenues from production from the properties purchased in Oklahoma and a
$119,496 increase in current liabilities.
Analysis of Results of Operations
Oil and gas sales for the year ended December 31, 1996 have increased $436,013
compared to the same period of 1995. Such increase is primarily due to an
increase in the price received for natural gas and revenues from the Oklahoma
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<PAGE>
properties purchased in March 1996. The price per MCF paid to the Company has
increased to an average of $1.48 in 1996 compared to $.99 in 1995. Lease
operating expenses have increased primarily due to the Oklahoma properties and
expenditures made on the Wyoming properties purchased at the end of 1995.
General and administrative expenses have increased during 1996 primarily due to
an increase in consulting fees.
Additions to property and equipment include the March acquisition of an interest
in the Cushing Field in Oklahoma for a purchase price of approximately $850,000.
Average Sales Price, Production Cost and Depletion Expense
The following is the Company's average sales price, average production cost and
average depletion expense per thousand cubic feet (MCF) of natural gas produced
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Average sales price ........................ $ 1.48 $ .99
===== ====
Average production cost .................... $ .65 $ .45
===== ====
Average depletion expense .................. $ .44 $ .24
===== ====
</TABLE>
Impact of Inflation and Changing Prices
During the two years ended December 31, 1996, inflation has not had a
significant impact on the Company's financial condition. Fluctuating prices for
natural gas over the past several years and the current oversupply of natural
gas have affected the Company's recent revenues. The costs of acquiring leases
and drilling wells have fluctuated with prices.
- 7 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
GREAT NORTHERN GAS COMPANY
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants 9
Balance Sheet as of December 31, 1996 10
Statements of Earnings for the Years Ended
December 31, 1996 and 1995 11
Statements of Stockholders' Equity for the
Years Ended December 31, 1996 and 1995 12
Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 13
Notes to Financial Statements for the Years
Ended December 31, 1996 and 1995 14
- 8 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Great Northern Gas Company:
We have audited the accompanying balance sheet of GREAT NORTHERN GAS COMPANY (a
Colorado corporation) as of December 31, 1996 and the related statements of
earnings, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Great Northern Gas Company as
of December 31, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Denver, Colorado
February 14, 1997
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<PAGE>
<TABLE>
<CAPTION>
GREAT NORTHERN GAS COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 1,404,099
Accounts receivable:
Oil and gas sales ......................................... 132,054
Joint interest billings ................................... 116,005
Income taxes .............................................. 6,075
Short term investments ...................................... 242,474
Accrued interest receivable ................................. 7,245
Other ....................................................... 9,619
------------
Total current assets ................................. 1,917,571
------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, accounted for using
the full cost method ...................................... 3,327,289
Furniture, fixtures and automobile .......................... 57,660
------------
3,384,949
Less accumulated depreciation, depletion
and amortization .......................................... 1,224,116
------------
Net property and equipment ........................... 2,160,833
------------
$ 4,078,404
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade ..................................................... $ 20,410
Oil and gas sales ......................................... 115,866
Ad valorem taxes .......................................... 51,840
------------
Total current liabilities ............................ 188,116
------------
DEFERRED INCOME TAXES ......................................... 172,167
------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized
50,000,000 shares, issued 3,603,313 ....................... 36,033
Additional paid-in capital .................................. 39,502,517
Accumulated deficit ......................................... (35,820,429)
------------
Total stockholders' equity ........................... 3,718,121
------------
$ 4,078,404
============
</TABLE>
The accompanying notes to financial statements
are an integral part of this balance sheet.
- 10 -
<PAGE>
<TABLE>
<CAPTION>
GREAT NORTHERN GAS COMPANY
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Oil and gas sales ................................................ $ 740,889 $ 304,876
Interest and other income ........................................ 131,066 198,142
--------- -----------
871,955 503,018
--------- -----------
COSTS AND EXPENSES:
Lease operating .................................................. 279,231 121,261
Production taxes ................................................. 46,544 17,418
Depreciation, depletion and
amortization ................................................... 230,338 81,153
General and administrative ....................................... 353,355 306,285
--------- -----------
909,468 526,117
--------- -----------
LOSS BEFORE INCOME TAXES ........................................... (37,513) (23,099)
--------- -----------
PROVISION FOR INCOME TAX EXPENSE (BENEFIT):
Current .......................................................... (6,074) (45,986)
Deferred ......................................................... (9,858) 32,859
--------- -----------
(15,932) (13,127)
--------- -----------
NET LOSS ........................................................... $ (21,581) $ (9,972)
========= ===========
EARNINGS PER SHARE OF
COMMON STOCK ..................................................... $ * $ *
========= ===========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING ......................................... 3,822,364 4,069,692
========= ===========
</TABLE>
* Less than $.01 per share
The accompanying notes to financial statements
are an integral part of these statements.
- 11 -
<PAGE>
<TABLE>
<CAPTION>
GREAT NORTHERN GAS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Common Stock Additional
---------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit
---------------------------------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 .................... 4,262,634 $ 42,626 $ 40,248,282 $(35,788,876)
Shares acquired
for retirement ...................... (348,909) (3,489) (423,998) --
Net loss ............................. -- -- -- (9,972)
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1995 .................... 3,913,725 39,137 39,824,284 (35,798,848)
Shares acquired
for retirement ...................... (310,412) (3,104) (321,767) --
Net loss ............................. -- -- -- (21,581)
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1996 .................... 3,603,313 $ 36,033 $ 39,502,517 $(35,820,429)
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
- 12 -
<PAGE>
<TABLE>
<CAPTION>
GREAT NORTHERN GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (21,581) $ (9,972)
Adjustments to reconcile
net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and
amortization ............................................. 230,338 81,153
Deferred income tax (benefit) expense ...................... (9,858) 32,859
Decrease (increase) in accounts receivable ................. (105,471) 123,584
Increase in other current assets ........................... -- (1,496)
Increase (decrease) in current liabilities ................. 119,496 (315,509)
----------- -----------
Net cash provided by (used in) operating activities .............. 212,924 (89,381)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets ...................................... 112,326 85,800
Additions to property and equipment ............................... (989,508) (381,152)
Purchases of short term investments ............................... (242,474) --
Proceeds from sale of short term investments ..................... 1,459,423 1,571,173
----------- -----------
Net cash provided by investing activities ........................ 339,767 1,275,821
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Stock ........................................ (324,871) (427,487)
----------- -----------
Net cash used in financing activities ............................. (324,871) (427,487)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS ............................... 227,820 758,953
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR .............................................. 1,176,279 417,326
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR .................................................... $ 1,404,099 $ 1,176,279
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
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<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Great Northern Gas Company, (the "Company") was reincorporated on September 15,
1989 as a Colorado corporation. The Company is an independent oil and gas
company engaged in onshore crude oil and natural gas exploration, development
and production in the continental United States. The Company's activities are
focused on properties located on the western slope of Colorado, Oklahoma, Utah
and Wyoming.
Statements of Cash Flows
Cash in excess of daily requirements is invested is money market accounts and
commercial paper. Such investments with maturities of three months or less are
deemed to be cash equivalents for purposes of the statements of cash flows. The
carrying amount of cash equivalents and short term investments approximates fair
value because of the short maturity of those instruments. No cash was paid for
interest during 1996 and 1995.
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 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. There
are many factors, including global events, that may influence the production,
processing, marketing, and valuation of crude oil and natural gas. A reduction
in the valuation of oil and gas properties resulting from declining prices or
production could adversely impact depletion rates and ceiling test limitations.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, namely cash and
cash equivalents and short term investments held to maturity, approximate their
fair values because of the short maturity of these instruments.
Property and Equipment
The Company uses the full cost method of accounting for oil and gas properties.
Under this method, all costs associated with property acquisition, exploration
and development activities, including costs of unsuccessful exploration, are
capitalized within a cost center; subject to a cost ceiling limitation, which
basically limits such costs to the present value of future net revenues after
tax from proved reserves discounted at 10%. The Company's oil and gas properties
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<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
are located within the continental United States, which constitutes one cost
center. No gain or loss is recognized upon normal sale or abandonment of oil and
gas properties unless the gain or loss significantly alters the relationship
between capitalized costs and proved oil and gas reserves of the cost center.
Maintenance, repairs, renewals and minor replacements are charged to expense as
incurred. Major additions and improvements are capitalized. When assets other
than oil and gas properties are sold, retired or otherwise disposed of, the cost
and related accumulated depreciation are eliminated from the accounts and gains
or losses are included in the statements of earnings.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization of oil and gas properties is computed
on a units-of-production method based on proved oil and gas reserves. The
provision for depreciation, depletion and amortization is calculated by applying
the rate to net capitalized property costs plus estimated future development
costs. The Company uses the straight-line method of depreciation for assets
other than oil and gas properties.
Income Taxes and Change in Accounting Policy
Effective January 1, 1992, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the measurement of deferred income tax assets for deductible temporary
differences and operating loss carryforwards and deferred tax liabilities for
taxable temporary differences. Measurement of current and deferred income tax
liabilities and assets is based on provisions of enacted tax law; the effects of
futures changes in tax laws or rates are not anticipated. Deferred tax assets
primarily result from net operating loss carryforwards and from the recognition
of depreciation, depletion and amortization in different periods for financial
reporting and tax purposes. The adoption of SFAS No. 109 did not require
adjustments to the financial statements.
Earnings Per Share of Common Stock
Earnings per share of Common Stock has been calculated using the weighted
average shares of Common Stock outstanding. The impact of dilative Common Stock
equivalents (stock options) is considered.
- 15 -
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
2. OIL AND GAS OPERATIONS
Capitalized costs and related accumulated depreciation, depletion and
amortization pertaining to oil and gas properties at December 31, 1996 are set
forth below:
Capitalized costs:
Evaluated ........................................... $ 2,966,289
Unevaluated ......................................... 361,000
Less accumulated depreciation, depletion and
amortization ........................................ (1,203,557)
----------
Net capitalized costs .................................. $ 2,123,732
==========
Costs incurred in oil and gas operations are as follows for the years ended
December 31:
1996 1995
---- ----
Oil and gas property acquisitions:
Proved ...................................... $851,213 $222,778
Unproved .................................... 15,624 66,224
Exploration ................................... 42,857 35,984
Development ................................... 48,187 57,649
-------- --------
$957,881 $382,635
======== ========
Average depletion expense per
MCF of natural gas produced ............. $ .44 $ .24
======== ========
The Company received 10 percent or more of its oil and gas revenues from the
following customers for the years indicated.
Customer 1996 1995
-------- ---- ----
A 24% 54%
B --% 13%
C 48% --%
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<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
3 COMMON STOCK-SALES, RETIREMENTS AND STOCK OPTIONS
On February 24, 1994, in accordance with the terms of the registration statement
filed with the Securities and Exchange Commission on April 9, 1993, the Company
sold and issued 220,467 Units at a price of $4 per Unit for net proceeds of
$786,000. The Units consist of 440,934 shares of Common Stock and 220,467 Class
A Warrants. The Class A Warrants are detachable from the Units and may be
separately transferred in the over-the-counter market immediately following
issuance unless otherwise mutually determined by the Company and the
Underwriter. Each Class A Warrant will entitle the holder thereof to purchase,
at a price of $3.00, at any time within a period of five years from April 9,
1993, one share of Common Stock of the Company. The Class A Warrants shall be
redeemable by the Company for a price of $.001 per Warrant upon ten (10) days
written notice if the bid price of the Common Stock is at least 125% of the
exercise price of the Warrants for at least ten (10) consecutive business days
prior to the notice of redemption. The Company also issued 5,000 shares of
Common Stock for services associated with the issuance of the Units.
During 1996 and 1995 the Company repurchased 310,412 and 348,909 shares of
Common Stock, which were retired.
On September 15, 1989 the Company's shareholders approved a stock option plan
whereby up to 500,000 shares of the Company's Common Stock are reserved for
issuance and may be granted to officers, directors and certain key employees at
the discretion of the Board of Directors. The stock option price must be at
least 100% of the fair market value at the date of grant unless the optionee
owns more than 10% of the Company's Common Stock in which case the price must be
110% of fair market value. Options may be exercised at the date of grant unless
the terms of the grant specify otherwise. Qualified options must be exercised
within ten years unless the grantee owns more than 10% of the Company's Common
Stock, in which case options must be exercised within five years.
At December 31, 1989, options on 275,000 shares of Common Stock had been granted
at a price of $.10 per share. During 1990, 50,000 of said options were exercised
and an additional 225,000 options were granted to the Company's President and
Vice President at a price of $.50 per share, which was the estimated market
value at the date of grant. Said options can be exercised at any time over a ten
year period ending April 5, 1998. No options were exercised for the years ended
December 31, 1996 and 1995.
On July 11, 1994, the Company's shareholders approved a nonqualified stock
option plan for key officers, employees and directors covering 500,000 shares of
the Company's Common Stock. Options granted under the nonqualified plan to any
one participant shall not exceed 200,000 shares. On October 4, 1994, 170,000
options were granted under this plan. Said options are exercisable at $1.00 per
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<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
share, not less than six months nor more than ten years from the date of the
grant. Options granted during 1994 were for restricted shares, which must be
held for a minimum of two years. No options were granted or exercised in 1996 or
1995.
4. OVERRIDING ROYALTY PLAN
On September 15, 1989 the Company's shareholders approved an overriding royalty
plan whereby the Company's President can assign overriding royalty interests
from the Company's prospects to an overriding royalty plan for the benefit of
qualified employees. Distributions from the plan are determined on a
year-to-year basis and made only to current employees. During 1996 and 1995,
$65,795 and $23,745 was paid to plan participants.
5. INCOME TAXES
The Company's provision for income taxes at December 31, 1996 and 1995 includes
deferred tax (benefit) expense of approximately ($10,000) and $33,000
respectively.
The difference between the provision for income taxes and the amount which would
be determined by applying the statutory federal income tax rate to earnings
before income taxes is analyzed below for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Tax benefit by applying the statutory federal
income tax rate to pretax accounting income ........................ $ (13,130) $ (7,854)
Increase (decrease) in tax from:
State taxes ........................................................ (1,125) (924)
Other .............................................................. (1,677) (4,349)
-------- --------
$ (15,932) $ (13,127)
======== ========
</TABLE>
The Company's net deferred tax liability at December 31, 1996 and 1995 primarily
relates to book basis being in excess of tax basis. Long-term deferred assets
and liabilities are comprised of the following at December 31, :
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Book basis in excess of tax basis ............................ $ (286,435) $ (294,834)
Loss carryforwards ........................................... 98,118 96,659
Other ........................................................ 16,150 16,150
-------- ---------
Net deferred tax liability .............................. $ (172,167 ) $ (182,025)
======== =========
</TABLE>
- 18 -
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
The Company has approximately $16,000,000 of net operating loss carryforwards
generated prior to December 31, 1987, that will expire in 2002. As the Company
may only use approximately $26,000 annually due to an equity change that
occurred in December, 1987, the carryforward tax asset above does not include
any amounts in excess of this limitation. The net operating losses for years
after 1987 are not subject to any annual utilization limitation
6. COMMITMENTS AND CONTINGENCIES
General and administrative expenses include rent expense for office facilities
and equipment of $25,433 and $26,034 for the years ended 1996 and 1995,
respectively.
The Company entered into an office lease during 1994 which expires in August
1999. Future minimum annual payments remaining are as follows:
Year ending December 31-
1997 $ 20,664
1998 20,664
1999 13,776
--------
$ 55,104
========
- 19 -
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
7. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Quantities of Natural Gas Reserves
All of the Company's natural gas reserves are located in the United States. The
Company's oil reserves at December 31, 1996 and 1995 are insignificant. The
following reserve related information is based on estimates prepared by
independent petroleum engineers. Reserve estimates are inherently imprecise and
are continually subject to revisions based on production history, results of
additional exploration and development, prices of oil and gas and other factors.
1996 1995
----------- -----------
Proved natural gas reserves (MCF):
Beginning of year ........................ 11,251,619 10,523,046
Revisions of previous estimates .......... (5,817,863) (7,581,773)
Purchases of reserves in place ........... 883,321 8,619,687
Production ............................... (499,941) (309,341)
----------- -----------
End of year .............................. 5,817,136 11,251,619
=========== ===========
Proved developed natural gas reserves (MCF):
Beginning of year ........................ 2,631,933 6,007,177
=========== ===========
End of year .............................. 2,163,000 2,631,933
=========== ===========
During 1995 the Company included in estimated quantities 982,660 mcf of natural
gas for the Pretty Water Field in Sweetwater County, Wyoming. Such reserves were
dependent upon third party construction of a gas sweetening plant. Such third
party delayed its construction plans indefinitely. Because of such delay, the
Company has not included such reserves in its 1996 estimates of natural gas
reserves.
The Company believes that current working capital combined with standard
industry joint ventures and future cash flows from operations, should be
adequate to finance the drilling of the offset locations.
- 20 -
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves
The following is the standardized measure of discounted future net cash flows
and changes therein relating to proved natural gas reserves. Future net cash
flows were computed using year-end prices and costs and relate to existing
proved natural gas reserves in which the Company has mineral interests.
1996 1995
------------ ------------
Future cash inflows ........................ $ 17,049,000 $ 8,539,000
Future production and development costs ..... (4,601,000) (2,870,000)
Future income tax expense .................. (2,763,000) (1,312,000)
------------ ------------
Future net cash flows ...................... 9,685,000 4,357,000
10% annual discount for estimated
timing of cash flows ..................... (3,764,000) (2,048,000)
------------ ------------
Standardized measure of discounted
future net cash flows .................... $ 5,921,000 $ 2,309,000
============ ============
The following are the principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31:
1996 1995
----------- -----------
Changes:
Sales of natural gas produced,
net of production costs ................. $ (415,000) $ (166,000)
Accretion of discount .................... 231,000 392,000
Net changes in prices and
production costs ....................... 5,089,000 (984,000)
Change in future development
costs including costs incurred
during the year ........................ (85,000) (375,000)
Revisions of previous quantity
estimates .............................. (2,277,000) (2,523,000)
Purchases of reserves in place ........... 1,400,000 1,950,000
Net change in income taxes ............... (1,007,000) 522,000
Other .................................... 676,000 (430,000)
----------- -----------
Net changes ............................ 3,612,000 (1,614,000)
Balance at beginning of year ............... 2,309,000 3,923,000
----------- -----------
Balance at end of year ..................... $ 5,921,000 $ 2,309,000
=========== ===========
- 21 -
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
The Company has not filed with or included in reports to any Federal authority
or agency, other than the Securities and Exchange Commission, any estimates of
proved natural gas reserves.
- 22 -
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is submitted with respect to the directors of the
Company:
<TABLE>
<CAPTION>
Director Position Currently
Name Age Since Held With the Company
---- --- -------- ----------------------
<S> <C> <C> <C>
Frank S. DiGrappa 71 1/1/88 Chairman of the Board,
Vice-President and Treasurer
Thomas L. DiGrappa 43 1/1/88 Chief Operating Officer and
President
Michael J. DiGrappa 44 9/15/89 Director
</TABLE>
During the year ended December 31, 1996, the Company's Board of Directors held
two meetings. All persons who were directors during 1996 attended all of the
meetings held while they were directors.
The Company currently has no standing audit, nominating or compensation
committees of its Board of Directors.
- 23 -
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (Continued)
Business Experience of Directors
Frank S. DiGrappa, 71, is Chairman of the Board, Chief Executive Officer,
Treasurer and Director of the Company. He has been involved in the oil and gas
business for 44 years. Mr. DiGrappa graduated from the University of Oklahoma
College of Law with a Bachelor of Law Degree in 1951. Upon graduation, he joined
Ashland Oil, Inc. in Ashland, Kentucky. He worked for Ashland for seven years in
various areas and capacities and was manager of the firm's Billings, Montana
District Office when he resigned to become manager of lands for the Anschutz
Drilling Co., Inc. in Denver, Colorado. After two years, he resigned to become
an independent landman and oil operator. In 1971, Mr. DiGrappa co-founded Teton
Energy Co., Inc., a private oil and gas exploration and production firm based in
Denver.
Until its sale to Petrotech in 1984, Mr. DiGrappa was instrumental in developing
Teton Energy into a company whose assets included 150 oil and gas wells and more
than 800,000 acres of oil and gas leases, located primarily in the Piceance
Creek Basin in western Colorado. Following the sale of Teton, Mr. DiGrappa
founded St. Francis Resources, Inc., a private Denver firm, and is its president
and owner.
Thomas L. DiGrappa, 43, is Chief Operating Officer, President, and Director of
the Company. He is the son of Frank DiGrappa. Tom DiGrappa graduated from the
University of Colorado School of Business with a degree in Minerals Land
Management in December, 1976. In February, 1977, he joined Continental Minerals,
Inc., a subsidiary of Continental Oil Company, in Spokane, Washington, as a
landman in uranium exploration. He resigned his position with Continental
Minerals in February, 1979, to join Intercontinental Energy Corp., a
Denver-based independent oil, gas, uranium and geothermal company. He was with
Intercontinental Energy until November, 1980, when he joined Teton Energy.
During the past year and a half he has served as president of the Company. Prior
to 1994, he served as Vice President of the Company.
Michael J. DiGrappa, 44, is a Director of the Company. He is the son of Frank
DiGrappa. Michael DiGrappa graduated from the University of Northern Colorado
School of Business with a degree in Business Administration and Marketing in
June, 1976. He was sales representative for Chemical Sales Co., Denver, until
1978 when he joined Air Products & Chemical, Inc. He was an area representative
for Air Products & Chemical, Inc. in Denver, Calgary and Oklahoma City between
1978 and 1982, when he was named sales manager at the Tubular Division of
Continental Emsco in Oklahoma City. He returned to Denver in 1984 and was the
accounts manager at Frontier Oil and Refining Co. until 1988. He is presently an
area representative of Liquid A.R.N. in Denver.
- 24 -
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers
The Executive Officers of the Company are Frank S. DiGrappa, Chairman of the
Board, Vice-President and Treasurer, and Thomas L. DiGrappa, Chief Operating
Officer and President. Information concerning both individuals' principal
occupation or employment during the past six years is set forth above under
BUSINESS EXPERIENCE OF DIRECTORS.
Direct compensation paid to or allowed by the Company's executives during the
year was $100,008 for Frank S. DiGrappa and $120,408 for Thomas L. DiGrappa.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table summarizes at January 15, 1995 (I) the number and percentage
of shares of Common Stock owned of record and beneficially by each person known
by the Company to be the beneficial owners of more than five percent of the
Company's Common Stock, (ii) the number and percentage of shares owned
beneficially by each director, (iii) the number and percentage of shares owned
beneficially by all officers and directors as a group:
Name/Address of Number of Shares
Beneficial Owner Beneficially Owned Percent of Class
---------------- ------------------ ----------------
St. Francis Resources, Inc. .........
621 Seventeenth Street
Suite 2150
Denver, CO 80293 .................... 2,415,255 49.5%
Frank S. DiGrappa
621 Seventeenth Street
Suite 2150
Denver, CO 80293 .................... 335,000 (1) 6.9%
Thomas L. DiGrappa
621 Seventeenth Street
Suite 2150
Denver, CO 80293 .................... 425,000 (2) 20.5%
Michael J. DiGrappa
621 Seventeenth Street
Suite 2150
Denver, CO 80293 .................... 10,000 (3) 0.2%
- 25 -
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT - (Continued)
All Officers and
Directors as a Group 3,045,678 (5) 62.4%
1. Includes 150,000 shares of Common Stock which may be acquired pursuant
to the exercise of stock options. Does not include 966,102 shares
indirectly held through 40% interest in St. Francis Resources, Inc.
2. Includes 425,000 shares of Common Stock which may be acquired pursuant
to the exercise of stock options. Does not include 362,288 shares
indirectly held through 15% interest in St. Francis Resources, Inc.
3. Includes 10,000 shares of Common Stock which may be acquired pursuant
to the exercise of stock options. Does not include 362,288 shares
indirectly held through an interest in St. Francis Resources, Inc.
4. Includes 10,000 shares of Common Stock which may be acquired pursuant
to the exercise of stock options.
5. Includes 1,690,678 shares held by St. Francis Resources, Inc., seventy
percent owned by Directors of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 7 to Financial Statements.
Management will provide, without charge, a copy of this Form 10-KSB.
Please send your request to the Company's Denver office, 621 17th
Street, Suite 2150, Denver, Colorado 80293.
- 26 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Great Northern Gas Company
Date: By: /s/ Frank S. DiGrappa
-------------------------------
Frank S. DiGrappa
Chairman of the Board, Chief
Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas L. DiGrappa
- ------------------------- President, Chief Operating March 27, 1997
Thomas L. DiGrappa Officer and Director
/s/ Frank S. DiGrappa
- ------------------------- Chief Executive Officer, March 27, 1997
Frank S. DiGrappa Executive Vice-President,
Treasurer and Director
/s/ Michael J. DiGrappa
- ------------------------- Director March 27, 1997
Michael J. DiGrappa
- 27 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,404,099
<SECURITIES> 242,474
<RECEIVABLES> 261,379
<ALLOWANCES> 0
<INVENTORY> 9,619
<CURRENT-ASSETS> 1,917,571
<PP&E> 3,384,949
<DEPRECIATION> 1,224,116
<TOTAL-ASSETS> 4,078,404
<CURRENT-LIABILITIES> 188,116
<BONDS> 0
0
0
<COMMON> 36,033
<OTHER-SE> 3,682,088
<TOTAL-LIABILITY-AND-EQUITY> 4,078,404
<SALES> 740,889
<TOTAL-REVENUES> 871,955
<CGS> 0
<TOTAL-COSTS> 325,775
<OTHER-EXPENSES> 583,693
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (37,513)
<INCOME-TAX> (15,932)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,581)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
