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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ______
____________________
Commission File Number __________
ENERGY SEARCH, INCORPORATED
TENNESSEE 62-1423071
280 FORT SANDERS WEST BLVD., SUITE 200, KNOXVILLE, TENNESSEE 37922
(800) 551-5810
Check mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No[_]
The number of shares outstanding of each of the issuer's classes of common
equity,
as of the latest practicable date: 3,013,280 (September 30, 1997)
---------
Traditional Small Business Disclosure Format (check one):
Yes [X] No [_]
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ENERGY SEARCH, INCORPORATED
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALANCE SHEETS AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 2
STATEMENTS OF OPERATIONS
THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 4
STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 5
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 6
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 10
ITEM 2 CHANGES IN SECURITIES 10
ITEMS 3, 4, 5 AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
ENERGY SEARCH, INCORPORATED
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996*
(Unaudited)
------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,282,093 $ 51,067
Accounts receivable 216,198 111,376
Due from related partnerships, net 197,249 621,865
Other current assets 138,302 121,067
----------- -----------
Total current assets 1,833,842 905,375
OIL AND GAS PROPERTIES, USING SUCCESSFUL
EFFORTS ACCOUNTING
Proved properties 9,545,734 6,011,800
Unproved properties 191,278 186,159
Less accumulated depreciation, depletion and
amortization (2,927,586) (2,751,099)
----------- -----------
Net oil and gas properties 6,809,426 3,446,860
OTHER ASSETS
Other property and equipment, net 254,550 194,668
Investments in related partnerships 1,377,514 1,363,423
Deferred tax asset 609,505 413,000
Other assets 73,532 345,046
----------- -----------
Total other assets 2,315,101 2,316,137
Total assets 10,958,369 $ 6,668,372
=========== ===========
</TABLE>
* Condensed from audited financial statements
2
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<TABLE>
<CAPTION>
September 30, December 31,
1997 1996*
(Unaudited)
------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 650,683 $ 902,456
Current portion of long-term debt 70,650 69,729
Accounts payable and accrued expenses 768,540 1,033,463
Drilling advances - 1,335,124
----------- -----------
Total current liabilities 1,489,873 3,340,772
LONG-TERM DEBT, less current portion 104,651 154,794
SHAREHOLDERS' EQUITY
Class A Convertible Preferred Stock (no par value; 5%
cumulative; 216,945 shares authorized, 207,700 shares
issued and outstanding at $10 per share stated value) - 2,049,307
Class B Convertible Preferred Stock (no par value; no
dividend preference, 450,000 shares authorized 242,300
shares issued and outstanding at $10 per share stated
value) - 2,196,853
Common stock (no stated value, 10,000,000 shares
authorized; 3,013,280 and 1,100,000 shares issued and
outstanding as of September 30, 1997 and December 31,
1996, respectively) 10,799,125 1,200
Retained earnings (deficit) (1,435,280) (1,074,554)
----------- -----------
Total shareholders' equity 9,363,845 3,172,806
----------- -----------
Total liabilities and shareholders' equity $10,958,369 $ 6,668,372
=========== ===========
</TABLE>
* Condensed from audited financial statements
3
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS Nine months Nine months Three months Three months
ENERGY SEARCH INCORPORATED Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Net turnkey revenue $540,480 $186,177 $(59,136) $333,388
Oil & Gas Revenue 335,454 197,394 195,890 69,212
Management fees 210,708 176,390 53,532 77,140
Other Revenue 264,110 42,399 124,220 4,269
---------- ------------ --------- ----------
Total revenue 1,350,752 602,360 314,506 484,009
OPERATING EXPENSES
Production expenses 175,064 127,214 53,923 43,112
Exploration expenses 74,535 190,349 30,781 150,754
Depreciation, depletion & amortization 400,187 277,579 142,754 92,527
Interest 63,045 179,789 20,519 44,482
General and administrative 1,104,185 871,019 251,736 399,576
---------- ------------ --------- ----------
Total operating expenses 1,817,016 1,645,950 499,713 730,451
NET (LOSS) FROM OPERATIONS (466,264) (1,043,590) (185,207) (246,442)
OTHER INCOME (EXPENSE)
Program reimbursement (35,395) (170,336) (11,722) (61,532)
Stock issuance expense - (83,080) -
Gain on sale of assets 4,177 53,096 1,214 (1,252)
---------- ------------ --------- ----------
Total other (expense) (31,218) (200,320) (10,508) (62,784)
NET (LOSS) BEFORE INCOME TAX
AND EXTRAORDINARY ITEM (497,482) (1,243,910) (195,715) $(309,226)
INCOME TAX BENEFIT 196,505 440,344 77,307 122,144
---------- ------------ --------- ----------
NET (LOSS) BEFORE EXTRAORDINARY $ (300,977) (803,566) $(118,408) $(187,082)
ITEM
EXTRAORDINARY ITEM-LOSS ON EARLY
EXTINGUISHMENT OF DEBT (NET OF INCOME TAX
BENEFIT OF $51,000) - (78,920) - -
---------- ------------ --------- ----------
NET (LOSS) $ (300,977) $ (882,486) $(118,408) $ (187,082)
Earnings per common and common equivalent
share (.11) (.80) (.04) (.17)
</TABLE>
4
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STATEMENTS OF CASH FLOWS
ENERGY SEARCH, INCORPORATED
<TABLE>
<CAPTION>
Nine months ended September 30
1997 1996
(Unaudited) (Unaudited)
------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (300,977) $ (882,486)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation, depletion and amortization expense 400,187 277,579
Dryholes and abandonments of previously capitalized oil
and gas properties 2,865 109,789
Loss on early extinguishment of debt 129,920
(Gain) on sale of assets (4,177) (53,096)
(Increase) in deferred tax asset (196,505) (491,344)
(Increase) decrease in other assets
Accounts receivable and due from partnerships 319,794 951,932
Other current assets (17,235) (27,819)
Other assets 250,786 (80,100)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities (264,923) (323,052)
Drilling advances (1,335,124) (756,871)
------------ -----------
Net cash used in operating activities (1,145,309) (1,145,548)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of proven properties (143,743) (182,429)
Proceeds from sale of other property and equipment 10,048 37,000
Purchase of oil and gas properties and other property and
equipment (3,508,313) (488,222)
Net investment in affiliated partnerships (164,694) (109,230)
Purchase of oil and gas leases (7,984) (32,356)
------------ -----------
Net cash used in investing activities (3,814,686) (775,237)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 6,551,765 -
Net proceeds from issuance of preferred stock - 2,184,160
Proceeds from issuance of long term debt 15,000
Payment of dividends on preferred stock (59,749) -
Payments on long-term debt (300,995) (252,523)
Payments of loan issue costs - (24,164)
------------ -----------
Net cash provided (used) in financing activities 6,191,021 1,922,473
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,231,026 1,688
CASH AND CASH EQUIVALENTS - Beginning of year 51,067 105,978
------------ -----------
CASH AND CASH EQUIVALENTS - End of period $ 1,282,093 $ 107,666
=========== ===========
</TABLE>
See notes to financial statements
5
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997 and 1996
BASIS OF PRESENTATION
The condensed Balance Sheets as of September 30, 1997 and December 31,
1996, Statements of Operations for the three and nine-month periods ended
September 30, 1997 and 1996, and Statements of Condensed Cash Flows for the
nine-month periods ended September 30, 1997 and September 30, 1996 have been
prepared by the Company.
In the opinion of management all adjustments, (which include
reclassifications and normal recurring adjustments,) necessary to present fairly
the financial position, results of operations and cash flows at September 30,
1997, and for all periods presented, have been made. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses. Actual results
may differ from these estimates. Interim results are not necessarily indicative
of results for a full year.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the 1996 audited
financial statements and notes thereto included in the exhibits of this filing.
EARNINGS PER SHARE
Earnings (loss) per share of common and common equivalent stock are based
on the weighted average common shares outstanding and are retroactively adjusted
for stock splits. The convertible preferred stock is considered to be the
equivalent of common stock from the time of its issuance in 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an independent oil and gas development and production
company focusing primarily on developmental drilling and production of natural
gas reserves in the Appalachian Basin and elsewhere in the mid-continent region
of the United States. The Company historically developed oil and gas properties
primarily by drilling natural gas wells in joint ventures with Tennessee limited
partnerships for which the Company served as managing general partner (the
"Affiliated Drilling Partnerships") and in which the Company retained a working
interest. The Company has now changed its focus.
The Company has transitioned from being primarily a driller-operator for
syndicated Affiliated Drilling Partnerships to an energy company developing
reserves for its own account. The Company in 1996 reduced its debt by converting
$2,077,000 of its variable rate subordinated debentures (the "Debentures" or
"Debenture Issue") to 207,700 shares of Class A Preferred Stock and raised
$2,423,000 in cash by the sale in private placements of 242,300 shares of Class
B Preferred Stock. The proceeds of Class A and Class B Preferred Stock were
used to eliminate substantially all long-term debt of the Company. In January
of 1997, all Class A and B shares of Preferred Stock were converted to common
stock, on a one-share-for-one-share basis, as a part of the Company's initial
public offering of common stock.
In January of 1997, the Company completed the initial public offering
("IPO") of common stock and common stock purchase warrants in the Company by
which it raised approximately $6,551,765 net of expenses. With these proceeds
the Company has now shifted its primary operational focus to the development of
wells wholly owned by the Company. While the Company anticipates the continued
sponsoring of Affiliated Drilling Partnerships on a limited basis, management
believes the new focus will allow the Company to more expeditiously
6
<PAGE>
develop its own reserves, cash flow from oil and gas revenues, and thus value
for the newly public company.
The Company continues to develop its largest contiguous acreage position in
southern West Virginia, the Beaver Lease. This area, management believes,
contains the potential for higher reserves per well with less associated
drilling and completion cost per cubic foot of gas recovered. As planned, the
Company has utilized a significant portion of the net proceeds raised in the
Company's initial public offering to begin to develop the Beaver Lease. The
Company's present strategy is to continue to develop the Beaver Lease and
surrounding areas, as well as other acreage held, or to be acquired by the
Company.
DEVELOPMENTS SINCE SEPTEMBER 30, 1997
On October 27, 1997, the Company completed a Regulation D Offering of
common stock in the Company by which it raised approximately $4,725,000, after
deducting the Underwriters' discount and non-accountable expense allowance. The
Company estimates additional offering expenses of $75,000. The Company intends
to use the net proceeds to increase working capital. The additional working
capital will be used for continued development of the Beaver Lease, further
developmental drilling activities elsewhere in southeastern Ohio and West
Virginia and for acquisition opportunities which may present themselves in areas
proximate to existing operations. The funds will ultimately be applied as
natural gas and oil opportunities present themselves.
NINE MONTHS ENDED SEPTEMBER 30, 1997
Financial Condition
Total assets increased $4,289,997 or 64.3% from December 31, 1996, to
September 30, 1997, primarily due to the funds received from the initial public
offering and the application thereof.
Current assets increased $928,467 or 102.5%. The Company has raised to date
approximately $6,551,765 net of underwriter fees, professional fees, and various
other costs associated with the stock offering. Pending use, the Company invests
the proceeds in short-term, investment grade obligations. At September 30, 1997,
the balance in the investment account was approximately $850,000. Due from
related partnerships decreased $424,616 or 68.3% primarily due to the collection
of the 1996-A year-end Affiliated Drilling Partnership receivable in January
1997.
Oil and gas properties increased $3,362,566 or 97.5% primarily as a result
of a significant increase in drilling activity in the first nine months of 1997
and the acquisition by the Company of oil and gas lease interests in proved
properties. Due to the increased drilling activity, the Company increased
capital expenditures for drilling in well related equipment from December 31,
1996 to September 30, 1997 in the amount of $1,149,767 and has recognized
intangible drilling costs of $2,240,423 in the first nine months due to the
Company drilled wells
Other assets decreased primarily due to the prepaid stock offering costs of
$265,948 being charged against the common stock account when the initial public
offering was closed. An offsetting increase in other assets was primarily due
to an increase in other property and equipment of $59,882 or 30.8%, and an
increase in the deferred tax assets of $196,505.
Total liabilities decreased $1,901,042 or 54.4% from December 31, 1996, to
September 30, 1997, due to a decrease in current liabilities of $1,850,899 or
55.4% and a decrease in long term debt of $50,143 or 32.4%.
Current liabilities decreased primarily due to a decrease in drilling
advances of $1,335,124. Drilling advances decrease (and revenues are recognized)
with the Company drilling Affiliated Drilling Partnership wells. The drilling
advance decrease represents the Company drilling all wells required to be
drilled at December 31, 1996 for Affiliated Drilling Partnerships by March 31,
1997. The Company raised an additional $765,000 through the 1997 Affiliated
Drilling Partnership in the second and third quarters of 1997. The Company
completed the required drilling for the 1997 Affiliated Drilling Partnership by
September 30, 1997. Accounts payable and accrued expenses decreased $264,923 or
25.6%. Notes payable decreased $251,773 or 27.9% due to the payment by the
Company of notes payable due to officers in the amount of $251,773.
7
<PAGE>
Results of Operations
During the nine months ended September 30, 1997, the Company had a net loss
of $300,977 compared to a net loss of $882,486 for the nine months ended
September 30, 1996. The decrease in the year to date loss is primarily the
result of an increase in turnkey revenues of $354,303 between these two periods.
Turnkey revenues of the Company have historically been a major portion of
total revenues. These fluctuate quarter to quarter. The Company drilled to
total depth 11 wells in the first quarter of 1997. Of these, 7 gross wells were
attributable to Affiliated Drilling Partnerships for which turnkey revenues were
recognized. This is an increase of 4 gross wells over the first quarter of
1996. Since all turnkey drilling for all Affiliated Drilling Partnerships was
accomplished in the first quarter of 1997, management expected little turnkey
revenues in the second and third quarters of 1997. The Company commenced the
1997 drilling program in May 1997 and drilled two wells to total depth by June
30, 1997 compared to only one well in the second quarter of 1996. The Company
drilled one well to total depth in the third quarter and thereby completed
drilling for the 1997 drilling program by September 30, 1997.
During the three months ended September 30, 1997, the Company's turnkey
expenses were in excess of turnkey revenue by $59,136 compared to turnkey
revenue of $333,388 for the three months ended September 30, 1996. The decrease
in turnkey revenue of $392,524 or 117.7% is due to a decrease in turnkey
drilling in the third quarter of 1997. As noted above, the Company drilled one
well in the third quarter of 1997 to four wells for the same period in 1996.
This decrease in turnkey revenues in the third quarter is consistent with the
Company's changing focus to drilling wells for its own account. In 1997, the
Company has drilled 14 wells for its own account. The Company contemplates
sponsoring a 1997-A drilling program in the fourth quarter and if successful,
would expect some level of turnkey revenues attributable to such program in the
fourth quarter of 1997. There can be no assurance, however, that the Company
will raise any particular level of funds. As a result, there is no assurance
that any increased revenues will result therefrom.
To a lesser degree the increase in earnings is due to an increase in oil
and gas revenue, management fees and other revenue of 69.9%, 19.5% and 522.9%
respectively, for a total of $394,089. Oil and gas revenue increased due to
the 14 Company wells drilled and the related revenue recognized in the third
quarter. The increase in other revenue is primarily due to the interest earned
on the IPO investment account of approximately $122,000, and approximately
$115,000 of net operating commission revenue earned by Equity Financial
Corporation, a wholly owned subsidiary.
Total operating expenses increased $171,066 or 10.4% for the nine month
period ending September 30, 1997 over the nine month period ending September 30,
1996, primarily due to a decrease in exploration costs of $115,814 or 60.8%
primarily due to the capitalization of landman expenses related to the Company
wells, an increase in depreciation, depletion and amortization expense of
$122,608 or 44.2% due to the write down of the investments in related
partnerships, and an increase in general and administrative expenses of
$233,166, or 26.8%. The increase in general and administrative expenses is due
primarily to an increase in total wages of the Company of which officer's
salaries for Messrs. Torrey, Remine and Cooper comprise $405,000. This results
from the fact that the Company now has two additional officers on the payroll of
the Company. Messrs. Torrey and Remine were, prior to the IPO on the payroll of
Equity Financial Corporation, an affiliate. The Company as of May 1, 1997 has
acquired EFC and Messrs. Torrey and Remine no longer receive a salary from EFC.
As a direct result of the Company's public status, general and administrative
costs have increased in marketing, printing and production, and professional
fees. Interest expense decreased $116,744 or 64.9% due to the Company's decrease
in debt as discussed above.
During the three months ended September 30, 1997, the Company's general and
administrative expenses decreased $147,840 or 37.0% due to the increase in
expenses as noted above and an offsetting decrease of approximately $318,000 due
to the capitalization of costs associated with the drilling and preparation of
the wells for production for the nine month period ending September 30, 1997.
These costs will eventually be transferred to oil and gas properties or expensed
depending on the outcome of the well.
8
<PAGE>
Other income and expense decreased $169,102 or 84.4% for the nine month
period ending September 30, 1997 over the nine month period ending September 30,
1996 primarily due to a decrease in program reimbursements of $134,941, or
79.2%, a result of improved performance of Programs resulting from higher
natural gas prices and improved production.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds for the nine months ended September 30, 1997
continues to be from the issuance of common stock to the public. The Company
has raised to date approximately $6,551,765, net of costs. As anticipated the
proceeds from the IPO have been spent primarily on developing the Beaver Lease
as well as other developmental drilling activities located generally in the
southeastern Ohio and West Virginia areas. Management eventually expects to see
positive cash flow from operating activities in 1997 and beyond primarily due to
the increased drilling activity for its own account. Pending use of the
remaining balance of the IPO proceeds, the Company has invested these funds in
short-term, investment grade obligations.
The Company anticipates additional cash flow from turnkey profits earned on
turnkey drilling contracts with future Affiliated Drilling Partnerships in the
future. However, there can be no assurance of how much, if any, additional cash
flow will, in fact, occur. The Company has currently raised $765,000 in the
1997 Affiliated Drilling Partnerships, $734,400 of which was recognized as
turnkey revenue for wells drilled to total depth as of September 30, 1997. The
Company contemplates sponsoring a 1997-A drilling program to be available in the
fourth quarter of 1997. If additional funds are not raised or if actual
drilling costs related to the drilling of Affiliated Drilling Partnership wells
exceed the fixed turnkey contract amount, then no additional cash flow from
turnkey drilling would be experienced.
The Company maintains a line of credit (the "Bank One Credit Facility")
with Bank One, Texas, N.A. (the "Bank"). The Bank One Credit Facility is secured
by all oil and gas assets of the Company. Pending renewal, interest only is
payable on the amounts drawn and outstanding. The interest rate applicable is
based on a floating rate equal to the Bank's base rate, published from time to
time, plus, one and three-fourths percent. Effective July 1, 1997, this line of
credit has been increased to $1,020,000. The credit limit reduces by $20,000 per
month pending reevaluation at the end of the annual credit period. The Bank has
advised the Company that the personal guarantees of current guarantors have been
eliminated. This is primarily due to the improved capitalization of the Company
resulting from the initial public offering.
On October 27, 1997, the Company completed a Regulation D private placement
of common stock in the Company by which it raised approximately $4,725,000,
after deducting the broker-dealers' commissions and non-accountable expense
allowance. The Company estimates additional offering expenses of $75,000. The
Company intends to use the net proceeds to increase working capital. The
additional working capital will be used for continued development of the Beaver
Lease, further developmental drilling activities elsewhere in southeastern Ohio
and West Virginia and for acquisition opportunities which may present themselves
in areas proximate to existing operations. The funds will ultimately be applied
as natural gas and oil opportunities present themselves.
9
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The following table sets forth the assets, liabilities and capitalization
of the Company as of September 30, 1997, as reflected in the interim financial
statements and the pro forma assets, liabilities and capitalization of the
Company as of September 30, 1997, giving effect to the sale of 750,000 common
shares, at $7.00 per share, and the application of the net proceeds.
<TABLE>
<CAPTION>
Pro Forma
September 30, September 30,
1997 1997
---- ----
<S> <C> <C>
Total assets $ 10,958,369 $15,608,369
Total liabilities $ 1,594,524 $ 1,594,524
Shareholders' Equity
Common stock (no stated value, 10,000,000
shares authorized, 3,013,280 shares issued
and outstanding) 10,799,125 15,449,125
Accumulated deficit (1,435,280) (1,435,280)
------------ -----------
Total shareholders' equity $ 9,363,845 $14,013,845
Total liabilities and shareholders' equity $ 10,958,369 $15,608,369
</TABLE>
After completion of the Regulation D offering, the Company will have
3,763,280 shares issued and outstanding.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company, its properties, nor any of its directors or officers
is involved in any material litigation or administrative proceedings, nor do any
of them have any knowledge that any such litigation or proceeding may be
contemplated.
ITEM 2. CHANGES IN SECURITIES
Following is information required by Item 701 of Regulation S-B as to all
equity securities of the registrant sold or issued by the registrant from
periods dating prior to and during the period covered by this report. The
following information restates and supersedes any similar information provided
in Part II of Form 10-QSB for the quarterly period ended June 30, 1997 for the
Company previously filed. None of the following securities were registered
under the Securities Act of 1933.
(a) Issuance of Common Stock
By board of directors action as of June 1, 1997, Jim Harry, an employee of
the Company, was issued 800 shares of unregistered Common Stock of the Company
in consideration for services rendered pursuant to his employment contract. The
issuance of these securities was exempt pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 701 promulgated thereunder.
(b) Issuance of Common Stock Purchase Warrants
Following is a list of common stock purchase warrants issued by the Company
prior to and since the
10
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Company's initial public offering. None of the following warrants were
registered.
<TABLE>
<CAPTION>
REF AMOUNT Offering SECURITIES ACT OR SEC RULE
NO. DATE (1) ISSUED (2) ISSUED TO CONSIDERATION EXEMPTION (3)
- --- -------- ---------- --------- ------------- ---------------------------
<S> <C> <C> <C> <C> <C>
1 7-1-96 400 Brenda B. Suttles services* 4(2); Rule 701
2 7-1-96 1,000 David L. Tuttle services* 4(2); Rule 701
3 7-1-96 1,000 Roy A. Lemasters services* 4(2); Rule 701
4 7-1-96 600 Timothy A. Boggess services* 4(2); Rule 701
5 7-1-96 400 Debra A. Martin services* 4(2); Rule 701
6 7-1-96 400 Andrew S. Pakes services* 4(2); Rule 701
7 7-1-96 1,960 James T. McKay services 4(2)
8 7-1-96 3,396 Derry M. Thompson services 4(2)
9 7-1-96 480 Palm States Equities services 4(2)
10 7-1-96 80 World Invest Corp services 4(2)
11 7-1-96 60 Gaines C. Walker services 4(2)
12 7-1-96 1,238 Robert L. Remine services* 4(2)
13 7-1-96 1,238 Charles P. Torrey, Jr. services* 4(2); Rule 701
14 7-1-96 1,238 Richard S. Cooper services* 4(2); Rule 701
15 7-1-96 4,000 Derry M. Thompson services 4(2)
16 7-1-96 4,000 James T. McKay services 4(2)
17 10-1-96 480 James T. McKay services 4(2)
18 10-1-96 2,400 Derry M. Thompson services 4(2)
19 10-1-96 1,260 Robert L. Remine services* 4(2); Rule 701
20 10-1-96 1,260 Charles P. Torrey, Jr. services* 4(2); Rule 701
21 10-1-96 1,260 Richard S. Cooper services* 4(2); Rule 701
22 2-28-97 480 Derry M. Thompson services 4(2)
23 2-28-97 480 Robert L. Remine services* 4(2); Rule 701
24 2-28-97 480 Charles P. Torrey, Jr. services* 4(2); Rule 701
25 2-28-97 480 Richard S. Cooper services* 4(2); Rule 701
26 2-28-97 200 Mitzi Kopotic services* 4(2); Rule 701
27 3-1-97 2,500 Douglas A. Yoakley services* 4(2); Rule 701
28 3-1-97 2,500 Kim A. Walbe services* 4(2); Rule 701
29 6-1-97 25,000 Daniel S. Edmunds services 4(2)
30 6-1-97 10,000 Karen Torrey services* 4(2); Rule 701
31 6-1-97 3,000 Roy A. Lemasters services* 4(2); Rule 701
32 6-1-97 2,500 Richard Wenter services 4(2)
</TABLE>
(1) Represents the effective date the issuance of the common stock purchase
warrants was approved by the board of directors of the Company.
(2) Represents the number of common shares the holder may purchase pursuant to
the warrants issued. These numbers are after the post-IPO two for one common
stock split with respect to those warrants issued prior to the initial public
offering of the Company.
(3) The common stock purchase warrants were issued by the Company in
transactions not involving a public offering exclusively to persons with pre-
existing employment, or other business relationships with the Company, as a
result of employment services, or service as a director of the Company
(designated by *), or marketing and related services rendered in connection with
the Company's year-end private placement, direct participation drilling program
known as Energy Search Natural Gas 1996-A L.P.
With regard to Reference Numbers 1-21 above, prior to the Company's
January 24, 1997 initial public offering ("IPO"), the Company authorized certain
common stock purchase warrants which were to be issued to key employees and
other agents of the Company for services. Each common stock purchase warrant
entitled the holder to purchase one (1) share of common stock at an exercise
price of $10.00 per share, which was reduced to $5.00 per
11
<PAGE>
share as a result of the post-IPO two for one common stock split (the "Exercise
Price"). The only exceptions to these Exercise Prices were the 4,000 warrants
issued each to Derry M. Thompson and James T. McKay, which had an Exercise Price
of $0.01 per share. The common stock purchase warrants were to be exercisable
within 90 days after completion of the IPO. See subsection (c) below for a list
of those common stock purchase warrants which have been exercised and subsection
(d) below for a list of those common stock purchase warrants which have been
surrendered for the issuance of new common stock purchase warrants.
With respect to Reference Numbers 27 and 28 above, by board of directors'
action effective March 1, 1997, Messrs. Yoakley and Walbe were issued 2,500
common stock purchase warrants each in consideration for their services as
outside directors of the Company. These warrants are exerciseable at $6.50 for
a period of 5 years from the date of issuance. The issuance of these warrants
was exempt from registration under Section 4(2) of the Securities Act of 1933
and Rule 701 promulgated thereunder.
With respect to Reference Numbers 29-31 above, by board of directors'
action effective June 1, 1997, Daniel S. Edmunds, Karen Torrey, Roy A. Lemasters
and Richard Wenter were issued 25,000, 10,000, 3,000 and 2,500, respectively,
common stock purchase warrants to purchase one share of common stock of the
Company per warrant at an exercise price of $6.50 per share on or before an
exercise date of January 30, 2002. Mr. Edmunds is an employee of Equity
Financial Corporation, a wholly-owned subsidiary of the Company, and was issued
such warrants in consideration for his services. Ms. Torrey and Mr. Lemasters
are employees of the Company and were each issued such warrants in consideration
for their services. Mr. Wenter was a consultant for the Company and was issued
such warrants in consideration for his services. The issuance of such warrants
to employees or consultants of the Company was exempt from registration under
Section 4(2) of the Securities Act of 1933 and/or Rule 701 promulgated
thereunder.
(c) Exercise of Common Stock Purchase Warrants
The following shares of common stock of the Company were issued to persons
who exercised common stock purchase warrants previously issued to them in
connection with employment, consulting or other services rendered by them,
respectively, to the Company. There were no underwriting commissions or
discounts paid with respect to the exercise of such common stock purchase
warrants or the issuance of shares of common stock resulting therefrom.
<TABLE>
<CAPTION>
NUMBER OF OFFERING SECURITIES ACT OR SEC
DATE OF ISSUE (1) SECURITIES SHARES ISSUED (2) ISSUED TO PRICE (3) RULE EXEMPTION
- ----------------- ---------- ----------------- --------- --------- ---------------------
<S> <C> <C> <C> <C> <C>
6-1-97 Common Stock 400 Brenda B. Suttles $2,000 Section 4(2); Rule 701(4)
6-1-97 Common Stock 200 Mitzi Kopotic $1,000 Section 4(2); Rule 701(4)
6-1-97 Common Stock 1,000 David L. Tuttle $5,000 Section 4(2); Rule 701(4)
6-1-97 Common Stock 1,000 Roy A. Lemasters $5,000 Section 4(2); Rule 701(4)
6-1-97 Common Stock 600 Timothy A. Boggess $3,000 Section 4(2); Rule 701(4)
6-1-97 Common Stock 400 Debra A. Martin $2,000 Section 4(2); Rule 701(4)
6-1-97 Common Stock 400 Andrew S. Pakes $2,000 Section 4(2); Rule 701(4)
6-1-97 Common Stock 4,000 Derry M. Thompson $20 Section 4(2)(5)
6-1-97 Common Stock 4,000 James T. McKay $20 Section 4(2)(5)
6-1-97 Common Stock 480 Palm States Equities $2,400 Section 4(2)
</TABLE>
(1) Represents the effective date that the issuance of the shares of common
stock was approved by the board of directors of the Company.
(2) All shares of common stock were issued pursuant to the exercise of common
stock purchase warrants held by the holders.
(3) Represents the aggregate exercise price of the holders' common stock
purchase warrants.
(4) All of these shares of common stock of the Company were issued as a result
of exercise common stock purchase
12
<PAGE>
warrants previously issued in a private transaction to the holders by the
Company, all of which holders were either existing employees, consultants or
similar service providers of the Company at the time of receipt of the common
stock purchase warrants. The common stock purchase warrants were issued as a
form of compensation or benefit to the holders. The exercise price of the common
stock purchase warrants were determined by the Company, in its discretion.
(5) All of these shares of common stock were issued as a result of common stock
purchase warrants previously issued in a private transaction to the holders by
the Company. The common stock purchase warrants were issued in a private
transaction to persons with whom the Company had a substantial pre-existing
relationship. These persons have for several years, as associated persons of
Equity Financial Corporation ("EFC") an NASD broker-dealer and affiliate of the
Company, marketed the Company's private placement direct participation drilling
programs. The common stock purchase warrants were issued to the holders as
consideration for company loyalty and services.
(d) Issuance Of New Common Stock Purchase Warrants In Exchange For
Outstanding Common Stock Purchase Warrants Of Certain Management Persons And
Certain Key Marketing Persons.
Effective April 7, 1997, the board of directors of the Company authorized
the issuance of certain common stock purchase warrants to individuals identified
below who are management or key marketing personnel of the Company (the
"Holders"). These individuals were previously the owners of certain
unregistered common stock purchase warrants issued prior to the January 24, 1997
initial public offering of the Company's common stock and series A common stock
purchase warrants, or thereafter (the "Unregistered Warrants"). According to
their terms, the Unregistered Warrants entitled the holder to one share of
common stock per Unregistered Warrant. The exercise price was $5.00 per share;
and the Unregistered Warrants were required to be exercised by April 24, 1997.
The listed "ask" price on the NASDAQ Small-Cap Stock Market of the
Company's Units (comprised of one share of common stock and one Series A common
stock purchase warrant each,) as of close of the market on April 7, 1997 was
$6.125. The Holders indicated that they would agree to not exercise their
Unregistered Warrants at $5.00 per share as of April 24, 1997, if the Company
would agree to issue new common stock purchase warrants (the "New Warrants") in
exchange for the Unregistered Warrants that would entitle the Holders to
purchase the same number of shares of common stock as under the Unregistered
Warrants, at an exercise price of $6.50 per share; and subject to an exercise
date of no later than January 30, 2002. The Holders agreed to exchange their
Unregistered Warrants for New Warrants as evidence of their belief in the
ability of management to enhance the stock value of the Issuer over time. Of
course, there can be no assurance that the stock value of the Company will
appreciate over any particular period of time, or at all. The board of
directors determined that it was in the best interest of the Company and the
holders of common stock of the Company to issue the New Warrants to the Holders
in exchange for the Unregistered Warrants.
Pursuant to the April 7, 1997 board of directors authorizing resolution, as
of June 1, 1997, the board of directors issued the following common stock
purchase warrants (the "New Warrants") to the Holders in exchange for surrender
by the Holders of their Unregistered Warrants, as indicated below. All of the
following transactions are exempt from registration pursuant to the Securities
Act of 1933 under Section 4(2) of such Act.
<TABLE>
<CAPTION>
NAME OF WARRANT HOLDER NO. OF UNREGISTERED WARRANTS NO. OF NEW WARRANTS
<S> <C> <C>
Charles P. Torrey, Jr. 2,978 2,978
Robert L. Remine 2,978 2,978
Richard S. Cooper 2,978 2,978
Derry M. Thompson 6,276 6,276
James T. McKay 2,440 2,440
</TABLE>
(e) Regulation D Private Placement of Common Stock
On or about October 27, 1997, the Company completed the private placement
sale of 749,961 shares of common stock at $7.00 per share. The Placement Agent
(the "Placement Agent") for the sale of such common stock was
Neidiger/Tucker/Bruner, Inc., of Denver, Colorado. Certain other NASD-member
broker-dealers,
13
<PAGE>
including Equity Financial Corporation, a wholly-owned subsidiary of the
Company, participated in the offering as selling agents (the "Participating
Selling Agents"). The shares of common stock were sold primarily to accredited
investors, as defined in Rule 501 of Regulation D, and to no more than 35
nonaccredited investors. The offer and sale of common stock by the Company in
this transaction was exempt from registration under Rule 4(2) of the Securities
Act and Rule 506 of Regulation D, promulgated thereunder.
The total offering proceeds were $5,249,727. Total commissions payable to
the Placement Agent were $367,480.89 (7%), and nonaccountable expense allowance
payable to the Placement Agent was $157,491.81 (3%) some of which commissions
and nonaccountable expense allowance were allowed to Participating Selling
Agents.
As additional compensation for selling the common stock in this
transaction, the Company issued to the Placement Agent (and its authorized
designees) warrants to purchase 75,000 shares of common stock (the
"Participating Selling Agent Warrants"). The Participating Selling Agent
Warrants provide for an exercise price of $7.00 per share and an exercise date
of no later than January 30, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Energy Search, Incorporated
-----------------------------------
(Company)
Date: November 11, 1997 /s/ Richard S. Cooper, President
----------------- -----------------------------------
Richard S. Cooper
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 1,282,093 51,067
<SECURITIES> 0 0
<RECEIVABLES> 573,911 893,705
<ALLOWANCES> (160,464) (160,464)
<INVENTORY> 75,802 66,067
<CURRENT-ASSETS> 1,833,842 905,375
<PP&E> 9,737,012 6,641,402
<DEPRECIATION> (2,927,586) (2,999,874)
<TOTAL-ASSETS> 10,958,369 6,668,372
<CURRENT-LIABILITIES> 1,489,873 3,340,772
<BONDS> 104,651 154,794
0 4,246,160
0 0
<COMMON> 10,799,125 1,200
<OTHER-SE> (1,435,280) (1,074,554)
<TOTAL-LIABILITY-AND-EQUITY> 10,958,369 6,668,372
<SALES> 335,454 289,188
<TOTAL-REVENUES> 1,354,929 1,533,455
<CGS> 27,458 19,150
<TOTAL-COSTS> 1,753,971 2,009,920
<OTHER-EXPENSES> 35,395 280,972
<LOSS-PROVISION> 0 57,996
<INTEREST-EXPENSE> 63,045 207,038
<INCOME-PRETAX> (497,482) (1,022,471)
<INCOME-TAX> 196,505 417,000
<INCOME-CONTINUING> (300,977) (605,471)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (78,920)
<CHANGES> 0 0
<NET-INCOME> (300,977) (684,391)
<EPS-PRIMARY> (.11) (.67)
<EPS-DILUTED> (.11) (.67)
</TABLE>
