<TABLE>
<CAPTION>
<S> <C>
EMPIRIC ENERGY, INC.
(Name of small business issuer in its charter)
<S> <C>
TEXAS
(State or other jurisdiction of 75-2455467
incorporation or organization) (IRS Employer Identification No.)
12750 MERIT DRIVE, SUITE 750
DALLAS, TEXAS 75251
(Address of principal executive offices) (Zip Code)
(972) 387-4100
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class on which registered Name of each exchange
COMMON STOCK ($.01 PAR VALUE) OVER THE COUNTER
</TABLE>
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
----
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes x No
----
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
Index to Form 10-KSB
<S> <C>
PART I PAGE #
Item 1. Description of Business 1
Item 2. Description of Property 1
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters 4
Item 6. Management Discussion and Analysis of Financial
Condition and Results of Operations 4
Item 7. Financial Statements 5
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 5
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 7
Item 10. Executive Compensation 8
Item 11. Security Ownership of Certain Beneficial Owners and Management 10
Item 12. Certain Relationships and Related Transactions 10
Item 13. Exhibits and Reports on Form 8-K 11
SIGNATURE PAGE. 11
</TABLE>
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"), Holmes County, Mississippi, Pennsylvania and South Texas.
On March 21, 1996, the Company signed an agreement with Westar Energy,
Inc. ("Westar") to take part in a joint venture drilling program to be drilled
in "segments". The number of wells to be drilled in each "segment" were to be
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.
In April 1998 the Company acquired 89 producing wells and four newly
drilled wells located on approximately 18,000 acres in Zavala County, Texas.
Initial production rates and tests were very promising and the Company expected
to utilize a financial commitment, also received in April, to begin a drilling
program on the remaining acreage. Unfortunately, the investor was unable to
fulfill his commitment and the drilling program did not materialize. During the
year, rapid production declines and falling prices required several wells to be
shut-in until prices rebound and one well to be plugged and abandoned.
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 Zavala and Frio Counties,
Texas, as well as in Indiana and Westmoreland Counties, Pennsylvania.
HOLMES COUNTY, MISSISSIPPI. The Company acquired all of the working
interest of the Thomas E. Smith 9-2 Well No. 1 (the "Smith Well"), a producing
gas well in Mississippi. The Smith well is a gas well completed at 11,800 ft.
in the Smackover Formation in the Thornton Smackover Field. Although not
currently producing, the well produced gas and condensate on a test run through
a nearby gas plant at rates up to 800 Mcf of gas and 30 Bbls of condensate per
day. 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 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.
In October 1997, the Company sold all its working interest only in the
Baker lease 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 for total consideration of
approximately $230,000. Should the option be exercised, the Company would
receive an additional $500,000.
PENNSYLVANIA PROPERTIES. (See Westar Energy, Inc. above.)
SOUTH TEXAS PROPERTIES. The Company owns interests, varying from 33% to
51%, in 12 producing wells in Zavala County, Texas. The gas is gathered by Frio
Pipeline Company and is sold into markets and delivered into the Houston Ship
Channel area. All production is shallow, less than 3,000 feet and there are
additional locations on the properties available for drilling.
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 is negotiating agreements in principal to acquire interests in
producing wells and leasehold acreage with further development possibilities.
The Company also has an option agreement to participate in the exploration and
development of potential drilling prospects utilizing these proprietary
techniques in West Texas and Morocco. This program for development, expansion
and financial growth depends on the Company' 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, 1998, of productive wells in the areas indicated.
<TABLE>
<CAPTION>
Productive Wells
Oil Gas Total
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Zavala County . 4.0 1.6 8.0 3.9 12.0 5.5
Mississippi
Smith (1) . . . -- -- 1.0 1.0 1.0 1.0
Pennsylvania (2) -- -- 7.0 3.0 7.0 3.0
Totals. . . . 4.0 1.6 16.0 7.9 20.0 9.5
<FN>
(1) This well is currently shut-in. It is expected that production will not
begin earlier than late 1999.
(2) Assumes approximately 54% working interest remaining after all costs and
"back-ins".
</TABLE>
Acreage
The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December 31, 1998.
<TABLE>
<CAPTION>
Developed Undeveloped Total
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
South Texas. . . 480 220 17,202 8,248 17,692 8,468
Richmond Acreage -0- -0- 21,535 13,211 21,535 13,211
Mississippi. . . 320 320 -0- -0- 320 320
South Louisiana. -0- -0- 300 300 300 300
Total . . . . . 800 540 39,047 21,759 39,847 22,299
<FN>
NOTE: Does not include Pennsylvania properties in which Empiric owns working
interest in the well bores only.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation in the ordinary course of its
business and operations. The Company does not expect the outcome of any current
litigation to have a material impact on its financial position or results of
operations.
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 1998 and 1999 regarding the OTC market.
<TABLE>
<CAPTION>
High Low Close
Volume Bid Bid Bid
------- ------ ------ ------
<S> <C> <C> <C> <C>
1998
First Quarter. . . . . . . 477,600 0.7200 0.3400 0.6300
Second Quarter . . . . . . 450,100 0.9400 0.5000 0.5000
Third Quarter. . . . . . . 285,000 0.5000 0.1700 0.1700
Fourth Quarter . . . . . . 436,900 0.6900 0.1600 0.4500
1999
First Quarter Thru 3/31/98 128,000 0.5600 0.3800 0.3100
</TABLE>
<PAGE>
As of March 31, 1999, there were approximately 596 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 for the years ended December 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR REVENUES PROFIT/LOSS COMMENTS
- ---- --------- ------------- ----------------
1997 $ 102,270 $ (160,166)
1998 $ 201,102 $ (1,413,831) See Note 1 below
<FN>
Note 1: Includes a special "non-cash" charge of $716,401 to adjust the total
capitalized value of oil and gas properties to the discounted value of oil and
gas reserves at December 31, 1998 in accordance with reserve evaluations. This
adjustment is required by the "full cost" method of accounting as explained in
Notes of the Financial Statements.
During the year 1998, the Company issued the following securities which
were outstanding at the end of the year:
1,765,577 Common Shares, par value $0.01
$ 575,000 Principal Amount preferred Series 'A' Convertible at
$3.33 into Common Shares (valued at $43,168)
327,490 Class 'B' Warrants, each allowing the purchase of one
Common Share for $2.50 until May 13, 2001
215,000 Class 'C' Warrants, each allowing the purchase of one
Common Share for $3.00 until May 13, 2002.
The above securities were issued for the purpose of acquiring properties or
working capital. The Common Shares were issued at prices from $0.23 to $0.81.
None of the above securities were registered.
As noted in the financial statements, the Company has suffered recurring
losses from operations. Future positive results are a function of the Company's
ability to raise capital or utilize securities to acquire producing properties
or drill developmental wells in order to generate profits. In the event the
Company is not able to raise capital or acquire properties, there is doubt about
the Company's ability to continue as a going concern.
</TABLE>
Liquidity
As of December 31, 1998, the Company had limited long term debt of $141,760
and a total equity-to-debt ratio of about 2-to-1. On the other hand, the
Company had a 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. 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 production properties to obtain improved cash flow as set forth
in the Planned Activities section above.
Year 2000 Compliance
The Company has assessed the impact of the Year 2000 issue on its
operations, including the development and implementation of project plans and
cost estimates required to make its information systems Year 2000 compliant.
The Company outsources its financial and evaluation functions and has received
written representation from every significant vendor supplying software or
services, including revenue checks, that each vendor's information system is
Year 2000 compliant. Therefore, the Company believes that anticipated spending
necessary to become Year 2000 compliant will not have a material effect on the
financial position, cash flows or results of operations of the Company. There
can be no assurance, however, as to the ultimate effect of the Year 2000 issue
on the Company.
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, 1998 F-1
Independent Auditors Report for year ended December 31, 1997 F-2
Consolidated Balance Sheet - December 31, 1998 F-3
Statements of Operations - Years ended December 31, 1998 and 1997 F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flow - Years ended December 31, 1998 and 1997 F-6
Notes to Financial Statements F-7 to F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 9, 1998, the Board of Directors of the Company dismissed the firm
of Thomas O. Bailey & Associates (TOB) as the Company's independent auditor.
The reports of TOB on the Company's financial statements for the two years
ended December 31, 1997 did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles, except that the report of TOB on the Company's financial
statements for the years ended December 31, 1997 and 1996 included an
explanatory paragraph relating to an uncertainty about the Company's ability to
continue as a going concern.
There were no disagreements with TOB during the audits of the Company's
financial statements for the two years ended December 31, 1997, and any
subsequent interim period preceding the change on any matter of accounting
principles and practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of TOB, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report.
On June 9, 1998, the Company appointed Hein + Associates, LLP as its
independent accountant. Hein + Associates, LLP accepted such appointment. The
Company had no relationship with Hein + Associates, LLP required to be reported
pursuant to Regulation S-K Item 304 (a) (2) during the two years ended December
31, 1997 or the subsequent interim prior to and including March 31, 1998.
<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 four 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 and Robert L. Thomas, Director. Following is a brief summary
of the business background and experience of Messrs. Ling, Rothrock, Skeen and
Thomas:
James J. Ling, age 76, 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., age 56, 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.
Clyde E. Skeen, age 82, 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.
Robert L. Thomas, age 44, has been a Director of the Company
since July 15, 1998. From 1982-1988, Mr. Thomas founded and was President of
Crown Energy Company, an oil and gas company based in Oklahoma. From 1977 to
1982, Mr. Thomas worked for Phillips Petroleum Company. Mr. Thomas also worked
for Ernst & Young, American Airlines and the Zale Corporation implementing
management information systems. Mr. Thomas is currently President of Thomas &
Associates consulting, a boutique consulting practice specializing in business
strategy development and technology driven process re-engineering. Mr. Thomas
graduated from Oklahoma State University with a BS Degree in Industrial
Engineering and Management in May 1977.
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, 1997 and 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
<S> <C> <C> <C> <C>
Name/Position . . . . . . . Fiscal Year Salary (1)(2)(3) Bonus* Stock Options
1997 $ 90,000 -0- $ 51,000
James J. Ling(1). . . . . . 1998 $ 90,000 -0- $ 121,000
1997 $ 25,000 -0- $ 6,000
Renn Rothrock, Jr.. . . . . 1998 $ 120,000 $20,000 $ 150,000
1997 $ 42,000 -0- $ 27,000
Clyde E. Skeen(2) . . . . . 1998 $ 42,000 -0- $ 40,000
<FN>
*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 paid Hill a monthly fee of $7,500 until April 1998 and $10,000 per month
until October 2001.
(2) Mr. Skeen does not receive compensation directly from the Company, but is paid
through Clyde Skeen Business Consultants, Inc., which is paid $3,500 per month by
the Company.
(3) Because of the Company's working capital condition, neither Mr. Ling nor Mr.
Skeen have received full cash compensation through their respective associated
companies for years 1995, 1996 and 1997. They have received notes payable for the
remainder of the consulting fees not paid in cash, 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, with a minimum amount of $20,000.
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.
</TABLE>
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 1,950,000 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. Stockholders of the
Company approved the Plan on March 29, 1994.
During 1998 the Board of Directors authorized an additional 1,250,000
shares to be set aside for issuance under the Plan bringing to 1,950,000 the
total shares authorized for the Stock Option Plan and, on that date, also
awarded additional stock options as follows:
a. Five (5) year option granted to Clyde Skeen Business
Consultants, Inc. to purchase up to 100,000 shares at a purchase price of $1.00
per share;
b. Five (5) year option granted to Hill Investors, Inc. to
purchase up to 300,000 shares at a purchase price of $1.00 per share.
c. Five (5) year option granted to Renn Rothrock to purchase up to
200,000 shares at a purchase price of $1.00 per share.
d. Five (5) year option granted to Vicki Newman to purchase up to
15,000 shares at a purchase price of $1.00 per share.
e. Five (5) year option granted to John Sobehrad to purchase up to
25,000 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. The exercise price of
all of the options granted under the 1994 Stock Option Plan were repriced from
$1.00 per share of Common stock to $0.50 per share of Common stock.
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, 1998:
<TABLE>
<CAPTION>
Shares Beneficially Owned % of Class
------------------------- ----------
<S> <C> <C> <C> <C>
Name. . . . . . . . . Common Warrants Common Warrants
- --------------------- --------- ---------- ------- ---------
James J. Ling(1). . . 781,105 18,095 10.2% 7.2%
Clyde E. Skeen(2) . . 305,750 28,250 4.0% 11.2%
Renn Rothrock, Jr.(3) 425,000 __ 5.6% 0.0%
Robert L. Thomas. . . 20,000 __ <1% __
<FN>
(1) Includes 369,525 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., owned by the DRL Trust 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 (renewed for another three
year period in October 1998), whereby Hill provides the services of Mr. Ling as
Chairman and Chief Executive Officer of the Company for which Hill received a
monthly fee of $7,500 until April 1998 and $10,000 per month thereafter. 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. 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.
On May 13, 1998, the R. Renn Rothrock Trust, a Trust for the benefit of
Dorothy Rothrock, Trustee, Thomas Rothrock, purchased a $50,000 three (3) year
note, 50,000 shares of Common stock and 12,500 Series "B" Warrants for a
consideration of approximately $80,000 in cash and New York Stock Exchange
securities. Dorothy Rothrock is a stepmother and Thomas Rothrock is a brother
to Renn Rothrock, Jr., President of the Company. Mr. Rothrock, Jr. is not the
beneficial owner of any of these securities.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
8-K Dated April 9, 1998, describing acquisition of certain producing
properties for securities of the Company.
8-K Dated June 9, 1998, electing Hein + Associates, LLP as new
independent accountant.
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.
_______________________________
James J. Ling
Chairman and Chief Executive Officer
_______________________________
R. Renn Rothrock, Jr.
President and Chief Operating Officer
_______________________________
Clyde E. Skeen
Secretary/Treasurer and
Chief Financial Officer
_______________________________
Robert L. Thomas
Director
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Empiric Energy, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of Empiric Energy, Inc. as of
December 31, 1998, and the related statement of operations, changes in
stockholders' equity and cash flows for the year 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has defaulted on several notes payable, and future working capital requirements
are dependent on the Company's ability to generate profitable operations, to
restructure its financing arrangements, and to continue its present short-term
financing, or obtain alternative funding. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Hein + Associates LLP
Dallas, Texas
April 15, 1999
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE SHAREHOLDERS OF EMPIRIC ENERGY, INC.
We have audited the accompanying statement of operations, cash flows and changes
in stockholders' equity of Empiric Energy, Inc. for the year ended December 31,
1997. 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 results of operations and cash flows of Empiric Energy,
Inc. for the year ended December 31, 1997 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 its financing arrangements, and to
continue its 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 no include any adjustments that
might result from the outcome of this uncertainty.
/c/ Thomas O. Bailey and Associates, P.C.
Certified Public Accountants
Dallas, Texas
March 4, 1998
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
- --------------------------------------------------------------------------------------
<S> <C>
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 721
Accounts receivable:
Oil and gas sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,188
Employee advances . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,041
------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 46,950
PROPERTY AND EQUIPMENT:
Oil and gas properties (full cost method):
Unproved leasehold costs . . . . . . . . . . . . . . . . . . . . . . 179,609
Proved leasehold costs and well equipment. . . . . . . . . . . . . . 4,318,875
Less accumulated depletion, depreciation and impairment . . . . . . . . . (2,444,578)
------------
Net property and equipment. . . . . . . . . . . . . . . . . . . . . . 2,053,906
OTHER FURNITURE AND EQUIPMENT, net of accumulated depreciation of $22,472 8,346
DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,281
------------
$ 2,112,483
============
Total assets
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
<S> <C>
CURRENT LIABILITIES:
Current portion of long-term debt, including related parties. .. . . . . . $ 411,043
Accounts payable and accrued expenses . . . . . . . . . . . . . .. . . . . 141,740
Oil and gas revenues payable. . . . . . . . . . . . . . . . . . . . . . . 8,962
Due to related parties. . . . . . . . . . . . . . . . . . . . . . .. . . . 21,731
------------
Total current liabilities . . . . . . . . . . . . . . . . . . . .. . . 583,476
LONG -TERM DEBT, net of current portion, including related parties . .. . . 141,760
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized; 7,625,353
shares issued and outstanding 76,254
Series A convertible preferred stock, no par value, $575,000
liquidation preference . . . . . . . . . . . . . . . 43,168
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 4,987,884
Receivables - Texoil. . . . . . . . . . . . . . . . . . . . . . . . . . . (74,061)
Obligation to repurchase treasury stock . . . . . . . . . . . . . . . . . (11,875)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,634,123)
------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 1,387,247
------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $ 2,112,483
============
</TABLE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
STATEMENTS OF OPERATIONS
<S> <C> <C>
Years Ended December 31,
--------------------------
1998 1997
----------- -----------
REVENUE -
Oil and gas sales . . . . . . . . . . $ 201,102 $ 102,270
COSTS AND EXPENSES:
Production expense. . . . . . . . . . 85,425 70,812
Depletion and depreciation. . . . . . 175,224 19,417
Impairment of oil and gas properties. 716,401 -
Bad debt expense. . . . . . . . . . . 32,457 -
General and administrative. . . . . . 569,776 335,591
------------ -----------
Total costs and expenses. . . . . . 1,579,283 425,820
OTHER INCOME (EXPENSE):
Dividend income . . . . . . . . . . . - 45,000
Interest income . . . . . . . . . . . 3,102 3,100
Consulting income. . . . . . . . . . 11,141 -
Gain on sale of lease option. . . . . - 50,000
Interest expense. . . . . . . . . . . (49,894) (6,839)
------------- -----------
Total other income (expense). . . . (35,651) 91,261
------------- -----------
LOSS BEFORE EXTRAORDINARY ITEM . . . . (1,413,832) (232,289)
EXTRAORDINARY ITEM -
Gain from extinguishment of debt. . . - 72,125
------------- -----------
NET LOSS . . . . . . . . . . . . . . . $(1,413,832) $ (160,164)
============ ===========
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item. . . . $ (0.21) $ (0.05)
============ ===========
Extraordinary item. . . . . . . . . . $ - $ 0.01
============ ===========
Net loss. . . . . . . . . . . . . . . $ (0.21) $ (0.04)
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING. . 6,855,574 4,900,617
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the period from January 1, 1997 to December 31, 1998
<S> <C> <C> <C> <C>
Common Stock Preferred Stock Series B Preferred
----------------------- ------------------------- Stock
Shares Amount Shares Amount Series A
---------- --------- --------- ---------- ----------
BALANCES, January 1, 1997. . . . . . . . . . . 4,330,700 $ 43,307 4,488 $ 448,803 $ -
Conversion of preferred stock to common stock . 448,803 4,488 (4,488) (448,803) -
Common stock issued for debt or by purchase. . 1,080,273 10,803 - - -
Net loss for the year. . . . . . . . . . . . . - - - - -
---------- --------- --------- ---------- ----------
BALANCES, December 31, 1997. . . . . . . . . .. 5,859,776 58,598 - - -
Agreement to repurchase treasury stock . . . . - - - - -
Equity instruments issued in the purchase of
oil and gas properties. . . . . . . . . . . . 992,577 9,926 - - 39,414
Common stock issued for services . . . . . . . 243,000 2,430 - - -
Warrants and options issued for services . . . - - - - -
Equity instruments issued for debt or by purchase. 300,000 3,000 - - 3,754
Conversion of notes payable to common stock. . . . . 230,000 2,300 - - -
Reclass of receivable to equity. . . . . . . . . . . - - - - -
Net loss for year. . . . . . . . . . . . . . . . . . - - - - -
--------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1998. . . . . . . . . . . . .7,625,353 $ 76,254 - $ - $ 43,168
========= ========== ========== ========== ==========
STATEMENTS OF STOCKHOLDERS' EQUITY
For the period from January 1, 1997 to December 31, 1998
<S> <C> <C> <C> <C> <C>
Additional Obligation to
Paid-In Repurchase Receivable Accumulated
Capital Treasury Stock Texoil Deficit Total
-------------- --------------- ---------- ----------- -----------
BALANCES, January 1, 1997. . . . . . . . . . . . . . . $ 3,579,342 $ - $ - $(2,060,127) $ 2,011,325
Conversion of preferred stock to common stock. . . . . 444,315 - - - -
Common stock issued for debt or by purchase. . . . . . . 263,004 - - - 273,807
Net loss for the year. . . . . . . . . . . . . . . . . . - - - (160,164) (160,164)
--------------- ------------- ---------- ----------- -----------
BALANCES, December 31, 1997. . . . . . . . . . . . . . 4,286,661 - - (2,220,291) 2,124,968
Agreement to repurchase treasury stock . . . . . . . . - (11,875) - - (11,875)
Equity instruments issued in the purchase of
oil and gas properties. . . . . . . . . . . . . . . . 314,149 - - - 363,489
Common stock issued for services . . . . . . . . . . . 114,715 - - - 117,145
Warrants and options issued for services . . . . . . . . 31,382 - - - 31,382
Equity instruments issued for debt or by purchase. . . . 128,277 - - - 135,031
Conversion of notes payable to common stock. . . . . . . 112,700 - - - 115,000
Reclass of receivable to equity. . . . . . . . . . . . . - - (74,061) - (74,061)
Net loss for year. . . . . . . . . . . . . . . . . . . . - - - (1,413,832) 1,413,832)
----------- ------------- ---------- ---------- ------------
BALANCES, December 31, 1998. . . . . . . . . . . . . . $4,987,884 $ (11,875) $(74,061) $(3,634,123) $ 1,387,247
=========== ============ ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
<S> <C> <C>
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,413,832) $ (160,164)
Adjustments to reconcile to net cash from operating activities:
Depletion, depreciation and impairment. . . . . . . . . . . . 891,625 24,947
Gain on sale of assets. . . . . . . . . . . . . . . . . . . . 32,457 -
Common stock, warrants and options issued for services . . . 148,527 -
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 16,996 5,992
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . (1,205) (731)
Accounts payable and accrued expenses . . . . . . . . . . . . 62,327 (182,946)
Oil and gas revenues payable. . . . . . . . . . . . . . . . . 8,962 -
Due to related parties. . . . . . . . . . . . . . . . . . . . 3,750 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,748 -
--------------- ---------------
Net cash used by operating activities . . . . . . . . . . . (246,645) (312,902)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of oil and gas properties. . . . . . . . . . - 220,000
Purchase of oil and gas properties. . . . . . . . . . . . . . . (349,995) (18,328)
Purchase of furniture and equipment . . . . . . . . . . . . . . (10,626) -
Advances to Texoil. . . . . . . . . . . . . . . . . . . . . . . (43,061) -
--------------- ---------------
Net cash (used) provided by investing activities. . . . . . (403,682) 201,672
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt. . . . . . . . . . . . . . . . . . 537,960 -
Repayments of long-term debt. . . . . . . . . . . . . . . . . . (102) (144,850)
Proceeds from sales of common stock . . . . . . . . . . . . . . 94,379 -
Proceeds from sale of preferred stock . . . . . . . . . . . . - 273,807
--------------- --------------
Net cash provided by financing activities . . . . . . . . . 632,237 128,957
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . (18,090) 17,727
CASH, beginning of the year. . . . . . . . . . . . . . . . . . . 18,811 1,084
--------------- --------------
CASH, end of the year. . . . . . . . . . . . . . . . . . . . . . $ 721 $ 18,811
=============== ==============
SUPPLEMENTAL INFORMATION -
Cash paid during the year for interest. . . . . . . . . . . . . $ 17,390 $ 6,599
=============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITY:
Purchase of oil and gas properties with equity securities,
Including convertible notes payable $ 455,989 $ -
=============== ==============
Obligation to repurchase treasury stock . . . . . . . . . . . $ 11,875 $ -
=============== ==============
Unamortized portion of notes payable discount . . . . . . . . . $ 26,930 $ -
=============== ==============
</TABLE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
Organization and Nature of Operations
-----------------------------------------
Empiric Energy, Inc. (the "Company") was incorporated under the laws of the
state of Delaware in 1982. The Company is engaged in the acquisition, operation
and development of oil and gas properties, which are located in Texas,
Mississippi and Pennsylvania as of December 31, 1998. The Company also has
working interests in unproved leasehold acreage in Texas and Louisiana as of
December 31, 1998.
Continued Operations
---------------------
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company has
suffered significant recurring losses from operations, has defaulted on several
notes payable, and future working capital requirements are dependent on the
Company's ability to generate profitable operations, to restructure its
financing arrangements, and to continue its present short-term financing, or
obtain alternative funding. These issues raise substantial doubt about the
Company's ability to continue as a going concern. Management is currently
attempting to raise capital through a private placement of equity securities in
order to complete one or more acquisitions of oil and gas properties in an
attempt to improve operating results.
Cash and Cash Equivalents
----------------------------
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Oil and Gas Properties
-------------------------
The Company uses the full cost method of accounting for its oil and gas
properties. The Company's properties are all located in the continental United
States, and therefore, its costs are capitalized in one cost center. Under the
full cost method, all costs related to the acquisition, exploration or
development of oil and gas properties are capitalized into the "full cost pool".
Such costs include those related to lease acquisitions, drilling and equipping
of productive and non-productive wells, delay rentals, geological and
geophysical work and certain internal costs directly associated with the
acquisition, exploration or development of oil and gas properties. During the
year ended December 31, 1998, internal costs capitalized into the full cost pool
were approximately $236,800. Upon the sale or disposition of oil and gas
properties, no gain or loss is recognized, unless such adjustments of the full
cost pool would significantly alter the relationship between capitalized costs
and proved reserves. Unproved properties are assessed periodically for possible
impairment. Any impaired amounts are charged to the full cost pool. The Company
had no impaired unproved properties as of December 31, 1998.
Under the full-cost method of accounting, a "full-cost ceiling test" is
required wherein net capitalized costs of oil and gas properties cannot exceed
the present value of estimated future net revenues from proved oil and gas
reserves, discounted at 10%, less any related income tax effects. During the
year ended December 31, 1998, the Company recorded impairment of the full cost
pool in the amount of $716,401 based on the full-cost ceiling test. There was no
impairment recorded for the year ended December 31, 1997.
Depletion, depreciation, and amortization of oil and gas properties is
computed using the unit-of-production method based on estimated proved oil and
gas reserves. Depletion, depreciation and amortization expense of $172,927 and
$19,417 was recorded for the years ended December 31, 1998 and 1997,
respectively. Depletion, depreciation and amortization per equivalent Mcf of
natural gas was approximately $1.35 and $0.57 for the years ended December 31,
1998 and 1997, respectively.
Other Property
---------------
Other assets classified as property and equipment are primarily office
furniture and equipment and vehicles, and are carried at cost. Depreciation is
provided using the straight-line method over estimated useful lives ranging from
three to five years. Gain or loss on retirement or sale or other disposition of
assets is included in income in the period of disposition. Depreciation expense
for other property and equipment was $2,297 and $0 for the years ended December
31, 1998 and 1997, respectively.
Loss Per Share
----------------
Basic loss per share is computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted loss per share
takes common stock equivalents (such as options and warrants) and convertible
securities into consideration. As of December 31, 1998, the Company had
convertible notes payable, convertible preferred stock, outstanding warrants for
542,500 shares of common stock and outstanding options for 1,285,000 shares of
common stock which are not included in the dilutive calculation of loss per
share as the effect would be antidilutive.
Income Taxes
-------------
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due, if any, plus net
deferred taxes related primarily to differences between the bases of assets and
liabilities for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets include recognition of operating
losses that are available to offset future taxable income and tax credits that
are available to offset future income taxes. Valuation allowances are recognized
to limit recognition of deferred tax assets where appropriate. Such allowances
may be reversed when circumstances provide evidence that the deferred tax assets
will more likely than not be realized.
Stock-Based Compensation
-------------------------
In January 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation", which
requires recognition of the value of stock options and warrants granted based on
an option pricing model. However, as permitted by SFAS 123, the Company
continues to account for stock options and warrants granted to directors and
employees pursuant to Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. See Note 7.
Use of Estimates and Certain Significant Estimates
--------------------------------------------------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of
proved oil and gas reserves, which as described above may affect the amount at
which oil and gas properties are recorded. It is at least reasonably possible
those estimates could be revised in the near term and those revisions could be
material.
Reclassifications
-----------------
Certain reclassifications have been made to conform the 1997 financial
statements to the presentation in 1998. The reclassifications had no effect on
net income.
2. ACQUISITION AND DISPOSITION OF OIL AND GAS PROPERTIES
In April 1998, the Company acquired interests in certain producing
properties in Texas and unproved leasehold properties in Texas and Louisiana for
total consideration of approximately $456,000. Consideration paid by the Company
for the acquisition included common stock, convertible notes payable,
convertible preferred stock, 300,000 Series B warrants and 200,000 Series C
warrants. The following unaudited pro forma information is presented as if the
interests in the property had been acquired at the beginning of the respective
periods.
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
-------------------------
1998 1997
----------- ------------
Revenues . . . . . . . . . . $ 251,664 $ 455,832
Net income (loss). . . . . . $(1,421,007) $ (53,720)
Net income (loss) per share. $ (0.21) $ (0.01)
</TABLE>
In October 1997, the Company sold its producing properties on the Baker 39 lease
in the Texas Panhandle for $220,000 in 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 in
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, 1999 at which time at
least 50% of the Company's leasehold interest must be purchased. If the
optionee purchases more than 50% but less than 100% of the Company's leasehold
interest, the option period for any remaining interest will be extended to
October 1, 2000.
3. RELATED PARTY TRANSACTIONS
Hill Investors, Inc., an affiliate of the chairman of the Company's board
of directors, has a consulting agreement with the Company that calls for monthly
payments of $10,000 for management consulting services. The agreement expires
in October 2001. During the years ended December 31, 1998 and 1997, the Company
incurred expense under this agreement of $112,500 and $90,000 respectively.
Clyde Skeen Business Consultants, an affiliate of a member of the Company's
board of directors and an officer of the Company, has a consulting agreement
with the Company that calls for monthly payments of $3,500 for management
consultant services. The agreement is on a month to month basis. During the
years ended December 31, 1998 and 1997, the Company incurred expense under this
agreement of $42,000 in each year.
At December 31, 1998, the Company had a liability to two members of its
board of directors of $21,731 for unreimbursed expenses and management fees.
At December 31, 1998, the Company had notes payable to members of its board
of directors and certain family members for approximately $257,000 as described
in Note 4.
4. LONG-TERM DEBT
Long-term debt at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
THIRD PARTY NOTES PAYABLE:
- ------------------------------------------------------------------------------------------
Unsecured note payable to a finance company, interest at 10.0%,
monthly payments of interest with principal due at maturity in July 1998.
This note is in default as of December 31, 1998. $ 100,000
Unsecured notes payable to an individual, interest at 8%, principal
and interest due at maturity in January 1999 75,000
Unsecured notes payable to a company, interest at 8.0%, monthly payments
of interest with principal due at maturity in December 1998. These notes
were not paid upon maturity and subsequently defaulted in 1999. 52,500
Note payable to an individual, interest at 8%, quarterly payments of
interest with principal due at maturity in February 2001. This note is
collateralized by the potential proceeds from the exercise of the option
for the Panhandle property. 50,000
Unsecured note payable to a finance company, interest at 8.0%, principal
and interest due on demand 30,000
Unsecured notes payable to an individual, interest at 8.0%, principal and
interest due on demand 11,875
Note payable to a commercial lender, interest at 14.5%, monthly payments
of $114 of principal and interest until maturity in November 2001. This
note is collateralized by computer equipment. 3,184
RELATED PARTIES NOTES PAYABLE:
- ------------------------------------------------------------------------------------------
Unsecured notes payable to an affiliate of the chairman of the board,
interest at 8.0%, quarterly payments of interest with principal due
at maturity in December 1998 and December 1999. These notes are convertible
into common stock at $0.60 per share. These notes were converted into
common stock in 1999. 92,074
Notes payable to family members of the chairman of the board, interest
at 8%, quarterly payments of interest with principal due at maturity in
January 2001. These notes are collateralized by the potential proceeds
from the exercise of the option for the Panhandle property. 50,000
Unsecured note payable to a trust of a family member of the president of
the Company, interest at 8%, quarterly payments of interest with principal
due at maturity in June 2003. 50,000
Unsecured note payable to a board member and officer, interest at 8.0%,
quarterly payments of interest with principal due at maturity in December
1999. This note is convertible into common stock at $0.60 per share. 27,600
Unsecured notes payable to family members of the chairman of the board,
interest at 8%, principal and interest due at maturity in January 2001. 25,000
Note payable to a board member and officer, interest at 8%, quarterly
payments of interest with principal due at maturity in January 2001. This
note is collateralized by the potential proceeds from the exercise of the
option for the Panhandle property. 12,500
------------
Total notes payable 579,733
Discounts on notes payable (net of accumulated amortization of $23,604) (26,930)
------------
Net notes payable 552,803
Less current portion (411,043)
------------
$ 141,760
============
</TABLE>
The discounts on notes payable resulted because the notes included an agreement
to issue shares of common stock along with the face amount of the related notes
payable. The discount represents the amount of cash received that was allocated
to stockholders' equity. The discounts are amortized using the effective
interest method over the terms of the related notes.
Maturities of long-term debt based on contractual requirements for the
years ending December 31, 1999 through 2003 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 . . $415,002
2000 . . 1,105
2001 . . 113,626
2003 . . 50,000
---------
$579,733
=========
</TABLE>
5. INCOME TAXES
The Company's deferred tax assets and (liabilities) are composed of the
following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Difference in bases of oil and gas properties . . . $ 514,000
Net operating loss carryforward . . . . . . . . . . 1,952,000
------------
Total deferred tax asset before valuation allowance 2,466,000
Valuation allowance . . . . . . . . . . . . . . . . (2,466,000)
------------
Net asset . . . . . . . . . . . . . . . . . . . . . $ -
============
</TABLE>
As of December 31, 1998, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $5,421,000, which will expire from
2007 to 2018.
6. STOCKHOLDERS EQUITY
During 1998, the Company issued Series A convertible preferred stock in
connection with the acquisition of oil and gas properties and for cash. Series
A preferred stock is denominated in face amounts rather than shares, has no par
value, no interest rate, no dividend rate, no voting privileges, a liquidation
preference equal to the face amount and is convertible into common stock at a
rate of $3.33 per share of common stock. There is $1,150,000 of face amount
authorized for the Series A convertible preferred stock, of which $575,000 is
issued at December 31, 1998. Due to the features of the Series A convertible
preferred stock, the Company recorded its value based on the fair market value
of the underlying convertible shares of common stock at the time of issuance.
During 1998, the Company entered into an agreement and a note payable with
a former employee to repurchase the common stock held by the stockholder for
total consideration of $11,875. This amount is reflected as an obligation to
repurchase treasury stock in the accompanying financial statements as of
December 31, 1998.
As of December 31, 1998, the Company has a receivable of $74,061 from a
related entity located in Canada. The Canadian entity has no significant assets
or operations other than its holding of approximately 130,000 shares of common
stock of the Company. Management anticipates that the amount of the receivable
will be used by the Company to purchase the common stock held by the Canadian
entity and the common stock will be placed into treasury during 1999.
During 1998, the Company designated two new series of warrants to purchase
common stock. The Series B warrants have an exercise price of $2.50 per share
of common stock and expire three years from the date of grant. The Series C
warrants have an exercise price of $3.00 per share of common stock and expire
four years from the date of grant. As of December 31, 1998, there are 327,490
and 215,000 warrants outstanding for the Series B and Series C warrants,
respectively. There were no Series B warrants or Series C warrants exercised
during the year ended December 31, 1998.
During May 1998, the Company granted 15,000 Series B warrants and 15,000
Series C warrants to a consultant in exchange for services. The fair value of
these warrants, as determined by the Black-Scholes option pricing model, of
$13,758 was recorded as an expense during the year ended December 31, 1998.
As of December 31, 1998, the Company has 252,266 of Series A warrants
outstanding. These warrants were initially issued in 1994, are exercisable at
$4.25 per share of common stock and expire in June 1999. There were no Series A
warrants exercised during the year ended December 31, 1998.
In 1997, the holders of the Company's Series B convertible preferred stock
converted all 4,488 outstanding shares into 448,403 shares of common stock.
After the conversion, there were no additional shares of Series B convertible
preferred stock authorized, available for issuance or outstanding.
7. STOCK BASED COMPENSATION
Stock Option Plans
--------------------
In 1994, the Company established a Stock Option Plan to compensate
directors, employees, advisors and consultants. All options granted under the
plan are exercisable at $1.00 per share and expire five years from the date of
grant. The exercise price for all options granted under this plan was
subsequently repriced in March 1999 to $0.50 per share. At December 31, 1998,
there are 635,000 stock options reserved and available for grant under the plan.
In April 1998, the Company granted 25,000 stock options under the 1994 plan
to a consultant in exchange for services. The options are exercisable at $1.00
per share (subsequently repriced to $0.50 per share) until expiration in April
2003. The fair market value of these options, as determined by the
Black-Scholes option pricing model, of $17,624 was recorded as an expense during
the year ended December 31, 1998.
The following is a summary of activity for the stock options granted for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1998 December 31, 1997
-------------------- ---------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
---------- --------- --------- ---------
Outstanding, beginning of year 675,000 $ 1.00 260,000 $ 1.00
Canceled or expired. . . . . . (30,000) $ 1.00 - -
Granted. . . . . . . . . . . . 640,000 $ 1.00 415,000 $ 1.00
Exercised. . . . . . . . . . . - - - -
---------- --------- --------- ---------
Outstanding, end of year . . . 1,285,000 $ 1.00 675,000 $ 1.00
========== ========= ========= =========
Exercisable, end of year . . . 1,095,000 $ 1.00 385,000 $ 1.00
========== ========= ========= =========
</TABLE>
If not previously exercised, options outstanding at December 31, 1998 will
expire as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Weighted
Average
Number Exercise
of Shares Price
---------------- ---------
December 31, 1999 115,000 $ 1.00
December 31, 2001 115,000 $ 1.00
December 31, 2002 415,000 $ 1.00
December 31, 2003 640,000 $ 1.00
---------------- ---------
Total . . . . . . 1,285,000 $ 1.00
================ =========
</TABLE>
Presented below is a comparison of the weighted average exercise prices and fair
values of the Company's common stock on the measurement date for the stock
options granted during fiscal years 1998 and 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997
--------------------------- ---------------------------
Number Exercise Fair Number Exercise Fair
of Shares Price Value of Shares Price Value
- ---------------------------------------- -------- ------ ------- -------- -------- -------
Exercise price greater than market price 640,000 $ 1.00 $ 0.42 415,000 $ 1.00 $0.83
</TABLE>
Pro Forma Stock-Based Compensation Disclosures
--------------------------------------------------
As discussed in Note 1, the Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock options. Accordingly, no
compensation cost has been recognized for grants of options to employees since
the exercise prices were not lower than the market prices of the Company's
common stock on the measurement dates. Had compensation been determined based on
the estimated fair value at the measurement dates for awards under those plans
consistent with the method prescribed by SFAS No. 123, the Company's December
31, 1998 and 1997 income and earnings per share would have been changed to the
pro-forma amounts indicated below.
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------------ ----------
Net income (loss):
As reported. . . . . . . . . . . $(1,413,832) $(160,164)
Pro forma. . . . . . . . . . . . $(1,800,586) $(246,899)
Net income (loss) per common share:
As reported. . . . . . . . . . . $ (0.21) $ (0.04)
Pro forma. . . . . . . . . . . . $ (0.26) $ (0.05)
</TABLE>
The estimated fair value of each officer and director option and warrant
granted during fiscal year 1998 and 1997 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------ ------
Expected volatility . . . 153.2% 153.2%
Risk-free interest rate . 6.0% 6.0%
Expected dividends. . . . - -
Expected terms (in years) 5 5
</TABLE>
8. ENVIRONMENTAL ISSUES
The Company is engaged in oil and gas exploration and production and may
become subject to certain liabilities as they relate to environmental clean up
of well sites or other environmental restoration procedures as they relate to
the drilling of oil and gas wells and the operation thereof. In the Company's
acquisition of existing or previously drilled well bores, the Company may not be
aware of what environmental safeguards were taken at the time such wells were
drilled or during such time the wells were operated. Should it be determined
that a liability exists with respect to any environmental clean up or
restoration, the liability to cure such a violation could fall upon the Company.
No claim has been made, nor is the Company aware of any liability which the
Company may have, as it relates to any environmental clean up, restoration or
the violation of any rules or regulations relating thereto.
9. COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with its president that calls for a
minimum annual salary of $120,000 and expires in December 2002. In addition to
the minimum salary, the agreement provides for a guaranteed minimum annual bonus
of $20,000. The bonus could potentially be significantly more based on the
Company meeting certain goals outlined by its board of directors.
The Company has a non-cancelable sublease for office space. The lease
requires minimum monthly rental payments of $3,281 until expiration in July
2000. Future minimum lease payments under the lease are $39,372 and $22,967 for
the years ending December 31, 1999 and 2000, respectively.
The Company incurred rent expense of $45,959 and $26,614 for the years
ended December 31, 1998 and 1997, respectively.
The Company has guaranteed the value of 113,500 shares of common stock held
by one stockholder to be worth at least the amount borrowed by the
stockholder from a bank to purchase the shares plus any accrued interest.
At December 31, 1998, the amount guaranteed by the Company is approximately
$75,000 and the underlying fair market value of the common stock is
approximately $57,000. If the stockholder decides to sell the common stock
subject to the guarantee, the Company would be required to reimburse the
stockholder for any deficiency. As of December 31, 1998, the stockholder has not
sold any of the common stock subject to the guarantee and any potential loss for
the Company due to this guarantee is not accrued in the accompanying financial
statements.
The Company is involved in litigation in the ordinary course of its
business and operations. The Company does not expect the outcome of any
current litigation to have a material impact on its financial position or
results of operations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
---------------------------------------------------------------------------
The Company's financial instruments are cash, amounts receivable and
payable and long-term debt. Management believes the fair values of these
instruments, with the exception of the long-term debt, approximate the carrying
values, due to the short-term nature of the instruments. Management believes
the fair value of long-term debt also reasonably approximates its carrying
value, based on expected cash flows and interest rates.
Financial instruments that subject the Company to credit risk consist
principally of receivables. The receivables are primarily from companies in the
oil and gas business or from individual oil and gas investors. These parties
are primarily located in the southwestern region of the United States. The
Company does not ordinarily require collateral. The Company believes the
allowance for doubtful accounts at December 31, 1998 is adequate.
11. FOURTH QUARTER ADJUSTMENTS
----------------------------
In the fourth quarter of 1998, the Company made some significant
adjustments that impacted previously reported quarterly results. These
adjustments would have increased depletion, depreciation and amortization by
approximately $90,000 and increased impairment expense for the full cost pool by
approximately $535,000 for the nine-month period ended September 30, 1998.
12. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
------------------------------------------------------------------------
The following table sets forth certain information with respect to the oil
and gas producing activities of the Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
-------------------------
1998 1997
------------ ------------
Costs incurred in oil and gas producing activities:
Acquisition of unproved properties. . . . . . . . . . . . . . . . $ 151,905 $ -
Exploration costs . . . . . . . . . . . . . . . . . . . . . . . . 2,504 -
Acquisition of proved properties. . . . . . . . . . . . . . . . . 304,084 -
Development costs . . . . . . . . . . . . . . . . . . . . . . . . 347,491 18,328
------------ ------------
Total costs incurred. . . . . . . . . . . . . . . . . . . . . . . $ 805,984 $ 18,238
============ ============
1998 1997
------------ ------------
Net capitalized costs related to oil and gas producing activities:
Unproved leasehold costs. . . . . . . . . . . . . . . . . . . . . $ 179,609 $ 25,200
Proved leasehold costs. . . . . . . . . . . . . . . . . . . . . . 4,318,875 3,667,300
Less accumulated depletion, depreciation and impairment . . . . . (2,444,578) (1,555,250)
------------ ------------
Net oil and gas property costs. . . . . . . . . . . . . . . . . . $ 2,053,906 $ 2,137,250
============ ============
</TABLE>
The following table, based on information prepared by independent petroleum
engineers and Company management, summarizes changes in the estimates of the
Company's net interest in total proved reserves of crude oil and condensate and
natural gas, all of which are domestic reserves:
<TABLE>
<CAPTION>
<S> <C> <C>
Oil Gas
(Barrels) (MCF)
--------- -----------
Balance, January 1, 1997. . . . 122,326 2,697,560
Sales of minerals in place . . (26,856) (71,348)
Extensions and discoveries . . - 354,032
Production. . . . . . . . . . . (3,748) (11,594)
--------- -----------
Balance, December 31, 1997. . . 91,722 2,968,650
Purchase of minerals in place . 29,125 894,154
Revisions of previous estimates (30,639) (1,902,562)
Production. . . . . . . . . . . (410) (125,695)
--------- -----------
Balance, December 31, 1998. . . 89,798 1,834,547
========= ===========
Proved developed reserves:
December 31, 1997 . . . . . . . 91,722 2,968,650
========= ===========
December 31, 1998 . . . . . . . 70,423 1,720,115
========= ===========
</TABLE>
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate and natural gas which 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
oil and gas reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. The above
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the limitations inherent in such estimation.
The process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.
13. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
------------------------------------------------------------------------
The standardized measure of discounted future net cash flows at December
31, 1998 and 1997, relating to proved oil and gas reserves is set forth below.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations of actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation process.
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
-------------------------
1998 1997
------------ ------------
Future cash inflows. . . . . . . . . . . . . . . . . . . $ 4,848,000 $ 4,315,000
Future development and production costs. . . . . . . . . (2,069,000) (777,000)
------------ ------------
Future net cash flows, before income tax . . . . . . . . 2,779,000 3,538,000
Future income taxes. . . . . . . . . . . . . . . . . . . - -
------------ ------------
Future net cash flows. . . . . . . . . . . . . . . . . . 2,779,000 3,538,000
10% annual discount. . . . . . . . . . . . . . . . . . . (905,000) (1,260,000)
------------ ------------
Standardized measure of discounted future net cash flows $ 1,874,000 $ 2,278,000
============ ============
</TABLE>
Future net cash flows were computed using year-end prices and costs, and
year-end statutory tax rates (adjusted for permanent differences) that relate to
existing proved oil and gas reserves at year end. The following are the
principal sources of change in the standardized measure of discounted net cash
flows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
--------------------------
1998 1997
------------- -----------
Sales of oil and gas produced, net of production costs $ (116,000) $ (31,000)
Purchase of minerals in place. . . . . . . . . . . . . 931,000 -
Sales of minerals in place . . . . . . . . . . . . . . - (220,000)
Net changes in prices and production costs . . . . . . (225,000) -
Revisions and other. . . . . . . . . . . . . . . . . . (1,222,000) (68,000)
Accretion of discount. . . . . . . . . . . . . . . . . 228,000 236,000
------------- -----------
Net change. . . . . . . . . . . . . . . . . . . . . (404,000) (83,000)
Balance, beginning of year . . . . . . . . . . . . . . 2,278,000 2,361,000
------------- -----------
Balance, end of year . . . . . . . . . . . . . . . . . $ 1,874,000 $2,278,000
============= ===========
</TABLE>
14. SUBSEQUENT EVENTS
None.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 721
<SECURITIES> 0
<RECEIVABLES> 46229
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49950
<PP&E> 4498484
<DEPRECIATION> 2444578
<TOTAL-ASSETS> 2112483
<CURRENT-LIABILITIES> 583476
<BONDS> 0
<COMMON> 76254
0
43168
<OTHER-SE> 1267825
<TOTAL-LIABILITY-AND-EQUITY> 2112483
<SALES> 201102
<TOTAL-REVENUES> 2115345
<CGS> 976870
<TOTAL-COSTS> 1579283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49894
<INCOME-PRETAX> (1413832)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1413832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1413832)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
