SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-19766
HOME-STAKE OIL & GAS COMPANY
(Name of small business issuer in its charter)
Oklahoma 73-0288030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 East 5th Street, Suite 2800
Tulsa, Oklahoma 74103
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (918) 583-0178
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 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 the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10- KSB. |_|
State issuer's revenues for its most recent fiscal year: $9,989,608
As of March 29, 1999, 4,273,827 shares of the Registrant's Common Stock
were outstanding. As of March 29, 1999, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $10,727,136 based on the last
reported trading price reported on the Nasdaq SmallCap Market. (Officers and
directors of the Registrant, and holders of more than 10% of the outstanding
common stock, are considered affiliates for purposes of this calculation.)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 24, 1999, are incorporated by reference into Part
III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one) Yes | | No |X|
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HOME-STAKE OIL & GAS COMPANY
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business........................................... 1
Item 2. Description of Property........................................... 5
Item 3. Legal Proceedings................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............... 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......... 11
Item 6. Management's Discussion and Analysis.............................. 12
Item 7. Financial Statements.............................................. 15
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................ 15
PART III
Item 9. Directors, Executive Officers and Compliance with Section 16(a)
of the Exchange Act............................................... 16
Item 10. Executive Compensation............................................ 16
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 16
Item 12. Certain Relationships and Related Transactions.................... 16
Item 13. Exhibits and Reports on Form 8-K.................................. 16
Signatures ................................................................ 18
Index to Financial Statements.............................................. F-1
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PART I
Item 1., Description of Business, Item 2., Description of Property, and Item 6,
Management's Discussion and Analysis, include certain statements which are not
historical fact, but are "forward looking statements". These forward looking
statements are based on current expectations, estimates, assumptions and beliefs
of management; and words such as "expects", "believes", "anticipates",
"intends", "plans" and similar expressions are intended to identify such forward
looking statements. Home-Stake Oil & Gas Company (the "Company" or "HSOG") does
not undertake to update, revise or correct forward looking information. Readers
are cautioned that such forward looking statements should be read in conjunction
with the Company's disclosures under the heading "Forward Looking Statements",
included on page 15 hereof.
ITEM 1. DESCRIPTION OF BUSINESS
General
The Company is actively engaged in the acquisition, exploration, development and
production of oil and gas properties. Its principal geographic operating areas
lie within the states of Oklahoma, Montana, New Mexico and Texas.
The Company was incorporated in the State of Oklahoma in 1917. The Company's
principal business activity from the date of its incorporation through the early
1950's was the acquisition and leasing of oil and gas mineral interests.
Accordingly, the Company's revenues were primarily from royalty interests in oil
and gas production from the mineral interests in properties leased to others. In
the 1950's the Company began participating as a working interest partner in the
acquisition and drilling of oil and gas properties, primarily drilled and
operated by industry partners. The Company also originated and participated in
the drilling of a few of its own prospects and discovered several significant
oil fields in south central Kansas during the 1950's. Beginning in 1985, the
Company developed an exploration staff to generate, sell and drill its own
prospects. The Company now also serves as operator for 58 producing wells.
In the mid-1970's the Company revised its business strategy to pursue a program
to increase its revenues generated from the ownership of working interests in
oil and gas properties relative to its revenues generated from royalty interests
(resulting from the ownership and leasing of oil and gas mineral interests). The
Company increased its relative investment in drilling ventures developed and
sold by other industry partners and in the oil and gas properties that it
acquired. In 1977, the Company received approximately 70% of its revenues from
royalty interests, whereas, in 1998, approximately 27% of its revenues were from
royalty interests.
At December 31, 1998, the Company had estimated proved reserves of 21,412,481
Mcf of natural gas and 2,994,928 barrels of oil. Natural gas reserves
constituted approximately 54% of the Company's reserves based on an "oil
equivalent" basis (converting each six Mcf of natural gas to a barrel of oil,
representing the estimated relative energy content of oil and natural gas).
Merger
Effective December 31, 1997, The Home-Stake Royalty Corporation ("HSRC") was
merged with and into the Company (the "Merger"). The Merger was accounted for as
a purchase, with HSOG deemed to be the purchased entity for accounting purposes.
Under the purchase method of accounting, the cost of the assets and liabilities
acquired is allocated based on their fair value, with the operations of the
acquired entity included with those of the acquiring entity from the date of
acquisition. Accordingly, the historical tables and other information included
in this report for activities during 1997 and 1996 reflect such information for
HSRC and do not include historical amounts for HSOG. However, information as of
December 31, 1998 and 1997 and for the year ended December 31, 1998, includes
the combined amounts for HSRC and HSOG (i.e. the merged entity).
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Partnership
The Company serves as general partner of H-S Royalty, Ltd., an Oklahoma limited
partnership (the "Partnership") formed in 1982. The Partnership was formed for
the purpose of distributing to stockholders a 3/16th royalty interest in certain
jointly owned mineral interests in properties, which were nonproducing at the
time of formation of the Partnership, located in ten states. Management of the
Company distributed the royalty interests to allow stockholders to realize a
portion of the direct economic benefits that result from the commercial
production and sale of oil and gas, as well as the maximization of certain
income tax benefits attributable to oil and gas producing activities. In
connection with the administration of the Partnership, the Company receives a
monthly administrative management fee of $500.
Competition
Competition in the oil and gas industry is intense. In seeking to obtain
desirable producing properties, new leases and exploration prospects, the
Company faces competition from both major and independent oil and gas companies,
as well as from numerous individuals and income and drilling programs. Many of
these competitors have financial and other resources substantially in excess of
those available to the Company.
Increases in worldwide energy production capability have brought about
substantial surpluses in energy supplies in recent years. This, in turn, has
resulted in substantial competition for markets historically served by domestic
natural gas sources both with alternate sources of energy, such as residual fuel
oil, and among domestic gas suppliers. Changes in government regulations
relating to the production, transportation and marketing of natural gas have
also resulted in significant changes in the historical marketing patterns of the
industry. Generally, these changes have resulted in the abandonment by many
pipelines of long-term contracts for the purchase of natural gas, the
development by gas producers of their own marketing programs to take advantage
of new regulations requiring pipelines to transport gas for regulated fees, and
the reliance on short-term sales contracts priced at spot market prices.
In light of these developments, many producers, including the Company, have
accepted oil prices that may differ from area "posted prices" in order to sell
their production. Also, gas prices, which were once effectively determined by
government regulations, are now largely established by competition. Competitors
in this market include other producers, gas pipelines and their affiliated
marketing companies, independent marketers, and providers of alternate energy
supplies, such as residual fuel oil.
Marketing
The Company's gas production from properties in which it owns working interests
is sold primarily on the spot market with a variety of purchasers, including
intrastate and interstate pipeline companies, their marketing affiliates,
independent marketing companies and other companies who have the ability to move
gas under firm transportation agreements. Gas produced from properties in which
the Company owns royalty interests is marketed and sold by owners of the
leasehold interests in such properties.
Substantially all of the Company's crude oil and condensate production is sold
at posted prices under short-term contracts, as is customary in the industry.
Seasonality
The results of operations of the Company are subject to seasonal fluctuations in
the price for natural gas. Natural gas prices have been generally higher in the
fourth and first quarters. Due to these seasonal fluctuations, results of
operations for individual quarterly periods may not be indicative of results
which may be realized on an annual basis.
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Regulation
General
The oil and gas industry is extensively regulated by federal, state and local
authorities. Legislation affecting the oil and gas industry is under constant
review for amendment or expansion. Numerous departments and agencies, both
federal and state, have issued rules and regulations binding on the oil and gas
industry and its individual members, some of which carry substantial penalties
for the failure to comply. The regulatory burden on the oil and gas industry
increases its cost of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
Exploration and Production
Exploration and production operations of the Company are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes requiring permits for the drilling of wells, maintaining bonding
requirements in order to drill or operate wells, and regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled and the plugging and abandoning of
wells. The Company's operations are also subject to various conservation
matters. These include the regulation of the size of drilling and spacing units
or proration units and the density of wells which may be drilled and the
unitization or pooling of oil and gas properties. In this regard, some states
allow the forced pooling or integration of tracts to facilitate exploration
while other states rely on voluntary pooling of lands and leases. State
conservation laws establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. In addition, Oklahoma and Texas have
adopted limits on gas production that attempt to match production with market
demand. The effect of these regulations is to limit the amounts of oil and gas
the Company can produce from their wells, and to limit the number of wells or
the locations at which the Company can drill.
Sales and Transportation
Federal legislation and regulatory controls have historically affected the price
of the gas produced by the Company and the manner in which such production is
marketed. However, due to the deregulation provisions of the Natural Gas Policy
Act of 1978, the Natural Gas Wellhead Decontrol Act of 1989 and regulations
promulgated by the Federal Regulatory Commission ("FERC"), the price of
virtually all gas produced by producers not affiliated with interstate pipelines
has been deregulated. As a result, most of the Company's gas production is no
longer subject to price regulation. Gas which has been removed from price
regulation is subject only to that price contractually agreed upon between the
producer and purchaser. Market determined prices for deregulated natural gas
fluctuate in response to market pressures.
The FERC regulates interstate natural gas transportation rates and service
conditions, which affects the marketing of gas produced by the Company, as well
as the revenues received from sales of such production. Since the mid- 1980s,
the FERC has issued a series of orders culminating in Order Nos. 636, 636-A and
636-B ("Order 636"), that have significantly altered the marketing and
transportation of gas. Order 636 mandates a fundamental restructuring of
interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sales, transportation, storage and other
components of the city-gate sales services such pipelines previously performed.
One of the FERC's purposes in issuing the orders is to increase competition
within all phases of the gas industry. Generally, Order 636 has eliminated or
substantially reduced the interstate pipelines' traditional role as wholesalers
of natural gas and has substantially increased competition and volatility in
natural gas markets. While some regulatory uncertainty remains due to pending
appeals of individual pipeline's implementation of Order 636, Order 636 may
ultimately enhance the ability of producers such as the Company to market and
transport their gas directly to end-users and local distribution companies,
although it may also subject producers to greater competition and the more
restrictive pipeline imbalance tolerances and greater associated penalties for
violation of such tolerances.
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As a result of Order 636, many interstate gas pipelines have spun-off their
gathering systems, which systems for the most part are not subject to FERC
jurisdiction. This action could affect the cost of gathering gas. States are
reviewing whether to regulate such gathering systems. The Company is unable to
predict what impact, if any, such divesting and regulation may have.
Sales of oil and natural gas liquids by the Company are not regulated and are
made at market prices. The price the Company receives from the sale of these
products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, the FERC implemented regulations establishing
an indexing system for transportation rates for most oil pipelines, which,
generally, would index such rates to inflation, subject to certain conditions
and limitations. These regulations could increase the cost of transporting oil
and natural gas liquids by pipeline, although the most recent adjustment
generally decreased rates. The Company is not able to predict with certainty
what effect, if any, these regulations will have on its operations, however, the
regulations may, over time, tend to increase transportation costs or reduce
wellhead prices for oil and natural gas liquids.
Operational Hazards and Insurance
The operations of the Company are subject to all risks inherent in the
exploration for, and development and production of, oil and gas, including such
natural hazards as blowouts, cratering and fires, which could result in damage
or injury to, or destruction of, drilling rigs and equipment, formations,
producing facilities or other property, or could result in personal injury, loss
of life or pollution of the environment. Any such event could result in
substantial cost to the Company which could have an adverse effect upon the
financial condition of the Company to the extent it is not fully insured against
such risk. The Company carries insurance against certain of these risks but, in
accordance with standard industry practice, is not fully insured for all risks,
either because such insurance is unavailable or because it elects not to obtain
insurance coverage because of cost. Although such operational risks and hazards
may to some extent be minimized, no combination of experience, knowledge and
scientific evaluation can eliminate the risk of investment or assure a profit to
any company engaged in oil and gas operations.
Environmental Matters
Operations of the Company are subject to numerous and constantly changing
federal, state and local laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of certain
permits, restrict or prohibit certain types, quantities and concentration of
substances that can be released into the environment in connection with drilling
and production, restrict or prohibit drilling activities that could impact
wetlands, endangered or threatened species or other protected natural resources
and impose substantial liabilities for pollution resulting from the Company's
operations. Such laws and regulations may substantially increase the cost of
exploring for, developing or producing oil and gas and may prevent or delay the
commencement or continuation of a given project. In the opinion of the Company's
management, the Company is in substantial compliance with current applicable
environmental laws and regulations and it is not anticipated that the Company
will be required in the near future to expend amounts that are material in the
aggregate to its overall operations by reason of environmental laws and
regulations. Nevertheless, changes in existing environmental laws and
regulations or in the interpretations thereof could have a significant impact on
the operating costs of the Company, as well as the oil and gas industry in
general. For instance, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas production wastes as "hazardous
wastes", which reclassification would make exploration and production wastes
subject to much more stringent and costly handling, disposal and clean-up
requirements. State initiatives to further regulate the disposal of oil and gas
wastes and naturally occurring radioactive materials are also pending in certain
states and these various initiatives could have a similar impact on the Company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as "Superfund" law, imposes liability, without regard to
fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site where the release occurred and companies that disposed or
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arranged for the disposal of the hazardous substances found at the site. Persons
who are or were responsible for releases of hazardous substances under CERCLA
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. The
Company is only able to directly control the operations of those wells with
respect to which it acts as operator. Notwithstanding the Company's lack of
control over wells operated by others, the failure of an operator of a well in
which the Company owns a working interest to comply with applicable
environmental regulations may, in certain circumstances, be attributed to the
Company. As of the date of this report, the Company has no material commitments
for capital expenditures to comply with existing environmental requirements.
Employees
At December 31, 1998, the Company employed 12 persons (currently 11) whose
functions are associated with management, operations and mineral management,
engineering, geology, land and gas contract administration, accounting and
financial planning, and administration and data processing. The Company
considers its relations with its employees to be excellent.
ITEM 2. DESCRIPTION OF PROPERTY
General
The Company owns interests in 1,525 producing properties, including both working
interests and royalty interests, located in 15 states. (For further details
regarding these properties, see "Producing Wells" included elsewhere herein.)
The Company is engaged in leasing of its minerals as well as the exploration,
production and sale of natural gas, condensate and crude oil from its
properties.
The Company has an extensive ownership of nonproducing perpetual minerals
located in 16 states, including North Dakota, Oklahoma, Michigan, Texas, Montana
and Mississippi. Such ownership comprises 3,307 properties covering 93,067 net
acres. The Company may from time-to-time participate in exploration activities
on certain of these properties, but generally leases them to others, retaining a
royalty interest in whatever production may be derived therefrom, thereby
eliminating the risk in the exploration of such properties. At the present time,
there are approximately 39 properties leased to others for such exploration
comprising 1,102 net acres.
In addition, the Company owns a leasehold interest in 124 nonproducing
properties comprising 11,599 net acres. These properties have varying lease
terms, with most expiring in the next five years. These leasehold interests are
located in nine states, including Montana, Texas and Oklahoma.
Acquisitions
During 1998, the Company purchased 18 non-operated producing gas properties from
Sid R. Bass, Inc. et al (the "Bass Properties") for a purchase price of
$6,685,000, adjusted for operations subsequent to January 1, 1998. This
acquisition was financed under the Company's credit facility described in
Financial Condition and Liquidity on page 13 hereof.
Current Activities
The Company's exploration and development activities are generally located in
the states of Oklahoma (Anadarko Basin), Texas and New Mexico. In 1998, the
majority of the Company's activities were conducted in the Anadarko and Permian
Basins of Oklahoma, Texas and New Mexico. Most recent drilling has been
developmental in nature (63% in 1998 and 80% in 1997) on both oil and gas
properties. In 1998, there were nine oil wells and 15 gas wells drilled; in 1997
there were 11 oil wells and 14 gas wells drilled.
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During 1999, the Company's drilling activities will continue to be primarily
developmental in nature. The Company is presently committed to participate in
the drilling (or completion) of ten (1.3 net) wells in 1999. The Company expects
to operate one (.45 net) of these wells. In 1999, the Company has budgeted $1.2
million for drilling activities, of which approximately $500,000 has been
committed. The primary area of focus during the next 12 to 18 months will
continue to be developmental drilling in the Arkoma Basin of Oklahoma and the
Permian Basin of New Mexico.
The Company remains active in the property acquisition market. In 1998, the
Company reviewed several property sales packages and submitted bids on four of
these packages, containing seven groups of properties. The Company was
successful in acquiring the Bass Properties.
Drilling Activity
During the periods indicated, the Company drilled or participated in the
drilling of the following exploratory and development wells:
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Gross Net Gross Net Gross Net
------------- ------------ ------------
Exploratory:
Productive................... 4 .50 0 .00 1 .17
Nonproductive................ 5 .59 5 .82 2 .29
-- ---- -- ---- -- ----
Total...................... 9 1.09 5 .82 3 .46
== ==== == ==== == ====
Development:
Productive................... 14 2.25 14 .50 13 .26
Nonproductive................ 1 .18 6 .75 3 .48
-- ---- -- ---- -- ----
Total...................... 15 2.43 20 1.25 16 .74
== ==== == ==== == ====
Total:
Productive................... 18 2.75 14 .50 14 .43
Nonproductive................ 6 .77 11 1.57 5 .77
-- ---- -- ---- -- ----
Total..................... 24 3.52 25 2.07 19 1.20
== ==== == ==== == ====
The above well information excludes wells in which the Company has only a
royalty or mineral interest.
1997 and 1996 information are those of The Home-Stake Royalty Corporation prior
to the merger, as explained on Page 1 of this Annual Report on Form 10-KSB.
At December 31, 1998, the Company was participating in the drilling of one (.12
net) well. It now appears this well will be non-commercial and be plugged (or
sold as a water supply well). In addition, the Company participated in one
additional recompletion (.16 net) subsequent to year-end which was completed as
a producing gas well.
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Operating Activities
The Company operates 51 producing wells and seven service wells located in 11
separate fields, which includes one waterflood consisting of nine producing
wells and three service wells. In addition, the Company has a non-operator
working interest ownership in approximately 280 other producing properties.
The Company operates wells in two fields in Dawson County, Montana. The
operations in the Glendive Field consist of 12 producing wells and four
saltwater disposal wells. The Gas City Field is unitized for secondary recovery
operations and consists of nine producing wells and three water injection wells.
Production is primarily from the Red River formation of Ordovician age in both
of these fields.
Operations in the Golden Trend Field in Grady and McClain counties in Oklahoma
consist of 17 producing wells completed in four formations of Pennsylvanian and
Ordovician age rock.
Northwestern Oklahoma operations consist of five producing wells in the Vici
Field in Ellis County. Production is from Pennsylvanian age rock.
The Company's operations in the Arkoma Basin of Eastern Oklahoma consists of
five producing gas wells located in the Hartshorne South and Kinta Fields in
Latimer County and the Ti North and Ashland Fields in Pittsburg County.
Another of the Company's producing fields is the West Cement Field in Caddo
County, Oklahoma. At present, there is one producing well completed in the
Medrano formation of Pennsylvania age rock.
The Company also operates one well in the Champmon Strawn Field in Gaines
County, Texas and one well in the Eunice Dome Field in Lea County, New Mexico.
Producing Wells
The following table sets forth certain information relating to the Company's
producing properties. Because the Company owns the mineral interests in numerous
producing wells, it does not have current information on the numbers of wells
drilled by the owners of the leasehold interests for these properties.
Accordingly, the Company keeps track of its royalty interests on a
property-by-property rather than a well-by-well basis, and the following table
sets forth the number of properties upon which there are one or more producing
wells. Net wells refers to the total number of wells in which the Company has an
interest, multiplied by the Company's working interest percentage in the wells.
Producing Wells as of December 31, 1998
-------------------------------------------------------------------
Gross Net
----- -----
Working interests - Oil.................... 112 28
Gas.................... 220 23
Royalty interests - Oil.................... 709 (1)
Gas.................... 484 (1)
(1) The term "net wells" is not applicable to a royalty interest since the
Company has no working interest in the applicable well.
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Acreage
As previously noted, the Company owns an interest in 1,525 producing properties,
including royalty interests in 1,193 properties (comprising approximately 27,550
net acres) and working interests in 332 properties (comprising 12,943 net
acres). The following table sets forth the Company's gross and net oil and gas
leasehold acreage as of December 31, 1998.
Acreage as of December 31, 1998
--------------------------------------------------------------
Gross Net
----- -----
Developed Acreage:
Leasehold........................... 72,631 13,396
Mineral............................. 297,356 29,097
Undeveloped Acreage:
Leasehold........................... 30,568 11,599
Mineral............................. 635,760 93,067
---------- --------
Total Acreage 1,036,315 147,159
========== ========
Proved Reserves
The following table reflects the proved reserves and proved developed producing
reserves, the future net revenues and the present value of future net revenues
from such reserves of the Company at December 31, 1998 as estimated by the
Company. The quantities of the Company's proved reserves of oil and natural gas
presented below, representing developed and undeveloped reserves, include only
those amounts which the Company reasonably expects to recover in the future from
known oil and gas reservoirs under existing economic and operating conditions.
Proved developed producing reserves are limited to those quantities which are
recoverable commercially from existing wells at current prices and costs, under
existing regulatory practices and with existing technology. Accordingly, any
changes in prices, operating and developmental costs, regulations, technology or
other factors could significantly increase or decrease estimates of the
Company's proved developed producing reserves. The Company's proved undeveloped
reserves include only those quantities which the Company reasonably expects to
recover from the drilling of new wells based on geological evidence from
directly offsetting wells. The risks of recovering these reserves are higher
from both geological and mechanical perspectives than the risks of recovering
developed reserves. The estimates of the Company's proved reserves do not
include proved undeveloped reserves attributable to the Company's royalty
interests (this information is not available to the Company) or outside operated
working interests (quantities are not considered material to the Company's
proved reserves). Furthermore, the reserve estimates do not include reserves
whose estimates of recoverability are less precise, commonly referred to as
"probable" or "possible" reserves. The Company has no reserves outside the
continental United States.
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Proved Oil and Gas Reserves at December 31, 1998
- --------------------------------------------------------------------------------
Present Value
Oil Gas Future Net of Future
(Bbls) (Mcf) Revenues Net Revenues(1)
--------- ---------- ------------ ---------------
Proved reserves............. 2,994,928 21,412,481 $ 44,896,422 $ 28,999,235
Proved developed producing
reserves................. 2,912,403 18,372,372 $ 40,251,936 $ 25,343,082
(1) Present value of future net revenues before deducting the impact of federal
and state income taxes (discounted at 10%).
The future net revenues are determined by using estimated quantities of proved
reserves and proved developed producing reserves and the periods in which they
are expected to be developed and produced based on December 31, 1998 economic
conditions. The estimated future production is priced based on the actual prices
in effect at December 31, 1998. The resulting estimated future gross revenues
are reduced by estimated future costs to develop and produce the proved reserves
based on December 31, 1998 cost levels, but not for debt service, general and
administrative expense and income taxes. For additional information concerning
the discounted future net revenues to be derived from these reserves and the
disclosure of the standardized measure information in accordance with the
provisions of Statement of Financial Accounting Standards No. 69, see
"Supplementary Information on Oil and Gas Producing Activities (unaudited)" at
page F-13 herein.
The reserve data set forth in this report represents only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a result,
estimates of different engineers may vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may justify
revision of such estimate. Accordingly, reserve estimates often differ from the
quantities of crude oil and natural gas that are ultimately recovered. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based. Estimates of the Company's proved
reserves have not been filed with, or included in reports to any Federal
authority or agency, other than the Securities and Exchange Commission.
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Oil and Gas Production, Sales Prices and Production Costs
The following table sets forth information with respect to production and
average product prices attributable to the Company's royalty interests and
working interests in producing properties, and, with respect to properties in
which The Company owns a working interest, the production costs (including
production taxes and transportation charges) per equivalent barrel of oil
produced for the periods indicated.
Royalty Interests
-----------------
1998 1997 1996
------------ ------------ ------------
Production:
Oil (Bbls)............... 104,536 55,014 57,137
Gas (Mcf)................ 642,773 376,703 393,114
Average Sales Prices:
Oil (per Bbl)............ $12.14 $18.97 $20.13
Gas (per Mcf)............ 2.04 2.52 2.12
Working Interests
-----------------
1998 1997 1996
------------ ------------ ------------
Production:
Oil (Bbls)............... 273,340 155,983 182,388
Gas (Mcf)................ 1,846,862 831,761 864,916
Average Sales Prices:
Oil (per Bbl)............ $12.10 $18.74 $20.16
Gas (per Mcf)............ 1.94 2.33 1.97
Average direct operating
costs per barrel of oil
equivalent (1)........... $5.22 $6.51 $9.03
(1) This item relates only to working interests since royalty owners are not
liable for operating costs. Barrels of oil equivalent are determined using
the ratio of six Mcf of gas to one barrel of crude oil, condensate or
natural gas liquids. See Item 6., Management's Discussion and Analysis, for
further discussion of these costs.
1997 and 1996 information are those of The Home-Stake Royalty Corporation prior
to the merger, as explained on Page 1 of this Annual Report on Form 10-KSB.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various minor legal actions arising in the normal
course of business. In the opinion of management, the Company's liabilities, if
any, in these matters will not have a material effect on the Company's financial
position, results of operations or cash flows.
-10-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's stockholders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1998, the Company had approximately 400 known holders of
record of its common stock. Prior to February 12, 1998, the Company's common
stock was listed in the "pink sheets" published by the National Quotation
Bureau. Trades were limited and, accordingly, there was no established public
trading market for the stock as defined in Item 201(a)(1) of SEC Regulation S-B.
On February 12, 1998 the Company's common stock began trading on the
Over-the-Counter Bulletin Board and on May 11, 1998, began trading on the Nasdaq
SmallCap Market under the symbol "HSOG". The table below reflects the high and
low sales prices per share for the Company's common stock as reported on either
the Over-the-Counter Bulletin Board or the Nasdaq SmallCap Market for the period
indicated.
1998
----
Quarter Low High
------- ------- -------
First............................... $ 4.250 $ 6.250
Second.............................. $ 6.250 $ 8.000
Third............................... $ 5.375 $ 6.750
Fourth.............................. $ 4.625 $ 5.750
The following table sets forth the per share amount of cash dividends declared
and paid by the Company ("HSRC in 1997") on their common stock during the
periods indicated (1997 restated to reflect the Merger and common stock split).
Cash Dividends
Declared and Paid
Per Share of
Common Stock
Years ended December 31, 1998 1997
------------------------ ------ ------
First Quarter........................ $ .02 $ .02
Second Quarter....................... .02 .02
Third Quarter........................ .02 .02
Fourth Quarter....................... .02 .00
The Company has historically paid quarterly cash dividends to its stockholders.
The Company's Board of Directors has adopted a dividend policy that provides for
the payment of quarterly dividends, dependent on numerous factors, including
future earnings, anticipated capital requirements, the financial condition and
prospects of the Company, and such other factors as the Board may deem relevant.
In addition, future dividends may be restricted pursuant to the terms of the
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<PAGE>
loan agreement between the Company and NationsBank, N.A. See "Management's
Discussion and Analysis" below for a description of these restrictions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere herein.
Results of Operations
As further described on page 1 of this Annual Report on Form 10-KSB and Note 1
to the financial statements (see page F-6), the 1997 results of operations
presented herein are the historical amounts for HSRC only and do not include
historical amounts for HSOG. Results of operations for 1998 reflect the
activities of the merged entities.
Net operations for 1998 decreased from income of $2,162,482 in 1997 to a loss of
$4,732,213 in 1998. The factors contributing to this increase are as follows:
Oil sales increased $608,820 (15%), primarily due to the increase in sales
volumes. The Company's oil production increased 166,863 barrels, primarily as a
result of the Merger with HSRC, partially offset by the sale in late 1997 of the
Company's interest in the Countyline Unit. The average sales price per barrel
decreased significantly from $18.80 in 1997 to $12.11 in 1998.
Gas sales increased 69% ($2,002,393) primarily due to the increase in sales
volumes. Gas production increased 1,281,153 mcf, primarily as a result of the
Merger with HSRC and the additional production provided by the Bass Properties
purchased March 31, 1998. The average sales price of the Company's natural gas
decreased from $2.36 per mcf in 1997 to $1.96 per mcf in 1998.
Income from equity affiliates decreased by $534,690. As described in the Notes
to the Financial Statements on Page F-6 herein, HSRC was merged with and into
HSOG on December 31, 1997. Consequently, there was no comparable amount for
1998.
Gains on sales of assets decreased 97% ($315,525) in 1998. The Company had two
major property sales in 1997; the Alden Field properties and the Countyline
Unit, which had gains of $99,600 and $194,900, respectively.
Production expenses increased 57%. Lease operating expenses increased $998,798
(67%) due primarily to the Merger with HSRC, partially offset by the decrease in
expenses associated with the Countyline Unit and the Company's Montana
properties. Production taxes increased $182,049 as a result of the higher oil
and gas sales described above. On a pro forma basis production expenses
decreased 20%.
Exploration expenses increased $572,023. This increase is a result of the
incomparable reporting between 1997 and 1998 due to the Merger. On a pro forma
basis, these expenses decreased 40%. Although the Company participated in a
greater number of dry holes in 1998, the Company had a lower working interest in
the wells drilled and a lower average cost per well. Condemned and abandoned
property expenses were higher in 1998, due primarily to the abandonment of
certain nonproducing leasehold costs on acreage the Company was unable to drill
due to lower product prices.
General and administrative expense increased $1,093,737 (96%) in 1998. This
increase was entirely related to the 1998 accounts including the costs of the
Company and HSRC, whereas the 1997 expense is only that of HSRC. General and
administrative expenses on a comparable pro forma basis decreased 3%.
Depreciation, depletion and amortization expense increased $3,876,228 related
primarily to the Merger. 1997 expense represents amounts calculated on asset
values prior to the Merger. In connection with the Merger, the carrying values
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<PAGE>
of the producing properties acquired from HSOG were adjusted to reflect the fair
values of the properties based on estimated discounted future net cash flows.
This purchase price adjustment increased the carrying value of the producing
properties in the amount of $10.1 million and was included in the 1998
calculation of depreciation, depletion and amortization. In addition, the
Company's producing asset costs increased $6.6 million related to the
acquisition of the Bass Properties.
The carrying value of the Company's properties are assessed for possible
impairment whenever facts and circumstances indicate such amounts may not be
recoverable, based on estimated future net cash flows. During 1998, prices for
crude oil and natural gas decreased significantly. Although future prices are
difficult to predict, the Company does not expect these depressed prices to
increase significantly in the near future. Accordingly, the estimated future
cash flows from producing properties decreased significantly in 1998. As a
result, in 1998 the Company recorded an impairment adjustment in the carrying
value of its producing oil and gas properties in the amount of $4,775,867.
Future impairment adjustments may be necessary, depending on future estimated
prices for crude oil and natural gas, as well as future well performance.
Interest expense increased $336,202 as a result of the Company's borrowings in
1998 to finance the acquisition of the Bass Properties on March 31, 1998.
The Company's effective tax rate varies significantly from year to year, due
principally to the significant effects of statutory depletion which is largely
independent of pre-tax income. In addition, in 1997 a portion of net income was
attributable to income from the Company's equity investee, for which there is no
corresponding income tax provision required. For additional information
attributable to each of these factors, see Note 4 to the Consolidated Financial
Statements on page F-10.
Financial Condition and Liquidity
The Company's operating activities have traditionally been self-financed through
internally generated cash flows. The principal uses of cash flows have been to
fund the Company's exploration and production activities and for the payment of
dividends to stockholders. The use of borrowed funds has generally been limited
to the acquisition of producing oil and gas properties where future revenues
from such purchases are expected to fund the debt.
In 1998, the Company spent $2.4 million for exploration and development
activities and $6.6 million on acquisitions. The Company has budgeted $1.2
million for exploration and development activities in 1999, of which
approximately $500,000 has been committed.
The working capital deficit at December 31, 1998 was $900,000. Despite this
deficit, the Company's working capital and internally generated cash flows from
operations are expected to be sufficient to finance the Company's note payments
and budgeted 1999 exploration and development activities. In addition, the
Company's line of credit described below is expected to be extended into 2000.
During 1998, the Company entered into a new credit facility with its bank that
provided long-term financing for the acquisition of the Bass Properties and an
operating line-of-credit. The Company borrowed $6.6 million under the long-term
loan that requires monthly principal payments of $110,000, plus interest at
prime less 1/2%. This credit facility also provides for a revolving term
line-of-credit until May 1, 1999, in the amount of $5 million, requiring monthly
payments of interest at prime less 1%. This credit facility, which is expected
to be extended another year, includes certain covenants which require, among
other things, that the Company maintain (i) a ratio of cash flow (defined in the
loan agreement to be income before income taxes plus depreciation, depletion and
amortization including impairment adjustments) to current maturities on the term
loan of more than 1.75 to 1.0, (ii) a ratio of total liabilities to
stockholders' equity of not more than 1.0 to 1.0, and (iii) a minimum net worth
of not less than $20 million. In addition, the Company's annual cash dividends
are limited to the lesser of $550,000 or net income. The Company has received a
waiver from the Bank permitting the payment of dividends in 1998 and allowing
its minimum net worth to fall below the minimum requirement through the maturity
of the loan. In connection with this line of credit, the Company pays a
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<PAGE>
commitment fee of one-half of one percent (1/2%) per annum on the unused portion
of the line.
In 1998, the Company's average direct operating costs per barrel of oil
equivalent decreased 20% to $5.22. This decrease is primarily the result of the
sale of the Countyline Unit effective July 31, 1997. In addition, repairs and
maintenance costs on the Company's Montana properties were lower in 1998 due to
the milder winter weather in the Spring and fewer mechanical break downs.
Average direct operating costs per barrel of oil equivalent are dependent upon
several factors, including principally the nature of a company's operations. For
example, gas properties are generally more economical to operate than oil
properties. Likewise, oil wells in a form of primary recovery (flowing or
pumping) are more economical to operate than oil wells in a form of secondary
recovery, such as waterfloods. The Company has large interests in two
waterfloods and one water-drive operation. These properties contributed
approximately 37% of the total working interest barrels of oil equivalent
production in 1998 but were responsible for approximately 63% of the direct
operating costs. Excluding these waterflood properties, the Company's direct
operating costs per barrel of oil equivalent in 1998 was $3.40.
The Company projects future earnings and believes it will fully realize its
deferred tax assets and, accordingly, no valuation allowances have been
provided. In management's opinion, the deferred tax assets will be realized as
reductions in future income taxes payable or by utilizing available tax planning
strategies. Uncertainties that may affect the ultimate realization of these
assets include future product prices, costs and tax rates. Therefore, the
Company will periodically review these factors and determine whether a valuation
allowance has become necessary.
Year 2000 Readiness
The Company began addressing the impact of Year 2000 (Y2K) on its operations in
mid 1997. This problem exists for certain computer systems due to the use of a
two digit year in most computer software. If left unchanged, beginning on
January 1, 2000, those computers would interpret the year as 1900 instead of
2000. Although the primary affects of this problem will be related to computer
systems, the problem has the potential of affecting other office equipment such
as copiers, facsimile machines, telephone system, postage metering equipment and
any other equipment or devices which might contain date-dependent embedded
computer processor chips.
The Company has already completed the modification of all in-house generated
computer software to make it Y2K compliant. This includes all phases of the
Company's financial and property accounting systems. Each individual computer
processor has been evaluated and determined to be Y2K compliant. All office
equipment including copiers, facsimile machines, phone system and postage
metering equipment has also been found to be Y2K compliant.
Certain pieces of field equipment used by the Company might contain
date-dependent embedded computer processors. This equipment is currently being
evaluated for Y2K compliancy. To the best of the Company's knowledge, all of
this equipment allows for manual operation of the electronic system in case of a
power or internal system failure thus permitting the Company to bypass any
problem which might occur.
The Company is in the process of requesting compliancy information from major
third-party suppliers, field equipment manufacturers and other companies from
whom it receives revenues. All third party vendor responses to-date have
indicated that they anticipate total compliance of all critical systems prior to
the end of the year. As for those vendors who have not yet responded, the
Company has requested that they respond prior to the end of the second quarter
of 1999.
All Y2K compliance modifications and confirmations have been or will be done by
existing Company personnel in the ordinary performance of their duties, without
incurring the expense of outside consultants or additional employees. The
Company is unable to estimate its internal costs associated with its Y2K
readiness efforts.
-14-
<PAGE>
The Company's contingency plans include the complete backup of all computer
systems and data at December 31, 1999 and the possibility of manual over-rides
of any affected field operations. Services of any major outside third-party that
indicates expected non-compliance at year-end will be moved to compliant service
providers wherever possible.
The Company believes the most likely worst-case scenario would involve limited
failures by third party vendors and is making every effort to ensure compliance
with third party vendors. The Company does not expect any significant disruption
in its operations or business activities. However, the Company's operations are
part of an industry that is heavily dependent on an interconnected network of
companies and transportation facilities that are beyond the control of the
Company and which could be adversely affected by Y2K problems. In a recent
survey by the oil and gas working group of the President's Council on Year 2000
Conversion, 94% of the 1,000 responding companies reported that they would be
Y2K ready by September 30, 1999. Given the nature of the Company's activities
and reliance on outside third-parties, the Company cannot guarantee that some
Y2K problems will not arise. If Y2K problems do arise, there is no assurance
that such problems might not have a material adverse impact on the Company's
financial condition or results of operations.
The above information is designated as "Year 2000 Readiness Disclosure" pursuant
to the Year 2000 Information and Readiness Disclosure Act, Public Law No.
105-271, 1998. The Year 2000 Readiness Disclosure Act does not insulate the
Company from liability under the Federal securities laws with respect to
disclosures relating to Y2K information.
Inflation
In recent years inflation has not had a significant impact on the Company's
operations or financial condition. The general economic pressures limiting oil
and gas prices in recent years have generally been accompanied by corresponding
downward pressure on costs to develop and operate oil and gas properties as well
as the costs of drilling and completing wells. The impact of inflation on the
Company in the future will depend on the relative increases, if any, in the
selling price of oil and gas and in the Company's operating, development and
drilling costs.
Forward Looking Statements
Certain statements included in this report which are not historical facts are
"forward looking statements", including statements with respect to oil and gas
reserves, the number and location of wells to be drilled, future capital
expenditures (including the amount and nature thereof), anticipated date of
repayment of bank debt, extension of existing line of credit, Y2K readiness and
other such matters. These forward looking statements are based on current
expectations, estimates, assumptions and beliefs of management; and words such
as "expects", "believes", "anticipates", "intends", "plans" and similar
expressions are intended to identify such forward looking statements. These
forward looking statements involve risks and uncertainties, including, but not
limited to: dependence upon the prices for oil and natural gas which prices are
subject to significant fluctuations in response to relatively minor changes in
supply and demand for such products, market uncertainty, political conditions in
oil producing regions, domestic and foreign government regulations, the price
and availability of alternative fuels and a variety of other factors;
competition in the acquisition of oil and gas properties and the development,
production and marketing of oil and natural gas; operating hazards typically
associated with the exploration, development, production and transportation of
oil and natural gas; federal, state and local laws relating to the exploration,
development, production and marketing of oil and natural gas, including
environmental and safety matters; changes in laws and regulations; and other
factors, most of which are beyond the control of the Company. Accordingly,
actual results and developments may differ materially from those expressed in
the forward looking statements.
ITEM 7. FINANCIAL STATEMENTS
The annual financial statements required by this Item begin at page F-1
following page 18 hereof.
-15-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in accountants and no disagreements on any matters of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT
The information required by this Item is incorporated by reference from sections
of the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders (the "Proxy Statement") entitled "Election of Directors",
"Executive Officers of the Company" and "Section 16(a) Beneficial Ownership
Reporting Compliance".
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Executive Compensation".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Principal Stockholders and Security
Ownership of Management".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Certain Relationships and Related
Transactions".
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following documents are included as exhibits to this Form 10-KSB. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit
Number Description
2.1 Purchase and Sale Agreement between Sid R. Bass, Inc. et al and the
Company, effective as of January 1, 1998 (filed as Exhibit 2 to the
Company's Current Report on Form 8-K, dated March 31, 1998).
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998).
3.2 Bylaws of the Company, as amended (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997).
-16-
<PAGE>
Exhibit
Number Description
4.1 Rights Agreement and Indenture dated as of May 2, 1994, between the
Company and The Fourth National Bank of Tulsa (now known as
NationsBank, N.A.) (filed as Exhibit 4.1 to the Company's Registration
Statement on Form 10, Registration No. 0-19766)
*10.1 Amended and Restated Home-Stake Oil & Gas Company Key Employee
Incentive Bonus Plan (filed as Exhibit 10.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997).
*10.2 Amended and Restated Employment Agreement by and between Robert C.
Simpson and the Company dated February 5, 1998 (filed as Exhibit 10.2
to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997).
*10.3 Amended and Restated Home-Stake Oil & Gas Company Change in Control
Severance Pay Plan (filed as Exhibit 10.3 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997).
*10.4 Home-Stake Oil & Gas Company 1997 Incentive Stock Plan (filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997).
*10.5 Form of Indemnity Agreement between the Company and each Director,
dated May 14, 1996 (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996).
10.6 Amended and Restated Loan Agreement dated March 31, 1998 between the
Company and NationsBank, N.A. (filed as Exhibit 10 to the Company's
Current Report on Form 8-K, dated March 31, 1998).
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended December 31, 1998.
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this Form 10-KSB to be signed on its behalf by the undersigned, thereunto
duly authorized.
HOME-STAKE OIL & GAS COMPANY
Date: March 29, 1999 By: /s/ Robert C. Simpson
---------------------------------
Robert C. Simpson
Chairman of the Board,
Chief Executive Officer
and President
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert C. Simpson Director, Chairman of the Board March 29, 1999
- ------------------------------ Chief Executive Officer and
Robert C. Simpson President
(Principal Executive Officer)
/s/ Chris K. Corcoran Director, Executive Vice March 29, 1999
- ------------------------------ President, and Chief
Chris K. Corcoran Financial Officer
(Principal Financial and
Accounting Officer)
/s/ L.W. Allegood Director March 29, 1999
- ------------------------------
L.W. Allegood
/s/ Larry F. Grindstaff Director March 29, 1999
- ------------------------------
Larry F. Grindstaff
/s/ Ronald O. Gutman Director March 29, 1999
- ------------------------------
Ronald O. Gutman
/s/ Joseph J. McCain, Jr. Director March 29, 1999
- ------------------------------
Joseph J. McCain, Jr.
/s/ I. Wistar Morris, III Director March 29, 1999
- ------------------------------
I. Wistar Morris, III
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<PAGE>
HOME-STAKE OIL & GAS COMPANY
INDEX TO FINANCIAL STATEMENTS
Covered by Report of Independent Auditors
Report of Independent Auditors...................................... F-2
Balance Sheets as of December 31, 1998 and 1997..................... F-3
Statements of Operations and Retained Earnings for the years
ended December 31, 1998 and 1997.................................. F-4
Statements of Cash Flows for the years ended
December 31, 1998 and 1997........................................ F-5
Notes to Financial Statements....................................... F-6
Not Covered by Report of Independent Auditors
Note 8 - Quarterly Results of Operations (unaudited)................ F-12
Supplementary Information on Oil and Gas Producing Activities for
the years ended December 31, 1998 and 1997 (unaudited)............ F-13
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Home-Stake Oil & Gas Company
We have audited the accompanying financial statements of Home-Stake Oil & Gas
Company listed in the accompanying index to financial statements (Item 7). 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 listed in the accompanying index to
financial statements (Item 7) present fairly, in all material respects, the
financial position of Home-Stake Oil & Gas Company at December 31, 1998 and
1997, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 22, 1999
F-2
<PAGE>
HOME-STAKE OIL & GAS COMPANY
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
Current assets:
Cash and cash equivalents......................... $ 212,031 $ 1,507,782
Accounts receivable............................... 1,476,995 1,730,114
Prepaid expenses.................................. 238,253 188,461
------------ ------------
Total current assets....................... 1,927,279 3,426,357
Property and equipment, at cost:
Producing oil and gas leases (working interests).. 37,054,044 29,138,034
Producing oil and gas royalties................... 9,006,126 9,075,949
Nonproducing oil and gas properties............... 1,494,000 1,841,049
Office equipment and other........................ 526,176 569,172
------------ ------------
48,080,346 40,624,204
Less accumulated depreciation,
depletion and amortization..................... 24,727,189 15,613,520
------------ ------------
Net property and equipment................. 23,353,157 25,010,684
Other assets........................................ 237,781 246,918
------------ ------------
$ 25,518,217 $ 28,683,959
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......... $ 897,720 $ 1,517,932
Income taxes payable.............................. - 92,822
Current notes payable (Note 3).................... 1,945,000 -
------------ ------------
Total current liabilities.................. 2,842,720 1,610,754
Long-term notes payable (Note 3).................... 4,290,000 -
Deferred income taxes (Note 4)...................... 2,914,813 5,207,548
Stockholders' equity (Note 7):
Preferred stock, $1 par value -
2,000,000 shares authorized; none issued
Common stock, $ .01 par value -
12,000,000 shares authorized,
4,517,363 shares issued........................ 45,174 45,174
Additional paid-in capital........................ 15,460,621 15,460,621
Retained earnings................................. 1,272,945 6,359,862
------------ ------------
16,778,740 21,865,657
Less treasury stock, at cost - 243,536 shares..... (1,308,056) -
------------ ------------
Total stockholders' equity................. 15,470,684 21,865,657
------------ ------------
$ 25,518,217 $ 28,683,959
============ ============
See accompanying notes.
F-3
<PAGE>
HOME-STAKE OIL & GAS COMPANY
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31, 1998 and 1997
1998 1997
---- ----
Revenues:
Oil and gas sales.............................. $ 9,565,933 $ 6,931,498
Income from equity affiliates.................. - 534,690
Gain on sales of assets........................ 9,947 325,472
Other income................................... 413,728 278,858
----------- ------------
9,989,608 8,070,518
Costs and expenses:
Production..................................... 3,234,996 2,054,149
Exploration.................................... 1,362,540 790,517
General and administrative..................... 2,237,185 1,143,448
Depreciation, depletion and amortization....... 4,891,694 1,015,466
Impairment of producing oil and gas properties. 4,775,867 -
Interest....................................... 375,800 39,598
Property and other taxes....................... 262,438 126,567
------------ ------------
17,140,520 5,169,745
Income (loss) before provision for income taxes..... (7,150,912) 2,900,773
Provision for (benefit from) income taxes (Note 4):
Current........................................ (125,964) 448,214
Deferred....................................... (2,292,735) 290,077
------------ ------------
(2,418,699) 738,291
------------ ------------
Net income (loss)................................... (4,732,213) 2,162,482
Retained earnings at beginning of year.............. 6,359,862 4,385,862
Cash dividends ($ .08 per share - 1998,
$ .06 per share - 1997)............. (354,704) (188,482)
------------ ------------
Retained earnings at end of year.................... $ 1,272,945 $ 6,359,862
============ ============
Weighted average number of shares outstanding....... 4,460,891 3,396,857
============ ============
Net income (loss) per common share -
basic and diluted.............................. $(1.06) $ .64
====== =====
See accompanying notes.
1997 amounts are those of The Home-Stake Royalty Corporation prior to the
merger, as explained in Note 1 Merger (Page F-6). See Note 2 (Page F-9) for
comparable pro forma amounts for 1997.
F-4
<PAGE>
HOME-STAKE OIL & GAS COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
1998 1997
---- ----
Operating activities:
Oil and gas sales, net of production taxes........ $ 9,562,002 $ 6,439,737
Other............................................. 413,728 353,284
------------ ------------
9,975,730 6,793,021
Cash paid to suppliers and employees.............. 5,504,398 3,964,129
Interest paid..................................... 375,800 39,598
Property and other taxes.......................... 262,438 126,567
Income taxes paid................................. 265,945 389,982
------------ ------------
6,408,581 4,520,276
Net cash provided by operating activities....... 3,567,149 2,272,745
Investing activities:
Proceeds from sales of property and equipment..... 100,002 1,718,211
Acquisition of property and equipment............. (9,540,604) (1,903,505)
Dividends from equity affiliate................... - 60,674
------------ ------------
Net cash used in investing activities........... (9,440,602) (124,620)
Financing activities:
Proceeds from notes payable....................... 7,225,000 -
Note payments..................................... (990,000) (1,366,035)
Purchase of treasury stock........................ (1,308,056) -
Cash dividends paid............................... (349,242) (262,563)
------------ ------------
Net cash provided by (used in)
financing activities...................... 4,577,702 (1,628,598)
------------ ------------
Net increase (decrease) in cash..................... (1,295,751) 519,527
Cash acquired in merger............................. - 361,391
Cash and cash equivalents at beginning of year...... 1,507,782 626,864
------------ ------------
Cash and cash equivalents at end of year............ $ 212,031 $ 1,507,782
============ ============
Reconciliation of net income (loss) to net cas
provided by operating activities:
Net income (loss)................................... $ (4,732,213) $ 2,162,482
Reconciling adjustments:
Depreciation, depletion and
amortization and impairment.................... 9,667,561 1,015,466
Gain on sales of assets........................... (9,947) (325,472)
Income from equity affiliates..................... - (534,690)
Dry hole costs and condemned and
abandoned properties........................... 1,362,540 790,517
Deferred income taxes............................. (2,292,735) 290,077
Changes in other assets and liabilities:
Accounts receivable............................. (96,273) (875,831)
Prepaid expenses and other assets............... (40,655) 18,629
Accounts payable................................ (198,288) (317,723)
Other liabilities............................... (92,841) 49,290
------------ ------------
Net cash provided by operating activities........... $ 3,567,149 $ 2,272,745
============ ============
See accompanying notes.
1997 amounts are those of The Home-Stake Royalty Corporation prior to the
merger, as explained in Note 1 Merger (Page F-6).
F-5
<PAGE>
HOME-STAKE OIL & GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
Description of business
Home-Stake Oil & Gas Company ("HSOG" or the "Company") is an "independent oil
and gas producer" actively engaged in the acquisition, exploration, development
and production of oil and gas properties. Oil and gas exploration and production
activities are subject to numerous risks inherent in the business. These include
the volatility of oil and gas prices, environmental concerns and governmental
regulations, general business risks and hazards involving the acquisition and
operation of oil and gas properties, the ability to continue to find new
reserves to replace those being depleted and the highly competitive nature of
the business. Its principal geographic operating areas lie within the states of
Oklahoma, Montana, New Mexico and Texas.
Note 1 - Summary of significant accounting policies
Merger
On December 31, 1997, The Home-Stake Royalty Corporation ("HSRC") was merged
with and into the Company. This transaction was accounted for by the purchase
method of accounting for business combinations. The merged companies adopted the
name of HSOG, which was deemed to be the purchased entity for accounting
purposes since the former HSRC stockholders received approximately 61% of the
merged entity's common stock. Accordingly, the statement of operations and
retained earnings and statement of cash flows for the year ended December 31,
1997, reflect the historical operations of HSRC prior to the merger. The balance
sheets at December 31, 1998 and 1997, reflect the assets and liabilities of the
merged entity.
Prior to their merger on December 31, 1997, both HSOG and HSRC were under common
management, with both frequently participating jointly in the acquisition of
mineral and leasehold interests and in exploration and development activities.
Each company generally owned an equal interest in the oil and gas properties in
which they jointly participated, however such interests sometime varied. Only
HSRC, however, served as operator on properties that were not operated by
outside parties.
In accordance with oil and gas industry practice, the oil and gas ventures in
which both companies participated were considered to be joint, but separate. For
those properties operated by outside parties, each Company was generally billed
separately for their share of operating and drilling costs and separately
reimbursed the operator for such costs. For properties operated by HSRC, HSOG
was billed for such costs monthly. Payroll costs for personnel were paid by
HSRC, with HSOG reimbursing one-half share of such costs. For substantially all
other general and administrative costs, each Company separately paid for its
one-half share.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
One of the most significant estimates made by the Company involves its oil and
gas reserves. The Company amortizes its costs of producing properties on the
unit-of-production method over the estimated remaining reserves of the Company.
Since estimates of remaining oil and gas reserves are highly subjective and
subject to constantly changing conditions, most of which are beyond the control
of the Company, it is reasonably possible that the Company's estimates will
change over time, affecting the rates of amortization. In addition, in assessing
whether any impairment to the carrying values of producing properties has
occurred, similar estimates of oil and gas reserves are used. Consequently
impairment adjustments to the carrying values are reasonably possible.
F-6
<PAGE>
HOME-STAKE OIL & GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 1 - Summary of significant accounting policies (continued)
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents and notes payable reported in
the balance sheets approximate fair value.
Cash and cash equivalents
The Company includes certificates of deposit and money market funds in cash and
cash equivalents since such amounts are readily convertible into known amounts
of cash.
Credit risks
The Company sells its oil and gas production directly or indirectly to numerous
oil refiners and pipeline companies without collateral. In addition, the Company
has numerous working interest owners to whom it grants credit on wells in which
it serves as operator. Substantially all of these owners are industry partners
or individuals who invest in oil and gas drilling ventures. The Company believes
its credit risks are limited due to the nature of its business and partner base
and has not incurred any significant losses in connection therewith.
Environmental costs
Environmental liabilities, which historically have not been material, are
recognized when it is probable that a loss has been incurred and the amount of
that loss is reasonably estimable. Environmental liabilities, when accrued, are
based upon estimates of expected future costs without discounting. At December
31, 1998 there are no such costs accrued.
Property and equipment
The Company follows the successful efforts method of accounting for its oil and
gas operations. Costs of productive oil or gas wells, as well as costs of
acquiring producing and nonproducing oil and gas properties, are capitalized.
Exploratory costs, annual delay rentals and exploratory dry holes are expensed.
Depreciation, depletion and amortization of producing properties are provided on
the unit-of-production method based on estimates of proved reserves.
Depreciation of other property and equipment is provided on straight-line or
accelerated methods over estimated useful lives.
Impairment of producing properties is measured based on their discounted
estimated future net cash flows and is included in accumulated depreciation,
depletion and amortization, when required. As a result of the significant
decreases in the average prices of crude oil and natural gas during 1998, the
Company's estimated future net cash flows were reduced, resulting in an
impairment charge of $4,775,867 in 1998.
Nonproducing oil and gas properties include both perpetual mineral rights and
term leasehold interests. The perpetual mineral rights are written-off when
unsuccessful exploration information is obtained. The Company does not maintain
an extensive inventory of nonproducing leasehold interests, rather such
interests are acquired in connection with specific drilling objectives. Such
nonproducing leasehold interests are written-off or reserved as warranted by
drilling results.
Renewals and betterments are capitalized; maintenance and repairs are charged to
expense. Replacement of individual items of lease equipment are capitalized.
When leases or other assets are sold or retired, the cost and related
accumulated depreciation, depletion and amortization are eliminated from the
accounts and the resulting gain or loss is recognized in income. The Company's
historical experience has been that the salvage value of equipment on property
abandonments is sufficient to cover the costs of dismantlement and site
restoration. Therefore, the Company does not accrue such costs and salvage value
is not considered in calculating property amortization.
F-7
<PAGE>
HOME-STAKE OIL & GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 1 - Summary of significant accounting policies (continued)
Oil and gas sales
The Company sells most of its crude oil and natural gas concurrent with
production and does not store significant volumes for future sales. Revenue is
recognized on the "sales method" when oil and gas are sold. Under this method,
the Company may "sell" more or less than its proportionate share of gas
production in a given period, creating an imbalance position. However, an asset
or liability is recorded only to the extent that the Company's imbalance
position in a property cannot be recouped from remaining reserves. The Company's
net imbalance positions at December 31, 1998 and 1997 were not material.
Derivatives
The Company does not utilize financial or commodity derivative instruments to
hedge its market risks.
Income taxes
Certain income and expense items are recorded in one year in the financial
statements and are reported in a different year in the income tax return. Such
items generally include tax credit carryforwards, intangible drilling and
development costs, depreciation and depletion. The tax effects associated with
these differences are recorded in these financial statements and described as
"deferred income taxes".
Net income (loss) per share
Basic net income (loss) per share is based on the weighted-average number of
common shares outstanding during the period. Diluted net income (loss) per share
includes the dilutive effect of stock options.
F-8
<PAGE>
HOME-STAKE OIL & GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 2 - Pro Forma Financial Information (unaudited)
Since the merger of the Company and HSRC was accounted for by the purchase
method of accounting, the accompanying 1997 statement of income and retained
earnings does not include any revenues or expenses of the former HSOG. Following
is summarized pro forma 1997 information, assuming the acquisition had occurred
on January 1, 1997. This pro forma information reflects the combined historical
amounts for the two companies, adjusted to eliminate the income and amortization
of each company related to its ownership in the other, and the increases in
depreciation, depletion and amortization and income taxes related to the merger.
Revenues:
Oil and gas sales................................. $ 13,344,522
Other............................................. 1,303,239
------------
14,647,761
Costs and expenses:
Production........................................ 4,044,742
Exploration....................................... 1,351,996
General and administrative expense................ 2,289,280
Depreciation, depletion and amortization.......... 2,552,615
Interest expense.................................. 276,139
Property and other taxes.......................... 231,957
------------
10,746,729
Income before income tax............................ 3,901,032
Income tax expense.................................. 1,351,961
------------
Net income.......................................... $ 2,549,071
============
Weighted average number of shares outstanding....... 4,517,363
=========
Basic net income per share.......................... $ .56
=====
Note 3 - Notes payable
Notes payable at December 31, 1998 consisted of the following balances:
Bank note due May 1, 2000, requiring monthly
principal payments of $110,000, plus
interest at prime less1/2% (7 1/4% at
December 31, 1998)............................. $ 5,610,000
Bank note due May 1, 1999, requiring monthly
payments of interest at prime less 1%
(6 3/4% at December 31, 1998) ................. 625,000
------------
6,235,000
Less current portion................................ 1,945,000
------------
$ 4,290,000
============
F-9
<PAGE>
HOME-STAKE OIL & GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 3 - Notes payable (continued)
During 1998, the Company entered into a new credit facility with its bank that
provided long-term financing for the acquisition of properties and an operating
line-of-credit. The Company borrowed $6.6 million under the long-term loan that
requires monthly principal payments of $110,000, plus interest at prime less
1/2%. This credit facility also provides for a revolving term line-of-credit
until May 1, 1999, in the amount of $5 million, requiring monthly payments of
interest at prime less 1%. At December 31, 1998, the Company had $625,000
borrowed under this line of credit. In connection with this line-of-credit, the
Company pays a commitment fee of one-half of one percent (1/2%) per annum on the
unused portion of the line.
The Company's credit facilities include certain loan covenants which require,
among other things, that the Company maintain certain financial ratios and
minimum net worth requirements. These facilities also limit annual cash
dividends to the lesser of $550,000 or net income. The Company received a waiver
from the bank permitting the payment of dividends in 1998 and allowing its
minimum net worth to fall below the minimum requirement through the maturity of
the loan.
Note 4 - Income taxes
Deferred income taxes represent the net tax effects associated with temporary
differences in the net book values of certain assets and liabilities for
financial reporting and income tax purposes. Significant components of the
Company's deferred income tax liabilities and assets at December 31, are as
follows:
1998 1997
---- ----
Deferred tax liabilities:
Intangible drilling costs......................... $ 1,520,505 $ 1,867,311
Excess of tax over book depreciation.............. 297,864 705,219
Leasehold costs................................... 1,558,630 2,934,635
------------ ------------
3,376,999 5,507,165
Deferred tax assets:
Alternative minimum tax credit carryforwards...... 281,756 241,611
Statutory depletion carryforwards................. 138,610 -
Deferred compensation accrual..................... 9,778 19,556
Other (net)....................................... 32,042 38,450
------------ ------------
462,186 299,617
------------ ------------
Net deferred tax liability.......................... $ 2,914,813 $ 5,207,548
============ ============
The reconciliation of the income tax provision to the "expected" provision
computed at the statutory federal income tax rate is as follows:
1998 1997
---- ----
Computed "expected" provision (benefit)..............$ (2,431,310) $ 986,263
Excess statutory depletion........................... (149,363) (188,966)
Income from equity affiliates........................ - (181,795)
Other................................................ 161,974 122,789
------------ ------------
Provision for (benefit from) income taxes............$ (2,418,699) $ 738,291
============ ============
At December 31, 1998, the Company had nonexpiring alternative minimum tax credit
carryforwards of approximately $282,000 and statutory depletion carryforwards of
approximately $407,700, both available to reduce future federal income taxes,
the benefits of which have been recognized in these financial statements.
F-10
<PAGE>
HOME-STAKE OIL & GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 5 - Benefit plans
The Company has a 401(k) Profit Sharing Plan covering substantially all the
Company's employees that have completed one year of service and provides for a
mandatory Company contribution equal to 3% of the employee's compensation and an
additional matching Company contribution of up to 3%. Company contributions to
the Plan were $51,496 and $24,322 in 1998 and 1997, respectively.
Note 6 - Commitments and contingencies
The Company has a non-cancelable operating lease covering its office space
through December 31, 1999. This lease provides for annual rental payments of
$125,592, subject to an annual expense adjustment.
The Company is involved in various legal actions arising in the normal course of
business. In the opinion of management and legal counsel, the Company's
liabilities, if any, in these matters will not have a material effect on the
Company's financial position, results of operations or cash flows.
Note 7 - Stockholders' Equity
Common Stock
The Company's Certificate of Incorporation authorizes the issuance of up to
12,000,000 shares of common stock, $.01 per share.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Preferred Stock at
the discretion of the Board of Directors. This stock is commonly referred to as
"blank check" stock, with the Board of Directors having the authority to
determine voting rights, dividend rights, preferences, etc.
Incentive Stock Plan
On December 11, 1997, the stockholders approved the adoption of the Home-Stake
Oil & Gas Company 1997 Incentive Stock Plan (the "Stock Plan") which became
effective on December 31, 1997. There are a total of 451,736 shares of common
stock authorized and reserved under the Stock Plan. The number of shares
reserved for issuance under the Stock Plan automatically increases as necessary
so that, when added to the number of shares subject to stock options granted or
awarded under the Stock Plan, the total number of shares reserved will equal 10%
of the issued and outstanding shares of the Company.
On February 12, 1998, the Board of Directors granted qualified stock options in
varying amounts to all employees totaling 155,250 shares. Such options vest over
a 5-year period, have an option price of $4.50 per share and expire 10 years
after the date of grant. Options for 24,000 of these shares were forfeited in
November, 1998. In addition, there were non-qualified options issued to all
outside directors in the aggregate amount of 100,000 shares that are exercisable
immediately, at an option price of $4.50 per share. Directors' options expire 5
years after the date of grant. At December 31, 1998, options to purchase 105,250
shares were exercisable. There were no options exercised in 1998.
The Company follows the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees", in accounting for the Stock Plan. Accordingly, since the
exercise price of stock options are equal to the market price of the common
stock at the date of grant, no compensation expense is recorded. Had the fair
value provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" been applied, the Company's net loss
and loss per share in 1998 would not have been materially different from the
amounts reported in the Statement of Operations.
F-11
<PAGE>
HOME-STAKE OIL & GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 7 - Stockholders' Equity (continued)
Shareholder Rights Plan
The Company has a Shareholder Rights Plan and has distributed to its
shareholders one "Right" for each outstanding share of common stock. Each Right
entitles the holder to purchase one-tenth of an additional share of common stock
from the Company and acquire a note payable from the Company to the holder or,
under certain circumstances, purchase the stock of an acquiring company. Upon
the occurrence of certain specified events related to a change in control of the
Company, each holder of a Right (other than a potential acquirer) will have the
right to acquire, upon exercise, shares of the Company's common stock at
one-half of the then current market price. The Rights expire January 1, 2000 and
are exercisable only if a person or group acquires 15% or more of the Company's
common stock or commences a tender offer that would result in a person or group
acquiring 15% or more of the Company's common stock. The Rights are redeemable
in whole, but not in part, at a price of $.01 per Right, payable in cash or
stock.
Note 8 - Quarterly Results of Operations (unaudited)
1998 Quarter ended
------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Revenues.....................$ 2,420,907 $ 2,868,324 $ 2,460,258 $ 2,240,119
Costs and expenses (1)....... 2,302,670 2,495,530 2,922,258 9,420,062
----------- ----------- ----------- -----------
Income (loss) before
provision for income taxes. 118,237 372,794 (462,000) (7,179,943)
Provision for (benefit from)
income taxes............... 28,614 118,713 (125,933) (2,440,093)
----------- ----------- ----------- -----------
Net income (loss)............$ 89,623 $ 254,081 $ (336,067) $(4,739,850)
=========== =========== =========== ===========
Basic income (loss)
per share (2).............. $ .02 $ .06 $ (.07) $ (1.10)
===== ===== ======= =======
Diluted income (loss)
per share (2).............. $ .02 $ .05 $ (.07) $ (1.10)
===== ===== ======= =======
1997 Quarter ended (3)
----------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Revenues.....................$ 2,609,789 $ 1,741,819 $ 1,648,925 $ 2,069,985
Costs and expenses........... 1,507,249 1,334,405 1,219,958 1,108,133
----------- ----------- ----------- -----------
Income before provision for
income taxes............... 1,102,540 407,414 428,967 961,852
Provision for income taxes... 335,071 83,745 49,279 270,196
----------- ----------- ----------- -----------
Net income...................$ 767,469 $ 323,669 $ 379,688 $ 691,656
=========== =========== =========== ===========
Basic and diluted
income per share........... $ .23 $ .10 $ .11 $ .20
===== ===== ===== =====
(1) Fourth quarter 1998 costs and expenses includes a charge of $4,775,867
related to the impairment in the carrying value of certain producing
properties. In addition, depreciation, depletion and amortization increased
approximately $1,500,000 as a result of the fourth quarter reduction in the
estimates of oil and gas reserves.
(2) The sum of the net income (loss) per share for the four quarters may not
equal total net income (loss) for the year due to changes in the average
number of shares outstanding during the year.
(3) See Note 1 (Merger) and Note 2 regarding the comparability of the 1998 and
1997 amounts presented on this page.
F-12
<PAGE>
HOME-STAKE OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)
Estimated quantities of proved oil and gas reserves
Changes in estimated proved oil and gas reserve quantities are summarized as
follows:
1998 1997
------ ------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
------ ----- ------ -----
Proved developed and undeveloped:
Beginning of year............... 4,470,192 18,540,196 2,432,711 8,835,929
Revisions of previous estimates.(1,231,355) (228,628) 187,009 1,625,539
Purchases of reserves in-place.. 122,765 4,718,680 894 2,896
Extensions, discoveries and
other additions............... 11,202 872,003 42,710 542,950
Added by merger................. - - 2,226,892 8,973,426
Sales of reserves in-place...... - - (209,027) (232,080)
Production...................... (377,876) (2,489,770) (210,997)(1,208,464)
--------- ---------- ---------- ----------
End of year..................... 2,994,928 21,412,481 4,470,192 18,540,196
========= ========== ========== ==========
Proved developed producing:
Beginning of year................ 4,386,132 15,902,988 2,380,522 7,369,964
========= ========== ========== ==========
End of year...................... 2,912,403 18,372,372 4,386,132 15,902,988
========= ========== ========== ==========
The estimates of oil and gas reserves were prepared by Company employees and do
not include proved undeveloped reserves attributable to either royalty interests
(information is not available) or outside operated working interests (quantities
are not considered significant to total Company proved reserves). Furthermore,
these estimates do not include reserves whose estimates or recoverability are
less precise, commonly referred to as "probable" or "possible" reserves. The
Company has no reserves outside the continental United States.
Standardized measure of discounted future net cash flows
In accordance with the requirements of Statement of Financial Accounting
Standards No. 69 ("SFAS No. 69") presented below are projections of future net
oil and gas cash flows (sales less production taxes, operating expenses, certain
development costs and estimated income taxes) and related present values of
proved oil and gas reserves. As required by SFAS No. 69, these projections are
based on end of period prices and costs, held constant for all future periods.
Present values of the future net oil and gas cash flows were calculated using a
10% discount factor as required. While this information was developed with
reasonable care and disclosed in good faith, it is emphasized that some of the
data are necessarily imprecise and represent only approximate amounts because of
the subjective judgments involved in developing such information. Accordingly,
this information may not represent the present financial condition of the
Company or its expected future results. This information does not include any
amounts applicable to "probable" or "possible" reserves which may become proved
in the future.
Although these disclosures have been prepared in accordance with SFAS No. 69,
this information does not purport to present the fair market value of the
Company's oil and gas properties or a fair estimate of the present value of
future cash flows expected to be obtained from their production. The reserve
estimates, while carefully made, may be significantly revised based on future
events. In addition, estimates of the timing of production, actual prices
realized and related production costs and taxes may also vary significantly from
those used in these calculations.
F-13
<PAGE>
HOME-STAKE OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)
1998 1997
---- ----
Future net cash flows:
Oil and gas sales..................................$ 70,149,666 $130,251,202
Lease operating expenses........................... (19,006,610) (39,352,926)
Production taxes................................... (5,629,857) (9,916,302)
Development costs.................................. (616,777) (646,142)
Income taxes....................................... (11,486,053) (20,500,870)
------------ ------------
33,410,369 59,834,962
Less discount to present
value at 10% rate.......................... (11,673,440) (26,643,527)
------------ ------------
Standardized measure of discounted
future net cash flows......................$ 21,736,929 $ 33,191,435
============ ============
The following information summarizes the principal changes in the standardized
measure of discounted future net cash flows.
1998 1997
---- ----
Beginning of year....................................$ 33,191,435 $ 20,992,095
Sales of oil and gas, net of production costs........ (6,233,288) (4,802,923)
Net changes in prices and production costs........... (12,766,121) (4,410,247)
Extensions and discoveries........................... 705,777 772,995
Purchases of reserves-in-place....................... 4,301,677 8,314
Added by merger...................................... - 16,198,548
Sales of reserves-in-place........................... - (1,530,374)
Revisions of previous quantity estimates............. (5,733,382) 2,686,262
Net change in income taxes........................... 4,082,167 1,638,638
Other (net).......................................... 869,520 (461,083)
Accretion of discount................................ 3,319,144 2,099,210
------------ ------------
End of year..........................................$ 21,736,929 $ 33,191,435
============ ============
F-14
<PAGE>
HOME-STAKE OIL & GAS COMPANY
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)
Costs incurred
Costs incurred in oil and gas producing activities include:
1998 1997
---- ----
Acquisition costs - proved properties................$ 6,442,989 $ 3,486
Acquisition costs - unproved properties.............. 360,186 646,496
Exploration costs.................................... 604,095 432,250
Development costs.................................... 2,016,424 837,628
------------ ------------
$ 9,423,694 $ 1,919,860
============ ============
Acquisition costs for proved and unproved properties related to the merger at
December 31, 1997 were $16,389,405 and $823,817, respectively.
F-15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 212,031
<SECURITIES> 0
<RECEIVABLES> 1,476,995
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,927,279
<PP&E> 48,080,346
<DEPRECIATION> 24,727,189
<TOTAL-ASSETS> 25,518,217
<CURRENT-LIABILITIES> 2,842,720
<BONDS> 4,290,000
0
0
<COMMON> 45,174
<OTHER-SE> 15,460,621
<TOTAL-LIABILITY-AND-EQUITY> 25,518,217
<SALES> 9,565,933
<TOTAL-REVENUES> 9,989,608
<CGS> 0
<TOTAL-COSTS> 3,234,996
<OTHER-EXPENSES> 1,362,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375,800
<INCOME-PRETAX> (7,150,912)
<INCOME-TAX> (2,418,699)
<INCOME-CONTINUING> (4,732,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,732,213)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
