UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
[Fee Required]
For the fiscal year ended: December 31, 1997
Commission file number #1-13162
EMPIRIC ENERGY, INC.
(Name of small business issuer in its charter)
Texas 75-2455467
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8201 Preston Road, Suite 580
Dallas, Texas 75225
(Address of principal executive offices) (Zip Code)
(214) 265-8392
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
Common Stock ($.01 par value) Over the Counter
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 X No
--
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of 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. Yes X No
-----
<PAGE>
EMPIRIC ENERGY, INC.
INDEX TO FORM 10-KSB
PART I
PAGE #
Item 1. Description of Business Description of Business 1
Item 2. Description of Property 2
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II.
Item 5. Market for Common Equity and Related Stockholder
Matters 6
Item 6. Management Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 7. Financial Statements 8
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8
PART III.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 9
Item 10. Executive Committee 10
Item 11. Security Ownership of Certain Beneficial Owners
and Management 12
Item 12. Certain Relationships and Related Transactions 12
Item 13. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 13
PART I.
ITEM I. DESCRIPTION OF BUSINESS
Background - From Inception to Present
- ------------------------------------------------------------------------------
The Company is an independent oil and gas exploration and production
company with leasehold properties in the Hugoton Panhandle Field (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 100 percent working interest in
approximately 7,000 gross acres on leases on the Brent Ranch, adjacent to the
Richmond acreage. The Company drilled three non-commercial wells on the Brent
Ranch in October 1994 and June 1995 and was required to drill four additional
wells by June 22, 1995 and five wells by October 1995. A dispute arose with
the leaseholders over the timely drilling of the wells to be commenced by June
22, 1995, which resulted in termination of the Brent Ranch lease and of the
Company's obligations to drill eight additional wells.
On March 31, 1994, the Company filed a registration statement with
the Securities and Exchange Commission for the sale of up to 500,000 Units at
$10.00 per Unit in a "best efforts"underwriting although a minimum requirement
for the sale of 250,000 units was in effect. Each Unit consisted of three
shares of the Company's Common Stock and one Warrant to purchase one share of
Common Stock at $4.25 per share for a five year period. The Public Offering
was closed on October 14, 1994 with net proceeds to the Company of $2,226,000
from the sale of 252,266 Units after Underwriter commissions and expenses. At
the time of the original underwriting, the Company's development drilling and
acquisition growth plans were based on the receipt of approximately
$5,000,000, only about one-half of which was obtained. This shortfall of
available capital has restricted the Company's growth to achieve a continuing
profitable status. The Company has attempted to raise additional capital
through private placements of debt/equity and from conventional financing
sources with limited success.
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 9,300 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, 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. In view of the cancellation of the Brent
Ranch Agreement along with the settlement of the legal dispute, this
requirement on the part of Texoil is no longer in effect.
On March 21, 1996, the Company signed an agreement with Westar Energy,
Inc. ("Westar") to take part in a joint venture drilling program for
approximately 100 gas wells (subsequently reduced to 88 wells), which were to
be drilled in "segments". The number of wells to be drilled in each "segment"
were mutually agreed upon between the parties. The drilling program was
accomplished on leases owned by Westar in Indiana and Westmoreland Counties,
Pennsylvania. Empiric received up to 55% working interest in the eight wells,
seven of which have been successfully completed and were on production at
December 31, 1997. The Company financed its portion of the drilling and
completion costs of the first eight wells by obtaining outside investors and
entered into an agreement wherein the Company will retain 20% of the revenues
and the investors will receive 80% until the investors receive up to 117% of
their investment, at which time the revenues will be split 50/50 for the
remaining production life of the wells. The above formal agreement with
Westar is no longer in effect.
The Company is also actively seeking the acquisition of additional
producing and non-producing oil and gas leases directly or through the
acquisition of or business combinations with all or a portion of
energy-related companies or properties. (See Planned Activities.)
ITEM 2. DESCRIPTION OF PROPERTY
Oil and Gas Properties
The following is a description of the Company's natural resource
properties. The Company has no agreement for sales of oil and gas to foreign
governments or authorities.
The Company has interests in oil and gas leases and wells in the Thornton
(Smackover) Field located in Holmes County, Mississippi, the Panhandle Field
of Texas, primarily in Moore and Potter Counties, and in Clay, Jack and Jones
Counties, Texas, as well as in Indiana and Westmoreland Counties,
Pennsylvania.
HOLMES COUNTY, MISSISSIPPI. The Company was incorporated in September
1992 and acquired substantially all of the working interest of the Thomas E.
Smith 9-2 Well No. 1 (the "Smith Well"), a producing gas well in Mississippi,
in exchange for 1,750,000 shares of its Common Stock from the working interest
owners, including Hill Investors, Inc. ("Hill"), a company controlled by James
J. Ling, the Chairman and Chief Executive Officer and a director of the
Company. The Company owns a 100 percent working interest in the Smith well, a
gas well completed at 11,800 feet in the Smackover Formation in the Thornton
Smackover Field. Although not currently producing, the well produced on a
test gas and condensate run through a nearby
TXG gas plant at rates up to 800 Mcf of gas and 30 Bbls of condensate per day.
The Smith well required extensive workovers and the Company has settled with
the operator regarding its portion of these costs. The Company is not able to
accurately predict when it will receive any cash flow from the well but
believes production and cash flow will begin in the latter part of 1998 as
soon as plans are developed and placed into operation to remove the 48 percent
carbon dioxide and the 3 percent hydrogen-sulfide which require separation
from the main gas stream, however, there is no assurance that this processing
will prove economically feasible.
PANHANDLE FIELD AREA. The Panhandle Field covers 19 counties in the
Texas and Oklahoma panhandles and in Western Kansas. It is one of the largest
gas fields in the United States and is estimated to contain reserves that
exceed 70 trillion cubic feet of gas and 1.5 billion barrels of oil.
<PAGE>
In 1992 and 1993 the Company participated in a 20-well drilling program
on the Richmond acreage in the Panhandle Field of Moore County to earn a 41.5
percent working interest (31.9 percent net revenue interest) in 26,755 acres
covered by oil and casinghead gas leases from Richmond Petroleum, Inc.
("Richmond Petroleum"). This drilling initially resulted in the completion of
18 commercial wells as pumping Red Cave Sandstone oil producers ranging from
poor to sometimes better than average. Of these 18 wells, six were shut in
because of decline in production, which the Company believes resulted
primarily from inadequate initial completion techniques. In addition to the
20 well drilling program, Empiric re-completed as a producer a shut in well
which was acquired with the leases. In early May 1993, the Company and a
non-affiliated working interest owner removed the operator of the Richmond
acreage because of their dissatisfaction with the drilling and completion
practices on certain wells. These practices included incorrectly recording
well locations, failure to drill wells to agreed depths, drilling wells too
close together, not using surface casing, failure to perforate all production
zones and using inappropriate fracture treatments. The Company subsequently
discharged the operator for cause and acquired his 28.5 per cent working
interest in exchange for 5,000 acres. As a result of this transaction the
Company owned an approximate 70 percent working interest in 21,755 acres.
In September 1993, the Company sold to Red Cave Limited Liability Company
("Red Cave") for $450,000 a 28.5 percent working interest in approximately
1,405 gross acres of the Richmond acreage on which 22 wells were producing or
deemed capable of production. As part of such consideration, the Company also
sold to Red Cave a 7.5 percent working interest in undeveloped leases covering
the remaining 20,350 acres of the Richmond acreage owned by the Company and an
option to purchase a 25 percent working interest in the Brent Ranch lease,
which was not exercised. The Company also granted to Red Cave a one-year
option to purchase an additional 20 percent working interest in such
undeveloped Richmond acreage for additional consideration of $183,231. This
option expired without exercise.
In May 1997, the Company entered into an agreement to sell all its
working interest in the Baker lease only of its West Texas Panhandle
production properties (approximately 580 acres) and granted a two year option
to sell its leasehold interest in approximately 13,500 non-producing acres, a
total consideration of approximately $540,000.
PENNSYLVANIA PROPERTIES. (See Westar Energy, Inc. above.)
Planned Activities
As described elsewhere in this report, the Company has developed many
contacts in the industry and has been presented with many opportunities for
investments in acquisitions or combinations with other companies and/or
working interest participation in promising proved and undeveloped acreage
prospects. The Company has agreements in principal as well as signed letters
of intent to acquire interests in producing wells, test drilling of
exploratory wells, development of leasehold acreage, and the acquisition of
already developed proprietary aerial survey data for high probability
discovery sites. The Company also has an agreement to participate in the
exploration and development of potential drilling prospects utilizing these
proprietary techniques in West Texas, Alaska, Montana, Argentina and Morocco.
A comprehensive public news release describing this program was issued on
March 26, 1998 and will be also disseminated to all shareholders with the 1997
Annual Shareholder Report, soon to be released. This program for development,
expansion and financial growth depends on the Company's obtaining adequate
working capital although a substantial portion of the cost will be provided by
the Company's equity securities.
Productive Well Summary
The following table sets forth certain information regarding the
Company's ownership, as of December 31, 1997, of productive wells in the areas
indicated.
<TABLE>
<CAPTION>
Productive Wells
Gas Total
Gross Net Gross Net
<S> <C> <C> <C> <C>
Texas
Baker 39. . . . - - - -
Thompson 23 . . - - - -
Sneed 53. . . . - - - -
Mississippi
Smith (1) . . . 1.0 1.0 1.0 1.0
Pennsylvania (2) 7.0 3.0 7.0 3.0
Totals. . . . 8.0 4.0 8.0 4.0
<FN>
(1) This well is currently shut-in. It is expected that production will not
begin earlier than June 1998.
(2) Assumes approximately 54% working interest remaining after all investor
costs, owner "back-ins" and finder commissions.
</TABLE>
Acreage
The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December 31, 1997
Developed Undeveloped Total
Gross Net Gross Net Gross Net
Lyon Operating 1223 611 -0- -0- 1223 611
Richmond Acreage -0- -0- 21,535 13,211 21,535 13,211
Mississippi 320 320 -0- -0- 320 320
Total 1543 931 21,535 13,211 23,078 14,142
NOTE: Does not include Pennsylvania properties in which Empiric owns working
interest in the well bores only.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no outstanding legal proceedings of a material nature regarding
the business affairs of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to the vote of security holders through
the date of this report.
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Series A Warrants were listed for trading
on the Boston Stock Exchange from October 24, 1994 to December 10, 1996, at
which time the securities were de-listed because of minimum unit prices being
bid on the Boston Stock Exchange. The Common shares are now quoted on the OTC
Bulletin Board market. The following are the high and low bid prices for the
Company's Common Stock as reported by the NASDAQ OTC Bulletin Board for the
periods indicated in 1997 and 1998 regarding the OTC market.
High Low Close
Volume Bid Bid Bid
------- ------ ------- -------
1997
First Quarter 141,600 0.8750 0.31250 0.43750
Second Quarter 167,000 0.5625 0.21875 0.31250
Third Quarter 68,400 0.4375 0.30000 0.37500
Fourth Quarter 840,454 1.4375 0.12500 0.78125
1998
First Quarter Thru 3/27/98 466,740 0.71875 0.34375 0.5625
As of March 26, 1998, there were approximately 597 record and beneficial
holders of the Common Stock and Series A Warrants.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
FINANCIAL RESULTS
The following schedule sets forth in summary form the financial results
of operations of the Company since its inception in October 1992 through
December 31, 1997.
YEAR REVENUES PROFIT/LOSS COMMENTS
1992 Minimal Minimal Only 3 months of operations
1993 $191,958 ($286,454)
1994 $138,012 ($998,929) See Note 1
1995 $ 85,282 ($245,636)
1996 $ 94,798 ($491,446) See Note 2 below
1997 $102,270 ($160,166)
Note 1: Includes a special "non-cash" charge of $830,000 to adjust the total
capitalized value of oil and gas properties to the discounted value of oil and
gas reserves at December 31, 1994 in accord with independent engineering
reserve evaluations. This adjustment is required by the "full cost" method of
accounting as explained in Note 1 of the Financial Statements.
<PAGE>
Note 2: Includes a special "non-cash" charge of $431,000 to adjust the total
capitalized value of oil and gas properties to the discounted value of oil and
gas reserves at December 31, 1996 in accord with independent engineering
reserve evaluations. This adjustment is required by the "full cost" method of
accounting as explained in Note 1 of the Financial Statements. The end of
year 1996 reserve evaluation for the Texas Panhandle properties was
substantially reduced due to the independent engineer's re-evaluation
downward, based upon actual initial potential tests of the wells and actual
production decline curves as extrapolated therefrom. During 1996, the
Management of the Company earned $135,000 of consulting fees from a
non-affiliated company for investment advice and assistance regarding
energy-related opportunities. This amount was included as "other income" in
the financial statements. During 1997, the Company received a $50,000
non-refundable amount for granting the two year option to purchase the
interest in the West Texas Panhandle properties described above. This amount
is included as "Other Income"during the year 1997.
From the outset, operations in West Texas have been adversely affected by
improper drilling, completion and maintenance practices performed by a
non-affiliated operator who was later removed for cause and his interest
purchased by the Company. Although casinghead gas was available from the
first wells drilled and completed in 1992, a suitable gas sales contract was
not available until mid-1995 and no gas was sold until subsequent to that
time.
The Company drilled three unsuccessful wells in 1994/1995 in the West
Texas Panhandle Brent Ranch properties, two of the wells in conjunction with
Texoil, Inc. at a total cost of more than $300,000. Although many other
promising drill sites were available on Company-owned leasehold properties,
the Company has not been able to obtain capital to develop these
opportunities.
During the year 1996, the Company completely eliminated its long term
debt in the total amount of approximately $270,000 through a planned program
which exchanged the long term debt plus other short term deb incurred in the
normal course of business for preferred stock. During 1997 the total
preferred stock valued at approximately $450,000 was exchanged for Common
stock and other considerations, including successful negotiations with
creditors for the reduction of debt. As a "bottom line" effect, the total
debt of the Company was reduced from approximately $455,000 as of December 31,
1996 to December 1997, and stockholders equity increased slightly, not
withstanding a reported book loss for the year 1997 of about $160,000.
Liquidity
As of December 31, 1997, the Company had no long-term debt and an
equity-to-debt ratio of about 16-to-1. On the other hand, the Company had a
small working capital deficit and a need for adequate working capital to take
advantage of its many promising opportunities to achieve growth in earnings
through acquisitions and developmental programs and to produce oil and gas
reserves. Although these ratios improved from comparative numbers at the
beginning of the year (about 4.5-to-1 and $600,000 respectively), the Company
needs and is seeking the infusion of working capital for expanded drilling and
developmental programs for further debt reduction and for acquisition of
producing properties to obtain improved cash flow as set forth in the Planned
Activities section above.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included as part of this Form
10-KSB following the signature page:
Page
Independent Auditors Report as of December 31, 1997 F-1
Balance Sheet - Comparative 1996/1997 F-2
Statements of Operations - Comparative 1996/1997 F-3
Statements of Cash Flow F-4
Statement of Changes in Stockholders' Equity F-5
Notes to Financial Statements F-6 thru 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company has three executive officers and three directors, James
J. Ling, Chairman and Chief Executive Officer, Renn Rothrock, Jr., President
and Chief Operating Officer and Clyde E. Skeen, Secretary, Treasurer and Chief
Financial Officer. Following is a brief summary of the business background
and experience of Messrs. Ling, Rothrock and Skeen:
James J. Ling. James J. Ling, age 75, is a co-founder of the Company and
has been Chairman of the Board, Chief Executive Officer and a Director since
inception in September, 1992. Since 1985, Mr. Ling has been President of Hill
Investors, Inc., a company organized to hold oil and gas investments and to
render consulting services. Mr. Ling founded Ling Electronics in 1955 and
through a series of mergers and acquisitions, which included Temco Aircraft
Corporation, Chance Vought, Wilson & Co., Braniff Airlines, Jones & Laughlin,
and National Car Rental, guided the conglomerate, LTV, to a position among the
largest industrial companies in the nation. Mr. Ling resigned his positions
with LTV in 1971 and disposed of all his stock in the Company.
R. Renn Rothrock, Jr. R. Renn Rothrock, age 55, has been President of
the Company since December 1997. Mr. Rothrock served as President of both
Hunter Gas Gathering, Inc. and Gruy Petroleum Management Co. and Executive
Vice President of Magnum Hunter Production, Inc. from January 1994 to
December 1997. He served as Executive Vice President and Chief Operating
Officer of Gruy from May 1988 until January 1994. Mr. Rothrock was
Executive Vice President and General Manager of Gruy Engineering Corporation
from 1986 until May 1988. Over his 33-year career, Mr. Rothrock has also
served as a reservoir engineer and operations research engineer at Skelly Oil
Company and as an area engineer at Amerada Petroleum Corporation; the
Engineering Editor of Petroleum Engineer International Magazine; Vice
President and Energy Manager of the First National Bank of Mobile, Alabama;
Executive Vice President of Energy Assets International Corporation, a public
company that financed oil and gas ventures; and the producer and operator of
his own gathering and transportation system. Mr. Rothrock earned a BS degree
in Petroleum Engineering and an MS degree in Engineering from the University
of Oklahoma. He is a member of the Society of Professional Engineers, the
National Society of Professional Engineers, the National Academy of Forensic
Engineers and the Texas Society of Professional Engineers. Mr. Rothrock is a
registered Professional Engineer in Texas and Oklahoma.
<PAGE>
Clyde E. Skeen. Clyde E. Skeen, age 81, is a co-founder of the Company
and has been a Director, Secretary and Treasurer of the Company since November
1992. From January, 1987 to June, 1989, Mr. Skeen was Executive Vice
President of Bell Textron, Inc. in charge of the V-22 Osprey Program of Bell
Helicopter Company and Boeing Vertol Company. From 1979 until his retirement
in 1985, Mr. Skeen was Senior Vice President of The Boeing Company, in charge
of all government business operations and a member of Boeing's senior
management council. From 1985 to 1987, Mr. Skeen was a full-time consultant
to Boeing on a variety of government and management issues. Mr. Skeen joined
Boeing in 1940 upon earning a Bachelor's Degree in Business Administration
from Pittsburgh State College, Kansas, and from 1949 to 1960 he held various
corporate officer positions including Controller, Vice President and Director
of Program Management for Boeing's space and intercontinental ballistic
missile programs. In 1960, Mr. Skeen joined Temco Aircraft Corporation as a
Director, Executive Vice-President and General Manager and was instrumental in
the formation of Ling-Temco-Vought, Inc. (LTV) in 1961. In 1964, Mr. Skeen
was elected President of LTV, a position he held until his resignation in
1971. Mr. Skeen is also President of Clyde Skeen Business Consultants, Inc.,
a private business consulting firm, a majority of the stock of which is owned
by Mr. Skeen.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
each of its executive officers for services rendered to the Company in all
capacities during the fiscal year ended December 31, 1996 and 1997.
Summary Compensation Table
Name/Position Fiscal Year Salary (1)(2)(3) Bonus*
James J. Ling(1) 1996 $90,000 -0-
1997 $90,000 -0-
Renn Rothrock, Jr. 1997 $25,000 -0-
Clyde E. Skeen(2) 1996 $42,000 -0-
1997 $42,000 -0-
*See Employment Contract Summary.
(1) Mr. Ling does not receive compensation directly from the Company. Under
the terms of a management consulting agreement entered into between the
Company and Hill Investors, Inc, Hill provides management consulting services
for which the Company pays Hill a monthly fee of $7,500.
(2) Mr. Skeen does not receive compensation directly from the Company, but is
paid through Clyde Skeen Business Consultants, Inc., which is paid by the
Company.
(3) Because of the Company's working capital condition, neither Mr. Ling nor
Mr. Skeen has received cash compensation through their respective associated
companies for years 1995, 1996 and 1997. They have received notes payable,
which are or have been recorded on the books of the Company.
In the opinion of Mr. Ling and Mr. Skeen, the fact that they are
compensated through consulting contracts rather than directly from the Company
has no adverse effect on their duties and fiduciary obligations to the Company
as officers and directors. Both Mr. Ling and Mr. Skeen devote substantially
all of their time to the business of the Company and are not engaged in
significant outside activities.
Mr. R. Renn Rothrock, Jr. is employed under the term of an Employment
Agreement effective December 1, 1997 for a period of five years from the
original effective date. The term of the contract will automatically extend
for an additional period of five years from each full year anniversary date
unless the Company notifies Mr. Rothrock to the contrary. Mr. Rothrock may
terminate the contract at the third anniversary from the original effective
date by giving six months notice to the Company.
The employment contract provides for a minimum annual salary of $120,000
plus 50% of the fees billed to outsiders for Mr. Rothrock's consulting or
expert witness services. Mr. Rothrock will also be entitled to a cash bonus
of up to 75% of his minimum annual salary based upon his performance in
obtaining goals to be established yearly by the Compensation Committee. The
Company has issued to Mr. Rothrock, or his assignee, 300,000 shares of the
Common stock of the Company at $.05 per share, such shares to be registered as
soon as possible. Additional incentive stock options will be granted to Mr.
Rothrock based upon the attaining or exceeding of twelve month operating
income goals.
Mr. Rothrock will be granted certain fringe benefits including a car
allowance, participation in health, dental and group life insurance plans and
will be reimbursed for reasonable and supportable expenses incurred in the
Company's interest.
1994 Stock Option Plan
The Board of Directors of the Company, on January 10, 1994, adopted a
stock option plan (the "Plan") to provide for the grant of non-qualified stock
options to employees and advisors of the Company. A total of 250,000 shares
has been authorized and reserved for issuance under the Plan, subject to
adjustment to reflect changes in the Company's capitalization in the event of
a stock split, stock dividend or similar event. The Plan is administered by
the Board of Directors who has the sole authority to interpret the Plan, to
determine the persons to whom options will be granted, the number of options
granted, the exercise price, duration and other terms of the options. On
January 10, 1994 the Board of Directors granted the following options, subject
to approval of the Plan by the stockholders of the Company: Hill Investors,
Inc., 75,000 shares; Clyde Skeen Business Consultants, Inc., 40,000 shares.
All options are exercisable at an exercise price of $1.00 per share. The
options granted to Hill Investors, Inc. and Clyde Skeen Business Consultants
become exercisable 1/12 each month, cumulatively beginning 30 days after
grant. No option is exercisable after five years from the date of grant
unless earlier terminated because of death, disability, termination of
employment or cessation of services to the Company. Stockholders of the
Company approved the Plan on March 29, 1994.
During 1997 the Board of Directors authorized an additional 250,000
shares to be set aside for issuance under the Plan bringing to 500,000 the
total shares authorized for the Stock Option Plan and, on that date, also
awarded additional stock options as follows:
<PAGE>
a. Five (5) year option granted to Clyde Skeen Business Consultants,
Inc. to purchase up to 40,000 shares at a purchase price of $1.00 per share;
b. Five (5) year option granted to Hill Investors, Inc. to purchase
up to 75,000 shares at a purchase price of $1.00 per share.
<PAGE>
c. Five (5) year option granted to Renn Rothrock to purchase up to
300,000 shares at a purchase price of $1.00 per share.
The above options are subject to all the same conditions and covenants of the
original Stock Option Plan dated January 10, 1994.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock and
Series A Warrants held by the principal Officers and Directors of the Company
as of December 31, 1997:
<TABLE>
<CAPTION>
Name Shares Beneficially Owned % of Class
Common Warrants Common Warrants
<S> <C> <C> <C> <C>
James J. Ling(1). . . 781,105 18,095 13.3% 7.2%
Clyde E. Skeen(2) . . 305,750 28,250 5.2% 11.2%
Renn Rothrock, Jr.(3) 425,000 --- 7.3% 0%
<FN>
(1) Includes 374,525 shares of Common Stock held by the Dorothy Ruth Ling
Trust, of which Mr. Ling is Trustee; and, 406,580 shares of Common Stock held by
Hill Investors, Inc., of which Mr. Ling is President.
(2) Clyde Skeen Business Consultants, Inc. is a corporation, of which the
majority of the stock is owned by Mr. Skeen.
(3) Includes 425,000 shares of Common Stock held by Susan J. Rothrock, wife
of Renn Rothrock, Jr.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a three year management consulting agreement
with Hill Investors, Inc. ("Hill") dated October 1, 1992, whereby Hill
provides the services of Mr. Ling as Chairman and Chief Executive Officer of
the Company for which Hill receives a monthly fee of $7,500.00. In the event
of the death or disability of Mr. Ling during the term of the agreement, the
agreement shall automatically terminate or, in the case of a reorganization of
the Company during the term of the agreement, the agreement may be terminated
at Mr. Ling's option. Upon any such termination for the foregoing reasons
such payments shall continue for a period of 36 months from the date of such
termination. Mr. Ling presently devotes the majority of his working time and
efforts to the business and affairs of the Company and expects to continue
doing so for the foreseeable future. Under the terms of the agreement the
Company is obligated to provide to Hill suitable office facilities and to
reimburse it for expenses incurred in connection with Hill's or Mr. Ling's
services to the Company, including, without limitation, the cost of providing
an automobile and health and life insurance for Mr. Ling. Pursuant to the
agreement, Hill is obligated to certain covenants of confidentiality and
non-competition and is entitled to receive the benefits of indemnification
against damages and cost of defense of litigation or claims resulting from
certain acts in the course of performance of its or Mr. Ling's management
duties as provided for in the Company's By-Laws. The Company has renewed the
agreement with Hill until October 1, 1998 on the same terms and conditions.
This contract will automatically be extended for an additional period of three
years from each full year anniversary date unless the Company notifies Mr.
Ling to the contrary.
Hill is a Delaware corporation which currently owns 406,580 shares or
about 8 percent of the Company's outstanding Common Stock. Mr. Ling is the
sole officer and director of Hill, and under existing SEC regulations, the
beneficial owner of 100 percent of its outstanding capital stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
/s/ James J. Ling
_______________________________
James J. Ling
Chairman and Chief Executive
Officer
/s/ R. Renn Rothrock, Jr.
_______________________________
R. Renn Rothrock, Jr.
President and Chief Operating
Officer
/s/ Clyde E. Skeen
_______________________________
Clyde E. Skeen
Secretary and Treasurer and
Chief Financial Officer-1080
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF EMPIRIC ENERGY, INC.
We have audited the accompanying balance sheets of Empiric Energy, Inc. (a
Delaware corporation) as of December 31, 1997, and 1996, and the related
statements of operations, changes in stockholders' equity, and cash flows for
each of the years then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Empiric Energy, Inc. as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the year ended December 31,
1997, the Company incurred a net loss of $160,164. Future working capital
requirements are dependent on the Company's ability to restore and maintain
profitable operations, to restructure it's financing arrangements, and to
continue it's present short-term financing, or obtain alternative financing as
required. It is not possible to predict the outcome of future operations or
whether the necessary alternative financing may be arranged, if needed. Those
conditions raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Thomas O. Bailey and Associates
- ----------------------------------------
Thomas O. Bailey and Associates
Certified Public Accountants
Dallas, Texas
March 4, 1998
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
Balance Sheet
December 31, December 31,
1997 1996
<S> <C> <C>
ASSETS
------
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,811 $ 1,084
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 63,225 69,217
Notes receivable-Texoil. . . . . . . . . . . . . . . . . . . . . . . . . 31,000 31,000
------------ ------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . 113,036 101,301
------------ ------------
Oil and gas properties, using full cost accounting
Properties being amortized . . . . . . . . . . . . . . . . . . . . . . . 3,692,500 3,894,172
------------ ------------
Less accumulated depreciation, depletion, amortization and impairment
Net oil and gas properties . . . . . . . . . . . . . . . . . . . . . . 1,555,250 1,535,833
------------ ------------
2,137,250 2,358,339
------------ ------------
Other assets
Other property and equipment, at cost,
less accumulated depreciation
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,133
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 2,076 2,742
------------ ------------
2,076 6,875
------------ ------------
TOTAL ASSETS
$ 2,252,362 $ 2,466,515
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------
Current Liabilities
- -------------------------------------------------------------------------
Accounts payable
Due to stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,413 $ 257,713
Short-term notes payable . . . . . . . . . . . . . . . . . . . . . . . . 17,981 22,627
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . 30,000 174,850
------------ ------------
$ 127,394 $ 455,190
------------ ------------
Stockholder's Equity
Preferred stock, $100 par value;
authorized 2,000,000 shares;
none outstanding at December 31, 1997,
4,488 outstanding at December 31, 1996
Common stock, $0.01 par value; 20,000,000. . . . . . . . . . . . . . . . - 448,803
shares authorized; 5,859,776 and
4,330,7000 outstanding December 31, 1997
and December 31, 1996, respectively
58,598 43,307
Additional paid-in capital
Retained deficits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,286,661 3,579,342
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . (2,220,291) (2,060,127)
------------ ------------
2,124,968 2,011,325
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 2,252,362 $ 2,466,515
============ ============
The Notes to Financial Statements are an integral part of this statement.
</TABLE>
<PAGE>
EMPIRIC ENERGY, INC.
Statements of Operations
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues
Oil and gas sales. . . . . . . . . . . . . . $ 102,270 $ 94,978
---------- ----------
Total revenues. . . . . . . . . . . . . 102,270 94,978
---------- ----------
Expenses
Production . . . . . . . . . . . . . . . . . 70,812 86,087
Depreciation, depletion, and amortization. . 19,417 22,969
General and administrative . . . . . . . . . 335,591 196,038
Interest . . . . . . . . . . . . . . . . . . 6,839 36,938
Full cost ceiling adjustment . . . . . . . . - 430,993
Total expenses. . . . . . . . . . . . . 432,659 773,025
---------- ----------
Other Income
Dividend income. . . . . . . . . . . . . . . 45,000 45,000
Interest income. . . . . . . . . . . . . . . 3,100 3,100
Consulting fees. . . . . . . . . . . . . . . - 135,000
Sale of option . . . . . . . . . . . . . . . 50,000 -
Other. . . . . . . . . . . . . . . . . . . . - 3,501
98,100 186,601
---------- ----------
(Loss) before income taxes and extraordinary item (232,289) (491,446)
Provision for income taxes. . . . . . . . . . . . - -
(Loss) before extraordinary item. . . . . . . . . (232,289) (491,446)
<FN>
Extraordinary item
Gain from extinguishment of debt net
of income tax effect 72,125 -
NET LOSS $(160,164) $(491,446)
Primary earnings per share:
Before extraordinary item $(0.05) $ (0.12)
Extraordinary item. . . . . . . . . . . . . . . . . $ 0.01 $ (0.12)
After extraordinary item. . . . . . . . . . . . . . $(0.04) $ 0.24
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
Statements of Cash Flows
December 31,
1997 1996
-------------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss. . . . . . . . . . . . . . . . . . . . $ (160,164) $(491,446)
Adjustments to reconcile net loss to net
cash provided by operating activities
DD&A -oil and gas properties . . . . . . . 19,417 22,969
Write-down as result of ceiling test . . . - 430,993
Depreciation and amortization - other. . . 5,530 7,605
(Increase) decrease in:
Accounts receivable-trade . . . . . . 5,992 (69,219)
Prepaid expenses
Other assets. . . . . . . . . . . . . (731)
Increase (decrease) in:
Accounts payable and accrued expenses (182,946) 4,676
Net cash provided by operating activities . . (312,902) (94,422)
Cash flows from investing activities
Capital expenditures . . . . . . . . . . . . . . (18,328) (227,878)
Net cash used by investing activities. . . . . (18,328) (227,878)
Cash flows from financing activities
Short-term notes payable . . . . . . . . . . . . (109,850) 64,850
Retirement of senior notes . . . . . . . . . . . - (267,520)
Liquidation of long-term note. . . . . . . . . . (35,000) -
Proceeds from issuance of common stock 74,051
Proceeds from issuance of preferred stock. . . . 273,807 448,803
Proceeds from sale of oil and gas properties . . 220,000 -
Net cash provided by investing activities . . . 348,957 320,184
Net increase in cash and cash equivalents. . . . . . 17,727 (2,116)
Cash and cash equivalents, at beginning of period. . 1,084 3,200
Cash and cash equivalents, at end of period. . . . . $ 18,811 $ 1,084
Interest paid during the year . . $6,599 $ 30,443
Income taxes paid during the year $ - $ -
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
ll
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
Statement of Changes in Stockholders' Equity
Preferred Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings
---------------- ---------- ------------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995. . . . . . . . . - - 4,055,500 40,555 3,508,043 (1,568,681)
Changes 1996:
Common Stock issued for debt or by purchase . 4,488 448,803 275,200 2,752 71,299
Net loss for the year ended December 31, 1996 - - - - - (491,446)
Balance at December 31, 1996. . . . . . . . . 4,488 $ 448,803 4,330,700 $43,307 $3,579,342 $(2,060,127)
Conversion of Preferred Stock to Common Stock (4,488) (448,803) 448,803 4,488 444,315 -
Common Stock issued for debt or by purchase . - - 1,080,273 10,803 263,004 -
Net loss for the year ended December 31, 1997 - - - - - (160,164)
- $ - 5,859,776 $58,598 $4,286,661 $(2,220,291)
Total
Stockholders'
Equity
---------------
<S> <C>
Balance at December 31, 1995. . . . . . . . . $ 1,979,918
Changes 1996:
Common Stock issued for debt or by purchase . 522,854
Net loss for the year ended December 31, 1996 (491,446)
Balance at December 31, 1996. . . . . . . . . $ 2,011,325
Conversion of Preferred Stock to Common Stock -
Common Stock issued for debt or by purchase . 273,807
Net loss for the year ended December 31, 1997 (160,164)
$ 2,124,968
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company's operating activities are related to exploration,
development and production of oil and natural gas in the United States. The
Company follows the full cost method of accounting for oil and gas properties.
Under this method, all costs related to the acquisition, exploration for and
development of oil and natural gas reserves are capitalized and accumulated in
a single cost center representing the Company's activities undertaken
exclusively in the United States. Such costs include lease acquisition cost,
geological and geophysical expenditures, lease rentals on undeveloped
properties, costs of drilling both productive and non-productive wells and
general and administrative expenses directly related to exploration and
development activities. Proceeds received from disposals are credited against
accumulated costs except when the sale represents a significant disposal of
reserves in which case a gain or loss is recognized. Abandonment of properties
is accounted for as adjustments of capitalized costs with no loss recognized.
The costs capitalized, including production equipment, are depreciated or
depleted on the unit-of-production method, based on proved oil and natural gas
reserves as determined by independent petroleum engineers. Oil and natural gas
reserves are converted to equivalent units based upon the relative energy
content, which is six thousand cubic feet of natural gas to one barrel of
crude oil. Depreciation of office and other property is computed generally
using the straight-line method over the useful lives of the assets.
The capitalized costs less accumulated depletion, depreciation and
deferred taxes are limited to an amount which is not greater than the
estimated future net revenue from proved reserves using period-end prices less
estimated future production-related general and administrative expenses,
financing costs and income taxes, plus the cost (net of impairments) of
undeveloped properties.
Provision for Uncollectible Receivables
The Company uses the allowance method to account for uncollectible
accounts receivable. The allowance for doubtful accounts is based on prior
year's experience and management's analysis of possible bad debts. Bad debt
recoveries are charged against the allowance account as realized. As of
December 31, 1997 and 1996 the allowance was $50,000 and $0, respectively.
Oil and gas properties not subject to depreciation, depletion and amortization
For oil and gas development activities in which a determination has not
been made about additional reserves that should be classified as proved or the
well or wells have been determined to be nonproductive the associated costs
are not included in the full cost pool for purposes of computing amortization.
In 1997 and 1996 there were no properties where a determination had not been
made.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts during the reporting period and
at the date of the financial statements. Actual results could differ from
those estimates.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The fair value of all reported assets and liabilities which represent
financial instruments (none of which are held for trading purposes)
approximate the carrying value of such amounts.
Cash Flows Presentation
For purposes of the Statement of Cash Flows, cash equivalents include
time deposits, certificates of deposit and all liquid debt instruments with
original maturities of three months or less.
Earnings Per Share
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. The number of shares used in
the computations were 4,900,617 in 1997 and 4,162,733 in 1996. For 1996 fully
diluted earnings per share, consisting of the weighted average of common
shares outstanding plus the fully converted preferred stock, are not presented
because the effect would be anti-dilutive.
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements the Company has
incurred recurring losses from operations and has a deficit working capital.
The Company's current net operating revenues are not sufficient to provide
adequate cash flow required to pay all of the Company's administrative
expenses. For this reason the Company must rely on short-term borrowing and
equity financing. Management has prepared a Private Placement offering to
qualified investors acceptable to the Company. As of March 15, 1998 4.5 units
of this offering have been sold in the amount of $112,500 which such funds
will be used for working capital.
NOTE 3 - RELATED PARTY TRANSACTIONS
Hill Investors, Inc. ("Hill"), an affiliate of Mr. Ling, has entered into
a three year management consulting agreement with the Company whereby Hill
provides certain management consulting services, receiving therefor a monthly
fee of $7,500. In the event of the death or disability of Mr. Ling or a
reorganization of the Company occurs during the term of the agreement, the
agreement shall automatically terminate (in the case of Mr. Ling's death or
disability) or, in the case of a reorganization, the agreement may be
terminated at Mr. Ling's option. Upon any such termination for the foregoing
reasons such payments shall continue for a period of 36 months from the date
of such termination. Mr. Ling presently devotes the majority of his working
time and efforts to the business and affairs of the Company and expects to
continue doing so for the foreseeable future. Under the terms of the
agreement the Company is obligated to provide to Hill suitable office
facilities and to reimburse it for expenses incurred in connection with Hill's
or Mr. Ling's services to the Company including without limitation, the cost
of providing an automobile and health and life insurance for Mr. Ling.
Pursuant to the agreement, Hill is obligated to certain covenants of
confidentiality and non-competition and is entitled to receive the benefits of
indemnification against damages and cost of defense of litigation or claims
resulting from certain acts in the course of performance of its or Mr. Ling's
management duties as provided for in the Company's by-laws. Hill provided
consulting services at a cost of $90,000 in 1997 and $90,000 in 1996.
<PAGE>
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
Contemporaneously with the formation of the Company in October, 1992,
Hill was issued 1,750,000 shares of the Company's common stock (the "Shares")
in consideration for Hill's: (i) assignment to the Company of its working
interest in the Smith Well in Holmes County, Mississippi; (ii) causing other
unaffiliated persons who owned substantially all of the remaining working
interest in the Smith Well to assign their interests in the well to the
Company in consideration for Hill's transfer to them of a total of 236,422 of
the Shares; and (iii) making available to the Company the opportunity to enter
into the farmout agreement which had been negotiated by Hill with Richmond
Petroleum, under which the Company subsequently earned its interest in the
Richmond acreage. Of the Shares assigned by Hill to owners of interests in
the Smith Well, 29,400 shares were transferred to Clyde Skeen Business
Consultants, Inc., the majority of the stock of which is owned by Clyde E.
Skeen, Secretary, Treasurer and a Director of the Company. Additionally, for
services rendered in the formation of the Company, Hill assigned to three
persons a total of 87,500 of the Shares, including 50,000 shares to Clyde
Skeen Business Consultants, Inc. Clyde Skeen Business Consultants, Inc.
provided consulting services at a cost of $42,000 in 1997, and $42,000 in
1996.
As a result of the Texoil transaction described in Note 4 below, the
Company now owns approximately 23 percent of Texoil Energy Limited's common
stock and 100 percent of the 6 percent preferred stock. If the 6 percent
preferred stock were converted into Texoil Energy Limited's common stock,
Empiric would own approximately 34 percent of Texoil's outstanding common
stock. The Company has no plans to convert the preferred stock into common
stock. In addition, the President of the Company is now a director of Texoil
Energy Limited.
NOTE 4 - ACQUISITION AND SALE OF OIL AND GAS PROPERTIES
In 1992 the Company acquired undivided interests in a producing well
located in Mississippi. This well has been shut-in for some time. The Company
has reached a full settlement and accommodation with the former the former
operator who had incurred costs in connection with a rework program of the
well. The Company plans to resume production of the well as soon as a system
for satisfactory removing impurities can be developed. This property was
recorded at its fair market value of $1.6 million when it was acquired. This
value was based on the discounted value of estimated reserves of the property
less a provision for all claims and encumbrances which may be assessed against
the property as estimated by management. Independent professional engineers
determined the estimated recoverable reserves. In exchange for this property
and other assets, including the opportunity to acquire the working interest in
the Panhandle Texas properties, and for obtaining the initial financing to
form the company the Company issued 1.75 million shares of its common stock
and $125,000 of its convertible senior notes.
In 1993 the Company acquired an additional 28.5 percent undivided
interest in property in the Texas Panhandle. This additional interest was
acquired for the assumption of the debts of the former operator and included a
substantial amount of supplies. The amount of the debts assumed plus other
expenditures related to the transaction totaled approximately $450,000. Part
of this additional interest in the property was sold shortly thereafter for
$450,000. The supplies were used on the Company's projects in the Panhandle.
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 9,300 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
<PAGE>
NOTE 4 - ACQUISITION AND SALE OF OIL AND GAS PROPERTIES (Continued)
Common Stock. In consideration, the Company received $128,750 cash and a
$121,250 note due in August 1995, 1,000,000 shares of Texoil Common stock and
$750,000 principal amount of 6 percent preferred stock, convertible into
750,000 shares of Texoil Common Stock. The stock of Texoil is valued at zero
amount on the financial statements.
As of October 1, 1997, the Company sold its producing properties on the
Baker 39 lease in the Texas Panhandle for $220,000 cash and granted an option
to sell its leasehold interest in approximately 13,500 acres for $540,000 of
which the Company's net interest is approximately $378,000. The balance of the
interest has been pledged to cover prior indebtedness. The Company received
$50,000 cash for the option, which is non-refundable. The optionee has the
right to exercise the option at any time on or before October 11, 1998 at
which time at least 50 percent of Empiric's leasehold interest must be
purchased. If the optionee purchases more than 50 percent but less than 100
percent of the Company's leasehold interest the option period for any
remaining interest will be extended to October 1, 2000. The proceeds from the
sale of the producing properties ($220,000) has been credited against the
carrying value of the property account. See Note 1.
On December 21, 1995, the Company entered into an agreement with Lyon
Operating Co., Inc. for the purchase of an undivided 72 percent of the
leasehold or working interest in approximately 1,223 acres of land situated in
Clay and Jack Counties, Texas. For this interest the Company paid $30,000
cash, a promissory note for $35,000 with interest at eight percent (8%)
payable on or before March 21, 1996, and 20,000 shares of the Company's stock.
The Company is currently in default in payment of this note. By mutual
agreement the promissory note has now been canceled and the Company's interest
in these properties has been released.
NOTE 5 - NOTES PAYABLE AND CURRENT PORTION OF LONG-TERM DEBT
<TABLE>
<CAPTION>
Notes payable consists of:
1997 1996
<S> <C> <C>
Bank note due on demand with interest at 12%. . . - 100,000
Lyon Operating Co., Inc. dated December 21, 1995
Due March 21, 1996 with interest at 8% . . . . . - 35,000
Other notes payable, due on demand with
Interest at 8% . . . . . . . . . . . . . . . . 30,000 39,850
Total . . . . . . . . . . . . . . . . . . . . . . $ - $174,850
Less portion due within one year. . . . . . . . . 30,000 174,850
Total long-term debt. . . . . . . . . . . . . . . $ - $ -
</TABLE>
On December 31, 1995, the Company issued $267,520, in senior secured
notes payable bearing interest at 8%, payable each six (6) months. The full
amount of the principal was due thirty-six (36) months from that date. The
notes were issued to two stockholders of the Company. On October 1, 1996,
these notes were exchanged for the Company's preferred stock.
The Company extinguished certain accounts payable and notes by agreement
resulting in the extraordinary gain reflected in income for the year.
The Company was in default on the note due to Lyon Operating Co. at
December 31, 1996. The note has since been canceled. See Note 4.
NOTE 6 - LEASES
The Company leases its office space under a sub-lease agreement entered
into in 1997 and expiring May 1998. The Company's commitment for 1998 is
$10,385. The Company expects to renew its lease at the termination date.
During the year the Company paid $22,342.25 under this agreement.
NOTE 7 - INCOME TAXES
The Company's deferred tax assets relate principally to non-deductible
expenses and to net operating loss carryforward. Deferred tax liabilities
relate to accelerated depreciation on fixed assets and to expense deductible
for tax purposes but not for financial statement purposes.
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax assets: . . . . . 1997 1996
----------- -----------
Temporary differences . . . . . $ 1,345,631 $ 1,345,631
Net operating loss carryforward 2,348,630 2,176,145
3,694,261 3,521,776
Deferred tax liabilities: . . . (3,276,193) (1,860,037)
Net deferred tax assets . . . . 418,068 1,661,739
Asset valuation reserve . . . . (418,068) (1,661,739)
Deferred tax provision
$ - $ -
</TABLE>
The Company believes that the tax benefit or asset computed under FASB
109 is not likely to be realized and therefore is fully reserved.
The Company has available net operating loss carryforward to reduce
future taxable income and income taxes, which will expire as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31, 2007 $ 505,161
December 31. 2008 823,485
December 31, 2009 627,142
December 31, 2010 220,357
December 31, 2011 172,485
December 31, 2012 1,601,927
-----------
$3,950,557
===========
<FN>
Due to the Net Operating Loss Carryforward shown in the table above no
provision for current income taxes was recorded for 1997 or 1996.
</TABLE>
<PAGE>
NOTE 8 - WARRANTS
At December 31, 1997 and 1996 252,266 warrants were outstanding at an
exercise price of $4.25 per share, subject to certain adjustments until June
14, 1999.
NOTE 9 - LEGAL PROCEEDINGS
In some instances the Company has entered into installment payout
arrangements with certain creditors to retire the related indebtedness
involved and in some cases the Company has entered into agreed judgements
with forbearance to permit time for raising funds to satisfy such
claims. In some of these cases the Company has defaulted on such agreements.
All of such underlying obligations are reflected in the records of the Company
as current liabilities.
The Company is not aware of any environmental liabilities or problems
associated with any of its properties. The Company has settled environmental
claims for clean-up in the past.
NOTE 10 - OIL AND GAS DATA
The following tables provide additional information about the Company's
oil and gas development and production activities.
Capitalized Costs
Following is a summary of costs incurred in oil and gas property acquisition
and development activities:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Unproved properties:
Acquisitions. . . $ - $ -
Developments. . . . 18,328 227,878
Proved Properties:
Acquisitions. . . . - -
Developments. . . . - -
------- --------
$18,328 $227,878
======= ========
<FN>
Following is a summary of oil and gas producing activities for the year ended
December 31, 1997 and 1996: (excluding corporate overhead and financing costs)
</TABLE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Oil and gas sales. . . . . . . . . . . . . . . . . . . . . $102,270 $ 94,978
Production costs . . . . . . . . . . . . . . . . . . . . . (70,812) (86,087)
Depreciation, depletion and amortization . . . . . . . . . (19,417) (22,969)
----------- --------
12,041 (14,078)
Income tax expense . . . . . . . . . . . . . . . . . . . . - -
----------- --------
Results of operations for oil and gas producing activities $ 12,041 $(14,078)
=========== ========
</TABLE>
Reserve Information (Unaudited)
The following estimates of proved oil and gas reserve quantities and
related standardized measure of discounted net cash flow are estimates by
independent petroleum engineers, 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.
Reserve Information Unaudited (Continued)
<PAGE>
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 following table is a summary of the reserve quantity information
(oil reserves are stated in barrels and gas reserves are stated in thousand
cubic feet):
<TABLE>
<CAPTION>
At December 31,
----------------
1997 1996
---------------- ----------
Oil Gas Oil Gas
(Bbls) (MCF) (Bbls) (MCF)
<S> <C> <C> <C> <C>
Proved developed and undeveloped:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . 122,326 2,697,560 240,542 2,992,460
Revisions of previous estimates. . . . . . . . . . . . . . . . . . . ( - ) ( - ) (113,780) (294,626)
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . . ( - ) 354,032 ( - )
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,748) (11,594) (4,436) (274)
Sales of reserves in place . . . . . . . . . . . . . . . . . . . . . (26,856) (72,348) ( - ) ( - )
---------------- ---------- --------- ----------
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . 91,722 2,968,650 122,326 2,697,560
================ ========== ========= ==========
Proved Developed Reserves:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . 98,736 2,640,616 98,736 2,636,097
---------------- ---------- --------- ----------
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . 91,722 2,966,650 99,667 2,640,616
================ ========== ========= ==========
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
</TABLE>
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
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.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Future cash inflows . . . . . . . . . . . . . . . . . . . $ 4,315,287 $ 4,656,234
Future production and development costs. . . . . . . . . (776,587) (998,984)
Future income tax expense . . . . . . . . . . . . . . . . - -
Future net cash flows . . . . . . . . . . . . . . . . . . 3,538,700 3,657,250
10% Annual discount for estimated timing of cash flows. . (1,260,741) (1,295,911)
Standardized measure of discounted future net cash flows $ 2,277,959 $ 2,361,339
</TABLE>
<PAGE>
NOTE 11 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
The following table presents summary
information on a quarterly basis for 1997 and 1996. (Unaudited)
<S> <C> <C> <C> <C>
1997 . . . . . . . . March 31 June 30 September 30 December 31
Revenues . . . . . . $ 31,885 $32,611 $ 26,714 $ 11,060
Expenses . . . . . . $(86,237) $(57,251) $ (86,333) $ (202,838)
Other income . . . . $ 41,014 $51,683 $ ( 2,880) $ 80,408
Net income . . . . . $ (13,338) $ 27,043 $ (62,499) $ (111,370)
Net income per share $ (0.010) $ (0.006) $ (0.013) $ (0.020)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 . . . . . . . . March 31 June 30 September 30 December 31
Revenues . . . . . . $ 20,567 $ 22.663 $ 19,051 $ 32,697
Expense. . . . . . . $ (74,362) $(100,389) $ (175,790) $ (422,484)
Other income . . . . $ 11,250 $ 11,250 $ 11,250 $ 152,851
Net income . . . . . $ (42,545) $ (66,476) $ (145,489) $ (236,936)
Net income per share $ (0.01) $ (0.01) $ (0.04) $ (0.057)
</TABLE>
