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, 1999
Commission file number #1-13162
EMPIRIC ENERGY, INC.
(Name of small business issuer in its charter)
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
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
--- ---
As of April 7, 2000, the aggregate market value at voting stock held by
non-affiliates, computed by reference to the closing price on the OTC Bullitin
Board, was $4,612,654.
As of April 7, 2000, the number of shares outstanding of the Registrants' common
stock was 9,132,102.
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EMPIRIC ENERGY, INC.
INDEX TO FORM 10-KSB
PART I. PAGE #
Item 1. Description of Business.........................................1
Item 2. Description of Property.........................................2
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............................................6
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................6
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...............................................9
Item 12. Certain Relationships and Related Transactions.................10
Item 13. Exhibits and Reports on Form 8-K...............................11
SIGNATURE PAGE.............................................................11
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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, 1999.
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 16 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.
Offshore Well
In April, 1999, the Company participated with another independent in
the drilling of an exploratory well on Vermilion Block 93/96, offshore Louisiana
in a water depth of 18 ft. The prospect was developed with the latest 3-D
seismic data and showed the potential for substantial gas reserves in three
separate Miocene sands down to 8,400 ft. The Company committed to and paid for
an estimated 10% of the geological, seismic and drilling costs of the prospect.
The well was actually drilled to a depth of approximately 8,400 ft. The sands
were encountered as projected. Unfortunately, the reservoirs were not sealed
adequately and the gas remaining in the sands was non-commercial and the well
was 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.)
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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. The option expired in October, 1999. The Company expects
to begin development of this property in the year 2000.
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.
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.
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Productive Well Summary
The following table sets forth certain information regarding the
Company's ownership, as of December 31, 1999, of productive wells in the areas
indicated.
PRODUCTIVE WELLS
OIL Gas Total
GROSS Net Gross Net Gross Net
Texas
Zavala County 4.0 1.6 8.0 3.9 12.0 5.5
Mississippi
Smith (1) 0 0 1.0 1.0 1.0 1.0
Pennsylvania (2) 0 0 7.0 4.0 7.0 4.0
Totals 4.0 1.6 16.0 8.9 20.0 10.5
(1) This well is currently shut-in. It is expected that production will not
begin earlier than late 2000.
(2) Assumes approximately 54% working interest remaining after all costs and
"back-ins".
Acreage
The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December 31, 1998
DEVELOPED Undeveloped Total
GROSS Net Gross Net Gross Net
South Texas 480 220 17,202 8,248 17,682 8,468
Richmond Acreage -0- -0- 21,535 13,211 21,535 13,211
Mississippi 320 320 -0- -0- 320 320
Total 800 540 38,737 21,459 39,537 21,999
NOTE: Does not include Pennsylvania properties in which Empiric owns working
interest in the well bores only.
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.
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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 (Symbol:
EMPE) for the periods indicated in 1998, 1999 and the first quarter of 2000
regarding the OTC market.
High Low Close
VOLUME Trade Trade Trade
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 128,000 0.5600 0.3800 0.3100
Second Quarter 614,900 0.9375 0.2188 0.3125
Third Quarter 1,535,500 1.4375 0.2182 1.4375
Fourth Quarter 884,700 1.6250 0.5312 0.9688
2000
First Quarter Thru 3/31/00 568,700 1.0625 .5938 .6084
As of March 31,2000, there were approximately 606 record and beneficial
holders of the Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of 1999 to 1998
The following schedule sets forth in summary form the financial
results of operations of the Company for the years ended December 31, 1998 and
1999.
YEAR REVENUES PROFIT/LOSS COMMENTS
---- --------- ------------ --------
1998 $ 201,102 $ (1,413,831) See Note 1 below
1999 $ 199,732 $ (967,710)
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.
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Revenues of $199,732 in 1999 were $1,370 or 0.6% lower than during
1998. The reduction was due to lower production even though average prices for
oil and gas were higher in 1999 than in 1998.
Production expense of $183,188 in 1999 was $97,763 or 114% higher than
1998. The increase was due to unforseen repairs to the Smith gas well in
Mississippi required to conform to Mississippi regulations.
Depletion and depreciation expenses of $163,207 were $12,017 or 6.9%
lower than 1998. The difference was due primarily to lower depletion due to
lower production volumes and higher prices used in the preparation of the
reserve reports in 1999 than 1998.
There was no impairment expense for 1999 compared to $716,401 in 1998.
The difference is due to the higher oil and gas prices for 1999 that prevented
any impairment of Company reserves.
Bad debt expense of $24,244 was $8,213 or 25% lower than 1998. Bad debt
expense in 1999 was due a change in the sale of gas to a pipeline which has been
acquired by an unrelated third party purchaser. The uncollected revenue more
than 120 days old at December 31, 1999 was fully reserved.
General and Administrative expense of $784,344 was $214,568 or 38%
higher than 1998. The difference was primarily due to the expense related to
stock issued for public relations services and a decision to expense major
portions of executive salaries and consulting fees that were capitalized in
1998.
Other income of $64,130 was $49,887 or 350% higher than 1998. The
difference was due primarily to the Company collecting a note receivable in 1999
that had been previously reserved.
Interest expense of $76,589 was $26,695 or 54% higher than 1998. The
difference was due to a higher level of debt in 1999 than in 1998.
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.
Liquidity
Cash flows provided an increase of $61,854 for 1999 leaving a cash
balance of $62,575 at December 31, 1999. Net cash used by operating activities
was $335,110 due primarily to the net loss of $967,710, offset by non cash
expenses and the increases in the accruals of current liabilities. Net cash used
by investing activities was $292,289 which was primarily for the purchase of oil
and gas properties. Financing activities, which included the net proceeds from
the issuances of long term debt and sales of common stock, provided cash of
$689,253 which was used to support the operating and investing activities
described above.
During the year 1999, the Company issued the following securities
which were outstanding at the end of the year:
5
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1,420,674 Common Shares, par value $0.01
299,490 Class 'D' Warrants, each allowing the purchase of one Common
Share at $1.50 until May 13, 2001
200,000 Class 'E' Warrants, each allowing the purchase of one Common
Share at $2.00 until May 13, 2002.
The Common Shares were issued at prices from $0.37 to $1.06 and were
issued for cash, receivables, components of debt, services and interest. None of
the above securities were registered.
As of December 31, 1999, the Company had working capital deficit of
$718,218 and an equity-to- debt ratio of about 1.2-to-1. 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 not incurred any significant expense related to Year
2000 compliance and remediation. Year 2000 compliance and remediation has not
had 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 and 1999...............F-1
Balance Sheet - December 31, 1999..........................................F-2
Statements of Operations - Years ended December 31, 1999 and 1998..........F-3
Statements of Changes in Stockholder's Equity.............................F-4
Statements of Cash Flow - Years ended December 31, 1999 and 1998...........F-5
Notes to Financial Statements......................................F-6 to F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
6
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PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The 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. Robert L. Thomas resigned as
Director of the Company in July, 1999 due to a potential conflict of interest.
James J. Ling, age 77, 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 57, 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 84, 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.
7
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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 1999.
SUMMARY COMPENSATION TABLE
NAME/POSITION FISCAL YEAR SALARY(1) (2) (3) BONUS* STOCK OPTIONS
James J Ling(1) 1998 $ 112,500 -0- $ 121,000
1999 $ 120,000 -0- -0-
Renn Rothrock, Jr.(2) 1998 $ 120,000 $ 20,000 $ 150,000
1999 $ 120,000 $ 20,000 -0-
Clyde E Skeen(3) 1998 $ 42,000 -0- $ 40,000
1999 $ 42,000 -0- -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 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 1998 and 1999. They have received notes payable for a
portion 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.
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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 was 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 1,950,000 shares
were 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 1999 the Board of Directors authorized an additional 300,000
shares to be set aside for issuance under the Plan bringing to 2,250,000 the
total shares authorized for the Stock Option Plan. No options were awarded in
1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock held by
the principal Officers and Directors of the Company as of December 31, 1999:
Name Shares Beneficially % of Class
---- ------ ------------ ----------
Owned
-----
James J. Ling(1) 861,105 9.5%
Clyde E. Skeen(2) 385,750 4.3%
Renn Rothrock, Jr.(3) 505,000 5.6%
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(1) Includes 369,525 shares of Common Stock held by the Dorothy Ruth Ling
Trust, of which Mr. Ling is Trustee; and, 486,580 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.
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 s hall 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 486,580 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.
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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
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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, 1999, and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Empiric Energy, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, 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.
The value of the Company's oil and gas properties are primarily supported by
non-producing petroleum reserves which will require significant capital costs to
realize. At December 31, 1999, the Company does not currently have the resources
required to realize these reserves.
HEIN + ASSOCIATES LLP
Dallas, Texas
March 31, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 62,575
Oil and gas sales receivable, net of allowance for doubtful accounts
of $24,244 45,047
-----------
Total current assets 107,622
PROPERTY AND EQUIPMENT:
Oil and gas properties (full cost method):
Unproved leasehold costs 179,609
Proved leasehold costs and well equipment 4,658,398
Less accumulated depletion, depreciation and impairment (2,603,395)
-----------
Net property and equipment 2,234,612
OTHER FURNITURE AND EQUIPMENT, net of accumulated
depreciation of $26,861 7,649
DEPOSITS 3,281
-----------
Total assets $ 2,353,164
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt, including related parties $ 371,602
Accounts payable and accrued expenses 254,599
Payroll taxes payable 43,651
Accrued interest payable, including related parties 29,486
Oil and gas revenues payable 11,962
Due to related parties 114,540
-----------
Total current liabilities 825,840
LONG -TERM DEBT, net of current portion, including related parties 223,849
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, no par value, $575,000 liquidation
preference 43,168
Common stock, $.01 par value, 20,000,000 shares authorized; 9,046,027 shares
issued and outstanding 90,461
Common stock subscribed, 46,875 shares 469
Additional paid-in capital 5,882,146
Receivables (99,061)
Obligation to repurchase treasury stock (11,875)
Accumulated deficit (4,601,833)
-----------
CURRENT LIABILITIES:
Total stockholders' equity 1,303,475
-----------
Total liabilities and stockholders' equity $ 2,353,164
===========
</TABLE>
See accompanying notes to these financial statements.
F-2
<PAGE>
EMPIRIC ENERGY, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1999 1998
----------- -----------
REVENUE -
Oil and gas sales $ 199,732 $ 201,102
COSTS AND EXPENSES:
Production expense 183,188 85,425
Depletion and depreciation 163,207 175,224
Impairment of oil and gas properties -- 716,401
Bad debt expense 24,244 32,457
General and administrative 784,344 569,776
----------- -----------
Total costs and expenses 1,154,983 1,579,283
OTHER INCOME (EXPENSE):
Other income 64,130 14,243
Interest expense (76,589) (49,894)
----------- -----------
Total other income (expense) (12,459) (35,651)
----------- -----------
NET LOSS $ (967,710) $(1,413,832)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.12) $ (0.21)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,318,679 6,855,574
=========== ===========
See accompanying notes to these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 1999
Common Stock Common Stock Subscribed Preferred Additional
-------------------------- ------------------------- Stock Paid-In
Shares Amount Shares Amount Series A Capital
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1998 5,859,776 $ 58,598 -- $ -- $ -- $ 4,286,661
Agreement to repurchase treasury stock -- -- -- -- -- --
Equity instruments issued in the purchase of
oil and gas properties 992,577 9,926 -- -- 39,414 314,149
Common stock issued for services 243,000 2,430 -- -- -- 114,715
Warrants and options issued for services -- -- -- -- -- 31,382
Equity instruments issued for debt or by
purchase 300,000 3,000 -- -- 3,754 128,277
Conversion of notes payable to common stock 230,000 2,300 -- -- -- 112,700
Reclass of receivable to equity -- -- -- -- -- --
Net loss for year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 1998 7,625,353 76,254 -- -- 43,168 4,987,884
Equity instruments issued in the purchase of
oil and gas properties 75,000 750 -- -- -- 50,790
Cancellation of common stock issued for
purchase of oil and gas properties (61,500) (615) -- -- -- --
Common stock issued for services and interest 220,000 2,200 -- -- -- 184,206
Common stock issued for cash 943,100 9,431 -- -- -- 444,368
Common stock issued for receivable 50,000 500 -- -- -- 24,500
Conversion of notes payable to common stock 194,074 1,941 -- -- -- 140,867
Common stock subscribed -- -- 46,875 469 -- 49,531
Net loss for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 1999 9,046,027 $ 90,461 46,875 $ 469 $ 43,168 $ 5,882,146
=========== =========== =========== =========== =========== ===========
Obligation to
Repurchase Accumulated
Treasury Stock Receivables Deficit Total
----------- ----------- ----------- -----------
BALANCES, January 1, 1998 $ -- $ -- $(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 -- -- -- 363,489
Common stock issued for services -- -- -- 117,145
Warrants and options issued for services -- -- -- 31,382
Equity instruments issued for debt or by
purchase -- -- -- 135,031
Conversion of notes payable to common stock -- -- -- 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 (11,875) (74,061) (3,634,123) 1,387,247
Equity instruments issued in the purchase of
oil and gas properties -- -- -- 51,540
Cancellation of common stock issued for
purchase of oil and gas properties -- -- -- (615)
Common stock issued for services and interest -- -- -- 186,406
Common stock issued for cash -- -- -- 453,799
Common stock issued for receivable -- (25,000) -- --
Conversion of notes payable to common stock -- -- -- 142,808
Common stock subscribed -- -- -- 50,000
Net loss for the year -- -- (967,710) (967,710)
----------- ----------- ----------- -----------
BALANCES, December 31, 1999 $ (11,875) $ (99,061) $(4,601,833) $ 1,303,475
=========== =========== =========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (967,710) $(1,413,832)
Adjustments to reconcile to net cash used by operating activities:
Depletion, depreciation and impairment 163,207 891,625
Bad debt expense 24,244 32,457
Common stock, warrants and options issued for services 186,406 148,527
Changes in assets and liabilities:
Accounts receivable (23,062) 16,996
Other assets -- (1,205)
Accounts payable and accrued expenses 185,996 62,327
Oil and gas revenues payable 3,000 8,962
Due to related parties 92,809 3,750
Other -- 3,748
----------- -----------
Net cash used by operating activities (335,110) (246,645)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of oil and gas properties (288,598) (349,995)
Purchase of furniture and equipment (3,691) (10,626)
Advances to Texoil -- (43,061)
----------- -----------
Net cash used by investing activities (292,289) (403,682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 325,066 537,960
Repayments of long-term debt (139,612) (102)
Proceeds from sales and subscription of common stock 503,799 94,379
----------- -----------
Net cash provided by financing activities 689,253 632,237
----------- -----------
NET INCREASE (DECREASE) IN CASH 61,854 (18,090)
CASH, beginning of the year 721 18,811
----------- -----------
CASH, end of the year $ 62,575 $ 721
=========== ===========
SUPPLEMENTAL INFORMATION -
Cash paid during the year for interest $ 22,170 $ 17,390
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITY:
Purchase of oil and gas properties with equity securities, including
convertible notes payable $ 50,925 $ 455,989
=========== ===========
Obligation to repurchase treasury stock $ -- $ 11,875
=========== ===========
Conversion of notes payable to common stock $ 142,808 $ 26,930
=========== ===========
Common stock issued for receivable $ 25,000 $ --
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-5
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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 1992. 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, 1999. The Company
also has working interests in unproved leasehold acreage in Texas as of
December 31, 1999.
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 or debt in order to complete one or
more acquisitions of oil and gas properties in an attempt to improve
operating results. Additionally, management is currently in discussions
with a third party to fund the development costs required to realize the
Company's proved non-producing reserves.
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 years ended December 31, 1999 and
1998, internal costs capitalized into the full cost pool were approximately
$63,000 and $237,000, respectively. 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, 1999.
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,
1999.
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
$158,817 and $147,418 was recorded for the years ended December 31, 1999
and 1998, respectively. Depletion, depreciation and amortization per
equivalent mcf of natural gas was approximately $1.13 and $1.35 for the
years ended December 31, 1999 and 1998, respectively.
F-6
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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
$4,390 and $2,297 for the years ended December 31, 1999 and 1998,
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, 1999, the
Company had convertible notes payable, convertible preferred stock,
outstanding warrants for 542,490 shares of common stock and outstanding
options for 1,170,000 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
------------------------
The Company applies 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.
F-7
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
2. ACQUISITION AND DIPOSITION 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
for 1998 is presented as if the interests in the property had been acquired
as of Januar 1, 1998.
Revenues $ 251,664
Net income (loss) $ (1,421,007)
Net income (loss) per share $ (0
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 had the right to exercise the option at any time before October
1999. This option was not exercised during 1999.
3. RELATED PARTY TRANSACTIONS
--------------------------
Hill Investors, Inc., an affiliate of the chairman of th 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, 1999
and 1998, the Company incurred expense under this agreement of $120,000 and
$112,500 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 agreemen is on a month to month basis.
During the years ended December 31, 1999 and 1998, the Company incurred
expense under this agreement of $42,000 in each year.
At December 31, 1999, the Company had a liability to two members of its
board of directors of $102,168 for unreimbursed expenses and management
fees.
At December 31, 1999, the Company had notes payable to members of its board
of directors and certain family members for $191,941 (net of $8,559
discount) as described in Note 4.
4. LONG-TERM DEBT
--------------
Long-term debt at December 31, 1999 consisted of the following:
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, 1999. $ 100,000
Unsecured notes payable to an individual, interest at 8%,
monthly payments of interest with principal due at
maturity of July and September 2001. 100,000
F-8
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
Unsecured notes payable to a company, interest at 8%,
monthly payments of interest with principal due at
maturity in December 1998. This note is in default
as of December 31, 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 was collateralized by the
potential proceeds from the exercise of the option
for the Panhandle property (Note 2). 50,000
Unsecured note payable to a bank, interest at 7%, monthly
payments of interest with principal due at maturity
in March 2000. 40,000
Unsecured notes payable to individuals, interest at 8%,
principal and interest due at maturity of July 1999.
These notes are in default as of December 31, 1999. 30,000
Unsecured note payable to a finance company, interest at
8%,principal and interest due on demand. 30,000
Unsecured notes payable to an individual, interest at 8%,
principal and interest due at maturity in December
1999. This note was not paid upon maturity and
subsequently defaulted in 2000. 15,000
Unsecured note payable to an individual, interest at 8%,
principal and interest due on demand. 11,875
Notes payable to a commercial lender, interest at 14.5%,
monthly payments of principal and interest until
maturity in November 2001. These notes are
collateralized by computer equipment. 5,307
Related Parties Notes Payable:
-----------------------------
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 were collateralized by the potential proceeds
from the exercise of the option for the Panhandle
property (Note 2). 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%, quarterly payments of interest with
principal due at maturity in December 1999. This note
is convertible into common stock at $0.60 per share. 34,500
Unsecured notes payable to an affiliate of the chairman of
the board, interest at 8%, quarterly payments of
interest with principal due at maturity in December
1999 and July 1999. Principal amount of $21,000 is
convertible into common stock at $0.60. This note was
in default as of December 31, 1999. 31,000
Unsecured notes payable to a family member of the chairman
of the board, interest at 8%, principal and interest
due at maturity in January 2001. 12,500
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 was
collateralized by the potential proceeds from the
exercise of the option for the Panhandle property
(Note 2). 12,500
Unsecured notes payable to a family member of the chairman
of the board, interest at 8%, principal and interest
due at maturity of December 1999. This note was not
repaid upon maturity and subsequently defaulted in
2000. 10,000
---------
F-9
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
Total notes payable 635,182
Discounts on notes payable (net of (39,731)
accumulated amortization of $43,613) ---------
Net notes payable 595,451
Less current portion (371,602)
---------
$ 223,849
=========
The discounts on notes payable resulted because certain 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, 2000 through 2003 are as follows:
2000 $ 371,602
2001 213,580
2003 50,000
---------
$ 635,182
=========
5. INCOME TAXES
------------
The Company's deferred tax assets and (liabilities) are composed of the
following at December 31, 1999:
Deferred tax assets:
Difference in bases of oil and gas properties $ 381,000
Net operating loss carryforward 2,415,000
Other 9,000
----------
Total deferred tax asset before valuation allowance 2,805,000
Valuation allowance (2,805,000)
Net asset $ --
==========
As of December 31, 1999, the Company has a net operating loss carryforward
for federal income tax purposes of approximately $6,700,000 which will
expire from 2007 to 2019.
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, 1999. 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 of $43,168.
During 1998, the Company entered into an agreement and a note payable with
a former employee to repurchase the common stock held by the former
employee 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, 1999.
F-10
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1999, 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 2000.
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, 1999,
there are 28,000 and 15,000 warrants outstanding for the Series B and
Series C warrants, respectively. There wer no Series B warrants or Series C
warrants exercised during the year ended December 31, 1999. During 1999,
299,490 and 200,000 of the Series B and Series C warrants respectively,
were canceled as described below.
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.
During 1999, the Company designated two new series of warrants to purchase
common stock. The Series D warrants have an exercise price of $1.50 per
share of common stock and can be exercised until May 2001. The Series E
warrants have an exercise price of $2.00 pe share of common stock and can
be exercised until May 2002. These warrants may be called by the Company a
$0.10 (Series D) and $0.15 (Series E) per warrant if the Company's common
stock trades for $1.88 (Series D) and $2.50 (Series E) per share for ten
consecutive days.
During 1999, 299,490 and 200,000 of the Series B and Series C warrants,
respectively, issued on the property acquisition in 1998 (Note 2), were
canceled by the Company. The warrant holders were given identical amounts
of Series D and Series E warrants. The fair value of the warrant
modification, as determined by the Black-Scholes options pricing model, of
$23,415 was recorded to the full cost pool during the year ended December
31, 1999.
During 1999, the Company issued 140,000 shares of common stock in exchange
for public relations services. The fair market value of those shares of
$111,250 was recorded as an expense during the year ended December 31,
1999.
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,
1999, there are 1,080,000 stock options reserved and available for grant
under the plan.
F-11
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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
$.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, 1999 and 1998:
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 1,285,000 $ 1.00 675,000 $ 1.00
Canceled or expired (115,000) $ 1.00 (30,000) $ 1.00
Granted - - 640,000 $ 1.00
Exercised - - - -
Repriced - previous (1,170,000) $ (1.00) - -
Repriced - new 1,170,000 $ 0.50 - -
----------- ----------- ----------- -----------
Outstanding, end of year 1,170,000 $ 0.50 1,285,000 $ 1.00
=========== =========== =========== ===========
Exercisable, end of year 1,120,000 $ 0.50 1,095,000 $ 1.00
=========== =========== =========== ===========
</TABLE>
If not previously exercised, options outstanding at December 31, 1999 will
expire as follows:
Weighted
Average
Number Exercise
of Shares Price
----------- ------------
December 31, 2001 115,000 $ 0.50
December 31, 2002 415,000 $ 0.50
December 31, 2003 640,000 $ 0.50
----------- ------------
Total 1,170,000 $ 0.50
=========== ============
F-12
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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 1998. No options were granted in 1999.
Number Exercise Fair
of Shares Price Value
--------- -------- ------
Exercise price greater than market price 640,000 $ 1.00 $ 0.42
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, 1999 and 1998 income and earnings per share
would have been changed to the pro forma amounts indicated below.
1999 1998
------------ ------------
Net loss:
As reported $ (891,710) $ (1,413,832)
Pro forma $ (961,710) $ (1,800,586)
Net loss per common share:
As reported $ (0.11) $ (0.21)
Pro forma $ (0.12) $ (0.26)
The estimated fair value of each officer and director option and warrant
granted during fiscal year 1998 was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
1998
------
Expected volatility 153.2%
Risk-free interest rate 6.0%
Expected dividends -
Expected terms (in years) 5
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.
F-13
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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-cancellable sublease for office space. The lease
requires minimum monthly rental payments of $3,281 until expiration in July
2000.
The Company incurred rent expense of $41,680 and $45,959 for the years
ended December 31, 1999 and 1998, 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, 1999, the amount guaranteed by the Company is approximately
$75,000 and the underlying fair market value of the common stock is
approximately $110,000. 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, 1999, 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.
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, 1999 is
adequate.
11. 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:
YEAR ENDED DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Costs incurred in oil and gas producing activities:
Acquisition of unproved properties $ - $ 151,905
Exploration costs 130,283 2,504
Acquisition of proved properties 63,123 304,084
Development costs 146,117 347,491
---------- ----------
Total costs incurred $ 339,523 $ 805,984
========== ==========
Net capitalized costs related to oil and gas producing activities:
Unproved leasehold costs $ 179,609 $ 179,609
Proved leasehold costs 4,658,398 4,318,875
Less accumulated depletion, depreciation and impairment (2,603,395) (2,444,578)
---------- ----------
Net oil and gas property costs $2,234,612 $2,053,906
========== ==========
</TABLE>
F-14
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
The following table for 1999 is based on information prepared by Company
management using reserve estimates previously prepared by independent
petroleum engineers. The table for 1998 is primarily based on reserve
estimates prepared by independent petroleum engineers and supplemented by
Company management. The tables summarize 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:
Oil Gas
(Barrels) (MCF)
---------- ----------
Balance, January 1, 1998 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
Revisions of previous estimates 9,555 138,192
Production (1,139) (133,204)
---------- ----------
Balance December 31, 1999 98,214 1,839,535
========== ==========
Proved developed reserves: (1)
December 31, 1998 70,423 1,720,115
========== ==========
December 31, 1999 78,349 1,478,366
========== ==========
(1) Approximately 71% of the reserves classified as proved developed at
December 31, 1999 are non- producing. The estimated capital costs required
to bring the reserves to production is $450,000. The Company does not
presently have the resources required to bring the reserves to production.
If it becomes necessary for the Company to participate with another party
to bring the reserves to production, the ultimate quantities of reserves
the Company would realize would be lower than the amounts reported.
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.
F-15
<PAGE>
<TABLE>
<CAPTION>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
12. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------
The standardized measure of discounted future net cash flows at December
31, 1999 and 1998, 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.
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Future cash inflows $ 5,888,000 $ 4,848,000
Future development and production costs (1,832,000) (2,069,000)
----------- -----------
Future net cash flows, before income tax 4,056,000 2,779,000
Future income taxes -- --
----------- -----------
Future net cash flows 4,056,000 2,779,000
10% annual discount (1,230,000) (905,000)
----------- -----------
Standardized measure of discounted future net cash flows $ 2,826,000 $ 1,874,000
=========== ===========
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:
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -----------
Sales of oil and gas produced, net of production costs $ (17,000) $ (116,000)
Purchase of minerals in place -- 931,000
Net changes in prices and production costs 601,000 (225,000)
Revisions and other 181,000 (1,222,000)
Accretion of discount 187,000 228,000
----------- -----------
Net change 952,000 (404,000)
Balance, beginning of year 1,874,000 2,278,000
----------- -----------
Balance, end of year $ 2,826,000 $ 1,874,000
=========== ===========
</TABLE>
F-16
<PAGE>
EMPIRIC ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
13. SUBSEQUENT EVENT
----------------
The Company has entered into a Security Exchange Agreement with Daedalus
Building Systems, Inc. that involves the exchange of $1,500,000 face value
of Empiric convertible preferred stock (convertible into 750,000 shares of
Empiric common stock) and 750,000 Empiric warrants to purchase a share of
Empiric common stock for $2 for a period of three years to Daedalus in
exchange for 1,500,000 common shares of Daedalus and 750,000 Daedalus
warrants to purchase a share of Daedalus common stock for $2 for a period
of three years. If the exchange agreement is consummated, management of the
Company plans to distribute the majority of the Daedalus common stock
shares received to its stockholders as a dividend.
The exchange agreement is contingent upon Daedalus receiving approval from
the Securities and Exchange Commission for its registration statement filed
in late 1999. This has not occurred as of the date of the accompanying
audit report.
**********
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000921182
<NAME> Empiric Energy, Inc.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 62,575
<SECURITIES> 0
<RECEIVABLES> 69,291
<ALLOWANCES> 24,244
<INVENTORY> 0
<CURRENT-ASSETS> 107,622
<PP&E> 4,838,007
<DEPRECIATION> 2,603,395
<TOTAL-ASSETS> 2,353,164
<CURRENT-LIABILITIES> 825,840
<BONDS> 0
0
43,168
<COMMON> 90,461
<OTHER-SE> 1,169,846
<TOTAL-LIABILITY-AND-EQUITY> 2,353,164
<SALES> 199,732
<TOTAL-REVENUES> 263,862
<CGS> 346,395
<TOTAL-COSTS> 1,154,983
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,589
<INCOME-PRETAX> (967,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (967,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (967,710)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
