SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission file number 0-8301
GOLDEN TRIANGLE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 25-1302097
(State or other jurisdiction of (IRS Employer
incorporation or organization) I. D. Number)
8504 Sonoma Valley N.E., Albuquerque, New Mexico 87122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(505) 856-5075; fax 857-9993
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class - Common Stock, $.001 Par Value
Indicate by check mark whether the registrant (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 (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 disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [X]
The aggregate market value of common equity held by non-affiliates of the
registrant was $7,400,294 as of March 16, 1998, based on the average bid and
asked prices of the common stock, $.001 par value, of the registrant,
($13.375 per share) at the close of the market on that day.
The number of shares outstanding of the registrant's common stock as of
March 16, 1998 was 580,398 shares.
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
Golden Triangle Industries, Inc. (the "Company" or "GTII") was
incorporated under the name Golden Triangle Royalty & Oil, Inc. on July 30,
1975 under the laws of the State of Colorado. The Company was organized
primarily to acquire and hold royalties on oil and gas properties. During the
past five years the Company has diversified and expanded its business to
include salt water disposal and oil field service operations. It has also
acquired and holds a variety of other interests, primarily as a passive
investor. See Item 2 for a description of the Company's properties. During
1996 the Company's name was changed to Golden Triangle Industries, Inc. to
reflect the expansion in the Company's core business from oil and gas
royalties to its broader base of activities.
In June 1997, the Company acquired a ranch property in Texas (the "Altair
Ranch"), covering 2,738 acres which contained materials and facilities
readily convertible to use by the Company. This property is also suitably
located to support expansion of oil field services into a new geographic
area. See Item 2. Properties (b) Altair Ranch, for additional information on
this acquisition.
The following definitions are provided to clarify certain terms used in
this report:
Authority to Prospect ("ATP") - a concession granted by the State of
Queensland, Australia, which entitles its holder to an exclusive right to
explore for oil and natural gas in Queensland in the particular area covered
by the ATP. See Item 2(d), "Oil and Gas Properties - Australian Properties"
for additional information.
Gross Production - the total production of oil, gas, or natural gas
liquids from a property or group of properties for any specified period of
time.
Net Royalty Acre - generally, a measurement of royalty or overriding
royalty and the equivalent of the full customary one-eighth royalty of the
gross production or revenue free and clear of exploration, drilling and
production costs from one acre of land. The number of net royalty acres used
in this report applies to figures as of December 31, 1997, and the number
will change as relinquishments take place on the ATPs, as an ATP expires or
is canceled, or any new areas are added.
Overriding Royalty Interest ("ORRI") - an interest carved out of the
lessee's leasehold or working interest. The amounts payable from ORRIs are
payments calculated as a percentage of either gross production or the gross
revenues of the working interest (based on the wellhead price) from a
concession or lease, usually free and clear of all exploration, drilling and
development and production costs, except for any applicable taxes and federal
levies. In calculating the wellhead price, pipeline and trucking costs have
already been deducted from the refinery price. The overriding royalties
discussed herein are generally expressed as a percent of the gross
production.
Royalty - generally, a share of the production reserved by the grantor of
an oil or gas lease or concession. The royalty interest is customarily free
of cost or expense incident to exploration, development or production, except
for production or gathering taxes. The royalty is part of the consideration
for the grant of the lease or Authority to Prospect.
Working Interest ("WI") - all or a fractional part of the ownership
rights granted by a concession or lease. The owner of a WI or a part thereof
pays all costs of operations and is entitled to the gross production, less
royalties retained by the grantor or lessor, and less ORRIs or other non-
operating interests created and assigned from the working interest. The
owner of a WI may incur operating expenses in excess of income.
Carried Working Interest - a WI assigned to a third party (or third
parties) who has agreed to pay all of the costs of drilling, equipping, and
operating the underlying lease until they have recouped all of their costs or
some other contractual amount from the revenues of the lease (referred to as
the time of payout) . At the time of payout, the interest is reassigned back
to the original owner who then shares pro rata in the ongoing costs and
revenues as a regular WI owner.
(b) Financial Information About Industry Segments
In the fiscal year ending December 31, 1997, the Company's revenues,
operating profits, and identifiable assets were attributable to its salt
water disposal and oil field service operations, acquisition and ownership of
interests in oil and gas leases, and rental of Company assets. (See Items 6
and 8, "Selected Financial Data" and Note 15 to Consolidated Financial
Statements at Item 8.)
(c) Narrative Description of Business
General - Salt Water Disposal and Oil Field Services
Through several of its subsidiaries, GTII is engaged in the salt water
disposal business, with injection facilities located in the top gas producing
counties in Texas. The oil industry of the United States produces more salt
water than oil, and governmental regulations require any salt water produced
from oil or gas wells to be injected back into the ground in another salt
water bearing zone to protect all fresh water zones from being contaminated.
Producers in the area separate the salt water from the produced gas and oil
and truck the salt water from locations at which it is produced to GTII's
subsidiaries' disposal sites. There the water is collected in storage tanks
and then injected back into a suitable formation. A fee is charged per barrel
or per load for this service. The collection of accounts receivable from oil
and gas producers for the Company's salt water disposal and oil field
services represents a risk factor in this service business.
During 1997, approximately 57% of the Company's revenues attributable to
this line of business were billed to a single customer, TransTexas Gas
Corporation. Another 14% was billed to a second long-time customer, Med Loz
Trucking. The loss of either of these customers could have a material
adverse effect on the Company's business as a whole. Management does not
foresee the loss of these customers, but continues to take steps to expand
the business into other areas and gain additional customers to prepare for
this possibility. Mechanical problems with a disposal well, surface owners
not renewing a lease, or a competitor installing a new disposal facility in
the Company's service area are other risk factors associated with salt water
disposal operations generally. GTII has not encountered any problems of this
nature in its operations to date and does not anticipate that any such
developments are likely to be encountered in connection with its operations
in the near future.
The continued profitability of the salt water disposal and oil field
service business is dependent upon stable or increased oil and gas prices
causing additional oil and gas production in the Company's service area.
This business is also subject to environmental considerations and must comply
with governmental regulations. See "Governmental Regulation" below.
During 1997 and the two prior fiscal years, the Company's salt water
disposal and oil field service business has contributed $1,844,332,
$2,239,670, and $1,789,864 or 74%, 90% and 67% of total consolidated
revenues. During the same time period, oil and gas revenues have contributed
$448,359, $311,221, and $210,800 or 18%, 13%, and 8% of consolidated
revenues.
See Item 2(a) Properties Attributable to Salt Water Disposal and Oil
Field Services for more complete information.
General - Oil and Gas
The majority of the Company's oil and gas properties are royalty
interests or ORRIs. Working interests account for less than 5% of the
Company's revenues from oil and gas properties.
The acquisition, exploration, development, production and sale of oil and
gas are subject to many factors that are outside the Company's control.
These factors include market prices; national and international economic
conditions; import and export quotas; availability of drilling rigs, casing,
pipe, and other equipment and supplies; availability of and proximity to
pipelines and other transportation facilities; the supply and price of
competitive fuels; and the regulation of prices, production, transportation,
and marketing by domestic and foreign governmental authorities. Additionally,
the Company generally has no control over whether the owner or operator of
leases to which its ORRI or working interests are attributable will elect to
explore for oil and gas on such properties, or to develop them following
discoveries that may occur. Each of these factors may affect the rate at
which oil and gas are produced on properties in which the Company has an
interest or affect whether wells will be drilled on such properties, and
could otherwise materially affect GTII's earnings from this line of business.
Australian concessions, discussed below, require that minimum prospecting
expenditures be incurred during their four year term. Some concessions from
prior years have not been developed and are not producing revenues.
The Company does not serve as the operator of properties under which it
owns working interests. However, it does bear the risk of fire, blowout or
other catastrophe to such properties in proportion to the fractional share
owned in the properties to the entire working interest of such properties.
The operators of these properties may carry insurance against some of these
risks but may not be fully insured due to prohibitive premium costs or
coverage being unavailable. Such risks are not borne by the Company on oil
and gas leases in which the Company owns an ORRI or royalty interest.
The sections which follow describe the impact of competition and
governmental regulation on the Company's salt water disposal and oil field
service and oil and gas properties lines of business, as well as the impact
of foreign currency regulation and foreign taxes on earnings from oil and gas
properties located outside the United States.
Competition
The oil and gas industry is highly competitive in all of its phases, with
competition for favorable producing royalties and overriding royalties being
particularly intense. The Company believes that price, geological and
geophysical skill, and familiarity with an area of operations are the primary
competitive factors in the identification, selection, and acquisition of
desirable leases. When attempting to purchase interests in such properties,
the Company competes with independent operators and occasionally major oil
companies, a number of which have substantially greater technical and
financial resources than the Company. In the salt water disposal business,
salt water disposal wells operated by other companies, as well as oil and gas
producers adding their own injection wells, provides competition. An
awareness of these factors, causes the Company to seek to provide the best
possible services at competitive prices.
Governmental Regulation
Oil and gas operations are subject to federal, state and local laws and
regulations governing waste, environmental quality, pollution control,
conservation and other measures regarding environmental and ecological
matters. The Company's salt water disposal business is operated under
permits from the Texas Railroad Commission and the Texas Natural Resource
Conservation Commission. Failure to comply with applicable regulations could
result in interruption or termination of the operations. Additionally, upon
cessation of use, disposal wells must be plugged and the sites cleaned up to
applicable standards. It is impossible to predict the impact of
environmental legislation and regulations on the Company's operations and
earnings in the future. However, compliance could require the Company to
make capital expenditures, and could adversely affect earnings.
The Company's operations could also be affected from time to time by
other federal, state and local laws and regulations and by political
developments. The domestic production and sale of oil and gas are subject to
federal regulation by the Department of Energy and the Federal Energy
Regulation Commission. Rates of production of oil and gas have for many
years been subject to federal and state conservation laws and regulations.
In addition, oil and gas operations are subject to extensive federal and
state regulations concerning exploration, development, production,
transportation and pricing, and even to interruption or termination by
governmental authorities. Removal of import duties on oil entering the U.S.
has had an adverse affect on the domestic oil industry.
In foreign countries, the Company may be subject to governmental
restrictions on production, pricing and export controls. Regulations
existing or imposed upon the Company or its properties at the time of their
acquisition may change to an unpredictable extent. The Company will have
little or no control over the change of regulations or imposition of new
regulations and restrictions, expropriation or nationalization by foreign
governments or the imposition of additional foreign taxes. Management
believes that these actions are unlikely to be undertaken by the governments
of Australia or Queensland, where the majority of the foreign oil and gas
properties from which the Company receives royalty income are located.
Foreign Currency
Due to the nature of the Company's activities in Australia, portions of
the Company's operating capital may at times be held in various foreign
currencies. This subjects the Company to the risk of currency fluctuations
and changes in rates of conversion for different currencies. Additionally,
revenues generated in foreign countries in which the Company has or may
acquire interests may be subject to governmental regulations which restrict
the free convertibility of such funds, and all remittances of funds out of
these countries might require the approval of the applicable government's
exchange control agency. In the Company's opinion, the foreign exchange
control laws currently in effect in Australia do not unreasonably delay the
remittance of funds generated in Australia to the United States.
Foreign Taxes and United States Tax Credits
As a result of its royalty and working interests attributable to
properties outside the United States, the Company is subject to the
imposition of taxes by foreign governments upon the Company's income derived
from such foreign jurisdictions. These taxes are of various types, with
differing tax rates, and are subject to change. Generally, the Company's
income from a foreign jurisdiction will be taxed in the same manner as that
for other companies operating in the jurisdiction, but discriminatory
taxation by a particular jurisdiction may occur. The current corporate
income tax rate in Australia is 30% of net profits.
The Company's income is also subject to taxation under the United States
Internal Revenue Code of 1986, as amended (the "Code"). The Code provides
that a taxpayer may obtain a tax credit for certain taxes paid to a foreign
country or may take a deduction for such taxes. A tax credit is generally
more favorable than a deduction. However, the particular tax circumstances
create differing benefits in varying situations. The tax credit applicable
to particular foreign income arises when such income is included in the
Company's taxable income under the provisions of the Code. There are,
however, substantial restrictions and limitations on the amount of the tax
credit that can actually be claimed. See Note 8 of the Notes to Consolidated
Financial Statements at Item 8.
Employees
The Company and its subsidiaries employ twenty-five persons (including
the executive officers).
(d) Financial Information About Foreign and Domestic Operations
See Note 15 to Consolidated Financial Statements at Item 8.
ITEM 2. DESCRIPTION OF PROPERTY
(a) Properties Attributable to Salt Water Disposal and Oil Field Services
GTII currently owns seven salt water disposal facilities. Salt water is
produced along with oil and gas, and governmental regulations require the
salt water to be disposed of in an environmentally safe manner. The Company
is in the primary business of injecting the salt water back into the ground
in another salt water bearing zone to protect all fresh water zones from
being contaminated. The Company is paid a fee on a per barrel or per load
basis for this service by oil and gas producers whose operations produce the
salt water that requires disposal.
GTII acquired its first salt water disposal property, OCR Investments,
Inc. (OCR), located in the Zapata/Laredo area of Texas, during 1993. During
1994, the Company acquired Transcon Energy Corporation (Transcon) which owned
and operated three disposal facilities in the same general area as OCR.
Transcon, like OCR, provides salt water disposal services for oil field
operations in an area of active drilling for deep gas.
Because of the favorable results from its salt water disposal facilities
in 1994, GTII continued expanding this business during 1995 by purchasing the
County Line Disposal facility, and opening a new disposal facility, OCR's
Chihuahua facility. During 1996 the Company acquired the Amando Disposal
Facility, granting the seller an option to repurchase it at any time within
five years, and during 1997, the seller, TransTexas Gas Corporation,
exercised its option. Upon exercise of the option, TransTexas paid cash of
$410,913, and agreed to make improvements, which the Company valued at
$269,000, to the Altair Ranch (see (b) Altair Ranch).
GTII acquired a new saltwater disposal facility near El Campo, Texas,
during 1997. This new facility, named Transcon Spanish Camp, is located near
producing gas wells. This facility was placed into service during the first
quarter of 1998.
With the exception of Transcon Spanish Camp, all of GTII's disposal sites
are located in the Texas counties of Webb and Zapata. Based on reports
published annually by the Texas Railroad Commission, the Company understands
that Webb County produces more gas than any other Texas county, while Zapata
County varies in rank between second or third from year to year. As there are
few other facilities located in the two county area, GTII benefits from
limited competition. Based on reserve estimates published by the U.S.
Department of Energy, and publicly available information on the volume of gas
produced annually from the two county area, the Company believes that
production could continue at the present rate for twenty years or more,
provided the price of natural gas remains at a level that is sufficient to
support such production.
In summary, the Company believes that gas production, along with the
associated salt water production in GTII's service area, should be
substantial for years to come. GTII's total revenues from disposal fees as
described above, and other oil field service revenues (described in the
following paragraph) totaled $1,844,332 during 1997.
In addition to salt water disposal services, the Company provides oil
field services such as fresh water supply, back filling drilling mud pits,
sand blasting, and steam cleaning. Additional information on the salt water
disposal business is available at "Narrative Description of Business" under
"General - Salt Water Disposal and Oil Field Services."
Subsequent to repurchasing the Amando disposal facility from the Company,
TransTexas sold a significant portion of its gas producing properties in the
Zapata area, including the Amando facility, to a purchaser that has
apparently elected to develop its own salt water disposal facilities. As a
result, the Company has seen some reduction in activities at some of its
facilities. The future impact on salt water disposal operations in this area
is not determinable at this time.
(b) Altair Ranch
During 1997, GTII acquired the Altair Ranch, a 2,738 acre ranch, located
approximately 45 minutes from Houston, Texas, for a purchase price of
$1,096,100. This property is located in an area of active oil and gas
production and sits along a trend line which has seen significant recent
exploratory drilling. Existing assets included approximately 90% of mineral
rights, fresh water supplies, a substantial quantity of stockpiled sand and
gravel, two usable buildings, and areas suitable for lay down yards for
drilling companies. In addition, the Company plans to re-evaluate the
production potential of six plugged gas wells along with the prospects of
leasing the property for exploration of deeper zones indicated by geological
trends across the area.
Primarily during the last quarter of 1997, the Company earned revenues
from this property from rental of its buildings and lay-down areas, sales of
fresh water, and sales of sand and gravel. Because of its location, the
Company has also established and received revenues from an oil reclamation
plant and oil field service business based on the rental of heavy equipment
for oil field use.
The oil reclamation plant, established in the last quarter of 1997, is
designed to accept oil generated from saltwater disposal and other off-grade
or unwanted oil, run it through a blending process, and sell it to oil
refineries. This facility is presently the only one of its type in the
surrounding area.
GTII plans to increase revenues further with its new trucking and
equipment services based at the Altair. With the purchase of four tractor
trailer trucks, several trailers, and three bulldozers the Company is
providing the following services to oil and gas operators: equipment moving,
vacuum services, oil transportation, drilling pad construction and leasing.
GTII also plans to construct a saltwater disposal facility on the property
and is considering other potential activities.
(c) Apache Ranch
GTII owns the 13,500 acre Apache Ranch which adjoins the Mescalero Indian
Reservation and ski resort area near Ruidoso, New Mexico. To date, activity
related to this ranch property has included land sales (financed by the
Company) in 1995 and 1996, revenues from cattle grazing leases in the
1995-1997 period, and hunting permits in 1996. See Note 4 of Notes to
Consolidated Financial Statements at Item 8.
(d) Oil and Gas Properties
General
As of December 31, 1997, the Company owned royalty interests, ORRIs and
working interests attributable to oil and gas wells located in the United
States, Canada, and Australia. In the United States, the Company's interests
are located in the states of Arkansas, Colorado, Kansas, New Mexico,
Oklahoma, Texas, and Mississippi. The majority of the company's oil and gas
interests are royalties or ORRIs. The Company also holds working interests
in the United States and in Australia.
Most of the U.S. leases under which the Company owns interests provide
that such leases will continue in existence as long as oil and gas are
produced on the related properties. The duration of the Australian
concessions in which the Company owns interests is discussed generally in the
following section.
Australian Properties
A significant portion of the Company's oil and gas properties consists of
ORRI under ATPs granted by the State of Queensland, Australia. The Company
currently has ORRI under eleven such ATPs. Each of these ATPs has an initial
term of four years. The area covered by an ATP is reduced by relinquishment
of approximately one-fourth of the area at the start of the third year of its
effectiveness and an additional one-fourth of the original area at the start
of the fourth year of its effectiveness. The area to be relinquished is
chosen by the holder of the ATP. An ATP does not require that any specific
work, such as drilling or geological or geophysical work, be performed by
the holder, but does require that the holder continuously prospect and expend
a specified minimum sum over the term of the ATP for such prospecting
efforts. Applications for renewal may be filed at the time of expiration of
an ATP.
The Company has ORRI in 2,234,569 net royalty acres under 27,728,800
gross surface acres in Australia. Unlike working interests, ORRIs do not
require that the Company bear any portion of exploration or drilling expenses
to develop the property. In addition, the Company holds 198,720 net working
interest acres under 2,649,600 gross working interest acres.
Oil revenues from Australia during 1997 totaled $366,500 from ATP 267 and
ATP 299, before transportation costs to market of $136,101. No revenues were
generated by the other nine ATPs during 1997.
Reserves
The majority of the Company's reserves are attributable to properties in
which the Company owns ORRI and royalty interests. Data necessary for the
computation of reserve estimates for such properties is not available to the
Company without the incurrence of unreasonable effort and expense. If
estimates of proved reserves were available for such properties, the Company
believes that reserves attributable to ATP 299 in Australia would account for
the majority of the proved oil reserves attributable to these interests. The
working interest holders of the properties under which the Company holds
royalty interests and ORRIs have not supplied the Company with information
deemed necessary for meaningful reserve calculations. Most of the Company's
domestic royalty interests are small, and the Company is of the opinion that
obtaining information necessary for meaningful reserve calculations for these
interests would involve unreasonable effort or expense. Oil production
attributable to the Company's royalty and ORRIs provided approximately 95% of
the Company's income attributable to oil and gas properties during the year
ended December 31, 1997.
Since the Company's working interests provide only a small percentage
(5%) of the Company's total income attributable to oil and gas properties, it
was determined that unreasonable effort and expense would be required to
prepare a reserve report on the properties to which these interests relate.
See "Supplementary Data for Reserves of Oil and Gas" under Item 8. Financial
Statements and Supplementary Data.
No estimates of total proved oil or gas reserves were filed by the
Company with, or included in reports to, any federal authority or agency
other than the Securities and Exchange Commission since the beginning of the
Company's last fiscal year.
Average Sales Price and Production Costs
The following table sets forth the average sales price per unit of oil
and gas production. Sales prices are based on market prices determined at
the point of delivery from the producing unit. Production or severance taxes
have not been deducted in determining the average sales price, but rather are
included as part of production costs. No sales prices of gas are shown for
Australia because the Company had no production of gas in Australia during
the relevant reporting periods. The average production (lifting) costs per
unit of production are not presented because the majority of the Company's
oil and gas revenues are attributable to royalties and ORRIs. The nature of
these interests does not require that the Company bear any portion of the
production or lifting costs. Additionally, the operators of the leases under
which the Company's working interests exist have not provided the Company
with information concerning production (lifting) costs. The Company's
working interests are small, the Company is not an operator of wells or
leases, and the Company is of the opinion that obtaining information
necessary for disclosure of production (lifting) costs would involve
unreasonable effort or expense.
United States Australia
Average Sales Price Average Sales Price
Fiscal Year Ended Oil Gas Oil
December 31, 1997 $19.21 $ 1.82 $US20.55
December 31, 1996 $20.43 $ 1.91 $US21.72
December 31, 1995 $16.30 $ 1.29 $US18.09
WORKING INTERESTS - DOMESTIC
Productive Wells and Developed Acreage
The Company's assets and revenues attributable to its domestic working
interests are not material. The interests held are quite small and the
Company has determined that the costs incurred to obtain and analyze the
information normally required to be presented would be unreasonable. As a
result this information has been omitted.
Non-Productive Acreage
GTII holds a 30% interest in approximately 11,787 acres of long-term
leases located in the Overthrust Belt in Arizona. The primary prospect in
this lease play is the Cochise Overthrust Prospect. Along with other working
interest owners, GTII intends to farm out the interest to a third party, who
would assume the costs of drilling and developing the properties. Under such
arrangements, GTII et al would attempt to recover out-of-pocket expenses
while retaining an overriding royalty interest.
WORKING INTERESTS - AUSTRALIA
The table below sets forth the undeveloped acreage in Australia in which
the Company held WI as of December 31, 1997. Working interests are acquired
by the Company with the intention to farm out operations while retaining an
ORRI or carried working interest.
GTII's Net
Gross Working WI
Area Acres Interest Acres
538 2,189,600 7.5% 164,220
554 460,000 7.5% 34,500
ROYALTY AND OVERRIDING ROYALTY INTERESTS - DOMESTIC AND CANADA
The Company owns royalty interests and ORRIs in oil and gas wells
primarily located in the states of Arkansas, Colorado, Kansas, New Mexico,
Oklahoma, Mississippi, and Texas. During 1996, the Company acquired ORRIs in
four producing wells in Texas and four producing wells in Mississippi.
During 1997, the Company acquired ORRIs under two production units in Canada.
These production units consist of the consolidation of numerous leases and,
between the units, contain more than 200 wells. The Company had no ORRIs in
undeveloped acreage in the United States, as of December 31, 1997.
Also see (d) Oil and Gas Properties - General.
OVERRIDING ROYALTY INTERESTS - AUSTRALIA
The following table sets forth the ATP number of each Australian
concession in which the Company had an ORRI as of December 31, 1997 and upon
which productive wells had been drilled, the percentage interest of the
Company therein, the number of such wells, the gross acreage of each
concession, and the net royalty acres held in each concession.
GTII's Net
Area & Gross Royalty Royalty
No. of Wells Acres Interest Acres
267 - 21 oil wells 736,000 2.6064700% 153,469
299 - 58 oil wells 588,000 1.6364559% 77,084
The following table sets forth the undeveloped acreage in which the
Company had ORRIs in Australia as of December 31, 1997. During 1997, GTII
received a 1% ORRI in ATP615 as part of the sale of its interest in Oil
Seeps, Inc.
GTII's Net
Gross Royalty Royalty
Area Acres Interest Acres
333 92,000 0.200% 1,472
415 901,600 1.463% 105,523
538 2,189,600 0.623% 109,130
542 1,932,000 1.200% 185,472
543 1,545,600 0.500% 61,824
550 552,000 0.500% 22,080
560 1,048,800 0.800% 67,123
582 8,960,800 1.000% 716,864
615 9,181,600 1.000% 734,528
The total of the producing and non-producing acreage in Australia under
which GTII holds ORRI interests is 2,234,569 net royalty acres under
27,728,800 gross surface acres.
Recent Developments - ORRI
After a record year in 1996 with fifteen successful oil wells completed
on ATP 299, Santos, the operator controlling the prospect, continued a
successful aggressive drilling program in 1997 with the completion of
thirteen new oil wells. The Company's revenues received from oil and gas
interests have shown a significant increase primarily due to these new wells
on ATP 299. Following is a list of the new wells completed as producers and
the field in which they are located:
Tarbat Field
Tarbat #11
Ipundu Field
Ipundu #6, #7, #8, #9, #10, #11, #12
Ipundu North #6, #7, #8, #9, #10
There are now 58 wells in twelve different fields on ATP 299. GTII
acquired additional interests in ATP 299 during 1997, bringing GTII's ORRI in
this ATP to 1.6364559291% of gross production, less transportation costs.
Each oil field has numerous undrilled locations, indicating upside potential
for the further development of ATP 299.
GTII also purchased additional interests in ATP 267 during 1997 bringing
GTII's total ORRI in ATP 267 to 2.60647% of gross production, less
transportation costs. There are currently 21 producing oil wells on this
concession from which GTII receives revenues.
In addition to the success on ATP 299, drilling programs were conducted
on ATPs 550 and 560 under which the Company holds ORRIs. Three producing oil
wells were completed on ATP 560 - the Utopia #1, Utopia #2, and Utopia #3,
and four wells were plugged and abandoned on this concession. One well on
ATP 560 was unsuccessful.
The Company understands that there have been less than 7,000 wells
drilled in the entire country of Australia, which is basically the same size
as the continental United States. Current technology coupled with better
understanding of the geology has led to substantial discoveries both onshore
and offshore Australia.
(e) Office Facilities
The Company's corporate office is located at 8504 Sonoma Valley N.E.,
Albuquerque, New Mexico 87122, and is leased from Kenneth Owens, Chairman of
the Board and President. In addition, the Company's subsidiaries have
offices in Zapata, Texas. Rent in the amount of $9,600 was paid to Kenneth
Owens in 1997 for these facilities. During 1997 GTII purchased 50% of the
office in Zapata for $30,106 which was paid in the form of 3,398 shares of
stock. The Company also has an office at 104 Fossil Court, Springtown, Texas
76082, which handles the stock transfer agent duties and other duties for the
Company. Karen Lee, Director of the Company, was paid $300 per month for
these facilities during the first quarter of 1997, at which time the rent
payments were discontinued pursuant to a renegotiation and reorganization of
Ms. Lee's compensation. The Company believes its office facilities are
adequate for the next year.
ITEM 3. LEGAL PROCEEDINGS
As of March 16, 1998, there were no material legal proceedings to which
the Company or any of its subsidiaries was a party or of which any of their
properties was the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock
The only class of common equity security authorized by the Company's
Articles of Incorporation, as amended, is the Company's Common Stock, $.001
par value. The Company's Common Stock trades on the NASDAQ SmallCap Market
tier of the NASDAQ Stock Market under the symbol "GTII". The range of high
and low sales prices for each quarter during the last two fiscal years, as
quoted in the National Association of Securities Dealers' Automatic Quotation
("NASDAQ") System, is set out in the table that follows. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions.
Year Ended December 31, 1997 Year Ended December 31, 1996
High Low High Low
1st Quarter 10 1/4 7 11/16 11 13/16 10 1/16
2nd Quarter 8 7 10 3/4 7 11/16
3rd Quarter 20 3/4 7 7/16 9 3/16 7 1/4
4th Quarter 23 1/4 11 3/4 10 3/4 8 1/16
Note: The prices reported above have been adjusted to give retroactive
effect of the Company's 1-for-3.5 reverse split that was effective May 1997.
As of March 16, 1998, there were approximately 12,110 holders of record
of the Company's Common Stock, plus an undetermined number of stockholders
who hold their stock in street name.
Dividend Reinvestment and Stock Purchase Plan
GTII set up a Dividend Reinvestment and Stock Purchase Plan (the "Plan")
during 1996, to provide existing shareholders of the Company's common stock
with a convenient and economical method of investing cash dividends and
making cash investments in the Company's common stock without payment of
brokerage commissions in connection with purchases.
Shareholders may choose to invest funds in common stock through optional
cash investments, with a minimum purchase of $25.00 per month and a maximum
purchase of $5,000 per month. The optional cash payments may be made
occasionally or at regular intervals, as the shareholder desires. A $2.50
service fee is charged for each optional cash investment.
The Plan provides that the common shares offered by the Company may be
either shares newly issued by the Company or shares purchased on the open
market at the Company's option. The purchase price for shares purchased on
the open market is the average price paid for such shares, and the purchase
price for newly issued shares is 98% of the average of the daily closing
prices of the common shares reported on the NASDAQ market on the five trading
days prior to the purchase date.
IMPORTANT: The above is only a brief outline of the Plan. Complete
details of the Plan were mailed to all shareholders during 1996. Before
enrolling shareholders should review the information received, or obtain
complete information on the Plan by requesting a copy of the Dividend
Reinvestment and Stock Purchase Plan from the corporate office.
The Company has registered 1,000,000 shares of common stock under the
Securities Act for sale by GTII pursuant to the Plan, which may be used at
the Company's discretion. During 1997 shares for the Plan were purchased
both in the open market and from the registered Company stock. An average of
142 stockholders per month purchased shares through the Plan during 1997.
Preferred Stock
During 1996, shareholders authorized an amendment of the Articles of
Incorporation of the Company, under which 1,000,000 preferred shares are
authorized for issuance, with directors given the authority to subdivide the
stock and assign the various rights to each class. Directors created Class A
and Class B preferred shares and authorized a program whereby shareholders
could exchange their common stock for preferred stock at a rate of one share
of preferred received for each ten shares of common surrendered. The offer
expired on August 30, 1996. The program resulted in the exchange of
2,001,710 common shares for 11,856 preferred A shares, and 188,585 preferred
B shares. As a result of the 1-for-3.5 reverse stock split effective May 20,
1997, there are now 3,371 preferred A shares and 53,903 preferred B shares
issued and outstanding. Neither class of preferred stock was registered. As
a result, any transfers carry trading restrictions associated with
unregistered shares and there is no established market for such shares.
Class A Convertible Preferred Stock - Class A preferred stock is a
convertible stock. The shareholder holding preferred stock has the same
voting rights as if all preferred shares held were common shares (1 preferred
share equals 10 common shares). These shares will be convertible back to
common shares in October 1999 or when gross revenues of the Company are $5
million or greater, whichever comes first. An annual cash dividend of $0.30
per share is paid on the Class A preferred shares. See Dividends - Preferred
Stock.
Class B Non-Convertible Preferred Stock - Class B preferred stock is non-
convertible. A shareholder holding Class B preferred stock has the same
voting rights as if all preferred shares held were common shares (1 preferred
share equals 10 common shares). The Class B preferred shares are not
convertible back to common shares. An annual cash dividend of $0.20 per
share and a stock dividend are paid on the Class B preferred shares. See
Dividends - Preferred Stock.
Dividends - Common Stock
The Company has not paid cash dividends on its common stock and does not
anticipate the payment of cash dividends in the foreseeable future. Payment
of cash dividends is within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. The
payment of stock dividends is also within the discretion of the Board of
Directors.
Dividends - Preferred Stock
Class A - An annual cash dividend of $0.30 per Class A preferred share is
paid on these shares.
Class B - An annual cash dividend of $0.20 per Class B preferred share is
paid on these shares.
In addition, a 30% stock dividend (3% when based on the number of common
shares exchanged for Class B preferred shares) was paid during 1997 on Class
B preferred shares, and a 40% stock dividend is to be paid during 1998. For
subsequent years, the annual dividend rate will increase above the 40% by 10%
when the annual gross revenues increase by $1 million dollars, up to 60%, and
will increase above 60% by 10% when the annual gross revenues increase by $2
million dollars. The increases in gross revenues will be calculated using
the 1995 year end gross revenue number as the base number. The stock
dividends will be paid in common shares which are not restricted and can be
sold by the shareholder in the open market.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
1997 1996 1995 1994 1993
(2) (2) (2)(3) (3)
Operating
revenues $2,481,715 $2,489,295 $2,676,204 $2,471,196 $1,776,810
Net income $ 438,784 $ 351,195 $ 683,169 $ 548,593 $ 179,410
Net income per share (1)
- basic $ 0.46 $ .45 $ .62 $ .15 $ .06
- diluted 0.46 .44 .62 .15 .06
Total assets $6,796,852 $6,113,063 $5,927,676 $4,565,770 $4,021,449
Long-term
debt $ - $ - $ 19,486 $ 5,991 $ -
(1) Net income per share has been restated to reflect the 1-for-20
reverse split in 1993, the 1-for-2.5 reverse split in 1995, and the 1-for-3.5
reverse split in 1997.
(2) Amounts presented for 1994 through 1996 have been restated for prior
period adjustments reported in Note 2 of the Consolidated Financial
Statements.
(3) The Transcon acquisition during 1994 was accounted for by the pooling
of interests method. Columns for 1993-1994 have been adjusted to include the
activities and assets of Transcon for those periods on a pooling basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note: Comparison to amounts discussed for 1996 and 1995 are based on restated
amounts due to prior period adjustments reported in Note 2 of the
Consolidated Financial Statements and in this management's discussion under
"Restatement of Prior Period Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
During the period 1995-1997, the Company has been able to generate cash
in amounts that were adequate to meet its cash needs. The ratio of current
assets to current liabilities represents the Company's liquidity. Current
assets were up when comparing 1997 to both 1996 and 1995. The primary
increases in current assets were in the categories discussed below, and in
inventory, which reflects raw materials inventory acquired in connection with
the Company's purchase of the Altair Ranch. Current liabilities were reduced
when comparing 1997 to 1995, but were up when comparing 1997 to 1996 because
of slightly higher accounts payable and a short-term bank note. The
liquidity ratio at December 31, 1997 was 7.34:1, compared with 8.31:1 at
December 31, 1996 and 2.95:1 at December 31, 1995.
Cash flows provided by operating activities for 1997 decreased when
comparing to 1996 primarily because of a significant ($198,930) increase in
receivables. Cash flows used in investing activities showed no material
change in the past three years. Cash flows provided by financing activities
for 1997 increased over 1996 and 1995. The increase was primarily due to the
sale of common stock through the Company's Dividend Reinvestment and Stock
Purchase Plan and to short term borrowings. In lieu of cash proceeds on a
portion of the sales price of the Amando facility, the Company received
$174,000 in non-cash improvements to the Altair property. The Company is to
receive $95,000 in additional non-cash improvements subsequent to December 31,
1997.
The Company's cash position was down when comparing December 31, 1997 to
December 31, 1996 because of the cash outlay for the purchase of the Altair
Ranch, and equipment for rental and oil reclamation operations which the
Company intends to conduct on or from the Altair. During 1996, the Company
provided collateral in the form of a certificate of deposit to enable
Southwest Tire Processors, Inc. to obtain bonding for a significant contract.
Bonding requirements expired during 1997, making these funds available once
again for operations.
It is important to note that the Company has no long-term bank debt and
its property and equipment are free from liens. However, the Company did
borrow $100,000 in May of 1997 which was repaid the following month, and
borrowed $76,000 in December of 1997 which was repaid in January of 1998.
These borrowings, under existing lines of credit, were made in order to meet
short-term cash flow requirements.
The Company's salt water disposal and oil field services business has one
customer upon which the Company is relatively reliant. This customer
accounted for approximately 57% of disposal service and rental revenues
during 1997. The customer's receivables balances at December 31, 1997 and
1996 were approximately 39% and 74% of the total of receivables then
outstanding ($741,380 and $447,450, respectively). The customer has
historically paid bills from two to six months after incurrence. A second
customer is responsible for 14% of the Company's revenues in 1997 and
represents 3% of the accounts receivable balances at December 31, 1997. The
Company has not experienced any significant inability to collect its
receivables in the past and believes that since the salt water produced from
oil and gas wells is required to be disposed of under existing regulations
and the limited number of disposal facilities that are available in its
service area provide assurance that its customers will continue to need the
Company's services and will continue to meet payment obligations as in the
past. Should the two significant customers refuse or be unable to do so,
however, the Company's earnings would be adversely affected.
Subject to the considerations discussed in the preceding paragraph, the
Company is not aware of any trends or demands that would be likely to reduce
its ability to generate cash sufficient to meet its needs in any material
way.
The Company has no commitments for capital expenditures as of December
31, 1997. GTII plans to continue its policy of acquiring property and
equipment primarily out of cash flows from operations as it has during the
past. However, the Company has established two lines of credit totaling
$275,000 for short term acquisition needs expiring in December 1998. The
Company has no plans to incur long term debt.
The total assets of the Company increased by $683,789 when comparing 1997
to 1996. This represents an approximate 11% increase in total assets during
the year. The increase is primarily attributable to the major land
acquisition of the Altair Ranch near Houston, Texas for $1,096,100, during
the second quarter. The categories of land, buildings, and inventory
increased because of this acquisition.
During 1997, the Amando disposal facility was sold to TransTexas Gas
Corporation for cash of $410,913 plus an arrangement whereby TransTexas would
make certain improvements to the Altair Ranch property. The Company
estimated the value of these services at a minimum of $269,000 which was
added to the cash in recognizing a total sales price of $679,913 for the
Amando facility. Of the $269,000, services valued at $174,000 were completed
prior to December 31, 1997, leaving $95,000 for the drilling of a disposal
well to be completed after that date. This amount is included in accounts
receivable-trade. The improvements completed on the Altair Ranch include
rebuilding of two office/storage facilities, clearing land, building new
gates, and providing water tanks and pumps. Additionally, in lieu of a
portion of the work planned for the Altair Ranch, TransTexas has reworked a
salt water disposal well at El Campo (Transcon Spanish Camp).
Believing that the location of the Altair Ranch offers opportunities for
expansion of business related to salt water disposal and oil field services,
the Company has spent approximately $300,000 acquiring bulldozers, trucks,
trailers and other pieces of heavy equipment to be utilized in its oil field
services and reclamation activities. The Company also spent $44,500 during
1997 to increase its existing interests in two producing Australian
properties, ATP 299 and ATP 267.
The Company has made no firm commitments to acquire additional assets.
However, as acquisition opportunities relating to its business segments
become available, management expects to make additional acquisitions. No
budget has been established for such acquisitions and the rate or dollar
amount of acquisitions which may occur are unpredictable. It is anticipated
that all acquisitions will be funded out of cash flows from operations.
However, the Company, as mentioned above, has established two lines of credit
totaling $275,000 that are available for temporary cash flows augmentation
whenever it becomes important to make acquisitions at particular times when
cash balances happen to be inadequate. Management has no plans or intention
to incur long term debt in order to finance such acquisitions.
During March 1998, the Company filed an S-3 Registration Statement to
issue warrants to existing stockholders to allow them to expand their
holdings through the purchase of additional shares of the Company's unissued
common stock. The warrants would allow stockholders to purchase 1 new share
of common for each four shares already held at 90% of the average stock price
for the five trading days before March 20, 1998. No estimate can be made as
to the amount of funds that this offering might bring in to the Company. It
is anticipated that most of the funds raised through this offering will be
utilized in further development of the resources available from the Altair
Ranch.
RESULTS OF OPERATIONS
Disposal and service revenues were down when comparing the year ended
December 31, 1997 ($1,844,332) to the same period in 1996 ($2,239,670), which
caused a reduction in total operating revenues. Disposal and service fees
increased by $449,806 in 1996 over 1995 amounts. Both the increase from 1995
to 1996 and the decrease from 1996 to 1997 were mainly due to the
acquisition and sale of the Amando facility in 1996 and 1997, respectively.
Operating revenues in 1997 were affected because of the loss of revenue in
the transition period between the sale of the Amando disposal facility in the
second quarter and start up of the new operations on the Altair Ranch. Now
that a large portion of the basic set up operations have been completed on
the Altair Ranch, GTII expects a favorable impact on revenues with increases
expected in each quarter of 1998, and with total operating revenues expected
to be higher for the year end December 31, 1998. Revenues are expected from
the following operations at Altair: proceeds of sales of reclaimed oil,
sales of sand and gravel, sales of fresh water for drilling operations and
frac jobs, rental income from land leases for lay-down yards where drilling
companies store equipment, and from trucking and equipment services
(equipment moving, vacuum services, oil transportation, pad construction and
leasing).
Oil and gas production revenues increased to $448,359 for the year ended
December 31, 1997, showing an increase of $137,138 over the year ended
December 31, 1996, and an increase of $237,539 over the year ended December
31, 1995. This significant increase is primarily due to royalty income
attributable to new wells being drilled on ATP 299 in Queensland, Australia,
in which GTII holds an ORRI. Production volumes for the last three years
have increased significantly. The Australian volume was up 70% and 155% in
1997 over 1996 and 1995. Fifteen new successful oil wells were drilled on
the ATP 299 concession in 1996 and thirteen more were added in 1997. In
addition to the increased oil sales, GTII also increased its interest in both
ATP 299 and ATP 267 during 1997. The Company expects revenues to continue to
increase as the operator of ATP 299 has announced an aggressive drilling
program for 1998.
Rental income has decreased from $593,818 in 1995 to $159,661 in 1997.
The decrease is due to the rental of the tire shredder being converted to an
investment in 1996 after recognizing rental income of $242,066. Rental
income in 1997 was generated from land leases and leasing of certain
equipment based at the Altair Ranch.
Costs of revenues as a percentage of revenue has increased from 26% of
operating revenues in 1995 to 39% in 1997. Australian marketing costs have
increased in cost from $67,755 in 1995 to $94,692 in 1996 and $142,112 in
1997. This increase is directly related to the increase in oil production
from the Australian producing properties during the past two years. Cost of
revenues in 1996 was 41% of operating revenues. The 1996 increase in direct
materials and supplies to $271,567 was partially due to increased costs for
revamping and upgrading certain equipment and facilities. Direct costs
decreased in 1997 to $166,182 as these costs did not recur. Depreciation,
depletion and amortization also increased by $131,499 to $406,625 in 1996 due
to increased oil and gas production and increases in equipment for the South
Texas operations. Depreciation, depletion, and amortization was comparable
between 1997 and 1996 with an increase of only $16,273.
Operating expenses have not changed materially when comparing the last
three years. These were $849,255, $804,989, and $811,389 in 1997, 1996, and
1995, respectively.
Net income increased to $438,784 in 1997 compared to $351,195 in 1996 and
decreased from $683,169 in 1995. Basic per share data reports $0.46 for
1997, $0.45 for 1996, and $0.62 for 1995.
RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company has determined that the carrying value of its US oil and gas
royalty properties exceeded their net realizable value. It was also
determined that this fact had not changed significantly during the years
ended December 31, 1997, 1996, and 1995. In order to correct the financial
statements to reflect this fact, the carrying value of these properties was
written down by $418,895 at December 31, 1994. This write-down was treated
as a prior period adjustment and was recorded as a reduction of the asset
balance, a $142,424 increase in deferred income tax assets, and a reduction
of retained earnings of $276,471. The effect of the write-down included an
adjustment of the Company's deferred income tax calculations. The effect of
the adjustment has resulted in restatement of each period as appropriate.
The write-down resulted in an income tax deduction in 1997 of $418,985, or an
income tax reduction of approximately $142,000 for income tax purposes.
During 1995, the Company purchased a tire shredding machine and leased it
to Southwest Tire Processors (SWTP), a tire disposal Company in New Mexico. In
October 1996, the equipment was transferred to SWTP in exchange for a 12.5%
equity interest in SWTP. This transaction was recorded as an exchange with the
investment in SWTP being recorded at the book value of the equipment given up.
At that time, it was believed that SWTP's significant contracts to dispose of
tires for various governmental entities which had expired during 1996 would be
renewed. Further, it was believed that the value of the Company's interest in
SWTP was at least the $391,739 recorded. During 1996, these contracts were
renewed at levels much lower than had been previously anticipated and SWTP has
not been able to meet the agreed upon payment schedule on indebtedness to the
Company related to the original equipment lease. As a result of these
factors, the Company has concluded that the value of its investment in SWTP
was impaired at December 31, 1996. In accordance with this conclusion, the
recorded amount has been written down to zero and the previously issued
financial statements for the year ended December 31, 1996 have been restated
to report this adjustment and the resulting impact on earnings and deferred
income taxes. Income tax effects of this adjustment will not be realized
until the interest in SWTP has been shown to be totally worthless or the
Company has disposed of its interest.
INCOME TAXES
The Company anticipates that it will continue to generate taxable income
sufficient to realize deferred tax assets, based on historical performance.
See Note 8 to Consolidated Financial Statements for disclosure of book vs.
tax differences.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income" which establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 establishes standards
for the way that public companies report information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the
public. It also establishes standards for disclosure regarding products and
services, geographic areas and major customers.
Both SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
they may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis. SFAS 132
is effective for years beginning after December 15, 1997, and requires
comparative information for earlier years to be restated, unless such
information is not readily available. The Company has no pensions or
postretirement benefits plans in place at this time. There is no impact on
the Company's financial statements due to the issuance of this statement.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking" statements within the meaning
of Section 27A of the Securities Act and the Company desires to take
advantage of the "safe harbor" provisions thereof. Therefore, the Company is
including this statement for the express purpose of availing itself of the
protections of such safe harbor provisions with respect to all of such
forward-looking statements. The forward-looking statements in this Form 10-K
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
from those anticipated. In the Form 10-K, the words "anticipates,"
"believes, "expects," "intends," "future" and similar expressions identify
forward-looking statements. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances
that may arise after the date hereof. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by this section.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems
to identify the systems that could be affected by the "Year 2000" issue. The
"Year 2000" problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company believes that all of its software and equipment
are "Year 2000" compliant and that this problem will have no affect on the
Company's internal operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statement information for Golden Triangle
Industries, Inc. and subsidiaries is set forth below.
- Report of Independent Certified Public Accountant
- Report of Independent Certified Public Accountant
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Changes in Stockholders' Equity
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
- Supplementary Data - Reserves of Oil and Gas
--------------------------------------------------------------
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Stockholders and Board of Directors
Golden Triangle Industries, Inc.
Albuquerque, New Mexico
We have audited the accompanying consolidated balance sheet of Golden
Triangle Industries, Inc. and subsidiaries as of December 31, 1997, and the
related consolidated statement of income, stockholders' equity, and cash
flows for the year 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden
Triangle Industries, Inc. and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Denver, Colorado
February 18, 1998
- -----------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
Golden Triangle Industries, Inc.
Albuquerque, New Mexico
We have audited the accompanying consolidated balance sheet of Golden
Triangle Industries, Inc. and Subsidiaries as of December 31, 1996, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years ended December 31, 1996 and 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Golden Triangle Industries,
Inc. and Subsidiaries at December 31, 1996, and the results of its
operations and its cash flows for each of the years ended December 31, 1996
and 1995 in conformity with generally accepted accounting principles.
/s/ ROBERT EARLY & COMPANY, P.C.
Robert Early & Company, P.C.
Abilene, Texas
March 16, 1997
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
GOLDEN TRIANGLE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31
<S> <C> <C>
1997 1996
ASSETS RESTATED
CURRENT ASSETS
Cash $ 95,648 $ 298,521
Accounts receivable - trade 741,380 447,450
Accounts receivable - related parties 20,000 95,663
Accounts and notes receivable - other 87,805 70,127
Inventories 199,627 -
Investments - available for sale 83,579 43,756
Prepaid expenses and other 24,969 -
---------- ----------
Total Current Assets 1,253,008 955,517
PROPERTY AND EQUIPMENT
Oil and gas properties (full cost method)
Proven 2,017,602 1,966,045
Unproven 414,628 408,643
Equipment and vehicles 2,600,031 2,388,179
Office furniture and equipment 78,758 59,531
Well leasehold and water rights 200,000 200,000
Buildings 312,606 -
Land 1,021,695 525,450
Accumulated depreciation, depletion
and amortization (1,664,197) (1,312,245)
---------- ----------
Net Property and Equipment 4,981,123 4,235,603
OTHER ASSETS
Restricted cash - 100,954
Other investments - 26,191
Accounts and notes receivable - non-current 275,129 396,751
Advances to related parties - non-current 79,091 -
Deferred income taxes 184,000 371,000
Other 24,501 27,047
---------- ----------
Total Other Assets 562,721 921,943
---------- ----------
TOTAL ASSETS $6,796,852 $6,113,063
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 76,586 $ 46,665
Accrued expenses 18,146 68,387
Line of credit 76,000 -
---------- ----------
Total Current Liabilities 170,732 115,052
STOCKHOLDERS' EQUITY
Preferred, $0.10 par (1,000,000 authorized)
Class A (3,371 shares outstanding) 337 337
Class B (53,903 shares outstanding) 5,390 5,390
Common, $.001 par (100,000,000 authorized
580,398 and 545,772 shares outstanding) 580 546
Stock to be issued (2,571 shares) - 11,250
Paid-in capital 7,350,571 6,982,197
Unrealized gain/(loss) on securities
held for sale (31,437) (48,218)
Accumulated deficit (699,321) (953,491)
---------- ----------
Net Stockholders' Equity 6,626,120 5,998,011
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,796,852 $6,113,063
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
GOLDEN TRIANGLE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
<S> <C> <C> <C>
1997 1996 1995
RESTATED RESTATED
OPERATING REVENUES
Disposal and service revenues $1,844,332 $2,239,670 $1,789,864
Oil and gas production 448,359 311,221 210,820
Rental income 159,661 242,066 593,818
Other income 26,582 7,715 1,657
Gain/(loss) on sale of assets 2,781 (311,377) 80,045
---------- ---------- ----------
Total Operating Revenues 2,481,715 2,489,295 2,676,204
COSTS OF REVENUES
Australian marketing costs 142,112 94,692 67,755
Production expenses and taxes 13,185 10,855 10,238
Contract services 47,902 50,926 68,498
Direct materials and supplies 166,182 271,567 167,305
Lease cost 123,698 134,378 80,738
Utilities 48,127 61,010 52,170
Depreciation, depletion & amortization 422,898 406,625 275,126
---------- ---------- ----------
Total Costs of Revenues 964,104 1,030,053 721,830
---------- ---------- ----------
GROSS PROFIT 1,517,611 1,459,242 1,954,374
OPERATING EXPENSES
Personnel costs 267,155 243,676 288,112
Directors' fees 9,034 6,750 5,000
Professional fees 64,441 69,218 68,366
Advertising and promotion 107,955 158,341 130,798
Stockholder relations 38,114 20,798 29,358
Repairs and maintenance 131,738 82,149 87,349
Rent 18,821 22,219 22,375
Taxes 50,581 39,307 27,361
Other expenses 161,416 162,531 152,670
---------- ---------- ----------
Total Operating Expenses 849,255 804,989 811,389
---------- ---------- ----------
INCOME FROM OPERATIONS 668,356 654,253 1,142,985
OTHER INCOME/(EXPENSES)
Interest and dividend income 49,212 6,410 1,823
Equity in income of investees - - (12,077)
Gain/(loss) on sale of securities 13,883 7,297 (199)
Stock transfer fees 7,965 5,314 21,095
Interest expense (518) (40,755) (14,598)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 738,898 632,519 1,139,029
Australian income taxes (70,896) (41,022) (20,200)
Current income tax expense (42,218) (57,302) (44,660)
Deferred income tax expense (187,000) (183,000) (391,000)
---------- ---------- ----------
NET INCOME $ 438,784 $ 351,195 $ 683,169
========== ========== ==========
Basic Earnings per Common Share $ 0.46 $ 0.45 $ 0.62
Diluted Earnings per Common Share 0.46 0.44 0.62
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
GOLDEN TRIANGLE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Stock Additional Marketable
Class A Class B Common Stock Sub- Paid In Securities Accumulated
Shares Amount Shares Amount Shares Amount scribed Capital Valuation (Deficit)
RESTATED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 - $ - - $ - 1,102,914 $1,102 $ - $6,910,948 $ - $(2,065,307)
Prior period adjustment-error
in overstatement of value of
oil and gas royalty property - - - - - - - - - 34,987
----- ------ ------ ------- --------- ------ -------- ---------- -------- -----------
Balances at January 1, 1995,
as restated - - - - 1,102,914 1,102 - 6,910,948 - (2,030,320)
Due to related parties:
Disposal site & equipment - - - - - - 175,321 - - -
50% of Jim Wells SWD, Inc. - - - - - - 20,000 - - -
Repurchased for cash - - - - (4,964) (5) - (53,615) - -
Other retirements - - - - (2,665) (2) - (3,184) - -
Marketable securities val-
uation allowance -adoption
of SFAS 115 - - - - - - - - (42,465) 42,465
Change in marketable securi-
ties valuation allowance - - - - - - - - (5,015) -
Net income for the year and
other - - - - - - 15,000 - 683,169
----- ------ ------ ------- --------- ------ -------- ---------- -------- -----------
Balances at Dec. 31, 1995 - - - - 1,095,285 1,095 195,321 6,869,149 (47,480) (1,304,686)
Issued for subscriptions - - - - 30,457 30 (184,071) 184,041 - -
Conversion of common to
preferred 3,371 337 53,903 5,390 (571,917) (572) - (5,153) - -
Repurchased for cash - - - - (8,786) (9) - (80,123) - -
Issued for services - - - - 429 1 - 4,496 - -
Other - - - - 1,024 1 - 9,787 - -
Change in marketable securi-
ties valuation allowance - - - - - - - - (738) -
Net income for the year - - - - - - - - - 351,195
----- ------ ------ ------- --------- ------ -------- ---------- -------- -----------
Balances at Dec. 31, 1996 3,371 337 53,903 5,390 546,492 546 11,250 6,982,197 (48,218) (953,491)
Repurchased for cash - - - - (14,871) (15) - (126,476) - -
Issued under Dividend
Reinvestment & Stock
Purchase Plan - - - - 25,843 25 - 303,060 - -
Issued for property - - - - 3,398 3 - 30,103 - -
Issued for directors' fees - - - - 286 1 - 2,533 - -
Issued as promotional effort - - - - 491 1 - 4,502 - -
Issued for subscriptions - - - - 2,571 3 (11,250) 11,247 - -
Issued as stock dividends
on Preferred stock - - - - 16,188 16 - 143,405 - (143,421)
Preferred stock dividends - - - - - - - - - (41,193)
Change in marketable securi-
ties valuation allowance - - - - - - - - 16,781 -
Net income for the year - - - - - - - - - 438,784
----- ------ ------ ------- --------- ------- -------- ---------- -------- -----------
Balances at Dec. 31, 1997 3,371 $ 337 53,903 $ 5,390 580,398 $ 580 - $7,350,571 $(31,437) $ (699,321)
===== ====== ====== ======= ========= ====== ======== ========== ======== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
GOLDEN TRIANGLE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
Year Ended December 31
<S> <C> <C> <C>
1997 1996 1995
RESTATED RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 438,784 $ 351,195 $ 683,169
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization 422,898 456,625 325,126
(Gain)/loss on sales of assets (22,545) 304,080 (79,846)
Directors' fees in stock 2,534 4,501 -
Equity in income of investees - - 12,076
Deferred income taxes 187,000 183,000 391,000
(Increase)/decrease in:
Accounts receivable (198,930) 124,870 (205,951)
Inventories 373 - 13,422
Prepaid expenses and other (42,647) 11,150 -
Restricted cash 100,954 (100,374) 4,576
Increase/(decrease) in:
Trade accounts payable 29,921 (54,429) 74,360
Accrued expenses (50,241) 24,404 22,309
Amounts due to related parties - (2,666) (109,994)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 868,101 1,302,356 1,130,247
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,644,154) (1,073,131) (1,294,895)
Purchase of inventory on Altair Ranch (200,000) - -
Purchase of marketable securities (56,971) (54,347) -
Loan payments received 87,389 5,596 223
Cash from purchase of Jim Wells - - 658
Investment in affiliates - (6,250) (5,000)
Proceeds from sale of securities 62,753 - -
Proceeds from sale of assets 467,534 136,277 40,850
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,283,449) (991,855) (1,258,164)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuing common stock 303,085 - -
Other - - 15,000
Purchase of outstanding shares (121,989) (70,343) (48,780)
Dividends on preferred shares (41,193) - -
Advances from/(to) related parties (101,428) 441,000 181,000
Repayments from/(to) related parties 98,000 (443,970) (181,000)
Proceeds from notes payable 176,000 - 24,922
Repayment of notes payable (100,000) (24,922) (13,205)
--------- --------- ---------
NET CASH PROVIDED/(USED) BY
FINANCING ACTIVITIES 212,475 (98,235) (22,063)
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH (202,873) 212,266 (149,980)
CASH - BEGINNING OF YEAR 298,521 86,255 236,235
--------- --------- ---------
CASH - END OF YEAR $ 95,648 $ 298,521 $ 86,255
========= ========= =========
Supplemental Disclosures - Non-Cash
Investing and Financing
Cash payments for:
Interest $ 518 $ 40,755 $ 14,598
Income taxes (US, Australian,
and state) 92,229 91,857 50,140
Stock issued to related party for
50% interest in Zapata office facility 30,106 - -
Exchange of account receivable for note - 275,223 -
Services and materials exchanged for
investment - 14,941 -
Stock to be issued for:
Property and equipment - - 175,321
Acquisition of subsidiary - - 20,000
Services provided as proceeds on
sale of Amando facility 269,000 - -
Dividends paid with common stock 143,421 - -
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
GOLDEN TRIANGLE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
GENERAL INFORMATION
Golden Triangle Industries, Inc. and its subsidiaries are engaged in the
businesses of disposing of oil field salt water and ownership of passive
(primarily royalty) interests in oil and gas production. The principal
business is salt water disposal. Salt water is produced along with oil and
gas and is required to be re-injected back into underground formations or
otherwise disposed of as a regulated waste product. The Company had six
disposal facilities in operation at the end of 1997. The disposal business
is generally located in an area south of Laredo, Texas. During 1997, the
Company acquired land near Houston, Texas and is developing additional
business opportunities associated with that property.
The passive oil and gas interests consist of U.S. and Australian properties.
Australia provided approximately 82% of gross oil and gas revenues during
1997. The bulk of the oil and gas asset base is located in Australia.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and to general practices within the oil and
gas industry for that portion of its business. Policies and practices which
materially affect the determination of financial condition, changes in
financial position, and results of operations are summarized as follows:
Principles of Consolidation. The consolidated financial statements
include the accounts of Golden Triangle Industries, Inc. and its
subsidiaries. All significant intercompany balances and transactions have
been eliminated. The Company's subsidiaries at December 31, 1997 are Golden
Triangle Coal & Mining, Inc., Golden Triangle Oil & Minerals, Inc. of
Australia, Houston Oil & Energy, Inc., OCR Investments, Inc. (OCR), Transcon
Energy Corporation (Transcon), Jim Wells Salt Water Disposal, Inc. (Jim
Wells), County Line Salt Water Disposal Inc., and Apache Ranch, Inc. (wholly
owned by Transcon). Golden Triangle Coal & Mining, Inc. and Golden Triangle
Oil & Minerals, Inc. of Australia are inactive. For purposes of these notes,
these entities are collectively referred to as "the Company" or "GTII".
Investment in Affiliates. Investments in affiliates in which the
Company has an ownership interest of 20% to 50%, or otherwise exercises
significant influence, are carried at cost, adjusted for the Company's
proportionate share of the subsidiary's undistributed earnings and losses.
Oil Seeps, Inc. (20%) was the only investment of this type at December 31,
1996. There were no investments in subsidiaries in which the Company owned
an equity interest between 20% and 50% at December 31, 1997.
Investments in which the Company owns an equity interest of less than 20% are
normally carried at cost. The Company's 12.5% investment in Southwest Tire
Processors, Inc. (SWTP) is carried at a zero basis at December 31, 1997 and
1996 because the fair value for the investment is not believed to be
reasonably determinable.
Investment Securities. Securities are classified as available for sale
or trading. Available for sale and trading securities are reported at fair
value with unrealized gains and losses, net of related deferred income taxes,
included in shareholders' equity or income, respectively. Realized
securities gains or losses are reported in the Consolidated Statement of
Income. The cost of securities sold is based on the specific identification
method.
Inventories. Inventories are stated at the lower of cost determined on a
first in/first out (FIFO) basis or market. The Company's inventory at
December 31, 1997 consisted of stockpiled sand and gravel and a small
inventory of reclaimed oil in tanks at the reclamation plant. These products
are both considered to be raw materials and are carried at cost.
Property and Equipment. The Company follows the full cost method of
accounting for oil and gas producing activities and, accordingly, capitalizes
all costs incurred in the acquisition, exploration, and development of proved
oil and gas properties, including the costs of abandoned properties, dry
holes, geophysical costs, and annual rentals. Costs are recorded in cost
centers on a country-by-country basis. In general, sales or other
dispositions of oil and gas properties are accounted for as adjustments to
capitalized costs, with no gain or loss recorded.
Depletion and amortization of working interests in each cost center is
computed on a composite unit-of-production method based on estimated proved
reserves attributable to the respective cost center. Depletion of royalty
interests and overriding royalty interests is calculated as 22% of gross
revenue. All costs associated with oil and gas properties are currently
included in the base for computation and amortization. Such costs include
all acquisition, exploration and development costs.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets. Useful lives are 10 years for tanks and ramps, 7
years for equipment, and 5 years for electronic equipment. Depreciation
totaled $320,834 and $291,347 for 1997 and 1996, respectively.
Gains or losses on sales of property and equipment other than oil and gas
properties are recognized as part of operations. Expenditures for renewals
and improvements are capitalized, while expenditures for maintenance and
repairs are charged to operations as incurred.
Intangible Assets and Amortization. Intangible assets consist of
disposal well leasehold, goodwill, and water rights. Goodwill and water
rights are being amortized on a 10 year straight line basis. Well leasehold
is being amortized on a 15 year straight line basis. The amortization
expense for these items is included with depreciation and depletion for
presentation purposes.
Income Taxes. The Company accounts for income taxes in accordance with
SFAS 109, "Accounting for Income Taxes" which requires the use of the
"liability method." Accordingly, deferred tax liabilities and assets are
determined based on the temporary differences between the financial statement
and tax bases of assets and liabilities, using enacted tax rates in effect
for the year in which the differences are expected to reverse. The Company
files a consolidated Federal income tax return. Currently Texas does not
accept consolidated reporting and the Company has elected to file separate
returns in New Mexico only for the entities required to file there. As such,
each entity may incur state tax liabilities based on its separate income or
capital structure. Investment tax credits are accounted for by the
flow-through method under which benefits are recognized in the year taxes are
actually reduced. Foreign income taxes are deducted as an expense when
incurred.
Earnings Per Share. Through December 31, 1996, the Company followed the
provisions of Accounting Principles Board Opinion (APB) No. 15, "Earnings Per
Share." Effective for the year ended December 31, 1997, the Company
implemented SFAS No. 128, "Earnings Per Share". SFAS 128 provides for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar
to fully diluted earnings per share. Earnings per share in prior periods have
been restated for the adoption of SFAS 128 and the restatement of the
financial statements as discussed in Note 2.
For the year ended December 31, 1997, 33,311 dilutive common share
equivalents were not included in the computation of diluted income per share
because their effect was determined to be anti-dilutive.
Cash Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents for
purposes of preparing its Statement of Cash Flows.
Cash Balances. The Company maintains multiple bank accounts at several
banks through the various consolidated entities. Funds deposited at the
banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000 for each unique combination of entity and bank. Cash balances
exceeded federally insured limits occasionally throughout the year.
Restricted Cash. During 1996, the Company provided collateral in the
form of a Certificate of Deposit in order for Southwest Tire Processors, Inc.
to obtain bonding for a significant tire shredding contract. Accordingly,
these funds were unavailable for operations until bonding requirements
expired in 1997.
Financial Instruments. Unless otherwise specified, the Company believes
the book value of the financial instruments approximates their fair value.
Environmental Issues. The Company's salt water disposal business is in a
regulated environmental industry and is operated under permits from the Texas
Railroad Commission and the Texas Natural Resource Conservation Commission.
Failure to comply with regulations could result in interruption or
termination of the operations. There are minor clean-up requirements in the
normal course of operations which are expensed as incurred. Additionally,
upon cessation of use, the disposal wells will require plugging and site
cleanup. Costs of voluntary termination and remediation have been estimated
to not be material and are expected to be recorded as incurred. There were
no clean-up costs accruals necessary at December 31, 1997.
Long-term Assets. The Company applies SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets". Under SFAS 121, long lived assets and
certain intangibles are reported at the lower of the carrying amount or their
estimated recoverable amounts.
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosure regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a Company
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Both SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
they may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis. SFAS 132 is
effective for years beginning after December 15, 1997, and requires
comparative information for earlier years to be restated, unless such
information is not readily available. The Company has no pensions or
postretirement benefit plans in place at this time. There is no impact on
the Company's financial statements related to the issuance of this statement.
Advertising Costs. All advertising costs are expensed as incurred.
Stock Transfer Fees. During 1993, the Company elected to be its own
stock transfer agent. During 1996, the Company hired an outside transfer
agent to administer its Dividend Reinvestment and Stock Purchase Plan
(discussed at Note 12). During 1997, the Company assumed the responsibility
of being its own transfer agent again. Fees earned while the Company serves
as its own transfer agent are shown as other income. Fees earned otherwise
have been offset against direct costs.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications. Certain items included in prior years financial
statements have been reclassified to conform to current year presentation.
NOTE 2: RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company has determined that the carrying value of its US oil and gas
royalty properties exceeded their net realizable value. It was also
determined that this fact had not changed significantly during the years
ended December 31, 1997, 1996, and 1995. In order to correct the financial
statements to reflect this fact, the carrying value of these properties was
written down by $418,895 at December 31, 1994. This write-down was treated
as a prior period adjustment and was recorded as a reduction of the asset
balance, a $142,424 increase in deferred income tax assets, and a reduction
of retained earnings of $276,471. The effect of the write-down included an
adjustment of the Company's deferred income tax calculations. The net effect
of the adjustment has resulted in restatement of each period as appropriate.
The write-down resulted in an income tax deduction in 1997 of $418,985, or an
income tax reduction of approximately $142,000 for income tax purposes.
During 1995, the Company purchased a tire shredding machine and leased it to
Southwest Tire Processors (SWTP), a tire disposal Company in New Mexico. In
October 1996, the equipment was transferred to SWTP in exchange for a 12.5%
equity interest in SWTP. This transaction was recorded as an exchange with
the investment in SWTP being recorded at the book value of the equipment given
up. At that time, it was believed that SWTP's significant contracts to dispose
of tires for various governmental entities which had expired during 1996 would
be renewed. Further, it was believed that the value of the Company's interest
in SWTP was at least the $391,739 recorded. During 1996, these contracts were
renewed at levels much lower than had been previously anticipated and SWTP has
not been able to meet agreed upon payment schedule on indebtedness to the
Company related to the original equipment lease. As a result of these
factors, the Company has concluded that the value of its investment in SWTP
was impaired at December 31, 1996. In accordance with this conclusion, the
recorded amount has been written down to zero and the previously issued
financial statements for the year ended December 31, 1996 have been restated
to report this adjustment and the resulting impact on earnings and deferred
income taxes. Income tax effects of this adjustment will not be realized
until the interest in SWTP has been shown to be totally worthless or the
Company has disposed of its interest. This 1996 adjustment totaled $391,739
less its related deferred tax benefit of approximately $133,200 yielded a net
income reduction of $258,539.
NOTE 3: ACQUISITION OF SUBSIDIARIES AND EQUITY METHOD INVESTEES
Oil Seeps, Inc. obtained a new authorization to prospect in Queensland,
Australia during 1995. The Company invested $5,000 for a 20% ownership
interest in this venture when it was applying for the prospect. During 1996,
the Company contributed $6,250 for its share of costs required to retain the
prospect. During 1997, the Company sold its investment in Oil Seeps, Inc.
for $22,481 but retained a 1% ORRI in underlying prospect, ATP 615.
During 1996, the Company acquired County Line SWD, Inc., a shell corporation
with existing salt water disposal permits in Texas, from officers of the
Company for $1. Certain disposal facilities were then transferred to this
entity as part of a restructuring of consolidated assets.
The Company had no acquisitions during the year ended December 31, 1997.
NOTE 4: ACCOUNTS AND NOTES RECEIVABLE
At December 31, 1997 and 1996, the Company has accrued receivables for oil
and gas production and receivables for salt water disposal and other services
as presented below. Collection of the accrued Australian production
generally occurs during the quarter following the quarter of production.
Collection of accrued domestic production generally occurs during the month
following production. The cost basis of the following receivables are
believed to approximate their fair values.
1997 1996
Salt water disposal $514,718 $417,655
Domestic oil and gas production 4,369 6,735
Australian oil production 35,391 23,060
Oil reclamation sales 25,432 -
Leasing 161,470 -
-------- ---------
Totals $741,380 $ 447,450
======== =========
The salt water disposal and oil field services businesses include two
customers that accounted for more that 10% of sales during 1997 and
receivables at December 31. These customers are TransTexas Gas and Med Loz
Trucking. TransTexas' receivable balances were approximately 39% and 74%,
while Med Loz's balances represented approximately 8% and 3% of accounts
receivable balances at December 31, 1997 and 1996. No allowances for bad
debts have been established because the Company has not experienced any
significant inability to collect its receivables.
The sale of two 40 acre tracts of the ranch land in 1995 and one 80 acre
tract in 1996 resulted in notes receivable secured by warranty deeds to the
tracts. The Company foreclosed on the note for one of the 40 acre tracts
during 1997. The remaining 1995 note bears interest at 10% per annum, is
payable in monthly installments of $500 including interest, and is due to pay
off in July 2009. The 1996 note bears interest at 8.6% per annum, requires
quarterly installments of approximately $2,000 including interest, and is due
to pay off in July 2017. These land note balances total $113,149 and
$159,134 at December 31, 1997 and 1996, respectively.
In October 1996, the Company converted an account receivable from SWTP for
unpaid rent on the tire shredder to a note. This note bears interest at 1%
per month and calls for monthly payments of $3,000 plus interest. This note
is secured by a lien against the tire shredder. SWTP has not made all of the
payments required under this note during 1997. The Company has agreed to a
reduction in the monthly payment and has, essentially, removed the due date
for the maturity of the note.
NOTE 5: INVESTMENTS AND OTHER INVESTMENTS
The following table illustrates the current values, costs and unrealized
gains and losses for the securities held. Note 3 includes a discussion of
investments in subsidiaries.
December 31, 1997 December 31, 1996
Market Unrealized Market Unrealized
Cost Value Loss Cost Value Loss
Marketable equity
securities held
for sale $131,212 $83,579 $(47,633) $108,169 $43,756 $(64,413)
The following is information regarding trading activity in securities. Cost
is determined by actual cost on a first-in first-out basis.
Proceeds Gains
from Sales and (Losses)
1997 $ 26,426 $ 5,957
1996 299 (40)
1995 505 (199)
In addition to equity securities, the Company traded a limited number of
futures contracts during the last quarter of 1996 and the first quarter of
1997. Net earnings totaled $7,927 and $7,338 during 1997 and 1996. At
December 31, 1996, $22,538 was invested in such contracts. The Company did
not hold any commodity investments at December 31, 1997. Other Investments
consisted of a 20% ownership in Oil Seeps, Inc., a 12.5% interest in SWTP.,
and a 7% interest in Signature Motorcars, Inc. at December 31, 1996. There
is no amount for Other investments at December 31, 1997, due to the
reclassification of Signature Motor Cars, the sale of the Oil Seeps
investment, and the write-down of the value of SWTP discussed at Note 2.
NOTE 6: OIL AND GAS PROPERTIES NOT SUBJECT TO AMORTIZATION
The Company has historically acquired Australian overriding royalties as
availability and negotiations provide opportunity. In addition, two working
interests have been acquired. However, the Company is not in a position to
control development activities in these areas. Australian concessions
require that minimum prospecting expenditures be incurred during their four
year term. No estimate can be made as to when development may begin on the
non-producing properties. Some concessions from prior years have not been
developed and are not producing revenues.
Royalty costs are amortized using the percentage method of depletion under
which depletion has been recorded at 22% of gross revenue. Since the costs
described above, as well as some U.S. properties, have not been developed,
they are being amortized only to the extent producing properties have been
depleted below cost. These costs excluded from amortization totaled $414,628
and $408,643 at December 31, 1997 and 1996.
NOTE 7: AMORTIZATION OF OIL AND GAS PROPERTIES
The following presents the amortization (depletion) charged against income on
a per unit basis. Working interests were amortized based on equivalent
barrels of oil produced while royalty depletion, as discussed above, is
calculated as a percentage of gross revenue.
1997 1996 1995
United States
Working interests ($/bbl.) $15.53 $ 6.89 $ 8.04
Royalty interests ($/$ revenue) .22 .22 .22
Australian royalties ($/$ revenue) .22 .22 .22
NOTE 8: INCOME TAXES
The provisions for income taxes expense are as follows:
1997 1996 1995
Current
Australian $ 70,896 $ 41,022 $ 20,200
Federal 31,270 14,856 14,080
State 10,948 42,446 30,580
-------- -------- --------
113,114 98,324 64,860
Deferred
Federal 172,000 168,000 360,000
State 15,000 15,000 31,000
-------- -------- --------
187,000 183,000 391,000
-------- -------- --------
$300,114 $281,324 $455,860
======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
liabilities and deferred tax assets are as follows:
1997 1996
Assets Liabilities Assets Liabilities
Depreciation, depletion
and amortization $ 47,000 $ - $237,000 $ -
Unrealized gains and
losses on marketable
securities 16,000 - 22,000 -
Equity investments 120,000 - 110,000 -
Installment sale
receivable - (17,000) - (29,000)
Other 34,000 - 53,000 -
-------- -------- -------- --------
Totals $217,000 $(17,000) $422,000 $(29,000)
======== ======== ======== ========
Australian income taxes are based on 30% of distributable income from oil
production and 10% of interest earned. These taxes are withheld by the
Australian payer. For U.S. tax purposes, the Company has the option of
deducting these foreign taxes or taking them as a credit, whichever provides
the Company with the most benefit.
The following table presents the significant differences between federal
income taxes based on book income before taxes and the Company's estimated
federal income tax expense.
1997 1996 1995
Federal income taxes computed at
statutory rate $251,226 $215,057 $387,270
Foreign taxes, net of federal benefit 46,791 27,075 13,332
State taxes, net of federal benefit 7,226 28,014 20,183
Other (5,125) 11,178 35,075
-------- -------- --------
Taxes on income $300,114 $281,324 $455,860
======== ======== ========
NOTE 9: LEASES
Lease cost for the Company's offices totaled $12,343, $14,400 and $16,150 for
1997, 1996 and 1995. These lease arrangements, essentially all with related
parties, do not require minimum lease payments or have fixed terms. Most of
these costs were paid to related parties. The Company also leased a vehicle
from a related party for $6,478 and $7,819 during 1997 and 1996.
There are two noncancellable leases which exist for salt water disposal
facilities. These have required payments of $24,000 in 1998 and $12,000 in
1999. Each of these leases has options for additional terms, which if
exercised would expand the amounts reportable as noncancellable commitments.
NOTE 10: PROPERTY AND EQUIPMENT ADDITIONS AND DISPOSITIONS
During 1996, the significant property and equipment additions consisted of
the acquisition of the Amando disposal facility in May at $750,000,
construction of a fresh water sales plant, and significant repairs and
disposal well maintenance activities. In June 1997, the Amando facility was
exchanged for cash and improvements to the Altair Ranch property discussed
below.
During 1996, the Company transferred its tire shredder to SWTP in exchange
for a 12.5% equity interest, as discussed at Note 2.
During June 1997, the Company purchased the Altair Ranch, which consists of
2,738 acres of land near Houston, Texas. This land contained an existing
inventory of sand and gravel, some buildings, and other facilities. As part
of the agreement to sell the Amando facility, the purchaser agreed to make
significant repairs to the buildings on the Altair among other services. This
entity also entered into an arrangement to lease certain acreage and other
assets on the Altair. This land had a purchase price of $1,096,100.
Improvements made to the property in conjunction with the Amando agreement
totaled $174,000. In addition to existing facilities on this property, the
Company has established an oil reclamation plant and has acquired various
pieces of heavy equipment (based at the Altair) which it leases for work in
the oil field.
The Company has granted 5% of the assets included in the Altair Ranch
purchase to individuals in return for services provided in connection with
the purchase. These interests are convertible into cash upon demand by the
individuals for established amounts totaling $43,900.
NOTE 11: TRANSACTIONS WITH RELATED PARTIES
During 1994, the Company loaned $65,000 to officers and directors. At
present, only limited payments have been made on this loan. However,
management believes this loan is valid and collectible.
Due to the significant demands for cash required to purchase the Amando
facility, officers and directors of the Company made short-term loans to the
Company totaling $441,000 during 1996. These loans were repaid, with
interest, before the end of the year of borrowing.
During 1995, the Company transferred certain small volume working and royalty
interests to a related party in exchange for a reduction in future
compensation of $21,600. This receivable is being amortized to contract
services as the services are rendered. The Company retained an option to
repurchase any of these interests within a three year period should it desire
to do so.
The Company leases its office facilities from its president and leased a
vehicle from another related party as discussed at Note 9.
During 1997, the Company loaned $98,000 to officers and directors of the
Company to finance their purchase of shares of Class B Preferred stock from
two stockholders of the Company. These loans carried interest rates of 2%
per month and were repaid, with interest, during the year.
During 1997, the Company had revenues from oil field services performed for
an affiliated entity, J Moss Investments, Inc. of $82,344 and sold it a
bulldozer for $34,140. The Company also paid this entity to dispose of
certain hazardous materials which had accumulated at disposal sites a total
cost of $40,010. The Company's President owns 40% of J Moss and the
remainder is owned by individuals who were previously significant
stockholders and directors of the Company. It does not compete directly with
any of the Company's operations.
NOTE 12: STOCK TRANSACTIONS
During 1997, stockholders authorized a 1 share for 3.5 shares reverse stock
split. All references to common stock and per share amounts in the
accompanying financial statements have been retroactively restated to reflect
the effect of the reverse split.
In August, 1996, the Company made an offer to exchange preferred shares for
common shares on a one for ten basis. The preferred shares offered consisted
of Class A preferred and Class B preferred. Common shares totaling 2,001,710
were exchanged for 11,586 Class A shares and 188,585 Class B shares. (These
share amounts have not been adjusted for the effect of the 1 for 3.5 reverse
split in 1997.)
Both classes of preferred stock retain the same number of voting rights as
the number of common shares given up (10 votes per preferred share). The
Class A shares are entitled to a $.30 per share cash dividend to be paid on
an annual basis. They are also convertible back into common shares after the
earlier of 38 months or the Company's gross revenues being in excess of $5
million. The Class B shares are entitled to a $.20 per share cash dividend
to be paid on an annual basis. In addition, a 30% common stock dividend
(i.e. 3 common shares per 10 shares of Class B preferred) is to be paid in
the first year after issuance and 40% in the second year. After the second
year, the stock dividend will increase or remain flat based on the increase
in gross revenues of the Company using 1995 as the base year. Class B shares
are not convertible back to common shares. Dividends on both classes of
preferred stock are non-cumulative.
During June 1996, the Company adopted a Dividend Reinvestment and Stock
Purchase Plan. Under this plan existing stockholders are given the
opportunity to use dividends or cash payments to purchase the Company's stock
through the transfer agent. The minimum investment is $25 per month and the
maximum investment is $5,000 per month. The Company filed a registration
statement for 1,000,000 shares and has the option of issuing new shares or
acquiring shares in the open market to fill purchases under the plan. The
Company did not issue any new shares during 1996. In 1997, the Company
issued 25,843 shares for total proceeds of $303,085. At December 31, 1997
and 1996, 958,232 and 1,000,000 shares of common stock were reserved for
potential issuance under this plan.
In December 1997, the Company acquired 50% of a house in Zapata, Texas from a
former director of the Company. This house functions as the business office
in Zapata. This was acquired for 3,398 shares of stock. The other 50% of the
house belongs to the Company's President.
During 1997, the Company issued stock dividends of 16,188 shares of common
stock to holders of Preferred B shares.
The Company has retired its treasury stock as a result of a change in the
Colorado Business Corporation Act.
NOTE 13: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per common share (EPS) for the years ended December 31, 1997, 1996, and 1995.
1997 1996 1995
Numerator:
Net income $438,784 $351,195 $683,169
Less preferred stock dividends (184,614) - (2) - (2)
-------- -------- --------
Numerator for basic EPS 254,170 351,195 683,169
Effect of dilutive sec.
preferred stock dividends - (1) - -
-------- -------- --------
Numerator for diluted EPS $254,170 $351,195 $683,169
======== ======== ========
Denominator:
Basic weighted average shares
outstanding 552,896 779,694 1,107,788
Convertible preferred shares - (1) 13,796 -
-------- -------- ---------
Denominator for diluted EPS 552,896 793,490 1,107,788
======== ======== =========
Basic EPS $0.46 $0.45 $0.62
Diluted EPS $0.46 $0.44 $0.62
(1) The equivalent common shares of convertible preferred stock of 33,311
were not included in the computation of the denominator for diluted earnings
per share due to their being found to be anti-dilutive. (2) No dividends were
paid in these periods.
NOTE 14: SHORT-TERM BORROWINGS
Short-term borrowings had the following outstanding balances at December 31:
1997 1996
Bank line of credit, interest payable monthly
at the Bank of New Mexico, Chase Manhattan prime
plus 2%, currently 10.5%, secured by accounts
receivable. Maturity is December 25, 1998.
Maximum amount $250,000 $ 76,000 $ -
Bank line of credit, interest payable monthly
at the Bank of America, bank prime plus 2%,
currently 10.5%, secured by accounts
receivable. Maturity is December 1, 1998.
Maximum amount $25,000 - -
During May and June 1997, the Company borrowed and repaid $100,000 under the
Bank of New Mexico line of credit. The balance at December 31, 1997 was
repaid on January 9, 1998.
NOTE 15: SEGMENT AND INTERNATIONAL INFORMATION
Business Segments:
The information regarding the Company's operations in the oil an gas industry
segment are presented in the Supplementary Data - Reserves of Oil and Gas.
1997 1996 1995
Revenues:
Oil field services $1,844,332 $2,239,670 $1,789,864
Other operations 186,243 249,781 595,475
Operating profit:
Oil field services $ 381,482 $ 635,831 $ 422,152
Other operations 144,869 197,368 551,327
Identifiable assets:
Oil field services $4,269,740 $3,752,908 $3,119,508
Other operations 841,558 626,404 1,020,754
Additions to property:
Oil field services $1,270,504 $1,053,550 $ 977,828
Other operations 316,108 - 488,300
Depreciation and amortization:
Oil field services $ 275,813 $ 280,969 $ 187,612
Other operations 41,374 52,413 44,148
International:
The Company operates principally in the United States and Australia. The
following is a summary of information by area for 1997, 1996 and 1995.
1997 1996 1995
Revenues:
United States $2,115,215 $2,270,230 $2,545,159
Australia 366,500 219,065 131,045
---------- ---------- ----------
Totals $2,481,715 $2,489,295 $2,676,204
========== ========== ==========
Operating profit:
United States $ 569,155 $ 578,074 $1,108,525
Australia 99,201 76,179 34,460
---------- ---------- ----------
668,356 654,263 1,142,985
Other income and expense 70,542 (21,734) (3,956)
---------- ---------- ----------
Income before income taxes $ 738,898 $ 632,519 $1,139,029
========== ========== ==========
Identifiable assets:
United States $5,603,047 $4,908,184 $4,674,603
Australia 1,168,805 1,204,879 1,253,073
Canada 25,000 - -
---------- ---------- ----------
$6,796,852 $6,113,063 $5,927,676
========== ========== ==========
NOTE 16: SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st 2nd 3rd 4th
Year ended December 31, 1997:
Net sales $762,913 $728,649 $ 480,470 $509,683
Gross profit 493,916 479,543 252,740 291,412
Income from operations 302,626 210,960 100,505 54,265
Net income $152,679 $215,612 $ 33,666 $ 36,827
Preferred dividends - - (184,614) -
-------- -------- --------- --------
Net income available to
common stockholders $152,679 $215,612 $(150,948) $ 36,827
======== ======== ========= ========
Basic and diluted EPS $ 0.27 $ 0.39 $ (0.26) $ 0.06
Year ended December 31, 1996: (Restated)
Net sales $591,490 $775,964 $750,305 $371,536
Gross profit 368,643 497,947 578,982 13,670
Income from operations 162,427 280,246 297,214 (85,634)
Net income 131,016 124,102 187,655 (91,578)
Basic EPS $ 0.03 $ 0.14 $ 0.33 $ (0.05)
Diluted EPS 0.03 0.14 0.32 (0.05)
(1) The fourth quarter for the year ended December 31, 1996 was
negatively impacted by the restatement of the SWTP investment.
(2) The third quarter of 1997 includes the effect of preferred stock
dividends granted during that period.
NOTE 17: CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMER
As shown in Note 4, the Company operates with significant accounts receivable
balances. Approximately 41% of the receivables for disposal/services and
rentals are due from a single customer. This customer has historically paid
bills from two to six months after incurrence. This customer represents
approximately 57% of salt water disposal, oil field services, and rental
revenues during 1997. Another customer is responsible for approximately 14%
of the Company's salt water disposal business and 8% of its year end
receivable balances. It follows that the Company's results of operations are
significantly reliant on these customers' continued ability to operate. A
mitigating factor is that salt water produced from oil and gas wells is
required to be disposed of under existing regulations and only a limited
number of disposal facilities exist in the Company's primary operating area.
Saltwater disposal services are primarily located in the Laredo/Zapata, Texas
area, which is a significant gas producing area. However, reductions in gas
prices could significantly reduce the level of activity for both production
levels and drilling services revenues.
NOTE 18: SUBSEQUENT EVENTS
During March 1998, the Company filed a registration statement on Form S-3 to
register 200,000 shares of common stock pursuant to warrants to be issued to
existing stockholders of the Company.
-------------------------------------------------------------
<PAGE>
SUPPLEMENTARY DATA - RESERVES OF OIL AND GAS
December 31, 1997, 1996 and 1995
Reserves of oil and gas - Royalty and Working Interests (unaudited)
The Company's domestic working interest properties are not material to the
Company's assets nor to its revenues. Domestic working interests generated
approximately 5% of the Company's total oil and gas revenues and represent
only an insignificant portion of the Company's capitalized oil and gas
properties. Since these properties and their revenues are not material,
Management has concluded that the Company would incur unreasonable cost and
effort in order to obtain reserve analysis as is required by accounting
disclosure rules for material oil and gas working interests. As a result of
this conclusion, some of the information normally presented for oil and gas
working interests by oil and gas producing entities has been omitted.
Instead, information has been presented which treats the Company's working
interest like royalties and ORRIs and they are included in the table below.
No information is presented for Australian working interests because the
Company's Australian working interests are non-producing. The Company is not
the operator on any of the oil and gas properties which it owns interests
under.
The quantities of proved reserves of oil and gas relating to royalty and
working interests are not presented because the necessary information is not
available to the Company or the Company's interests are not large enough to
economically obtain this information. The Company's share of oil and gas
produced from these interests is presented in the following schedule:
Working Interests Royalties and ORRIs
United States Australia
Oil Gas Oil Gas Oil Gas
(bbls.) (mcf) (bbls.) (mcf) (bbls.) (mcf)
For the year ended:
December 31, 1997 566 2,158 2,571 12,616 17,485 -
December 31, 1996 535 4,157 3,217 9,059 10,255 -
December 31, 1995 132 - 3,056 8,670 6,855 -
Results of Operations for Producing Activities
for the Year Ended December 31
1997 1996 1995
United United United
States Australia States Australia States Australia
Sales of oil & gas $81,859 $366,500 $92,156 $219,065 $79,775 $131,045
Production costs
(including taxes) 13,185 142,112 10,855 94,692 10,238 67,755
Acquisition &
exploration costs 5,985 44,557 19,581 - - -
Depletion 25,108 80,630 25,049 48,194 15,336 28,030
------- -------- ------- -------- ------- --------
Total costs 44,278 267,299 55,485 142,886 25,574 95,785
------- -------- ------- -------- ------- --------
Results of oper-
ations from pro-
ducing activities
(excluding cor-
porate overhead $37,581 $ 99,201 $36,671 $ 76,179 $54,201 $ 35,260
======= ======== ======= ======== ======= ========
In addition to the acquisition & exploration costs presented above, the
Company spent $25,000 purchasing interests in two Canadian producing
properties. However, no revenues had been received by year end and no
information was available to estimate the production.
Capitalized Costs Relating to Oil and Gas Producing Activities
December 31, 1997
United
Canada States Australia Total
Unproved properties (not
being amortized) $ - $ 51,424 $ 363,204 $ 414,628
Proved properties (being
amortized)
Evaluated proved properties - 250,057 - 250,057
Unevaluated proved properties 25,000 528,053 1,214,492 1,767,545
-------- --------- ---------- ----------
Total proven properties 25,000 778,110 1,214,492 2,017,602
-------- --------- ---------- ----------
Total Capitalized Costs 25,000 829,534 1,577,696 2,432,230
Accumulated Depletion - (337,785) (408,891) (746,676)
-------- --------- ---------- ----------
Net Capitalized Costs $ 25,000 $ 491,749 $1,168,805 $1,685,554
======== ========= ========== ==========
December 31, 1996
United
States Australia Total
Unproved properties (not being amortized) $ 45,439 $ 363,204 $ 408,643
Proved properties (being amortized
Evaluated proved properties 268,057 - 268,057
Unevaluated proved properties 528,053 1,169,935 1,697,988
--------- ---------- ----------
Total proven properties 796,110 1,169,935 1,966,045
--------- ---------- ----------
Total Capitalized Costs 841,549 1,533,139 2,374,688
Accumulated depletion (312,677) (328,260) (640,937)
--------- ---------- ----------
Net Capitalized Costs $ 528,872 $1,204,879 $1,733,751
========= ========== ==========
December 31, 1995
United
States Australia Total
Unproved properties (not being amortized) $ 41,903 $ 363,204 $ 405,107
Proved properties (being amortized)
Evaluated proved properties 268,057 - 268,057
Unevaluated proved properties 512,009 1,169,935 1,681,944
--------- ---------- ----------
Total proven properties 780,066 1,169,935 1,950,001
--------- ---------- ----------
Total Capitalized Costs 821,969 1,533,139 2,355,108
Accumulated Depletion (287,628) (280,066) (567,694)
--------- ---------- ----------
Net Capitalized Costs $ 533,341 $1,253,073 $1,787,414
========= ========== ==========
Costs Incurred in Oil and Gas Property Acquisition, Exploration and
Development
1997 1996 1995
United United United
States Australia States Australia States Australia
Property acqui-
sition costs
Proved $ - $ - $16,045 $ - $ - $ -
Unproved 5,985 44,557 3,536 - 3,767 -
Sales of
properties (18,000) - - - - -
Exploration
costs - - - - - -
Development
costs - - - - - -
-------- -------- ------- -------- ------- -------
$(12,015) $ 44,557 $19,581 $ - $ 3,767 $ -
======== ======== ======= ======== ======= =======
In addition to the 1997 acquisition costs presented above, the Company spent
$25,000 purchasing interests in two proved properties in Canada. Property
acquisition costs are negative in 1997 due to the sale of one lease. The
sales price is reported as a reduction in the cost pool in accordance with
full cost accounting rules described at Note 2 to the financial statements.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Board of Directors of the Company (the "Board") presently consists of six
members. Each director is elected at the annual meeting of shareholders to
hold office until the next annual meeting of shareholders and until his/her
successor has been elected and qualified. Currently serving as directors
are: Kenneth Owens, Howard Siegel, Karen Lee, John Vuksich, Richard Levine,
and Glenn Gagnon. David Polston, Betty Polston and Ivan Webb resigned as
directors during 1997. The following table sets forth information concerning
the persons currently serving as directors of the Company.
Date First
Position With Elected
Name Age the Company as Director
Kenneth Owens 60 Chairman of the 1994
Board and President
Howard B. Siegel 55 Director 1980
Karen Lee 38 Director 1989
John M. Vuksich 46 Director 1995
Richard A. Levine 50 Director 1997
Glenn Gagnon 33 Director 1997
Executive Officers
Unless otherwise specified by the Board, all executive officers are elected
for a term of one year, commencing with the date of the first meeting of the
Board following the annual meeting of stockholders, and serve until their
successors are elected or appointed and qualified, or until their respective
death, resignation, removal or disqualification. All of the Company's
officers are executive officers. The following table sets forth certain
information with respect to the persons currently serving as executive
officers of the Company.
Date First
Position With Elected
Name Age the Company as Officer
Kenneth Owens 60 Chairman of the 1994
Board and President
Robert Early 42 Chief Financial 1997
Officer
Shawna Owens 25 Secretary/Treasurer 1995
Family relationships between the Company's officers and directors include:
Kenneth Owens and Shawna Owens are father and daughter.
Kenneth Owens, Chairman of the Board and President, has expertise in various
areas of business. Beginning in 1961 he performed in a supervisory capacity
for several worldwide companies including Bechtel and Brown & Root. He has
been involved in a variety of projects including: (1) Alaskan oil and gas
pipeline; (2) ICBM projects; and (3) underground nuclear testing in Nevada.
He has also been active in real estate and agriculture, acquiring a major
ownership interest in ranch grazing land and cattle operations in Texas,
Arizona, and New Mexico covering hundreds of thousands of acres.
At the present time, he is active in both agricultural ventures and oil and
gas operations. He is also a consultant for surrounding businesses in south
Texas concerning the Railroad Commission of Texas and the Texas Natural
Resource Conservation Commission. He incorporated Transcon Energy
Corporation in Texas in 1988, and since that time he has incorporated several
other companies and holds positions in these companies as President and/or
CEO or Director. Most of these companies have become subsidiaries of GTII.
Any non-subsidiary entities of which Mr. Owens is a director are privately
held.
Robert Early, Chief Financial Officer, received his Bachelor of Business
Administration from Abilene Christian University in 1979, where he majored in
Accounting and minored in Agricultural Business. He received his Certified
Public Accountant certificate in Texas in 1981. Mr. Early worked for an
independent oil company for six years, then moved to a position as partner of
the firm Ashley, Early & Folwell, P.C. in 1987. In 1991 he became the sole
owner of the firm and changed the name to Robert Early & Company, P.C. Mr.
Early has been doing tax work since 1983 and auditing since 1987. Mr. Early
was previously the auditor for the Company through November 1997.
Shawna Owens, Secretary/Treasurer, attended Texas A&M University and has
experience in management, accounting and public relations with different law
firms. Ms. Owens worked in Washington, D. C. for Senator Pete Dominici of
New Mexico and also worked with the Sergeant of Arms for the U. S. Senate
Chambers. She is in charge of the day to day accounting and treasury
functions and was instrumental in centralizing GTII's accounting. Ms. Owens
also performs public relations duties for the Company. She has been employed
by the Company since August, 1995.
Howard B. Siegel, Director, received his Bachelor of Business Administration
Degree from the University of Oklahoma in 1966. He received a Doctor of
Jurisprudence Degree from St. Mary's University School of Law in 1969. Mr.
Siegel was formerly an attorney for Superior Oil Company, a major oil and gas
company located in Houston. He previously served as Vice President, General
Counsel, and a member of the Board of Directors of Tenneco Inc. Federal
Credit Union. From July 1974 to August 1989, Mr. Siegel was employed as an
attorney with the law firm of Bracewell & Patterson in Houston, Texas, and
from that date until January, 1991 he was employed by Hurt, Richardson,
Garner, Todd & Cadenhead in Atlanta, Georgia. Mr. Siegel is currently a
practicing attorney in Houston, Texas. Mr. Siegel has served in an advisory
capacity to the Board of Directors of the Company since March 25, 1980.
Karen Lee, Director, graduated with high honors from Cisco Junior College.
She administers the operation of the Company's offices in Springtown, Texas,
performs many tasks in connection with the Company's public relations and
broker relations programs, does much of the research and writing for filing
of Securities and Exchange Commission documents, and performs transfer agent
duties for the Company. She is a member of the Southwest Securities Transfer
Association, Inc. Ms. Lee been employed by the Company for the past 18
years.
John M. Vuksich, Director, received a B.S. degree from the U. S. Military
Academy at West Point, a M.S. degree from Stanford University, and another
M.S. degree from the Naval War College. From 1987 to 1991 he was the System
Element Manager/Operations Research Analyst for the Strategic Defense
Initiative Organization in Washington, D. C. From August 1991 to July 1993
he was the Senior Cost Analyst for the Office of the Assistant Secretary of
Defense where he conducted independent assessments for the Under Secretary of
Defense for Acquisition of selected defense programs, and assessed all
elements of the Strategic Defense Initiative. From September 1994 until
February 1996, Mr. Vuksich served as the Science Advisor to the Governor of
New Mexico.
Dr. Richard A. Levine, Director, received three degrees from State University
of New York at Buffalo - B.A., D.D.S., with honors, and M.D., with honors.
After residencies including the U.S. Army Institute of Surgical Research and
Resident in General Surgery at Buffalo General Hospital, and appointments at
several hospitals such as Chief of Plastic Surgery at Charleston Veteran's
Administration Hospital and Attending Plastic Surgeon at Medical University
of South Carolina, Dr. Levine settled in San Antonio. He has been
self-employed in San Antonio for the past fifteen years, and on the active
staff of the Baptist Memorial Hospital System. He is Chairman of the
Division of Plastic Surgery for the Baptist Memorial Hospital System, and is
the Clinical Associate Professor - Department of Plastic Surgery at the
University of Texas Health Science Center at San Antonio. Dr. Levine has had
articles published in the "Journal of Plastic and Reconstructive Surgery" and
has given numerous presentations on various subjects in his field.
Glenn Gagnon, Director, received a Bachelor of Science degree from Texas A&M
University in 1994. From 1990-1994 he was employed by Gold Gyms Inc. and was
responsible for marketing, sales and automation of new facilities. He has
been employed by GTII since 1994 and is now in charge of public relations for
the Company. He established the Dividend Reinvestment and Stock Purchase
Plan for the Company and is currently assisting with filing of Securities and
Exchange Commission documents.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information as to the Company's chief
executive officer for the past three fiscal years.
Name and Salary Cash Bonus Cash
Principal Position Year Compensation Compensation
Kenneth Owens 1995 $ -0- $ -0-
Chairman and President 1996 -0- -0-
1997 5,000 -0-
Director Compensation
In 1995 and 1996 the Board approved a $1,500 fee for each director to be paid
as cash or 500 shares of stock. The fee was paid in cash to six directors,
and in stock to four directors in 1995. In 1996 the fee was paid in cash to
five directors and in stock to one director. For 1997 director compensation,
the Board approved a $1,500 fee or 143 shares of stock for each director.
The fee was not paid prior to December 31, 1997.
Compensation Committee Report
The Board of Directors delegates responsibility for executive compensation to
the Compensation Committee which is presently comprised of two of the
directors on the Board. This committee reviews the salaries of each of the
officers of the Company, and recommends the directors' fees for the year.
The Committee recommended to the Board that Kenneth Owens, President,
receive a salary of $1,000 per month beginning in August of 1997, and that
directors' fees for 1997 be set at $1,500 cash or 143 shares of stock per
director. The Committee has also recommended, and the Board has approved, an
employee stock bonus plan whereby shares of GTII purchased by the Company may
be issued to employees as compensation. During 1997, a total of 30 shares
were issued to two employees through this program.
Performance Graph - Set forth below is a line graph comparing the yearly
percentage change in the cumulative total shareholder return on the
Corporation's Common Stock against the cumulative total return of the NASDAQ
Stock Market and the NASDAQ Non-Financial Stocks. The graph assumes that the
value of the investment in the Corporation's Common Stock and each index was
$100 at December 31, 1992. GTII's numbers reflect a 1-for-20 reverse stock
split in 1993, a 1-for-2.5 reverse stock split in 1995, and a 1-for-3.5
reverse stock split in 1997.
Comparison of Five-Year Cumulative Total Return
December 31
1992 1993 1994 1995 1996 1997
GTII Stock 100.00 67.50 57.38 72.88 57.75 84.00
NASDAQ Stock 100.00 114.80 112.21 158.68 195.19 239.63
Non-Financial
Stocks 100.00 115.45 111.02 154.71 187.97 220.77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
common stock as of March 16, 1998 with respect to (1) each person known by
the Company to own beneficially more than 5% of the Company's common stock,
(ii) each of the Company's directors, and (iii) all directors and officers of
the Company as a group. The title of class is common stock, $.001 par value.
NOTE: Some of the following shareholders exchanged all or a portion of their
common shares for preferred shares in 1996 (see Part II, Item 5, Preferred
Stock). In accordance with the Preferred Stock Plans, the preferred shares
have the same voting rights as if they were common shares (1 preferred share
is equivalent to 10 common shares). Therefore, the shares are listed below
as common shares, with a footnote following to explain the breakdown of the
number of common and the number of preferred each person holds.
# of Shares
Name and Beneficially Percent of
Address of Stockholder Owned Class
Kenneth Owens 419,722(1) 36.01%
P. O. Box 125
Magdalena, New Mexico 87825
Howard B. Siegel 850 0.07%
2525 South Shore Blvd., Ste. 210
League City, TX 77573
Karen Lee 2,331 0.20%
104 Fossil Court
Springtown, Texas 76082
John Vuksich 3,232(2) 0.28%
4322 Shadow Oak Lane
Austin, Texas 78746-1267
Shawna Owens 3,710(3) 0.32%
P. O. Box 22010
Albuquerque, New Mexico 87154
Dr. Richard A. Levine - 0.00%
8500 Village Drive, Ste. 102
San Antonio, Texas 78217
Glenn Gagnon 1,165(4) 0.10%
8504 Sonoma Valley N.E.
Albuquerque, New Mexico 87122
Robert Early 15 0.00%
2208 Ivanhoe
Abilene, Texas 79605
All directors and officers as a 431,025(5) 36.98%
group (8 persons)
David Polston 64,916(6) 5.57%
21349 Water Wood Drive
San Antonio, Texas 78266
Betty Polston 62,263(7) 5.34%
526 Admiral Benbow
McQueeney, Texas 78123
(1)Common - 20,562; Preferred B - 39,916
(2)Common - 372; Preferred B - 286
(3)Common - 2,850; Preferred B - 86
(4)Common - 135; Preferred A - 23; Preferred B - 80
(5)Common - 27,115; Preferred A - 23; Preferred B - 40,368
(6)Common - 7,766; Preferred B - 5,715
(7)Common - 3; Preferred B - 6,226
Note: The stockholders identified in this table have sole voting and
investment power with respect to the shares beneficially owned by them.
Changes in Control
No changes in control occurred during 1997, and management is not aware of
any present arrangements that would cause a change in control in the future.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, GTII loaned $98,000 to officers, directors, and employees so
that they could purchase preferred B shares from two GTII shareholders. The
agreement called for the persons receiving the loans to repay GTII as quickly
as possible, plus pay a finance charge to GTII of 2% per month. The intent of
this action was to increase board of director and officer financial interest
in GTII, resulting in an additional incentive to board members and officers
to increase stockholder value. Following is a table showing the related
party who GTII loaned the money to, date of loan, amount of loan, interest
paid, and the date the related party repaid the loan.
Interest
Amount of Date of Paid to Date
Name Loan Loan GTII Paid Off
Kenneth Owens $96,000 05/15/97 $2,626.43 06/30/97
Shawna Owens 1,000 05/15/97 13.15 06/03/97
Glenn Gagnon 1,000 05/15/97 13.15 06/03/97
As noted in the table, all loans, plus interest, were repaid to GTII by June
30, 1997.
Several of the officers and directors of the Company have invested in the oil
and gas business, either directly or through entities in which they have an
interest. Certain of these interests could directly compete with the
interests of the Company. Although the Company is not aware of any present
conflicts of interest, such present or future activities on the part of the
officers and directors could directly compete with the interests of the
Company. If the Company should enter into future transactions with its
officers, directors or other related parties, the terms of any such
transaction will be as favorable to the Company as those which could be
obtained from an unrelated party in an arm's-length transaction.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report
or are incorporated by reference:
Financial Statements - The following information has been
included in response to Item 8 above.
- Report of Independent Certified Public Accountants
- Consolidated Balance Sheets
- Consolidated Statements of Operations
- Consolidated Statements of Changes in Shareholders' Equity
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
- Supplementary Data for Reserves of Oil and Gas
(b) Reports on Form 8-K
A report on Form 8-K was filed during the quarter ended
December 31, 1997 to report a change in accountants. The
report was filed during December of 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GOLDEN TRIANGLE INDUSTRIES, INC.
Date: March 18, 1998 By: /s/ KENNETH OWENS
Kenneth Owens
President
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
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ KENNETH OWENS Chairman of the Board March 18, 1998
Kenneth Owens and President
/s/ ROBERT EARLY Chief Financial March 18, 1998
Robert Early Officer
/s/ HOWARD B. SIEGEL Director March 18, 1998
Howard B. Siegel
/s/ KAREN LEE Director March 18, 1998
Karen Lee
/s/JOHN VUKSICH Director March 18, 1998
John Vuksich
/s/ RICHARD A. LEVINE Director March 18, 1998
Richard A. Levine
/s/ GLENN GAGNON Director March 18, 1998
Glenn Gagnon
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summary financial information which has been
extracted from the consolidated financial statements of Golden Triangle
Industries, Inc. and subsidiarys for the periods ended December 31, 1997, 1996
and 1995, and from its quarterly financial statements filed on Form 10-Q for
the periods presented. These summary schedules are qualified in their
entirety by reference to such financial statements and the notes thereto.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995 MAR-31-1996 MAR-31-1997
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 95648 298521 86255 59558 218124
<SECURITIES> 83579 43756 5427 4628 51363
<RECEIVABLES> 849185 613240 1055321 1093936 969798
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 199627 0 0 0 0
<CURRENT-ASSETS> 1253008 955517 1208153 1303092 1229285
<PP&E> 6645320 5547848 5147640 5297195 6626500
<DEPRECIATION> (1664197) (1312245) (1099991) (1181219) (1420488)
<TOTAL-ASSETS> 6796852 6113063 5927676 6005292 6236029
<CURRENT-LIABILITIES> 170732 115052 409597 460865 308611
<BONDS> 0 0 0 0 0
0 0 0 0 0
5727 5727 0 0 5727
<COMMON> 580 546 1103 1133 569
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<TOTAL-LIABILITY-AND-EQUITY> 6796852 6113063 5927676 6005292 6236029
<SALES> 2452352 2792957 2594502 591450 762898
<TOTAL-REVENUES> 2481715 2489295 2676204 591490 762913
<CGS> 964104 1030053 721830 139953 159787
<TOTAL-COSTS> 964104 1030053 721830 139953 159787
<OTHER-EXPENSES> 849255 804989 811389 289110 300500
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 518 40755 14598 14 0
<INCOME-PRETAX> 738898 632519 1139029 166103 320306
<INCOME-TAX> 300114 281324 455860 35087 167627
<INCOME-CONTINUING> 438784 351195 683169 131016 152679
<DISCONTINUED> 0 0 0 0 0
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<EPS-PRIMARY> 0.46 0.45 0.62 0.03 0.27
<EPS-DILUTED> 0.46 0.44 0.62 0.03 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summary financial information which has been
extracted from the consolidated financial statements of Golden Triangle
Industries, Inc. and subsidiarys for the quarterly financial statements
filed on Form 10-Q for the periods presented. These summary schedules are
qualified in their entirety by reference to such financial statements and
the notes thereto.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1996 DEC-31-1997
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<SECURITIES> 4903 54228 5728 75138
<RECEIVABLES> 1230099 889009 974469 780976
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<INVENTORY> 0 200000 0 197251
<CURRENT-ASSETS> 1273892 1298067 1102367 1305422
<PP&E> 5198669 5872098 5249912 6122726
<DEPRECIATION> (1199100) (1452585) (1292613) (1552078)
<TOTAL-ASSETS> 6444586 6453710 6258262 6598457
<CURRENT-LIABILITIES> 684262 400895 403902 365537
<BONDS> 0 0 0 0
0 0 0 0
5727 5727 5727 5727
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<TOTAL-COSTS> 304710 296185 476033 413111
<OTHER-EXPENSES> 620071 681791 894385 944830
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<INCOME-PRETAX> 544949 547315 726296 674620
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