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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, 1997
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, 1998 was approximately $576,506 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 18, 1998
----- -----------------
Common Stock, $.01 Par Value 3,108,460 shares
NO DOCUMENTS INCORPORATED BY REFERENCE
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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 in the Continental United
States.
During 1996, the Company purchased for $850,000 proved producing reserves in
Oklahoma. During 1997 the Company purchased for $575,000 proved producing
reserves in California and $220,000 for proved producing reserves in Wyoming.
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, 1998 the Company had three full-time employees and one
full-time geologic consultant. 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.
2
<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 monthly to allow for monthly price and
volume adjustments. During the years ended December 31, 1997 and 1996 there were
no long-term contracts and substantially all of the oil and gas revenues were
from sales to four and two purchasers, respectively.
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 owns approximately 16% interest in American-Tuymen
Exploration Company, which owns a 61% interest in a Russian Stock Company. The
Russian Stock Company owns a producing license in Western Siberia currently
making 650 barrels of oil per day. The Company has no basis recorded nor
revenues recorded related to this investment.
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.
3
<PAGE>
ITEM 2. PROPERTIES - (Continued)
Acreage
- -------
As of December 31, 1997 the Company held developed and undeveloped interests in
oil and gas leases as follows:
Acreage
----------------------------------------------------------
Producing Non-producing
------------------------- --------------------------
Gross(1) Net(2) Gross(1) Net(3)
Colorado 4,080 1,130 -- --
Oklahoma 960 480 -- --
Utah 1,320 1,320 -- --
Wyoming 3,200 3,200 13,000 13,000
(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.
Exploratory and Development Wells Drilled
- -----------------------------------------
During the year ended December 31, 1997 the Company participated in the drilling
of 1 well (.475 net), which was a producer. One dry hole was drilled on the
Company's Elkol Prospect by Hallwood Resources. The Company did not have any
cost on said well.
During the year ended December 31, 1996 the Company participated in the drilling
of 3 wells (1 net), all of which were dry.
Reserve Information
- -------------------
Information relating to the oil and gas properties of the Company, including
unaudited reserve information, is set forth in Note 8 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.
4
<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 1997, 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
1997 1996
----------------------- -----------------------
Quarter High Low High Low
1st $1.50 $1.25 $1.00 $1.25
2nd $1.50 $1.25 $1.00 $1.00
3rd $1.62 $1.50 $1.12 $1.00
4th $1.62 $1.50 $1.38 $1.00
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, 1998 there were approximately 415 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>
1997 1996 1995 1994 1993
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Oil and gas sales $1,108,371 $ 740,889 $ 304,876 $ 420,189 $ 598,649
Total revenues 1,676,239 871,955 503,018 3,694,865 666,990
Total assets 3,913,105 4,078,404 4,315,218 5,035,326 1,469,410
Net oil and gas
properties 1,831,582 2,123,732 1,498,753 1,275,234 1,226,320
Stockholders' equity 3,361,448 3,718,121 4,064,573 4,502,032 1,320,598
Net earnings (loss) 144,889 (21,581) (9,972) 2,474,931 176,973
Basic earnings (loss) per share
of Common Stock .04 * * .54 .04
Weighted average
shares of Common Stock
outstanding 3,441,569 3,822,364 4,069,692 4,582,175 3,859,727
*less than $.01 per share
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997 the Company had working capital of $1,692,612 compared to
working capital of $1,729,455 at December 31, 1996. Net cash provided by
operating activities was $290,454 for 1997 compared to net cash provided by
operating activities of $212,924 for 1996. Such increase is primarily related to
an increase in oil and gas sales.
Net cash provided by investing activities was $619,395 for 1997 compared to
$339,767 for 1996. Such increase is primarily related to an increase in proceeds
from the sale of property and equipment. Net cash used in financing activities
increased to $501,562 for 1997 from $324,871 for 1996 due to an increase in cost
of common shares repurchased by the Company.
Analysis of Results of Operations
- ---------------------------------
Oil and gas sales for the year ended December 31, 1997 have increased $367,482
compared to the same period of 1996. Such increase is primarily due to revenues
from the purchase of White River Dome, Gasaway and Long Beach Unit properties
and increased commodity prices. Lease operating expenses and production taxes
have increased primarily due to the White River Dome and Gasaway properties
purchased at the end of 1996 and expenditures made on the Haybarn properties
purchased in 1997. General and administrative expenses have increased during
1997 primarily due to the addition of one full time employee, additional
consulting expenses and salary increases.
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
Analysis of Results of Operations-(CONTINUED)
- ---------------------------------------------
During 1997 the Company sold its properties at South Douglas Creek for $700,000
and its White River Dome and Gasaway properties for $728,000. Because such sales
represented approximately 50% of the Company's reserves at the time, a gain of
$351,760 was recorded.
Haybarn Field was acquired in June of 1997 for $220,000. The Long Beach Unit was
acquired in 1997 for $575,000.
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:
1997 1996
-------- --------
Average sales price $ 2.33 $ 1.48
======= ========
Average production cost $ 1.00 $ .65
======= ========
Average depletion expense $ .58 $ .44
======= ========
Impact of Inflation and Changing Prices
- ---------------------------------------
During the two years ended December 31, 1997 and 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, 1997 10
Statements of Earnings for the Years Ended
December 31, 1997 and 1996 11
Statements of Stockholders' Equity for the
Years Ended December 31, 1997 and 1996 12
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 13
Notes to Financial Statements for the Years
Ended December 31, 1997 and 1996 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, 1997 and the related statements of
earnings, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1997. 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 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, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 20, 1998
9
<PAGE>
GREAT NORTHERN GAS COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,812,386
Accounts receivable:
Oil and gas sales 90,902
Joint interest billings 139,201
Other 9,619
------------
Total current assets 2,052,108
------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, accounted for using
the full cost method 2,682,627
Furniture, fixtures and automobile 60,105
------------
2,742,732
Less accumulated depreciation, depletion
and amortization 881,735
------------
Net property and equipment 1,860,997
------------
$ 3,913,105
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Trade $ 24,404
Oil and gas sales 229,707
Income taxes 17,286
Other 88,099
------------
Total current liabilities 359,496
------------
DEFERRED INCOME TAXES 192,161
------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized
50,000,000 shares, issued 3,297,343 32,975
Additional paid-in capital 39,004,013
Accumulated deficit (35,675,540)
------------
Total stockholders' equity 3,361,448
------------
$ 3,913,105
============
The accompanying notes to financial statements
are an integral part of this balance sheet.
10
<PAGE>
GREAT NORTHERN GAS COMPANY
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
REVENUES:
Oil and gas sales $ 1,108,371 $ 740,889
Gain on sale of properties and equipment 351,760 --
Interest and other income 216,108 131,066
----------- -----------
1,676,239 871,955
----------- -----------
COSTS AND EXPENSES:
Lease operating 391,718 279,231
Production taxes 84,075 46,544
Depreciation, depletion and
amortization 274,675 230,338
General and administrative 737,528 353,355
----------- -----------
1,487,996 909,468
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 188,243 (37,513)
----------- -----------
PROVISION FOR INCOME TAX EXPENSE (BENEFIT):
Current 23,360 (6,074)
Deferred 19,994 (9,858)
----------- -----------
43,354 (15,932)
----------- -----------
NET EARNINGS (LOSS) $ 144,889 $ (21,581)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE OF
COMMON STOCK .04 $ *
=========== ===========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 3,441,569 3,822,364
=========== ===========
* 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, 1997 AND 1996
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
Shares acquired
for retirement (305,970) (3,058) (498,504) --
Net earnings -- -- -- 144,889
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1997 3,297,343 $ 32,975 $ 39,004,013 $(35,675,540)
============ ============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GREAT NORTHERN GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 144,889 $ (21,581)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Gain on sale of property and equipment (351,760) --
Depreciation, depletion and amortization 274,675 230,338
Deferred income tax expense (benefit) 19,994 (9,858)
Decrease (increase) in accounts receivable 31,276 (105,471)
Increase in current liabilities 171,380 119,496
----------- -----------
Net cash provided by operating activities 290,454 212,924
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,543,015 112,326
Additions to property and equipment (1,166,094) (989,508)
Purchases of short term investments -- (242,474)
Proceeds from sale of short term investments 242,474 1,459,423
----------- -----------
Net cash provided by investing activities 619,395 339,767
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Stock (501,562) (324,871)
----------- -----------
Net cash used in financing activities (501,562) (324,871)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 408,287 227,820
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,404,099 1,176,279
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,812,386 $ 1,404,099
=========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
13
</TABLE>
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
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.
Statements of Cash Flows
- ------------------------
Cash in excess of daily requirements is invested in 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 1997 and 1996.
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
14
<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
- ------------
The Company accounts for taxes pursuant to 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 carry forwards 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 carry forwards and from the recognition
of depreciation, depletion and amortization in different periods for financial
reporting and tax purposes.
Earnings Per Share
- ------------------
Effective December 15, 1997, the company has adopted the provisions of Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share".
SFAS 128 requires entities to present both Basic Earnings Per Share ("EPS") and
Diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Earnings per share amounts
for 1996 have been restated to reflect the adoption of SFAS 128. Potential
dilution of securities exercisable into common stock were computed using the
treasury stock method based on the average fair market value of the stock.
15
<PAGE>
<TABLE>
<CAPTION>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years ended December 31,
1997 1996
-------- ---------
Earnings Shares Per Share Loss Shares Per Share
-------- ------ --------- ---- ------ ---------
(in thousands, except purchase amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 145 3,442 $ .04 $ (22) 3,822 $ --
Effect of diluted securities:
Stock options outstanding -- 428 -- -- -- --
------ ------ ------ ----- ------ ---------
Diluted EPS $ 145 3,870 $ .04 $ (22) 3,822 $ --
====== ====== ====== ===== ====== =========
</TABLE>
Assumed conversions were not included in the calculation for diluted EPS in 1996
as they would have been antidilutive.
2. SALE OF OIL AND PROPERTIES
During 1997 the Company sold its properties at South Douglas Creek for $700,000
and its White River Dome and Gasaway properties for $728,000. Because such sales
represented approximately 50% of the Company's reserves at the time of sale, a
gain of $351,760 was recorded. The proceeds from the South Douglas Creek sale
were placed in a tax free exchange account and subsequently used to purchase the
Long Beach Unit in California.
3. OIL AND GAS OPERATIONS
Capitalized costs and related accumulated depreciation, depletion and
amortization pertaining to oil and gas properties at December 31, 1997 are set
forth below:
Capitalized costs:
Evaluated $ 2,606,585
Unevaluated 76,042
Less accumulated depreciation,
depletion and amortization (851,045)
------------
Net capitalized costs $ 1,831,582
===========
Costs incurred in oil and gas operations are as follows for the years ended
December 31:
1997 1996
---------- ----------
Oil and gas property acquisitions:
Proved $ 864,384 $ 851,213
Unproved 73,435 15,624
Exploration 62,156 42,857
Development 166,119 48,187
---------- ----------
$1,166,094 $ 957,881
========== ==========
Average depletion expense per
MCF of natural gas produced $ .58 $ .44
========== ==========
16
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. OIL AND GAS OPERATIONS - (Continued)
The Company received 10 percent or more of its oil and gas revenues from the
following customers for the years indicated.
Customer 1997 1996
-------- ---- ----
A 10% 24%
B 29% --%
C 20% 48%
D 19% --%
4. 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 1997 and 1996 the Company repurchased 305,970 and 310,412 shares of
Common Stock, respectively, 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.
17
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. COMMON STOCK-SALES, RETIREMENTS AND STOCK OPTIONS - (Continued)
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, 1997 and 1996.
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
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 1997 or
1996.
5. 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 1997 and 1996,
$77,200 and $65,795 was paid to plan participants.
6. INCOME TAXES
The Company's provision for income taxes at December 31, 1997 and 1996 includes
deferred tax expense (benefit) of approximately $19,994 and ($9,858)
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:
1997 1996
----------- ----------
Tax expense (benefit) by
applying the statutory federal
income tax rate to pretax
accounting income $ 65,885 $ (13,130)
Increase (decrease) in tax from:
State taxes 5,647 (1,125)
Other (28,178) (1,677)
---------- ----------
$ 43,354 $ (15,932)
========== ==========
18
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. INCOME TAXES - (Continued)
The Company's net deferred tax liability at December 31, 1997 and 1996 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:
1997 1996
---------- ----------
Book basis in excess of tax basis $ (267,797) $ (286,435)
Loss carry forwards 59,486 98,118
Other 16,150 16,150
---------- ----------
Net deferred tax liability $ (192,161) $ (172,167)
========== ==========
The Company has approximately $16,000,000 of net operating loss carry forwards
generated prior to December 31, 1987, that will fully expire in 2002. As the
Company may only use approximately $26,000 annually due to an equity change that
occurred in December, 1987, the carry forward tax asset above does not include
any amounts in excess of this limitation.
7. COMMITMENTS AND CONTINGENCIES
General and administrative expenses include rent expense for office facilities
and equipment of $24,291 and $25,433 for the years ended 1997 and 1996,
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-
1998 $ 20,664
1999 13,776
--------
$ 34,440
========
19
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. 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, 1997 and 1996 are included herein
assuming one barrel of oil equals six mcf of gas. 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.
1997 1996
----------- ----------
Proved natural gas reserves (MCF):
Beginning of year 5,817,136 11,251,619
Revisions of previous estimates (460,735) (5,817,863)
Purchases of reserves in place 4,655,656 883,321
Sale of reserves in place (2,872,493) --
Production (476,108) (499,941)
----------- ----------
End of year 6,663,456 5,817,136
=========== ==========
Proved developed natural gas reserves (MCF):
Beginning of year 2,163,000 2,631,933
========== ==========
End of year 1,029,799 2,163,000
========== ==========
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.
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 that relate to existing
proved natural gas reserves in which the Company has mineral interests.
20
<PAGE>
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves - (Continued)
1997 1996
----------- -----------
Future cash inflows $11,760,000 $17,049,000
Future production and development costs (6,316,000) (4,601,000)
Future income tax expense (577,000) (2,763,000)
----------- -----------
Future net cash flows 4,867,000 9,685,000
10% annual discount for estimated
timing of cash flows (1,988,000) (3,764,000)
----------- -----------
Standardized measure of discounted
future net cash flows $ 2,879,000 $ 5,921,000
=========== ===========
The following are the principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31:
1997 1996
------------- ------------
Changes:
Sales of natural gas produced,
net of production costs $ (633,000) $ (415,000)
Accretion of discount 592,000 231,000
Net changes in prices and
production costs (3,318,000) 5,089,000
Change in future development
costs including costs incurred
during the year 78,000 (85,000)
Revisions of previous quantity
estimates (780,000) (2,277,000)
Purchases of reserves in place 1,178,000 1,400,000
Sales of reserves in place (3,076,000) --
Net change in income taxes 1,293,000 (1,007,000)
Other 1,624,000 676,000
---------- ------------
Net changes (3,042,000) 3,612,000
Balance at beginning of year 5,921,000 2,309,000
---------- ----------
Balance at end of year $ 2,879,000 $ 5,921,000
=========== ===========
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:
Director Position Currently
Name Age Since Held With the Company
---- --- ----- ---------------------
Frank S. DiGrappa 72 1/1/88 Chairman of the Board,
Vice-President and Treasurer
Thomas L. DiGrappa 44 1/1/88 Chief Operating Officer and
President
Michael J. DiGrappa 45 9/15/89 Director
During the year ended December 31, 1997, the Company's Board of Directors held
two meetings. All persons who were directors during 1997 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, 72, 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, 44, 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, 45, 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 Martin Oil Company in Denver.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers
- ------------------
The Executive Officers of the Company are Frank S. DiGrappa, Chairman of the
Board, Executive 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 $100,000 salary, $110,000 bonus for Frank S. DiGrappa and $120,408
salary, $110,000 bonus 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 66.3%
Frank S. DiGrappa
621 Seventeenth Street
Suite 2150
Denver, CO 80293 332,000 (1) 9.1%
Thomas L. DiGrappa
621 Seventeenth Street
Suite 2150
Denver, CO 80293 425,000 (2) 11.7%
Michael J. DiGrappa
621 Seventeenth Street
Suite 2150
Denver, CO 80293 10,000 (3) 0.3%
All Officers and
Directors as a Group 3,182,255 (4) 87.3%
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT - (Continued)
1. Includes 150,000 shares of Common Stock which may be acquired pursuant
to the exercise of stock options.
2. Includes 425,000 shares of Common Stock which may be acquired pursuant
to the exercise of stock options.
3. Includes 10,000 shares of Common Stock which may be acquired pursuant
to the exercise of stock options.
4. Includes 2,415,255 shares held by St.. Francis Resources, Inc., a
corporation controlled by the DiGrappa family.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no related party transactions.
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: March 31, 1998 By: /s/ FRANK S. DI GRAPPA
----------------------------
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 31, 1998
- ----------------------- Officer and Director
Thomas L. DiGrappa
/S/ Frank S. DiGrappa Chief Executive Officer, March 31, 1998
- ---------------------- Executive Vice-President,
Frank S. DiGrappa Treasurer and Director
/S/ Michael J. DiGrappa Director March 31, 1998
- ------------------------
Michael J. DiGrappa
27
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,812,386
<SECURITIES> 0
<RECEIVABLES> 230,103
<ALLOWANCES> 0
<INVENTORY> 9,619
<CURRENT-ASSETS> 2,052,108
<PP&E> 2,742,732
<DEPRECIATION> (881,735)
<TOTAL-ASSETS> 3,913,105
<CURRENT-LIABILITIES> 359,496
<BONDS> 192,161
0
0
<COMMON> 32,975
<OTHER-SE> 3,328,473
<TOTAL-LIABILITY-AND-EQUITY> 3,913,105
<SALES> 1,108,371
<TOTAL-REVENUES> 1,676,239
<CGS> 475,793
<TOTAL-COSTS> 750,468
<OTHER-EXPENSES> 737,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 188,243
<INCOME-TAX> 43,354
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,889
<EPS-PRIMARY> .04
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