<PAGE> 1
U.S. 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 July 31, 1996
Commission File Number 0-9898
SUMMIT PETROLEUM CORPORATION
(Name of small business issuer in its charter)
Colorado 84-0838160
State of incorporation IRS Employer
Identification Number
16701 Greenspoint Park Drive, Suite 200, Houston, Texas 77060
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (713) 873-4828
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
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for fiscal 1996: $659,179
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price offered by Midland Resources
Inc. for such stock: $310,543
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. Common Stock, Par Value
$.01; 2,400,184 Shares as of September 30, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Responses to Part III, Items 9, 10, 11, and 12, are incorporated by
reference to the Definitive Proxy Statement to be filed within 120 days of
July 31, 1996.
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . 1
ITEM 2. DESCRIPTION OF PROPERTIES . . . . . . . . . . . . . . . 2
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 24
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . 24
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . 24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 24
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
EXHIBITS
(ii)
<PAGE> 3
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company is engaged in the production and sale of oil and gas.
Principal products are crude oil and natural gas which are sold to various
purchasers, including pipeline companies which service the areas in which the
producing wells are located. The Company also serves as operator for most of
the oil and gas properties in which it owns an interest. The Company may enter
into farm-out, joint venture, drilling participation, limited partnership or
any other suitable arrangement.
The Company has no operations in foreign countries and no portion of
its sales or revenues is derived from sales to customers in foreign countries.
The acquisition, development, production and sale of oil and gas is subject to
many factors which are outside the Company's control, including national and
international economic conditions, the availability of drilling rigs, casing,
pipe and other equipment and supplies, proximity to pipelines, the supply and
price of other fuels, and the regulation of production, transportation and
pricing by state and federal governmental regulatory agencies.
Unless the context otherwise requires, as used herein, the term
"Company" refers to Summit Petroleum Corporation.
RECENT DEVELOPMENTS
On July 17, 1996, Summit Petroleum Corporation (the "Company"),
Midland Resources, Inc., an affiliate, and MRI Acquisition Corp. ("MRI
Acquisition"), a wholly owned subsidiary of Midland Resources Inc., entered
into an Agreement and Plan of Merger whereby MRI Acquisition made a tender
offer for all of the outstanding shares of the Company at $0.70 per share. On
the close of the tender offer on September 18, 1996, 1,956,552 shares, or
approximately 81.5 percent, of the Company's outstanding stock had been
tendered and acquired by MRI Acquisition. Further under the terms of the
Agreement and Plan of Merger, as less than 90 percent of the outstanding stock
was tendered, the Company's Board of Directors shall call a meeting of its
stockholders, as soon as practicable, for the purpose of voting upon a merger
with MRI Acquisition. All of the shares acquired by MRI Acquisition will be
voted in favor of the approval of the merger and the remaining shareholders
will have only the right to receive $0.70 per share. The Company expects that a
shareholder vote and the merger will occur before December 31, 1996.
HISTORICAL INFORMATION
The Company was organized on January 16, 1981, as a Colorado
corporation, to engage in the oil and gas industry. On July 16, 1981, the
Company conducted a public offering of its securities to raise capital.
Effective July 31, 1987, the Company purchased all of the stock of
Rock Oil Corporation, a Denver-based exploration and production company whose
name was changed to Pike Petroleum Corporation ("Pike") in 1988. On August 1,
1991 Pike adopted a plan of liquidation whereby all of Pike's assets where
distributed to the Company. This allows the Company an opportunity to utilize
net operating losses, reducing income tax payments and increasing cash flow.
In 1989, under a management agreement, Midland Resources Operating
Company, Inc. ("MRO"), formerly Miresco, Inc., a company then owned by Deas H.
Warley III, an officer, director and shareholder of the Company, agreed to
provide certain administrative services to the Company for $10,000 per month.
On December 31, 1993, MRO was acquired by Midland Resources, Inc. ("MRI"). MRO
currently receives a fee of $5,000 per month to provide these services. This
fee does not include legal, auditing, independent oil and gas reserve study
costs, principal and interest on indebtedness, taxes, usual and customary
billable expenses for lease operation, pre-existing consulting agreements, and
certain other costs and expenses. The purpose of the Company entering into the
transactions with Mr. Warley and MRO was to reduce overhead and provide new
management to restructure and provide for the growth of the Company.
OTHER BUSINESS MATTERS
The Company's gas operations are particularly affected by seasonal
factors. Competition for the sale of oil and gas is principally related to
pricing as it is affected by quality, availability of transportation and
transportation costs. The price for oil is widely followed and is generally
subject to worldwide market factors.
In 1996, the Company had sales to the following companies that
amounted to 10% or more of oil and gas revenues:
<TABLE>
<S> <C>
Conoco Inc 15%
Panenergy Field Services Inc. 13%
AMOCO Production Company 11%
Western Gas Resources, Inc. 11%
Sun Refining and Marketing Co. 11%
</TABLE>
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Because of the ready market for its oil and gas, the Company does not
consider itself dependent on any single customer or group of customers.
The Company must comply with laws affecting the discharge of materials
into the environment. Compliance with such laws has not been a material factor
in the Company's operations.
The Company maintains insurance customary for operations of a similar
nature. No loss of production coverage has been sought.
Under the management agreement, many services normally requiring
employees are performed by MRO. As a result, the Company has only three
officers. The Company has one employee who is employed in Colorado.
REGULATORY MATTERS
The Company's exploration, production and marketing operations are
regulated at the federal, state and local levels. Oil and gas exploration,
development and production activities are subject to various laws and
regulations governing a wide variety of matters. For example, there are
statutes or regulations addressing conservation practices and the protection of
correlative rights, and such regulations may affect the Company's operations
and limit the quantity of oil or gas that the Company may produce or sell.
Other regulated matters include marketing, transportation and valuation of
royalty payments.
Among other regulatory matters at the federal level, the Federal
Energy Regulatory Commission ("FERC") regulates interstate transportation of
natural gas under the National Gas Act and regulates the maximum selling prices
of certain categories of gas sold in "first sales" in interstate commerce under
the Natural Gas Policy Act ("NGPA"). The Company's gas sales are affected by
regulation of intrastate and interstate gas transportation. In an attempt to
promote competition, the FERC has issued a series of orders which have altered
significantly the marketing and transportation of natural gas. To date, the
Company has not experienced any material adverse effect on gas marketing as a
result of these FERC orders. However, the Company cannot predict what effect
these or subsequent regulations may have on its future gas marketing.
As an owner and operator of oil and gas properties, the Company is
additionally subject to various federal, state and local environmental
regulations, including air and water quality control laws. These laws and
regulations may, among other things, impose liability on the lessee under an
oil and gas lease for the cost of pollution clean-up resulting from operations,
subject the lessee to liability for pollution damages, and require suspension
or cessation of operations in affected areas and impose restrictions on the
injection of liquids into subsurface aquifers that may contaminate groundwater.
Although the Company believes that it is in substantial compliance with
existing applicable environmental laws and regulations, there can be no
assurance that substantial costs for compliance will not be incurred in the
future. Moreover, it is possible that other developments, such as stricter
environmental laws, regulations and enforcement policies thereunder, could
result in additional, presently unquantifiable, costs or liabilities to the
Company.
ITEM 2. DESCRIPTION OF PROPERTIES.
OIL AND GAS PROPERTIES
The principal oil and gas properties of the Company at the end of
fiscal 1996 consisted of working interests and royalty interests in producing
and non-producing oil and gas leaseholds located in Texas, Oklahoma, Colorado
and Wyoming. The Company owns these leasehold interests in percentages which
vary. The terms of producing oil and gas leaseholds are continuing and such
leases remain in force by virtue of, and for so long as, production from lands
under each lease is maintained. The terms of leases without production or
production less than required by the lease may expire at fixed dates in the
future. These leases may or may not be extended, depending upon the lease in
question, by further exploration and development within varying periods of
time. Non-producing oil and gas leaseholds are generally for a primary term,
such as five or ten years, which is subject to extension by production.
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<PAGE> 5
Effective January 1, 1994 the Company purchased a ten percent working
interest with an approximate .0875 percent net revenue interest in certain oil
and gas properties in Ward County, Texas from MRI for $85,696, MRI's cost
adjusted for revenues and expenses through December 31, 1993. The successful
drilling of three additional Cherry Canyon wells during the second quarter of
fiscal 1996 at a cost to the Company of approximately $103,000, brings the
total number of wells in this field to ten.
Effective August 1, 1994 the Company acquired ten percent of MRI's
working interest in certain oil and gas properties in Coke and Howard Counties,
Texas for $201,596, MRI's cost adjusted for revenues and expenses from August
1, 1994 through August 15, 1994, the closing date, and transaction costs.
Effective September 1, 1995, the Company participated with MRI in the
acquisition of working interests in certain Redfish Bay properties in Nueces
County, Texas. The Company acquired approximately a four percent working
interest (on the same basis as MRI) for approximately $82,000. MRO, the
operater, commenced an immediate rework program which established a gas well
with initial production rates of 1,550 MCFD of gas and 16 barrels of condensate
per day. After six months of production, the zone was depleted, and, in the
first quarter of 1996, this wellbore was recompleted to another zone with
initial production rates of 240 BOPD and 100 MCFD and expected average
production rates of approximately 150 BOPD and 60 MCFD, subject to normal
declines. Additional development opportunities on these properties will be
pursued during the next year.
During fiscal 1995, the Company, in participation with MRI, acquired a
five percent working interest in three seismic exploration projects located
Terry and Hockley Counties, Texas in exchange for expending certain monies in
connection with acquiring an interest in certain oil and gas leases, seismic
options, conducting 3-D geophysical surveys, interpretation of 3-D seismic data
and the drilling of two or more test wells. MRO will operate the projects. In
May, 1996, the initial well was drilled and proved to be non-productive.
The Company believes it has satisfactory title to its properties. Oil
and gas interests are subject to overriding royalties, production payments and
other burdens. Title to any of the Company's properties is subject to liens
for current taxes, liens incident to operating agreements, minor encumbrances,
easements and restrictions, none of which materially interfere with their use
and possession in the Company's business. The former shareholders of Pike
retained the right to be assigned or paid 50% of any promotional or carried
interest (including any overriding royalty interest, carried working interest
or net turnkey drilling and competition profits) actually received by the
Company on any new wells drilled or leases sold on any of the oil and gas
leases of Pike in existence on July 31, 1987, and any renewal or extensions of
such leases for 21 years, or any new oil and gas leases acquired by Pike within
1 mile of such leases.
The following table indicates the gross and net acres of developed and
undeveloped oil and gas leases held by the Company as of July 31, 1996 "Gross"
acres or wells refers to the number of acres or wells in which the Company owns
a working interest. "Net" acres or wells refers to the sum of the fractional
working interests owned by the Company in gross acres or wells.
TABLE I
<TABLE>
<CAPTION>
PROPERTY ACREAGE DEVELOPED UNDEVELOPED TOTAL
---------------- ----------- ----------- -----------
<S> <C> <C> <C>
Gross Working Interest Acreage 11,355 27,648 39,003
Net Working Interest Acreage 1,223 3,543 4,766
Royalty Acreage 44 390 434
ACTIVE WELLS OIL GAS TOTAL
------------ ----- ----- -----
Gross Working Interest Wells 101.0 33.0 134.0
Net Working Interest Wells 6.1 8.7 14.8
Royalty Wells 0.1 0.6 0.7
</TABLE>
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NET PRODUCTION, UNIT SALES AND PRODUCTION COST
The following table summarizes the net oil and natural gas production
for the Company, the average sales price per barrel (bbl) of oil and per 1000
cubic feet (mcf) of natural gas produced and the average production (lifting)
cost per unit of production, for the years ended July 31, 1994, 1995 and 1996.
TABLE II
PRODUCTION, PRICE, AND COST DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
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1994 1995 1996
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<S> <C> <C> <C>
Oil (a):
Production (Bbls) . . . . . . . . . . . . . 10,788 12,456 13,339
Revenue . . . . . . . . . . . . . . . . . . $ 158,242 $ 207,369 $ 244,773
Average Bbls per day . . . . . . . . . . . 30 34 36
Average Sales price per Bbl . . . . . . . . $ 14.67 $ 16.64 $ 18.35
Gas:
Production (Mcf) . . . . . . . . . . . . . 149,926 145,535 134,857
Revenue . . . . . . . . . . . . . . . . . . $ 286,650 $ 244,479 $ 233,879
Average Mcf per day . . . . . . . . . . . . 411 399 368
Average sales price per Mcf . . . . . . . . $ 1.91 $ 1.68 $ 1.73
Production costs:
Production costs . . . . . . . . . . . . . $ 195,157 $ 235,446 $ 232,135
Equivalent Bbls (b) . . . . . . . . . . . . 35,775 36,712 35,815
Production cost per
equivalent Bbl . . . . . . . . . . . . $ 5.46 $ 6.41 $ 6.48
Production cost per
sales dollar . . . . . . . . . . . . . $ 0.44 $ 0.52 $ 0.48
Total revenues . . . . . . . . . . . . . . . . . $ 444,892 $ 451,848 $ 478,652
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</TABLE>
(a) Includes condensate and natural gas liquids.
(b) Gas production is converted to equivalent bbls at the rate of six mcf
per bbl, representing the estimated relative energy content of natural
gas to oil.
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<PAGE> 7
ESTIMATED FUTURE NET REVENUES FROM PROVED OIL AND GAS RESERVES
A summary projection of the estimated future net revenues and present
value of future net reserve categories, as of July 31, 1996, is as follows:
TABLE III
ESTIMATED FUTURE NET REVENUES FROM PROVED RESERVES (a)
AS OF JULY 31, 1996
<TABLE>
<CAPTION>
PROVED
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<S> <C>
Estimated future net
revenues before income taxes
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309,449
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,329
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,849
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,513
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,710
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,704,816
------------
Total before estimated future income taxes . . . . . . . . . . . . $ 3,045,666
------------
Present value of estimated
future net revenues
before income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 1,699,693
- ------------------------------- ------------
</TABLE>
(a) Prepared in accordance with the rules and regulations of the SEC based
on the reserve reports and the Company's financial statement
disclosures. Estimated future net revenues represent estimated future
gross revenues from the production and sale of proved reserves, net of
estimated production costs and future development costs estimated to
be required to achieve estimated future production.
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ESTIMATED NET PROVED OIL AND GAS RESERVES
The estimated proved developed oil and gas reserves for the Company
are summarized below:
TABLE IV
PROVED RESERVES
---------------
AS OF JULY 31, 1996
<TABLE> -------------------
<CAPTION>
PROVED
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<S> <C>
Oil and liquids (bbls):
Proved developed . . . . . . . . . . . . . . . . . . . . . 152,525
Proved undeveloped . . . . . . . . . . . . . . . . . . . . 38,663
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 191,188
==========
Natural gas (mcf)
Proved developed . . . . . . . . . . . . . . . . . . . . . 1,263,329
Proved undeveloped . . . . . . . . . . . . . . . . . . . . 212,279
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 1,475,608
==========
</TABLE>
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The table above should be read in connection with the following
definitions:
Proved Reserves . . . Estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be
economically producible in future years from known
reservoirs under existing economic and operating
conditions, e.g., prices and costs as of the date the
estimate was made, and assuming continuation of
current regulatory practices using conventional
production methods and equipment.
Proved Developed
Reserves . . . . . . Proved oil and gas reserves which are expected to be
recovered from existing wells with existing equipment
and operating methods. Developed reserves include
both producing and non-producing reserves. Producing
reserves are those reserves expected to be recovered
from existing completion intervals producing to a
market as of the date of the appropriate reserve
report. Non-producing reserves are reserves that are
currently shut-in awaiting a pipeline connection or
in reservoirs behind the casing or at minor depths
above or below the producing zone and are considered
proved by production either from wells in the field,
by successful drill-stem tests, or by core analyses
from the particular zones. Non-producing reserves
require only moderate expense for recovery.
Proved Undeveloped
Reserves . . . . . . Proved oil and gas reserves which are expected to be
recoverable from additional wells yet to be drilled
or from existing wells where a relatively major
expenditure is required for completion.
For information concerning costs incurred by the Company for oil and
gas operations, net revenues from oil and gas production, estimated future net
revenues attributable to the Company's oil reserves and present value of future
net revenues on a 10% discount rate and changes therein, refer to the Company's
Financial Statements and the related Notes. The Company emphasizes that
reserve estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of producing oil and gas properties.
Accordingly, the estimates are subject to change as further information becomes
available.
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<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Response is not required.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
LACK OF MARKET
There is no established public trading market for the Company's common
stock. There is only limited, sporadic and infrequent trades of the Company's
common stock in the over-the-counter market, consequently there are no reliable
quotations of trading prices during the fiscal years ended July 31, 1995 and
1996 and the period through September 30, 1996. Effective September 18, 1996,
MRI acquired approximately 81.5% of the Company's outstanding common stock for
$0.70 per share.
TRANSFER AGENT AND NUMBER OF SECURITY HOLDERS
As of September 30, 1996, there were 672 shareholders of record of the
Company's common stock. The transfer agent for the Company's common stock is
Stock Transfer Company of America, Inc., Dallas, Texas.
PAYMENT OF DIVIDENDS
The Company did not pay any cash dividends for the fiscal years ended
July 31, 1995 and 1996, and it is the present policy of the Company not to do
so, but to retain earnings for future growth and business activities. The
Company is also subject to certain loan covenants which include restrictions on
dividends, distributions and redemptions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion should be read in conjunction with the audited
financial statements of Summit Petroleum Corporation.
PLAN OF OPERATION
The Company was organized on January 16, 1981, as a Colorado
corporation, to engage in the oil and gas industry. On July 16, 1981, the
Company conducted a public offering of its securities to raise capital.
Effective July 31, 1987, the Company purchased all of the stock of
Rock Oil Corporation, a Denver-based exploration and production company whose
name was changed to Pike Petroleum Corporation ("Pike") in 1988. On August 1,
1991 Pike adopted a plan of liquidation whereby all of Pike's assets where
distributed to the Company. This allows the Company an opportunity to utilize
its net operating losses of approximately $700,000 for the fiscal years 1984
through 1987. The ability to utilize these net operating losses reduces income
tax payments and increases cash flow, accordingly. If not utilized, these loss
carryforwards will expire in years 2000 through 2002.
-7-
<PAGE> 10
The Company intends to increase production and reserves through
development of existing oil and gas properties and future acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Effective January 1, 1994 the Company purchased a ten percent working
interest with an approximate .0875 percent net revenue interest in certain oil
and gas properties in Ward County, Texas from MRI for $85,696, MRI's cost
adjusted for revenues and expenses through December 31, 1993. The successful
drilling of three additional Cherry Canyon wells during the second quarter of
fiscal 1996 at a cost to the Company of approximately $103,000, brings the
total number of wells in this field to ten. These wells were completed in the
lowest of four productive Cherry Canyon zones and are expected to contribute
combined average net production of approximately 100 barrels of oil per day
("BOPD") and approximately 265 thousand cubic feet of gas per day ("MCFD"),
subject to normal declines. Additional zones will be added sequentially as the
lower zones deplete.
Effective August 1, 1994 the Company acquired ten percent of MRI's
working interest in certain oil and gas properties in Coke and Howard Counties,
Texas for $201,596, MRI's cost adjusted for revenues and expenses from August
1, 1994 through August 15, 1994, the closing date, and transaction costs.
Effective September 1, 1995, the Company participated with MRI in
the acquisition of working interests in certain Redfish Bay properties in
Nueces County, Texas. The Company acquired approximately a four percent
working interest (on the same basis as MRI) for approximately $82,000. MRO,
the operator, commenced an immediate rework program which established a gas
well with initial production rates of 1,550 MCFD of gas and 16 barrels of
condensate per day. After six months of production, the zone was depleted,
and, in the first quarter of 1996, this wellbore was recompleted to another
zone with initial production rates of 240 BOPD and 100 MCFD and expected
average production rates of approximately 150 BOPD and 60 MCFD, subject to
normal declines. The Company's share of this rework program was approximately
$22,000. Additional development opportunities on these properties will be
pursued during the next year.
During fiscal 1995, the Company, in participation with MRI, acquired a
five percent working interest in three seismic exploration projects located
Terry and Hockley Counties, Texas in exchange for expending certain monies in
connection with acquiring an interest in certain oil and gas leases, seismic
options, conducting 3-D geophysical surveys, interpretation of 3-D seismic data
and the drilling of two or more test wells. MRO will operate the projects. In
May, 1996, the initial well was drilled and proved to be non-productive. As of
July 31, 1996 costs associated with these projects was approximately $93,000.
Additional costs of approximately $87,000 are anticipated over the next year
for additional and exploration and development.
In fiscal 1996, the two Johnson Estate field extension development
wells located in Sterling County, Texas were completed at a cost to the Company
of approximately $30,000. These wells are expected to contribute 60 BOPD and
100 MCFD, subject to normal declines.
As a result of the events discussed above, the Company had negative
working capital of approximately $94,100 as of July 31, 1996 as compared to
July 31, 1995, when the Company had positive working capital of approximately
$15,900. As of July 31, 1996, the Company had total assets of approximately
$1,210,300 with approximately $259,900 in current liabilities and $261,700
long-term debt. Current assets were approximately 14% of total assets.
Effective March 1, 1995, the Company entered into a one year gas swap
agreement to hedge against a portion of the price risk associated with gas
price declines. This agreement covered approximately 30% of the Company's
total estimated gas production. The Company's price under this agreement is a
minimum of $1.50 per mcf with a 40% participation in prices over $1.50.
-8-
<PAGE> 11
On May 1, 1995, the Company's borrowing base under its $1,500,000
credit facility was increased to $500,000. Amounts outstanding under this loan
agreement bear interest of prime (8.25% at July 31, 1996) plus 1.5%. Interest
is payable monthly as it accrues. Principal on this note is payable in monthly
installments of $9,000 with final maturity on December 12, 1997. The balance
of this note at July 31, 1996 was $369,711. This note is secured by the
majority of the Company's oil and gas properties.
The following table sets forth a summary of historical financial
information for the Company. This table should be read in conjunction with the
financial statements and related notes of the Company. It should be noted that
there are no audited financial statements included herein for the year 1992 or
1993. This table is not covered by the reports of independent certified public
accountants.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED JULY 31,
------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 597,271 $ 691,022 $ 643,360 $ 627,930 $ 657,831
Total Revenues $ 604,461 $ 704,081 $ 652,938 $ 640,664 $ 659,179
Income (loss) before cumulative effect and
extraordinary items $ 139,011 $ 187,640 $ 85,417 $ 36,014 $ 55,853
Income (loss) per share before cumulative
effect and extraordinary items $ 0.042 $ 0.056 $ 0.032 $ 0.015 $ 0.021
Weighted average number of common and
common equivalent shares outstanding,
adjusted for subsequent stock splits 3,325,000 3,325,000 2,708,456 2,400,184 2,673,398
Total Assets $ 674,794 $ 792,266 $ 916,882 $ 1,013,170 $ 1,210,290
Net Working capital (deficit) $ (682) $ 238,329 $ 65,613 $ 15,891 $ (94,119)
Term debt, including current portion $ 214,600 $ 168,400 $ 202,854 $ 302,872 $ 374,500
Stockholders' equity $ 260,181 $ 486,662 $ 596,820 $ 632,834 $ 688,687
</TABLE>
RESULTS OF OPERATIONS - YEARS ENDED JULY 31, 1994, 1995 AND 1996:
Net income for fiscal 1995 was $36,014 as compared to $387,603 in
fiscal 1994, a decrease of $351,589 or 91%. Net income for fiscal 1994
includes the cumulative effect on prior years of a change in the method of
accounting for income taxes of $302,186 due to the adoption of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". There
was no such item for fiscal 1995. The following is a discussion of changes in
other individual financial statement items.
-9-
<PAGE> 12
For the year ended July 31, 1995, oil and gas revenues increased from $444,892
in fiscal 1994 to $451,848, an increase of $6,956 or 2%. Oil and gas
production quantities for fiscal 1994 were 10,788 bbls and 149,926 mcf.
Oil and gas production quantities for fiscal 1995 were 12,456 bbls and 145,535
mcf. Average oil and gas prices were $14.67 per bbl and $1.91 per mcf for
fiscal 1994. Average oil and gas prices were $16.64 per bbl and $1.68 per mcf
for fiscal 1995.
Revenues from property operations for fiscal 1995 were $176,082 as
compared to $198,468 in fiscal 1994, a decrease of $22,386 or 11%. This
decrease was from reductions in operating fees charged on marginally economical
properties as well as loss of operator responsibilities on certain properties
sold during fiscal 1994.
Interest and other income increased in fiscal 1995 from $9,578 in
fiscal 1994 to $12,734, an increase of $3,156.
Oil and gas production costs increased in fiscal 1995 from $195,157 in
fiscal 1994 to $235,446, an increase of $40,289 or 21%. This increase is
primarily due to the purchase of additional properties in August, 1994.
General and administrative expenses decreased in fiscal 1995 from
$232,651 in fiscal 1994 to $220,893, a decrease of $11,758 or 5%.
Depreciation, depletion and amortization based on production and other
methods increased from $86,491 in fiscal 1994 to $87,085, an increase of $594.
Interest expense increased from $15,524 in fiscal 1994 to $40,881 in
fiscal 1995, an increase of $25,357 or 163%, due to higher interest rates and
purchase financing of oil and gas properties.
Net income for fiscal 1996 was $55,853 as compared to $36,014 in
fiscal 1995, an increase of $19,839 or 55%. The following is a discussion of
changes in other individual financial statement items.
For the year ended July 31, 1996, oil and gas revenues increased from
$451,848 in fiscal 1995 to $478,652, an increase of $26,804 or 6%. Oil and gas
production quantities for fiscal 1995 were 12,456 bbls and 145,535 mcf. Oil
and gas production quantities for fiscal 1996 were 13,339 bbls and 134,857 mcf.
Average oil and gas prices were $16.64 per bbl and $1.68 per mcf for fiscal
1995. Average oil and gas prices were $18.35 per bbl and $1.73per mcf for
fiscal 1996.
Revenues from property operations for fiscal 1996 were $179,179 as
compared to $176,082 in fiscal 1995, an increase of $3,097.
Interest and other income decreased in fiscal 1996 to $1,348 from
$12,734 in fiscal 1995, a decrease of $11,386 or 89%. A loan recovery of
$8,907 in fiscal 1995 accounts for the majority of this difference.
Oil and gas production costs decreased in fiscal 1996 from $235,446 in
fiscal 1995 to $232,135, a decrease of $3,311.
General and administrative expenses decreased in fiscal 1996 from
$220,893 in fiscal 1995 to $187,197, a decrease of $33,696 or 15%. This
decrease was due primarily to a decrease in the amount charged by MRO for
management fees of $27,000 and a decrease in shareholder relations expenses of
$11,608, offset in part by increases in various other costs.
Depreciation, depletion and amortization based on production and other
methods increased from $87,085 in fiscal 1995 to $111,496, an increase of
$24,411 or 28% due primarily to property acquisitions and development.
-10-
<PAGE> 13
Interest expense decreased from $40,881 in fiscal 1995 to $39,101 in
fiscal 1996, a decrease of $1,780.
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors and Stockholders
Summit Petroleum Corporation
I have audited the accompanying balance sheets of Summit Petroleum Corporation
(a Colorado Corporation) as of July 31, 1996 and 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended July 31, 1996. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audits provide a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Summit Petroleum Corporation
as of July 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended July 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note A, the Company changed its method of accounting for income
taxes effective August 1, 1993.
As discussed in Note I, effective September 18, 1996, Midland Resources, Inc.,
a related entity, through a wholly owned subsidiary, acquired approximately
81.5% of the Company's outstanding common stock.
Howard E. Ehler
Midland, Texas
September 18, 1996
-11-
<PAGE> 14
SUMMIT PETROLEUM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
--------------------------------------------
1996 1995
-------------------- -----------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash $ 14,552 $ 12,051
Trade accounts receivable 29,718 43,866
Accrued oil and gas sales 49,906 35,486
Due from related parties 31,575 29,056
Deferred income tax benefits 38,901 77,370
Prepaid expenses and other 1,121 7,921
------------------ -----------------
Total current assets 165,773 205,750
Property and equipment at cost:
Oil and gas properties, using the full cost method 3,521,637 3,173,589
Other 31,737 31,737
------------------ -----------------
3,553,374 3,205,326
Less accumulated depreciation, depletion and
amortization 2,687,341 2,575,845
------------------ -----------------
866,033 629,481
Deferred income tax benefits 171,845 166,773
Other assets 6,639 11,166
------------------ -----------------
Total assets $ 1,210,290 $ 1,013,170
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Trade accounts payable $ 78,106 $ 17,610
Accrued expenses 68,997 59,854
Current portion of long-term debt 112,789 112,395
------------------ -----------------
Total current liabilities 259,892 189,859
Long-term debt 261,711 190,477
Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share; 20,000,000
shares authorized; none issued - -
Common stock, par value $0.01 per share; 80,000,000
shares authorized; 3,325,000 shares issued 33,250 33,250
Capital in excess of par value 1,981,597 1,981,597
Accumulated deficit (1,048,715) (1,104,568)
------------------ -----------------
966,132 910,279
Less cost of treasury stock (924,816 shares) 277,445 277,445
------------------ -----------------
Total stockholders' equity 688,687 632,834
------------------ -----------------
Total liabilities and stockholders' equity $ 1,210,290 $ 1,013,170
================== =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
-12-
<PAGE> 15
SUMMIT PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended July 31,
-------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenue:
Oil and gas sales $ 478,652 $ 451,848 $ 444,892
Property operation fees 179,179 176,082 198,468
------------- ------------- -------------
Total operating revenue 657,831 627,930 643,360
Operating costs and expenses:
Oil and gas production 232,135 235,446 195,157
General and administrative 187,197 220,893 232,651
Depreciation, depletion and amortization 111,496 87,085 86,491
------------- ------------- -------------
Total operating costs and expenses 530,828 543,424 514,299
------------- ------------- -------------
127,003 84,506 129,061
Other income (expense):
Interest and other income 1,348 12,734 9,578
Interest expense (39,101) (40,881) (15,524)
------------- ------------- -------------
Net other income (expense) (37,753) (28,147) (5,946)
------------- ------------- -------------
Income before income taxes and cumulative
effect of an accounting change 89,250 56,359 123,115
Federal and State Income taxes:
Current - - -
Deferred 33,397 20,345 37,698
------------- ------------- -------------
Income before cumulative effect of an
accounting change 55,853 36,014 85,417
Cumulative effect on prior years of change in the
method of accounting for income taxes - - 302,186
------------- ------------- -------------
Net income $ 55,853 $ 36,014 $ 387,603
============= ============= =============
Income per common share:
Income before cumulative effect of
accounting change $ 0.021 $ 0.015 $ 0.032
Cumulative effect of an accounting change - - 0.111
------------- ------------- -------------
Net income $ 0.021 $ 0.015 $ 0.143
============= ============= =============
Weighted average number of common and
common equivalent shares outstanding:
Common stock 2,400,184 2,400,184 2,708,456
Stock options 273,214 - -
------------- ------------- -------------
2,673,398 2,400,184 2,708,456
============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
-13-
<PAGE> 16
SUMMIT PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock Capital in Treasury stock
------------------------- excess of Accumulated ----------------------
Shares Par value Par value deficit Shares Cost
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
July 31, 1993 66,500,000 $ 585,000 $ 1,429,847 $ (1,528,185) - $ -
Net income - - - 387,603 - -
Purchase of
treasury stock - - - - 18,496,314 277,445
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
July 31, 1994 66,500,000 585,000 1,429,847 (1,140,582) 18,496,314 277,445
Net income - - - 36,014 - -
Reverse stock
split (1 for 20) (63,175,000) (551,750) 551,750 - (17,571,498) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
July 31, 1995 3,325,000 33,250 1,981,597 (1,104,568) 924,816
277,445
Net income - - - 55,853 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
July 31, 1996 3,325,000 $ 33,250 $ 1,981,597 $ (1,048,715) 924,816 $ 277,445
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
-14-
<PAGE> 17
SUMMIT PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended July 31,
-------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 55,853 $ 36,014 $ 387,603
Depreciation, depletion and
amortization 111,496 87,085 86,491
Deferred income taxes (benefits) 33,397 20,345 (264,488)
(Increase) decrease in trade accounts
receivable related to operations 14,148 (11,268) 6,687
(Increase) decrease in accrued oil
and gas sales (14,420) 2,838 6,417
(Increase) decrease in due from related
parties (2,519) (725) 4,237
(Increase) decrease in prepaid expenses
and other 11,327 (11,244 4,561
Increase (decrease) in accounts payable
related to operations 25,930 (35,306) (3,112)
Increase (decrease) in accrued expenses 9,143 (4,438) (16,884)
------------- ------------- -------------
Net cash provided by operating activities 244,355 83,301 211,512
Cash flows from investing activities:
Sales of property and equipment 2,183 1,416 14,553
Additions to property and equipment (315,665) (261,577) (176,916)
------------- ------------- -------------
Net cash used by investing activities (313,482) (260,161) (162,363)
Cash flows from financing activities:
Borrowings from bank 203,000 200,000 92,500
Principal repayments on notes payable (131,372) (109,982) (58,046)
Purchase of treasury stock - - (277,445)
------------- ------------- -------------
Net cash provided (used) by financing
activities 71,628 90,018 (242,991)
------------- ------------- --------------
Increase (decrease) in cash 2,501 (86,842) (193,842)
Cash, beginning of year 12,051 98,893 292,735
------------- ------------- --------------
Cash, end of year $ 14,552 $ 12,051 $ 98,893
============= ============= =============
Supplemental disclosures:
Interest paid $ 33,669 $ 41,726 $ $15,133
Income taxes paid $ - $ - $ -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
-15-
<PAGE> 18
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Summit Petroleum Corporation ("the Company") was organized on January 16, 1981,
and is currently engaged in development, exploration, operation and production
of oil and gas properties. The Company operates exclusively in the Continental
United States.
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 and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and gas
properties and, accordingly, capitalizes all costs associated with acquisition,
development and exploration of oil and gas reserves. Normal dispositions of
oil and gas properties are accounted for as adjustments to capitalized costs,
with no gain or loss recognized. Major renewals and betterments which extend
the useful lives of properties are capitalized.2
Depreciation, depletion and amortization of capitalized oil and gas properties
and estimated future costs to develop reserves, is computed using the units of
production method (equivalent physical units of six MCF of Gas to each barrel
of oil), based on estimated proved recoverable oil and gas reserves.
Under the full cost accounting rules, the net capitalized cost of oil and gas
properties, less the related deferred income taxes, is limited to the estimated
present value, net of income tax, of future net revenues discounted at 10% from
proved oil and gas reserves. No impairment writedowns were required for the
years ended July 31, 1996, 1995 or 1994.
Treasury Stock
Treasury stock is carried at cost. Upon reissuance, the cost of treasury stock
is reduced by the average cost per share.
Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109 as of
August 1, 1993. This statement requires that deferred tax assets and
liabilities be recognized for the future tax consequences of differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates applicable to the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
The cumulative effect of this change in accounting, which was a deferred tax
asset of $302,186, is reported separately in the statement of operations for
fiscal year 1994.
-16-
<PAGE> 19
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A. (Continued)
Income Per Share
Income per share of common stock is computed based on the weighted average
number of common shares outstanding during each year, adjusted for subsequent
stock splits. Stock options are included as equivalent shares whenever their
inclusion has a dilutive effect on income per share.
Environmental
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the removal or
mitigation of the environmental effects of the disposal or release of petroleum
or chemical substances at various sites. Environmental expenditures are
expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations,
and that have no future economic benefits are expensed. Liabilities for
expenditures of a non-capital nature are recorded when environmental assessment
and/or remediation is probable, and the costs can be reasonably estimated.
NOTE B. FINANCIAL INSTRUMENTS AND CONCENTRATIONS
The carrying amounts of cash, receivables and current liabilities approximate
their fair value due to the short term nature of these instruments.
The carrying amounts of long-term debt approximate fair value because these
instruments bear interest at current market rates.
Financial instruments which potentially expose the Company to concentrations of
credit risk, as contemplated by Statement of Financial Accounting Standards No.
105 are cash and accounts receivable.
The Company's cash investments are placed only with high quality financial
institutions and the Company has not suffered any credit losses. Therefore
management is of the opinion that significant credit risk does not exist.
The Company's operating revenues are derived primarily from sales and operating
charges to customers in the oil and gas industry. This concentration in a
single industry affects the Company's overall exposure to credit risk since
customers may be similarly affected by changes in economic conditions. The
Company has not experienced significant credit losses on its accounts
receivable and management is of the opinion that significant credit risk does
not exist.
NOTE C. RELATED PARTIES
Approximately 38% of the Company's outstanding common stock is owned directly
and beneficially by the Company's president and chairman of the board of
directors, Mr. Deas H. Warley III. Mr. Warley also owns directly and
beneficially approximately 37% of the outstanding common stock of Midland
Resources, Inc. ("MRI"), and also serves as that company's president and
chairman of the board.
The Company is managed by MRI, through MRI's wholly owned subsidiary, Midland
Resources Operating Company Inc. ("MRO"), under an agreement which continues on
a month-to-month basis until canceled by either party. Under this agreement,
MRO is compensated for these services at a monthly rate of $8,500 in 1995 and
$5,000 for 1996. These fees exclude certain direct costs (legal, auditing,
debt payments, taxes, oil and gas property expenditures, etc.) which continue
to
-17-
<PAGE> 20
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE C. (Continued)
be borne by the Company. Management fees incurred under this agreement for the
years ended July 31, 1996, 1995 and 1994 were $77,500, $104,500 and $113,000,
respectively.
MRO also serves as operator on certain oil and gas properties in which the
Company has an interest. The Company's share of operating and supervision
charges incurred on these properties for years ended July 31, 1996, 1995 and
1994 were $47,803, $28,106, and $18,852, respectively.
The Company also purchased oil and gas properties from MRI at MRI's cost of
$85,696 in January, 1994, $201,596 in August, 1994 and $82,006 in October,
1995.
The amount due from related parties at July 31, 1996 represents undistributed
oil and gas revenues due from MRO of $25,547, advance billings from MRO for
management fees of $5,000 and property operating and miscellaneous charges due
from MRI of $1,028. The amount due from related parties at July 31, 1995
represents undistributed oil and gas revenues due from MRO of $19,873, advance
billings from MRO for management fees of $8,500 and property operating and
miscellaneous charges due from MRI of $683.
Trade accounts payable and accrued expenses include amounts due to MRO for
normal property operating expenses of $61,575 and $6,321 at July 31, 1996 and
1995, respectively.
NOTE D. STOCK OPTION PLAN
The Company has adopted a long-term incentive plan which reserves 500,000
shares of the Company's common stock for officers, other key employees and,
under limited circumstances, members of the board of directors. The price per
share of shares subject to the plan may not be less than the fair market value
of the stock on the date that options are granted.
Effective June 1, 1995, options to purchase 200,000 shares were granted at an
option price of $0.0625 per share. As of July 31, 1996, no options had been
exercised and, if not exercised by June 1, 2005 these options will expire.
However, as a result of the transaction discussed in Note I, all of the
outstanding options have subsequently been cancelled.
The board of directors and stockholders have also approved a director's stock
option plan for directors who are not employees. Effective June 1, 1995,
options were granted to two directors to purchase 100,000 shares of the
Company's common stock at an option price of $0.0625 per share. As of July 31,
1996 no options had been exercised and, if not exercised by June 1, 2005, these
options will expire. However, as a result of the transaction discussed in
Note I, all of the outstanding options have subsequently been cancelled.
-18-
<PAGE> 21
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE E. LONG-TERM DEBT
Long-term debt at July 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Note payable to bank in monthly installments of $9,000,
2plus interest at a rate equal to prime (8.25% at July 31,
1996 and 8.75% at July 31, 1995) plus 1.5%; collateralized
by a first lien on the Company's oil and gas properties $ 369,711 $ 293,214
Automotive purchase contract, payable in monthly
installments of $462, including interest at 9.75% per annum 4,789 9,658
--------- ---------
Total 374,500 302,872
Less current portion 112,789 112,395
--------- ---------
Long-term portion $ 261,711 $ 190,477
========= =========
</TABLE>
The note payable to bank is subject to a loan agreement which provides for a
borrowing base of $500,000. This agreement restricts the Company's ability to
incur debt, make investments and loans, pay dividends, sell assets, enter into
merger agreements or change the nature of its business. The agreement also
restricts the use of loan proceeds advanced under the agreement and, it further
requires the maintenance of certain financial ratios. This agreement expires
December 12, 1997.
Future maturities of long-term debt as of July 31, 1996 are as follows:
<TABLE>
<CAPTION>
Years ending July 31:
<S> <C>
1997 $ 112,789
1998 261,711
---------
Total $ 374,500
=========
</TABLE>
NOTE F. INCOME TAXES
As discussed in Note A, the Company adopted the requirements of Statement 109
effective August 1, 1993 and has reported the cumulative effect of this change
in accounting, in the amount of $302,186, in the statement of operations for
the year ended July 31, 1994. The effect of this change was a decrease in
income before cumulative effect of an accounting change for the years ended
July 31, 1996, 1995 and 1994 of $33,397, ($.0125 per share), $20,345 ($0.008
per share) and $37,698 ($0.014 per share), respectively.
-19-
<PAGE> 22
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE F.(Continued)
The following is a reconciliation of income taxes computed at the federal
statutory rate of 34% and the income tax provision for the years ended July 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Statutory rate on income before income taxes
and cumulative effect of an accounting change $ 30,345 $ 19,162 $ 41,859
State income taxes, net of federal benefit 1,325 1,127 2,462
Other 1,727 56 (6,623)
-------- -------- --------
Income tax provision $ 33,397 $ 20,345 $ 37,698
======== ======== ========
</TABLE>
The tax effects of temporary differences which give rise to significant
portions of deferred tax assets and liabilities at July 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
Deferred tax assets:
<S> <C> <C>
Tax loss carryforwards $ 250,976 $ 292,235
All other 4,817 588
---------- ---------
Gross deferred tax assets 255,793 292,823
Deferred tax liabilities:
Oil and gas properties, due to different methods
of depreciation, depletion and amortization and
to differences in the treatment of property
expenditures and sales for financial reporting
and tax purposes 44,581 48,628
All other 466 52
---------- ---------
Gross deferred tax liabilities 45,047 48,680
---------- ---------
Net deferred tax assets $ 210,746 $ 244,143
========== =========
</TABLE>
At July 31, 1996, the Company had losses for tax purposes which are available
for carryforward of approximately $700,000. If not utilized, these losses are
scheduled to expire in years 1999 through 2002. The transaction discussed in
Note I will result in limitations on the availability of these losses to offset
future taxable income. However, management is of the opinion that these
limitations will not affect the utilization of these losses and, that based on
future expectations, it is more likely than not that the Company's future
taxable income, subject to these limitations, will be sufficient to fully
utilize these losses prior to their expiration. The income tax benefits
associated with these loss carryforwards could be reduced, prior to their
expiration, if future events occur, or fail to occur, which change
management's opinion as to the likelihood that these losses will be fully
utilized.
-20-
<PAGE> 23
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE G. MAJOR CUSTOMERS
The Company's oil and gas production is sold to various purchasers. Management
is of the opinion that the loss of any one purchaser would not have a material
effect on the Company's ability to sell its production.
For the year ended July 31, 1996, five purchasers accounted for 15%, 13%, 11%,
11% and 11%, respectively of the Company's oil and gas revenues. For the year
ended July 31, 1995, five purchasers accounted for 13%, 13%, 12%, 12% and 12%,
respectively of the Company's oil and gas revenues. For the year ended July
31, 1994, four purchasers accounted for 17%, 15%, 12% and 11%, respectively of
the Company's oil and gas revenues. No other single customer accounted for 10%
or more of total oil and gas revenues in any of these years.
NOTE H. OIL AND GAS INFORMATION
Net capitalized costs related to the Company's oil and gas producing activities
as of July 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Capitalized costs, subject to depreciation,
depletion and amortization $ 3,435,428 $ 3,159,730
Less accumulated depreciation, depletion and
amortization 2,674,690 2,571,575
----------- ------------
760,738 588,155
Unproved properties not subject to depreciation,
depletion and amortization 86,209 13,859
----------- ------------
Net capitalized cost $ 846,947 $ 602,014
=========== ============
</TABLE>
The following is summary of costs incurred in acquisition, development and
exploration of oil and gas properties for the years ended July 31, 1996, 1995
and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Acquisition $ 81,441 $ 215,455 $ 85,375
Development $ 176,122 $ 33,952 $ 86,589
Exploration $ 92,668 $ - $ -
Depreciation, depletion and amortization per equivalent barrel of oil produced for the years ended July 31, 1996, 1995
and 1994 is as follows (an equivalent barrel of oil is one barrel of oil or six MCF of gas):
1996 $ 2.88
1995 $ 2.31
1994 $ 2.40
</TABLE>
-21-
<PAGE> 24
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE I. CHANGE IN CONTROL
As the result of a recent offer submitted to the Company's stockholders,
Midland Resources, Inc., a related entity (Note C), through a wholly owned
subsidiary, has acquired 1,956,552 shares (81.5%) of the Company's outstanding
common stock effective September 18, 1996. These shares were acquired by cash
purchase of $0.70 per share and the 300,000 outstanding stock options discussed
in Note D were cancelled upon payment of $0.6375 each.
NOTE J. OIL AND GAS RESERVES (UNAUDITED)
The estimates of the Company's proved oil and gas reserves, which are located
entirely within the United States, were prepared in accordance with guidelines
established by the Securities and Exchange Commission and the Financial
Accounting Standards Board. These guidelines require that reserve estimates be
prepared under existing economic and operating conditions, with no provision
for price or cost escalators, except by contractual arrangement. These
estimates are based on evaluations by management of MRI. Management emphasizes
that reserve estimates are inherently imprecise and are expected to change as
new information becomes available and as economic conditions in the industry
change.
CHANGES IN PROVED RESERVE QUANTITIES (UNAUDITED):
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (MCF)
----------- ---------
<S> <C> <C>
Proved reserves, July 31, 1993 70,019 957,031
Revision of previous quantity estimates 19,471 201,879
Production (10,788) (149,926)
Purchases of minerals-in-place 49,897 127,996
Sales of minerals-in-place (479) (13,682)
Extensions and discoveries 27,393 328,504
-------- ---------
Proved reserves, July 31, 1994 155,513 1,451,802
Revisions of previous quantity estimates (10,738) 136,619
Production (12,456) (145,535)
Purchases of minerals-in-place 23,026 84,800
-------- ---------
Proved reserves, July 31, 1995 155,345 1,527,686
Revision of previous quantity estimates (5,071) (41,944)
Production (13,339) (134,857)
Purchases of minerals-in-place 32,198 96,046
Extensions and discoveries 22,055 28,677
-------- ---------
Proved reserves, July 31, 1996 191,188 1,475,608
======== =========
Proved developed reserves:
July 31, 1994 98,729 1,045,973
July 31, 1995 113,379 1,239,601
July 31, 1996 152,525 1,263,329
</TABLE>
-22-
<PAGE> 25
SUMMIT PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE J. (Continued)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS RELATING TO PROVED RESERVES (UNAUDITED):
<TABLE>
<CAPTION>
July 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Future cash inflows $ 6,389,294 $ 5,188,631 $ 5,669,837
Future production cost 2,845,328 2,617,991 2,510,858
Future development cost 498,300 359,450 514,400
Future income taxes (a) 494,703 273,286 409,404
------------ ----------- -----------
Future net cash flows 2,550,963 1,937,904 2,235,175
Annual discount (10%) for estimated
timing of cash flows 1,057,538 810,194 888,397
----------- ----------- -----------
Standardized measure of discounted
future cash flows $ 1,493,425 $ 1,127,710 $ 1,346,778
=========== =========== ===========
</TABLE>
(a) Estimated future income taxes are computed at current statutory rates on
future net cash flows before income taxes, less the income tax bases of the oil
and gas properties, estimated future statutory depletion in excess of bases and
available tax loss carryforwards.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS RELATING TO PROVED RESERVES (UNAUDITED):
<TABLE>
<CAPTION>
Years ended July 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Sales of oil and gas produced,
net of production costs $ (242,848) $ (321,224) $ (234,435)
Net changes in price and production costs 287,912 (189,413) 56,407
Extensions and discoveries 86,358 - 172,361
Revisions of estimated future development costs (4,636) - (23)
Revision of quantity estimates (17,507) 159,501 52,857
Accretion of discount 123,444 153,856 102,235
Purchases of minerals-in-place 316,145 133,862 326,593
Sales of minerals-in-place - - (14,013)
Previously estimated development costs incurred 16,998 - 26,437
Net change in income taxes (99,536) 85,044 (169,451)
Changes in estimated timing of cash flows and other (100,615) (240,694) 27,791
----------- ----------- -----------
Changes in standardized measure 365,715 (219,068) 346,759
Standardized measure, beginning of year 1,127,710 1,346,778 1,000,019
----------- ----------- -----------
Standardized measure, end of year $ 1,493,425 $ 1,127,710 $ 1,346,778
=========== =========== ===========
</TABLE>
-23-
<PAGE> 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
no later than November 28, 1996.
ITEM 10. EXECUTIVE COMPENSATION
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
no later than November 28, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
no later than November 28, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
no later than November 28, 1996.
-24-
<PAGE> 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) REPORTS ON FORM 8-K.
None.
(c) EXHIBITS
* 3.1 Articles of Incorporation
* 3.2 Bylaws
* 10.1 Pike Petroleum Corporation Management Agreement
between Miresco, Inc. and Pike Petroleum Corporation,
The Company and Deas H.Warley III dated August 28,
1989 (Filed as Exhibit 10.4 to the Company's Form
8-K dated August 28, 1989.)
* 10.2 Assignment and Bill of Sale between the Company and
Midland Resources, Inc. dated August 15, 1994
(Filed as Exhibit 10.11 to the Company's Form 8-K/A
dated August 15, 1994.)
* 10.3 Loan Agreement between the Company and Midland
National Bank dated September 7, 1994 (Filed as
Exhibit 10.12 to the Company's Form 8-K/A dated
August 15, 1994.)
* 10.4 Partial Assignment, Bill of Sale and Agreement
between the Company and McCulliss Resources Company,
Inc. dated December 1,1993 (Filed as Exhibit 10.13
to the Company's Form 10-KSB dated July 31, 1994.)
* 10.5 Partial Assignment of Oil and Gas Leases and Bill of
Sale between the Company and Midland Resources, Inc.
dated January 11, 1994 (Filed as Exhibit 10.14 to the
Company's Form 10-KSB dated July 31, 1994.)
* 10.6 Assignment between the Company and Midland Resources,
Inc. dated August 1, 1995 (Filed as an Exhibit of the
same number to the Company's Form 10-KSB dated July
31, 1995.)
* 10.7 Assignment between the Company and Midland Resources,
Inc. dated August 1, 1995 (Filed as an Exhibit of the
same number to the Company's Form 10-KSB dated July
31, 1995.)
* 10.8 Purchase and Sale Agreement, Stipulation of Interest
and Exploration and Development Agreement between the
Company, Midland Resources, Inc., Midland Resources
Operating Company, Inc., AXEM - Blackbird L.L.C. and
Pathfinder Oil & Gas, Inc. (Filed as an Exhibit of
the same number to the Company's Form 10-KSB dated
July 31, 1995.)
* 10.9 Agreement and Plan of Merger between the Company, MRI
Acquisition Corp. and Midland Resources, Inc. dated
July 17, 1996. (Filed as Exhibit 1 to the Company's
Schedule 14D-9 dated July 18, 1996.)
* 16 Letter from Darrell M. Dillard dated July 13, 1994
(Filed as an Exhibit of the same number to the
Company's Form 8-K dated July 12, 1994.)
* 21 Subsidiaries (Filed as Exhibit 22 to the Company's
Form 10-K dated April 11, 1991.)
27 Financial Data Schedule
* 99.1 Stock Redemption and Purchase Agreement dated
December 17, 1993 (Filed as an Exhibit of the same
number to the Company's Form 8-K dated December 17,
1993.)
- -----------------------------------
* Incorporated by reference.
-25-
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: October 27, 1996 SUMMIT PETROLEUM CORPORATION
(REGISTRANT)
By: /s/ Deas H. Warley III
-------------------------------------
Deas H. Warley III
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Date: October 27, 1996 By: /s/ Deas H. Warley III
-------------------------------------
Deas H. Warley III, Director, President,
Chief Financial Officer
Date: October 27, 1996 By: /s/ Alan R. Barth
--------------------------------------
Alan R. Barth, Controller
Date: October 27, 1996 By: /s/ Wayne M. Whitaker
--------------------------------------
Wayne M. Whitaker, Director
Date: October 27, 1996 By: /s/ Darrell M. Dillard
--------------------------------------
Darrell M. Dillard, Director
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
* 3.1 Articles of Incorporation
* 3.2 Bylaws
* 10.1 Pike Petroleum Corporation Management Agreement between
Miresco, Inc. and Pike Petroleum Corporation, The Company and
Deas H. Warley III dated August 28, 1989 (Filed as Exhibit
10.4 to the Company's Form 8-K dated August 28, 1989.)
* 10.2 Assignment and Bill of Sale between the Company and Midland
Resources, Inc. dated August 15, 1994 (Filed as Exhibit 10.11
to the Company's Form 8-K/A dated August 15, 1994.)
* 10.3 Loan Agreement between the Company and Midland National Bank
dated September 7, 1994 (Filed as Exhibit 10.12 to the
Company's Form 8-K/A dated August 15, 1994.)
* 10.4 Partial Assignment, Bill of Sale and Agreement between the
Company and McCulliss Resources Company, Inc. dated December
1, 1993 (Filed as Exhibit 10.13 to the Company's Form 10-KSB
dated July 31, 1994.)
* 10.5 Partial Assignment of Oil and Gas Leases and Bill of Sale
between the Company and Midland Resources, Inc. dated January
11, 1994 (Filed as Exhibit 10.14 to the Company's Form 10-KSB
dated July 31, 1994.)
* 10.6 Assignment between the Company and Midland Resources, Inc.
dated August 1, 1995 (Filed as an Exhibit of the same number
to the Company's Form 10-KSB dated July 31, 1995.)
* 10.7 Assignment between the Company and Midland Resources, Inc.
dated August 1, 1995 (Filed as an Exhibit of the same number
to the Company's Form 10-KSB dated July 31, 1995.)
* 10.8 Purchase and Sale Agreement, Stipulation of Interest and
Exploration and Development Agreement between the Company,
Midland Resources, Inc., Midland Resources Operating Company,
Inc., AXEM - Blackbird L.L.C. and Pathfinder Oil & Gas, Inc.
(Filed as an Exhibit of the same number to the Company's Form
10-KSB dated July 31, 1995.)
* 10.9 Agreement and Plan of Merger between the Company, MRI Acquisition
Corp. and Midland Resources, Inc. dated July 17, 1996. File as
Exhibit 1 to the Company's Schedule 14D-9 dated July 18, 1996.)
* 16 Letter from Darrell M. Dillard dated July 13, 1994 (Filed as
an Exhibit of the same number to the Company's Form 8-K dated
July 12, 1994.)
* 21 Subsidiaries (Filed as Exhibit 22 to the Company's Form 10-K
dated April 11, 1991.)
27 Financial Data Schedule
* 99.1 Stock Redemption and Purchase Agreement dated December 17,
1993 (Filed as an Exhibit of the same number to the Company's
Form 8-K dated December 17, 1993.)
</TABLE>
- ----------------------------
* Incorporated by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353196
<NAME> SUMMIT PETROLEUM CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 14,552
<SECURITIES> 0
<RECEIVABLES> 123,199
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 165,773
<PP&E> 3,553,374
<DEPRECIATION> 2,687,341
<TOTAL-ASSETS> 1,210,290
<CURRENT-LIABILITIES> 259,892
<BONDS> 261,711
<COMMON> 33,250
0
0
<OTHER-SE> 932,882
<TOTAL-LIABILITY-AND-EQUITY> 1,210,290
<SALES> 478,652
<TOTAL-REVENUES> 659,179
<CGS> 232,135
<TOTAL-COSTS> 530,828
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,101
<INCOME-PRETAX> 89,250
<INCOME-TAX> 33,397
<INCOME-CONTINUING> 55,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,853
<EPS-PRIMARY> 0.021
<EPS-DILUTED> 0.021
</TABLE>
