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, 1998 Commission File Number: 0-13871
VINEYARD OIL & GAS COMPANY
(Exact name of Registrant as specified in its Charter)
PENNSYLVANIA 25 1349204
(State or other jurisdiction of incorporation or organization (I.R.S.
Employer Identification Number)
10299 West Main Road, North East, Pennsylvania 16428-0391
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (814) 725-8742
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Parts II or III of this
Form 10-KSB or any amendment to this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year: $12,830,171
As of March 31, 1999, there were 5, 125,562.50 shares of common stock issued
and outstanding. The aggregate value of the voting stock held by non-
affiliates of Vineyard oil & Gas Company (hereinafter referred to as
Vineyard, Company, or Registrant) on that date is unknown. The
Registrant's stock is not listed on any exchange and private sale
information is unavailable to management.
Documents Incorporated By Reference
None.
TABLE OF CONTENTS
ITEM PAGE
PART I
1.BUSINESS 2
2.PROPERTIES 5
3.LEGAL PROCEEDINGS 9
4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
5.MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED
STOCK-HOLDER MATTERS 9
6.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATION 10
7.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 13
8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 13
PART III
9.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 14
10.EXECUTIVE COMPENSATION 15
11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 16
12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
PART IV
13.EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K 17
SIGNATURES 18
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES 19
INDEX OF EXHIBITS
PART I
ITEM 1.BUSINESS
General Development of Business
Originally, Vineyard obtained oil/gas leases and developed those leaseholds
into oil & gas production properties for its own account and on behalf of
Limited Partners.
Over the past ten years, Vineyard Oil & Gas Company has shifted its primary
business objectives towards the marketing of natural gas. Although remaining
in the oil and gas production business, the 'gas marketing' segment of the
company has become the dominant factor of the company's financial progress.
As a result of the company's original mission, several related 'profit
centers' were established to service the company's oil & gas production,
as well as unrelated third parties. Well Service, Equipment Rental,
Pipeline Transmission and, as mentioned above, gas Marketing, have all
become part of Vineyard's business activities.
At present, Vineyard has no subsidiaries. The company is however, a 45%
owner of Northern Pipeline, a Limited Liability Company that gathers and
markets gas for third party producers. See investment in jointly owned
company in Note D to the financial statements dated December 31, 1998,
included in this form 10-KSB.
The most recent addition to Vineyard's business activities is that of
marketing electricity to consumers of electric power within the state of
Pennsylvania.
Vineyard was incorporated under the laws of Pennsylvania in November of 1978.
Its principal executive office is at 10299 West Main Road, North East, PA.
16428, with a telephone number of (814) 725-8742.
Further information concerning the industry segments of the Registrant can be
found in Note F, to the financial statements dated December 31, 1998, included
in this Form 10-KSB.
NARRATIVE DESCRIPTION OF BUSINESS DURING FISCAL 1998
Exploration and Development Activities
Vineyard engaged in no exploration and development activities during the year
1998, and the Company does not foresee any exploration or development
activities during the year 1999, or in the immediate future.
Since the late 1980's, market conditions for oil and gas drilling have not
warranted company or investor interest in exploration or development.
Should market conditions change significantly, the company retains the
ability to engage in all phases of drilling and completion of wells, other
than the actual drilling.
Operation of Oil and Gas Wells
The Company operates approximately 163 gas wells and 16 oil wells on behalf
of itself and Limited Partnerships of which it is also the General Partner,
as well as operating approximately 22 wells for third parties. Such
operations are primarily in New York and Pennsylvania.
Management of Investment Partnerships
As of March 31, 1999, the Company was the General Partner of 11 Limited
Partnerships for which it maintained all books, records and annually
provided appropriate tax information.
Revenue from Activities
The total revenue contributed by each of the various activities of the
Company for the last two fiscal years is set forth in the Income Statement
attached to this report.
Sources and Availability of Raw Materials
The Company has not drilled a well since 1987. The equipment the Company
Possesses from the drilling era is now being used to service wells, to
repair wells and to install pipeline(s).
Both plastic and steel pipe products are readily available and should
continue to be available in 1999.
The Company is cognizant, however, that the oil and gas industry is subject
to tremendous flux and a sudden increase in prices could result in shortages.
Seasonality of Business
The various segments of the Registrant's business are subject to seasonal
changes. Revenues generated by the sale of natural gas are also seasonal with
more demand coming in the colder winter months
when heating consumption is high. Vineyard has continued to stabilize its
sales of natural gas by entering into contracts with several individual
industrial end-users that use gas in the summer only, to provide for a more
level consumption of natural gas on a twelve (12) month basis.
Comments Concerning Liquidity and Capital Resources
Information concerning Vineyard's practices with respect to liquidity and
capital resources is set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" included in Item 6.
Major Customers
See Related Parties Transactions and Business Segment Information, and
Major Customers and Suppliers contained in Note H to the Financial Statements
dated December 31, 1998, included in this Form 10-KSB.
Competition
Vineyard's business activities in the service field, as well as gas marketing,
are faced with competition from many similarly placed companies, as well as
much larger companies and companies which are affiliates of major pipeline
companies. The inconsistent price of natural gas has eliminated some
competitors and has adversely affected many others, just as it has adversely
affected Vineyard. The existence of other companies in the oil and gas
business has not influenced the price of supplies, subcontracted services,
and equipment consumed by Vineyard. Vineyard does not deem its oil and gas
operations to be a significant factor in the industry as a whole, but believes
that they are significant in it's immediate area of operations in Northwestern
Pennsylvania.
Markets
Over 97% of Vineyard's gas production is serviced by two(2) major natural
gas transportation companies. The vast majority of wells owned and
operated by Vineyard are adjacent to the first (NFG) of the two (2) natural
gas transmission companies. The second company (Columbia Gas Transmission)
has only gathering lines near Vineyard's wells, which in turn delivers the
gas to a third transmission company (Tennessee Gas Pipeline) to transport
the gas back to itself, at an additional charge. Consequently, the Company
is in an unequal bargaining position in contracting for price and volumes of
natural gas to be purchased by natural gas pipeline companies. This second
Company(Columbia Gas Transmission) sold its gathering lines to Norse Pipeline,
LLC who hopes to develop new markets.
Vineyard's bargaining position has been improved through the opening of
end-user markets pursuant to rules and regulations promulgated by the
Federal Energy Regulatory Commission and the Pennsylvania and New York Public
Utility Commissions. These rules and regulations force the natural gas
transmission companies to transport the Company's production to independent
industrial or third party end-users. Although this transportation is done
at a fee, it does allow the Company a choice of markets for its production
and that of
Producers it markets for.
The agreements that Vineyard has with the pipeline companies permit
transportation of Vineyard's production to end-users. While the existence and
availability of end-users is benefiting the Company in regards to a higher
price for productions, as well as the taking of higher volumes, said end-user
market is dependent on the pipeline companies. Lack of sales to end-users
would cause a reduction in the price received by the Company for which the
Company could sell on a day-to-day basis. The Company is confident that it
possesses the contacts, knowledge, and information necessary to continue to
market natural gas to end-users. The Company's ability to market to end-
users is such that it is now marketing significant volumes of natural gas
for third party producers of natural gas to industrial and commercial end
users for a fee payable to the Company.
Gas Marketing
Demand for the Company's gas depends on many factors beyond Vineyard's
control, including the level of domestic production, foreign imports, the
price of fuel oil, access to pipelines, seasonal demands for fuel and
government regulation. To help offset the impact of these factors, during
the early 1980's, the Company began to market its gas as well as that of
other producers directly to end-users and to broker gas via spot deals
with suppliers and end-users. This portion of Vineyard's business has grown
to higher levels and has become a major part of the Company's over-all
business.
Pipelines
Vineyard Oil & Gas Company owns approximately 48 miles of pipelines that
gather both its productions and that of other companies to be transported
to the major transmission companies and directly to end-users. The Company
is in the process of expanding this gathering system to allow producers to
consolidate compression and dehydration.
The Company also owns a 45% interest in Northern Pipeline Company, LLC which
imposes a gathering charge for the collection of natural gas.
Environmental Regulation
Vineyard's drilling and well services are subject to existing laws and
regulations designed to protect the environment. Compliance with said laws
and regulations has decreased the efficiency of the Company's operations
but has not materially increased the cost of doing business. Environmental
regulations are no more burdensome to Vineyard than to other similar oil
and gas companies. Additional laws and regulations which could be passed
or repealed at any time could result in a material increase or decrease in
the cost of doing business.
Employees
On March 31, 1999, the Company had 13 full-time employees. None of
Vineyard's employees are presently represented by a union for collective
bargaining purposes.
ITEM 2. PROPERTIES
Information Concerning Reserves, Production Wells, Acreage, Drilling
Activities, and Real Estate are as follows:
Introduction
The Company believes that it has satisfactory title to its interests in
developed oil and gas properties, all of which are located primarily in New
York and Pennsylvania. The Company's developed oil and gas properties
are also subject to customary royalty interest generally contracted for in
connection with the acquisition of the properties, burdens incident to
operating agreements, current taxes, and easements and restrictions
(collectively, "Burdens"). The Burdens are customary in the Company's
industry and do not place the Company in a competitive disadvantage
As is customary in the oil and gas industry in the case of undeveloped
properties, little or no investigation of title is made at the time of
acquisition (other than a preliminary review of local real estate records).
However, investigations are generally made, and in virtually every case, a
title opinion is obtained from local counsel before drilling operations
begin.
The Company's headquarters in North East, Pennsylvania include an office
complex, a four unit apartment house, a single family dwelling, a repair
shop, a storage building and 19 acres of land zoned Industrial.
Definitions
The following words have the following definitions when used herein:
Gross Well or Gross Acre: A gross well or gross acre is a
well or acre in which an interest
is owned. The number of gross
wells or acres is the total number
of wells or acres in which an
interest is owned.
Net Well or Net Acre: A net well or net acre is deemed to
exist when the sum of fractional
ownership interests in gross wells
or net acres equals one. The number
of net wells or net acres is the
sum of the fractional interests owned
in gross wells or gross acres.
Proved Oil and Gas Reserves: Proved oil and gas reserves are the
estimated quantities of crude oil,
natural gas, and natural gas
liquids which geological and
engineering data demonstrate with
reasonable certainty to be
recoverable in the future from
known reservoirs under existing
economic and operating conditions;
i.e., prices and costs as of the
date the estimate is made. Prices
include consideration of changes in
existing prices provided only by
contractual arrangements, but not
of escalations based upon future
conditions.
Proved Developed Oil and
Gas Reserves: Proved developed oil and gas
reserves are reserves that can be
expected to be recovered through
existing wells with existing
equipment and available operating
methods.
Proved Undeveloped Reserves: Proved undeveloped oil and gas
reserves are reserves that are
expected to be recovered from new
wells on undrilled acreage, or from
existing wells where a relatively
major expenditure is required for
recompletion. Reserves on
undrilled acreage are limited to
those drilling units that offset
productive units and that are
reasonably certain of production
when drilled.
Developed Acreage: Developed acreage is acreage that
is spaced or assignable to
productive wells or is acreage held
by production which eventually
could receive additional wells.
Undeveloped Acreage: Undeveloped acreage is acreage on
which wells have not been drilled
or completed to a point which would
permit production of commercial
quantities of oil and gas
regardless of whether or not such
acreage contains proved reserves.
Exploratory Well: A well drilled to find and produce
oil or gas in an unproven area, to
find a new reservoir in a field
previously found to be productive
of oil or gas in another reservoir,
or to extend a known reservoir.
Development Well: A well drilled within the proved
area of an oil or gas reservoir to
the depth of stratigraphic horizon
known to be productive.
Dry Well: A dry well is an exploratory or a
development well found to be
incapable of producing either oil
or gas in sufficient quantities to
justify completion as an oil or gas
well.
Barrels (Bbls.): Equal to 42 U.S. gallons and
represents the basic unit for
measuring oil production.
Mcf: Equal to the volume of 1,000 cubic
feet of natural gas under
prescribed conditions of pressure
and temperature and represents the
basic unit for measuring natural
gas.
Significant Properties
As of March 31, 1999, the Company had no individual interests in an oil and
gas property that accounted for more than 10% of the Company's proved
developed oil or gas reserves, including the Company's interest in reserves
owned by 11 Partnerships.
Oil and Gas Reserve Information
See Proved Reserves Table included in Note J (unaudited) to the Financial
Statements dated December 31, 1998, included in this Form 10-KSB
Reserves Reported to Other Agencies
Vineyard does not file any estimates of total proved net oil or gas
reserves with any other Federal authority or agency, other than the
Securities and Exchange Commission on this Form 10-KSB.
Oil and Gas Production
The following table sets forth net quantities of oil and natural gas
produced by Vineyard, including its proportional share in production of
partnerships, for the years indicated. All production is from wells
located in the United States. For further information see Note J to the
Financial Statements dated December 31, 1998, included in this Form 10-KSB.
1998 1997
GAS (mcfs) 129,309 149,632
OIL (barrels) 602
Average Annual Sales Prices and Production Costs
The following table sets forth the average annual sales price per unit of
oil and gas produced by the Company, including its proportional interest in
the production of Partnerships.
1998 1997
Average Annual Sales Price
per Unit of Gas (mcf) $2.63 $2.80
Average Annual Sales Price
per Unit of Oil (barrel) $13.62 $17.83
Equivalent Average Annual Production Cost
1998 1997
Gas (per mcf) $1.54 $1.91
Oil (per barrel) $29.86* $21.92*
* The price can change while the oil is being produced, therefore, certain
production can be sold below production cost. Fixed cost remained fairly
constant while production was reduced due to low oil prices.
Oil and Gas Wells
The following table sets forth information as of March 31, 1999, regarding
the Company's productive oil and gas wells.
Gross Wells Net Wells
Gas Wells 126 73.6
Oil Wells 13 6.1
During the year 1998, the Company analyzed past, current and projected income
from company owned wells, and elected to sell 53 oil wells while plugging 28
oil wells and 4 gas wells. For further information, see Note G to the
financial statements dated December 31, 1998 included in this form 10-KSB.
Acreage
The following table sets forth information as of March 31, 1999, regarding
the Company's developed and undeveloped oil and gas acreage.
LEASEHOLD ACREAGE
Gross Acreage Net Acreage
Developed Natural Gas Acreage 13, 947.35 4,762.45
Undeveloped Natural Gas Acreage* -0- -0-
Developed Oil Acreage 75 27
Undeveloped Oil Acreage 25 25
* The lack of drilling activity in the Company's area of operations has
resulted in large amounts of undeveloped acreage being freed from the
obligations of oil and gas leases. The Company currently has undrilled
locations on acreage held for the benefit of the Company by production and
is confident that it can acquire acreage in amounts in excess of its needs
in the event of an up-turn in drilling activity.
Natural gas lease acreage typically costs the Company between $2.00 and
$5.00 per acre in delayed rentals. No delay rentals are currently paid.
The majority of the natural gas leases entered into by the Company are for
a two-(2) year period, and typically is a 7/8th interest. Oil acreage
generally is burdened by additional third party royalty interest and
generally a lease is being held by production on some part of that lease.
Drilling Activity
There has been no drilling activity during the years 1998 and 1997.
Present Activities
As of March 31, 1999, no wells were in the process of drilling.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings for the Company other than
being party to several actions which arise in the normal course of the
Company's business. In Management's opinion, none of these lawsuits or
proceedings should, individually or in the aggregate, have a material
adverse affect upon the financial position of the Company.
See Note G to the Financial Statements dated December 31, 1998, included in
this Form 10-KSB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market and Value of Common Stock
There is no established public trading market for Vineyard's common stock.
Vineyard's common stock is traded privately on a sporadic basis principally
in the Northwestern Pennsylvania market.
Number of Holders of Common Stock
As of March 31, 1999, the stock ledger of the Registrant indicated that
there were 975 shareholders of its common stock.
Dividends
The Company did not declare or pay a dividend during fiscal 1998. The
Board of Directors does not anticipate paying or declaring a dividend
during fiscal 1999 or in the near future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The Company's results of operation for the year ended December 31, 1998,
and its financial condition at December 31, 1998, are discussed in the
following paragraphs and should be read in conjunction with the financial
statements of the Company.
Business Overview
The year 1998 again had a business climate that was volatile for all energy
related
companies, particularly so for small independent producers and marketers
such as Vineyard. The winter of 1998 was also in part mild, thus our endusers
did not burn as much gas as in a normal winter.
The Company showed a net profit of $186, 568 in 1998, down from $192,936 in
1997.
The Company is continuing to analyze certain facets of its operations and
is contemplating
closing those cost centers which are unable to function profitably and at
the same time, grow the centers that are profitable.
General and administrative expenses are reviewed periodically for cost savings
while in-house accounting procedures have been be evaluated and made more
efficient wherever possible. In December, 1996, management presented and
the Board adopted a detailed business plan identifying company strengths,
industry trends and growth projects for 1997 and beyond.
Gas Marketing and Transmission
The year 1998, as in years past, saw wellhead prices too inconsistent to
warrant significant investment capital for new drilling ventures with
Vineyard Oil & Gas.
Management, some time ago, identified this trend and has successfully added
to Vineyard's gas marketing and transportation. These divisions have shown
continued significant improvement and are the major focus of the Company now
and for the immediate future.
Management, however, recognizes that our consistent gains in these areas are
subject to our continued ability to secure production as well as the
marketing of that production.
Most contracts are renewed on an annual basis and are subject to fierce
competition. The loss of a major supplier or user of gas could be of
significance. Vineyard markets gas from third party producers with year to
year contracts. One of Vineyard's major producers sold their production to a
company without a marketing team. Vineyard has continued to market gas for
them in 1998 and in 1999.
Vineyard's largest producer contemplated selling their production, but rejected
all offers and Vineyard Oil & Gas continues to market this production. If the
Vineyard were to loose these producers, the Company would have to find
Equivalent suppliers under similar contract terms.
The "acquisition mode" within the oil and gas industry has generated interest
from some of Vineyard's competitors in acquiring our Company. The Company is
currently reviewing a formal offer.
Management will continue to talk informally to those companies expressing
interest in our assets and will evaluate all written proposals (if any) to
maximize shareholder value.
Gas Transmission
Vineyard currently owns and operates 48 miles of gathering lines.
In 1996, the Company (45% owner) and two producers formed a limited liability
company (Northern Pipeline) which acquired Pennzoil's National Transit
Pipeline. 1998 showed continued expansion of our Northern Pipeline project.
We now have renovated over 60 miles of this pipeline and continue to gather
and market the natural gas related to it.
Our plans include the continued expansion and restoration of strategic segments
of the pipeline. We are also evaluating the potential interconnection of
Northern Pipeline with a much larger private pipeline, which could
substantially increase our throughput volumes thereby improving our gathering
and marketing revenues. Additionally, there has been interest expressed by
other oil and gas producers to purchase isolated portions of the Northern
Pipeline system.
Management considers this area of its operations a major part of its business
plan.
Liquidity and Capital Resources
The cash flow of Vineyard Oil and Gas Company is dependent primarily on gas
marketing sales, revenues from well services, sale of existing production,
and the transmission of third party gas.
The continued inconsistent prices for both oil and gas has adversely impacted
the Company's desire to attract outside investment capital for drilling new
wells. Gas and oil prices are unstable, therefore, the Company will direct
its attention to increased activity in gas marketing, and transmission of
third party gas.
The Company is continuing to review the various cost centers in an effort to
control and reduce costs where possible. The Company is continuing to
analyze all partnership programs in an effort to determine which are not
economic to maintain. The Company will try to close additional partnerships
no longer considered economically viable in 1999.
Comparative Results of Operations
The total revenues for 1998 increased $2,891, 310, or 29%, over total revenues
in 1997. Gas marketing accounted for $2,829, 651 of the increase, as a result
of increased volumes sold at increased prices. Gas purchases increased
$2,830, 238, or 33%, over 1997. Well services revenue decreased $22,638, or
9%, due principally to a decrease in contract mark ups. Production and
royalties revenue decreased $45,011, or 11%, due to a decrease in gas
production of Company wells. Equipment rental increased $59,298, or 32%,
due to increased services provided to outside customers.
Other income increased $49,625 over 1997. Of this increase, $20,000 were
proceeds from the sale of wells and $53,293 were proceeds from the sale of
timber. These increases were offset partly by a decrease in interest income.
Equity in earnings of jointly owned company increased $20,385 over 1997.
This increase was the result of increased volumes of gas gathered during
the year.
Direct costs and expenses increased $2,851,507, or 31%, over 1997. Gas
purchases increased $ 2, 830, 238 as explained above. Well and equipment
service costs increased $ 62,673, and production decreased $ 33,067 over the
prior year. Equipment expenses increased slightly $ 7,898, and depreciation
decreased by $ 16,235.
General and administrative expenses increased $48,395, or 12%, over 1997.
This amount included increases in consulting services of $ 19, 435, attorney
fees of $ 7,399, Board of Directors fees of $4,225, insurance of $ 7,799, and
group insurance of $3,612.
Interest expense decreased $2,139 from 1997. Interest expense in 1998 was on
installment trade accounts payable.
Net income decreased $6,368 from 1997. Although other income and equity in
earnings of jointly owned company increased $70,010, as explained previously,
this was more than offset by the increase in well and equipment and general
and administrative expenses..
Net current assets at December 31, 1998, increased $167,332 over 1997.
Accounts receivable increased $571,702 while cash decreased $295,869. Trade
accounts payable increased $100,775.
Fixed assets decreased $246,469 from 1997. Of this amount $245,605 was the
book value of the wells which were sold in 1998. These assets were fully
depreciated. A similar amount was written off against the accumulated
depreciation account.
Cash restricted for well plugging increased $111,290. Of this amount, $16,430
was investment income and the balance was amounts transferred by Vineyard Oil
and Gas Company. There were no partnership contributions to the account in
1998.
Investments represent the Company's interest in a jointly owned company.
The investment showed a net decrease for the year of $49,342. The account
increased by $31,607 net income and a Company investment of $12,343, and
was reduced primarily by distributions.
Deferred revenues decreased $40,990 from 1997. The account increased by
$16,430 of interest earned and decreased by the cost of well plugging in
1998. There were no partnership contributions to the account in 1998.
Net cash used by operating activities in 1998 was $233,047. The major
reason for the decrease in cash was an increase in accounts receivable of
$575,402, offset by an increase in accounts payable of $75,336. Investment
in the jointly owned company produced cash of $49,342. The overall effect
was a decrease in cash of $184,579 in 1998.
YEAR 2000 ISSUES
Description
The Year 2000 Issue results from a computer's inability to process year-
date data accurately beyond the year 1999. Except in recent years, computer
programmers consistently have abbreviated dates by eliminating the first two
digits of the year with the assumption that these two digits would always be
Thus, January 1, 1965, became 01/01/65. Unless corrected, this shortcut
is expected to create widespread problems when the clock strikes 12:00:01
A.M. on January 1, 2000. On that date, some computer programs may recognize
the date as January 1, 1900, and process data inaccurately or stop processing
altogether. Additionally, the use of abbreviated dates may cause failures
when systems currently attempt to perform calculations into the year 2000.
The Year 2000 Issue presents another challenge - the algorithm used in some
computers for calculating leap years is unable to detect that the year 2000
is a leap year. Therefore, systems that are not year 2000 ready may
register the additional day and date calculations may be incorrect.
Furthermore, some software programs use several dates in the year 1999 to
mean something other than the date. Examples of such dates are 01/01/99,
09/09/99, and 12/31/99. As systems process information using these dates,
they may produce erratic results or stop functioning.
The Year 2000 Issue could result in miscalculations or an inability to
processtransactions, send invoices or engage in similar normal business
activities.
Company's State of Readiness
Based upon a Summer 1998 assessment by the Company, it was determined
that it will be required to modify and possibly replace material
portions of existing software and hardware relating to its operations,
and has commenced the remedial process. With respect to its
operations, the Company anticipates that the testing and implementation
of its upgrades will be completed on or before July 1, 1999.
Beginning in 1999, the Company has initiated communications with all of
its significant business partners to determine their Year 2000
compliance. Responses are evaluated as they are received to determine
if additional action is required to ensure compliance of the business
partner or if alternatives are available. The Company expects that by
June 1999, all of its principal business partners will have advised the
Company that they are Year 2000 compliant or have initiated programs
that will render them Year 2000 compliant in a timely fashion.
Company Cost to Address Year 2000 Issues
New Repaired
Hardware Software Hardware Software
Costs incurred through
12/31/98 $19,455 $2,317 $0.00 $0.00
Estimated remaining costs $0.00 $3,500 $0.00 $0.00
Total costs $19,455 $5,817 $0.00 $0.00
The Company intends to utilize its current staff for testing and
implementation. The above noted estimate does not include a
provision relating to staff costs. These costs are currently
indeterminable.
The Year 2000 Issue costs have been, and are expected to be, funded
through current operating income.
The Risks of the Company's Year 2000 Issues
The Company deems its greatest risk related to the Year 2000 Issues as
being unable to provide oil and gas production to its customers, since
this production will rely heavily on the assurances provided by the
third party producers.
The Company's Contingency Plans
To the extent that any of its business partners are materially affected
by Year 2000 problems, the Company intends to seek the same services
from alternative firms that are Year 2000 compliant. In view of the
responses from its current business partners, the Company will identify
alternative firms on an as needed basis. There can be no assurance,
however, that the Company would be able to make appropriate arrangements
should the need arise, and accordingly it is uncertain whether, or to
what extent, the Company may be affected if problems with its business
partners arise.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this is submitted in a separate section of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Gorzynski, Felix and Gloekler, P.C., was retained by the
Company for the 1998 audit. There were no disagreements with the auditors
on any matters of accounting principles or practices, financial statement
disclosures, or auditing scope and procedures for the years ended December
31, 1998, and 1997.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Officers, and Nominees as of March 31, 1999.
Name Age
James J. Concilla 61 Board Chairman, President, Director and a member
of the Executive Committee. Mr. Concilla has a
Bachelors of Science degree from Edinboro
University and a Masters degree in Mathematics
from the state of Pennsylvania. Mr. Concilla has
been an employee, director, and officer of the
Company since its organization in 1978.
Charles L. Valone 67 A Director and member of the Wage and Bonus
Committee. Mr. Valone has been
a director of the Company since its founding. Mr.
Valone has owned and operated vineyards in North
East, Pennsylvania, since 1948. These operations
are unrelated to the Company.
Jeffery L. Buchholz 52 Secretary, Treasurer, Director, and a member of
the Executive, and Audit Committees. Mr.
Buchholz holds a Bachelors degree in Business
Administration from Lambuth College, Jackson,
Tennessee, and a Masters degree in Education from
Georgia Southern University, Statesboro, Georgia.
Mr. Buchholz, a Director since 1989, and the
Secretary/Treasurer since 1990, has been a teacher
and Union Officer in the Ripley, New York, school
system since 1970.
Stephen B. Millis 41 Vice-President, Director, and a member of the
Executive Committee. Mr. Millis holds a Bachelor
of Arts degree from Gannon University. Mr.
Millis, an employee since 1982, was elected Vice-
President and a Director in 1992.
James J. MacFarlane 37 Mr. MacFarlane was elected a Director in 1993.
Mr. MacFarlane is a member of the Wage/Bonus
Committee. Mr. MacFarlane holds a Bachelor
of Science degree from the University of Pittsburgh.
Mr. MacFarlane has been a Consulting Geologist/
Engineer with MacTech Mineral Management, Inc.,
Bradford, Pennsylvania, since 1987. MacTech
Mineral Management, Inc. is unrelated to the
Company.
W. Eric Johnson 40 Mr. Johnson was elected as a Director in 1997.
Mr.Johnson is a member of the Audit and Wage/
Bonus Committees. Mr. Johnson holds a Bachelor
of Science Degree from the University of Dayton.
Mr. Johnson has been an investment broker with
Thomas F. White and Company, Inc. Erie, PA since
1989. Thomas F. White and Company, Inc. is
unrelated to the Company.
David H. Stetson 40 Mr. Stetson was elected as a Director in 1998. Mr.
Stetson is a member of the Audit committee. Mr.
Stetson has been President and Co-owner of Stetson
Brother's Hardware Store, Inc. in North East, PA.,
for the past twenty years. Stetson Brothers, Inc. is
unrelated to the Company.
Current Officers Title/Office Year in Which Term to Expire
and Directors Service as at Annual
Director Began Meeting in
James J. Concilla Board Chairman/President 1978 1999
Jeffery L. Buchholz Director/Secretary/Treasurer 1989 1999
Charles L. Valone Director 1978 2001
Stephen B. Millis Director/Vice-President 1992 2000
James J. MacFarlane Director 1993 2001
W. Eric Johnson Director 1997 2000
David Stetson Director 1998 2000
March 31, 1999 Board Committees and Members
Executive Audit Wage/Bonus
James J. Concilla Jeffery L. Buchholz Charles Valone
Jeffery L. Buchholz W. Eric Johnson W. Eric Johnson
Stephen B. Millis David Stetson James J. MacFarlane
ITEM 10. EXECUTIVE COMPENSATION
Executive Officers
The following table sets forth certain information concerning compensation
during fiscal 1996, 1997 and 1998 by the Company to each of the Company's
executive officers.
Summary Compensation Table
Name and Year Base Salary Commissions Bonus Other
Principal Position (1) (2) (3) (4) (5) (6)
James J. Concilla 1998 $75,000 $61,129 0 $3,000
President, Chairman 1997 $47,341 $31,928 0 $3,000
of the Board 1996 $47,341 $15,000 0 $3,000
Stephen B. Millis 1998 $50,970 $88,074 0 $3,000
Vice-President 1997 $36,941 $43,289 0 $3,000
1996 $36,941 $17,000 0 $3,000
Jeffery L. Buchholz 1998 $2,431 0 0 0
Secretary/Treasurer 1997 $874 0 0 0
1996 $1,159 0 0 0
Mr. Concilla's base salary for 1998 was adjusted to $75,000 with no
commissions as of January 1, 1998.
The unpaid amount of $27,664 is reflected in accounts payable.
The Company paid Mr. Millis a base salary of $36, 941 / year. Mr. Millis
also earned commissions up to July 1, 1998. Retroactive to July 1, 1998
the Company changed Mr. Millis' compensation to salary only of $65, 000 / year
The amount due Mr. Millis for 1998 was $78, 886. The amount paid Mr. Millis in
1998 was $97, 099 which, included commissions of $60, 158 earned in 1996 and
The unpaid amount for 1998 of $41, 945 is reflected in accounts payable.
Mr. Millis disputes the Companies right to change his compensation. Mr. Millis
claims he has an employment contract that requires that he be paid a salary of
$36, 941 plus commissions. The $18,000 in dispute at December 31, 1998 is not
reflected in accounts payable.
Reflects commissions related to the sale of natural gas. The commissions
paid to Mr. Concilla in 1998 were earned during 1996 and 1997. The 1998
commissions reported above for Mr. Millis were earned during the years 1996
1997 and 1998 up to June 30, 1998. The commissions reported above for 1996
and 1997 represent commissions paid in 1996 and 1997, which were in part
earned in prior years
No stock bonus was awarded to any directors, executive officers or other
employees of the
Company during the years 1996, 1997 or 1998.
In April, 1995, the Board of Directors established life insurance plans
for Mr. Concilla and Mr. Millis, contributed annually in the amounts as
shown.
(6) Mr. Concilla and Mr. Millis are given the use of Company vehicles and
the Company provides Mr. Buchholz, a part-time employee, with
personal automobile labor maintenance.
No officer received any other non-cash compensation during the years ending
December 31, 1996, 1997 or 1998, other than health insurance which all full-
time employees of the Company are entitled to receive.
Executive Officer Severance Package
An Executive Officer severance package which was in effect for Chief
Executive Officer Concilla and Vice President Millis was withdrawn by the
Wage/Bonus Committee, which is a majority of the Board of Directors, in
December of 1997.
No stock options were awarded to any directors, executive officers or other
employees of the Company during fiscal 1998.
Directors
Directors are paid $150 for each meeting of the Board of Directors at which
the director is present. In addition, directors attending Wage/Bonus
and/or Audit Committee meetings are also each paid $150.00 per meeting.
There is no compensation for directors attending Executive Committee
meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Set forth below is information, as of March 31, 1999, concerning the stock
ownership of all persons who own of record or are known to the Company to
own beneficially at least 5% of the outstanding common stock, all directors
owning stock and all officers and directors as a group.
Name and Address Number of Shares (1) Percentage of Class
James J. Concilla 307,261. 256.0%
20 Blaine Street
North East, PA 16428
Charles L. Valone 142,000 2.8%
11217 Old Lake Road
North East, PA 16428
Stephen B. Millis 221,650 4.3%
11370 Martin Road
North East, PA 16428
Jeffery L. Buchholz 2,375.5 .05%
149 Orchard Beach Park
North East, PA 16428
W. Eric Johnson 38,345.63 .7%
830 Compass Drive
Erie, PA 16505
David H. Stetson 81,475.5 1.6%
9916 East Lake Road
North East, PA. 16428
All Officers and Directors
as a group (5 individuals) 793,701.38 15.5%
NOTE: Director MacFarlane is not a shareholder.
(1) All shares are beneficially owned and the sole investment and voting
power is held by the persons named. Includes shares which may be owned
beneficially by the wives and/or minor children and/or trusts for the
benefit of the minor children of the persons names, as to which beneficial
interest is disclaimed.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1), (2), and (3) The response to this portion of Item 13 is
submitted as a separate section of this Report.
(b) Reports on Form 8-K filed in the fourth quarter 1998: None.
(c) Other reports on Form 8-K: None.
(d) Exhibits - The response to this portion of Item 13 is submitted as a
separate section of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VINEYARD OIL & GAS COMPANY
James J. Concilla Chairman, Board of Directors,
JAMES J. CONCILLA President
Jeffery L. Buchholz Secretary/Treasurer, Director
JEFFERY L. BUCHHOLZ
Charles L. Valone Director
CHARLES L. VALONE
Stephen B. Millis Vice-President, Director
STEPHEN B. MILLIS
James J. MacFarlane Director
JAMES J. MACFARLANE
W. Eric Johnson Director
W. ERIC JOHNSON
David H. Stetson Director
DAVID H. STETSON
Melissa A. Carris Controller
MELISSA A. CARRIS
FORM 10-KSB ITEM 7
VINEYARD OIL AND GAS COMPANY
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Balance Sheet - December 31, 1998
2. Income Statements - Years Ended December 31, 1998 and 1997
3. Statements of Shareholders' Equity - Years Ended December 31,
1998 and 1997
4. Statements of Cash Flows - Years Ended December 31, 1998 and
1997
5. Notes to Financial Statements - December 31, 1998
Independent Auditors' Report
Board of Directors
Vineyard Oil and Gas Company
North East, Pennsylvania
We have audited the accompanying balance sheet of Vineyard Oil
and Gas Company as of December 31, 1998, and the related statements
of income, shareholders' equity, and cash flows for each of the two
years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to provide reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes an assessment of the accounting principles used and
significant estimates made by management, as well as an evaluation
of the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements
present fairly, in all material respects, the financial position of
Vineyard Oil and Gas Company at December 31, 1998, and the results
of its operations and its cash flows for each of the two years in
the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Gorzynski, Felix and Gloekler, P.C.
March 20, 1999
North East, Pennsylvania
EXHIBIT NUMBER 27
FINANCIAL DATA SCHEDULE
For the Year Ended December 31, 1998
[S] [C]
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
<CASH AND CASH ITEMS> 680,464
[SECURITIES] --
[RECEIVABLES] 2,496,739
[ALLOWANCES] 70,000
[INVENTORY] 174,659
[CURRENT-ASSETS] 3,324,848
[PP&E] 8,584,977
[DEPRECIATION] 8,076,530
[TOTAL-ASSETS] 4,450,311
[CURRENT-LIABILITIES] 2,633,047
[BONDS] --
[PREFERRED-MANDATORY] --
[PREFERRED] --
[COMMON] 256,278
[OTHER-SE] 1,166,414
[TOTAL-LIABILITY-AND-EQUITY] 4,450,311
[SALES] 9,845,241
[TOTAL-REVENUES] 9,938,861
[CGS] 9,323,193
[TOTAL-COSTS] 9,323,193
[OTHER-EXPENSES] 420,124
[LOSS-PROVISION] --
[INTEREST-EXPENSE] 2,608
[INCOME-PRETAX] 192,936
[INCOME-TAX] --
[INCOME-CONTINUING] 192,936
[DISCONTINUED] --
[EXTRAORDINARY] --
[CHANGES] --
[NET-INCOME] 192,936
[EPS-PRIMARY] .038
[EPS-DILUTED] .038
VINEYARD OIL AND GAS COMPANY
Balance Sheet
December 31, 1998
ASSETS
Current Assets
Cash $ 680,464
Accounts receivable, less allowance for
doubtful accounts of $70,000 2,426,739
Inventories (Note A) 174,659
Prepaid expenses 42,986
Total current assets $3,324,848
Property, Plant and Equipment (Note A)
Land and land improvements $ 193,680
Building and improvements 257,008
Oil and gas properties and transmission
equipment 6,945,833
Drilling and other equipment 1,188,456
$8,584,977
Less: accumulated depletion, depreciation and
amortization ( 8,076,530
$ 508,447
Other Assets
Cash restricted for well plugging (Note A) $ 382,057
Investments - at equity (Note D ) 234,959
$ 617,016
$4,450,311
See Note s to financial statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade $2,437,385
Limited partnerships 168,275
Accrued expenses 27,387
Total current liabilities $2,633,047
Deferred Revenue (Note A) $ 394,572
Commitments and Contingencies (Note G) $
Shareholders' Equity
Common stock, authorized 15,000,000 shares
without par value, issued 5,125,563 shares
at December 31, 1998, at stated value of $.05 $ 256,278
Additional paid-in capital 4,935,430
$5,191,708
Retained Earnings (Deficit) ( 3,544,096
$1,647,612
Less: Cost of 67,944 Shares Held in Treasury ( 224,920
$1,422,692
$4,450,311
VINEYARD OIL AND GAS COMPANY
Income Statements
For the Years Ended December 31, 1998 and 1996
1998 1996
Earned Revenues
Gas marketing $9,011,565 $5,900,466
Well services 246,432 200,207
Production and royalties 400,934 441,465
Equipment rental and service income 186,310 167,483
$9,845,241 $6,709,621
Other income 82,398 45,022
Equity in earnings of jointly owned
company 11,222 12,449
$9,938,861 $6,767,092
Costs and Expenses
Direct costs of earned revenues
Gas marketing $8,666,825 $5,537,960
Well services 344,583 327,430
Production 180,961 208,660
Equipment expenses 41,495 44,455
Depreciation and amortization 89,329 110,723
$9,323,193 $6,229,228
General and administrative 408,557 397,149
Depreciation 11,567 10,942
Interest 2,608 10,808
$9,745,925 $6,648,127
Net Income Before Income Taxes $ 192,936 $ 118,965
Income Taxes (Note C) 0 0
Net Income $ 192,936 $ 118,965
Income Per Common Share $ .038 $ .023
See Note s to financial statements.
VINEYARD OIL AND GAS COMPANY
Statements of Shareholders' Equity
For the Years Ended December 31, 1998 and 1996
Capital in Retained
Common Excess of Earnings Treasury
Stock Par Value (Deficit) Stock
Balance at January 1, 1996 $256,278 $4,935,430 ($3,855,997)
($224,920)
Net Income For the Year -- -- 118,965
Balance at December 31, 1996 $256,278 $4,935,430 ($3,737,032)
($224,920)
Net Income For the Year -- -- 192,936
Balance at December 31, 1998 $256,278 $4,935,430 ($3,544,096)
($224,920)
See Note s to financial statements.
VINEYARD OIL AND GAS COMPANY
Statements of Cash Flows
For the Years Ended December 31, 1998 and 1996
1998 1996
Operating Activities
Net income $ 192,936 $ 118,965
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion, depreciation and
amortization 100,896 121,665
Provision for losses on accounts
receivable ( 3,200) ( 5,327)
Changes in operating assets and
liabilities providing (using) cash:
Accounts receivable 1,243,634 ( 1,944,174)
Inventories 24,027 23,722
Prepaid expenses ( 20,640) 10,236
Accounts payable ( 910,022) 1,758,508
Accrued expenses ( 24,908) ( 22,103)
Deferred revenue 12,279 17,161
Net cash provided by operating
activities $ 615,002 $ 78,653
Investing Activities
Purchases of property, plant and
equipment ($ 6,996) ($ 78,335)
Investment in jointly-owned company ( 104,276) ( 126,291)
Net cash (used in) investing
activities ($ 111,272) ($ 204,626)
Financing Activities
Principal payments on borrowings ($ 48,132) ($ 86,907)
Net cash (used in) financing
activities ($ 48,132) ($ 86,907)
Increase (Decrease) in Cash $ 455,598 ($ 212,880)
Cash at Beginning of Year 606,923 819,803
Cash at End of Year (Note ) $1,062,521 $ 606,923
See Note s to financial statements.
VINEYARD OIL AND GAS COMPANY
Note s to Financial Statements
December 31, 1998
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Vineyard Oil and Gas Company is a
producer and marketer of its own oil and natural gas and gas
produced by others. It also transports natural gas and performs
well maintenance, service, construction, trucking and other jobs
related to the oil and gas industry. Its principal markets are
industrial end-users, third party producers and utility companies
located mostly in Pennsylvania and New York.
Restricted Cash - Restricted cash consists of cash collected
from limited partnerships, which is held in escrow in separate bank
accounts, and a certificate of deposit required by the state to be
maintained to offset future plugging costs. Since these funds will
be restricted for a period of more than one year, the assets and
any deferred revenue related thereto have been classified as
noncurrent items. (See Deferred Revenue).
Inventories - Inventories are stated at the lower of cost
(first-in, first-out method) or market. Inventory consists of
parts and piping utilized in the Company's oil and gas operations
and gas produced in 1998 to be redelivered to customers in future
periods.
Development Costs of Oil and Gas Properties - The Company
follows the successful efforts method of accounting for its oil and
gas producing activities as prescribed by FASB Statement No. 19.
Under this method, all costs of production equipment, properties
and wells are capitalized and depleted on the units of production
method based on the estimated recoverable oil and gas reserves.
Costs of acquiring undeveloped oil and gas leasehold acreage are
capitalized. Geological expenses are charged against income as
incurred.
For income tax purposes, tangible costs are depreciated using
accelerated tax methods and intangible costs are expensed when
incurred.
Property, Plant and Equipment - Property, plant and equipment
is stated on the basis of cost. Expenditures for major additions
or betterments are capitalized. Maintenance and repairs are
charged to expense as incurred. Differences between amounts
received and net carrying value of assets retired or disposed of
are included in the income statement. Depreciation of assets is
computed by the straight-line method for financial reporting
purposes at rates sufficient to amortize the costs over their
estimated useful lives and by accelerated methods for income tax
purposes.
Investments in Limited Partnerships - The Company accounts for
its investments in limited partnerships under the proportional
consolidation method, which recognizes its share of earnings or
losses after the date of acquisition.
Deferred Revenue - The Company, as general partner, is
withholding from quarterly partnership distributions an estimated
fee for future well plugging charges. The plugging fees are
recorded as a deferred cost until the actual plugging costs have
been incurred by the partnerships. The Company holds in escrow
cash collected from the partnerships, plus earnings thereon,
designated to cover these future costs. Future collections are
contingent upon future revenue distributions and therefore are
currently indeterminable.
Income Taxes - The Company provides for taxes based on income
as reported in the income statement. Deferred income taxes are
provided on certain income and expenses which are recognized in
different periods for tax and financial reporting purposes.
Earnings Per Share - Primary earnings per share are determined
by dividing net income by the weighted average number of common
equivalent shares outstanding (5,125,563 in 1998 and 1996).
The following schedule summarizes the changes in the number of
shares of capital stock:
Common
Stock
Balance at January 1, 1996 5,125,563
Issuance of shares --
Balance at December 31, 1996 and 1998 5,125,563
Other - Certain reclassifications were made to the prior
year's financial statements to conform to current presentations.
Concentrations of Credit Risk - Financial instruments that
potentially subject the Company to concentrations of credit risk
consist principally of cash investments and trade accounts
receivable.
At December 31, 1998, the carrying amount of the Company's
deposits was $797,978 and the bank balance was $864,217. Of the
bank balance, $304,239 was covered by federal depository insurance
and $559,978 was uninsured. The Company also maintains a $264,543
balance in a short-term government bond fund. This balance is not
insured. (See Note B.)
Credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the
Company's customer base and their dispersion across many different
industries.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Investment Tax Credits - Investment credits are accounted for as a
reduction of income tax expense in the years they are available for use
under the flow through method. In accordance with the 1982 Tax Act, an
amount equal to 50% of the allowable investment credit on property and
equipment acquired after December 31, 1982 and has been applied to reduce
the tax basis of such property and equipment.
NOTE B - CASH FLOW INFORMATION
For purposes of the statement of cash flows, cash includes demand
deposits, certificates of deposit, and short-term investments with
original maturities of three months or less.
The Company's non-cash investing and financing activities and cash
payments for interest and income taxes were as follows:
Cash paid during the year for:
1998 1996
Interest $ 2,125 $ 11,291
Income taxes -- --
Cash consists of the following at the end of each year presented:
1998 1996
Cash in bank $ 797,978 $447,520
Short-term investment 264,543 159,403
$1,062,521 $606,923
Cash is classified as follows for financial statement reporting purposes:
1998 1996
Unrestricted cash $ 680,464 $281,186
Cash restricted for well plugging 382,057 325,737
$1,062,521 $606,923
NOTE C - INCOME TAXES
The taxes on pretax income are reconciled with income tax expense as
follows:
1998 1996
Expected tax on pretax income from
continuing operations at statutory
rates $ 58,495 $ 40,448
Tax (benefit) expense of excess
financial basis depreciation ( 16,030) ( 4,611)
Tax (benefit) expense of net
operating loss carryover ( 42,465) ( 35,837)
Income tax expense $ -- $ --
Amounts for deferred tax assets and liabilities are as follows:
1998 1996
Deferred tax liability $ -- $ --
Deferred tax asset $2,024,421 $1,998,102
Valuation allowance ( 2,024,421)( 1,998,102)
$ -- $ --
The net change in the valuation allowance was $26,319 between 1998 and
1996.
The following temporary differences gave rise to the deferred tax asset
at December 31, 1998 and 1996:
1998 1996
Excess of financial accounting over
tax depreciation $ 16,030 $ 4,611
Tax credit carryforward 549,157 549,157
Net operating loss carryforward 1,459,234 1,444,334
$2,024,421 $1,998,102
The Company has available at December 31, 1998, unused investment credots
and operating loss carryforwards, which may provide for future tax benefits
expiring as follows:
Unused
Year of Investment Unused Operating
Expiration Credits Loss Carryforward
1999 $ 87,666 $ --
1999 183,968 --
2000 226,056 --
2001 51,467 82,826
2002 -- 867,597
2003 -- 1,544,234
2004 -- 1,593,565
2005 -- --
2006 -- 102,646
2007 -- 5,592
2008 -- 51,581
2009 -- --
2010 -- --
2011 -- 43,824
$549,157 $4,291,865
NOTE D - INVESTMENT IN JOINTLY OWNED COMPANY
The Company owns a 45% interest in Northern Pipeline Company, LLC, which
operates a pipeline for the transportation of natural gas and which began
operations in July, 1996. This investment is carried at cost, under the
equity method and is adjusted for the Company's proportionate share of
undistributed earnings or losses.
Following is a summary of unaudited financial position and unaudited
results of operations of Northern Pipeline Company, LLC:
1998 1996
Current assets $172,448 $ 57,407
Property and equipment, net 605,307 300,513
Other assets, net 4,328 5,564
$782,083 $363,484
Current liabilities $106,927 $ 52,263
Long-term debt -- 13,257
$106,927 $ 65,520
Equity 675,156 297,964
$782,083 $363,484
Sales $145,774 $ 54,142
Net income $ 24,937 $ 27,211
NOTE E - RELATED PARTY TRANSACTIONS
1. The Company is reimbursed for actual and necessary expenses paid or
incurred in connection with its management of various related limited
partnerships. It also charges the partnerships for certain well-tending
and related services provided.
Transactions and balances for the years ended December 31, 1998 and 1996
are as follows:
1998 1996
Drilling and well services
revenue $ 96,325 $114,069
Production and royalties revenue 319,848 340,911
Gas marketing revenue 16,712 20,061
$432,885 $475,041
Accounts receivable $ 93,282 $102,599
Accounts payable $168,275 $110,991
2. The Company charges Northern Pipeline, LLC, for equipment rental. It also
charges the subsidiary a monthly management fee.
Transactions and balances for the years ended December 31, 1998 and 1996
are as follows:
1998 1996
Equipment rental and service
income $ 23,869 $ 25,622
Other income 4,320 2,200
$ 28,189 $ 27,822
Accounts receivable $ 60,066 $ 10,892
Accounts payable $ 37,592 $ --
NOTE F - BUSINESS SEGMENT INFORMATION
The Company's business segments are gas marketing, well services and
equipment rental and oil and gas production. The Company's gas marketing
operation involves purchasing gas from local producers and interstate pipeline
sources, as well as marketing gas from the Company's managed limited
partnerships, and reselling that gas to industrial gas users through
transportation arrangements on intrastate and interstate pipeline systems.
In the well services and equipment rental operation, the Company rents
well service equipment (e.g. for use in water hauling, pipeline
installation, and welding) and provides workover and well tending services
for producing wells.
The Company's well services are performed principally for limited
partnerships of which the Company is the general partner.
Revenues from oil and gas production operations are primarily derived
from working and royalty interests in the sale of oil and gas production
and for the transmission of such production.
1998 1996
Revenues:
Gas marketing $9,011,565 $5,900,466
Well services and equipment
rental 432,742 367,690
Oil and gas production -
unaffiliated customers 400,934 441,465
$9,845,241 $6,709,621
General corporate 93,620 57,471
$9,938,861 $6,767,092
Income (loss) before
income taxes:
Gas marketing $ 344,740 $ 362,506
Well services and equipment
rental ( 7,148)( 71,426)
Oil and gas production 184,456 189,313
$ 522,048 $ 480,393
General corporate ( 329,112)( 361,428)
$ 192,936 $ 118,965
Identifiable assets:
Gas marketing $2,466,371 $3,679,207
Well services and equipment
rental 818,019 456,660
Oil and gas production 628,661 669,883
$3,913,051 $4,805,750
General corporate 537,260 422,408
$4,450,311 $5,228,158
Capital spending:
Gas marketing $ -- $ --
Well services and equipment
rental 6,996 78,335
Oil and gas production -- --
$ 6,996 $ 78,335
General corporate -- --
$ 6,996 $ 78,335
Depletion, depreciation and
amortization:
Gas marketing $ -- $ --
Well services and equipment
rental 41,923 67,231
Oil and gas production 47,406 43,492
$ 89,329 $ 110,723
General corporate 11,567 10,942
$ 100,896 $ 121,665
NOTE G - COMMITMENTS AND CONTINGENCIES
All except eleven of the limited partnerships in which the Company was the
general partner have closed and their assets have reverted to the Company.
Prior to the closing of the partnerships, the Company had been escrowing
partnership cash to provide for future well-plugging costs. (See Note
A).
Upon closing of the partnerships, the Company will now assume all well-plugging
responsibilities associated with the wells which were previously assets of the
partnerships. As of December 31, 1998, the wells transferred to the Company
from these partnerships continued to produce oil and gas. Also, as of December
31, 1998 the Company owned 216 oil and gas wells, excluding wells in which the
Company has an interest as a general partner.
Under current promulgated regulations of the Pennsylvania Department of
Environmental Protection, Oil and Gas Division, to the extent that the
mechanical integrity of the wells is sound, non-producing wells can receive
a permit to be placed on inactive status for an indefinite period of time and
not be plugged. Also, wells that fail to produce enough gas to feed
transportation
lines will still produce some gas; at that time, instead of being plugged, the
wells would be available to be turned over to landowners, who could use gas
produced for personal home utilities.
Lastly, future explorations may discover formations deeper than those
existing, and non-producing wells may be deepened to access them. For these
reasons, no well-plugging liability relating to gas wells owned directly by
the Company, or in which the Company has an interest as a general partner, has
been recorded as of December 31, 1998.
The Company has been informed that two of its major suppliers are in the
process of being sold. The impact of these sales are not readily
determinable.During 1998, the Company purchased approximately $3,682,000 of
gas from these two suppliers for resale, which represents 42% of total gas
purchases for the year.
The Company is also a party to several actions which arise in the normal
course of the Company's business. In management's opinion, none of these
lawsuits or proceedings should, individually or in the aggregate, have a
material adverse effect upon the financial position of the Company.
NOTE________ H - MAJOR CUSTOMERS AND SUPPLIERS
The Company makes a substantial portion of its gas marketing sales to
three customers. During 1998 and 1996, sales to the three largest customers
aggregated approximately $4,058,000 (45%) and $1,446,000 (25%), respectively.
At December 31, 1998 and 1996, amounts due from those customers included in
trade accounts receivable were approximately $484,000 and $352,000,
respectively.
The Company purchased approximately $4,486,000 (52%), from three suppliers and
$3,475,000 (63%), from four suppliers of gas for resale, during 1998 and 1996,
respectively. At December 31, 1998 and 1996, amounts due to those suppliers
included in accounts payable were approximately $1,064,000 and $1,109,000,
respectively.
NOTE________ I - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash - Fair value approximates carrying value due to the initial maturities
of the instruments being three months or less.
The estimated fair values of the Company's financial instruments as of December
31, 1998, are as follows:
Carrying
Amount Fair Value
Financial assets:
Cash $1,062,521 $1,062,521
NOTE J - SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
In November 1982, the Financial Accounting Standards Board issued Statement
No. 69, "Disclosures About Oil and Gas Producing Activities". This Statement
establishes a standardized comprehensive set of supplemental unaudited
disclosures for oil and gas exploration and production activities which are
included in the schedules that follow.
Proved Reserves - The following schedule presents estimates of proved oil
and natural gas reserves attributable to the Company, all of which are
located
in the United States. Proved reserves are estimated quantities of oil and
natural gas which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved-developed reserves are
those which are expected to be recovered through existing wells with existing
equipment and operating methods. All proved reserves are developed. Reserves
are stated in barrels of oil and thousands of cubic feet of natural gas.
Gas (MCF) Oil (BBL)
Proved reserves at December 31, 1995 971,394 6,351
Production (177,076) (1,781)
Revisions in previous quantity estimates 74,434 3,131
Proved reserves at December 31, 1996 868,752 7,701
Production (149,632) ( 810)
Revisions in previous quantity estimates 95,688 345
Proved reserves at December 31, 1998 814,808 7,236
Capitalized Costs - The Company's net investment in oil and gas producing
properties, excluding transmission equipment, at December 31, 1998 and 1996 is
as follows:
1998 1996
Proved oil and gas properties $5,740,913 $5,740,913
Accumulated depletion, depreciation
and amortization ( 5,634,109)( 5,598,591)
$ 106,804 $ 142,322
Costs Incurred in Oil and Gas Property Acquisitions, Exploration and
Development Activities - There were no costs incurred in oil and gas property
acquisitions, exploration and development activities for the years ended
December 31, 1998 and 1996.
Results of Operations for Oil and Gas Producing Activities - The following
summarizes the "Results of Operations for Producing Activities" as defined by
FASB 69, for the years ended December 31, 1998 and 1996. As required, income
taxes are included in the results, but were computed under FASB guidelines
using statutory tax rates, while considering the effects of permanent
differences and tax credits relating to oil and gas producing activities.
1998 1996
Revenues $935,012 $964,125
Less:
Production costs $370,299 $368,814
Depletion, depreciation
and amortization 47,406 88,626
$417,705 $457,440
1998 1996
$517,307 $506,685
Income taxes -- --
Results of operations from
oil and gas producing
activities before corporate
overhead and interest costs $517,307 $506,685
Geological and engineering estimates of proved oil and natural gas reserves
at any one point in time are highly interpretive, inherently imprecise, and
subject to ongoing revisions that may be substantial in amount. Although every
reasonable effort is made to ensure that the reserve estimates reported
represent the most accurate assessments possible, these estimates are by their
nature generally less precise than other estimates presented in connection
with financial statement disclosures.
Standardized Measure of Discounted Future Net Cash Flows - The following
schedule presents estimates of the standardized measure of discounted future
net cash flows from the Company's proved reserves. Estimated future cash
flows are determined using year-end prices adjusted only for fixed and
determinable increases for natural gas provided by contractual agreement.
Estimated future
production and development costs are based on economic conditions at year end.
Future federal income taxes are computed by applying the applicable
statutory federal income tax rates under the Revenue Reconciliation Act of
1994 to the differences between the future pretax net cash flows and the tax
basis of proved oil and gas properties. Future net cash flows from oil and gas
production have
been discounted at ten percent as required by the FASB. Therefore, all
properties are discounted at the same rate regardless of the attendant risk.
The assumptions used to compute the standardized measure are, therefore, those
required by the FASB and, as such, do not necessarily reflect the Company's
expectations of actual revenues to be derived from those reserves nor their
present worth.
Because the standardized measure of future net cash flows was prepared
using the prevailing economic conditions existing at the respective year end,
it should be emphasized that such conditions continually change, as evidenced
by the fluctuations in natural gas and crude oil prices during the last several
years. Accordingly, such information should not serve as a basis in making any
judgment on the potential value of the Company's recoverable reserves, or in
estimating future results of operations.
1998 1996
Future cash inflows $2,473,000 $2,024,000
Future production costs ( 1,113,000)( 963,000)
Future income tax expense -- --
Future after-tax net cash
flows $1,360,000 $1,061,000
10% annual discount ( 629,000)( 495,000)
Standardized measure of
discounted future net
cash flows $ 731,000 $ 566,000
Changes in Standardized Measure of Discounted Future Net Cash Flows-FASB 69
requires a reconciliation which displays the principal sources of changes in
the standardized measure of discounted future net cash flows during the year.
The Company believes that such a reconciliation may suggest a degree of
accuracy that is inappropriate in light of the subjectivity and imprecision of
the underlying reserve estimates. The Company cautions users not to infer an
unwarranted degree of reliance on the amounts and the reasons for the changes
in those standardized measures.
1998 1996
Beginning of year $566,000 $639,000
Changes resulting from:
Sales of production ($935,000) ($964,000)
Net change in prices
relating to future
production 612,000 456,000
Extensions and discoveries -- --
Revisions in previous
quantity estimates 280,000 216,000
Accretion of discount 50,000 56,000
Net change in income taxes -- --
Other 158,000 163,000
Net increase (decrease) $165,000 ($ 73,000)
End of year $731,000 $566,000
FORM 10-KSB ITEM 7
VINEYARD OIL AND GAS COMPANY
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Balance Sheet - December 31, 1998
2. Income Statements - For the Years Ended December 31, 1998 and
1997
3. Statements of Shareholders' Equity - For the Years Ended
December 31, 1998 and 1997
4. Statements of Cash Flows - For the Years Ended December 31,
1998 and 1997
5. Notes to Financial Statements - December 31, 1998
Independent Auditors' Report
Board of Directors
Vineyard Oil and Gas Company
North East, Pennsylvania
We have audited the accompanying balance sheet of Vineyard Oil
and Gas Company as of December 31, 1998, and the related statements
of income, shareholders' equity, and cash flows for each of the two
years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to provide reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes an assessment of the accounting principles used and
significant estimates made by management, as well as an evaluation
of the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements
present fairly, in all material respects, the financial position of
Vineyard Oil and Gas Company at December 31, 1998, and the results
of its operations and its cash flows for each of the two years in
the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Gorzynski, Felix and Gloekler, P.C.
March 25, 1999
Erie, Pennsylvania
VINEYARD OIL AND GAS COMPANY
Balance Sheet
December 31, 1998
ASSETS
Current Assets
Cash $ 432,703
Accounts receivable, less allowance for
doubtful accounts of $73,700 2,998,441
Inventories (note A) 172,461
Prepaid expenses 29,769
Total current assets $3,633,374
Property, Plant and Equipment (Note A)
Land and land improvements $ 193,680
Building and improvements 257,008
Oil and gas properties and transmission
equipment 6,700,228
Drilling and other equipment 1,187,592
$8,338,508
Less: accumulated depletion, depreciation and
amortization ( 7,913,763)
$ 424,745
Other Assets
Cash restricted for well plugging (note A) $ 445,239
Investments - at equity (note D) 185,617
$ 630,856
$4,688,975
See notes to financial statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable
Trade $2,538,160
Limited partnerships 142,836
Accrued expenses 45,137
Total current liabilities
$2,726,133
Deferred Revenue (Note A) $ 353,582
Commitments and Contingencies (Note G) $ --
Shareholders' Equity
Common stock, authorized 15,000,000 shares
without par value, issued 5,125,563 shares
at December 31, 1998, at stated value of $.05 $ 256,278
Additional paid-in capital 4,935,430
$5,191,708
Retained Earnings (Deficit) ( 3,357,528)
$1,834,180
Less: Cost of 67,944 Shares Held in Treasury ( 224,920)
$1,609,260
$4,688,975
VINEYARD OIL AND GAS COMPANY
Income Statements
For the Years Ended December 31, 1998 and 1997
1998 1997
Earned Revenues
Gas marketing $11,841,216 $9,011,565
Well services 223,794 246,432
Production and royalties 355,923 400,934
Equipment rental and service income 245,608 186,310
$12,666,541 $9,845,241
Other income 132,023 82,398
Equity in earnings of jointly owned
company 31,607 11,222
$12,830,171 $9,938,861
Costs and Expenses
Direct costs of earned revenues
Gas marketing $11,497,063 $8,666,825
Well services 407,256 344,583
Production 147,894 180,961
Equipment expenses 49,393 41,495
Depreciation and amortization 73,094 89,329
$12,174,700 $9,323,193
General and administrative 456,952 408,557
Depreciation 11,482 11,567
Interest 469 2,608
$12,643,603 $9,745,925
Net Income Before Income Taxes $ 186,568 $ 192,936
Income Taxes (Note C) -- --
Net Income $ 186,568 $ 192,936
Income Per Common Share $ .036 $ .038
See notes to financial statements.
VINEYARD OIL AND GAS COMPANY
Statements of Shareholders' Equity
For the Years Ended December 31, 1998 and 1997
Capital in Retained
Common Excess of Earnings Treasury
Stock Par Value (Deficit) Stock
Balance at January 1, 1997 $256,278 $4,935,430($3,737,032)($224,920)
Net Income For the Year -- -- 192,936 --
Balance at December 31, 1997 $256,278 $4,935,430($3,544,096)($224,920)
Net Income For the Year -- -- 186,568 --
Balance at December 31, 1998 $256,278 $4,935,430($3,357,528)($224,920)
See notes to financial statements.
VINEYARD OIL AND GAS COMPANY
Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
1998 1997
Operating Activities
Net income $ 186,568 $ 192,936
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion, depreciation and
amortization 84,576 100,896
Provision for losses on accounts
receivable 3,700 ( 3,200)
(Gain) on disposal of assets ( 74,751) --
Changes in operating assets and
liabilities providing (using) cash:
Accounts receivable ( 575,402) 1,243,634
Inventories 2,198 24,027
Prepaid expenses 13,217 ( 20,640)
Accounts payable 75,336 ( 910,022)
Accrued expenses 17,750 ( 24,908)
Deferred revenue ( 40,990) 12,279
Net cash provided by (used in)
operating activities ($ 307,798) $ 615,002
Investing Activities
Purchases of property, plant and
equipment ($ 2,500) ($ 6,996)
Proceeds from sale of equipment 76,377 --
Change in investment in jointly-owned
company 49,342 ( 104,276)
Net cash provided by(used in)
investing activities $ 123,219 ($ 111,272)
Financing Activities
Principal payments on borrowings $ -- ($ 48,132)
Net cash (used in) financing
activities $ -- ($ 48,132)
Increase (Decrease) in Cash ($ 184,579) $ 455,598
Cash at Beginning of Year 1,062,521 606,923
Cash at End of Year (Note B) $ 877,942 $1,062,521
See notes to financial statements.
VINEYARD OIL AND GAS COMPANY
Notes to Financial Statements
December 31, 1998
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Vineyard Oil and Gas Company is a
producer and marketer of its own oil and natural gas and gas
produced by others. It also transports natural gas and performs
well maintenance, service, construction, trucking and other jobs
related to the oil and gas industry. Its principal markets are
industrial end-users, third party producers and utility companies
located mostly in Pennsylvania and New York.
Restricted Cash - Restricted cash consists of cash collected
from limited partnerships, which is held in escrow in separate bank
accounts, and a certificate of deposit required by the state to be
maintained to offset future plugging costs. Since these funds will
be restricted for a period of more than one year, the assets and
any deferred revenue related thereto have been classified as
noncurrent items. (See Deferred Revenue).
Inventories - Inventories are stated at the lower of cost
(first-in, first-out method) or market. Inventory consists of
parts and piping utilized in the Company's oil and gas operations.
Development Costs of Oil and Gas Properties - The Company
follows the successful efforts method of accounting for its oil and
gas producing activities as prescribed by FASB Statement No. 19.
Under this method, all costs of production equipment, properties
and wells were capitalized and are depleted on the units of
production method based on the estimated recoverable oil and gas
reserves. Costs of acquiring undeveloped oil and gas leasehold
acreage were capitalized. Geological expenses were charged against
income as incurred.
For income tax purposes, tangible costs are depreciated using
accelerated tax methods and intangible costs are expensed when
incurred.
Property, Plant and Equipment - Property, plant and equipment
is stated on the basis of cost. Expenditures for major additions
or betterments are capitalized. Maintenance and repairs are
charged to expense as incurred. Differences between amounts
received and net carrying value of assets retired or disposed of
are included in the income statement. For the years ended December
31, 1998 and 1997, the Company realized net gains on the disposal
of assets of $74,751 and $0, respectively. These amounts are
reported as other income in these financial statements.
Depreciation of assets is computed by the straight-line method for
financial reporting purposes at rates sufficient to amortize the
costs over their estimated useful lives and by accelerated methods
for income tax purposes.
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments in Limited Partnerships - The Company accounts for
its investments in limited partnerships under the proportional
consolidation method, which recognizes its share of earnings or
losses after the date of acquisition.
Deferred Revenue - The Company, as general partner, has
withheld from prior years' quarterly partnership distributions an
estimated fee for future well plugging charges. The plugging fees
are recorded as a deferred cost until the actual plugging costs
have been incurred by the partnerships. The Company holds in
escrow cash collected from the partnerships, plus earnings thereon,
designated to cover these future costs. Future collections are
contingent upon future revenue distributions and therefore are
currently indeterminable. The Company plugged 28 oil and 4 gas
wells in 1998 at a cost of $48,000. See note G for additional
information.
Income Taxes - The Company provides for taxes based on income
as reported in the income statement. Deferred income taxes are
provided on certain income and expenses which are recognized in
different periods for tax and financial reporting purposes.
Earnings Per Share - Basic earnings per share are determined
by dividing net income by the weighted average number of common
shares outstanding (5,125,563 in 1998 and 1997).
The following schedule summarizes the changes in the number of
shares of capital stock:
Common
Stock
Balance at January 1, 1997 5,125,563
Issuance of shares --
Balance at December 31, 1998 and 1997 5,125,563
Other - Certain reclassifications were made to the prior
year's financial statements to conform to current presentations.
Concentrations of Credit Risk - Financial instruments that
potentially subject the Company to concentrations of credit risk
consist principally of cash investments and trade accounts
receivable.
At December 31, 1998, accounts receivable, net of allowance,
amounted to $2,998,441.
At December 31, 1998, the carrying amount of the Company's
deposits was $877,942 and the bank balance was $913,654. Of the
bank balance, $278,355 was covered by federal depository insurance
and $635,299 was uninsured.
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the
Company's customer base and their dispersion across many different
industries.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Investment Tax Credits - Investment credits are accounted for
as a reduction of income tax expense in the years they are
available for use under the flow through method. In accordance
with the 1982 Tax Act, an amount equal to 50% of the allowable
investment credit on property and equipment acquired after December
31, 1982 and has been applied to reduce the tax basis of such
property and equipment.
NOTE B - CASH FLOW INFORMATION
For purposes of the statement of cash flows, cash includes
demand deposits, certificates of deposit, and short-term
investments with original maturities of three months or less.
Short term investments consist of money market funds, and are
reported at market value, which equals cost.
The Company's non-cash investing and financing activities and
cash payments for interest and income taxes were as follows:
Cash paid during the year for:
1998
1997
Interest $ 469 $ 2,125
Income taxes -- --
Cash consists of the following at the end of each year
presented:
1998 1997
Cash in bank $514,128 $ 797,978
Short-term investments 363,814 264,543
$877,942 $1,062,521
NOTE B - CASH FLOW INFORMATION (CONTINUED)
Cash is classified as follows for financial statement
reporting purposes:
1998 1997
Unrestricted cash $ 432,703 $ 680,464
Cash restricted for well plugging 445,239 382,057
$ 877,942 $1,062,521
NOTE C - INCOME TAXES
The taxes on pretax income are reconciled with income tax
expense as follows:
1998 1997
Expected tax on pretax income from
continuing operations at statutory
rates $ 56,012 $ 58,495
Tax (benefit) expense of excess
financial basis depreciation ( 15,845)( 16,030)
Tax (benefit) expense of net
operating loss carryover ( 40,167)( 42,465)
Income tax expense $ -- $ --
Amounts for deferred tax assets and liabilities are as
follows:
1998 1997
Deferred tax liability $ -- $ --
Deferred tax asset $1,892,569 $2,024,421
Valuation allowance ( 1,892,569)( 2,024,421)
$ -- $ --
The net change in the valuation allowance was $131,852 between
1998 and 1997.
NOTE C - INCOME TAXES (CONTINUED)
The following temporary differences gave rise to the deferred
tax asset at December 31, 1998 and 1997:
1998
1997
Excess of financial accounting over
tax depreciation $ 15,845 $ 16,030
Tax credit carryforward 461,491 549,157
Net operating loss carryforward 1,415,233 1,459,234
$1,892,569
$2,024,421
The Company has available at December 31, 1998, unused
investment credits and operating loss carryforwards, which may
provide for future tax benefits expiring as follows:
Unused
Year of Investment Unused Operating
Expiration Credits Loss Carryforward
1999 $183,968 $ --
2000 226,056 --
2001 51,467 --
2002 -- 675,068
2003 -- 1,544,234
2004 -- 1,593,565
2005 -- --
2006 -- 102,646
2007 -- 5,592
2008 -- 51,581
2009 -- --
2010 -- --
2011 -- 43,824
$461,491 $4,016,510
NOTE D - INVESTMENT IN JOINTLY OWNED COMPANY
The Company owns a 45% interest in Northern Pipeline Company,
LLC, which operates a pipeline for the transportation of natural
gas and which began operations in July, 1997. This investment is
carried at cost, under the equity method and is adjusted for the
Company's proportionate share of undistributed earnings or losses.
NOTE D - INVESTMENT IN JOINTLY OWNED COMPANY (CONTINUED)
Following is a summary of unaudited financial position and
unaudited results of operations of Northern Pipeline Company, LLC:
1998 1997
Current assets $ 78,735 $172,448
Property and equipment, net 594,521 605,307
Other assets, net 3,091 4,328
$676,347 $782,083
Current liabilities $ 93,011 $106,927
Equity $583,336 $675,156
$676,347 $782,083
Sales $238,852 $145,774
Net income $ 70,237 $ 24,937
NOTE E - RELATED PARTY TRANSACTIONS
1. The Company is reimbursed for actual and necessary expenses
paid or incurred in connection with its management of various
related limited partnerships. It also charges the partnerships for
certain well-tending and related services provided.
Transactions and balances for the years ended December 31,
1998 and 1997 are as follows:
1998 1997
Well services revenue $ 89,083 $ 96,325
Production and royalties revenue 273,922 319,848
Gas marketing revenue 6,832 16,712
$369,837 $432,885
Accounts receivable $ 80,999 $ 93,282
Accounts payable $142,836 $168,275
2. The Company charges Northern Pipeline, LLC, for equipment
rental. It also charges the LLC a monthly management fee.
NOTE E - RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions and balances for the years ended December 31,
1998 and 1997 are as follows:
1998 1997
Equipment rental and service
income $ 16,370 $ 23,869
Other income 4,320 4,320
$ 20,690 $ 28,189
Accounts receivable $ -- $ 60,066
Accounts payable $ 39,683 $ 37,592
NOTE F - BUSINESS SEGMENT INFORMATION
Description of the types of products and services from which
each reportable segment derives its revenue
The Company's three reportable business segments are gas
marketing, well services and equipment rental and oil and gas
production. The Company's gas marketing operation involves
purchasing gas from local producers and interstate pipeline
sources, as well as marketing gas from the Company's managed
limited partnerships, and reselling that gas to industrial gas
users through transportation arrangements on intrastate and
interstate pipeline systems.
In the well services and equipment rental operation, the
Company rents well service equipment (e.g. for use in water
hauling, pipeline installation, and welding) and provides workover
and well tending services for producing wells.
The Company's well services are performed principally for
limited partnerships of which the Company is the general partner.
Revenues from oil and gas production operations are primarily
derived from working and royalty interests in the sale of oil and
gas production and for the transmission of such production.
Measurement of segment profit or loss and segment assets
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The
Company evaluates performance based on profit and loss from
operations before income taxes not including nonrecurring gains and
losses.
NOTE F - BUSINESS SEGMENT INFORMATION (CONTINUED)
The Company accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is, at
current market prices.
Factors management used to identify the Company's reportable
segments
The Company's reportable segments are strategic business units
that offer different products and services. They are managed
separately because each segment requires different technology and
marketing strategies.
The Company's segment profit or loss and assets are as
follows:
Well Services
Gas and Equipment Oil & Gas a) All
Marketing Rental Production Others Totals
1998Revenues
from
External
Customers $11,841,216 $469,402 $355,923 $ -- 12,666,541
Intersegment
revenues -- -- -- -- --
Other revenue -- -- -- 163,630 163,630
Depreciation
and
amoritization -- 41,843 31,251 11,482 84,576
Segment
profit 344,1 ( 29,090) 176,778 (305,273) 186,568
Segment
assets 3,027,987 462,133 683,201 515,654 4,688,975
Expenditures
For Segment
Assets -- 874 -- -- 874
1997Revenues
from
External
Customers 9,011,565 432,742 400,934 -- 9,845,241
Intersegment
Revenues -- -- -- -- --
Other revenue -- -- -- 93,620 93,620
Depreciation
And
Amortization -- 41,923 47,406 11,567 100,896
Segment
Profit 344,740 4,741 172,567 ( 329,112) 192,936
Segment
assets 2,466,371 818,019 628,661 537,260 4,450,311
Expenditures
for segment
assest -- 6,996 -- -- 6,996
a) Revenue from segments below quantitative thresholds are
attributable to the Company's equity in earnings of its
jointly owned company and unallocated revenues such as
interest income and gains recognized on the disposition of
assets. General and administrative expenses are not allocated
to the Company's three business segments. This activity is
reported as "all others".
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Well-Plugging
All except eleven of the limited partnerships in which the
Company was the general partner have closed and their assets have
reverted to the Company. Prior to the closing of the partnerships,
the Company had been escrowing partnership cash to provide for
future well-plugging costs. (See Note A). Upon closing of the
partnerships, the Company will now assume all well-plugging
responsibilities associated with the wells which were previously
assets of the partnerships. As of December 31, 1998, the wells
transferred to the Company from these partnerships continued to
produce oil and gas. Also, as of December 31, 1998 the Company
owned 133 oil and gas wells, excluding wells in which the Company
has an interest as a general partner.
Under current promulgated regulations of the Pennsylvania
Department of Environmental Protection, Oil and Gas Division, to
the extent that the mechanical integrity of the wells is sound,
non-producing wells can receive a permit to be placed on inactive
status for an indefinite period of time and not be plugged. Also,
wells that fail to produce enough gas to feed transportation lines
will still produce some gas; at that time, instead of being
plugged, the wells would be available to be turned over to
landowners, who could use gas produced for personal home utilities.
Lastly, future explorations may discover formations deeper
than those existing, and non-producing wells may be deepened to
access them. For these reasons, no well-plugging liability
relating to gas wells owned directly by the Company, or in which
the Company has an interest as a general partner, has been recorded
as of December 31, 1998. Contingent upon the quantity of wells
which would revert to landowners and based on the average cost to
currently plug wells, the well plugging liability could range from
zero to one million, two hundred thousand dollars.
2. Threatened Litigation
A dispute currently exists between the Company and one of its
officers regarding incentive compensation. The $18,000 currently
in question has not been accrued as of December 31, 1998. The
ultimate resolution of this matter and its effect on the financial
statements is indeterminable.
3. Negotiations Related to Merger/Sale
The "acquisition mode" within the oil and gas industry has
generated interest, from some of the Company's competitors, in
acquiring the Company. The Company is currently evaluating a
formal offer, and may continue to talk informally with those
companies expressing an interest in acquisition. The effect of
these negotiations is currently indeterminable.
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
4. Other
The Company is also a party to several actions which arise in
the normal course of the Company's business. In management's
opinion, none of these lawsuits or proceedings should, individually
or in the aggregate, have a material adverse effect upon the
financial position of the Company.
5. Year 2000 Computer Systems Compliance
The Company has reviewed its hardware and software relating to
its operations regarding the "Year 2000 Issue". The Company has
made and will continue to make the expenditures necessary to ensure
that its systems and applications continue to function properly
before, during and after the Year 2000. These expenditures which
are expensed as incurred, have not been and are not expected to be
material to the Company's financial position or results of
operations. The Company deems its greatest risk related to the
Year 2000 Issue as being unable to provide oil and gas production
to its customers since this production will rely heavily on the
assurances provided by third party producers. For further
information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Year 2000 Issues".
NOTE H - MAJOR CUSTOMERS AND SUPPLIERS
The Company makes a substantial portion of its gas marketing
sales to three customers. During 1998 and 1997, sales to the three
largest customers aggregated approximately $6,626,000 (56%) and
$4,058,000 (45%), respectively. At December 31, 1998 and 1997,
amounts due from those customers included in trade accounts
receivable were approximately $1,460,000 and $484,000,
respectively.
The Company purchased approximately $7,536,000 (65%), from
five suppliers and $4,486,000 (52%), from three suppliers of gas
for resale, during 1998 and 1997, respectively. At December 31,
1998 and 1997, amounts due to those suppliers included in accounts
payable were approximately $1,461,000 and $1,064,000, respectively.
NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash - Fair value approximates carrying value due to the
initial maturities of the instruments being three months or less.
NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial
instruments as of December 31, 1998, are as follows:
Carrying
Amount Fair Value
Financial assets:
Cash $877,942 $877,942
NOTE J - SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
In November 1982, the Financial Accounting Standards Board
issued Statement No. 69, "Disclosures About Oil and Gas Producing
Activities". This Statement establishes a standardized
comprehensive set of supplemental unaudited disclosures for oil and
gas exploration and production activities which are included in the
schedules that follow.
Proved Reserves - The following schedule presents estimates of
proved oil and natural gas reserves attributable to the Company,
all of which are located in the United States. Proved reserves are
estimated quantities of oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved-developed reserves are
those which are expected to be recovered through existing wells
with existing equipment and operating methods. All proved reserves
are developed. Reserves are stated in barrels of oil and thousands
of cubic feet of natural gas.
Gas (MCF) Oil (BBL)
Proved reserves at December 31, 1996 868,752
7,701
Production (149,632)
( 810)
Revisions in previous quantity estimates 95,688
345
Proved reserves at December 31, 1997 814,808
7,236
Production (129,309)
( 602)
Revisions in previous quantity estimates 82,629 (3,892)
Proved reserves at December 31, 1998 768,128 2,742
NOTE J - SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
(CONTINUED)
Capitalized Costs - The Company's net investment in oil and
gas producing properties, at December 31, 1998 and 1997 is as
follows:
1998 1997
Proved oil and gas properties $6,700,228 $6,945,833
Accumulated depletion, depreciation
and amortization ( 6,598,394)( 6,812,748)
$ 101,834 $ 133,085
Costs Incurred in Oil and Gas Property Acquisitions,
Exploration and Development Activities - There were no costs
incurred in oil and gas property acquisitions, exploration and
development activities for the years ended December 31, 1998 and
1997.
Results of Operations for Oil and Gas Producing Activities -
The following summarizes the "Results of Operations for Producing
Activities" as defined by FASB 69, for the years ended December 31,
1998 and 1997. As required, income taxes are included in the
results, but were computed under FASB guidelines using statutory
tax rates, while considering the effects of permanent differences
and tax credits relating to oil and gas producing activities.
1998 1997
Revenues $355,923 $400,934
Less:
Production costs $147,894 $180,961
Depletion, depreciation
and amortization 31,251 47,406
$179,145 $228,367
$176,778 $172,567
Income taxes -- --
Results of operations from
oil and gas producing
activities before corporate
overhead and interest costs $176,778 $172,567
Geological and engineering estimates of proved oil and natural
gas reserves at any one point in time are highly interpretive,
inherently imprecise, and subject to ongoing revisions that may be
substantial in amount. Although every reasonable effort is made to
ensure that the reserve estimates reported represent the most
accurate assessments possible, these estimates are by their nature
generally less precise than other estimates presented in connection
with financial statement disclosures.
NOTE J - SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
(CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows - The
following schedule presents estimates of the standardized measure
of discounted future net cash flows from the Company's proved
reserves. Estimated future cash flows are determined using year-
end prices adjusted only for fixed and determinable increases for
natural gas provided by contractual agreement. Estimated future
production and development costs are based on economic conditions
at year end. Future federal income taxes are computed by applying
the applicable statutory federal income tax rates to the
differences between the future pretax net cash flows and the tax
basis of proved oil and gas properties. Future net cash flows from
oil and gas production have been discounted at ten percent as
required by the FASB. Therefore, all properties are discounted at
the same rate regardless of the attendant risk. The assumptions
used to compute the standardized measure are, therefore, those
required by the FASB and, as such, do not necessarily reflect the
Company's expectations of actual revenues to be derived from those
reserves nor their present worth.
Because the standardized measure of future net cash flows was
prepared using the prevailing economic conditions existing at the
respective year end, it should be emphasized that such conditions
continually change, as evidenced by the fluctuations in natural gas
and crude oil prices during the last several years. Accordingly,
such information should not serve as a basis in making any judgment
on the potential value of the Company's recoverable reserves, or in
estimating future results of operations.
1998 1997
Future cash inflows $2,484,000 $2,473,000
Future production costs ( 1,250,000)( 1,154,000)
Future income tax expense -- --
Future after-tax net cash
flows $1,234,000 $1,319,000
10% annual discount ( 776,000)( 629,000)
Standardized measure of
discounted future net
cash flows $ 458,000 $ 690,000
Changes in Standardized Measure of Discounted Future Net Cash
Flows-FASB 69 requires a reconciliation which displays the
principal sources of changes in the standardized measure of
discounted future net cash flows during the year. The Company
believes that such a reconciliation may suggest a degree of
accuracy that is inappropriate in light of the subjectivity and
imprecision of the underlying reserve estimates. The Company
cautions users not to infer an unwarranted degree of reliance on
the amounts and the reasons for the changes in those standardized
measures.
NOTE J - SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
(CONTINUED)
1998 1997
Beginning of year $690,000 $566,000
Changes resulting from:
Sales of production ($356,000) ($935,000)
Net change in prices
relating to future
production ( 228,000) 612,000
Extensions and discoveries -- --
Revisions in previous
quantity estimates 204,000 280,000
Accretion of discount 63,000 50,000
Net change in income taxes -- --
Other 85,000 117,000
Net increase (decrease) ($232,000) $124,000
End of year $458,000 $690,000
FORM 10-KSB ITEM 13
VINEYARD OIL AND GAS COMPANY
EXHIBITS
Exhibit Number Document
11 Computation of earnings per
share
27 Financial data schedule
EXHIBIT NUMBER 11
COMPUTATION OF EARNINGS PER SHARE
For the Years Ended December 31, 1998 and 1997
1998 1997
Net Income $ 186,568 192,936
Weighted Average Number of Common
Equivalent Shares Outstanding 5,125,563 5,125,563
Net Income Per Common Share $ .036 $.038
EXHIBIT NUMBER 27
FINANCIAL DATA SCHEDULE
For the Year Ended December 31, 1998
Item Number
Item Description
EXHIBIT NUMBER 27
FINANCIAL DATA SCHEDULE
For the Year Ended December 31, 1998
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[CASH] 384,595
[SECURITIES] 0
[RECEIVABLES] 3,072,141
[ALLOWANCES] 73,700
[INVENTORY] 172,461
[CURRENT-ASSETS] 3,585,266
[PP&E] 8,338,508
[DEPRECIATION] 7,913,763
[TOTAL-ASSETS] 4,688,975
[CURRENT-LIABILITIES] 2,726,133
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 256,278
[OTHER-SE] 1,352,982
[TOTAL-LIABILITY-AND-EQUITY] 4,688,975
[SALES] 12,666,541
[TOTAL-REVENUES] 12,830,171
[CGS] 12,174,700
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 12,174,700
[LOSS-PROVISION] 468,434
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 469
[INCOME-TAX] 186,568
[INCOME-CONTINUING] 0
[DISCONTINUED] 186,568
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 186,568
[EPS-PRIMARY] .036
[EPS-DILUTED] .036
