SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 33-55254-32
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Nevada 87-0438647
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1800 E. Sahara, Suite 107, Las Vegas, Nevada 89104
___________________________________________________________
(Address of principal executive offices, including zip code)
Issuer's Telephone Number: (702) 938-0261
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) 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 No X
___ ___
As of December 31, 1998, 17,950,361 shares of common stock were outstanding,
and the aggregate market value of the common stock of the Registrant held by
nonaffiliates was approximately $2,200,000.
Documents incorporated by reference: Exhibits (Item 13)
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $-0-
This Form 10-KSB consists of 29 pages. The Exhibit Index begins on page 12.
<PAGE>
TABLE OF CONTENTS
Form 10-KSB Annual Report - 1998
Chancellor Group, Inc.
(formerly Nighthawk Capital, Inc.)
Page
Facing Page
Index
PART I
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders 2
PART II
Item 5. Market for Registrant's Common Equity
And Related Shareholder Matters 3
Item 6. Management's Discussion And Analysis Or Plan Of
Operations 3
Item 7. Financial Statements 8
Item 8. Disagreements On Accounting And Financial Disclosures 8
PART III
Item 9. Directors And Executive Officers Of The Registrant 9
Item 10. Executive Compensation 10
Item 11. Security Ownership Of Certain Beneficial Owners And
Management 11
Item 12. Certain Relationships And Related Transactions 11
PART IV
Item 13. Exhibits, Financial Statement Schedules, And
Reports On Form 8-K 12
SIGNATURES 13
<PAGE>
PART I
Item 1. Business
Chancellor Group, Inc. (formerly Nighthawk Capital, Inc.)("Nighthawk",
the "Company", the "Registrant") was organized under the laws of the state
of Utah in 1986 and subsequently reorganized under the laws of Nevada in 1993.
In July 1995, the Company acquired all of the issued capital of two Kentucky
based operations, Delstar Gas Systems, Inc. ("DGS") and Northstar Gas Systems,
Inc. ("NGS"), covering gas reserves, and gas transmission systems, respectively.
In December, 1995, the Company formed a wholly owned subsidiary in the state
of Kentucky, Delstar Resources, Inc. ("DRI"), which acquired
additional freehold lands and gas reserves for $5,425,000. On August 1, 1996,
the Company completed the spinoff of its wholly owned subsidiary,
Chancellor Australia Pty. Ltd., which contained all of the non-energy
operations and assets of the group. In September, 1997 the Company acquired
100% ownership of Radly Petroleum, Inc. ("Radly"), a Texas corporation, in
exchange for approximately 80% of the Company's outstanding common stock. In
July, 1998 the Company acquired 100% ownership in Lichfield Petroleum
America, Inc., ("Lichfield") a Texas corporation. Chancellor Group, Inc.,
Radly, Lichfield, DGS, NGS, and DRI remain as separate legal entities and
and operate as separate legal entities. The Company has taken an impairment
writedown in connection with DGS, NGS, and DRI until such time as certain
disputes between the Company and the original owners of DGS and NGS are
resolved. Management expects that the dispute, which related to the payment
terms for DGS and NGS in the original acquisition agreements, will be resolved
in favour of the Company in 2000. Until such time, management has adopted a
conservative approach of writing off the entire value of those subsidiaries,
as well as DRI. An additional reason for this approach is that when the
current management group acquired effective control of the Company in
September 1997, it found that the previous management and control group had
left the seller's of DGS and NGS in charge of the day to day operations of
those companies, without installing board representation from the parent
company. Since January 1997, the sellers (the Paul family), have failed,
neglected and refused to provide the Company with the books and records of
either DGS, NGS, or DRI, which they also manage. The Company is in the
business of acquisition, exploration, and development of natural gas and oil
properties.
The Company's officers are currently commencing the implementation of an
extensive business plan, through which the Company will raise new equity
capital to finance the initial development work on its existing Texas gas
assets, recover operating control of and finance the redevelopment of the
extensive Kentucky gas assets, and acquire interests in several important
new drilling and development projects. The Company is also proposing to
either acquire or create a new publicly held subsidiary which will hold most
of its energy assets, and raise substantial new equity capital from certain
institutions with which to acquire a large portfolio of as yet undefined
producing oil and gas properties. The Company intends to create and build
a midsized integrated energy concern over the next several years, based on
its business plan.
1
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Item 2. Properties
The Company maintains its offices in Las Vegas, Nevada, and in
Melbourne, Australia. The Company's oil and gas properties consist of a
contingent interest in certain freehold and leasehold lands (together with
extensive plant and equipment) located in Lawrence County, Kentucky, which
contain substantial proved and probable reserves of natural gas and, to a
lesser extent, oil. The Company also has approximately 6,000 acres of
leasehold land in Pecos County, Texas, as more fully described elsewhere
herein, containing substantial proved and probable reserves of natural gas.
Item 3. Legal Proceedings
The Company was involved in no legal proceedings during the fiscal year
ended December 31, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
The Company, on September 23, 1997 acquired all of the issued capital of
Radly Petroleum, Inc., a Texas corporation through the issuance of 12,300,000
shares of common stock. As a result of this transaction, the sellers of
Radly and their affiliates owned in excess of 80% of the post transaction
common stock of the Company. Shane Rodgers, Adam Radly, Michael Heisser, and
George Cole, and John B. Rodger were elected to the board of directors of the
Company.
2
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
(a) Principal Market or Markets: The Company's common stock trades
under the symbol CHAG on the OTC Bulletin Board System.
High and low bids for the Company's common stock for the previous eight
quarters are shown below.
BID
Class Quarter Ended High Low
Common Mar. 31, 1997 N/A N/A
Common June 30, 1997 N/A N/A
Common Sept. 30, 1997 N/A N/A
Common Dec. 31, 1997 N/A N/A
Common Mar. 31, 1998 N/A N/A
Common June 30, 1998 N/A N/A
Common Sept. 30, 1998 N/A N/A
Common Dec. 31, 1998 N/A N/A
(b) Common Stock: On December 31, 1998 there were 17,950,361
shares of common stock issued and outstanding, which were held by more than 700
shareholders of record excluding individuals holding securities in street name.
The Company has never paid cash dividends on its common stock and currently
intends to continue its policy of retaining all of its earnings for use in its
business.
(c) Preferred Stock: The Company at December 31, 1998 had 48,000
preferred shares, $1,000 par value per share, issued and outstanding.
Item 6. Management's Discussion and Analysis or Plan of Operations
The following discussion should be read in conjunction with the Financial
Statements and notes thereto included herein.
The Company
- -----------
Chancellor Group, Inc. is in the business of acquisition,
exploration, and development of natural gas and oil
properties. The Company is further examining opportunities in the fields of
power generation, minerals development and environmental engineering and
remediation. The Company is constantly reviewing investment opportunities
and intends to develop a geographically diversified portfolio of projects,
each of which exhibits a significantly positive net present value.
The Company, through two subsidiaries, has under lease 100% of the oil, gas
and mineral rights on 6,352 contiguous acres located in Pecos County,
south Texas.
3
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The property contains proven undeveloped reserves of approximately
250 billion cubic feet (bcf) of economically recoverable natural gas,
representing estimated future cash inflows of more than $540 million, and
future net cash flows before taxes of approximately $480 million, with a
net present value using PV-10% of approximately $182.6 million, representing
$9.73 per primary share of common stock issued and outstanding as of
June 30, 1999, and $6.82 per share of common stock on a fully diluted basis.
Comparison of Operating Results
- -------------------------------
Effective September 23, 1997 the Company entered into a stock purchase
agreement with Polaris Oil & Gas, Inc., in which the Company issued
12,300,000 shares of common stock representing approximately 80% of its
issued and outstanding shares in exchange for all the common stock of
Radly Petroleum, Inc. The assets of Radly Petroleum, Inc. consist of
oil, gas and mineral leases and proved gas reserves situated on 3,491 acres
located in Pecos County, Texas. Also as of September 23, 1997, the Company
elected an entirely new board of directors, and new officers and directors
assumed management of the Company. Due to these substantial changes in the
Company's business and management structure as of September 23, 1997, corporate
activities occuring prior to that time are unrelated to activities occuring
after that time and to future corporate activities. As a consequence, a
comparison of corporate financial activity of the Company prior to and
subsequent to September 23, 1997 is not meaningful.
On July 25, 1998, the Company acquired 100% of the stock of Lichfield
Petroleum America, Inc. ("Lichfield"). The assets of Lichfield consist of
oil, gas and mineral leases, and proved reserves situated on 2,861 acres
located in Pecos County, Texas.
The Company generated no revenue during the entire period covered by this
report. The period subsequent to
September 30, 1997 was primarily devoted to preparatory activities related
to development of the Company's natural resources assets, negotiations
related to the acquisition of additional natural resources assets, capital
raising activities and organizational activities. The Company anticipates
that during the course of 2000, revenue will begin to be received from its
natural gas development activities, and from other acquisitions and
investments.
The Company incurred general and administrative expense of $12,458 in 1996,
nil in 1997, $164,445 in the fiscal year ending July 31, 1998, $74,491 in
the transition period ended December 31, 1998, and $44,685 in the six months
ending June 30, 1999. These amounts do not include accumulated executive
compensation for those periods. Of these amounts, $43,037 was expended prior
to September 30, 1998 and $203,380 was expended subsequent to September 30,
1998. The expenses incurred were directly related to the Company's present
business purposes, and consisted of consulting expenses related to operational
and administrative needs of the Company, legal expenses, and office expenses.
These expenses were incurred in the ordinary course of the Company's
business and it is expected that they will continue in the future.
The Company's current estimated monthly operating costs are $5,000.
Also, as the Company commences development of its natural resources assets,
and the implementation of its business plan, Management anticipates that
general and administrative expenses will increase to an average of
$185,000 per month, in line with the forecast increase in operational activity,
staff hiring, and opening of a new corporate head office.
4
<PAGE>
Liquidity & Capital Resources
- -----------------------------
As of December 31, 1998 the Company had a working capital deficit of $246,008.
This deficit was funded by accounts payable and reimbursements and unpaid
salaries payable to certain officers and directors in the same amount,
in aggregate.
The Company has been provided with working capital by loans from certain
officers and directors, from time to time, as needed. There is no assurance
that in the future such officers and directors will be able or willing to
provide additional debt funding to the Company.
The Company is actively seeking additional sources of capital to be used
for operations, and for the development of existing energy properties, as well
as for the acquisition of aditional energy properties or interests therein.
Management has set a short term capital
acquisition target of $11,300,000, which would provide sufficient operational
capital to; commence initial drilling and development at the Company's Glass
Mountain gas project located in Pecos County, Texas; fund the acquisition of a
producing oil property located in Wyoming and which managment expects will
generate at least $500,000 in net monthly cash flow; fund certain additional
drilling investments; fund the cost of an option to acquire a majority
interest in several secondary oil and gas recovery projects in the United
States; fund the equity component of a small environmental engineering
company acquisition in Wyoming; and fund certain general and administrative
expenses. Management believes that it presently has identified the investor
sources for the required capital raising, which will be by way of a private
placement of securities to a limited number of accredited investors.
The Company is pursuing the use of various potential instruments with which
to raise capital, including the sale of equity, the sale of preferred stock,
and the issuance of debt. The Company's ability to raise capital will depend
upon, among other things, investor perception of the Company's financial
prospects, the prevailing share price of the Company's stock on the OTCBB
market, the prevailing and expected price for oil and natural gas, the
success of prior projects, the availability of and return on competing
investment opportunities, and various macroeconomic factors.
The Company continually reviews exploration, development, and acquisition
opportunities and expects to participate in numerous such projects in late 1999
and beyond. The Company currently owns certain gas development assets and
reserves as outlined herein above. It is anticipated that $22 million will be
required to fully develop these properties, of which a substantial portion is
expected to be provided by cashflow generated from an initial set of wells.
Thus, Management believes that the Company's development activities will be
limited by the availability of capital with which to develop these resources.
There is no assurance as to the certainty, timing, or final amount that will be
available to the Company for oil and gas exploration activities.
Often in the oil and gas exploration business, a company that owns
development rights but lacks capital for drilling and completion will enter
into a joint venture with a company who provides the required development
capital in exchange for a share of the revenues arising from that project.
These arrangements vary in nature. Should the Company not be able to raise
the required capital to develop its properties by itself, it will likely
seek such a joint venture arrangement. If it does so, revenues available
to the Company from production of its oil and gas rights will be diluted.
5
<PAGE>
Year 2000 Compliance Issues
- ---------------------------
Computer software used by the Company consists primarily of
(1) off-the-shelf commercial accounting software and (2) analytical
geophysical software. The vendor of the accounting software has stated
that its product is Year 2000 compliant. The geophysical software does
not employ dates in its algorithms. Thus, the Company does not believe
that it has any risk exposure to Year 2000 computer issues.
Certain Risks
- -------------
Forward Looking Statements. This Report on Form 10-KSB contains forward
looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward
looking statements include statements regarding: future oil and gas
production and prices, future exploration and development spending, future
drilling and operating plans and expected results, reserve and production
potential of the Company's properties and prospects, "Year 2000" compliance
issues and the Company's strategy. Actual events or results could differ
materially from those discussed in the forward looking statements as a
result of various factors including, without limitation, the factors set
forth below and elsewhere in this 10-KSB.
Dependence on Additional Capital. Successful development of the Company's
oil and natural gas reserves will require a substantial amount of additional
funding relative to the Company's current capitalization. There is no
assurance that such development capital will be available to the Company
as it is required. Further, due to the lack of operating cash flow in
amounts sufficient to fund Company operations, there is no assurance that
the Company will be able to continue its efforts to operate and to develop
its oil and gas reserves.
Exploration and Development Risks. The business of exploring for and, to a
lesser extent, of acquiring and developing oil and gas properties is an
inherently speculative activity that involves a high degree of business
and financial risk. Although available geological and geophysical
information can provide information with respect to a potential oil or gas
property, it is impossible to determine accurately the ultimate production
potential, if any, of a particular property or well.
Volatility of Oil and Gas Prices. The Company's future revenues,
profitability and rate of growth are substantially dependent upon prevailing
market prices for natural gas and oil, which can be extremely volatile
and in recent years have been depressed by excess domestic and imported
supplies.
Uncertainty of Estimates of Proved Reserves and Future Net Revenues.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of
the producer. Estimating quantities of proved reserves is inherently
imprecise. Such estimates are based upon certain assumptions about future
production levels, future natural gas and crude oil prices and future
operating costs made using currently available geologic engineering and
economic data, some or all of which may prove incorrect over time.
6
<PAGE>
Operating and Weather Hazards. The costs and timing of drilling, completing
and operating wells is often uncertain. Drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors,
including regulatory and environmental constraints, unexpected drilling
conditions, equipment failures, accidents, adverse weather conditions,
encountering unexpected formations or pressures in drilling and completion
operations, encountering corrosive or hazardous substances, mechanical
failure of equipment, blowouts, cratering and fires. These conditions could
result in damage or injury to, or destruction of, formations, producing
facilities or other property or could result in personal injuries,
loss of life or pollution of the environment.
Additional factors. Additional factors that could cause actual events to
vary from those discussed above and elsewhere in this report include,
among others: loss of key company personnel; adverse change in governmental
regulation; regulatory and/or environmental constraints; inability to
obtain critical supplies and equipment, personnel and consultants; and
inability to access capital to pursue the Company's plans.
Glossary
- --------
When the following terms are used in written material related to the Company,
they have the following meanings:
Bbl - One stock barrel or 42 U.S. gallons liquid volume, usually used in
reference to crude oil or other liquid hydrocarbons.
Bcf - One billion cubic feet; expressed, where gas sales contracts are in
effect, in terms of contractual temperature and pressure basis and, where
contracts are nonexistent, at 60 degrees Fahrenheit at 14.65 pounds per
square inch absolute.
Prospect - An area in which a party owns or intends to acquire one or more
oil and gas interests which is geographically defined on the basis of
geological data and which is reasonably anticipated to contain at least
one reservoir of oil, gas, or other hydrocarbons.
Proved Developed Reserves - Proved Reserves which can be expected to be
recovered through existing wells with existing equipment and operating
methods.
Proved Reserves - The estimated quantities of crude oil, natural gas, and
other hydrocarbons which, based upon geological and engineering data, are
expected to be produced from known oil and gas reserves under existing
economic and operating conditions, and the estimated present value thereof
based upon the prices and costs on the date that the estimate is made and
any price changes provided for by existing conditions.
Proved Undeveloped Reserves - Reserves that are expected to be recovered
from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
7
<PAGE>
PV10% - The discounted future net cash flows for proved oil and gas
reserves computed using prices and costs, at the dates indicated, before
income taxes and a discount rate of 10%.
Royalty Interest - An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of the costs of production.
Undeveloped Acreage - Oil and gas acreage (including, in applicable
instances, rights in one or more horizons which may be penetrated by
existing well bores, but which have not been tested) to which Proved
Reserves have not been asigned by independent petroleum engineers.
Working Interest - The operating interest under a lease which gives the owner
the right to drill, produce and conduct operating activities on the
property and a share of production, subject to all royalty interests,
and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
Item 7. Financial Statements
The Report of the Independent Certified Public Accountant appearing at
page F-1 and the Financial Statements and Notes to Financial Statements
appearing at pages F-2 through F-10 are incorporated herein by reference.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
8
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The Directors and Officers of the Registrant as of the date of this report are
as follows:
Served as a
Name Age Position Director since
Shane X.G. Rodgers 39 Chairman, Chief Executive Officer September, 1997
Acting President; Acting Treasurer;
Acting Secretary; and a Director
Ashraf Khan 55 Vice President; Executive Vice- March, 1998
President, Asia/Mid-East; and a
Director
William Stinson 45 Director March, 1998
All Directors of the Company will hold office until the next annual meeting of
the shareholders, and until successors have been elected and qualified.
Officers of the Company are elected by the Board of Directors at the first
meeting of the Company's shareholders, and hold office until their death,
resignation, or removal from office.
Shane Rodgers, Chairman; Chief Executive Officer; Acting Treasurer; Acting
Secretary, and a Director. Mr. Rodgers has had an extensive and successful
career as an investment banker, working primarily in Australia and the United
States of America. He has assisted six companies to go public in the United
States in recent years.
Mr. Rodgers has also worked in the power generating sector in the United
States in the 1980's, as a vice president for a small publicly held energy
and environmental concern. In addition, he has been involved in the financing
of power generating facilities.
During his career, he has also been extensively involved in the natural
resources sector.
Ashraf Khan, Vice President and a Director. Mr. Khan provides advice as a
Director, and serves the interests of the Company in Asia and the Middle East,
where it is examining several investment opportunities, and from where it
expects to derive substantial equity capital to finance it's growth and
development.
Mr. Khan has an extensive and successful background as a high level
banker, working throughout the Mid-East and in Europe.
9
<PAGE>
William H. Stinson, a Director, is based in Houston, Texas. He is a highly
experienced petroleum geologist and, up until 1990, held a number of senior
technical positions with Atlantic Richfield International, working for them
in Los Angeles, Britain (London and the North Sea), Indonesia, and Africa,
including positions as Chairman of several joint venture technical
subcommittees. Since 1990, he has continued as an external advisor to
Atlantic Richfield on projects in Asia and the Middle East. He is also
retained by Hunt Overseas Oil Company; the Abu Dhabi National Oil Company;
and CMS Energy. He also interfaces with industry on new concessions, as well
as with the World Bank and the United Nations on program funding.
Item 10. Executive Compensation
Compensation paid to Officers and Directors is set forth in the Summary
Compensation Table below. The Company may reimburse its Officers and
Directors for any and all out-of-pocket expenses incurred relating to the
business of the Company. During the reporting of this report, the Company
has not paid cash compensation to any officer or director. The figures set
out below exclude compensation paid in the form of common stock. The only
such issuance during the relevant period was 400,000 shares issued at 38 cents
each to Mr. Rodgers in May 1999 as part payment of accumulated unpaid
compensation since October 1997. The Company also owes Mr. Rodgers $40,000 in
cash compensation. Mr. Ashraf Khan has accumulated unpaid cash compensation
as of June 30, 1999 in the approximate amount of $130,000.
SUMMARY COMPENSATION TABLE
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation
Shane Rodgers, 1997 $ 30,000 - -
President/CEO 1998 $ 120,000 - -
1999 $ 40,000 (to May 99) -
Ashraf Khan 1998 $ 80,000 -
CFO 1999 $ 50,000 (to May 99) -
10
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the date of this Report, the stock
ownership of each person known by the Registrant to be the beneficial owner
of five percent or more or the Registrant's common stock, each Officer and
Director individually and all Directors and Officers of the Registrant as a
group:
NO. OF % OF
NAME CLASS SHARES CLASS
Horizon Trustees Limited Common 7,621,500 42.46
Pilares Oil & Gas, Inc. Common 4,500,000 25.10
and affiliates
Lichfield Petroleum, Ltd. Common 2,500,000 13.93
Lichfield Petroleum, Ltd. Preferred 48,000 100.00
Item 12. Certain Relationships and Related Transactions
On December 31, 1998, 7,621,500 of the Company's common shares,
representing 42.46 of its common shares outstanding, were held by
Horizon Trustees Limited.
11
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
-- The following Exhibits are incorporated by reference herein:
3.1 Articles of Incorporation
3.2 By Laws
(b) Reports on Form 8-K
-- There were no reports filed on form 8-K during the last quarter
covered by this report.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on September 14, 1999.
CHANCELLOR GROUP, INC.
By: /s/Shane X.G. Rodgers
Shane X.G. Rodgers
Acting President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated, on September 14, 1999.
Chairman of the Board, and Director:
/s/Shane X.G. Rodgers
Shane X.G. Rodgers
Vice President and Director:
/s/Ashraf Khan
Ashraf Khan
Director:
/s/William H. Stinson
William H. Stinson
13
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CHANCELLOR GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1997, & 1998,
December 31, 1998, and June 30, 1999
<PAGE>
CHANCELLOR GROUP, INC.
Consolidated Financial Statements
TABLE OF CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT ON
THE FINANCIAL STATEMENTS F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-3
Consolidated statements of stockholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6
<PAGE>
RONALD R. CHADWICK, P.C.
Certified Public Accountant
3025 South Parker Road
Suite 109
Aurora, Colorado 80014
Telephone (303)306-1967
Fax (303)306-1944
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Chancellor Group, Inc.
Melbourne, Australia
I have audited the accompanying consolidated balance sheets of Chancellor
Group, Inc. as of July 31, 1996, 1997, & 1998, December 31, 1998, and
June 30, 1999 and the related consolidated statements of operations,
stockholders' equity and cash flows for the periods then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Chancellor Group, Inc. and subsidiaries as of July 31, 1996, 1997 & 1998,
December 31, 1998, and June 30, 1999 and the results of their
operations and their cash flows for the periods then ended
in conformity with generally accepted accounting principles.
Aurora, Colorado
September 14, 1999 RONALD R. CHADWICK, P.C.
<PAGE>
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
CONSOLIDATED BALANCE SHEETS
July 31, July 31, July 31, Dec. 31, June 30,
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
ASSETS
Current assets
Cash $ 615 $ $ $ $
-------- ------- ---------- ------------ ------------
Total current
assets 615
Oil and gas
properties 35,905 35,905 35,905
-------- ------- ---------- ------------ -----------
Total Assets $ 615 $ $ 35,905 $ 35,905 35,905
======== ======= ========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,072 7,072 171,517 246,008 201,323
-------- ------ ---------- ------------ -----------
Total Liabilities 7,072 7,072 171,517 246,008 201,323
-------- ------ ---------- ------------ -----------
Stockholders' equity
Common stock: $.001 par value,
250,000,000 shares authorized,
3,300,000 (1996), 2,735,000 (1997),
17,930,361 (1998), 17,950,361 at
Dec. 31, 1998, 18,760,361 at
June 30, 1999, issued and
outstanding
3,300 2,725 17,930 17,950 18,760
Preferred Series B stock:
$1,000 par value;
250,000 shares authorized;
48,000 issued and outstanding at
July 31, 1998, Dec. 31, 1998,
and June 30, 1999
48,000,000 48,000,000 48,000,000
Paid in capital 412,196 412,196 (47,512,642) (47,510,662) (47,304,349)
Accumulated deficit (421,953) (422,003) (640,900) (717,391) (879,829)
-------- -------- ----------- ----------- -----------
Stockholders'
Equity (6,457) (7,072) (135,612) (210,103) (165,418)
-------- -------- ----------- ----------- -----------
Total Liabilities
and Stockholders'
Equity $ 615 $ $ 35,905 $ 35,905 $ 35,905
======== ======== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
CONSOLIDATED STATEMENT OF OPERATIONS
Year Year Year Five Months Six Months
Ended Ended Ended Ended Ended
July 31, July 31, July 31, Dec. 31, June 30,
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
Sales $ $ $ $ $
Operating expenses 419,953 50 218,897 76,491 162,438
--------- -------- --------- --------- ----------
Income (loss)
from operations (419,953) (50) (218,897) (76,491) (162,438)
Provision for
income tax
--------- -------- --------- --------- ----------
Net income (loss) $(419,953) $ (50) $(218,897) $(76,491) $ (162,438)
========= ======== ========= ========= ==========
Net income (loss) per share
(Basic and fully diluted)
$ (.20) * $ (.02) * *
========= ======== ========= ========= ==========
Weighted average number of
common shares outstanding
2,091,667 2,970,417 13,321,450 17,950,361 18,587,028
========= ========= ========== ========== ==========
*less than $.01 per share
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
COMMON STOCK Preferred
Par value $.001 Series B Paid in (Accumulated
Shares Amount Amount Capital Deficit )
Balances at
July 31, 1995 1,800,000 $ 1,800 $ $12,473,406 $ (2,000)
Compensatory
stock issuances 157,845 158 386,561
Debt retirement 150,313 150 362,526
Sales of
common stock 91,842 92
Stock dividend
(1 for 2) 1,100,000 1,100 (1,100)
Capital reserve (12,809,197)
Net gain (loss) (419,953)
---------- ------- ---------- ----------- ---------
Balances at
July 31, 1996 3,300,000 $ 3,300 $ $ 412,196 $(421,953)
Treasury stock
purchase and
cancellation (565,000) (565)
Net gain (loss) (50)
---------- ------- ---------- ----------- ----------
Balances at
July 31, 1997 2,735,000 $ 2,735 $ $ 412,196 $(422,003)
Compensatory
stock
issuances 395,361 395 54,057
Issuance of
stock for Radly
Petroleum, Inc.
12,300,000 12,300 3,700
Issuance of stock
for Lichfield
Petroleum
America, Inc.
Common 2,500,000 2,500
Preferred
Series B
(48,000 shs) 48,000,000 (47,982,595)
Net gain (loss) $(218,897)
----------- ------- ----------- ------------ ---------
Balances at
July 31, 1998 17,930,361 $17,930 $48,000,000 $(47,512,642) $(640,900)
Compensatory
stock
issuances 20,000 20 1,980
Net gain (loss) (76,491)
------------ ------- ----------- ------------ ---------
Balances at
Dec. 31, 1998 17,950,361 $17,950 $48,000,000 $(47,510,662) $(717,391)
Contributed
capital 21,123
Compensatory
stock
issuances 810,000 810 185,190
Net gain (loss) (162,438)
---------- ------- ----------- ------------ ---------
Balances at
June 30, 1999 18,760,361 $18,760 $48,000,000 $(47,304,349) $(879,829)
========== ======= =========== ============ =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year Five Months Six Months
Ended Ended Ended Ended Ended
July 31, July 31, July 31, Dec. 31, June 30,
1996 1997 1998 1998 1999
------- ------- ------- ----------- ----------
Cash Flows From
Operating Activities:
Net income (loss) $(419,953) $ (50) $(218,897) $ (76,491) $(162,438)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used for) operating
activities:
Compensatory
stock issuances 386,719 54,452 2,000 186,000
Accounts payable (12,458) 164,445 74,491 (44,685)
--------- ------ -------- -------- ---------
Net cash
provided by (used
for) operating
activities (45,692) (50) (21,123)
--------- ------ -------- -------- --------
Cash Flows From
Financing Activities:
Treasury stock
purchase (565)
Contributed
capital 21,123
Sales of
common stock 92
--------- ------ -------- -------- -------
Net cash provided
by (used
for) financing
activities 92 (565) 21,123
--------- ------ -------- -------- -------
Net Increase
(Decrease) In Cash (45,600) (615)
Cash At The
Beginning
Of The Period 46,215 615
--------- ------ -------- -------- -------
Cash At The End
Of The Period $ 615 $ $ $ $
========= ====== ======== ======== =======
Schedule of Non-Cash Investing and Financing Activities:
- --------------------------------------------------------
During the year ended July 31, 1996, the Company issued 362,526 common
shares for debts of $362,676. During the year ended July 31, 1998, the
Company issued 12,300,000 common shares for all the outstanding common shares
of Radly Petroleum, Inc., valued at $16,000, and issued 2,500,000 common
shares and 48,000 Preferred Series B shares for all the outstanding common
shares of Lichfield Petroleum America, Inc., valued at $19,905.
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
CHANCELLOR GROUP, INC.
(Formerly Nighthawk Capital, Inc.)
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Chancellor Group, Inc. (the "Company") was
incorporated in the state of Utah on May 2, 1986, then on December 31,
1993 dissolved as a Utah corporation and reincorporated as a Nevada
corporation. The Company's primary business purpose is to engage in the
exploration and production of oil and gas. In 1996 the Company's corporate
name was changed from Nighthawk Capital, Inc. to Chancellor Group, Inc.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Chancellor Group, Inc., and its wholly owned subsidiaries Radly Petroleum, Inc.
("Radly")(for the period from September 18, 1997 to December 31, 1998), and
Lichfield Petroleum America, Inc. ("Lichfield")(for the period from July 25,
1998 to December 31, 1998). These entities are collectively hereinafter
referred to as "the Company". All intercompany accounts and transactions
have been eliminated.
Oil and gas properties
The Company follows the successful efforts method of accounting for its oil
and gas activities. Under this accounting method, costs associated with the
acquisition, drilling and equipping of successful exploratory and development
wells are capitalized. Geological and geophysical costs, delay rentals and
drilling costs of unsuccessful exploratory wells are charged to expense as
incurred. Depletion and depreciation of the capitalized costs for producing
oil and gas properties are provided by the unit-of-production method based
on proved oil and gas reserves. Undeveloped properties are periodically
assessed for possible impairment due to unrecoverability of costs invested.
Cash received for partial conveyances of property interests are treated as
a recovery of cost and no gain or loss is recognized.
Income tax
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
F-6
<PAGE>
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
Notes to Consolidated Financial Statements - Continued
NOTE 1. ORGANIZATION, OPERATIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
Accounting year
The Company through July 31, 1998 employed a fiscal accounting year ending
July 31, and thereafter switched to a calendar year.
The Company recognizes income and expenses based on the accrual method of
accounting.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Net income (loss) per share
The net income (loss) per share is computed by dividing the net income (loss)
by the weighted average number of shares of common outstanding. Warrants,
stock options, and common stock issuable upon the conversion of the Company's
preferred stock (if any), are not included in the computation if the effect
would be anti-dilutive and would increase the earnings or decrease loss per
share.
NOTE 2. OIL AND GAS PROPERTIES
The Company holds working interests in approximately 6,000 acres in Pecos
County, Texas, which are carried at leasehold cost of $35,905. The Company's
oil and gas properties have been appraised in two engineering reports by
Nova Petroleum Resource Co., Certified Petroleum Geologists and Registered
Professional Engineers, dated August 27, 1997 (updated July 15, 1999) and
April 3, 1998. According to the reports, the Company's Pecos County properties
are estimated to contain over 240 billion cubic feet of proven undeveloped
oil and gas reserves, with a 10% discounted net present value before income
tax of approximately $182,000,000. Proven undeveloped reserves are reserves
that are considered recoverable from additional wells yet to be drilled.
F-7
<PAGE>
CHANCELLOR GROUP, INC.
(Formerly Nighthawk Capital, Inc.)
Notes to Consolidated Financial Statements - Continued
NOTE 3. CAPTIAL RESERVE - KENTUCKY SUBSIDIARIES
At July 31, 1995 the Company was in possession of two wholly owned oil and gas
subsidiaries in Kentucky named Delstar Gas Systems, Inc. and Northstar Gas
Systems, Inc. ("Kentucky subsidiaries"). The two subsidiaries had audited
net assets of approximately $12,000,000 at July 31, 1995. A subsequent dispute
developed between principals of the two subsidiaries and principals of
Chancellor Group, Inc. over payment terms and amounts stemming from the
parties' original merger agreement. Currently, the records of the Kentucky
subsidiaries are not available to the Company for audit. For its fiscal
year end 1996 financial statements, and for subsequent years until contested
matters with the Kentucky subsidiaries are resolved and records available,
the Company has established a capital reserve of approximately $12,000,000 to
offset the two subsidiaries last known asset valuation, and has recorded no
further transactions from the subsidiaries.
NOTE 4. INCOME TAXES
Deferred income taxes arise from the temporary differences between financial
statement and income tax recognition of net operating losses. These loss
carryovers are limited under the Internal Revenue Code should a significant
change in ownership occur.
At December 31, 1998 the Company was not able to definitely determine its
current or deferred tax benefits or liabilities due to the unavailability of
records from its Kentucky subsidiaries. The Company does not believe it has
any income tax liability, current or deferred at December 31, 1998.
F-8
<PAGE>
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
Notes to Consolidated Financial Statements - Continued
NOTE 5. ACQUISITION OF RADLY PETROLEUM, INC. AND LICHFIELD PETROLEUM
AMERICA, INC.
In September, 1997 Chancellor Group, Inc. acquired all the outstanding stock
of Radly Petroleum, Inc., making Radly a wholly owned subsidiary.
The transaction was accounted for as a purchase, and the cost was recorded
at $16,000 consisting of 12,300,000 shares of Chancellor Group, Inc.'s
common stock. The two companies' accounts have been consolidated from
September 18, 1997 forward. No pro forma income information is presented as
it is immaterial.
In July, 1998 Chancellor Group, Inc. acquired all the outstanding stock of
Lichfield Petroleum America, inc., making Lichfield a wholly owned subsidiary.
The transaction was accounted for as a purchase, and the cost was recorded at
$19,905 consisting of 2,500,000 shares of Chancellor Group, Inc.'s common
stock, and 48,000 shares of Preferred Series B stock. The two companies'
accounts have been consolidated from July 25, 1998 forward. No pro forma
income information is presented as it is immaterial.
F-9
<PAGE>
CHANCELLOR GROUP, INC.
(formerly Nighthawk Capital, Inc.)
Notes to Consolidated Financial Statements - Continued
NOTE 6. STOCKHOLDERS' EQUITY
Common stock
The Company has 250,000,000 authorized shares of common stock, par value $.001,
with 17,950,361 shares outstanding as of December 31, 1998, and 18,760,361
shares outstanding as of June 30, 1999.
Preferred stock
Preferred Series B Stock - The Company has provided for the issuance of
250,000 shares, par value $1,000 per share, of convertible Preferred
Series B stock ("Series B"), and 48,000 shares were outstanding as of December
31, 1998 and June 30, 1999. Each Series B share is convertible into 1 share
of the Company's common stock anytime after 18 months from the date of issue
at a price equal to 95% of the average between the bid and asked trading
price of the Company's common stock on NASDAQ for the five weeks prior to
the week of conversion. The Company retains the right to permit the conversion
of the preferred stock to common stock on the same terms at anytime after
6 months from the date of issue of the preferred stock. The Company may redeem
the preferred stock for cash at anytime at the stated face value. The
preferred stock carries a dividend rate of 8% cumulative per annum, payable
in the form of additional preferred stock of the same series at the election
of the Company. The preferred stock carries no voting rights, but has
senior liquidation rights over the common stock.
Stock options
The Company currently has stock options outstanding to various individuals
in the following amounts:
50,000 options exercisable for one share of common stock at $1.50 per share
50,000 options exercisable for one share of common stock at $2.50 per share
50,000 options exercisable for one share of common stock at $3.50 per share
50,000 options exercisable for one share of common stock at $4.50 per share.
The options expire at various dates through July, 2000, save for 12,500 options
out of each set above which have no expiration date. The Company has incurred
and accrued no material compensation expense in connection with these options.
F-10
<PAGE>
CHANCELLOR GROUP, INC.
Supplemental Information (Unaudited)
Period Ended December 31, 1998
Capitalized Costs Relating to Oil & Gas
Producing Activities at December 31, 1998
- -----------------------------------------
Unproved oil and gas properties $ -
Proved oil and gas properties 35,905
Support equipment and facilities -
-----------
35,905
Less accumulated depreciation, depletion,
amortization, and impairment
-----------
Net capitalized costs $ 35,905
===========
Costs Incurred in Oil and Gas Producing
Activities for the Period Ended December 31, 1998
- -------------------------------------------------
Property acquisition costs
Proved $ -
Unproved -
Exploration costs -
Development costs -
Results of Operations for Oil and Gas Producing
Activities for the Period Ended December 31, 1998
- -------------------------------------------------
Oil and gas sales $ -
Gain on sale of oil and gas properties
Gain on sale of oil and gas leases
Production costs
Exploration expenses
Depreciation, depletion, and amorization
-----------
-
Income tax expense
-----------
Results of operations for oil and gas
producing activities (excluding
corporate overhead and financing costs) $ -
===========
Reserve Information
The following estimates of proved and proved developed reserve quantities
and related standardized measure of discounted net cashflow are estimates
only, and do not purport to reflect realizable values or fair market values
of the Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available. All of the
Company's reserves are located in the United States.
Proved reserves are estimated reserves of crude oil (including condensate
and natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
The standardized measure of discounted future net cash flows is computed
by applying year end prices of oil and gas (with consideration of price
changes only to the extent provided by contractual arrangements) to the
estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on year end costs) to be incurred in developing
and producing the proved reserves, less estimated future income tax expenses
(based on year end statutory tax rates, with consideration of future tax rates
already legislated) to be incurred on pretax net cash flows less tax basis
of the properties and available credits, and assuming continuation of
existing economic conditions. The estimated future net cash flows are then
discounted using a rate of 10 percent a year to reflect the estimated timing
of the future cash flows.
<PAGE>
CHANCELLOR GROUP, INC.
Supplemental Information (Unaudited) - Continued
Period Ended December 31, 1998
Reserve Information
- -------------------
Oil Gas
(Bbls) (Bcf)
------ -----
Proved developed and undeveloped reserves
Beginning of period - 249.50
Revisions of previous estimates
Improved recovery
Purchase of minerals in place
Extensions and discoveries
Production
Sales of minerals in place
------ ------
End of period - 249.50
====== ======
Proved developed reserves
Beginning of period - -
End of period - -
Standardized Measure of Discounted Future
Net Cash Flows at December 31, 1998
Future cash inflows $ 580,013,502
Future production costs ( 77,681,437)
Future development costs ( 22,535,000)
Future income tax expenses (163,131,002)
-------------
$ 316,666,063
Future net cash flows (10% annual discount
for estimated timing of cash flows) $ 120,536,224
-------------
Standardized measures of discounted future net cash
flows relating to proved oil and gas reserves $ 120,536,224
=============
The following reconciles the change in the standardized measure of
discounted future net cash flow during the period ended December 31, 1998.
Beginning of period $ 120,536,224
Sales of oil and gas produced, net of production costs
Net changes in prices and production costs
Extensions, discoveries, and improved recovery,
less related costs
Development costs incurred during the period which
were previously estimated
Net change in estimated future development costs
Revisions of previous quantity estimates
Net change from purchases and sales of minerals in place
Accretion of discount
Net change in income taxes
Other
-------------
End of period $ 120,536,224
=============
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10KSB FOR THE YEAR ENDED
12/31/98.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1889
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35905
<DEPRECIATION> 0
<TOTAL-ASSETS> 35905
<CURRENT-LIABILITIES> 246008
<BONDS> 0
0
0
<COMMON> 17950
<OTHER-SE> (228053)
<TOTAL-LIABILITY-AND-EQUITY> 210103
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 76491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (76491)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76491)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
