UNITED STATES SECURITIES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED December 31, 1996
Commission File Number: 33 - 509 - D
SUNRAY MINERALS, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0210772
(State or other jurisdiction (IRS Employer identification number)
of incorporation or organization)
P.O. Box 814653, Dallas, TX 75381
(Address of principal executive offices)(Zip Code)
972/650-1612
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to section 12 (g) of the Act:
Common
(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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10 any
amendment to this Form 10-K.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date: 886,280 Common Shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc) into which the document is
incorporated: (1) Any annual report to security holders;(2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b)
or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980) None.
PART I
ITEM 1. BUSINESS
History
Sunray Minerals, Inc. (the "Company"), formerly Tarragon Corporation, was
organized under the laws of the state of Nevada on August 22, 1985. From 1985
until November 1993, the Company engaged in no substantial business.
The Company was incorporated for the purpose of searching, investigating and
acquiring business opportunities.
The Company effected a 1-for-100 reverse stock split of the issued and
outstanding shares of common stock effective November 10, 1993. The reverse
split was approved by the board of directors and by majority written consent of
the majority shareholders on November 5, 1993. Following the reverse split, the
Company's outstanding shares of common stock were reduced from 4,111,319 to
41,113.
During 1993, the Company entered into an agreement with Benitex, A.G., a
Liechtenstein corporation ("Benitex"), to acquire working interests in certain
oil and gas properties in exchange for common stock. The properties included
producing oil and gas wells in Oklahoma. Also included are oil leases in the
same geographical area that will require additional development. The properties
were transferred to the Company on November 30, 1993. For financial reporting
purposes, this transaction was recorded as a purchase with the cost of the
properties to Benitex as the basis. As a result of the transaction, the
Company acquired assets valued at $803,471 in exchange for 286,000 post split
shares of common stock and Benitex became a majority stockholder of the Company.
On November 30, 1993, the Company acquired Waste Oil Recycling Corporation
(WORC) in exchange for 350,000 shares of common stock. As a result of this
merger, the Company acquired assets consisting of a real estate mortgage
receivable in the principal amount of $500,000 and an investment as a minority
stockholder in a real estate operating company which is the obligor on the
mortgage receivable.
On December 10, 1993, the Company entered into an agreement with Benitex which
provided for Benitex to acquire a minimum of 100,000 shares and a maximum of
700,000 shares of the common stock of the Company for a price of $3.00 per
share. The agreement provided for the purchase to be completed by September 30,
1994. Pursuant to this agreement, the Company issued 9,167 shares of common
stock for $27,500 as of December 31, 1993. The proceeds of the sale of common
stock were used primarily to acquire oil and gas prospects. During 1994, the
Company issued 175,000 shares of common stock for $525,000 in cash. The
agreement terminated September 30, 1994.
The Company commenced oil and gas operations in December 1993. It is currently
engaged in oil and gas exploration and development in Oklahoma. All of the
Company's oil and gas properties are located within the state of Oklahoma. The
Company's business strategy has been to increase production, cash flow and
reserves through the acquisition and development of mature properties along with
acquiring oil and gas prospects located in Oklahoma and Texas. These properties
have characteristics that include an established production history, proved
undeveloped reserves, and at times, multiple prospective reservoirs that provide
significant development opportunities. Prior to acquiring a property, the
Company performs a thorough geological and engineering analysis of the property
to formulate a comprehensive development plan. Development activities seek to
increase cash flow from existing proved reserves and to establish additional
proved reserves. These activities typically involve the drilling of new wells,
workovers and recompletions of existing wells, and the application of other
techniques designed to increase production.
During 1996, the Company acquired a working interest in four wells in which
three of the wells were successfully completed. Completion operations on the
fourth well were unsuccessful due to mechanical problems. As the acquisition of
the fourth well was a "turnkey" project, management of the Company is awaiting
designation of a substitute well from the operator (a related party). Of the
three wells successfully completed, the Company spent $162,726 for acquisition,
exploration, and development of these properties.
Since 1994, the Company has decreased the number of properties in which it has
an interest from 18 to seven. The primary reason for this reduction was due to
the sale of a majority of the Company's properties in August 1995 to raise cash
to meet financial obligations.
COMPETITION
The business of exploring, developing, and producing oil and gas is highly
competitive. The Company competes with numerous firms and other individuals in
its activities, including major oil firms and other independent exploration and
producing firms, many of which have substantially greater financial resources,
management and technical staffs and facilities than those of the Company. Major
and independent oil and gas companies and individuals actively bid for desirable
producing properties as well as unexplored oil and gas prospects and compete for
equipment, services, and labor required to explore, develop and operate such
properties. The Company faces intense competition in attempting to form
exploration groups with other energy firms to provide funding to complete
desired exploration, including drilling. In the opinion of the Company, the
decision of a firm to participate in a proposed exploration group is based on
the estimated likelihood of finding oil and gas in commercial quantities, the
cost of exploration and, if warranted, development, the size of the potential
reservoir, the interest to be earned by completing specified exploration or
drilling or providing necessary funding, alternative opportunities for the
employment of limited capital, the exploration philosophy or area of interest of
potential participants, the reputation of the Company, and other factors, many
of which are beyond the control of the Company.
In its efforts to acquire leases or other exploration rights in new prospect
areas, the Company faces competition from major oil companies, independent oil
firms and oil and gas speculators. The ability to acquire leases or exploration
rights is generally determined by the amount of cash required to obtain the
property interest, the royalty or other interest reserved by the transferor, and
the nature of any commitment to drill or complete other exploration.
GOVERNMENT REGULATION
The following discussion of government regulation is necessarily brief and is
not intended to constitute a comprehensive discussion of the various statutes,
rules, regulations, and governmental orders, policies and practices which may
affect operations of the Company.
State And Local Regulations Of Drilling And Production
State regulatory authorities have established rules and regulations requiring
permits for drilling, drilling bonds and reports concerning drilling and
producing activities. Such regulations also cover the location of wells, the
method of drilling and casing wells, the surface use and restoration of well
locations, the plugging and abandoning of wells, the density of wells within a
given area, and other matters. The states in which the Company operates also
have statutes and regulations governing a number of environmental and
conservation matters, including the unitization and pooling of oil and gas
properties and establishment of maximum rates of production from oil and gas
wells.
Environmental Regulations
The Company's activities are subject to numerous laws and regulations concerning
the storage, use and discharge of materials into the environment, the
remediation of environmental impacts, and other matters relating to
environmental protection, all of which may adversely affect the Company's
operations and the costs of doing business. It is likely that state and federal
environmental laws and regulations will become more stringent in the future.
Legislative proposals to reclassify a significant portion of oil and gas
production waste as "hazardous waste," would, if enacted, impose stricter
disposal requirements that could have a significant impact on the operating
costs of the Company and the oil and gas industry in general. This adverse
impact could result in a significant number of wells becoming uneconomic.
Various states from time to time consider initiatives to further regulate the
disposal of materials associated with oil and gas exploration and production.
The Company does not currently believe that it will be required in the near
future to expend amounts that are material by reason of environmental laws and
regulations.
FEDERAL AND BUREAU OF INDIAN AFFAIRS LEASES
A part of the Company's activities may be conducted under oil and gas leases
issued by the Bureau of Land Management or by the Indian tribes under the
supervision of the Bureau of Indian Affairs. These activities must comply with
the regulations and orders which regulate several aspects of the oil and gas
industry, including, but not limited to, drilling and operations on these leases
and the calculation and payment of royalties to the federal government or the
governing Indian tribe. Operations on Indian tribal lands must also comply with
applicable requirements of the governing body of the tribe involved.
SAFETY AND HEALTH REGULATIONS
The Company must also conduct its operations in accordance with various laws and
regulations concerning occupational safety and health. Currently, the Company
does not foresee expending substantial amounts to comply with these occupational
safety and health laws and regulations. However, since such laws and
regulations are frequently changed and amended, the Company is unable to predict
what amounts may be required in the future to comply with these laws and
regulations.
EMPLOYEES AND CONSULTANTS
The Company has one full time employee. In addition, the Company will engage
technical consultants as independent contractors to provide specific geological,
geophysical and other professional services.
OPERATIONAL HAZARDS
The Company is engaged in the drilling and production of oil, and as such, its
operations are subject to the usual hazards incident to the industry. These
hazards include blowouts, cratering, explosions, uncontrollable flows of oil,
natural gas or well fluids, fires, pollution, releases of toxic gas, and other
environmental hazards and risks. These hazards can cause personal injury and
loss of life, severe damage to, and destruction of property and equipment,
pollution or environmental damage, and suspension of operations.
ITEM 2. PROPERTIES
The Company holds interests in seven oil and gas wells located in north central
Oklahoma. Proved oil and gas reserves at December 31, 1996, were $139,349,
compared to $52,761 at December 31,1995, primarily as a result of development
drilling activities and acquisitions of producing properties. During 1997, the
Company sold all of its interests in four of its wells to JOC Operating, Inc.,
and acquired the interest of JOC Operating, Inc., in four of its wells. The
Company expects no substantive changes in production and reserves due to this
sale and acquisition.
In the oil and gas industry and as used herein, the word "gross" well or acre is
a well or acre in which a working interest is owned; the number of gross wells
is the total number of wells in which a working interest is owned. A "net"
well or acre is deemed to exist when the sum of fractional ownership working
interests in gross wells or acres equals one. The number of net wells or acres
is the sum of the fractional working interest owned in gross wells or acres.
WELLS AND ACREAGE
Shown below is a tabulation of the productive wells owned by the Company as of
December 31, 1996.
Productive Wells
Gross Net
----- -----
Oil 4 1.05
Gas 3 .56
----- -----
Total 7 1.61
Set forth below is information respecting the developed and undeveloped acreage
owned by the Company as of December 31, 1996.
Developed Acreage Undeveloped Acreage
----------------- -------------------
Gross Net Gross Net
------- ------- ------- -------
Texas 0.00 0.00 614.18 10.93
Oklahoma 720.00 219.60 360.00 83.23
------- ------- -------- -------
Totals 720.00 219.60 1,003.18 94.16
Set forth below is a tabulation of wells completed in the period indicated in
which the Company has participated and the results thereof for each of the three
years ended December 31, 1996.
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Gross Net Gross Net Gross Net
Exploratory: ------ ------ ----- ----- ----- ------
Dry 0.00 0.00 0.00 0.00 0.00 0.00
Oil 0.00 0.00 0.00 0.00 0.00 0.00
Gas 0.00 0.00 2.00 0.50 0.00 0.00
----- ----- ----- ----- ----- -----
Totals 0.00 0.00 2.00 0.50 0.00 0.00
Years Ended December 31,
--------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Gross Net Gross Net Gross Net
Development: ------ ------ ----- ----- ----- ------
Dry 0.00 0.00 2.00 0.75 0.00 0.00
Oil 2.00 0.75 1.00 0.08 0.00 0.16
Gas 1.00 0.25 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -----
Totals 3.00 1.00 3.00 0.83 0.00 0.16
PRODUCTION AND SALE OF OIL AND GAS
The following table summarizes certain production information for all properties
in which the Company had an interest during the periods indicated.
Year Ended December 31,
-----------------------------
1996 1995 1994
----- ------ ------
Average net daily
production:
Oil (BBLS) 3.77 23.04 22.68
Gas (MCF) 20.83 85.26 113.27
Total BOE 7.24 37.25 41.56
Average sales Price:
Oil ($ per BBS) 22.34 18.64 16.69
Gas ($ per MCF) .91 1.07 1.45
Equivalent barrel of
oil 5.46 6.42 9.85
The average production cost per barrel of oil, which included lifting cost
(electricity, fuel, water, disposal, repairs, maintenance, pumper,
transportation and similar items), and production taxes, was $8.90 for
1996.
The oil from the Company's producing wells is sold to one of a variety of
unaffiliated purchasers. Oil prices are extremely volatile. The sale of oil is
subject to price adjustments, production curtailments, and similar provisions in
oil purchase contracts, and the sale of oil is subject to general economics and
political conditions affecting the production and price of crude oil and natural
gas.
As of December 31, 1996, the Company owned working interests in oil and gas
producing properties and undeveloped leases located in Oklahoma. The following
is a table of the properties, working interest percent and type of production.
Working Producing Wells
Interest -----------------
Name and Location Percentage Oil Gas
- ----------------- ---------- ----- -----
Bivin #J-1
Lincoln County, Oklahoma .278516 x
Ruby Carpenter #1-26
Lincoln County, Oklahoma .329710 x
Clara Jane #1
Noble County, Oklahoma .225000 x x
Billings State #1
Noble County, Oklahoma .231225 x
Tully #1
Noble County, Oklahoma .375000 x x
Brown #1
Seminole County, Oklahoma .250000 x
Amend #1
Grant County, Oklahoma .375000 x x
EXECUTIVE OFFICES
The Company's principal executive offices are located at 580 Decker Drive, Suite
200, Irving, Texas 75062. The office space is within the offices leased by Las
Colinas Oil Corp. (Las Colinas), a related party. Las Colinas provides the
Company office space, supplies, office equipment, etc. for a monthly fee in the
amount of $750.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company was traded in the over-the-counter market.
Currently, the Company's stock is not actively traded, and there is no current
market for its stock. As of December 31, 1996, there were 886,280 shares of
common stock outstanding and approximately 249 shareholders of the Company.
Initially, the trading symbol was SURL. The symbol was changed to SRAY in May
1994.
No dividends have been paid on the Company's common stock, and the Company does
not anticipate paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Statement of Operations
Data:
Total Revenue $ 48,432 $ 132,356 $ 234,598 $ 19,069 $ 71,674
Net Loss (840,999) (528,694) (459,286) (22,039) (283,097)
Net Loss per share (.95) (.61) (.62) (.23) (6.89)
Weighted average
number of shares
outstanding 886,212 861,280 741,021 96,196 41,113
Balance Sheet Data:
Working Capital $ 34,171 $423,892 $ 23,065 $(14,318) 0
Total Assets 493,244 1,333,162 1,875,611 1,836,451 0
Long Term Debt 0 0 0 0 0
Stockholders' Equity 488,862 1,328,862 1,858,916 1,793,202 (25,730)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
The following discussion provides information on the results of operations for
each of the three years ended December 31, 1996 and the financial condition and
financial resources as of December 31, 1996, 1995, and 1994. The financial
statements including the notes thereto should be referred to in conjunction with
this discussion.
Profitability of the operations of the Company in any accounting period is
directly related to realized prices of oil and/or gas sold, the volume of oil
and gas produced and the results of exploration and development activities. The
Company utilizes the successful efforts method of accounting for exploration,
development and production of oil and gas reserves, whereby all non-productive
costs and expenses are incurred. All productive costs are capitalized and
amortized as depletion and depreciation using the units of production method.
The basis of the units of production method are reservoir studies performed by
engineers who use current production, economic life and knowledge of the areas
where production exists, among other factors, to derive and estimate the volume
of the recoverable reserves. Reservoir studies are performed annually and rates
of depletion and/or depreciation are adjusted as necessary. Accordingly, the
results of operations of the Company may fluctuate from period to period based
on the foregoing factors, among others.
Oil and gas accounting methods utilized by the Company limit the amount of costs
which the Company may capitalize by requiring the Company to recognize a
valuation allowance to the extent that capitalized costs of oil and gas
properties, net of accumulated depreciation, depletion and amortization and
related deferred taxes, exceed the discounted future net revenues of proved oil
and gas reserves, plus the lower of costs or fair market value of unevaluated
properties, net of Federal income tax. This limitation on capitalized costs of
oil and gas properties is generally referred to as the "Ceiling Test
Limitation". As a result of this limitation, the Company recorded a valuation
allowance at December 31, 1996 of -0-, December 31, 1995 of -0- and December 31,
1994 of $179,244.
RESULTS OF OPERATIONS
A pipeline to a gas well in which the Company has a 23.12 % interest was
completed in February 1996. The Company began receiving revenue from this well
in March 1996. Production from this well was at the rate of 21,000 cubic feet
of gas per day at year end December 1996.
In the first six months of 1996, the Company acquired a working interest in two
re-entry wells. The first well re-entry in which the Company has a 25% interest
began producing in August 1996. Production from this well was at the rate of
81,000 cubic feet of gas per day at year end December 1996. The second well re-
entry in which the Company has a 37.5% interest began producing in June 1996.
Production from this well was at the rate of 11 barrels of oil per day at year
end December 1996.
The Company drilled a well on one of its leases in September 1996. This well
was completed as a producer. The Company's interest in this well is 37.5%.
Production from this well was at the rate of 6 barrels of oil per day at year
end December 1996.
In August 1996, the Company acquired a 50% interest in another re-entry well.
Work on this project began in the fourth quarter 1996. Drilling complications
occurred on the well in which operations ceased. Drilling operations resumed in
the third quarter of 1997 with larger equipment in which mechanical problems
occurred again. Management of the Company is considering other alternative
methods on this well for completion.
1996 Compared to 1995
The Company suffered a loss of $840,999 for 1996 compared to a loss of $528,694
in 1995. The loss includes the write off of $156,216 in leased prospects that
expired in 1996, $141,802 in leased prospects that expired in 1997, well
abandoned costs of $41,372 that occurred in 1997 along with dry hole costs of
$9,267. The 1997 losses were written off (loss) for 1996 as the Company had no
plans to renew the leases or continue producing the said well in 1997.
Total general and administrative expense for the year were $167,120. Management
of the Company has implemented a program to decrease in overhead costs effective
the first quarter of 1997. These reductions include a decrease in rent,
payroll, and payments to consultants.
Oil and gas sales were $38,463 in 1996, a decrease of $65,078 from 1995 in which
oil and gas revenues were $103,541. This decrease was primarily due to the sale
of the majority of the Company's oil and gas properties that occurred August
14, 1995.
In 1996 total operating expenses increased by $180,845 to $570,931 from $390,086
in 1995. This increase included reductions in lease operating-related party of
$35,829 from 1995 to $23,546, a decrease of $11,631 from 1995 to $9,000 in
general and administrative-related party and a decrease of $125,865 from 1995 to
$9,267 in dry hole costs. However, increases occurred in well abandonment cost
of $41,371 for 1996 from 0 in 1995, an increase of $298,018 in 1996 for leased
prospects expired from 0 in 1995 In addition, depreciation and depletion
decreased by $4,185 from 1995 to $31,608 in 1996. The increase in total
operating expenses also included an increase from 1995 to 1996 in general and
administrative expenses of $19,037 to $158,120 from $139,083 in 1995 due to an
increase in consultant expense. The leased prospects expired as the Company did
not have the funds to renew the leases or drill wells on the leases to keep the
them from expiring. The general and administrative-related party expense
decreased by $11,631 as a result of lower fees for rent and other services.
Lease operating-related party expense decreased as a result of ownership in
fewer wells.
1995 Compared to 1994
The Company suffered a loss of $528,694 in 1995 compared to a loss of $460,646
in 1994. For 1995, the Company lost $238,989 in the sale of properties, a loss
in the mortgage settlement of $31,975, both of which are one-time charges. In
addition, the dry hole costs were $135,132, which are high due to the Company's
West Texas venture.
Sales from oil and gas decreased from $198,175 in 1994 to $103,541 in 1995, as a
result of the sale of oil and gas properties that occurred August 14, 1995.
Total operating expenses decreased from $695,244 in 1994 to $390,06 in 1995.
This reduction was made up of $59,375 in lease operating-related party and
$360,293 reduction in depreciation and depletion due to the aforementioned sale.
This was partially offset by the increase in dry hole costs of $53,244 from the
West Texas venture and increases in general and administrative expenses of
$71,220 from wages, consultants, and office expense. The general and
administrative related party expense decreased by $10,938, as a result of lower
fees for rent and other services.
The Company engages in a segment of the oil business that requires a virtually
continuous drilling program. The Company utilizes the knowledge and experience
of management, along with outside consultants, in determining the geographic
areas and depth of the wells, which are primary economic considerations. The
wells in which the Company attempts to acquire an interest are normally
considered shallow, but usually are lower risk due to lower costs than those
drilled to greater depths. Deeper wells are more costly and, therefore, present
greater risks.
LIQUIDITY AND CAPITAL RESOURCES
The Company purchased an additional interest in two of its existing wells in the
amounts of 16.50% and 19.55% on February 1, 1997. Management of the Company is
examining various alternatives in order to increase income.
The Company prepaid to a related party for a 50% interest in a well (re-entry)
which was drilled in the fourth quarter of 1996. Mechanical problems occurred
during the drilling which caused a delay in operations. Drilling operations
resumed in the third quarter of 1997 in which mechanical problems occurred
again. Management of the Company is considering other alternative methods on
this well for completion.
During 1996, the Company purchased an interest in three re-entry wells and
drilled a development well on one of its own leases. All were completed as
successful commercial wells with the exception of one well in which completion
operations are pending. Of the three new producing wells added, the Company
spent $162,726 for acquisitions, exploration and development of these
properties. Total proved oil and gas reserves added from these three wells in
1996 were 9,933 BBLS along with 44,167 MMCF. An accepted method of calculating
cost of finding is to divide the Company's expenditures for oil and gas
acquisition, exploration and development by the net barrels of oil equivalent
(BOE's) added during the year. Using this method, the Company's cost of finding
for 1996 was $9.41 per BOE.
The Company has recorded as an Other Asset an investment in 85,000 shares of
Great Western Asset Group, Inc. (GWAG), a private company. This investment was
one of the assets acquired as a result of a merger with Waste Oil Recycling
Corp. GWAG, located in Mesa, Arizona, is involved primarily in the construction
of single family homes. These shares are accounted for at cost (originally
$510,000) and are reviewed for impairment on an annual basis. In 1996, the
Company wrote down this asset to $190,500.
The Company received $422,675 in December 1995 as full settlement on an amount
due from Great Western Asset Group covering a notes receivable. Of this
amount, $191,000 was used for the acquisition and drilling of three wells,
$50,226 was invested in the successful drilling of a well on one of the
Company's leases, $9,267 was paid on the remaining dry hole costs of a well
drilled in 1995, $172,182 was used for general & administrative expenses, lease
operating expenses and intangible drilling costs that occurred in 1996.
The information contained herein may include certain forward-looking statements
that are based on assumptions that in the future may prove not to have been
accurate. Those statements, and Sunray Minerals, Inc.'s business and prospects,
are subject to a number of risks, including production variances from
expectations, volatility of oil and gas prices, the need to develop and replace
its reserves, the substantial capital expenditures required to fund its
operations, environmental risks, drilling risks, risks related to exploration
and development drilling, uncertainties about estimates of reserves,
competition, government regulation, and the ability of the Company to implement
its business strategy.
INFLATION
The Company's activities have not been, and in the near term are not expected to
be, materially affected by inflation or changing prices in general. The
Company's oil exploration and production activities are generally affected by
prevailing prices for oil, however. (See ITEM 1. BUSINESS.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, including the required accountant's
reports, are included immediately following the signature page to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the name, age and position of each executive officer and
director of the Company who served during the year ended December 31, 1996.
NAME AGE POSITION (S) TERM BEGAN TERMINATED
Michael P. O'Brien 42 President/Director 1993 N/A
Paul B. McCully 66 Vice President/ 1993 1/3/96
Director
S. Randell Wyatt 38 Secretary/Treasurer 1993 N/A
& Director
All directors of the Company serve for one year and/or until their respective
successors are elected and qualified. Executive officers serve at the pleasure
of the board of directors.
MICHAEL P. O'BRIEN, age 42, has been involved with the oil and gas industry for
over 20 years. He served as Vice President Land for a large independent oil and
gas company where he was employed from 1974 to 1988. He is currently on the
board of directors and serves as an officer in two companies relating to
drilling, exploration, production and operating, including Las Colinas Oil
Corp., where he was employed from 1988 to December 1, 1996. (See ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS). He has completed courses with
the Institute for Energy Development, an extension of the University of
Oklahoma, and is currently classified as a Registered Land Professional with the
American Association of Professional Landmen.
PAUL B. McCULLY, age 66, is chairman of Las Colinas Oil Corp., an oil and gas
exploration and production firm, where he has been employed since 1988 (See ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS). In 1961, Mr. McCully
founded Wil-Mc Oil Corp., which was engaged in exploration and production of oil
and gas. He was president of Wil-Mc Oil Corp. from 1963 to 1988, including the
period following the sale of the company in 1986 to Harbert Energy, Birmingham,
Alabama. Mr. McCully received a B.S. degree in Petroleum Engineering in 1952
from Texas Tech University. Mr. McCully resigned January 3, 1996.
S. RANDELL WYATT, age 38, has been employed in the oil and gas industry since
1981. He served in contract administration for an independent oil company from
1981 to 1988. Since that time, he has functioned in business administration as
a Manager in accounting, personnel, insurance and land for three oil and gas
companies relating to exploration, production, drilling and well servicing. He
was previously employed by Las Colinas Oil Corp. in a management capacity. (See
ITEM 13, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS). Mr. Wyatt is
currently a member of the American Association of Professional Landmen. He
received a B.B.A. degree in General Business in 1981 from Abilene Christian
University.
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Based solely upon a review of forms 3, 4 & 5 and amendments thereto, furnished
to the Company during or respecting its last fiscal year, no director, officer,
beneficial owner of more than 10% of any class of equity securities of the
Company or any other person known to be subject to Section 16 of the Exchange
Act failed to file on a timely basis reports required by Section 16 of the
Exchange Act for the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The following is a summary of cash compensation paid to the President during the
last fiscal year. None of the Company's other executive officers received total
compensation in excess of $100,000.
Year Ended
December 31 Title Compensation
----------- -------- ------------
Michael P. O'Brien 1996 Pres/Dir $21,250
1995 Pres/Dir $13,961
1994 Pres/Dir -0-
Paul B. McCully resigned as an officer and director of the Company on January 3,
1996. The Board of Directors approved issuing 25,000 shares of common stock of
the Company to Mr. McCully as compensation for prior service. In addition, the
Board of Directors, on March 1, 1997 approved issuing of 25,000 shares of common
stock of the Company to Michael P. O'Brien and 25,000 shares of common stock of
the Company to S. Randell Wyatt as compensation for prior services.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth as of December 31, 1996, the number of shares of
the Company's outstanding Common Stock owned of record or beneficially by each
person who held of record, or was known by the Company to own beneficially, more
than 5% of the Company's 886,280 shares of Common Stock outstanding, and the
name and share holdings of each officer, director, and all officers and
directors as a group.
NAME OF PERSON OWNERSHIP SHARES PERCENT
OR GROUP
- ---------------------- --------- -------- --------
Principal Shareholders
Wellshire Securities,
Inc. Direct 579,495 65.39%
D.B. Brown Family Trust Direct 58,335 6.58%
Serliana A.G. Direct 73,509 8.29%
Officers & Directors None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
The terms of the following transactions between related parties were not
determined as a result of arm's length negotiations. In each case, in the
opinion of management, the terms of the transaction were no less favorable than
would have been negotiated in an arm's length transaction.
In December, 1996 the Company and Las Colinas Oil Corp. entered into an
Agreement whereby the Company would purchase certain assets from Las Colinas Oil
Corp. The assets consisted of producing oil and gas wells and proved
undeveloped leases for future drilling prospects. In addition, the Company
would acquire the ongoing business of oil field operations currently conducted
by Las Colinas Oil Corp. The completion of the Agreement was dependent on the
ability of the Company to raise sufficient funds to finance the project. The
Company was not successful in its attempts to borrow the necessary funds from
commercial banks and/or investment bankers, therefore, the project was
abandoned.
The unsuccessful attempt to acquire assets from Las Colinas Oil Corp. by the
Company was a related party transaction. Negotiations regarding the purchase
and sale were not considered as being conducted at "arms length" due to various
relationships of the parties. The Company paid $22,500 to an investment banking
organization as a due diligence fee for the legal fees and engineering studies
performed in connection with this endeavor which is included in the general and
administrative expenses for this fiscal year.
Officers and directors, Michael P. O'Brien and S. Randell Wyatt are former
officers, directors and/or employees of Las Colinas Oil Corp. (Las Colinas).
The Company occupied office space within the offices leased by Las Colinas and
utilized space, supplies, office equipment, etc. during 1996. The Company paid
$9,000 to Las Colinas under this agreement in the year ended December 31, 1996.
The amounts paid were at the rate of $750 per month.
Las Colinas is the operator for certain oil and gas properties in which the
Company owns a working interest. As the operator, Las Colinas charges a fee for
services and pays the expenses incidental to the wells. These expenses
including the service fees are billed to the Company on a monthly basis. Las
Colinas also collects and disburses a portion of oil & gas revenues for the
Company. At December 31, 1996, the balance owed to the Company from Las Colinas
was $33,948. Las Colinas may also own a working interest in the same properties
as the Company.
The Company also owns an interest in certain oil and gas properties which are
operated by operators other than Las Colinas. In these instances the direct
charges to the wells are similar to those charges by Las Colinas. Revenue is
distributed either direct from the first purchaser to the Company or through the
Operator to the Company.
The oil and gas prospects and producing properties owned by the Company were
acquired from Las Colinas.
In the year ended December 31, 1996, the Company paid $191,000 to Las Colinas to
purchase working interest in three drill and/or rework projects. The Company
paid to Las Colinas $58,486, for a working interest, to drill another well on
one of its own leases.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS
Report of independent auditor
Balance sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 & 1994
Statements of Stockholders' Equity "Deficit" as of December 31, 1996, 1995
& 1994
Statements of Cash Flow for the years ended December 31, 1996, 1995 & 1994
Notes to Financial Statements
Schedules other than those listed above are omitted because of the absence of
conditions which they are required or because the information is shown in the
financial statements.
B. Reports on Form 8-K filed during the year ended December 31, 1996
None
C. EXHIBITS
The following exhibits are included as part of this report (see exhibit
index in separate exhibit volume):
Exhibit SEC Reference Title of Document Location
No. No.
- ------- ------------- ----------------- -----------------
Item 3. Articles of Incorporation and Bylaws
3.01 3 Articles of Incorporation Incorporated by
reference (1)
3.02 3 Amendment to Articles of Incorporated by
Incorporation reference (1)
3.03 3 Certificate of Amendment to Incorporated by
Articles of Incorporation reference (2)
3.04 3 Bylaws Incorporated by
reference (1)
Item 27 Financial Data Schedule
27.01 27 Financial Data Schedule This Filing
(1) Incorporated by reference from the Registrant's registration statement on
form S-18 filed with the Commission, SEC file number 33-509-D.
(2) Incorporated by reference from the Registrant's annual report on form 10-K
for the fiscal year ended December 31, 1991.
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
Date: February 23, 1998
SUNRAY MINERALS, INC.
By /s/ Michael P. O'Brien, President
and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in capacities and on the dates indicated.
Date: February 23, 1998
/s/ Michael P. O'Brien, President
and Director
/s/ S. Randell Wyatt, Secretary/
Treasurer and Director
<PAGE>
J. S. OSBORN, P.C.
CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
17430 CAMPBELL ROAD, SUITE 114
JOHN S. OSBORN, DALLAS, TEXAS 75252 AMERICAN INSTITUTE OF
CPA 972-735-0033 FAX 972-735-0035 CERTIFIED PUBLIC
ACCOUNTANTS
TEXAS SOCIETY OF
MARK L. CLELAND, CERTIFIED PUBLIC
CPA ACCOUNTANTS
SEC PRACTICE SECTION,
AICPA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Sunray Minerals, Inc.
Dallas, Texas
We have audited the accompanying balance sheets of Sunray Minerals, Inc. as of
December 31, 1996 and 1995 and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunray Minerals, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ J. S. Osborn, P. C.
Dallas, Texas
June 24, 1997
<PAGE>
SUNRAY MINERALS, INC
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
CURRENT ASSETS: 1996 1995
--------- ---------
Cash $ 608 $ 415,809
Accounts receivable-trade 3,997 2,125
Accounts receivable-related 33,948 10,144
party
Interest receivable 0 114
--------- ---------
Total Current Assets 38,553 428,192
PROPERTY and EQUIPMENT:
Oil and gas properties 386,829 486,000
Less: Accumulated depreciation,
depletion And amortization (122,638) (91,030)
--------- ---------
Total Property and Equipment 264,191 394,970
OTHER ASSETS:
Investment in Great Western 190,500 510,000
--------- ---------
Total Other Assets 190,500 510,000
TOTAL ASSETS $ 493,244 $1,333,162
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,675 $ 2,810
Payroll taxes payable 707 1,490
--------- ---------
Total Current Liabilities 4,382 4,300
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par
value; 1,000,000 shares
authorized; no shares issued -- --
Common stock, $0.01 par value;
20,000,000 shares authorized;
886,280 and 861,280 shares
issued and outstanding at
December 31, 1996 and 1995, 8,863 8,613
respectively
Additional paid-in capital 2,957,553 2,956,803
Accumulated deficit (2,477,554) (1,636,554)
--------- ---------
Total Stockholders' Equity 488,862 1,328,862
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $493,244 $1,333,162
The accompanying notes are an integral part of these financial statements.
<PAGE>
SUNRAY MINERALS, INC.
STATEMENT OF OPERATIONS
For The Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------- -------- --------
REVENUE:
Sales from oil and gas $38,463 $103,541 $198,175
Interest 9,601 28,624 34,503
Other income 368 191 1,920
------- -------- --------
Total Revenue 48,432 132,356 234,598
OPERATING EXPENSE:
Lease operating -- 73 --
Lease operating-related party 23,546 59,375 117,734
Depreciation and depletion 31,607 35,792 396,085
Dry hole costs 9,267 135,132 81,888
Expired leases 298,018 -- ---
Well abandonment costs 41,372 -- ---
Interest -- -- 105
General and administrative 158,121 139,083 67,863
General and administrative- 9,000 20,631 31,569
related party
------- -------- --------
Total Operating Expense 570,931 390,086 695,244
OTHER INCOME AND EXPENSE:
(Gain) loss on sale of property (1,000) 238,989 --
Writedown of investment 319,500 -- --
Loss on mortgage note receivable -- 31,975 --
------- -------- --------
Total Other Income and Expense 318,500 270,964 --
NET INCOME (LOSS) $(840,999) $(528,694) $(460,646)
Weighted average shares 886,212 861,280 741,021
outstanding
LOSS PER SHARE:
Loss per share ($0.95) ($0.61) ($0.62)
The accompanying notes are an integral part of these financial statements
<PAGE>
SUNRAY MINERALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1996, 1995 and 1994
COMMON
------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------- -------- ---------- -----------
Balance, December 31, 1993 686,280 $ 6,863 $2,433,553 $(647,214)
Issuance of stock 175,000 1,750 523,250
Net loss (460,646)
-------- -------- ---------- -----------
Balance, December 31, 1994 861,280 $ 8,613 $2,956,803 $(1,107,860)
Net loss (528,694)
-------- -------- ---------- -----------
Balance, December 31, 1995 861,280 8,613 2,956,803 $(1,636,554)
Issuance of stock 25,000 250 750
Net loss (840,999)
-------- -------- ---------- -----------
Balance, December 31, 1996 886,280 $ 8,863 $2,957,553 $(2,477,553)
The accompanying notes are an integral part of these financial statements
<PAGE>
SUNRAY MINERALS, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(840,999) $(528,694) $(460,646)
Adjustments to reconcile net loss to
net cash (used) by operating
activities:
Depreciation and depletion 31,607 35,791 396,084
Write off dry hole costs 9,267 -- --
Write off expired leases 298,018 -- --
Well abandonment cost 41,372 -- --
Writedown of investment in Great 319,500 -- --
Western
(Gain) loss on sale of properties -- 220,091 --
Loss on sale of mortgage note 23,297 --
principal
Issue stock for services 1,000
Changes in working capital:
(Increase) decrease in
Accounts receivable (1,872) 15,026 (17,151)
Accounts receivable-related party (23,804) 23 1,326
Interest receivable 114 10,991 (3,530)
Increase (decrease) in
Accounts payable 865 (13,410) (10,742)
Accounts payable-Related party -- -- (16,287)
Payroll taxes payable (783) 1,016 474
-------- -------- --------
NET CASH (USED) BY OPERATING ACTIVITIES: (165,715) (235,869) (110,472)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Properties (249,486) -- (474,416)
Sale of Properties 225,000
Collection of Note Receivable 422,675 54,028
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES: (249,486) 647,675 (420,388)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock -- -- 525,000
-------- -------- --------
NET CASH PROVIDED BY FINANCING -- -- 525,000
ACTIVITIES:
NET INCREASE (DECREASE) IN CASH: (415,201) 411,806 (5,860)
CASH AT BEGINNING OF YEAR 415,809 4,003 9,863
-------- -------- --------
CASH AT END OF YEAR $ 608 $415,809 $ 4,003
======== ======== ========
The accompanying notes are an integral part of these financial statements
<PAGE>
SUNRAY MINERALS, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1996, 1995 and 1994
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW AND NON-CASH INVESTING ACTIVITIES
1996 1995 1994
-------- -------- --------
CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ 105
NON-CASH INVESTING ACTIVITIES:
Common stock issued for compensation $ 1,000 $ -- $ --
-------- -------- --------
Total $ 1,000 $ -- $ --
The accompanying notes are an integral part of these financial statements
<PAGE>
SUNRAY MINERALS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
History:
The Company was organized August 22, 1985, as a Nevada corporation under the
name Tarragon Corporation for the purpose of seeking, investigating, and, if
such investigation warranted acquiring an interest in potential business
opportunities. The Company's name was changed to Sunray Minerals, Inc. on
December 31, 1991. The Company has not paid a dividend to its investors.
The Company commenced oil and gas operations in December 1993.
During 1995 the Company sold most of its producing properties.
The Company purchased an interest in three re-entry wells and drilled a
development well on one of its own leases during 1996. Three were completed as
successful commercial wells and a fourth well is pending completion operations.
Basis of Accounting:
It is the Company's policy to prepare its financial statements on the accrual
basis of accounting in accordance with generally accepted accounting principles.
Receipts are recorded as income in the period in which they are earned and
expenses are recognized in the period in which the related liability is
incurred. Sales from oil and gas are recorded in the month of actual
production.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
Earnings (Loss) per Common Share:
Earnings (loss) applicable to common stock is based on the weighted average
number of shares of common stock and common stock equivalents outstanding.
Property and Equipment:
The Company follows the successful efforts method of accounting for exploration,
development and production of oil and gas reserves, whereby all productive costs
are capitalized and unproductive costs are expensed in the year incurred.
Geological and geophysical costs and costs of carrying and retaining undeveloped
properties are charged to expense as incurred. Costs of drilling exploratory
wells and other test wells that do not find proved reserves are charged to
expense. Costs of development wells or other successful wells are capitalized
and depleted using the units of production method based on total proved reserves
applicable to each property. Costs of unproved properties are assessed
periodically, and loss recognized if the properties are impaired. Estimates of
oil and gas reserves were prepared by a related party engineer. Net capitalized
costs of oil and gas properties are subject to a ceiling test. For ceiling test
purposes, the Company compares its undiscounted standardized measure of future
net cash flows from estimated production to net oil and gas properties. There
were charges to depletion in the amount of $179,244, relating to ceiling test
limitations in 1994. There were no such charges in 1995 or 1996. The Company
has working interests in developed and undeveloped leases located in Texas and
Oklahoma. All of the Company's leases were operated by an affiliate during 1996
and 1995. This same affiliate operated most of the Company's leases in 1994.
Upon sale or retirement of depreciable or depletable property, the cost and
related accumulated depreciation, depletion and amortization are removed and
gain or loss is recognized. Renewals and replacements that improve or extend
the useful life of existing properties are capitalized. Expired leases are
charged to expense in the period the lease term expires.
Depletion and Depreciation:
The Company will deplete its cost in the leases and related equipment on a lease
by lease basis using the units of production method based upon the amount of
production in relation to its estimated reserves as determined by current
engineering studies.
Income Tax:
The Company is subject to the greater of federal income taxes computed under the
regular system or the alternative minimum tax (AMT) system. No provision for
income taxes has been made due to the Company having an accumulated net
operating loss.
Accounting Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B - PROPERTY AND EQUIPMENT:
Property and Equipment at cost, are summarized as follows:
1996 1995
-------- ---------
Oil and gas properties, successful
efforts method:
Producing leasehold costs $181,767 $ 74,229
Nonproducing leasehold costs 59,540 315,722
Intangible development costs 87,340 84,965
Lease and well equipment 58,182 11,084
-------- ---------
386,829 486,000
Less accumulated depreciation,
depletion and amortization (122,638) (91,030)
-------- ---------
$245,774 $ 394,970
Costs incurred in oil and gas property acquisition, exploration, and development
activities:
1996 1995 1994
-------- -------- --------
Acquisition Costs $193,932 $ 10,001 $400,648
Exploration Costs 0 101,820 0
Development Costs 37,269 1,358 73,768
NOTE C - INVESTMENT IN GREAT WESTERN:
The Company owns 85,000 shares (5.8%) of the outstanding common stock of Great
Western Asset Group, Inc. (GWAG), a private company as a result of a merger with
Waste Oil Recycling Corp. GWAG., located in Mesa, Arizona, is involved
primarily in the construction of single family homes. These shares are accounted
for at cost (originally $510,000) and are reviewed for impairment on an annual
basis. In 1996 the Company wrote down this asset to $190,500.
NOTE D - COMMON STOCK:
The Company issued 645,167 shares for oil & gas properties in 1994. In the
first quarter of 1996 the Company issued 25,000 shares of its common stock to a
resigning director as compensation for services in the amount of $1,000.
NOTE E - INCOME TAXES:
The Company has net operating loss carryforwards of approximately $900,000 that
is available to offset its future income tax liability.
No deferred tax asset has been recognized for the operating loss carryforward as
it is more likely than not that all or a portion of the net operating loss will
not be realized and any valuation allowance would reduce the benefit to zero.
NOTE F - RELATED PARTY TRANSACTIONS:
The Company's officers and directors were officers, directors and employees of
Las Colinas Oil Corp. (Las Colinas) until the fourth quarter of 1996. The
Company occupies office space within the offices leased by Las Colinas and
utilizes their personnel, supplies and office equipment. Las Colinas agreed to
supply these services for a fixed monthly fee. During 1996, 1995 and 1994 the
Company recorded $6,000, $19,000 and $30,000 respectively as an expense under
this agreement.
Las Colinas is the operator for most of the oil & gas properties in which the
Company owns a working interest. As the operator, Las Colinas charges a fee for
services and pays the expenses incidental to the leases. These expenses,
including the service fees, are billed to the Company on a monthly basis. Las
Colinas also collects and disburses oil & gas revenues for certain properties of
the Company. The balance owed to the Company for oil & gas revenues collected
was $33,948 and $10,144 at December 31, 1996 and 1995 respectively. Las Colinas
may also own a working interest in the same properties as the Company.
In 1994 the Company issued 175,000 shares of its common stock to Benitex, A.G.
for $525,000 cash. These funds were used primarily to purchase nonproducing
properties from Las Colinas in 1994. The value of these properties was
determined by actual costs to Las Colinas or independent third party appraisals.
During 1995 the Company sold to an affiliate the majority of its existing
producing properties for $225,000 cash. The sales price was calculated using a
discounted net present value based upon an independent reserve appraisal. The
sale of these properties resulted in a net loss to the Company in the amount of
$238,989.
During 1996 the Company purchased interests in three re-entry wells from Las
Colinas in amounts totaling $191,000.
NOTE G - SUPPLEMENTAL INFORMATION ABOUT OIL & GAS ACTIVITIES (UNAUDITED):
<TABLE>
1996 1995 1994
------------- ------------- -------------
Oil Gas Oil Gas Oil Gas
Bbl MCF Bbl MCF Bbl MCF
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Beginning of Period 4,320 117,330 38,004 108,643 84,264 593,559
Revision of previous
estimates 1,530 (111,936) 4,777 155,907 (45,159) (445,497)
Additions 10,615 47,904 5,617 0 7,178 1,935
Dispositions 0 0 (39,231) (129,254) 0 0
Production (1,379) (7,602) (4,847) (17,966) (8,279) (41,344)
------ ------ ------ ------- ------ -------
End of Period 15,086 45,696 4,320 117,330 38,004 108,653
</TABLE>
Following are the standard measures of discounted future net cash flows and
changes therein relating to proved oil and gas reserves as of December 31, 1996,
1995 and 1994:
1996 1995 1994
--------- -------- --------
Future cash flows $ 438,542 $162,122 $933,100
Future production costs (195,958) (75,794) (476,090)
Future development costs 0 0 0
Future net cash flows 242,584 86,328 457,010
10% annual discount for estimates
timing of cash flows (103,235) (33,567) (148,200)
---------- ------- ---------
Standard measure of discounted
future net cash flows $ 139,349 $52,761 $ 308,810
The principal sources of changes in the standardized measure of discounted
future net cash flows were as follows:
1996 1995 1994
--------- -------- --------
Standardized measure of
discounted future net cash
flows - beginning of year $ 52,761 $ 308,810 $1,074,050
Sales of oil & gas produced,
net of production costs (14,917) (44,093) (80,441)
Extensions, discoveries and
improved recovery less
related costs 106,014 0 0
Revisions of previous
quantity estimates (4,509) 13,044 (1,168,489)
Purchases of reserves
in place 0 0 474,416
Sales of reserves in place 0 (225,000) 0
Accretion of discount 0 0 9,274
--------- -------- --------
Standardized measure of
discounted future net
cash flows - end of year $ 139,349 $ 52,761 $308,810
SUNRAY MINERALS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
Note A - Nature of Business and Summary of Significant Accounting Policies:
History:
The Company was organized August 22, 1985, as a Nevada corporation under the
name Tarragon Corporation for the purpose of seeking, investigating, and, if
such investigation warranted acquiring an interest in potential business
opportunities. The Company's name was changed to Sunray Minerals, Inc. on
December 31, 1991. The Company has not paid a dividend to its investors.
The Company commenced oil and gas operations in December 1993.
During 1995 the Company sold most of its producing properties.
The Company purchased an interest in three re-entry wells and drilled a
development well on one of its own leases during 1996. Three were completed as
successful commercial wells and a fourth well is pending completion operations.
Basis of Accounting:
It is the Company's policy to prepare its financial statements on the accrual
basis of accounting in accordance with generally accepted accounting principles.
Receipts are recorded as income in the period in which they are earned and
expenses are recognized in the period in which the related liability is
incurred. Sales from oil and gas are recorded in the month of actual
production.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
Earnings (Loss) per Common Share:
Earnings (loss) applicable to common stock is based on the weighted average
number of shares of common stock and common stock equivalents outstanding.
Property and Equipment:
The Company follows the successful efforts method of accounting for exploration,
development and production of oil and gas reserves, whereby all productive costs
are capitalized and unproductive costs are expensed in the year incurred.
Geological and geophysical costs and costs of carrying and retaining undeveloped
properties are charged to expense as incurred. Costs of drilling exploratory
wells and other test wells that do not find proved reserves are charged to
expense. Costs of development wells or other successful wells are capitalized
and depleted using the units of production method based on total proved reserves
applicable to each property. Costs of unproved properties are assessed
periodically, and loss recognized if the properties are impaired. Estimates of
oil and gas reserves were prepared by a related party engineer. Net capitalized
costs of oil and gas properties are subject to a ceiling test. For ceiling test
purposes, the Company compares its undiscounted standardized measure of future
net cash flows from estimated production to net oil and gas properties. There
were charges to depletion in the amount of $179,244, relating to ceiling test
limitations in 1994. There were no such charges in 1995 or 1996. The Company
has working interests in developed and undeveloped leases located in Texas and
Oklahoma. All of the Company's leases were operated by an affiliate during 1996
and 1995. This same affiliate operated most of the Company's leases in 1994.
Upon sale or retirement of depreciable or depletable property, the cost and
related accumulated depreciation, depletion and amortization are removed and
gain or loss is recognized. Renewals and replacements that improve or extend
the useful life of existing properties are capitalized. Expired leases are
charged to expense in the period the lease term expires.
Depletion and Depreciation:
The Company will deplete its cost in the leases and related equipment on a lease
by lease basis using the units of production method based upon the amount of
production in relation to its estimated reserves as determined by current
engineering studies.
Income Tax:
The Company is subject to the greater of federal income taxes computed under the
regular system or the alternative minimum tax (AMT) system. No provision for
income taxes has been made due to the Company having an accumulated net
operating loss.
Accounting Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Note B - Property and Equipment:
Property and Equipment at cost, are summarized as follows:
1996 1995
Oil and gas properties, --------- ----------
successful efforts method:
Producing leasehold costs $181,767 $ 74,229
Nonproducing leasehold costs 59,540 315,722
Intangible development costs 87,340 84,965
Lease and well equipment 58,182 11,084
-------- --------
386,829 486,000
Less accumulated depreciation,
depletion and amortization (122,638) (91,030)
-------- --------
$245,774 $394,970
Costs incurred in oil and gas property acquisition, exploration, and development
activities:
1996 1995 1994
-------- -------- --------
Acquisition Costs $193,932 $ 10,001 $400,648
Exploration Costs 0 101,820 0
Development Costs 37,269 21,358 73,768
Note C - Investment in Great Western:
The Company owns 85,000 shares (5.8%) of the outstanding common stock of Great
Western Asset Group, Inc. (GWAG), a private company as a result of a merger with
Waste Oil Recycling Corp. GWAG., located in Mesa, Arizona, is involved
primarily in the construction of single family homes. These shares are accounted
for at cost (originally $510,000) and are reviewed for impairment on an annual
basis. In 1996 the Company wrote down this asset to $190,500.
Note D - Common Stock:
The Company issued 645,167 shares for oil & gas properties in 1994. In the
first quarter of 1996 the Company issued 25,000 shares of its common stock to a
resigning director as compensation for services in the amount of $1,000.
Note E - Income Taxes:
The Company has net operating loss carryforwards of approximately $900,000 that
is available to offset its future income tax liability.
No deferred tax asset has been recognized for the operating loss carryforward as
it is more likely than not that all or a portion of the net operating loss will
not be realized and any valuation allowance would reduce the benefit to zero.
Note F - Related Party Transactions:
The Company's officers and directors were officers, directors and employees of
Las Colinas Oil Corp. (Las Colinas) until the fourth quarter of 1996. The
Company occupies office space within the offices leased by Las Colinas and
utilizes their personnel, supplies and office equipment. Las Colinas agreed to
supply these services for a fixed monthly fee. During 1996, 1995 and 1994 the
Company recorded $6,000, $19,000 and $30,000 respectively as an expense under
this agreement.
Las Colinas is the operator for most of the oil & gas properties in which the
Company owns a working interest. As the operator, Las Colinas charges a fee for
services and pays the expenses incidental to the leases. These expenses,
including the service fees, are billed to the Company on a monthly basis. Las
Colinas also collects and disburses oil & gas revenues for certain properties of
the Company. The balance owed to the Company for oil & gas revenues collected
was $33,948 and $10,144 at December 31, 1996 and 1995 respectively. Las Colinas
may also own a working interest in the same properties as the Company.
In 1994 the Company issued 175,000 shares of its common stock to Benitex, A.G.
for $525,000 cash. These funds were used primarily to purchase nonproducing
properties from Las Colinas in 1994. The value of these properties was
determined by actual costs to Las Colinas or independent third party appraisals.
During 1995 the Company sold to an affiliate the majority of its existing
producing properties for $225,000 cash. The sales price was calculated using a
discounted net present value based upon an independent reserve appraisal. The
sale of these properties resulted in a net loss to the Company in the amount of
$238,989.
During 1996 the Company purchased interests in three re-entry wells from Las
Colinas in amounts totaling $191,000.
Note G - Supplemental information about oil & gas activities (unaudited):
<TABLE>
1996 1995 1994
<C> <C> <C> <C> <C> <C>
<S> Oil Bbl Gas MCF Oil Bbl Gas MCF Oil Bbl Gas MCF
------- ------- ------- ------- ------- -------
Beginning of Period 4,320 117,330 38,004 108,643 84,264 593,559
Revision of
previous estimates 1,530 (111,936) 4,777 155,907 (45,159) (445,497)
Additions 10,615 47,904 5,617 0 7,178 1,935
Dispositions 0 0 (39,231)(129,254) 0 0
Production (1,379) (7,602) (4,847) (17,966) (8,279) (41,344)
------- ------- ------- ------- ------- -------
End of Period 15,086 45,696 4,320 117,330 38,004 108,653
</TABLE>
Following are the standard measures of discounted future net cash flows and
changes therein relating to proved oil and gas reserves as of December 31, 1996,
1995 and 1994:
1996 1995 1994
-------- -------- --------
Future cash flows $438,542 $162,122 $933,100
Future production costs (195,958) (75,794) (476,090)
Future development costs 0 0 0
-------- -------- --------
Future net cash flows 242,584 86,328 457,010
10% annual discount for
estimates timing of cash
flows (103,235) (33,567) (148,200)
-------- -------- --------
Standard measure of
discounted future net
cash flows $ 139,349 $ 52,761 $ 308,810
The principal sources of changes in the standardized measure of discounted
future net cash flows were as follows:
1996 1995 1994
Standardized measure of
discounted future net cash
flows - beginning of year $ 52,761 $ 308,810 $1,074,050
Sales of oil & gas produced,
net of production costs (14,917) (44,093) (80,441)
Extensions, discoveries and
improved recovery, less 106,014 0 0
related costs
Revisions of previous quantity
estimates (4,509) 13,044 (1,168,489)
Purchases of reserves in place 0 0 474,416
Sales of reserves in place 0 (225,000) 0
Accretion of discount 0 0 9,274
Standardized measure of
discounted future net cash
flows - end of year $ 139,349 $ 52,761 $ 308,810
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1996, AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-START> JAN-01-1996
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 608
<SECURITIES> 0
<RECEIVABLES> 37,945
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,553
<PP&E> 386,829
<DEPRECIATION> 122,638
<TOTAL-ASSETS> 493,244
<CURRENT-LIABILITIES> 4,382
<BONDS> 0
<COMMON> 8863
0
0
<OTHER-SE> 2,957,553
<TOTAL-LIABILITY-AND-EQUITY> 493,244
<SALES> 38,463
<TOTAL-REVENUES> 48,432
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 570,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (840,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (840,999)
<DISCONTINUED> 0
<EXTRAORDINARY> (318,500)
<CHANGES> 0
<NET-INCOME> (840,999)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
