PART I
FINANCIAL INFORMATION
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments which are, in the opinion of management, necessary to fairly
present such information. Although the Company believes that the disclosures
are adequate to make the information presented not misleading, certain
information and footnote disclosure, including significant accounting policies,
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K.
BALANCE SHEETS
ASSETS
September 30
1996 December
(Unaudited) 1995
Current assets
Cash $20,008 $3,198
Note Receivable-Texoil 64,750 31,000
Total current assets 84,758 34,198
Oil and gas properties, using full
cost accounting (Note 2)
Properties being amortized 3,685,940 3,601,294
Properties not being amortized 65,000 65,000
3,750,940 3,666,294
Less accumulated depreciation, depletion,
amortization and impairment 1,135,212 1,081,871
Net oil and gas properties 2,615,728 2,584,423
Other assets
Other property and equipment, at cost,
less accumulated depreciation 5,167 8,267
Other 4,127 6,213
Total other assets 9,294 14,480
TOTAL ASSETS $2,709,780 $2,633,101
The Notes to Financial Statements are an integral part of this statement.
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30
1996 December
(Unaudited) 1995
Current liabilities
Current portion of long-term
debt $ - $ -
Accounts payable 313,751 253,036
Due to stockholders 50,000 22,628
N/P Texas Central Bank 100,000 75,000
N/P Lyon Operating Co. 35,000 35,000
Total current liabilities 498,751 385,664
Long-term debt
Senior Secured N/P - 267,520
Total liabilities 498,751 653,184
Stockholders' equity
Preferred stock, $0.05 par value;
authorized 2,000,000 shares;
4,296 issued 215
Common stock, $0.01 par value;
authorized 20,000,000 shares;
issued 4,055,500 40,555 40,555
Additional paid-in capital 3,991,783 3,508,043
Retained deficits (1,821,524) (1,568,681)
Total stockholders' equity 2,211,029 1,979,917
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,709,780 $2,633,101
The Notes to Financial Statements are an integral part of this statement.
Statements of Operations (Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
Revenues
Oil and gas sales $ 62,282 $ 77,275 $ 19,051 $ 19,810
Total Revenues $ 62,282 $ 77,275 $ 19,051 $ 19,810
Expenses
Production 58,943 43,309 21,801 16,042
Depreciation, depletion,
and amortization 53,341 57,013 15,138 23,453
Full cost ceiling
adjustment - - - -
Interest 22,093 2,550 6,721 2,550
General and admin 214,498 161,608 132,129 59,871
Total expenses 348,875 264,480 175,790 101,916
Other Income
Dividend income 33,750 - 11,250 -
Interest income - - - -
Total other income 33,750 - 11,250 -
Loss before provision for
income taxes (252,843) (187,205) (145,488) (82,106)
Provision for income taxes - - - -
NET LOSS $(252,843) $(187,205) $(145,488) $(82,106)
Primary earnings per
share (Note 1) $(0.06) $(0.05) $(0.04) $(0.02)
The Notes to Financial Statements are an integral part of this statement.
Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1996 1995
Cash flows from operating activities
Net loss $(252,843) $ (187,205)
Adjustments to reconcile net loss to net
cash provided by operating activities
DD&A 53,341 57,013
Depreciation and amortization 5,186 7,047
(Increase) decrease in:
Accounts receivable-trade (33,750) (121,250)
Prepaid expenses - -
Other assets - (5,250)
Increase (decrease) in:
Accounts payable and accrued
expenses 60,714 176,100
NET CASH PROVIDED BY OPERATING
ACTIVITIES 167,352 73,545
Cash flows from investing activities
Loan made - -
Capital expenditures (84,646) 73,123
NET CASH USED BY INVESTING
ACTIVITIES (84,646) 73,123
Cash flows from financing activities
Short-term notes payable 52,372 -
Long-term debt retired (267,520) -
Proceeds from issuance of
preferred stock 483,955 -
Proceeds from sale of oil/gas properties - -
NET CASH PROVIDED BY INVESTING
ACTIVITIES 268,807 -
NET INCREASE IN CASH AND CASH
EQUIVALENTS 16,809 (422)
Cash and cash equivalents, at beginning
of period 3,198 2,554
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 20,007 $ 2,132
The Notes to Financial Statements are an integral part of this statement.
NOTES TO FINANCIAL STATEMENTS
(1) See notes to financial statements included in the Company's 1995
Annual Report on Form 10-K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW - HISTORY
THE COMPANY FROM INCEPTION, SEPTEMBER 1992 TO PRESENT
The Company is an independent oil and gas exploration and
production company operating primarily in the Panhandle Field, which
extends from West Texas through Central Oklahoma into Western Kansas.
During 1992 and 1993, the Company participated in a 20 well drilling
program on leases in Moore and Potter Counties, north of Amarillo, Texas
resulting in wells producing from the Red Cave Sandstone Formation. As
a result, the Company earned a 41.5 percent working interest in
approximately 26,755 gross acres covered by oil and casinghead gas leases
(the "Richmond acreage").
In October 1993, the Company acquired a 100 percent working
interest in approximately 7,000 gross acres on leases on the Brent Ranch,
adjacent to the Richmond acreage. In October 1994 and June 1995, the
Company drilled three wells on the Brent Ranch which were determined to
be non-commercial. Soon thereafter, the Company and the Brent Ranch
lessors became engaged in disagreements relative to the Company's
requirement to drill additional wells within certain time periods. These
disagreements resulted in the filing of a lawsuit in July 1993 against the
Company by the lessors for termination of the lease and damages due to
alleged failure to timely drill additional wells and other lease non-
performance claims. The Court determined that the Company was liable to
the lessors for $200,000 covering liquidated damages, attorney's fees and
other costs. The matter was then settled fully by the Company agreeing to
lease termination, to plug and abandon six inactive wells and to pay $25,000,
$10,000 of which was later recovered by the Company retaining and selling
the gas rights to certain of the properties.
After acquiring the Richmond and Brent Ranch properties in the
Texas Panhandle area, the Company continued its program of actively
seeking the acquisition of promising oil and gas properties directly or through
the acquisition of and/or business combinations with other energy companies.
In furtherance of this objective, the Company has completed or is in the
process of completing the transactions described next in summary.
TEXOIL AGREEMENT
Pursuant to an agreement dated March 23, 1995 between the
Company and Texoil Energy, Ltd. ("Texoil"), a Canadian corporation,
Texoil acquired one-half of the Company's interest in approximately 9,000
acres of oil and casinghead gas leases in Moore and Potter Counties, Texas,
including the 7,000 acres on the Brent Ranch and 225,000 shares of the
Company's Common Stock. In consideration therefor, the Company received
$128,750 cash and a $121,250 note due in July 1995, 1,000,000 shares of
Texoil Common Stock and $750,000 principal amount of 6% preferred stock
(the "6% Preferred Stock"), convertible into 750,000 shares of Texoil
Common Stock. Under the terms of the agreement, Texoil was required to
fulfill the Company's obligation to drill nine wells on the Brent Ranch and
four wells on the Richmond acreage. The proceeds of the $121,250 note
were used to partially fund the Company's obligations under the Texoil
Agreement. Texoil paid two-thirds of the drilling and testing costs and
shared the completion costs equally with Empiric on the two wells drilled on
the Brent Ranch in 1995. Empiric retained 50 percent of its working interest
in the leases and any production therefrom. These leases have been canceled
as a part of the overall settlement with the Brent Ranch Lessors.
Depending on available financing, the Company and Texoil may
continue to develop the 9000 acres of the Richmond acreage. Under the
Texoil Agreement, Texoil is required to pay 66 2/3 percent of the drilling and
testing costs of eleven new wells at locations to be mutually agreed upon.
Texoil and the Company will share equally the completion costs of, and
revenues from, such wells. Texoil may also participate with the Company
in the enhancement and development of the Taureaux/Lyon properties
described below on mutually agreeable terms.
The Company owns approximately 26 percent of Texoil's outstanding
common stock and 100 percent of the 6% Series A Preferred Stock. If the
6% Series A Preferred Stock were converted into Texoil common stock, the
Company would own approximately 38 percent of Texoil's outstanding
common stock. The Company has no plans to convert the Series A Preferred
Stock into the common stock of Texoil.
The Company has not been able to proceed with the joint development
plans with Texoil since neither company has been able to obtain adequate
working capital, although the opportunities and the drilling site acreage is
still available.
TAUREAUX/LYON AGREEMENTS
Pursuant to an agreement dated December 21, 1995 with Lyon
Operating Co., Inc. ("Lyon"), the Company acquired from Lyon 72 percent
working interest in 1223.2 acres in Clay and Jack Counties, Texas, which
includes one producing oil well and eleven non-producing oil wells. As
consideration for the Lyon acquisition, the Company paid $30,000 cash, a
$35,000 Note and 20,000 shares of its Common Stock.
In February 1996, the Company agreed to acquire from Taureaux
Corporation ("Taureaux"), an affiliate of Lyon, a 20 percent net revenue
interest in 198.5 acres in Jack County, Texas, which contains two wells, one
of which has been drilled to the lower Ellenberger level at 8700 feet and is
awaiting completion and one of which produces minimal gas at a shallower
level.
The Company plans to enhance production on the producing well on
the Lyon acreage by rework and repair at an estimated cost of approximately
$20,000 and to re-establish production on the shut-in wells. The cost to re-
establish production is not known and depends on the condition of and ability
to use the downhole equipment.
On the Taureaux acreage, the Company plans to complete the well
which has already been drilled to the 8700 foot Lower Ellenberger depth and
is awaiting completion and to also drill the producing gas well to the Lower
Ellenberger formation to search for oil. The $75,000 original cost of this
transaction includes an acquisition of 20 percent working interest in the wells
and will also pre-pay the Company's portion of the completion costs on such
well.
The Company has not been able to proceed with its plans to develop
the opportunities acquired as a result of the Taureaux/Lyon agreements.
However, the opportunities remain and may be activated as soon as
investment capital can be obtained.
WESTAR JOINT VENTURE
Pursuant to a Definitive Agreement dated April 15, 1996, the
Company and Westar Energy, Inc. ("Westar") agreed to jointly participate
in the drilling, completion, equipping and operating of approximately 100 oil
and/or gas wells in Indiana and Westmoreland Counties, Pennsylvania (the
Agreement). Westar currently owns and operates approximately 500 oil and
gas wells in Western Pennsylvania and Northern West Virginia. The
Agreement provides for the drilling and completion of a minimum of twenty
and a maximum of 100 "infill" wells surrounded by production on the subject
acreage, to a depth sufficient to test and obtain production from the Lower
Bradford Kane Sands at approximately 4,000 feet. The First Phase will
include a total of 18 wells, consisting of four segments: first segment - 3
wells; second through fourth segment - 5 wells each. Drilling of the first 3-
well segment began September 12, 1996, and has now been completed to a
total planned depth of approximately 4,000 feet on all three wells. These
wells have been logged and analyzed for total reserves and estimated daily
production rates by independent analysts. The wells are determined to be
commercially productive with total reserves per well estimated from .8
billion cubic feet (Bcf) to 1.6 Bcf, with daily production rates of 300 Mcfpd
to 500 Mcfpd. The first well (the Watterson No. 5, White Township, Indiana
County, Pennsylvania) has been fraced and completed. This well released
and sold gas into the buyer's accumulation line on November 12, 1996. The
Company owns 62.5 percent working interest, with 50.0 percent net revenue
interest in the first 3-well segment. The objective is to complete all 18 wells
of the First Phase by December 31, 1996. The Company shall have the
right, based upon information provided by Westar, at least 30 days prior to
completion of the last of the five wells in each segment, to evaluate and
determine whether it elects to participate in the drilling of the five wells in
the next segment. If, within 20 days after receiving the Westar information
as to the next segment, the Company elects not to participate in the drilling
of any wells in the Westar proposal, the Agreement will terminate, except as
to the wells in which the Company has theretofore participated.
For the consideration set forth below, the Company will acquire a 75
percent working interest in the leases, wells, equipment and all contractual
rights of Westar pertaining to each well, including contracts for the sale of
production from the wells. Westar agreed to drill, complete, fracture and
equip each well for a fixed cost price of $180,000 to 100 percent of the
working interest or $135,000 per well to the 75 percent working interest of
the Company. If a well is determined to be not capable of commercial
production, Westar will repay or credit the Company against the cost of the
next well the amount of the Company's portion of the unexpended cost in the
non-commercial well. As each well is completed as capable of commercial
production, Westar shall execute an assignment to the Company of 50 percent
of the working interest in the well and deliver to an escrow agent an
additional assignment for 25 percent working interest. The 25 percent
working interest will be held by an escrow agent subject to a Value
Guaranty, described below. Proceeds from the sale of oil and gas
attributable to the 25 percent working interest held in escrow shall be held
in suspense by the oil and/or gas purchaser or by the escrow agent until the
Company's interest in the 25 percent working interest is finally determined
under the Value Guaranty. Westar will reserve a reversionary interest in
each well equal to 15 percent of the working interest conveyed to the
Company (or 11.25 percent of the Company's 75 percent working interest)
which shall become effective as to each well in a five well segment only
when the Company has received proceeds from production from all five wells
in a segment equal to 110 percent of the Company's cost of drilling,
completing, equipping, reworking and operating all five wells in the segment,
plus all taxes attributable to production (except income taxes).
Following completion of the First Phase, subject to Westar's ability
to identify additional mutually agreeable "infill" drilling locations, the
parties intend to drill up to an additional 80 wells, in 20 well phases, in
1997 and 1998. Provided the Company has participated in the drilling of all
20 wells in the First Phase, the Company will have the right to participate in
subsequent phases on substantially the same terms and conditions as in the
First Phase.
Excluding the first 3-well segment of the First Phase in which the
Company owns 62.5 percent working interest as set forth above, the
Company's 75 percent share of the turnkey cost of drilling, completing and
equipping each of the remaining wells in the First Phase, the Company shall
pay Westar $135,000 per well, $90,000 of which shall be paid in cash prior
to commencement of the well, which shall represent payment for 50 percent
of the working interest in such well. The remaining $45,000 cost per well
for the 20 wells in the First Phase shall be paid by delivery to an escrow
agent of 300,000 shares of the Company's Common Stock (15,000 shares per
well) (the "Shares") which shall constitute payment for the remaining 25
percent of the working interest in the wells. The Company will agree to
register the Shares under the Securities Act of 1933 to enable Westar to sell
such Shares in an underwritten offering or from time to time in the open
market. Pursuant to a Value Guaranty in the Agreement, Westar will receive
$900,000 from the sale of its 300,000 shares. In the event the sale of the
300,000 Shares is not completed by December 31, 1996 or Westar does not
receive $900,000 from the sale of the Shares, the Company must compensate
Westar for the difference between the Value Guaranty and the net
consideration, if any, received by Westar (the "Shortfall"): (i) by purchasing
from Westar all or any part of the Shares not sold by Westar or arranging for
the purchase by others, or (ii) by issuing to Westar additional shares to make
up the Shortfall, or (iii) by reconveying to Westar a portion of the 25 percent
working interest in the wells in the First Phase based on the amount of the
Shortfall or (iv) if the Shortfall is satisfied by any means other than the
issuance of additional shares of Common Stock, all of the unsold Shares held
by the escrow agent shall be retransferred to the Company. In the event that
the Company elects not to participate in all 20 wells in the First Phase, the
Value Guaranty shall be proportionately reduced by $45,000 or 15,000 shares
per well.
In view of the fact that the original drilling program has not
progressed on the time frame originally contemplated and that realistically the
first 18 wells may not be completed and evaluated by December 31, 1996,
the Company will attempt to negotiate with Westar to re-establish a
reasonable, yet attainable, revised deadline date for the Value Guaranty
portion of the Agreement described above.
Under the Agreement, the Company has the right until December 31,
1996, to request Westar to sell any part of the Shares in escrow, but not less
than 10,000 shares, to any party designated by the Company. In such event,
the total sales price will be credited against the Value Guaranty, whether or
not Westar elects to sell such Shares. The Company also plans to obtain a
more realistic date for substitution in the Agreement for this covenant of the
Agreement.
For its assistance in identifying and participating in the
negotiations of the Westar transaction, the Company has agreed to assign to
an unaffiliated third party 6.25 percent working interest from its 50 percent
working interest in each of the wells acquired by the Company, but not from
the 25 percent working interest, which was acquired subject to the value
guaranty described above.
As stated above, the Company has been able to raise only sufficient
working capital to obtain an approximate 50 percent interest in the first 3-
well segment, but has the right and with the infusion of adequate working
capital, expects to expand its working interest to 75 percent as per the
complete summary of terms of the Westar Agreement outlined above. The
Company expects to receive some cash flow from the Westar program in the
next few months.
FINANCIAL RESULTS FOR FISCAL YEAR 1995 - THIRD QUARTER
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
Financial results of Empiric Energy, Inc. for the three month period
ended September 30, 1996, included the implementation and the recording
of a major debt reduction program wherein $429,555 of total Company debt,
including the entire amount of long-term debt ($267,520) was exchanged for
4,296 shares of Series "B" Preferred Stock, $5.00 par value, $100 liquidation
per share and convertible into Common Stock of the Company at the rate of 40
Common shares of the Company for each $100 liquidation value per share,
equal to $2.50 per each Common share.
In summary, this transaction eliminated all of the long-term debt,
reduced accounts payable and increased the book net worth of the Company
as of September 30, 1996, as compared with the book net worth at December
31, 1995 by $230,000, notwithstanding a loss of about $250,000 for the nine
month period ended September 30, 1996.
Revenues of $85,282 for fiscal year ended December 31, 1995
resulted in a loss from operations of $245,636 as compared with revenues of
$62,282 and an operating loss of $252,843 for the nine month period ended
September 30, 1996. Operating results for the similar nine month period
ended September 30, 1995 included revenues of $77,275 and a loss of
$187,205.
Revenues of $19,051 for the three month period ended September 30,
1996 produced an operating loss of $145,480 as compared with revenues of
$19,810 and a corresponding loss of $82,106 for the similar three month
period ended June 30, 1995. The general trend of declining revenues and
increasing operating losses as described for the periods set forth above has
been caused in substantial part by the fact that the decline in production from
the producing wells has not been offset by the discovery of additional
production, due to the lack of development funds. This downward trend will
continue until expanded drilling programs and/or acquisition of production
and reserves can be successfully achieved. Such programs will require
additional financing, as will be discussed later.
FINANCIAL CONDITION DISCUSSION
As of September 30, 1996, the Company had a net worth of
$2,211,029. This amount increased from the year ended December 31, 1995
because of the debt reduction transaction explained above. The working
capital deficit at September 30, 1996 was $413,997 as compared to a
working capital deficit of $380,192 at September 30, 1995.
NEED FOR THE INFUSION OF CAPITAL
Each of the Company's business strategy objectives delineated below
will require investments in excess of capital funds now available to the
Company. These funds must be generated from financial institutions through
the placement or sale of Empiric's equity or indebtedness. In this regard, the
Company made a revised filing of a Registration Statement on April 12, 1996
with the Securities and Exchange Commission seeking to register 1,500,000
shares of the Company's Common Stock for ultimate sale and the infusion
of up to $4.5 million, less offering expenses of new equity funds. This
Registration Statement was withdrawn with the approval of the Securities and
Exchange Commission on August 13, 1996. The Company is currently
planning to file a revised statement to reflect its proposed method of
obtaining needed financing on favorable terms. An underwriter has not been
obtained as yet.
STRATEGY AND BUSINESS PLANS
The Company's business strategy continues to be the development of
plans and programs to increase its cash flow and oil and gas reserves through
exploratory and development drilling and the acquisition of all or a portion
of producing properties or energy-related companies. In implementing this
strategy the Company plans to do the following:
- - Continue and increase the drilling and completion program to
the maximum extent of the Westar Joint Venture Agreement
described above, so long as positive results are experienced;
- - Develop the Richmond acreage by drilling development wells
and infill location wells. Certain of the Richmond acreage
will be developed in conjunction with Texoil;
- - Continue the development and enhancement of the
Taureaux/Lyon properties; and,
- - Actively pursue business combinations with or the acquisition
of producing properties or other energy companies with
producing properties. Although the Company is continually
seeking business combinations and producing properties for
acquisition, no such transactions have been finalized as of the
date of this report.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
There were no reports filed.
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EMPIRIC ENERGY, INC.
Date: November 15, 1996 By:_____Clyde E. Skeen______________
Clyde E. Skeen
Chief Financial Officer
