<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------------------
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMM. FILE# 0-12813
AMERICAN ATLAS RESOURCE CORPORATION
(Formerly Wepco Energy Co.)
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0809164
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
240 WEST JESSUP, BRIGHTON, COLORADO 80601
--------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (303) 659-8203
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER
SHARE.
Check whether the Registrant (1) filed all reports to be filed by Section 13 or
15(d) of the Securities Exchange Act 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.(X)
Registrant's revenues for fiscal year ended December 31, 1997: $1,259,400
On December 31, 1997, there were 720,430 shares of Common Stock issued and
outstanding and 462,890 shares of Series A Preferred Stock, face value of $3.82,
(convertible to 4,628,900 shares of Common Stock) and 61,013 shares of Series B
Preferred Stock, face value of $5.00, (convertible to 610,130 shares of Common
Stock). The aggregate market value of the Common Stock held by non-affiliates of
the Registrant on that date is not available because the Common Stock is not
traded in any reporting market (see Item 5 Page 10).
Documents Incorporated by Reference
-----------------------------------
NONE
<PAGE> 2
AMERICAN ATLAS RESOURCE CORPORATION
ANNUAL REPORT ON FORM 10-KSB
INDEX
Securities and Exchange Commission Item Number
and Description
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
Item 1. Description of Business ..................................... 1
Item 2. Description of Properties ................................... 6
Item 3. Description of Legal Proceedings ............................ 9
Item 4. Submission of Matters to a Vote of Security Holders ......... 9
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters ............................... 9
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 10
Item 7. Financial Statements ........................................ 13
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ....................... 13
PART III
Item 9. Directors and Executive Officers ............................ 14
Item 10. Executive Compensation ...................................... 15
Item 11. Security Ownership of Certain Beneficial Owners
and Management ............................................ 17
Item 12. Certain Relationships and Related Transactions .............. 18
Item 13. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ....................................... 19
Signatures ........................................................... 22
Exhibits Index ....................................................... 24
Exhibits .......................................................
</TABLE>
<PAGE> 3
PART I
ITEM 1 - BUSINESS
BACKGROUND
American Atlas Resource Corporation ("American Atlas" or the "Company") is the
new name of Wepco Energy Co. ("Wepco"). At its Annual Shareholders Meeting on
August 6, 1993, Wepco shareholders voted to change the Company name. American
Atlas/Wepco was incorporated by Polaris Oil & Gas, Inc. ("Polaris") on June 19,
1984, under the laws of the State of Delaware, as a wholly-owned subsidiary of
Polaris. The shareholders approved and adopted an Agreement and Plan of Merger
pursuant to which Polaris was merged with and into American Atlas/Wepco, and the
holders of shares of Common Stock of Polaris became holders of corresponding
shares of Common Stock of American Atlas /Wepco on July 13, 1984.
Effective December 31, 1992, American Atlas/Wepco completed the "1992
Reorganization". This was accomplished through the acquisition of 100 percent of
the Common Stock of Schreider & Company, Inc. and the remaining unowned shares
of American Gas Compression Services, Inc., see "1992 Reorganization
Transaction" below.
Hereafter, the term "Company" as used, refers to American Atlas and its
wholly-owned subsidiaries States Exploration Co. ("States"), Schreider &
Company, Inc. ("Schreider") and American Gas Compression Services, Inc.
("AGCSI").
NARRATIVE DESCRIPTION OF BUSINESS
The Company is primarily engaged in (a) oil and gas property acquisition,
exploration, development and production activities; (b) fabricating, leasing and
servicing natural gas compressors; and (c) selling and servicing of oil and gas
field equipment. The area of these activities is the Rocky Mountain region of
the United States, which will continue to be the focus of the Company's
operations. The Company has no present plans for operations in foreign
countries.
OIL AND GAS ACQUISITION, PRODUCTION, DEVELOPMENT AND EXPLORATION
The Company has interests in approximately 20 oil and gas wells located in 6
states within the continental United States. Eleven of these wells located in
Adams and Baca Counties of Colorado, are operated by the Company.
The Company's largest oil and gas property is the Comanche Creek Field. This
field is operated by the Company and is located in Adams County, Colorado.
Currently there are seven producing wells in the field.
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In 1997 and 1996, the sales from the oil and gas segment accounted for 15
percent and 45 percent, respectively, of the Company's total revenues.
The Company intends to continue to develop the Comanche Creek Field. As of
December 31, 1997, an independent petroleum engineer, retained by the Company,
determined three proved undeveloped drilling locations exist containing
approximately 56,100 barrels of oil and 224,500 MCF of gas with an estimated
undiscounted value of $436,300. These same three proved undeveloped locations
had an undiscounted value of $1,172,600 at January 1, 1998, the difference being
the change in pricing. The Company holds approximately 800 undeveloped acres in
the Comanche Creek Field.
Occasionally, operators of the Company's non-operated properties propose the
drilling of a well on acreage in which the Company has an interest. As to each
proposal, the Company performs evaluations to determine its level of
participation, if any. If the Company decides not to participate, it attempts to
farm-out its interest to other oil companies or elects to non-consent under
applicable operating agreements.
NATURAL GAS COMPRESSOR FABRICATION, LEASING AND SERVICING
The natural gas compression business meets the needs of oil and gas companies
involved in the production of natural gas. The purpose of gas compression is to
reduce the flowing tubing pressure at the wellhead, and increase flowing
pressure to a pressure sufficient for gas to enter the sales line, which results
in an increase in production and sales volumes. The sales line is where the
producer of the natural gas transfers the gas to the purchaser. A normal gas
compression unit will consist of a natural gas engine, compressor, cooler, inlet
scrubbers, control panel, fuel and starting gas system and the necessary piping
to connect the components. All of these components are mounted on an oil field
skid.
The Company operates its natural gas compression functions in its wholly-owned
subsidiary, AGCSI. At December 31, 1997, AGCSI maintained a rental fleet of 38
natural gas compressor packages, of which 16 were under rental agreements. One
of the compressor packages is rented to Schreider, a wholly-owned subsidiary of
the Company. The rented compressor packages are currently located in the
following areas:
Colorado:
Adams County 1 Utah:
Baca County 1 Uintah County 3
Rio Blanco County 2 Wyoming:
Carbon County 1
Sweetwater County 8
Four compressor packages are being remanufactured at AGCSI's maintenance
facility located in Brighton, Colorado. All others are available for rental.
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Of the 38 compressor packages currently in the rental fleet, the breakdown by
horsepower ("HP") is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Unit Power 10HP 15HP 30HP 50HP 100HP 150HP
Number of Units 2 10 12 8 4 4
</TABLE>
In the past, AGCSI has acquired its compressor packages by purchasing used
equipment from other compressor companies, from surplus inventory of producers,
or from brokers. Upon acquisition of compressor packages, it is the Company's
policy to remanufacture each major component prior to being put into service
under a rental agreement. The performance of a complete remanufacturing process
provides AGCSI the assurance of meeting its stringent quality standards required
for each compressor package.
AGCSI usually signs a rental agreement with a natural gas operator for a period
of three to twelve months. However, the average period of time compressors are
on lessee's location is between 6 to 18 months. The rental rates received vary
from $800 per month for a 10 HP compressor, to $2,400 per month for a 150 HP
compressor. These rental rates include a maintenance agreement, whereby AGCSI is
responsible for parts, labor and lubricants associated with operating the
compressor and providing monthly maintenance.
AGCSI also performs service work on compressors not owned by the Company. To
date, the sale of outside service has not been a significant part of AGCSI's
revenues. The percentage of total revenues contributed by the gas compression
segment was 23 percent in 1997 and 35 percent in 1996.
AGCSI commenced the manufacture of its own 10hp and 15hp compressor packages for
its rental fleet and sale in 1993. The intent was to provide oil and gas
producers with a cost effective compressor package that was portable, reliable
and easily operated. AGCSI manufactured ten of these packages. The initial
acceptance of the units was encouraging; however, when gas prices fell to the $1
per MCF and lower range, the units were returned because of marginal or
sub-economic reasons.
AGCSI continues to actively pursue all rental opportunities within its marketing
area. It has encountered strong competition from larger rental fleet operations
in the form of severe reduction of rental and maintenance rates. Also with the
significantly lower natural gas prices, other rental fleet operators and
independently owned compressor packages are now readily available for purchase
at substantially lower prices than in 1990 through 1994.
AGCSI has reduced rental prices to meet competitive price cutting and will
continue to do so if it is in the best long-term benefit to the Company. AGCSI
has reviewed its carrying value of its compressor fleet at December 31, 1997,
and has determined that the recorded values approximate fair market value. The
recorded values of these packages continue to be significantly below replacement
cost of newly manufactured packages; however, these amounts may be greater than
the asking prices of similar packages available for purchase in the as-is,
where-is, used market place which in management's opinion are not comparable to
its fleet of well maintained compressors.
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SALES AND SERVICING OF OIL AND GAS FIELD EQUIPMENT
This is a segment of the industry conducted by Schreider, and/or AGCSI, wholly
owned subsidiaries. Sales and servicing of oil and gas field equipment accounted
for 62 percent of the Company's total revenue in 1997 and 19 percent in 1996.
The increase in sales from this section was caused in part by the increased
efforts in selling compressors and gas handling equipment.
This business segment concentrated on sales of inventory,including the sale of
28,000 ft. of 6 5/8 inch pipe recovered previously and the sale and service of
compressors and related gas handling equipment. The Company may reactivate its
well reclamation in the future if and when management is confident that the
return on invested assets is warranted.
Sales of oil and gas field equipment have been generated, whereby Schreider
obtains used oil and gas field equipment to market, by purchasing depleted wells
from oil and gas operators. Wells purchased have marginal oil or gas production
or have not produced for a period of time. Schreider salvages the useable
equipment from a well and resells it to wholesalers and end users.
1992 REORGANIZATION TRANSACTIONS
On December 12, 1992, the Company's Board of Directors approved a plan of
reorganization ( "1992 Reorganization") which involved issuance of 462,890
shares of the Company's newly authorized 1993 Series A Convertible Preferred
Stock ("Series A Preferred Stock"). Preferred stock was utilized because the
Company did not have a sufficient number of authorized but unissued shares of
its Common Stock at the time of the transactions. The 1992 Reorganization is
fully described in the Company's Form 8-K, filed on March 3, 1993 and the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1992. The
1992 Reorganization is summarized as follows:
1. Acquisition of 100 percent of the common stock of Schreider & Company, Inc.
making it a wholly-owned subsidiary of the Company;
2. Acquisition of the remaining 2 percent of the common stock of American Gas
Compression Services, Inc. not already owned by the Company, making it a
wholly-owned subsidiary of the Company; and
3. Acquisition of fractional undivided working interests in certain oil and
gas properties from various working interest owners associated with
Schreider, ("Et. Al's." or "Et. Al's. Interest").
OTHER INFORMATION ABOUT THE COMPANY'S BUSINESS
The Company has not made any public announcement and no information has
otherwise become public about any new product or line of business requiring the
investment of a material amount of the Company's total assets.
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<PAGE> 7
The Company has no patents, trademarks, licenses, franchises or concessions
other than oil and gas leasehold interest granted by federal and state
authorities and private mineral owners
The Company's business is not seasonal except to the extent that weather and
market conditions can affect oil and gas exploration and production activities.
The nature of the Company's business does not include a backlog of orders. Nor
does the Company engage in any research and development activities as those
terms are customarily used.
COMPETITION, MARKETS AND CUSTOMERS
A large number of companies and individuals are engaged in exploration,
development and production of oil and gas, many of which possess substantially
greater technical and financial resources than the Company. There is competition
for leases and suitable prospects for oil and gas drilling operations.
Competition is also intense in obtaining funding for exploration and development
activities.
Production and marketing of oil and gas is affected by a number of factors which
are beyond the Company's control, the effect of which cannot be predicted. These
factors include crude oil imports, actions by foreign oil-producing nations, the
availability of adequate pipelines and other transportation facilities, the
marketing of competitive fuels and other matters affecting the availability of a
ready market, such as fluctuating supply and demand.
The natural gas compression business is directly affected by all of the risks
related to oil and gas exploration and production, with primary emphasis on the
volatility of natural gas prices. Since this segment is dependent on the (1)
production of natural gas, (2) the volatility of natural gas prices, (3) supply
and (4) demand, they have substantial effect on the Company; and may adversely
affect the ability of the Company to rent new compressors or keep existing
rental contracts.
The natural gas compression business is highly competitive in many respects,
including identification of prospective leasing and/or sales clients, securing
financing for obtaining the necessary compressor packages and personnel to
conduct such operations and activities. In seeking suitable opportunities, the
Company competes with a number of other companies, including large natural gas
compression companies with greater financial resources and, in some cases, with
more experience. Many other natural gas compression companies in the industry
have financial resources, personnel and facilities substantially greater than
those of the Company and there can be no assurance that the Company will
continue to be able to compete effectively with these larger entities.
During 1994 and 1995 there were several acquisition/mergers of existing large
rental fleet operators. These consolidations coupled with lower natural gas
prices has sponsored predatory pricing tactics previously not experienced by
AGCSI.
The Company does not refine or otherwise process crude oil or natural gas. Oil
production is sold at posted field prices and natural gas is sold under both
long-term and short-term contracts with purchasers who have pipelines and
gathering systems in the areas of production.
Four customers accounted for more than 94 percent of the Company's aggregate oil
and gas sales for the fiscal year ended December 31, 1997. Three customers
accounted for more than 58 percent of AGCSI's compressor rental income and two
customers accounted for more than 83 on sales of Oil and Gas field equipment,
see Item 7 below and in particular "Notes to Consolidated Statements".
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<PAGE> 8
GOVERNMENT REGULATIONS
The Company currently owns leasehold interests where production from oil and gas
wells is controlled by the state or the federal government. Control is exercised
through regulations requiring drilling permits, establishing the spacing of
wells, requiring the pooling and unitization of properties, limiting the number
of days in a given month during which a well can produce and otherwise limiting
the rate of allowable production. Local, state and federal environmental
controls also affect the operations of the Company through regulations enacted
to protect against waste, conserve natural resources, prevent pollution and
otherwise guard against abuse of the environment. Such regulations could require
spending substantial funds on environmental protection and penalties can be
imposed for violating such regulations. To date no such penalties have been
threatened or imposed on the Company.
The Company believes that its operations comply with all applicable legislation
and regulations in all material aspects, and that the existence of such
regulations has had no more effect on the Company's method of operations than
similar companies in the industry. Consequently, the Company does not anticipate
any material capital expenditures for environmental control facilities for the
current or succeeding year. However, no assurance can be given as to the future
capital expenditures which may be required for compliance with environmental
regulations which may be adopted in the future.
OPERATING HAZARDS AND UNINSURED RISKS
All of the Company's business segments are subject to operating hazards normally
incident to drilling for and producing of oil and gas, such as unusual
formations and pressures, blow-outs, environmental pollution and personal
injury. The Company maintains insurance coverage customary for companies of a
similar size engaged in operations similar to that of the Company. Losses can
occur from uninsurable risks or in amounts in excess of existing insurance
coverage. The occurrence of an event which is not insured or not fully insured
could have an adverse impact upon the Company's financial position.
EMPLOYEES
As of December 31, 1997, the Company had five full-time employees; it retains
independent consultants as needed.
ITEM 2 - PROPERTIES
GENERAL
COMPRESSION EQUIPMENT. See Item 1, "Natural Gas Compressor Fabrication,
Leasing and Servicing," on page 2, for information concerning significant
equipment owned and leased by the Company.
OFFICES AND MAINTENANCE FACILITY. The corporate offices of the Company
consist of approximately 1600 square feet located at 240 West Jessup Street,
Brighton, Colorado, 80601.
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The Company owns approximately one half acre of land which includes a 5,000
square foot maintenance facility located within the city limits of Brighton,
Colorado. The maintenance facility was purchased in September, 1991 by AGCSI and
is being financed by the seller, who holds the first mortgage on the property.
The shop and yard are used for compressor fabrication, remanufacturing,
equipment storage and repair of vehicles and heavy equipment used in field
operations.
MISCELLANEOUS. The Company owns one pipeline system located in Colorado.
The Colorado pipeline is currently abandoned and consist of approximately 3
miles of pipe. The pipeline was obtained by the Company through settlement of a
gas contract dispute. It is the Company's intent to salvage the pipe for resale,
unless new drilling of gas wells within areas serviced by the pipelines
commences. If such activity does take place, the Company will attempt to sell
the pipeline to operators or gas gathering companies. The financial statements
of the Company do not reflect any cost basis or value for the pipeline at
December 31, 1997, due to the difficulty in assessing it's ultimate value, if
any.
RESERVE INFORMATION. The Company's reserves of oil, gas, condensate and
natural gas liquids (hereinafter referred to as "oil and gas") and the present
value thereof have been estimated as of January 1, 1995 and thereafter, by an
independent engineer, Mr. Warren Johnston. Reserves estimated for producing
wells were determined by a combination of volumetric estimates, extrapolation of
performance history and analogy to other wells producing from similar reservoirs
in the respective areas.
The following is a summary of estimated proved developed and proved undeveloped
net recoverable reserves as of January 1, 1998, 1997 and 1996. The reserve
amounts have been prepared by an independent petroleum engineer, with
unescalated prices and costs.
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ---------
January 1, Developed Undeveloped Developed Undeveloped
- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
1998 9,200 56,100 224,000 224,500
1997 22,400 56,200 538,200 224,600
1996 29,200 75,200 695,400 376,000
</TABLE>
The Company has not filed any oil or gas reserve estimates or included any such
estimates in reports to any other federal or foreign government authority or
agency within the past 12 months.
There have been no major discoveries or other favorable or adverse events, other
than fluctuating prices, that are believed to have caused a significant change
in the estimated proved reserves since January 1, 1998.
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OIL AND GAS PROPERTIES
The Company owns working interests in developed and undeveloped oil and gas
properties in Colorado, Montana, Oklahoma, Utah and Wyoming. The following
tables set forth relevant information as of December 31, 1997:
<TABLE>
<CAPTION>
State: Oil Wells Gas Wells
- ------ --------- ---------
Gross Net Gross Net
----- ---- ----- ----
<S> <C> <C> <C> <C>
Colorado 7 6.64 4 1.85
Montana 1 .02 -- --
Oklahoma -- -- 3 .04
Utah 1 .01 -- --
Wyoming 1 .05 -- --
---- ---- ---- ----
TOTAL 10 6.72 7 1.89
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Developed Undeveloped
State: Acreage Acreage
- ------ --------- -----------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Colorado 4,343 1,879 840 635
Montana 320 40 -- --
Oklahoma 1,892 189 -- --
Utah 240 3 -- --
Wyoming 41 5 -- --
----- ----- ----- -----
TOTAL 6,836 2,116 840 635
===== ===== ===== =====
</TABLE>
DRILLING ACTIVITIES
The Company has not participated in the drilling of any wells during the last
three years.
OIL AND GAS PRODUCTION
<TABLE>
<CAPTION>
Average
Sales Price Average Production
Production ----------------------- Cost of Oil
---------- Oil Per Gas Per & Gas
Oil (BBL) GAS (MCF) (BBL) (MCF) (Eqv. BBL)
--------- --------- --------- -------- ------------------
(1)
For the year ended:
<S> <C> <C> <C> <C> <C>
December 31, 1997 3,100 44,000 $ 18.73 $ 2.19 $ 7.63
December 31, 1996 6,400 91,000 19.32 1.85 6.16
December 31, 1995 7,900 113,000 17.25 1.33 6.16
</TABLE>
(1) For purposes of calculating average production cost per equivalent barrel
of oil in this table, MCF's of gas have been converted to barrels of oil at
a ratio of six MCF for each barrel.
The Company's oil production is sold pursuant to contracts which can be
terminated by either party upon notice. The Company's gas production is sold
pursuant to both long-term contracts, which generally permits the purchaser to
charge its customers the maximum lawful price subject to market price
adjustments and short-term contracts (i.e. one month to two years), which
generally provide for
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the Company to receive a fixed percentage of the price which the purchaser
receives for the gas. Such gas purchase contracts generally allow the purchaser
to curtail or cease gas purchases, often resulting in the shut-in of applicable
wells. Elections by gas purchasers to cease gas purchases from wells in which
the Company maintains an interest has historically resulted in reduced revenues
to the Company, usually occurring during the summer months.
See Item 7 and in particular "Notes to Consolidated Financial Statements," for
information with respect to the Company's major customers.
TITLE TO PROPERTIES
Oil and gas interests are subject to customary burdens, including royalty and
overriding interests and operating agreements. Titles to the Company's
properties may also be subject to liens incident to operating agreements and
minor encumbrances, easements and restrictions. The Company believes that it has
satisfactory title to its properties; none are subject to bank or other lender's
liens or mortgages.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings.
On March 4, 1998, AGCSI received notice that two pumpers that received 1st and
2nd degree burns in a fire on one of its compressors on March 20, 1997 want
$50,000 each. AGCSI has turned the matter over to its insurance carrier.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the Company's fiscal year
ended December 31, 1997 to a vote of security holders.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On July 26, 1988 NASDAQ deleted the Company from its National List (in which it
published bid and ask quotations on the Company's Common Stock) due to the
Company's failure to meet certain capital and surplus requirements. Since then,
quotations for the Company's Common Stock have not been generally available.
The number of stockholders of record of the Company's Common Stock was 990. No
dividends have been declared or paid by the Company on its Common Stock since
the inception of the Company nor does management anticipate that the Company
will pay dividends on its Common Stock in the foreseeable future.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 VS. 1996 Net loss per common share was $.02 for the year ended
December 31, 1997, compared to a loss of $.03 for the prior fiscal year. Gross
revenue increased by 84% between the two periods which was comprised of a 31%
decline in oil and gas, a 20% increase in compressor rental, 498% increase in
sales and service of oil and gas field equipment and 100% decrease in sales of
oil and gas properties.
Operating losses increased in the oil and gas segment by 16% to $42,900 chiefly
from increased depletion expense. Production in the fourth quarter of 1997 was
down because of mechanical problems on several wells and a delay in repairs
because of weather and workover rig availability.
Compressor rental income increased by 20% in 1997, with more units being placed
in services. Compressor operating losses declined 7% between periods.
Competition remains very strong and rental rates remain depressed.
Sales and services of oil and gas field equipment increased almost five fold in
1997 vs. 1996 and operating income increased by $82,900. Substantially all of
the gas line pipe recovered in 1996 was sold in 1997 to a single customer. Five
gas compressors were sold to two customers. Four of theses compressors were
originally held in the rental fleet and were remanufactured to the customer's
specific needs.
General and administrative costs declined 6% between the periods.
Interest expenses declined 20% or $4,100 between the periods which reflects the
retirement of the Bonus Interest notes.
In summary, the prospects for the Company improved substantially over 1996, but
the $9,700 loss to common shareholders was still a significant disappointment
considering the substantial increase in revenues and decrease in general and
administrative and interest costs.
1996 VS. 1995 Net loss per common share was $.03 for the year ended
December 31, 1996, compared to a profit of $.01 for the prior fiscal year. Gross
revenues declined by 30% between the two periods which was comprised of a 31%
decline in the Oil and Gas segment; a 32% decline in Compression Rental and
Service and a 23% decline in the Sales and Service of Oil and Gas Field
Equipment segment. These reductions carried through to Operating Income because
operating costs are largely fixed in nature as opposed to variable with the
revenue streams of the three industry segments. Oil and gas operations lost
$37,000 compared to a profit of $9,500 in 1995. The non-reoccurring sale of
propriety seismic data in 1995 which netted $38,800 was not repeated in 1996.
The sale of substantially all non-operated oil and gas properties at auction in
June of 1996 and the exchange of minor interests in five Oklahoma wells for the
account payable to a prior officer and director netted income of $50,900
compared to $59,200 in 1995.
Sales, service and compression rental income continued to fall with natural gas
prices throughout 1996. The loss incurred in 1996 of $128,000 as compared to
$69,600 reflects the failure to rent the
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<PAGE> 13
units available in the fleet and a roll back in rental rates, warranted by
competition, to retain current customers. Compression segment's cost reduction
of $55,000 in 1996 could not overcome the $113,000 reduction in revenues.
The single largest contributor to 1995 revenues and profitability was the sale
of two of the Company's four pipelines which resulted in income of $156,500.
During 1996, the Company undertook salvage operations of one of the two
remaining pipelines and has incurred costs of $19,000 which were included in its
inventory. No sales were made from this source in 1996. Other equipment sales
were made that had substantially lower margins than in 1995.
Depreciation expense was down between the two periods by $33,600. The majority
of this reduction was in the oil and gas segment where sales of properties over
the past two years have reduced the depreciable basis. Also, price increases for
oil and gas in December 1996, caused extension of the economic lives of the
remaining properties thus reducing the write off percentages.
General and administrative costs declined by $50,000. The compression segment
decrease was approximately $36,000 representing salary paid to a sales
representative in 1995 and $13,000 in the oil and gas segment from savings
derived when the Company's controller resigned and was replaced by a consultant.
Interest expense declined $20,000 representing the repayment of long term debt
from the pipeline sales and from the auction proceeds in June of 1996.
In summary, 1996 started off on a promising note with the pipeline sales in late
1995 and substantial debt reduction; however, numerous pending and potential
rentals and sales did not materialize because of changes in customers plans
and/or pricing from competition.
LIQUIDITY AND CAPITAL RESOURCES
Management continues to follow the survival strategy for its operations in 1997
which it implemented in 1995. All non-essential and non-core assets are being
actively marketed. The management has been cut by two-thirds and a full-time and
a part-time sales representative has been added on a salary/commission basis.
The Company's executive offices were sublet in 1994, reducing and/or eliminating
all non-essential costs and expenses. Management elected to postpone the audit
of the 1997, 1996 and 1995 financial statements and will continue postponement
or transfer work performed by consultants or independent professionals to
current personnel wherever possible.
Further, management has elected to defer payments on certain debts, dividend and
other obligations in order to remain current with its suppliers and employees
until sufficient monies are raised through sales, refinancing and/or
recapitalization activities are consummated.
There are no assurances that the current situation will abate and the Company
can resume on its path to growth and future profitability.
If the Company is to survive with its current working capital deficits of
$356,700, it must continue to sell its non-core assets and generate such
additional funds as necessary from its compressor sales and rental activities.
Management, unfortunately, has no control over oil and gas prices and supply and
demand for natural
11
<PAGE> 14
gas in its market area. If these elements improve and management's survival
tactics work, the Company will survive, if not, one or all of its business
segments will be sold to pay its obligations.
INFLATION AND CHANGING PRICES
The oil and gas industry has been subject to inflationary cost pressures over
the past several years, particularly in the areas of lease operating costs and
general and administrative costs. In general, until 1982, the impact of such
cost increases were offset by increases in prices received for crude oil and gas
sold during the same period. Since 1982 the price per barrel received for crude
oil has declined, largely to an oversupply of crude oil relative to market
demand. Such declines accelerated during 1986 through late 1988, although there
was a modest recovery since late 1988 through the second quarter of 1990.
Beginning on August 2, 1990, the date Iraq invaded Kuwait, the price of oil
began a rapid increase from an average price of $18.00 per barrel to a high of
$40.00 per barrel.
These inflated oil prices began to recede in October 1990 and have continued to
decline through December, 1994, reaching an average of $14.55 per barrel. The
average price for oil received by the Company was $17.25 per barrel, $19.32 in
1996 and $18.72 in 1997. Management includes this comment from Friday, March 6,
1998, from the IPAMS, WILDCATTER WEEKLY
"CRUDE OIL"
OPEC has scheduled a March 16, ministerial monitoring committee
meeting, but on Wednesday after the Venezuelan oil minister said he
would not attend the meeting (and did not seem overly concerned about
production volumes), the price for April NYMEX light, sweet crude
dropped to a four-year low of $15.07/barrel. That's the lowest since
April 4, 1994, when it dropped to $14.79/barrel.
During 1993 the average oil price decreased 2.5% to $16.39, in 1994 the average
oil price dropped 11% to $14.55 and in 1995 average oil prices increased $2.70
or approximately 19%. The beginning oil price used in 1996 Reserve Report was
$15.69 per barrel, the 1997 Reserve Report was $20.25 per barrel and the 1998
Reserve Report was $15.53 per barrel. While the mid March 1997 price was $18.50
and the average February, 1998 price was $13.12 per barrel, management does not
know what the average price for the current year will be.
Over the last four to five years, market prices for natural gas have fluctuated
as well. As a result of an oversupply of natural gas, pipeline purchasers have
exercised "market out" contract provisions to reduce prices paid to producers;
purchasers have curtailed the amount of gas taken from wells and have been very
selective in the granting of new contracts. During the winter of 1991, gas
prices began to rebound due to the cold weather conditions in the Northeast.
These conditions also occurred in 1992. However, the winters of 1993 and 1994
were milder than expected and gas prices have declined 9% in 1993, an additional
7% in 1994, and an additional 16% in 1995 with $1.25 MCF being used in the 1995
Reserve Report. Gas prices used for the January 1, 1997 Reserve Report reflect
substantially higher prices of $3.09 in Baca County and $4.26 in Adams County,
Colorado which were the highest prices in several years. Gas prices used in the
January 1, 1998 Reserve Report were $1.89 in Baca County and $2.06 in Adams
County, Colorado which in turn are reflected in the lower revenue value and
quantities currently reported. These prices have subsided to levels more in line
with prior years results. March of 1998, Baca County, Colorado prices were in
the $1.89 range which is above 1997 price of $1.40.
12
<PAGE> 15
Due to the reduction in product prices and substantial reduction of industry
exploration activity, certain costs and services associated with the drilling of
oil and gas wells have also declined since 1982; however, this trend reversed
itself in 1997 and prices for workover and drilling rigs increased
substantially. Because of a variety of factors, none of which is within the
control of the Campany, the Company is unable to predict future cost trends or
the prices to be received by it, and the demand, for any oil and gas produced in
the future.
The compressor rental, sales and servicing segments of the Company are directly
related to the fluctuations in oil and gas prices. If prices decline, the demand
for compressors and service will also decline; thus putting pressure on the
Company to lower prices received for these services. In addition, the
exploration activity will decrease which will cause downward pressure on the
prices received for oil field equipment. The reverse generally takes place when
oil and gas prices are on the increase, or even when prices appear to be
stabilizing.
ITEM 7 - FINANCIAL STATEMENTS
The Consolidated Financial Statements included in this report follow page F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Management decided to postpone the audits of its 1997, 1996 and 1995 financial
statements because of liquidity concerns.
13
<PAGE> 16
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, with respect to each director and executive
officer of the Company, as of March 31, 1998, his name and age, his position and
offices, the expiration of his term as director and the period during which he
has served as a director:
<TABLE>
<CAPTION>
Expiration of Period as
Name Age Position Term as Director Director
<S> <C> <C> <C> <C>
Rudy C. Schreider, Jr. 55 Chief Executive Officer 1996 Oct., 1988
Director to Present
</TABLE>
EXECUTIVE OFFICERS
Rudy C. Schreider, Jr., is the President and Chief Executive Officer and a
Director of American Atlas. He has held these positions since October, 1988. Mr.
Schreider was the President of American Atlas from October, 1988 until August,
1993. Since 1985, Mr. Schreider has served as President and Director of
Schreider & Company, Inc.. Mr. Schreider has held the positions of Chief
Executive Officer, Secretary and Director of American Gas Compression Services,
Inc. since its inception. Mr. Schreider is also the President and Director of
Schreider Operating Company. From July, 1983 until March, 1984, Mr. Schreider
was President of Tango Corporation and its oil and gas, real estate and aviation
subsidiaries. From September, 1980 until June, 1983, he was co-founder and
Senior Vice President of Finance of the Quantum Corporation and its subsidiary
Quantum Resource Corporation, both oil and gas companies owning substantial
proven reserves and active in partnership related drilling activities. For the
14 years prior to September, 1980, Mr. Schreider was associated with Touche Ross
& Co., an international public accounting firm, serving as a general service
partner (audit function) for his last three years. Mr. Schreider is a CPA and
member of the AICPA and Colorado CPA societies. Mr. Schreider has served as
president and director of several professional and civic organizations on both a
local and national level. Mr. Schreider holds undergraduate and graduate degrees
in Accounting and Business from Rice University in Houston, Texas.
14
<PAGE> 17
ITEM 10 - EXECUTIVE COMPENSATION
The following sets forth the compensation of the Company's chief executive
officer for the last three year period ended December 31, 1997. There are no
executive officers whose compensation is greater than $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Total Annual
Name Position Year Salary ($) Compensation
- ---- -------- ---- ---------- ------------
(1) (2)
<S> <C> <C> <C> <C>
Rudy C. Schreider, Jr. Chief Executive Officer 1997 $60,000 $60,000
Director 1996 $60,000 $60,000
1995 $60,000 $60,000
</TABLE>
(1) Mr. Schreider's salary since August 15, 1994 has been accrued but not paid,
the cash portion in 1994 was $37,500. As of December 31, 1997, the Company
owes $202,500 for Mr. Schreider's salary, plus related payroll taxes of
$15,500.
(2) The executive officer of the Company and its subsidiaries have not been
awarded, earned or paid any compensation, other than salaries, during the
three year period ended December 31, 1997.
The directors of the Company do not receive any fee or other compensation for
attending meetings of the Board of Directors; however, they may be reimbursed
for actual expenses incurred in connection with attending such meetings. The
Company does not provide any other benefits to its directors.
The Company does not have any stock bonus, pension or profit-sharing plans other
than the Incentive Stock Option Plan described below.
STOCK OPTION PLAN
At the 1993 Annual Meeting of Shareholders, approval was obtained to discontinue
the 1984 Incentive Stock Option Plan, of which no options were outstanding; and
implement the 1993 Key Employees' Incentive Stock Option Plan, (the "Option
Plan"). Pursuant to the Option Plan, the Board of Directors are authorized to
grant options to purchase up to 75,000 (increased to 750,000 to reflect the 10
shares for one stock split effective March 31, 1995) shares of the Company's
Common Stock only to employees of the Company or its wholly-owned subsidiaries.
The exercise price of the option to acquire Common Stock shall not be less than
the fair market value of the Common Stock at the date of grant; provided,
however, that the exercise price shall not be less than 110% of the fair market
value of the Common Stock on the date of grant in the event an optionee owns 10%
or more of the Common Stock of the Company.
There were no outstanding options at December 31, 1997 and none have been
exercised under the Plan.
15
<PAGE> 18
The following table summarizes the stock options granted during the fiscal years
ended December 31,:
Option Grants in 1997 and 1996
None
Aggregated Options Exercised in Last Fiscal Year and
Fiscal Year End Option Values
None Outstanding
16
<PAGE> 19
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1998 the number and
percentage of shares of the Company's voting equity securities for, (a) each
person who, to the knowledge of the Company, is the beneficial owner of 5
percent or more of the outstanding shares of the Company's voting equity
securities; (b) each of the Company's officers and directors; and (c) all of the
Company's officers and directors as a group. Unless otherwise noted in the
footnotes following the table, the director or officer in each case has sole
voting and investment power with respect to the listed shares.
<TABLE>
<CAPTION>
Series A and Series B
1993 Convertible Common Stock
Name and Address of Common Stock Preferred Stock (2) Equivalents (1)
Beneficial Owner Shares Percent Shares Percent Shares Percent
- --------------------------------- ------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
G.H. and N.E. Englund As Trustees 117,940 16.4% 96,668(a) 18.2% 1,084,620 18.2%
of the Englund Family Trust
P.O. Box 5466
Incline Village, Nevada 89450
Daniel R. Wenzinger 26,480(f) 3.7% 86,649(e) 16.3% 892,970 15.0%
1660 Lincoln Street, Suite 2812
Denver, Colorado 80264
Francis Schreider Trust -- -- 16,105(b) 3.5% 161,050 2.7%
123 Running Water
Georgetown, Texas 78625
J.E. Wenzinger -- -- 8,851(c) 1.7% 68,510 1.1%
480 So. Marion Pkwy. #904-A
Denver, Colorado 80209
Officer and Director
Rudy C. Schreider, Jr -- -- 234,405(d) 44.0% 2,344,050 39.3%
240 West Jessup
Brighton, Colorado 80601
All Officers and Directors
as a Group (1 person) -- -- 234,405 44.0% 2,344,050 39.3%
</TABLE>
(1) Common Stock Equivalents represents the maximum shares of common stock to
be issued, assuming: (a) the 523,903 shares of Series A and Series B
Preferred Stock were converted to common stock at the ratio of 10 common
for each share of Preferred Stock.
(2) Includes 462,890 shares of Series A Convertible Preferred Stock, and 61,013
shares of Series B Convertible Preferred Stock.
(a) Includes 88,628 shares of Series A Preferred Stock; and 8,040 shares of
Series B Preferred Stock.
(b) Represents 16,105 shares of Series A Stock.
(c) Represents 6,251 shares of Series A Preferred Stock; and 2,600 shares of
Series B Preferred Stock.
(d) Includes 218,405 shares of Series A Preferred Stock; and 16,000 shares of
Series B Preferred Stock.
(e) Includes 79,749 shares of Series A Preferred Stock; and 6,900 shares of
Series B Preferred Stock.
(f) Mr. Wenzinger's Series A Preferred Shares are held in the name of Atlas
Energy Corp. ("Atlas"), which is a privately-owned Colorado corporation.
Mr. Wenzinger (who resigned as an officer and director of the Company on
April 12, 1995) is the sole Shareholder and Director of Atlas.
(g) R.C. Schreider, the beneficiary of the Francis Schreider Trust is the
parent of Rudy C. Schreider, Jr.; J.E. Wenzinger is the parent of Daniel R.
Wenzinger; Messrs. Schreider and Wenzinger disclaim ownership or the right
to vote any of these shares.
17
<PAGE> 20
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The executive officers of the Company, Messrs. Schreider and Wenzinger, (who
resigned as an officer and director on April 12, 1995) were also officers,
directors and former majority shareholders of entities involved in the 1992
Reorganization.
Schreider's issued and outstanding capital stock at the time of the 1992
Reorganization was owned 72% by Mr. Schreider who is the Chief Executive Officer
and a Director of the Company and 25% by Mr. Wenzinger who was the
President/Treasurer/Chief Financial Officer and a Director of the Company.
Messrs. Schreider and Wenzinger held the similar positions with Schreider. Prior
to the 1992 Reorganization, Schreider owned 33,202 shares or 35.5% of the
outstanding Common Stock of the Company. Schreider also held the rights to
purchase additional shares of the Company's Common Stock through a warrant for
682 shares and an option for 450 shares. As a result of the 1992 Reorganization,
Mr. Schreider received 165,977 shares of Series A Preferred Stock valued at
$634,032, he also received a warrant to purchase 490 shares of Common Stock for
$221 per share, which expired July 1994 and an option to acquire 324 shares of
Common Stock, at $34 per share, which expired November 1995. In connection with
the 1992 Reorganization, Mr. Wenzinger received 57,631 shares of Series A
Preferred Stock valued at $220,150, he also received a warrant to purchase 171
shares of Common Stock for $221 per share, which expired July 1994 and an option
to acquire 113 shares of Common Stock, at $34 per share, which expired in
November 1995.
Mr. Wenzinger was a Director, Treasurer of AGCSI. In connection with the 1992
Reorganization, he received 69.89 shares of Series A Preferred Stock of the
Company, valued at $267, in exchange for his shares of AGCSI.
A portion of the 10% Bonus Interest Promissory Notes issued by AGCSI were
subscribed to by Messrs. Schreider and Wenzinger and various family members of
both. The original investments in the Notes by Messrs. Schreider and Wenzinger
was $26,000 and $23,600, respectively. In connection with the issuance of
warrants for Common Stock for the release of the Noteholder's security interest
in AGCSI's compressors, as of December 31, 1992, Messrs. Schreider and Wenzinger
received warrants to purchase 2,638 shares and 5,513 shares, respectively. These
warrants expired with payment of the Bonus Notes in 1997, unexercised.
In addition, Messrs. Schreider and Wenzinger personally owned undivided working
interests in the same oil and gas properties as the Et. Als. They also exchanged
their interests for shares of Series A Preferred Stock on the same basis as all
other Et. Als. Mr. Schreider received 52,428 shares of Series A Preferred Stock,
valued at $200,274 and Mr. Wenzinger received 22,048 shares of Series A
Preferred Stock, valued at $84,225.
All of the 1992 Reorganization transactions which involved Messrs. Schreider and
Wenzinger or their family members were conducted upon the same terms and
conditions as all 1992 Reorganization transactions involving unrelated parties.
There are no preferential rights associated with any transaction in which the
officers of the Company were involved.
Messrs. Wenzinger and Schreider purchased 6,900 and 16,000 units of Series B
Preferred Stock with Class A and B Warrants for cash of $34,500 and $80,000,
respectively.
18
<PAGE> 21
During 1996, the Company exchanged its interest in five oil and gas properties
in Oklahoma for an account payable owed Mr. Wenzinger. The account payable arose
from salary, consulting fees and expenses prior to his resignation. The reserve
value of the wells was equal to the payable of $12,400. The Company recorded a
profit of $10,700 which was the difference between the book value and the
payable.
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included in Part II (Item 7) of this report:
Management's Report in Lieu of Independent Auditor's Report
Financial Statements:
Consolidated Balance Sheet at December 31, 1997.
Consolidated Statements of Operations for each of the two years
in the period ended December 31, 1997.
Consolidated Statement of Changes in Stockholders' Equity for
each of the two years in the period ended December 31, 1997.
Consolidated Statements of Cash Flow (Indirect Method) for each
of the two years in the period ended December 31, 1997.
Notes to Consolidated Financial Statements.
2. Exhibits
3.1 Certificate of Incorporation of WEPCo Energy Co. (Incorporated by
reference to Exhibit 3.1 to Form 10-K for the fiscal year ended
December 31, 1986).
3.2 Certificate of Amendment to Certificate of Incorporation of WEPCo
Energy Co. filed with the Delaware Secretary of State on August
24, 1987. (Incorporated by reference to Exhibit 3.2 to Form 10-K
for the fiscal year ended December 31, 1987).
3.3 Certificate of Amendment to Certificate of Incorporation of WEPCo
Energy Co. filed with the Delaware Secretary of State on December
4, 1991. (Incorporated by reference to Exhibit 3.3 to Form 10-K
for the fiscal year ended December 31, 1991).
3.3A Certificate of Designation of 1993 Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.3A to Form 10-KSB for the
fiscal year ended December 31, 1993).
3.4 By-Laws of WEPCo Energy Co., as amended (Incorporated by
reference to Exhibit 3.2 to Form 10-K for the fiscal year ended
December 31, 1986).
3.5 1993 Convertible Preferred Stock Certificate of Designation.
(Incorporated by reference to Form 10-KSB for the fiscal year
ended December 31, 1993).
19
<PAGE> 22
4.4 Specimen of Common Stock Certificate of WEPCo Energy Co.
(Incorporated by reference to Exhibit 4.7 to Form S-4
Registration Statement filed November 10, 1986).
10.1 Stock Option Plan adopted by Polaris Oil & Gas, Inc. on July 10,
1984, and transferred and assumed by WEPCo Energy Co.
(Incorporated by reference to Exhibit 10(a) to Form 8-K filed on
September 5, 1984). 10.2 Sublease dated March 31, 1989, Wepco
Energy Company as sublessee and Western Mud Company as sublessor.
(Incorporated by reference to Exhibit 10.10 to Form 10-K for the
fiscal year ended December 31, 1988).
10.3 Letter Agreement dated December 18, 1989, by and among KPW Oil
Company, Schreider & Company, Inc. and Daniel R. Wenzinger.
(Incorporated by reference to Exhibit 10.3 to Form 10-K for the
fiscal year ended December 31, 1989).
10.4 Letter Agreement dated December 15, 1989, by and between
Schreider & Company, Inc. and Atlantic Oil Company. (Incorporated
by reference to Exhibit 10.4 to Form 10-K for the fiscal year
ended December 31, 1989).
10.5 Agreement dated December 22, 1989, by and between Billings 401
Joint Venture and WEPCo Energy Co. accompanying Assignment of
Lessor's Interest in Lease of even date from Billings 401 Joint
Venture to Schreider & Company, Inc. (Incorporated by reference
to Exhibit 10.5 to Form 10-K for the fiscal year ended December
31, 1989).
10.6 Assignment Agreement dated as of September 30, 1989, by and
between Continental Illinois Energy Development Corporation and
Schreider & Company, Inc. (Incorporated by reference to Exhibit
10.6 to Form 10-K for the fiscal year ended December 31, 1989).
10.7 Settlement Agreement dated December 29, 1989, by and between
Ameritrust Company National Association and WEPCo Energy Co.
(Incorporated by reference to Exhibit 10.7 to Form 10-K for the
fiscal year ended December 31, 1989).
10.8 Promissory Note and Commercial Pledge Agreement, each dated
December 29, 1989, from WEPCo Energy Co. in favor of The
Professional Bank of Colorado. (Incorporated by reference to
Exhibit 10.8 to Form 10-K for the fiscal year ended December 31,
1989).
10.9 Secured Term Loan Agreement dated as of December 29, 1989, by and
between WEPCo Energy Co. and Schreider & Company, Inc.
(Incorporated by reference to Exhibit 10.9 to Form 10-K for the
fiscal year ended December 31, 1989).
10.10 Promissory Note and Commercial Pledge Agreement, each dated
December 29, 1989, by WEPCo Energy Co. in favor of Schreider &
Company, Inc. (Incorporated by reference to Exhibit 10.10 to Form
10-K for the fiscal year ended December 31, 1989).
10.11 Purchase and Sale Agreement dated September 15, 1990 between
WEPCo Energy Co. and Enron Oil and Gas Company for interest in
the Shelton State #1-12, Roger Mills County, Oklahoma.
(Incorporated by reference to Exhibit 10.11 to Form 10-K for the
fiscal year ended December 31, 1990).
10.12 Promissory Note dated October 17, 1990 by American Gas
Compression Services, Inc. in favor of WEPCo Energy Co.
(Incorporated by reference to Exhibit 10.12 to Form 10-K for the
fiscal year ended December 31, 1990).
20
<PAGE> 23
10.13 Commercial Pledge Agreement dated October 17, 1990 from American
Gas Compression Services, Inc. in favor of WEPCo Energy Co.
(Incorporated by reference to Exhibit 10.13 to Form 10-K for the
fiscal year ended December 31, 1990).
10.14 Letter Agreement dated August 24, 1990 by and among Davis, Graham
& Stubbs, and Schreider & Company, Inc. (Incorporated by
reference to Exhibit 10.14 to Form 10-K for the fiscal year ended
December 31, 1990).
10.15 10% Secured Bonus Interest Promissory Note issued by American Gas
Compression Services, Inc. (Incorporated by reference to Exhibit
10.15 to Form 10-Q for the nine months ended September 30, 1991).
10.16 American Gas Compression Services, Inc.: Agency Agreement.
(Incorporated by reference to Exhibit 10.16 to Form 10-Q for the
nine months ended September 30, 1991).
10.17 American Gas Compression Services, Inc.: Commercial Pledge
Agreement. (Incorporated by reference to Exhibit 10.17 to Form
10-Q for the nine months ended September 30, 1991).
10.18 Settlement Agreement and Mutual Release dated March 11, 1992 by
and among David V. Creel, Bob N.Nichols, WEPCo Energy Co. and
Rudy C. Schreider, Jr. (Incorporated by reference to Exhibit
10.18 to Form 10-Q for the three months ended March 31, 1992).
10.19 Purchase and Sale Agreement, dated April 20, 1992 and amended
April 21 and 30, 1992 between Wepco Energy Co. and Plymouth
Resources, Inc. for interest in four wells and undeveloped
acreage located in Custer and Roger Mills counties, Oklahoma.
(Incorporated by reference to Exhibit 10.19 to Form 10Q for the
six months ended June 30, 1992).
10.20 Schreider & Company Shareholders' Exchange Agreement: Exchange of
Working Interest by Et. Al's. (Incorporated by reference to
Exhibit 10.20 to Form 10KSB for the fiscal year ended December
31, 1992).
10.21 Schreider & Company Shareholders' Exchange Agreement: Exchange of
Schreider & Company Common Stock. (Incorporated by reference to
Exhibit 10.21 to Form 10KSB for the fiscal year ended December
31, 1992).
10.22 American Gas Compression Services, Inc. Shareholder Exchange
Agreement: Exchange of American Gas Compression Services, Inc.
Common Stock. (Incorporated by reference to Exhibit 10.22 to Form
10KSB for the fiscal year ended December 31, 1992).
10.23 Warrant Agreement by and between American Gas Compression
Services, Inc. and 10% Secured Bonus Interest Promissory Note
holders. Whereas the Company issued a warrant to purchase its
common stock at an exercise price of $.0382 per share.
(Incorporated by reference to Exhibit 10.23 to Form 10KSB for the
fiscal year ended December 31, 1992).
10.93.1 Promissory Note and Security Agreement dated April 12, 1993 by
American Gas Compression Services, Inc. and Wepco Energy Co., as
co-debtors and Norwest Equipment Finance Inc. (Incorporated by
reference to Exhibit 10.93.1 to Form 10QSB for the three months
ended March 31, 1993).
21
<PAGE> 24
10.93.2 1993 Key Employees' Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 10.93.2 to Form 10KSB for the fiscal year
ended December 31, 1993).
22.1 Subsidiaries of the Registrant. (Incorporated by reference to
Exhibit 22.1 to Form 10KSB for the fiscal year ended December 31,
1992).
27 Financial Data Schedule. (Filed herewith, see Exhibit Index).
(b) Reports on Form 8-K.
NONE
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DATED: March 30, 1998
American Atlas Resource Corporation
By: /s/ Rudy C. Schreider, Jr.
-----------------------------------------
Rudy C. Schreider, Jr., President, C.E.O.
Pursuant with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on the behalf of the
Registrant and in the capacities and on the dates indicated.
/s/Rudy C. Schreider, Jr. March 30, 1997
- --------------------------- --------------
Rudy C. Schreider, Jr. President Date
Chief Executive Officer
Director
23
<PAGE> 26
ITEM 7 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN ATLAS RESOURCE CORPORATION
(FORMERLY WEPCO ENERGY CO.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS (SUBMITTED IN RESPONSE TO PART II,
ITEM 8).
<S> <C>
Management's Report in Lieu of Independent Auditor's Report F-2
Consolidated Balance Sheet - December 31, 1997 F-3
Consolidated Statements of Operations - for the Years Ended December 31,
1997 and 1996 F-4
Consolidated Statement of Changes in Stockholders' Equity - for
the Period from January 1, 1996 through December 31, 1997 F-5
Consolidated Statements of Cash Flows - for the Years ended December 31,
1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 27
MANAGEMENT'S REPORT IN LIEU OF
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
American Atlas Resource Corporation
We have prepared the accompanying consolidated balance sheet of American Atlas
Resource Corporation (formerly WEPCo Energy Co.) and subsidiaries as of December
31, 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the two year period
ended December 31, 1997 without audit by Independent Auditors. These
consolidated financial statements are the responsibility of the Company's
management.
Independent Auditors would have subjected these financial statements to audits,
in accordance with generally accepted auditing standards which require planning
and performance of audit procedures to obtain reasonable assurance about whether
the financial statements are free of material misstatements. Independent
Auditors would assess the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. The Independent Auditors would then opine as to the fairness of
the financial position of the Company at the end of the period presented in
conformity with generally accepted principles.
The consolidated financial statements referred to above have been prepared by
the Company without audit. In the opinion of management, these financial
statements contain all adjustments necessary to present fairly, in all material
aspects, the financial position of American Atlas Resources Corporation and
subsidiaries as of December 31, 1997 and the results of our operation and our
cash flow for each of the years in two year period ending December 31, 1997, in
conformity with generally accepted accounting principles.
Rudy C. Schreider, Jr.
March 30, 1998
F-2
<PAGE> 28
AMERICAN ATLAS RESOURCE CORPORATION and SUBSIDIARIES
(Formerly WEPCO Energy Co.)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 76,800
Accounts Receivable (less $10,000 allowance for doubtful accounts) 108,300
Parts and Equipment Inventory 94,600
Prepayments and Other 2,100
-----------
TOTAL CURRENT ASSETS 281,800
-----------
PROPERTY AND EQUIPMENT:
Oil and Gas Properties, (at cost, on the successful
efforts method of accounting)
Proved Properties 1,653,600
Natural Gas Compressors 948,100
Land and Building 141,900
Automobiles and Trucks 163,600
Shop Machinery, Equipment, Furniture and Fixtures 79,900
-----------
2,987,100
Accumulated Depreciation, Depletion and Amortization (1,829,700)
-----------
1,157,400
-----------
OTHER ASSETS: 5,000
-----------
TOTAL ASSETS $ 1,444,200
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 329,100
Oil and Gas Revenues Payable 248,400
Production Taxes Payable 31,000
Current Portion of Long-Term Debt 29,800
-----------
TOTAL CURRENT LIABILITIES 638,300
-----------
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-Term Debt 97,100
Production Taxes Payable 69,900
Advances From Joint Owners and Affiliates 39,600
-----------
206,600
-----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, $.01 par value;
1,000,000 shares authorized:
Series A; 462,890 shares issued and outstanding;
face value $3.82 per share 1,768,200
Series B; 61,013 shares issued and outstanding;
face value $5.00 per share 305,100
Common Stock, $.01 par value; 12,000,000
shares authorized; 720,430 shares issued and outstanding 7,200
Additional Paid-In Capital 5,312,000
Accumulated Deficit (6,793,200)
-----------
TOTAL STOCKHOLDERS' EQUITY 599,300
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,444,200
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 29
AMERICAN ATLAS RESOURCE CORPORATION and SUBSIDIARIES
(Formerly WEPCo Energy Co.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Oil and Gas Sales $ 154,400 $ 225,300
Compressor Rental Income and Sales 286,400 239,500
Gain on Sale of Oil and Gas Properties (Net) -- 50,900
Sales and Services of Oil and Gas Field Equipment 778,100 130,100
Management and Operator Fees 35,600 37,300
Other Income 4,900 2,500
----------- -----------
1,259,400 685,600
----------- -----------
COSTS AND EXPENSES:
Oil and Gas Production Costs 79,500 132,900
Compressor Operating Costs 258,300 220,500
Costs of Oil and Gas Field Equipment and Services 626,100 123,900
Depreciation, Depletion and Amortization 190,000 172,900
Write Down of Oil and Gas Properties
to Estimated Future Net Revenues -- 100
General and Administrative 165,000 176,500
Interest Expense 16,300 20,400
----------- -----------
1,335,200 847,000
----------- -----------
INCOME (LOSS) BEFORE TAXES: (75,800) (161,400)
PROVISION FOR INCOME TAXES:
Income Tax Benefit (Expense) -- --
----------- -----------
NET PROFIT (LOSS) (75,800) (161,400)
LESS PREFERRED DIVIDENDS 21,400 21,400
----------- -----------
NET PROFIT (LOSS) TO
COMMON STOCKHOLDERS $ (97,200) $ (182,800)
=========== ===========
NET PROFIT (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.02) $ (.03)
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,349,300 5,349,300
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 30
AMERICAN ATLAS RESOURCE CORPORATION and SUBSIDIARIES
(Formerly WEPCo Energy Co.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock
Series A Series B
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 462,890 $ 1,768,200 61,013 $ 305,100
Net Loss
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 462,890 $ 1,768,200 61,013 $ 305,100
Net Loss
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 462,890 $ 1,768,200 61,013 $ 305,100
=========== =========== =========== ===========
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 720,430 $ 7,200 $ 5,312,000 $(6,556,000) $ 836,500
Net Loss (161,400) (161,400)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 720,430 $ 7,200 $ 5,312,000 $(6,717,400) $ 675,100
Net Loss (75,800) (75,800)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 720,430 $ 7,200 $ 5,312,000 $(6,793,200) $ 599,300
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 31
AMERICAN ATLAS RESOURCE CORPORATION and SUBSIDIARIES
(Formerly WEPCo Energy Co.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Profit (Loss) Income $ (75,800) $(161,400)
Adjustments to Reconcile Net Profit (Loss) Income to
Net Cash (Used) Provided by Operating Activities:
Depreciation, Depletion and Amortization 190,000 172,900
Write Down of Oil and Gas Properties
to Estimated Future Revenues -- 100
Gain on Sale of Oil and Gas Properties -- (50,900)
Bonus Interest -- 2,000
--------- ---------
114,200 (37,300)
Changes in Operating Assets/Liabilities:
Decrease (Increase) in Accounts Receivable 22,900 (53,200)
Decrease (Increase) in Parts and Equipment Inventory (17,800) (16,600)
Decrease (Increase) in Prepayments and Other (400) (400)
(Decrease) Increase in Accounts Payable
and Accrued Expenses (11,000) 33,800
(Decrease) Increase in Undistributed Revenue 100 10,900
(Decrease) Increase in Production Taxes Payable 7,000 (14,600)
--------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (115,000) (77,400)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Oil and Gas Properties -- 62,600
Additions to Oil and gas Properties (Net) (6,500) (11,700)
Additions to Compressors and Other Equipment (1,500) (5,100)
--------- ---------
NET CASH (USED) PROVIDED IN INVESTING ACTIVITIES (8,000) 45,800
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from Notes 21,800 38,300
Payments on Notes (105,900) (105,700)
--------- ---------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (84,100) (67,400)
--------- ---------
NET (DECREASE) INCREASE IN CASH 22,900 (99,000)
CASH, Beginning of Year 53,900 152,900
--------- ---------
CASH, End of Year $ 76,800 $ 53,900
========= =========
SUPPLEMENTAL INFORMATION:
Cash Paid During the Year For:
Interest $ 59,700 $ 18,200
Net Book Value of Oil and Gas Properties
exchanged for Account Payable $ -- $ 1,700
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 32
AMERICAN ATLAS RESOURCE CORPORATION AND SUBSIDIARIES
(Formerly WEPCo Energy Co.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business -- American Atlas Resource Corporation ("American
Atlas" or the "Company") is the new name of Wepco Energy Co. ("Wepco"). At
its Annual Shareholders Meeting on August 6, 1993, Wepco shareholders voted
to change the Company name. American Atlas/Wepco was incorporated by
Polaris Oil & Gas, Inc. ("Polaris") on June 19, 1984, under the laws of the
State of Delaware, as a wholly-owned subsidiary of Polaris. The
shareholders approved and adopted an Agreement and Plan of Merger pursuant
to which Polaris was merged with and into American Atlas/Wepco, and the
holders of shares of Common Stock of Polaris became holders of
corresponding shares of Common Stock of American Atlas /Wepco on July 13,
1984.
The Company and its wholly-owned subsidiaries, States Exploration Co.
("States") and Schreider & Company, Inc. ("Schreider"), are engaged in the
exploration and development of oil and gas properties and sales and
services of oil field equipment. American Gas Compression Services, Inc.
("AGCSI"), is engaged in the leasing, fabrication and servicing of natural
gas compressors. The Company and its subsidiaries operate exclusively in
the oil and gas industry, and all of its operations are conducted within
the continental United States.
Basis of Presentation -- The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. The Company has a working capital deficit of $356,700 as of
December 31, 1997. The continuation of the Company as a going concern is
dependent upon obtaining additional long-term debt and/or equity financing,
and/or selling property and equipment and achieving and maintaining
profitable operations.
Financial Reporting -- The consolidated financial statements for the years
ended December 31, 1997 and 1996 include the accounts of American Atlas and
its wholly-owned subsidiaries, States, Schreider and AGCSI. All material
intercompany accounts and transactions have been eliminated.
A summary of the Company's significant accounting policies follows:
Parts and Equipment Inventory -- Inventory, which primarily includes
compressor parts and oil field equipment, is recorded at the lower of cost
or market. Compressor parts are valued using the first-in-first-out method;
oil field equipment is valued using the specific identification method.
Oil and Gas Properties The Company follows successful efforts method of
accounting for costs incurred in the acquisition, exploration and
development of oil and gas properties. Under this method, geological and
geophysical costs, annual delay rentals on undeveloped leases and
exploratory dry hole costs are charged to expense as incurred. Intangible
drilling and development costs are capitalized on successful wells and
development dry holes. Property acquisition costs are capitalized as
incurred and are charged to expense when abandoned.
F-7
<PAGE> 33
Depreciation, depletion and amortization are provided on the
units-of-production method based on the estimated proved oil and gas
reserves, computed on a property-by-property basis. Costs are not
capitalized in an amount which exceeds total estimated future net revenues
of the Company's proved reserves.
Unproved properties are assessed periodically for impairment on a
property-by-property basis. Proceeds from sales of interests in unproved
oil and gas properties in which the Company retains an economic interest
are credited against property costs. Gains on sales of interests in
unproved properties are recognized when property costs are fully recovered
and the Company has no substantial commitments for future performance.
Natural Gas Compressors -- Compressors are recorded at cost, which includes
the initial acquisition cost and all direct and indirect cost associated
with overhauling and reconditioning. Depreciation is provided over an
estimated useful life of ten years using the straight-line method.
Land and Building -- Land and Building are recorded at cost. Land cost
estimated to be $24,000 is not depreciated. The remaining cost associated
with the building is depreciated over a thirty year life using the
straight-line method. Maintenance and repairs are included in operations as
incurred; expenditures for major improvements are capitalized.
Automobiles, Trucks, Equipment and Shop Machinery and Tools -- All items
are carried at cost plus any significant expenditures which are required to
get the equipment in operating condition or extend the life of the asset.
All maintenance and repair expenditures are charged to operations. These
assets are depreciated using the straight-line method over their estimated
useful lives.
Furniture and Fixtures -- Furniture and fixtures are carried at cost.
Maintenance and repairs are charged to operations as incurred; expenditures
for major improvements are capitalized. Depreciation is provided using the
straight-line method over five to seven years, which represents the
estimated useful lives of the related assets.
Net (Loss) Income Per Common and Common Equivalent Share -- Net Loss per
common share is computed on the basis of the weighted average number of
common and common stock equivalent shares outstanding during the period.
Common Stock outstanding at December 31, 1997 and 1996, used in the
computation of Net (Loss) Income per common share was adjusted to reflect
the automatic conversion of the Preferred Stock Series A to Common Stock at
December 31, 1994, which was postponed, as accrued dividends in the amount
of $79,600 were not declared nor paid by the Company because of liquidity.
The Board of Directors has not declared dividend on the Preferred Stock
Series B in the amount of $21,400 for the year ending December 31, 1995,
and an equal amount in 1996 and 1997 which amount has been deducted from
Net Loss in determining Net Loss to Common and Common Equivalent Shares
outstanding. Common Stock equivalents are not included in the weighted
average shares or net loss per share calculation for the year ending
December 31, 1997 and 1996, due to their effect being antidilutive. All
references to per share amounts gives retroactive effect to the 1 for 10
stock split, which became effective March 31, 1995.
F-8
<PAGE> 34
2. RECEIVABLES:
<TABLE>
Receivables consist of the following, at December 31, 1997:
<S> <C>
Accrued Oil and Gas Sales $ 18,800
Compressor Rental and Sales and Service
($10,000 Allowance for Doubtful Accounts) 89,500
--------
$108,300
</TABLE>
3. NOTES PAYABLE:
The Company's notes payable and long-term debt consist of the following as
of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Brighton Shop (A) 75,900
Notes to the Banks and Finance Company (B) 50,900
Other 100
---------
126,900
Less Current Portion (29,800)
----------
Total Long-Term Debt $ 97,100
==========
</TABLE>
(A) This note is payable to the seller of the AGCSI's maintenance facility
and the Company's corporate offices located in Brighton, Colorado. It
is collateralized by a first mortgage on the facility. The note
requires monthly payments based upon 8.5% per annum, with principal
and interest amortized over 20 years. On October 15, 2001, the
unamortized principal balance of $63,000 becomes due.
(B) In June 1995, the Company purchased a mechanics truck for its Utah
compressor operations. The purchase was financed by a $36,000,
thirty-six month loan at 7.375% collaterized by the truck. In October
1996, the Company purchased a utility vehicle. The purchase was
financed by a $34,800, thirty-six month note at 8.9% collaterized by
the vehicle. In October, 1997, the Company purchased a truck to
replace the one that was stolen, $21,300 was financed over a
thirty-six month term at 8% per annum.
Minimum principal payments due for the next five years on the notes and
long-term debt as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 29,800
1999 20,700
2000 10,500
2001 65,900
2002 and after --
--------
$126,900
========
</TABLE>
4. INCOME TAXES:
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes in 1992 and elected to restate the financial
statements for the year ended December 31, 1991. Retained earnings were
increased by $11,000 to reflect the cumulative effect of adoption on years
prior to 1991 and recorded a $114,000 net deferred tax asset based upon its
interpretation of the Standard and oil and gas reserve report projections
prepared by its independent petroleum engineers.
F-9
<PAGE> 35
As of December 31, 1994, the Company increased the evaluation allowance to
reflect the uncertainty as to the prudence and feasibility of its tax
planning strategy because of its lack of control over oil and gas prices.
The components of the net deferred tax asset recognized as of December 31,
1997, are as follows:
<TABLE>
<S> <C>
Deferred Tax Asset $ 1,003,300
Less Valuation Allowance (838,800)
-----------
164,500
Deferred Tax Liability (164,500)
-----------
Net Deferred Tax Asset $ -0-
===========
</TABLE>
The temporary differences between the tax basis of assets and their
financial reporting amounts that give rise to the deferred tax liability
are primarily a result of the timing of deductions and write-offs for
certain costs of oil and gas exploration and production activities.
Temporary differences are also created due to the differences arising from
the use of financial accounting for the acquisitions of companies versus
the tax basis of the assets received, most recently the acquisition of
Schreider and the Et. Al's. Interest.
F-10
<PAGE> 36
The amounts which give rise to the net deferred tax asset (liability) as of
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------
Liability Asset Liability Asset
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Excess Book Basis $ 1,085,300 $ $ 1,081,000 $
Excess Book Depreciation 555,900 562,000
Excess Book
Officer's Salary (218,000) (153,000)
----------- -----------
Total Taxable Temporary Differences 1,423,200 1,490,000
----------- -----------
Net Operating Loss Carry Forward 8,416,000 8,325,100
----------- -----------
Tax Effect of Temporary Differences $ 483,900 $ 2,861,000 $ 506,000 $ 2,830,000
----------- -----------
Investment Tax Credit Carry Forward 90,000 90,000
----------- -----------
2,951,000 2,920,000
Less Valuation Allowance (2,467,100) (2,414,000)
----------- -----------
Total Deferred Tax Asset 483,900 506,000
Less Total Deferred Tax Liability (483,900) (506,000)
----------- -----------
Net Deferred Tax Asset $ -0- $ -0-
=========== ===========
</TABLE>
The tax net operating loss carry forwards of approximately $8,325,100 begin
to expire in 1997 and continue through 2007. The investment tax credit
carry forwards expire 1997 through 2004.
The components of income tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Federal:
Current $ -0- $ -0-
Deferred (25,000) (55,000)
-------- --------
$(25,000) $(55,000)
======== ========
</TABLE>
Total income tax (benefit) expense differed from the amounts computed, by
applying the U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Total Expense Computed by Applying
the U.S. Statutory Rate $(25,000) $(55,000)
Income Tax Benefit -- --
Net Increase in Deferred Tax Asset 25,000 (55,000)
-------- --------
-0- -0-
Alternative Minimum Tax -- --
-------- --------
$ -0- $ -0-
======== ========
</TABLE>
5. STOCKHOLDERS' EQUITY:
Preferred Stock
The Company's Certificate of Incorporation, as amended, provides that the
directors have the authority to issue up to 1,000,000 shares of $.01 par
value preferred stock. Such shares can be issued in one or more series upon
terms fixed by the directors which terms may include some or all of the
following features: (a) voting power; (b) may be convertible; (c) may be
entitled to the benefit of a sinking fund to be applied to the redemption
of the shares; (d) may have other rights; and (e) may be entitled to
receive cumulative or noncumulative dividends.
On December 12, 1992, the Board of Directors approved the acquisition of
Schreider, AGCSI and the Et. Al's. Interest through the issuance of
additional equity securities. This plan of acquisition involved the
designation and issuance of the 1993 Series A Convertible Preferred Stock.
Effective
F-11
<PAGE> 37
in December, 1992, the Company completed final agreements and documents
consummating the issuance of 462,890 shares of the Series A Preferred
Stock.
The features of the Series A Preferred Stock issued include: (a) each
Series A Preferred share is being convertible to 10 shares of the Company's
Common Stock; holders of the Series A Preferred Stock may convert to Common
Stock at their option any time or it will automatically be converted on
December 31, 1995; and (b) is entitled to a non-cumulative dividend,
payable quarterly, at a rate of 6% per annum of the face value of $3.82 per
share. The Series A Preferred Stock does not have any liquidation
preference; but, is entitled to one vote per share. The automatic
conversion of the Series A Preferred Stock has been postponed until
management has determined that it has sufficient liquidity to pay the three
quarterly dividends totalling $79,600 originally scheduled for 1994.
In June, 1994, the Company completed a private placement offering under a
Securities Exchange Commission Regulation D filing. The offering consists
of Units of 1993 Series B Convertible Preferred Stock and Warrants to
purchase Common Stock (the "Units"). Each Unit consists of one share of
1993 Series B Convertible Preferred Stock ("Series B Preferred Stock"), one
Class A Common Stock Purchase Warrant, and one Class B Common Stock
Purchase Warrant (the "Series B Warrants").
The features of the Series B Preferred Stock include: (a) an annual
cumulative dividend payable quarterly rate of 7% of the face value of $5.00
per share; (b) each Series B Preferred share is convertible to 10 shares of
Common Stock; (c) each share is entitled to ten votes on all matters
brought before the Company's shareholders; (d) the Series B Preferred Stock
is redeemable for $5.00 per share after December 31, 1995; and do not have
any liquidation preference.
The Company sold 61,013 Units of the Series B Preferred Stock and warrants,
of which 22,900 were sold to officers of the Company, with total proceeds
being $305,100.
During 1994 management and the Board of Directors postponed dividend
payments until the Company's liquidity position improves. Cumulative but
undeclared dividends on the Series B Preferred Stock was $64,200 and
$79,600 on the Series A Preferred Stock at December 31, 1997.
Common Stock
Effective March 31, 1995, the Company declared a 10 for 1 share split of
its Common Stock. All warrants and options were adjusted to reflect this
change.
At the 1993 Annual Meeting of shareholders, approval was obtained to
discontinue the 1984 Incentive Stock Option Plan, of which no options were
outstanding; and implement the 1993 Key Employees' Incentive Stock Option
Plan, (the "Option Plan"). Pursuant to the Option Plan, the Board of
Directors are authorized to grant options to purchase up to 750,000 shares
of the Company's Common Stock. Only employees of the Company or its
wholly-owned subsidiaries are eligible to participate in the option plan.
The exercise price of the option to acquire Common Stock shall not be less
than the fair market value of the Common Stock on the date of grant; in the
event an optionee owns 10% or more of the Common Stock of the Company, the
exercise price shall not be less than 110% of the fair market value of the
Common Stock on the date of the grant.
F-12
<PAGE> 38
6. COMMITMENTS AND CONTINGENT LIABILITIES:
As general partner of certain managed limited partnerships, the Company is
contingently liable for the obligations of the partnerships.
7. MAJOR CUSTOMERS:
Major purchasers of the Company's oil and gas, which accounted for more
than 10% of the Company's oil and gas sales for the years ended December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Customer A $22,300 $71,600
Customer B 48,400 54,800
Customer C 18,500 45,900
Customer D 44,800
</TABLE>
Major purchasers of the Company's natural gas compression services, which
accounted for more than 10% of the Company's compressor rental income for
the years ended December 31, 1997 and 1996 is
<TABLE>
<CAPTION>
as follows: 1997 1996
--------- ---------
<S> <C> <C>
Customer A $ 59,900 $ 50,400
Customer B 46,200
Customer C 31,800
</TABLE>
Major purchasers of oil and gas field services and equipment which
accounted for more than 10% for the year ended December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Customer A: 336,000
Customer B: 310,600
Customer C: 72,100
</TABLE>
8. RELATED PARTY TRANSACTIONS:
The Company owed the Wepco Energy 1984 Drilling Program $56,900 and $90,600
as of December 31, 1997 and 1996, respectively.
During 1996, the Company exchanged its interest in five oil and gas
properties in Oklahoma for an account payable owed Mr. Wenzinger, a former
officer and director. The account payable arose from salary, consulting
fees and expenses prior to his resignation. The reserve value of the wells
was equal to the payable $12,400. The Company recorded a profit of $10,700
which was the difference between the book value and the payable.
F-13
<PAGE> 39
9. INDUSTRY SEGMENTS AND OIL AND GAS PRODUCING ACTIVITIES:
The Company operates primarily in (1) oil and gas exploration and
development, (2) fabrication and leasing, of natural gas compressors, and
(3) sales and service of oil and gas field equipment. Summarized financial
information concerning the business segments is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Oil and Gas $ 190,000 $ 313,500
Compressor Rental 291,300 242,000
Sale and Service of Oil and Gas field Equipment 778,100 130,100
----------- -----------
$ 1,259,400 $ 685,600
=========== ===========
Operating (Loss) Income:
Oil and Gas $ (42,900) $ (37,000)
Compressor Rental (119,700) (128,200)
Sale and Service of Oil and Gas Field Equipment 86,700 3,800
----------- -----------
$ (75,900) $ (161,400
=========== ===========
Identifiable Assets:
Oil and Gas $ 359,400 $ 456,000
Compressor Rental 775,700 858,300
Sale and Service of Oil and Gas Field Equipment 22,300 34,300
----------- -----------
$ 1,157,400 $ 1,348,600
=========== ===========
Depreciation, Depletion and Amortization Expense:
Oil and Gas $ 101,700 $ 94,200
Compressor Rental 76,900 76,700
Sale and Service of Oil and Gas Field Equipment 11,400 2,000
----------- -----------
$ 190,000 $ 172,900
=========== ===========
Additions to Property and Equipment:
Oil and Gas $ 6,500 $ --
Compressor Rental (7,700) --
Sale and Service of Oil and Gas Field Equipment -- 36,300
----------- -----------
$ (1,200) $ 36,300
=========== ===========
</TABLE>
F-14
<PAGE> 40
Results of operations for oil and gas producing activities are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Oil and Gas Sales $ 154,400 $ 225,300
Cost and Expenses:
Oil and Gas Production Cost 79,500 132,900
Depreciation, Depletion and Amortization
and write down to estimated future value 100,000 94,200
--------- ---------
179,500 227,100
Expired Leases and Exploration Expense -- 100
--------- ---------
Income (Loss) Before Income Taxes (25,100) (1,900)
Income Tax Benefit -- --
--------- ---------
Income (Loss) from Oil and Gas
Producing Activities $ (25,100) $ (1,900)
========= =========
</TABLE>
Information relating to costs incurred in oil and gas producing activities
for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Development costs -- --
</TABLE>
Aggregate capitalized costs and related accumulated depreciation, depletion
and amortization write down to estimated future value relating to oil and
gas producing activities for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Proved Properties $ 1,653,600 $ 1,647,100
Accumulated Depreciation
Depletion and Amortization
and write down to estimated future value (1,294,200) (1,194,200)
----------- -----------
Net Capitalized Costs $ 359,400 $ 452,900
=========== ===========
</TABLE>
10. CONCENTRATIONS OF CREDIT RISK:
The Company maintains demand deposit accounts with two banks located in
Denver, Colorado. These accounts are maintained in the names and federal
identification numbers of the separate entities, and for limited periods of
time they exceed the insurance levels of the Federal Deposit Insurance
Corp., thereby minimizing any chances of loss.
F-15
<PAGE> 41
The Company, as operator of jointly owned oil and gas properties, sells oil
and gas production to relatively large U.S. oil and gas purchasers and pays
vendors for oil and gas services. The risk of non-payment by the purchasers
or joint owners is considered minimal.
11. SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited):
The determination of oil and gas reserves is based on estimates and is
highly complex and interpretive. The estimates are subject to continuing
change as additional information becomes available; and an accurate
determination of the reserves may not be possible for several years after
discovery. Moreover, the standardized measure of discounted net cash flows
will not necessarily correspond with the current market value of the
Company's oil and gas reserves. A market value determination would include
many additional factors.
Reserve quantities and estimated future net revenues are based on estimates
prepared by an independent petroleum engineer for 1997, 1996 and 1995. The
Company's reserves are all located within the continental United States.
Following is a summary of the changes in the Company's interest in
quantities of proved reserves for the two years ended December 31, 1997.
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcfs)
---------- ----------
<S> <C> <C>
PROVED RESERVES:
Reserves at December 31, 1995 104,400 1,071,400
Production (6,400) (91,000)
Sales of Minerals in Place (3,300) (55,900)
Revisions (16,100) (161,300)
---------- ----------
Reserves at December 31, 1996 78,600 763,200
Production (3,100) (43,700)
Sales of Minerals in Place -- --
Revisions (10,200) (10,200) (271,000)
---------- ----------
Reserves at December 31, 1997 65,300 448,500
========== ==========
PROVED DEVELOPED RESERVES:
December 31, 1997 9,200 224,000
December 31, 1996 22,400 538,600
December 31, 1995 29,200 695,400
</TABLE>
F-16
<PAGE> 42
The standardized measure of discounted future net cash flows and changes
therein for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Future Cash Inflows $ 1,898,000 $ 4,466,000
Future Production and Development Costs (1,211,800) (2,210,000)
Future Income Tax Expense -- --
----------- -----------
Future Net Cash Flows 686,200 2,256,000
10% Annual Discount for Estimating Future
Net Cash Flows (193,500) (744,000)
----------- -----------
Standardized Measure of Discounted Future
Net Cash Flows $ 492,700 $ 1,512,000
=========== ===========
</TABLE>
The Company will not incur any future income tax expense due to its net
operating loss carry forwards.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Standardized Measure, Beginning of Year $ 1,512,000 $ 973,000
Sales and Transfers of Oil and Gas Produced,
Net of Production Costs (74,900) (93,000)
Net Changes in Prices and Production Costs (1,095,000) 734,000
Net Change Due to Sale of Minerals in Place -- (42,000)
Net Change Due to Quantity Revisions -- (157,000)
Accretion of Discount 151,000 97,000
----------- -----------
Standardized Measure, End of Year $ 492,700 $ 1,512,000
=========== ===========
</TABLE>
The foregoing quantity and discounted future net cash flow information is
based on prices and costs as of the end of each respective reporting
period.
F-17
<PAGE> 43
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
27 Financial Data Schedule
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-01-1997
<CASH> 76,800
<SECURITIES> 0
<RECEIVABLES> 118,300
<ALLOWANCES> 10,000
<INVENTORY> 94,600
<CURRENT-ASSETS> 281,800
<PP&E> 2,987,100
<DEPRECIATION> 1,829,700
<TOTAL-ASSETS> 1,444,200
<CURRENT-LIABILITIES> 636,500
<BONDS> 97,100
0
2,073,300
<COMMON> 7,200
<OTHER-SE> (1,481,400)
<TOTAL-LIABILITY-AND-EQUITY> 1,444,200
<SALES> 1,218,900
<TOTAL-REVENUES> 1,259,400
<CGS> 963,900
<TOTAL-COSTS> 1,153,900
<OTHER-EXPENSES> 160,000
<LOSS-PROVISION> 5,000
<INTEREST-EXPENSE> 16,300
<INCOME-PRETAX> (75,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
