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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 March 31, 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: 3,000,000 (March 31, 1997)
---------
Traditional Small Business Disclosure Format (check one):
Yes [X] No [_]
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<PAGE>
ENERGY SEARCH, INCORPORATED
PART I
FINANCIAL INFORMATION PAGE
ITEM 1 FINANCIAL STATEMENTS
BALANCE SHEETS AT MARCH 31, 1997 AND 2
DECEMBER 31, 1996
STATEMENTS OF OPERATIONS
THREE-MONTH PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1996 4
STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 5
MARCH 31, 1996
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
ITEM 5 OTHER INFORMATION 11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 17
ITEMS 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
ENERGY SEARCH, INCORPORATED
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996*
(Unaudited)
----------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,395,216 $ 51,067
Accounts receivable 99,110 111,376
Due from related partnerships, net 165,346 621,865
Other current assets 123,059 121,067
----------- -----------
Total current assets 5,782,731 905,375
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties 458,341 420,040
Unproved properties 190,439 186,159
Intangible drilling costs 485,598
Wells and related equipment 5,825,328 5,591,760
Less accumulated depreciation,
depletion and amortization (2,823,980) (2,751,099)
----------- -----------
Net oil and gas properties 4,135,726 3,446,860
OTHER ASSETS
Other property and equipment, net 204,426 194,668
Investments in related partnerships 1,506,908 1,363,423
Deferred tax asset 298,000 413,000
Other assets 72,148 345,046
----------- -----------
Total other assets 2,081,482 2,316,137
Total assets $11,999,939 $ 6,668,372
=========== ===========
</TABLE>
*Condensed from audited financial statements
2
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996*
(unaudited)
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Notes payable $ 650,683 $ 902,456
Current portion of long-term debt 81,640 69,729
Accounts payable and accrued
expenses 1,247,593 1,033,463
Drilling advances - 1,335,124
----------- -----------
Total current liabilities 1,979,916 3,340,772
LONG-TERM DEBT, less current portion 133,566 154,794
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;
3,000,000 and 1,100,000 shares issued
and outstanding as of March 31, 1997
and December 31, 1996, respectively) 10,801,041 1,200
Retained earnings (deficit) (914,584) (1,074,554)
----------- -----------
Total shareholders' equity 9,886,457 3,172,806
----------- -----------
Total liabilities and shareholders'
equity $11,999,939 $ 6,668,372
=========== ===========
</TABLE>
*Condensed from audited financial statements
3
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<TABLE>
<CAPTION>
STATEMENTS OF OPERATION (Unaudited)
ENERGY SEARCH INCORPORATED 03/31/97 03/31/96
For the three months ended (unaudited) (unaudited)
REVENUE
<S> <C> <C>
Net turnkey revenue $ 731,374 $ 12,587
Oil & Gas Revenue 90,803 72,243
Management fees 82,283 43,600
Other Revenue 59,003 44,231
--------- ---------
Total revenue 963,463 172,661
OPERATING EXPENSES
Production expenses 43,925 52,594
Exploration expenses 95,820 120,774
Depreciation, depletion & 100,513 85,615
amortization
Interest 20,650 48,667
General and administrative 361,950 203,905
--------- ---------
Total operating expenses 622,858 511,555
NET INCOME (LOSS) FROM OPERATIONS 340,605 (338,894)
OTHER INCOME (EXPENSE)
Program reimbursement (8,849) (55,743)
Gain on sale of assets 2,963 -
--------- ---------
Total other income (expense) (5,886) (55,743)
NET INCOME (LOSS) BEFORE INCOME TAX 334,719 (394,637)
INCOME TAX (EXPENSE) BENEFIT (115,000) 155,882
--------- ---------
NET INCOME (LOSS) $ 219,719 $(238,755)
Earnings per common and common
equivalent share 0.09 (0.22)
Earnings per common share -
assuming full dilution 0.09
</TABLE>
4
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STATEMENTS OF CASH FLOWS
ENERGY SEARCH, INCORPORATED (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31
1997 1996
(unaudited) (unaudited)
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 219,719 $ (238,755)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation, depletion and
amortization expense 100,513 85,615
Dryholes and abandonments of previously
capitalized oil and gas properties - 97,360
(Gain) on sale of assets (2,963) -
(Increase) decrease in deferred tax
asset 115,000 (155,882)
(Increase) decrease in other assets
Accounts receivable and due from
partnerships 468,785 1,017,449
Other current assets (1,992) (2,392)
Other assets 265,989 5,243
Increase (decrease) in liabilities
Accounts payable and accrued
liabilities 214,130 77,002
Drilling advances (1,335,124) (552,620)
----------- ----------
Net cash provided in operating
activities 44,057 333,020
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of proven properties (38,301) -
Proceeds from sale of other property
and equipment 8,548 -
Purchase of oil and gas properties and
other property and equipment (755,232) (171,839)
Net investment in affiliated
partnerships (143,485) (63,380)
Purchase of oil and gas leases (4,280) (8,255)
----------- ----------
Net cash used in investing activities (932,750) (243,474)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock 6,553,681 -
Net proceeds from issuance of preferred
stock - 80,000
Payment of dividends on preferred stock (59,749) -
Payments on long-term debt (261,090) (134,635)
Payments of loan issue costs - (3,500)
----------- ----------
Net cash provided (used) in financing
activities 6,232,842 (58,135)
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,344,149 31,411
CASH AND CASH EQUIVALENTS - Beginning
of year 51,067 105,978
----------- ----------
CASH AND CASH EQUIVALENTS - End of year $ 5,395,216 $ 137,389
=========== ==========
</TABLE>
See notes to financial statements
5
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997 and 1996
BASIS OF PRESENTATION
The condensed Balance sheets as of March 31, 1997 and December 31, 1996, the
Statements of Operations for the three-month periods ended March 31, 1997 and
1996, and the Statements of Condensed Cash Flows for the three month periods
ended March 31, 1997 and March 31, 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 March 31, 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.
EQUITY FINANCIAL CORPORATION ACQUISITION
On March 3, 1997, the Company's Board of Directors approved the acquisition of
Equity Financial Corporation ("EFC"). EFC is a Tennessee corporation and an NASD
member broker-dealer. EFC acted as placement agent for each of the Company's
drilling programs and received sales commissions in connections with the
offerings. EFC is owned by two of the Company's officers. The purchase price is
$190,000 plus 7% of the gross commissions generated by EFC (not to exceed 50% of
the net income of EFC) for 3 years.
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 has 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 small interest. However, the Company has now changed its focus. 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 $6,553,681 net of expenses of the offering. With these
proceeds the Company has now shifted its primary operational focus to the
development of wells which will be wholly owned by the Company. While the
Company anticipates the continued sponsoring of Affiliated Drilling
Partnerships, management believes the new focus will allow the Company to more
expeditiously develop its own reserves, cash flow from oil and gas revenues, and
thus value for the newly public company.
6
<PAGE>
The past Affiliated Drilling Partnerships were syndicated by the Company's
affiliate, and now wholly owned subsidiary, Equity Financial Corporation
("EFC"), an NASD member broker-dealer. These partnerships were capitalized with
investor funds raised in various private offerings. The Company also operates an
approximately 60-mile gas gathering system servicing its primary areas of
operation in southeastern Ohio (the "Gas Gathering System"). The Gas Gathering
System is owned by a Tennessee limited partnership (the "Pipeline Operating
Partnership") which is comprised of the Company, as managing general partner
owning a 28.74% general partner interest and a single limited partner which is
another Tennessee limited partnership. To date, approximately $47,000,000 has
been raised in private offerings for various energy related activities of the
Company including oil and gas development and production, development of natural
gas pipelines, formation of pipeline partnerships, and for the Company's working
capital.
Historically, the Company's primary source of revenues has been derived
from turnkey drilling, management and administrative fees received from
Affiliated Drilling Partnerships pursuant to various agreements governing the
joint drilling, development and operation of wells between the various
Affiliated Drilling Partnerships and the Company (the "JDOA(s)"), management
fees from the Pipeline Operating Partnership, partnership revenue from its
varying equity interests in the Affiliated Drilling and Pipeline Partnerships
formed since 1992, and production revenues attributable to its own working
interest in wells. With the Company's primary focus now concentrated on drilling
wells to be owned wholly by the Company, the proportion of revenue to be
generated by production revenue attributable to working interest in wells owned
by the Company will dramatically increase.
As a part of the Company's transition 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.
Then 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 July 1996, the Company negotiated its largest acreage acquisition to
date, expanding its operations into southern West Virginia. This area,
management believes, contains the potential for higher reserves per well and
less production cost per cubic foot of gas recovered than the Company's previous
areas of operation in southeastern Ohio and western West Virginia. The Company
leased in excess of 17,000 acres from Beaver Coal Company, Ltd. (the "Beaver
Lease") on which management believes there exists substantial developmental
drilling locations (qualified under SEC guidelines as proved undeveloped
reserves, "PUDS") offsetting producing wells. Current drilling of 14 wells on
this acreage supports the Company's estimates of both reserves and costs. As
planned, the Company has utilized a portion of the net proceeds raised in the
initial public offering to begin to develop the Beaver Lease. The Company's
present strategy is to continue to use the balance of the proceeds of the IPO
and current cashflows from operations to develop the Beaver Lease and
surrounding areas, as well as other acreage held, or to be acquired by the
Company.
DEVELOPMENTS SINCE MARCH 31, 1997
The Company as of May 1, 1997, acquired an affiliate company, Equity
Financial Corporation ("EFC"), a Tennessee corporation previously owned by
Messrs. Charles P. Torrey, Jr. and Robert L. Remine. Messrs. Torrey and Remine
are officers, directors and major shareholders of the Company. The sale price
for the acquisition was $190,000 cash plus 7% of the gross commissions generated
by EFC (not to exceed 50% of the net income of EFC) for 3 years. This
acquisition did not involve a "significant amount of assets" nor was it a
"significant business acquisition" for SEC reporting purposes on Form 8-K. It is
expected that EFC will continue to market the Company's Affiliated Drilling
Partnership private placement programs in the future.
7
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997
Financial Condition
Total assets increased $5,331,567 or 80.0% from December 31, 1996, to March
31, 1997, primarily due to an increase in current assets of $4,877,356, or
538.7%, and a net increase in oil and gas properties of $688,866 or 20.0% and a
decrease in other assets of $234,655 or 10.1%.
Current assets increased primarily as a result of the Company's receipt of
proceeds from its initial public offering which closed on January 30, 1997. The
Company raised $6,553,681 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. Due
from related partnerships decreased $456,519 or 73.4% due to the collection of
the 1996-A year end Affiliated Drilling Partnership receivable in January 1997.
Oil and gas properties increased primarily as a result of a significant
increase in drilling activity in the first quarter of 1997 and the acquisition
by the Company of oil and gas lease interest 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 March 31, 1997 in
the amount of $233,568 and has recognized intangible drilling costs of $485,598
in the first quarter due to the Company drilled wells. The Company also
acquired a farm-out of oil and gas leases as well as a joint venture working
interest in a developmental well during the first quarter of 1997 at a total
cost of approximately $33,000.
Other assets increased primarily due to an increase in the investments in
related partnerships of $143,485 or 10.5%, due to contributions made to
Affiliated Drilling Partnerships and the net income (loss) recognized during the
period, and a decrease in the deferred tax assets of $115,000 for the first
quarter earnings. Other assets decreased primarily due to the prepaid stock
offering costs of $265,948 being charged against the common stock account.
Total current and long term debt decreased $1,382,084, or 39.5% from
December 31, 1996, to March 31, 1997, due to a decrease in current liabilities
of $1,360,856, or 40.7% and a decrease in long term debt of $21,228, or 13.7%.
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's drilling of Affiliated Drilling Partnership wells. The
drilling advance decrease represents the Company's drilling of all wells
required to be drilled for Affiliated Drilling Partnerships through March 31,
1997. There was in the first quarter an offsetting increase in current
liabilities resulting from an increase in accounts payable and accrued expenses
of $214,130, or 20.7% (attributable to the increased drilling activity), and
payment by the Company of notes payable due to officers in the amount of
$251,773. It is important to note that Drilling activity for Affiliated Drilling
Programs varies quarter to quarter. Management does not expect any significant
revenue recognition associated with Affiliated Drilling Partnership activity in
the second quarter of 1997.
Results of Operations
During the three months ended March 31, 1997, the Company had net income of
$219,719 compared to a net loss of $238,755 for the three months ended March 31,
1996. This increase in earnings is primarily the result of an increase in net
turnkey revenues of $718,787 between these two periods. 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.
To a lesser degree the increase in earnings is due to an increase in oil
and gas revenue, management fees and other revenue of 25.7%, 88.7% and 33.4%
respectively, for a total of $72,015.
Turnkey revenues of the Company have historically been a major portion of
total revenues. These fluctuate quarter to quarter. Since all turnkey drilling
for all Affiliated Drilling Partnerships was accomplished in
8
<PAGE>
the first quarter of 1997, little or no turnkey revenues are expected by
management in the second quarter of 1997. The Company contemplates sponsoring a
1997 drilling program to be available in May 1997 and if successful, would
expect some level of turnkey revenues attributable to such program to begin to
be realized in the third quarter of 1997. There can be no assurance, however,
that the Company will raise any particular level of funds in its planned 1997
Drilling Partnership. As a result, there is no assurance that any increased
revenues will result.
Total operating expenses increased $111,303 or 21.8% for the three month
period ending March 31, 1997 over the three month period ending March 31, 1996,
primarily due to an increase in general and administrative expenses of $158,045,
or 77.5%. 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 $92,438. 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. EFC has been acquired by the Company as of
May 1, 1997 and Messrs. Torrey and Remine no longer receive a salary from EFC.
The net income for the three months ended March 31, 1997, is also partially
the result of a net decrease in other income (expense) resulting from a decrease
in program reimbursements of $46,894, or 84.1%. This decrease is 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 three months ended March 31, 1997 has
been from the issuance of common stock to the public. The Company raised
$6,553,681, net of costs, in its public offering in January 1997. It is
currently anticipated that the remaining proceeds of the IPO will be 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
third and fourth quarter of 1997. However, there can be no assurance of how
much, if any, additional cash flow will, in fact occur. In the event funds for
the 1997 Affiliated Drilling Partnerships 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. As discussed previously, the Company does not
anticipate the recognition of any turnkey drilling profits in the second quarter
of 1997. This is consistent with prior years.
The Company maintains a line of credit (the "Bank One Credit Facility")
with Bank One, Texas, N.A.( the "Bank") which is not to exceed $900,000. The
credit limit amount reduces by $10,000 per month pending reevaluation at the end
of the annual credit period. 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. The Bank has advised the Company that it will
alter the terms of the Bank One Credit Facility to eliminate personal guarantees
of current guarantors. This is primarily due to the improved capitalization of
the Company resulting from the initial public offering.
9
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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 by the registrant during the period
covered by this report. No such securities were registered under the Securities
Act of 1933.
ISSUANCE OF COMMON STOCK PURCHASE WARRANTS
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 share as a result of the post-IPO two for one common stock split (the
"Exercise Price"). The common stock purchase warrants were to be exercisable
within 90 days after completion of the IPO.
<TABLE>
<CAPTION>
OFFERING SECURITIES ACT OR SEC
DATE (1) AMOUNT ISSUED(2) ISSUED TO CONSIDERATION RULE EXEMPTION (3)
- -------- ---------------- --------- ------------- ------------------
<S> <C> <C> <C> <C>
3-3-97 480 Charles P. Torrey, Jr. services Section 4(2)
3-3-97 480 Robert L. Remine services Section 4(2)
3-3-97 480 Richard S. Cooper services Section 4(2)
3-3-97 480 Derry M. Thompson services Section 4(2)
3-3-97 200 Roy Lemasters correction of Section 4(2)
clerical error
</TABLE>
(1) Represents the 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.
(3) With the exception of Mr. Roy Lemasters, all of 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 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 respect to Mr. Lemasters, the 200 common stock purchase warrants were
issued to him to correct a clerical error made in the number of common stock
purchase warrants which were to have been previously issued to him. Mr.
Lemasters had a pre-existing employment relationship with the Company and was
issued these common stock purchase warrants as a result of previous services
rendered to the Company in 1996.
10
<PAGE>
ITEM 5. OTHER INFORMATION
a. ACQUISITION OF EQUITY FINANCIAL CORPORATION
In a transaction approved by the board of directors of the Company on
March 3, 1997, which transaction closed effective May 1, 1997, the Company
acquired 100% of the outstanding stock of Equity Financial Corporation, ("EFC"),
a Tennessee corporation and an NASD member broker-dealer previously owned by
Messrs. Charles P. Torrey, Jr. and Robert L. Remine. Messrs. Torrey and Remine
are officers, directors and principal shareholders of the Company. The Company
paid $190,000 plus 7% of the gross commissions generated by EFC (not to exceed
50% of the net income of EFC) for 3 years, for the stock of EFC. Management
believes and has been advised that the acquisition does not involve a
"significant amount of assets" and was not a "significant business acquisition"
for purposes of SEC reporting on Form 8-K. It is expected that EFC will continue
to market the Company's future private placement Affiliated Drilling
Partnerships.
b. ELECTION OF CERTAIN OFFICERS AND DIRECTORS
On March 3, 1997, Mr. Douglas A. Yoakley and Mr. Kim A. Walbe were
elected to the board of directors of the Company. These persons are the initial
two outside directors of the Company as required by the Company's bylaws, as
amended. They will serve as directors for a term to last until the first annual
meeting of the shareholders of the Company or until their successors are duly
elected and qualified.
Brief resumes of Messrs. Yoakley and Walbe are set forth below.
DOUGLAS A. YOAKLEY - DIRECTOR, elected March 3, 1997 for a term of the shorter
of one year or until the first annual meeting of shareholders. Mr. Yoakley
founded Pershing Yoakley & Associates, a multi-specialty public accounting firm
with over one hundred employees in three offices, including Knoxville and
Chattanooga, Tennessee and Clearwater, Florida. Mr. Yoakley has a Bachelor of
Science degree in Accountancy from University of Tennessee and is a member of
American Institute of Certified Public Accountants. Mr. Yoakley serves as a
director for the following organizations: The Philadelphians, Inc.; Healthcare
Horizons, Inc.; Camel Manufacturing, Inc.; and Clinical Laboratories, Inc.
KIM A. WALBE - DIRECTOR, elected March 3, 1997 for a term of the shorter of one
year or until the first annual meeting of shareholders. Mr. Walbe is an
independent consultant supervising drilling and completion of wells in West
Virginia, Virginia and Kentucky. Mr. Walbe prepares oil and gas reserve reports
for wells in New York, Pennsylvania, West Virginia, Ohio, Kentucky and Virginia.
Mr. Walbe is also involved in supervising acquisition quality control and
interpretation of all forms of electric log data, including deviated well data.
He functions as well-site geologist in Kentucky, West Virginia and Virginia;
evaluates leases in Ohio, Virginia, Pennsylvania, West Virginia, New York and
Kentucky; interprets aerial photography and prepares geological structure maps
from interpretations; prepares lineation/fracture/borehole televisions maps for
Devonian Shale well site selection and prepares and delivers testimony in oil
and gas litigation as an expert witness. Currently Mr. Walbe is an Adjunct
Professor of Geology at the University of Charleston. Mr. Walbe has also been a
contract consultant since 1985 to the Gas Research Institute's Devonian Shale
Program. Mr. Walbe is a member of the following societies: Appalachian
Geological Society, American Institute of Professional Geologists, Society of
Petroleum Engineers of A.I.M.E., Society of Professional Well Log Analysts and
American Society for Photogrammetry and Remote Sensing.
c. AMENDMENT TO BYLAWS; ADOPTION OF FIFTH AMENDED AND RESTATED BYLAWS
On March 3, 1997, the board of directors of the Company adopted the
Fifth Amended and Restated Bylaws of the Company. These Fifth Amended and
Restated Bylaws of the Company are attached as an Exhibit to this report. The
change from the Fourth Amended and Restated Bylaws of the Company to the Fifth
Amended and Restated Bylaws of the Company was to modify the definition of
"outside director(s)" for purposes of Section 3.01 thereof.
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d. RISK FACTORS
The Company's future results may be affected by inherent risks and
uncertainties that exist in the exploration, development and production of oil
and natural gas. Such risks and uncertainties include, but are not limited to,
the following:
FACTORS AFFECTING EARNINGS AND STOCK PRICE
The statements contained in this report on Form 10-QSB that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward looking statements. It is important to note that the Company's actual
results could differ materially from those described in such forward looking
statements. You should consult the risk factors listed from time to time in
Company's reports on Form 10-QSB, 10-KSB, and annual reports to shareholders.
Among the factors that could cause actual results to differ materially are the
following risk factors:
RISKS ASSOCIATED WITH OIL AND GAS INDUSTRY
Current Oil and Gas Markets. There is substantial uncertainty as to the
prices at which natural gas and oil produced by the Company may be sold, and it
is possible that under some market conditions the production and sale of oil and
gas from some or all of the Company's wells may not be economical. The
availability of a ready market for oil and gas and the prices obtained for oil
and gas depend upon numerous factors beyond the control of the Company,
including competition from other natural gas and oil suppliers and national and
international economic and political developments. The Company is not subject to
any gas price controls. Future changes in regulations may have an effect on the
Company's operations.
Reliance on Estimates of Proved Reserves and Future Net Revenues;
Depletion of Reserves; Price Volatility. There are numerous uncertainties
inherent in estimating quantities of proved reserves and in projecting rates of
production and timing of development expenditures, including many factors beyond
the control of the producer. Any reserve data set forth in this report or
incorporated by reference herein represent only estimates. In addition, the
estimates of future net revenues from proved reserves of the Company and the
present value thereof are based on certain assumptions about future production
levels, prices, and costs that may not prove to be correct over time. The rate
of production from oil and gas properties declines as reserves are depleted.
Except to the extent the Company acquires additional properties containing
proved reserves, conducts successful exploration and development activities or,
through engineering studies, identifies additional behind-pipe zones or
secondary recovery reserves, the proved reserves of the Company will decline as
reserves are produced. Future oil and gas production is therefore highly
dependent upon the Company's level of success in acquiring or finding additional
reserves. Oil and gas prices may be quite volatile, depending on numerous
factors, including steps taken by the Organization of Petroleum Exporting
Countries ("OPEC"), tensions in the Middle East and weather conditions.
Risks of Oil and Gas Activities. Significant risks are inherent in the
oil and gas business, including the drilling of dry and unsuccessful wells,
operating hazards and uninsured risks, intense competition for attractive
properties, governmental regulations, volatile prices and other uncontrollable
factors. Furthermore, oil and gas drilling is speculative. The possibility
always exists that wells drilled will be non-productive. Even wells that are
completed may not produce enough natural gas or oil to pay out.
Exploration and Development Risks. Exploration and development drilling
activities are subject to much greater risks of failure than those associated
with the ownership of producing properties. The drilling of exploratory wells
involves the greatest risks, since such wells are located in unproved areas. The
drilling of development wells, although generally consisting of drilling in
proven areas, may result in dry holes or the failure to produce oil or gas in
commercial quantities. The drilling of development wells and exploratory wells
also involves the risk that unusual or unexpected formations and pressures will
be encountered, and other conditions
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will exist, that could result in the Company incurring substantial losses as
well as liabilities to third parties or governmental entities.
Operating Hazards and Uninsured Risks. The Company's operations will be
subject to all risks inherent in the exploration for, and development and
production of, oil and gas, including such natural hazards as blowouts,
cratering and fires, which could result in damage or injury to, or destruction
of, formations, producing facilities or other property, or could result in
personal injury, loss of life or pollution of the environment. Any such event
could result in substantial loss to the Company which could have a material
adverse effect upon the financial condition of the Company. Under the terms of
the operating agreements to be entered into with the operators of wells not
operated by the Company, it is anticipated that the operators will carry
insurance to cover certain of these risks. It is anticipated that the Company
will be required to pay its proportionate share of the premiums for insurance
provided by the operator and will be named as an insured under the policies.
However, the Company may not be fully insured against all risks, either because
such insurance is not available or because of premium costs.
Competition and Markets. The oil and gas business is highly competitive
and has few barriers to entry. The Company will be competing with other oil and
gas companies and investment partnerships in the search for, and obtaining of,
future desirable prospects, the securing of contracts with third parties for the
development of oil and gas properties, the contracting for the purchase or
rental of drilling rigs and other equipment necessary for drilling operations,
and the purchase of equipment necessary for the completion of wells, as well as
in the marketing of any oil and gas which may be discovered. Many of the
Company's competitors are larger than the Company and have substantially greater
access to capital and technical resources than does the Company and may
therefore have a significant competitive advantage. Many of the Company's
competitors are capable of making a greater investment in a given area than is
the Company, although large and small companies alike are subject to the
economics of cost effectiveness. The prices at which the Company will be able to
sell any oil or gas production will have a substantial effect on its earnings,
if any.
Competition from Alternative Energy Sources. Natural gas competes with
coal, oil, propane, butane, nuclear power and other fuels in the heating and
energy generation markets. Numerous factors, all difficult to predict, affect
the relative desirability or demand at any point in time for any given fuel.
The extent to which public or legislative initiatives to develop and use
alternative fuels will, in the future, affect the demand for oil or natural gas
cannot be predicted at this time.
Industry Conditions. In recent decades, there have been periods of
worldwide overproduction and underproduction of hydrocarbons as well as periods
of increased and relaxed energy conservation efforts. Such conditions have
resulted in periods of excess supply of, and reduced demand for, crude oil on a
worldwide basis and natural gas on a domestic basis. These periods have been
followed by periods of short supply of, and increased demand for, crude oil and,
to a lesser extent, natural gas. The excess or short supply of crude oil and
natural gas has placed pressures on prices and has resulted in dramatic price
fluctuations.
Shut-In Wells and Curtailed Production. In the recent past, production
from oil and natural gas wells (particularly gas wells) in many geographic areas
of the United States had been curtailed due to lack of market demand, and it is
possible that such curtailments may resume in the future. Therefore, it is
possible that the Company's wells may have to be shut-in or that oil or gas
produced from the wells may have to be sold at less than favorable prices.
Production may also be delayed or wells shut-in in the event there is difficulty
in securing markets for production, logistical problems develop in the
transportation of natural gas from the wells or there are title problems
associated with the drillsites. Although it is anticipated that substantially
all natural gas from the Company's wells will be sold to the Pipeline Operating
Partnership, an affiliate of the Company, the agreement regarding the gathering
and marketing of natural gas between the Company, for itself and on behalf of
Affiliated Drilling Partnerships, and the Pipeline Operating Partnership
governing such arrangement will not protect the Company from market or price
risks.
Regulation; General. Oil and gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by federal
and state agencies. Failure to comply with such rules and regulations can
result in substantial penalties. The regulatory burden on the oil and gas
industry will increase the Company's cost of doing business and will affect its
profitability. Because such rules and regulations are frequently amended
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or interpreted, the Company is unable to predict the future cost or impact of
complying with such laws. Oil and gas operations are regulated by an agency of
state government in every state of the United States. Many state authorities
require permits for drilling operations, drilling bonds and reports concerning
operation and impose other requirements relating to the exploration and
production of oil and gas. Some states also have statutes or regulations
addressing conservation matters, including provisions for the pooling of oil and
gas properties, the establishment of maximum rates of production from oil and
gas wells and the regulation of spacing, plugging and abandonment of such wells.
The statutes and regulations may also limit the rate at which oil and gas can be
produced from certain properties.
In Ohio and West Virginia, where most of the Company's oil and gas
properties are located, such regulation is by the Ohio Department of Natural
Resources and the West Virginia Division of Environmental Protection Office of
Oil and Gas, respectively. Each of these agencies has been granted broad
regulatory and enforcement powers which are likely to create additional
financial and operational burdens on gas and oil operations like those of the
Company. Ohio and West Virginia also have in place other pollution and
environmental control laws which have become increasingly burdensome in recent
years. Enforcement efforts with respect to gas and oil operations have recently
increased and it can be anticipated that such regulation will expand and have a
greater impact on future gas and oil operations. There is no assurance that
laws and regulations enacted in the future will not adversely affect the
Company's exploration for, and production and transmission of, oil and natural
gas. Such legislation and/or actions of local, state and federal governments
may have a material effect on the Company in the future. To the best knowledge
of management, the Company has complied in all material respects with applicable
regulatory requirements of the states in which it operates. To date, the
Company has received no material notice of violation or complaint concerning its
compliance with environmental laws. There can be no assurance, however, that
the Company's business operations will not result in violations of environmental
laws or related liabilities in the future.
Environmental Regulation. The Company is subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, qualities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain oil and gas production wastes as
"hazardous wastes," which reclassification would make such wastes subject to
much more stringent handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
It is not anticipated that the Company will be required in the near future to
expend amounts that are material in relation to its total capital expenditure
program by reason of environmental laws and regulations, but because such laws
and regulations are frequently changed, the Company is unable to predict the
ultimate cost of such compliance.
Environmental Risks and Liability. There are numerous natural hazards
involved in the drilling of wells, including unexpected or unusual formations,
pressures, blowouts involving possible damages to property and third parties,
surface damages, bodily injuries, damage to and loss of equipment, reservoir
damage and loss of reserves. Uninsured liabilities may result in the loss of
Company assets and may create theoretically unlimited liability for the Company.
Oil and gas operations present risks of environmental contamination from
drilling operations and leakage from oil field storage or transportation
facilities. The Company may be subject to liability for pollution, abuses of
the environment and other, similar damages. Although the Company will maintain
insurance coverage in amounts the Company believes are adequate, it is possible
that insurance coverage may exclude risks such as environmental contamination,
may be insufficient or subject to reduction or cancellation in the future. In
such event, the Company's assets may have to be utilized to pay costs of
controlling blowouts, replacing destroyed equipment, personal injury, property
damage and environmental contamination claims. Furthermore, oil and gas
activities can result in liability under federal, state and local environmental
regulations for activities involving, among other things, water pollution and
hazardous waste transportation, storage and disposal. Such liability can attach
not only to the operator of record of a well but also to other parties that may
be deemed to be current or prior
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operators or owners of a well or the equipment involved. Since inception, the
Company has experienced no material environmental incident. There can be no
assurance, however, that the Company will not experience one or more
environmental incidents and resulting liability in the future in connection with
its business operations.
RISKS ASSOCIATED WITH THE COMPANY
The Company's Fiduciary Responsibility to its Related Partnerships. The
Company owes a fiduciary duty to each Affiliated Drilling Partnership, the
Pipeline Income Partnership, the Pipeline Operating Partnership, and any future
partnership in which the Company is the managing general partner, or serves in a
similar capacity. Accordingly, the Company has been, and will continue to be,
obligated to exercise good faith, reasonable business judgment and integrity in
handling each such Partnership's business and funds. If the Company were to
violate its above-described duties, the Company could be subject to legal
redress which could result in liability.
Conflicts of Interest. The nature of the Company's activities in the
oil and gas business results in many situations in which conflicts of interest
may arise. In general, conflicts of interest are inherent in oil and gas
drilling programs involving non-industry participants because transactions are
entered into without arms-length negotiation. The interests of the investors, on
one hand, and those of the Company, as managing general partner and driller-
operator, on the other hand, may be inconsistent in some respects or in certain
instances. Situations involving conflicts of interest include, but are not
limited to: the determination of JDOA or limited partnership agreement terms
(particularly relating to compensation of the Company) in syndicated Affiliated
Drilling Partnerships; the selection and allocation of drillsites as between the
Company and various Affiliated Drilling Partnerships; allocation of overhead
among related parties or affiliates; handling the "proving-up" by an Affiliated
Drilling Partnership of unproven acreage which such partnership has no
contractual right to drill; use of Company personnel or resources; structuring
of gas marketing arrangements; related-party transactions and similar
circumstances. The Company, as managing general partner of the Affiliated
Drilling Partnerships, the Pipeline Operating Partnership and the Pipeline
Income Partnership, is accountable to investor partners therein as a fiduciary
and must, therefore, exercise good faith and integrity in handling the affairs
of the various partnerships. This is particularly true in the handling of
conflicts between the Company's activity for its own account, and its activity
on behalf of partnerships it manages. The Company, in recognition of its
fiduciary responsibilities to investor partners, must endeavor to resolve any
and all such conflicts on a basis which the Company believes to be fair and
equitable and otherwise in or not opposed to the best interests of such investor
partners. With respect to the selection of drilling prospects and drillsites,
the Company is not obligated under the terms of the relevant limited partnership
agreements or JDOA's to offer to Affiliated Drilling Partnerships the prior
right to drill any acreage "proved up" by the drilling of any Partnership well.
Each of the Affiliated Drilling Partnerships, as well as the Pipeline Income
Partnership and the Pipeline Operating Partnership, present numerous situations
or circumstances which do, or could, result in a conflict of interest on the
part of the Company. Failure to adequately resolve such conflicts of interest
appropriately could result in liability or other adverse consequences to the
Company. The Company presently has no formal procedure to deal with conflicts of
interest but instead handles the evaluation and resolution of them on a case-by-
case basis taking into account all relevant facts and circumstances.
Limited Capital; Need for Significant Additional Financing. The Company
anticipates, based on the current plans and assumptions relating to its
operations, that the net proceeds of its initial public offering will be
sufficient to satisfy its operating cash requirements for approximately 18 to 24
months following the consummation of the Company's initial public offering.
There can be no assurance, however, that the Company will not require additional
financing sooner than currently anticipated.
The net proceeds of the Company's initial public offering may not be
sufficient to develop fully the Company's oil and gas properties or otherwise
carry out the Company's business plan. Development of the Company's oil and gas
properties and execution of the Company's business plan may require capital
resources substantially greater than the net proceeds of this Offering or
resources otherwise currently available to the Company. The Company's current
arrangements for additional sources of capital include its working capital
revolving line of credit with Bank One, Texas, N.A. (the "Bank One Credit
Facility") and its contemplated future offerings, on a private placement basis,
of Affiliated Drilling Partnerships. There can be no assurance that these, or
any other, sources of capital will be available to the Company on acceptable
terms, or at all, in the future. The
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inability to obtain additional financing would have a material adverse effect on
the Company, including requiring the Company to curtail significantly or farm-
out its development of its oil and gas properties. Any additional financing may
involve substantial dilution to the interests of the Company's then existing
shareholders.
Financing the Company's Growth Through Private Placement Securities
Offerings. The capital needs of the Company have increased materially since its
inception. Prior to 1996, substantially all of the Company's drilling capital
has been raised through the offering of investment interests in Affiliated
Drilling Partnerships to private investors. These Affiliated Drilling
Partnerships have been sponsored by principals of the Company, as well as by the
Company, and have been marketed by Equity Financial Corporation ("EFC"), an
NASD-member broker-dealer and an affiliate of the Company. It is anticipated
that a portion of the Company's drilling capital in the future will continue to
be raised by the offering of investment interests, on a private placement basis,
in future Affiliated Drilling Partnerships. To the extent the Company may depend
on capitalization through syndication of future Affiliated Drilling
Partnerships, there can be no assurance that future offerings will be successful
or will raise adequate capital for desired Company activities. Also, there is no
assurance that any other sources of capital will be available to the Company.
Risk of Oil and Gas Operations. The Company's operations are subject to
all of the risks normally incident to the operation and development of oil and
gas properties and the drilling of oil and gas wells, including encountering
unexpected formations or pressures, blowouts, cratering and fires, which could
result in personal injuries, loss of life, pollution damage and other damage to
the properties of the Company or others. Oil and gas operations present risks
of environmental contamination from drilling operations and leakage from oil
field storage or transportation facilities. The Company has never experienced a
significant environmental mishap, but spills of oil and other liquids could
occur which could create material liability to the Company for clean-up
expenses.
Dependence on Key Personnel. The Company depends to a large extent on the
abilities and continued participation of certain key employees, including
Charles P. Torrey, Jr., its chief executive officer, Richard S. Cooper, its
president, Robert L. Remine, its secretary and treasurer, and John M. Johnston,
vice president - exploration and production. The loss of any of these officers
or other key employees could have a material adverse effect on the Company's
business.
Development of Additional Reserves. The Company's future success depends
upon its ability to find or acquire additional natural gas and oil reserves that
are economically recoverable. Except to the extent that the Company conducts
successful exploration or development activities or acquires properties
containing proved reserves, the proved reserves of the Company will generally
decline as reserves are produced. There can be no assurance that the Company
will be able to discover and exploit additional commercial quantities of oil and
gas, or that the Company will have success drilling productive wells or
acquiring underdeveloped properties at low finding costs.
Undeveloped Acreage May be Lost. The Company's oil and gas leases typically
require the drilling of wells, payment of minimum royalties or delay rentals or
the continued production of oil or gas in commercial quantities in order for the
leases to remain valid and not lapse. Typically, once a well is drilled and
becomes commercially productive, as long as commercial production from such
lease continues, the lease will not lapse and is deemed to be "held by
production." Nonetheless, lease termination or expiration clauses are specific
to each lease.
Properties Pledged to Secure Debt. Substantially all of the Company's
properties are pledged to secure the Bank One Credit Facility and an equipment
and vehicle loan from SunTrust Bank. A failure to pay the principal or accrued
interest on such secured obligations could cause the Company to lose its
interest in its principal properties.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
NUMBER DESCRIPTION
- ------ -----------
EXHIBIT 3.4 Fifth Amended and Restated Bylaws of the Company
EXHIBIT 23.4 Consent of Plante & Moran, LLP.
EXHIBIT 27 Financial Data Schedule
EXHIBIT 99 Financial Report with Additional Information,
December 31, 1996
(b) REPORTS OF FORM 8-K
On February 25, 1997, the Company filed a report on Form 8-K which contained the
following information:
INFORMATION REQUIRED BY ITEM 304(a)(1) OF REGULATION S-K
(i) On February 25, 1997, the Company dismissed Ronald D. Cameron, Certified
Public Accountant as its independent accountant.
(ii) The reports of Ronald D. Cameron on the financial statements for the past
two fiscal years contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principle.
(iii) The Company's board of directors participated in and approved the
decision to change independent accountants.
(iv) In connection with its audits for the two most recent fiscal years and
through February 25, 1997, there have been no disagreements with Ronald D.
Cameron on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of Ronald D. Cameron would have caused him to
reference thereto in his report on the financial statements for such years.
(v) During the two most recent fiscal years and through February 25, 1997,
there have been no reportable events (as defined in Regulation S-K Item 304
(a)(1)(v)).
(vi) Ronald D. Cameron furnished the Company with a letter addressed to the
Securities and Exchange stating that he agrees with the above statements.
INFORMATION REQUIRED BY ITEM 304(a)(2) OF REGULATION S-K.
(i) The Company engaged Plante & Moran, LLP as its new independent accountants
as of December 2, 1996 to audit the financial statements for the year ended
December 31, 1996 as required by Nasdaq Small-Cap Stock Market and the National
Market System for the listing of the Company's common stock and redeemable
Series A common stock purchase warrants. During the most recent fiscal year and
through February 25, 1997, the Company engaged Plante & Moran, LLP to assist the
former auditor, Ronald D. Cameron, CPA, applying on generally accepted
accounting principles and Securities and Exchange reporting disclosure issues in
connection with the registration statement, final date January 24, 1997. The
Company has not consulted with Plante & Moran LLP on items which concerned the
subject matter of a disagreement or reportable event with the former auditor (as
described in Regulation S-K Item 304(a)(2)).
ITEMS 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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
-------------------------------------
(Registrant)
Date: May 13, 1997 /s/ Richard S. Cooper, President
---------------------------- -------------------------------------
Richard S. Cooper
Date:
---------------------------- -------------------------------------
(Signature)/1/
________________
/1/ Print the name and title of each signing officer under his signature.
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EXHIBIT 3.4
FIFTH AMENDED AND RESTATED BYLAWS
OF
ENERGY SEARCH, INCORPORATED
Adopted as of March 3, 1997
These Fifth Amended and Restated Bylaws ("Bylaws") shall supersede all
prior Bylaws, amendments and restatements thereof, and shall regulate the
business and affairs of the Corporation, subject to the provisions of the
Corporation's Charter, as amended and restated, and any applicable provisions of
the Tennessee Business Corporation Act, Section 48-11-101 et seq., Tennessee
Code Annotated, as amended, (the "Tennessee Act").
SECTION 1
OFFICES AND REGISTERED AGENT
SECTION 1.01. REGISTERED OFFICE. The Corporation shall designate and
continuously maintain a registered office in the State of Tennessee.
SECTION 1.02. PRINCIPAL OFFICE. The principal office of the Corporation
shall be that which is designated as such in its Charter.
SECTION 1.03. OTHER OFFICES. The Corporation may also have other offices
within and without the State of Tennessee at such places as the Board of
Directors may from time to time determine.
SECTION 1.04. REGISTERED AGENT. The Corporation shall designate and
continuously maintain a registered agent in the State of Tennessee at its
registered office.
SECTION 2
SHAREHOLDERS
SECTION 2.01. PLACE. All meetings of the shareholders of the Corporation
shall be held at the principal office of the Corporation, or at such other place
as may be fixed by resolution of the Board of Directors.
SECTION 2.02. ANNUAL MEETING. The annual meeting of the shareholders of
the Corporation shall be held at 10:00 a.m. E.S.T. on the third Wednesday in May
of each and every year, if not a legal holiday, and if a legal holiday, then on
the next succeeding business day, not a legal holiday. The Board of Directors
may, however, by resolution, fix the date of the annual meeting on any day
within the period of sixty (60) days next succeeding the foregoing date. At the
annual meeting, the shareholders shall elect Directors, receive reports on the
activities and financial condition of the Corporation, and transact such other
business as may properly come before the meeting.
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SECTION 2.03. SPECIAL MEETINGS. The Corporation shall hold a special
meeting of its shareholders upon the call of the Board of Directors or the
President, or upon the written demand(s) to the Secretary by shareholders
holding at least ten (10%) percent of all votes entitled to be cast on any issue
to be considered at the proposed special meeting. Any call or demand for a
special meeting shall describe the purpose(s) for which the special meeting is
to be held. Only business within the purpose(s) described in the meeting notice
for the special meeting may be conducted at such meeting.
SECTION 2.04. NOTICE OF MEETINGS. The Corporation shall notify its
shareholders of the date, time and place of each annual and special meeting of
shareholders no fewer than ten (10) days, nor more than two (2) months before
the meeting date. If a meeting is adjourned to a different date, time and/or
place, notice of the new date, time and/or place need not be given if they are
announced at the meeting before adjournment, unless a new record date is or must
be fixed.
SECTION 2.05. WAIVER OF NOTICE. A shareholder's attendance at a meeting:
(a) Waives objection to lack of notice or defective notice of the
meeting unless the shareholder at the beginning of the meeting (or
promptly upon arrival) objects to holding the meeting or transacting
business at the meeting; and
(b) Waives objection to consideration of a particular matter at the
meeting that is not within the purpose(s) described in the meeting
notice, unless the shareholder objects to considering the matter when it
is presented.
SECTION 2.06. QUORUM. Unless otherwise required by law, a majority of the
votes entitled to be cast on a matter must be represented at any meeting of the
shareholders to constitute a quorum on that matter. If, however, such majority
is not represented at a meeting, the chairman of the meeting or the holders of a
majority of the votes in fact represented at the meeting (whether in person or
by proxy) shall have the power to adjourn the meeting to another date, time
and/or place without notice other than announcement at the meeting, unless a new
record date is or must be fixed, until the requisite quorum is present or
represented, when any business may be transacted which might have been
transacted at the meeting as it was originally scheduled before adjournment.
SECTION 2.07. VOTING REQUIREMENTS. Except as otherwise provided in these
Bylaws, action on any matter voted upon at a meeting of the shareholders is
approved if a quorum exists and if the votes cast in favor of the action exceed
the votes cast against the action. However, Directors shall be elected by a
plurality of the votes cast by the shares entitled to vote in the election at a
meeting of the shareholders at which a quorum is present.
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SECTION 2.08. ACTION WITHOUT MEETING. Action that is required or
permitted to be taken at a meeting of the shareholders may be taken without such
a meeting if all shareholders entitled to vote on the action consent to taking
such action without a meeting. If all of such shareholders so consent, the
affirmative vote of the number of shares that would be necessary to authorize or
take such action at a meeting shall be the act of the shareholders, except as
otherwise provided in these Bylaws. Such consent (or counterpart(s) thereof)
shall describe the action taken, be in writing, be signed by each shareholder
entitled to vote on the action, indicate each signing shareholder's vote or
abstention on the action, and be delivered to the Secretary of the Corporation
and included in the minutes or corporate records.
SECTION 3
BOARD OF DIRECTORS
SECTION 3.01. GENERAL POWERS AND QUALIFICATIONS. All corporate powers of
the Corporation shall be exercised by and under the authority of, and the
business and affairs of the Corporation shall be managed under the direction of,
the Board of Directors. All Directors must be natural persons and shall be at
least eighteen (18) years of age. Within ninety (90) days after successful
completion of the initial public offering of common stock of the Corporation
anticipated to take place in the latter part of 1996 (the "IPO"), at least two
(2) members of the Board of Directors shall be outside Directors (the "Outside
Directors.") To qualify as an Outside Director for purposes of these Bylaws, a
Director must not currently be, or have been within the past year, an officer or
regular salaried employee of the Company.
SECTION 3.02. NUMBER OF DIRECTORS. Until successful completion of the
IPO, the Board of Directors shall be comprised of three (3) Director(s). Upon
successful completion of the IPO, the Board of Directors shall be comprised of
five (5) Directors, at least two (2) of which shall be Outside Directors. These
Bylaws may be amended from time to time by the shareholders or by the Board of
Directors to increase or decrease the number of Directors within the limits
provided by law.
SECTION 3.03. ELECTION AND TENURE. Directors shall be elected by the
shareholders at each annual meeting of the shareholders for those Director terms
then expired. The Directors of the Corporation shall have staggered terms in
accordance with Section 48-18-106 of the Tennessee Act Upon successful
completion of the IPO, the Board of Directors then in office shall appoint two
(2) Outside Directors who shall serve until his or her successors is duly
elected and qualified. in the election of first group Directors at the first
annual meeting of Shareholders after successful completion of the IPO.
Commencing at the first annual meeting of Shareholders after consummation of the
IPO, the Board of Directors of the Company shall be divided into three classes,
each class to consist as nearly as possible of one-third of the Directors. The
term of office of one class of Directors shall expire each year with the initial
term of office of the Class I Directors expiring at the 1998 annual meeting of
Shareholders; the initial term of office of the Class II Directors expiring at
the 1999 annual meeting of the
3
<PAGE>
Shareholders; and the initial terms of office of the Class III Directors
expiring at the 2000 annual meeting of Shareholders. Commencing with the 1998
annual meeting of Shareholders, the Directors of the class elected at each
annual meeting of Shareholders shall hold office for a term of three years.
SECTION 3.04. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and place as the Board of Directors
shall determine from time to time, but no less frequently than once a year.
SECTION 3.05. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the President or by any two (2) Directors. If, however, the
Board of Directors is comprised of only one (1) Director, then special meetings
may be called by that single Director.
SECTION 3.06. NOTICE OF MEETINGS. Regular meetings of the Board of Directors
may be held without notice of the date, time, place, or purpose of the meeting.
Special meetings of the Board of Directors must be preceded by at least two (2)
days' notice to each Director of the date, time and place, but not the purpose,
of such special meeting. Notice of any adjourned meeting need not be given if
the time and place to which the meeting is adjourned are fixed at the meeting at
which the adjournment is taken, and if the period of adjournment does not exceed
one (1) month in any one (1) adjournment.
SECTION 3.07. WAIVER OF NOTICE. If a Director attends or participates in a
meeting, he or she waives any required notice to him or her of the meeting
unless the Director at the beginning of the meeting (or promptly upon arrival)
objects to holding the meeting or transacting business at the meeting and does
not thereafter vote for or assent to action taken at the meeting.
SECTION 3.08. QUORUM AND VOTING. A quorum of the Board of Directors consists
of a majority of the number of Directors which comprise the Board, as fixed by
these Bylaws. If a quorum is present when a vote is taken, the affirmative vote
of a majority of the Directors present is the act of the Board of Directors,
except as otherwise provided in these Bylaws.
4
<PAGE>
SECTION 3.09. VACANCY. If a vacancy occurs on the Board of Directors,
including a vacancy resulting from an increase in the number of Directors or a
vacancy resulting from a removal of a Director with or without cause:
(a) The shareholders may fill the vacancy;
(b) The Board of Directors may fill the vacancy; or
(c) If the Directors remaining in office constitute fewer than a
quorum of the Board, they may fill the vacancy by the affirmative vote of a
majority of all Directors remaining in office.
SECTION 3.10. REMOVAL OF DIRECTORS. The shareholders may remove any one (1)
or more Directors, with or without cause, at any special meeting which is
specifically called for that purpose.
SECTION 3.11. ACTION WITHOUT MEETING. Action which is required or permitted
to be taken at a meeting of the Board of Directors may be taken without such a
meeting if all Directors consent to taking such action without a meeting. If all
Directors so consent, the affirmative vote of the number of Directors that would
be necessary to authorize or take such action at a meeting shall be the act of
the Board, except as otherwise provided in these Bylaws. Such consent (or
counterpart(s) thereof) shall describe the action taken, be in writing, be
signed by each Director entitled to vote, indicate each signing Director's vote
or abstention on the action, and be delivered to the Secretary of the
Corporation and included in the minutes or corporate records.
SECTION 3.12. INDEMNIFICATION. With respect to claims or liabilities
arising out of service as a Director of the Corporation, the Corporation shall
indemnify and advance expenses to each present and future Director (and his or
her estate, heirs, and personal representatives) to the fullest extent required
or allowed by the laws of the State of Tennessee, both as now in effect and as
hereafter adopted or amended.
SECTION 3.13 COMMITTEES. The Board of Directors may, from time to time, in
a manner consistent with the requirements of Section 48-18-206 of the Act, or
any successor provision thereto, authorize and constitute one or more committees
to be comprised, unless otherwise indicated herein, of at least one (1)
Director. Such committees shall have such purposes and authorities as shall be
specified by the Board of Directors. The members of such committees shall be
subject to qualifications and conditions as shall be specified by the Board of
Directors.
SECTION 4
OFFICERS
SECTION 4.01. REQUIRED OFFICERS. The officers of the Corporation shall be a
Chief Executive Officer, a President, a Vice President, a Secretary, a Treasurer
and such other officers as may from time to time be elected or appointed by the
Board of Directors. Except for the offices of President and Secretary, the same
individual may simultaneously hold more than one (1) office in the Corporation.
All officers must be natural persons and shall be at least eighteen (18) years
of age.
5
<PAGE>
SECTION 4.02. ELECTION. At the first meeting of the Board of Directors
after each annual meeting of the shareholders, the Board shall elect the
officers of the Corporation by a majority vote of those Directors present,
provided a quorum exists.
SECTION 4.03. TERM OF OFFICE. The officers of the Corporation shall hold
office for one (1) year or until their successors are chosen and qualify in
their stead, subject, however, to the right and authority of the Board of
Directors to remove any officer at any time with or without cause.
SECTION 4.04. POWERS AND DUTIES OF OFFICERS. The powers and duties of the
officers of the Corporation shall be as follows:
(a) Chief Executive Officer. The Chief Executive Officer shall serve
as the Chairman of the Board of the Corporation, shall consult with and
advise the President and other officers as necessary or appropriate in
carrying out their duties, and shall have such powers and perform such
duties as may be assigned to him or her by the Board of Directors.
(b) President. The President shall be the primary Officer of the
Corporation, shall have general and active management of the Corporation,
shall consult with the Chief Executive Officer as may be necessary or
appropriate and shall see that all orders and resolutions of the Board of
Directors are carried into effect, subject, however, to the right of the
Board of Directors to delegate any specific powers, unless exclusively
conferred upon the President by law, to any other officer(s) of the
Corporation.
(c) Vice President. The Vice President shall have such powers and
perform such duties as may be assigned to him or her by the Board of
Directors or the President, and shall consult with the Chief Executive
Officer as may be necessary or appropriate to carry out his or her duties.
In the absence or disability of the President, the Vice President shall
perform the duties and exercise the powers of the President. The Vice
President may sign and execute contracts and other obligations pertaining
to the regular course of his or her duties.
(d) Secretary. The Secretary shall attend all meetings of the Board of
Directors and of the shareholders of the Corporation and shall be
responsible for preparing the minutes of such meetings. The Secretary shall
be responsible for the care and custody of the minute book of the
Corporation and for authenticating records of the Corporation. It shall be
his or her duty to give or cause to be given notice of all meetings of the
shareholders and of the Board of Directors. The Secretary shall also
perform such other duties as may be assigned to him or her by the Board of
Directors or by the President, under whose supervision he or she shall act,
and shall consult with the Chief Executive Officer as may be necessary or
appropriate to carry out his or her duties. In the event the Secretary is
absent for some reason from any meeting where minutes are to be prepared or
is otherwise unable to take such minutes, the presiding officer of such
meeting shall appoint another person, subject to the approval of those
present and entitled to vote at such meeting, to take the minutes thereof.
6
<PAGE>
(e) Treasurer. The Treasurer shall have custody of the Corporation
funds, securities and shall keep full and accurate account of receipts and
disbursements in the appropriate Corporation books, and shall require the
deposit of all monies and other valuable assets in the name of and to the
credit of the Corporation in such financial institutions as may be
designated by the Board of Directors. The Treasurer shall require
disbursement of the funds of the Corporation as may be ordered by the Board
of Directors, and shall render to the President and the Board of Directors,
at any time they may require, an account of his or her transactions as
Treasurer and of the financial condition of the Corporation. The Treasurer
shall also report on the financial condition of the Corporation at all
annual meetings of the shareholders. The Treasurer shall also perform such
other duties as may be assigned to him or her by the Board of Directors or
by the President, under whose supervision he or she will act, and shall
consult with the Chief Executive Officer as may be necessary or appropriate
to carry out his or her duties.
SECTION 4.05. REMOVAL. The Board of Directors may remove any officer at any
time with or without cause.
SECTION 4.06. VACANCIES. Any vacancies occurring in the offices of the
President, Vice President, Secretary or Treasurer shall be filled by the Board
of Directors as soon as practicable. Vacancies in other offices may be filled at
the discretion of the Board of Directors.
SECTION 4.07. DELEGATION OF POWERS AND DUTIES. In case of the absence of
any officer of the Corporation, or for any reason that the Board of Directors
may deem sufficient, the Board of Directors may delegate the powers of such
officer to any other officer or to any Director for the time being.
SECTION 4.08. INDEMNIFICATION. With respect to claims or liabilities
arising out of service as an officer of the Corporation, the Corporation shall
indemnify and advance expenses to each present and future officer (and his or
her estate, heirs and personal representatives) to the fullest extent required
or allowed by the laws of the State of Tennessee, both as now in effect and as
hereafter adopted or amended.
SECTION 5
RECORDS AND REPORTS
SECTION 5.01. CORPORATE RECORDS. The Corporation shall keep as permanent
records minutes of all meetings of its shareholders and Board of Directors, a
record of all actions taken by the shareholders or Board of Directors without a
meeting, appropriate accounting records, and a list of its shareholders in
alphabetical order by class and series showing their respective addresses and
the number of shares each shareholder holds.
7
<PAGE>
SECTION 5.02. RECORDS AT PRINCIPAL OFFICE. The Corporation shall keep at
all times a copy of the following records at its principal office:
(a) Its Charter or Restated Charter and all amendments thereto;
(b) These Bylaws and all amendments thereto;
(c) Resolutions adopted by the Board of Directors creating one (1) or
more classes or series of shares of stock, and fixing their relative
rights, preferences, and limitations, if shares issued pursuant to those
resolutions are outstanding;
(d) The minutes of all meetings of shareholders and the records of all
actions taken by shareholders without a meeting for the past three (3)
years;
(e) All written communications to shareholders generally within the
past three (3) years, including the past three (3) years' annual financial
statements;
(f) A list of the names and business addresses of its current
Directors and officers; and
(g) The most recent annual report delivered to the Tennessee Secretary
of State.
SECTION 5.03. ANNUAL FINANCIAL STATEMENTS. The Corporation shall prepare
annual financial statements that include a balance sheet as of the end of the
fiscal year, an income statement for that year, a statement of changes in
shareholders' equity for the year unless that information appears elsewhere in
the financial statements, and such other information necessary to comply with
the requirements of the applicable provisions of the Tennessee Act or any other
federal, state or local law to which the Corporation shall be subject.
SECTION 6
ISSUANCE AND TRANSFER OF SHARES
SECTION 6.01. CERTIFICATES OF STOCK. All shares of issued and outstanding
stock of the Corporation shall be evidenced by stock certificates that shall be
numbered and shall be entered on the books of the Corporation as they are
issued. The certificates shall show the class of stock, the holder's name, the
number of shares and the date issued. They shall be signed by the President and
the Secretary.
SECTION 6.02. LOST CERTIFICATES. In case of loss or destruction of a
certificate of stock, no new certificate shall be issued in lieu thereof except
upon satisfactory proof of the loss to the Board of Directors. Upon issuing a
duplicate certificate in lieu of a lost or destroyed certificate, the Board may
require the giving of such security as it may deem expedient against loss to the
Corporation. Any such new certificate shall have "duplicate" marked on its face.
SECTION 6.03. RESTRICTIONS AND LIMITATIONS. The certificates of stock may
be restricted or limited as to transferability or otherwise by the Charter,
these Bylaws, an agreement among shareholders or any two (2) or more
8
<PAGE>
of them, or an agreement between shareholders and the Corporation. Each
certificate which is so restricted or limited shall have conspicuously noted
thereon a statement as to the existence of such restriction or limitation. In
addition to such restrictions or limitations, if any, the following legend, if
applicable, shall appear upon each certificate of stock, and such stock shall be
subject to the following restrictions:
TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED
AND MAY NOT OCCUR ABSENT APPROPRIATE REGISTRATION UNDER FEDERAL AND
APPLICABLE STATE SECURITIES LAWS OR QUALIFICATIONS FOR EXEMPTION FROM
REGISTRATION.
SECTION 6.04. TRANSFER OF SHARES. The rights against the Corporation
inherent in the shares represented by a certificate of stock in the Corporation
are transferable only by registration of such shares in the name of the
transferee or assignee as the registered holder on the books of the Corporation.
In all cases of transfer, the former certificate shall be surrendered and
canceled before a new certificate is issued. Shares of stock may be transferred
on the books of the Corporation only by:
(a) Delivery of the certificate properly endorsed by the holder of
record; or
(b) Delivery of the certificate and a separate document containing a
written assignment of the certificate by the holder of record or a proper
written power of attorney to sell, assign or transfer the same or the
shares represented thereby.
SECTION 7
MISCELLANEOUS PROVISIONS
SECTION 7.01. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SECTION 7.02. NO SEAL. The Corporation shall have no seal, unless otherwise
determined by the Board of Directors.
SECTION 7.03. NOTICES. Whenever notice is required to be given to
shareholders, Directors or officers, unless otherwise provided by law, the
Charter or these Bylaws, such notice may be given in person, or by telephone,
telegraph, teletype, facsimile transmission or other form of wire or wireless
communication, or by mail or other private carrier. If such notice is given by
mail, it shall be sent postage prepaid by first class United States mail or by
registered or certified United States mail, return receipt requested, and
addressed to the respective address which appears for each such person on the
books of the Corporation. Written notice sent by mail to shareholders shall be
deemed to have been given when it is mailed. Any other written notice shall be
deemed to have been given at the earliest of the following:
(a) When received;
9
<PAGE>
(b) Five (5) days after its deposit in the United States mail if sent
first class, postage prepaid; or
(c) On the date on the return receipt, if sent by registered or
certified United States mail, return receipt requested, postage prepaid,
and the receipt is signed by or on behalf of the addressee.
SECTION 7.04. WAIVER OF NOTICE. Whenever any notice is required to be given
under the provisions of any statute, or of the Charter or these Bylaws, a waiver
thereof in writing signed by the person entitled to such notice, whether before
or after the date stated thereon, and delivered to the Secretary of the
Corporation and included in the minutes or corporate records, shall be deemed
equivalent thereto.
SECTION 7.05. NEGOTIABLE INSTRUMENTS. All checks, drafts, notes or other
obligations of the Corporation shall be signed by such of the officers of the
Corporation, or by such other person(s), as may be authorized by the Board of
Directors.
SECTION 7.06. DEPOSITS. The monies of the Corporation may be deposited in
the name of the Corporation in such bank(s) or financial institution(s) as the
Board of Directors shall designate from time to time and shall be drawn out by
check signed by the officer(s) or person(s) designated by resolution adopted by
the Board of Directors.
SECTION 8
AMENDMENT OF BYLAWS
SECTION 8.01. BY SHAREHOLDERS. These Bylaws may be amended by a majority
vote of all shares issued and outstanding and entitled to vote at any annual or
special meeting of the shareholders where a quorum is present, provided notice
of intention to amend shall have been contained in the notice of any special
meeting for that purpose. These Bylaws may also be amended by the shareholders
without a meeting in the same manner as provided therefor herein, except that
such action to amend must be by a majority vote of all shares issued and
outstanding and entitled to vote if such a meeting were to take place.
SECTION 8.02. BY BOARD OF DIRECTORS. By a majority vote of the Directors
then in office, the Board of Directors may amend these Bylaws, including bylaws
adopted by the shareholders, at any regular or special meeting of the Board of
Directors where a quorum is present, provided that the shareholders may from
time to time specify particular provisions of these Bylaws that may not be
amended by the Board of Directors. The Board of Directors may also amend these
Bylaws without a meeting in the same manner as provided therefor herein, except
that such action to amend must be by a majority vote of the Directors then in
office.
10
<PAGE>
CERTIFICATION
By my signature below I certify that I am the Secretary of the Corporation
and that the foregoing document represents the Fifth Amended and Restated Bylaws
of the Corporation duly adopted by the Board of Directors of the Corporation.
These Fifth Amended and Restated Bylaws shall supersede and amend any and all
prior Bylaws of the Corporation, or any amendments or restatements thereof.
/s/ Robert L. Remine Dated: March 3, 1997
- --------------------
SECRETARY OF ENERGY SEARCH, INCORPORATED
11
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANT
The undersigned consents to the use in this report on Form 10-QSB of Energy
Search, Incorporated for Quarter ended March 31, 1997 of our audit report which
is dated May 6, 1997, included herein, on the financial statements of Energy
Search, Incorporated as of December 31, 1996.
/s/ Plante & Moran, LLP
- -----------------------------------
Plante & Moran, LLP
May 13, 1997
Grand Rapids, Michigan
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 5,395,216 51,067
<SECURITIES> 0 0
<RECEIVABLES> 424,920 893,705
<ALLOWANCES> (160,464) (160,464)
<INVENTORY> 68,059 66,067
<CURRENT-ASSETS> 5,782,731 905,375
<PP&E> 7,421,195 6,641,402
<DEPRECIATION> (3,081,043) (2,999,874)
<TOTAL-ASSETS> 11,999,939 6,668,372
<CURRENT-LIABILITIES> 1,979,916 3,340,772
<BONDS> 133,566 154,794
0 4,246,160
0 0
<COMMON> 10,801,041 1,200
<OTHER-SE> (914,584) (1,074,554)
<TOTAL-LIABILITY-AND-EQUITY> 11,999,939 6,668,372
<SALES> 90,803 289,188
<TOTAL-REVENUES> 966,426 1,533,455
<CGS> 4,065 19,150
<TOTAL-COSTS> 602,208 2,009,920
<OTHER-EXPENSES> 8,849 280,972
<LOSS-PROVISION> 0 57,996
<INTEREST-EXPENSE> 20,650 207,038
<INCOME-PRETAX> 334,719 (1,022,471)
<INCOME-TAX> (115,000) 417,000
<INCOME-CONTINUING> 219,719 (605,471)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (78,920)
<CHANGES> 0 0
<NET-INCOME> 219,719 (684,391)
<EPS-PRIMARY> .09 (.67)
<EPS-DILUTED> .09 (.67)
</TABLE>
<PAGE>
EXHIBIT 99
ENERGY SEARCH, INCORPORATED
FINANCIAL REPORT
WITH ADDITIONAL INFORMATION
DECEMBER 31, 1996
<PAGE>
ENERGY SEARCH, INCORPORATED
CONTENTS
REPORT LETTER 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Shareholders' Equity (Accumulated Deficit) 4
Statement of Cash Flows 5
Notes to Financial Statements 6-21
REPORT LETTER 22
ADDITIONAL INFORMATION
Costs Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities 23
Estimates of Natural Gas and Oil Reserves 24-25
<PAGE>
[LETTERHEAD OF PLANTE & MORAN, LLP APPEARS HERE]
================================================================================
Independent Auditor's Report
To the Shareholders of
Energy Search, Incorporated
We have audited the accompanying balance sheet of Energy Search, Incorporated,
(the Company) as of December 31, 1996 and the related statements of operations,
shareholders' equity (accumulated deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Energy Search,
Incorporated, as of December 31, 1995, were audited by other auditors whose
report dated January 30, 1996, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Energy Search, Incorporated, as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ PLANTE & MORAN, LLP
Grand Rapids, Michigan
March 6, 1997
<PAGE>
ENERGY SEARCH, INCORPORATED
BALANCE SHEET
<TABLE>
<CAPTION>
December 31
-----------------------------
ASSETS
1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 51,067 $ 105,978
Accounts receivable 111,376 78,439
Due from affiliated partnerships, net of $160,464 allowance for
uncollectible accounts in 1996 and $102,468 in 1995 (Note B and K) 621,865 1,114,828
Other current assets 66,067 62,165
Deferred tax asset (Note D) 55,000 -
------------- -------------
Total current assets 905,375 1,361,410
OIL AND GAS PROPERTIES
Proven properties 420,040 347,400
Unproven properties 186,159 139,913
Wells and related equipment 5,591,760 4,920,839
Less accumulated depreciation, depletion and amortization (2,751,099) (2,447,439)
------------- -------------
Net oil and gas properties 3,446,860 2,960,713
OTHER ASSETS
Other property and equipment - Net (Note C) 194,668 76,267
Investments in related partnerships (Note J) 1,363,423 1,223,928
Deferred tax asset (Note D) 413,000 -
Prepaid stock offering costs (Note L) 265,948 -
Other 79,098 189,488
------------- -------------
Total other assets 2,316,137 1,489,683
------------- -------------
Total assets $ 6,668,372 $ 5,811,806
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note E) $ 902,456 $ 636,773
Current portion of long-term debt (Note F) 69,729 146,481
Accounts payable and accrued liabilities 1,033,463 692,803
Drilling advances (Note I) 1,335,124 2,415,120
------------- -------------
Total current liabilities 3,340,772 3,891,177
LONG-TERM DEBT, less current portion (Note F) 154,794 2,285,592
SHAREHOLDERS' EQUITY (DEFICIT) (Notes G, H and L)
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; 1,100,000
shares issued and outstanding) 1,200 1,200
Accumulated deficit (1,074,554) (366,163)
------------- -------------
Total shareholders' equity (accumulated deficit) 3,172,806 (364,963)
------------- -------------
Total liabilities and shareholders' equity $ 6,668,372 $ 5,811,806
============= =============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
ENERGY SEARCH, INCORPORATED
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
REVENUE
Net turnkey revenue $ 882,237 $ 2,025,078
Oil and gas sales 289,188 173,162
Management fees (Note I) 213,666 175,350
Other revenue 56,737 118,473
------------ -----------
Total revenue 1,441,828 2,492,063
OPERATING EXPENSES
Production costs 171,336 158,196
Exploration costs 242,130 75,877
Depreciation, depletion and amortization 374,711 574,239
Interest 207,038 234,820
General and administrative 1,279,739 977,278
------------ -----------
Total operating expenses 2,274,954 2,020,410
------------ -----------
NET INCOME (LOSS) FROM OPERATIONS (833,126) 471,653
OTHER INCOME (EXPENSE)
Program subsidies (Note I) (197,892) (188,072)
Stock issuance expense (Note I) (83,080) -
Gain on sale of assets 54,096 73,540
Equity in income (losses) of related partnerships 37,531 (88,779)
------------ -----------
Total other income (expense) (189,345) (203,311)
------------ -----------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,022,471) 268,342
INCOME TAX BENEFIT (Note D) 417,000 -
------------ -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (605,471) 268,342
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT
OF DEBT (NET OF INCOME TAX BENEFIT OF $51,000) (Note G) (78,920) -
------------ -----------
NET INCOME (LOSS) $ (684,391) $ 268,342
============ ===========
NET LOSS PER SHARE AVAILABLE TO COMMON
STOCKHOLDERS BEFORE EXTRAORDINARY ITEM $ (0.60)
EXTRAORDINARY ITEM PER SHARE (0.07)
------------
NET LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS $ (0.67)
============
PRO FORMA FINANCIAL INFORMATION
Pro forma information assuming change in tax status since inception
Pro forma net income before pro forma income tax expense $ 268,342
Pro forma income tax expense -
-----------
Pro forma net income $ 268,342
===========
Pro forma earnings per share $ 0.24
===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
ENERGY SEARCH, INCORPORATED
STATEMENT OF SHAREHOLDERS' EQUITY (ACCUMULATED DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- --------------------- Accumulated
Shares Amount Shares Amount Deficit Total
-------- ------------ --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - January 1, 1995 - $ - 1,200 $ 1,200 $ (634,505) $ (633,305)
Net income for the year
ended December 31, 1995 - - - - 268,342 268,342
-------- ------------ --------- --------- ----------- -----------
BALANCE -December 31, 1995 - - - 1,200 (366,163) (364,963)
Recapitalization of common
stock (Note H) - - 548,800 - - -
Issuance of preferred
stock A (Note G) 207,700 2,049,307 - - - 2,049,307
Issuance of preferred
stock B (Note G) 242,300 2,196,853 - - - 2,196,853
Distribution to
shareholders in excess
of capital - - (24,000) (24,000)
Two-for-one stock split
(Note H) - - 550,000 - - -
-------- ------------ --------- --------- ----------- -----------
Net loss for the year ended
December 31, 1996 - - - - (684,391) (684,391)
-------- ------------ --------- --------- ----------- -----------
BALANCE - December 31, 1996 450,000 $ 4,246,160 1,100,000 $ 1,200 $(1,074,554) 3,172,806
======== ============ ========= ========= =========== ===========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
ENERGY SEARCH, INCORPORATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (684,391) $ 268,342
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion and amortization expense 374,711 574,239
Dryholes and abandonments of previously capitalized oil and gas properties 125,854 -
Loss on early extinguishment of debt 129,920 -
(Gain) on sale of assets (54,096) (73,540)
Equity in (income) losses of related partnerships (37,531) 88,779
Deferred taxes (468,000) -
(Increase) decrease in assets:
Accounts receivable and due from partnerships 460,026 (265,348)
Other current assets (3,902) (24,176)
Prepaid stock offering costs (261,783) 21,413
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 340,660 98,633
Drilling advances (1,079,996) (850,876)
----------- ------------
Net cash used in operating activities (1,158,528) (162,534)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of proven properties (170,000) (146,109)
Proceeds from sale of other property and equipment 38,000 152,000
Purchase of oil and gas properties and other property and (892,165) (548,269)
equipment
Distributions from affiliated partnerships 23,934 71,077
Contributions to affiliated partnerships (125,898) (390,026)
Purchase of oil and gas leases (46,246) (49,009)
----------- ------------
Net cash used in investing activities (1,172,375) (910,336)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term debt 265,683 540,000
Net proceeds from issuance of preferred stock 2,169,160 -
Proceeds from issuance of long-term debt 140,145 887,000
Payments on long-term debt (270,695) (313,330)
Payments of loan issue costs (28,301) (71,761)
----------- ------------
Net cash provided by financing activities 2,275,992 1,041,909
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (54,911) (30,961)
CASH AND CASH EQUIVALENTS - Beginning of year 105,978 136,939
----------- ------------
CASH AND CASH EQUIVALENTS - End of year $ 51,067 $ 105,978
=========== ============
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest during the year $ 192,994 $ 229,264
============ ============
Cash paid for income taxes during the year $ - $ -
============ ============
NONCASH ACTIVITIES:
Assets distributed to shareholders $ 24,000 $ -
============ ============
Preferred stock issued (Note G) $ 2,077,000 $ -
============ ============
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Energy Search, Inc., (ESI) is engaged in the
exploration, development, production and marketing of oil and natural
gas in the Appalachian Basin area including southeastern Ohio and
southern West Virginia. ESI's revenue is primarily derived from the
drilling of oil and gas wells on a contract basis, the sale of natural
gas and crude oil from wells in which it has working interests, the
transmission of natural gas through a pipeline and gathering system
owned by an affiliated partnership in which ESI has an ownership
interest, the management and operation of oil and gas wells, and the
formation and management of oil and gas partnerships. Since inception,
all ESI oil and gas wells and the majority of its markets for oil and
gas produced were located primarily in Ohio. In 1996, ESI began
operations in West Virginia.
Commencing in 1997, ESI plans to drill wells on its own behalf on
acreage leased in West Virginia that will be financed from public funds
raised through the initial public offering (Note L). ESI will also
continue to sponsor the formation of oil and gas partnerships.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Inventory: Materials and supplies inventory, consisting primarily of
tubular goods and field materials, are stated at the lower of average
cost or market.
Oil and Gas Properties: ESI uses the successful efforts method of
accounting for oil and gas producing activities. Prior to 1997, wells
were drilled with capital raised primarily through limited
partnerships. Under the terms of the partnership and drilling
contracts, ESI does not capitalize intangible drilling costs since
these costs are the responsibility of the contracting parties. ESI
does capitalize all tangible drilling costs when incurred, since they
retain ownership of the well equipment. For 1997 and future years, all
intangible and tangible drilling costs for successful development wells
drilled with ESI's capital will be capitalized.
Oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized
at time of impairment. Proven properties represent purchased working
interests in producing oil and gas wells, as well as costs to acquire
oil and gas leases. Proven properties and wells and related equipment
are depreciated and depleted by the units-of-production method using
estimates of proven reserves. Because of inherent uncertainties in
estimating proven reserves, estimates of depletion and depreciation
could change significantly.
6
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Property and Equipment: Other property and equipment are
recorded at cost. Major additions and improvements are capitalized,
while repairs, replacements and maintenance that do not improve or
extend the life of the respective assets are expensed. Depreciation is
computed under the double-declining balance method over the estimated
useful lives.
Investments in Related Partnerships: Investments in related
partnerships are accounted for by the equity method. ESI, as the
managing general partner of the oil and gas partnerships, makes initial
capital contributions to the partnerships in accordance with provisions
in the respective placement memorandum governing the activities of the
particular partnership. Income or losses are allocated to the
investments according to ESI's ownership interest in the partnerships,
and distributions or withdrawals are deducted from the investments.
See Note B for additional partnership information.
Turnkey Drilling Revenue: ESI enters into contracts with the
affiliated oil and gas partnerships to drill oil and gas wells under
turnkey agreements. Under the terms of the contracts, ESI provides all
tangible well equipment and receives working interests in the completed
wells. The partnerships pay all intangible drilling costs and receive
working interests in the wells. The partnerships advance funds to ESI
in order to finance the drilling activity. ESI initially defers the
full amount of the drilling advances and recognizes drilling revenue as
the wells are completed. Drilling expenses are netted against turnkey
drilling revenue and were $2,046,458 and $1,760,848 in 1996 and 1995,
respectively.
Income Taxes: ESI accounts for income taxes following the liability
method. A current tax liability or asset is recognized for the
estimated taxes payable or refundable on tax returns. Deferred tax
liabilities or assets are recognized for the estimated future tax
effect of temporary differences between book and tax accounting and
operating loss and tax credit carry forwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. In 1995, ESI was a subchapter S corporation.
As such, all income, losses and credits of ESI were reported in the
individual federal income tax returns of the shareholders. As a
result, there was no provision for federal income taxes in the
accompanying financial statements. Pro forma income tax and earnings
per share information has been presented in the statement of operations
for the year ended December 31, 1995, as if ESI had been a C
corporation since inception. Pro forma 1995 income tax expense was
offset by a pro forma tax benefit recognized from a pro forma operating
loss carryforward.
7
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments: A summary of the methods and
significant assumptions used to estimate the fair value of financial
instruments is as follows:
. Short-Term Financial Instruments - The fair value of short-
---------------------------------
term financial instruments, including cash, trade accounts
receivable and trade accounts payable, approximate their carrying
amounts in the financial statements due to the short maturity of
such instruments.
. Other Assets - The fair value of investments in related
------------
partnerships is not practically determinable. See Note B for
information about partnerships.
. Notes Payable and Long-Term Debt - Based on interest rates
--------------------------------
currently available to the Company for debt instruments with
similar terms and remaining maturities, the fair values of notes
payable and long-term debt approximate their carrying amounts in
the financial statements.
Stock Options and Warrants: The Company has stock option and stock
warrant plans (Note L). Options and warrants granted to employees are
accounted for using the intrinsic value method, under which
compensation expense is recorded at the amount by which the market
price of the underlying stock at the grant date exceeds the exercise
price of an option.
Earnings Per Share: Earnings (loss) per share of common and common
equivalent stock are computed by dividing net income (loss) less the
preferred stock dividend by 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; however, conversion
has not been assumed due to the net loss for 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." The statement establishes
standards for computing and presenting earnings per share (EPS) and
simplifies previous standards. This new statement is not expected to
have a material impact on EPS as presented.
Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash
equivalents.
Accounting Standards Implemented in 1996: In March 1995, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related
8
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles held for disposal. The Statement
requires that the long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should
be based on the fair value of the asset.
The Statement is effective for fiscal years beginning after December
15, 1995. ESI has adopted the Statement effective January 1, 1996;
however, the adoption had no material effect on ESI's financial
position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation." The Statement establishes a fair value based
method of accounting for stock-based compensation plans. It encourages
entities to adopt that method for all arrangements under which
employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts
based on the price of its stocks. At December 31, 1996, the statement
did not have a material impact on ESI's financial statements.
Reclassifications: Certain reclassifications have been made to 1995
amounts to conform to 1996 presentations.
NOTE B - AFFILIATED OIL AND GAS PARTNERSHIPS
Since 1989, ESI has sponsored the formation of partnerships for the
purpose of conducting oil and gas exploration, development, and
production activities on certain oil and gas properties. Such
partnerships include the Natural Gas/Tax Credit 1989 L.P., the Natural
Gas/Tax Credit 1990 L.P., the Natural Gas/Tax Credit 1991 L.P., the
Natural Gas/Tax Credit 1992 L.P., the Natural Gas/Tax Credit 1992-A
L.P., the Natural Gas 1993 L.P. and the Energy Search Natural Gas 1993-
A L.P., the Energy Search Natural Gas 1994 L.P. and Energy Search
Natural Gas 1994-A L.P., and the Energy Search Natural Gas 1995 L.P.
Energy Search Natural Gas 1995-A L.P. ESI serves as managing general
partner of these partnerships and, as such, has full and exclusive
discretion in the management and control of the partnerships. The
turnkey drilling and operating agreements that ESI enters into with the
partnerships provide that the partnerships pay for the intangible
drilling costs of the wells at an agreed-upon price per well. ESI
provides all tangible equipment required in the drilling, equipping,
completing and operating of the properties. Revenue from the
partnership oil and gas properties is allocated based on the working
interest ownership percentage of the properties. ESI's interests in
the limited partnerships range from .5 percent to 9 percent at December
31, 1996 and 1995.
9
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE B - AFFILIATED OIL AND GAS PARTNERSHIPS (Continued)
In 1993, ESI sponsored the formation of the ESI Pipeline Operating L.P.
(the Operating Partnership), which purchased a portion of ESI's gas
pipeline and gathering system. ESI contributed its remaining interest
in the pipeline system to the new partnership in exchange for an
ownership interest in the Operating Partnership. ESI has advanced
funds to the Operating Partnership for each extension of the pipeline.
ESI has no legal obligation to continue to advance funds in the future.
ESI provides a guaranteed 10 percent return to pipeline investors
through 1997. Operations of the pipeline have been sufficient to fund
the preferential return through 1996, and management does not
anticipate the need for a supplement through 1997. After preferential
returns, all cash is used to repay advances used to fund pipeline
extensions.
Also, in 1993, ESI sponsored the formation of the ESI Natural Gas
Pipeline Income L.P. (the Pipeline Partnership). The Pipeline
Partnership made a capital contribution to the Operating Partnership to
finance the initial purchase of ESI's pipeline system. In turn, the
Pipeline Partnership received an ownership interest in the Operating
Partnership. ESI serves as managing general partner for both of these
partnerships and, as such, has full and exclusive discretion in the
management of and control of the partnerships. The Operating
Partnership earns revenue by charging gas wells a transportation fee
based on the volume of gas moved through the pipeline system.
Substantially all of these gas wells are operated by ESI. As of
December 31, 1996 and 1995, the Pipeline Partnership owned
approximately 57 percent and 62 percent of the Operating Partnership,
with ESI owning the remaining 43 percent and 38 percent, respectively.
Total assets and equity of the related partnerships in the aggregate
were approximately $6,382,000 and $5,808,000, respectively, at December
31, 1996, and $4,430,000 and $4,412,000, respectively, at December 31,
1995.
Revenue, net income (loss) from continuing operations, and net income
for ESI's share of such items of the following equity investees for the
period ending December 31, 1996 and 1995, are given below. In the case
of each equity investee, the net income (loss) from continuing
operations equals the net income (loss).
10
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE B - AFFILIATED OIL AND GAS PARTNERSHIPS (Continued)
<TABLE>
<CAPTION>
EQUITY INVESTEE NET INCOME (LOSS) FROM
REVENUE CONTINUING OPERATIONS
-------------------- -----------------------
1996 1995 1996 1995
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Energy Search Natural Gas
Pipeline Income, L.P. $ 5 $ (360) $ (3,169) $ (15)
ESI Pipeline Operating L.P. 178,282 94,039 37,460 (88,779)
Energy Search Natural Gas
1993 L.P. 8,452 9,411 821 2,306
Energy Search Natural Gas
1993-A L.P. 14,315 15,304 5,506 8,085
Energy Search Natural Gas
1994 L.P. 11,607 3,053 (3,439) (3,783)
Energy Search Natural Gas
1994-A L.P. 567 106 (2,056) (2,660)
Energy Search Natural Gas
1995 L.P. 6,914 - (1,408) (26,229)
Energy Search Natural Gas
1995-A L.P. 2,879 - 5,816 (22,567)
Energy Search Natural Gas
1996 L.P. - N/A (32,193) N/A
Energy Search Natural Gas
1996-A L.P. - N/A (6,400) N/A
</TABLE>
11
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE C - PROPERTY AND EQUIPMENT
The principal categories of property and equipment are as follows:
<TABLE>
<CAPTION>
Depreciable
1996 1995 Life-Years
--------- --------- -----------
<S> <C> <C> <C>
Machinery and equipment $ 39,942 $ 150,027 5
Office furniture, equipment and software 143,785 136,660 5
Airplane 146,932 - 7-31
Vehicles 112,784 126,913 5
--------- ---------
Total cost 443,443 413,600
Less accumulated depreciation 248,775 337,333
--------- ---------
Net carrying amount $ 194,668 $ 76,267
========= =========
</TABLE>
Depreciation expense totaled $66,445 and $68,841 for the years ended
December 31, 1996 and 1995, respectively.
NOTE D - INCOME TAXES
The following is a summary of the provision for income taxes for the
year ended December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Current recovery $ -
Deferred benefit 468,000
Amount allocated to extraordinary item (51,000)
---------
Net income tax benefit $ 417,000
=========
</TABLE>
The following is a reconciliation of the statutory federal income tax
rate to the Company's effective tax rate:
<TABLE>
<CAPTION>
<S> <C>
Income tax at federal statutory rate 34.0%
State income taxes, net of federal benefit 6.0
Effect of nondeductible expenses (.5)
---------
Actual effective tax rate 39.5%
=========
</TABLE>
12
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE D - INCOME TAXES (Continued)
The significant components of ESI's deferred tax assets and liabilities
at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Allowance for uncollectible accounts $ 55,000
Accounting for equity investors 198,000
Federal net operating loss 657,000
State net operating loss 102,000
Other 6,000
-----------
Total deferred tax assets 1,018,000
Valuation allowance for deferred tax assets -
Deferred tax liabilities:
Depreciation 401,000
Pooling of capital 149,000
-----------
Total deferred tax liabilities 550,000
-----------
Net deferred tax assets $ 468,000
===========
</TABLE>
At December 31, 1996, ESI has federal and state operating loss
carryforwards of approximately $1,900,000 that expire in the years 2005
to 2011. These carryforwards are available to offset future taxable
income.
The net deferred tax asset of $468,000 at December 31, 1996, consists
of a current and long-term portion of $55,000 and $413,000,
respectively.
NOTE E - NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes payable to shareholders, unsecured, due on
demand, annual interest-only payments at 10% $ 251,773 $ 236,773
Line of credit at bank, collateralized by lien on oil
and gas property, interest payable at prime plus
2.0%, paid off in 1996 - 400,000
Line of credit at bank, collateralized by lien on oil
and gas property, interest payable at prime plus
1.75% 650,683 -
---------- ----------
Total $ 902,456 $ 636,773
========== ==========
</TABLE>
13
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE E - NOTES PAYABLE (Continued)
The Company has an $870,000 line of credit. The initial borrowing base
was $900,000 but is reduced by $10,000 per month. It has various loan
covenants including requirements on its tangible net worth, debt to
tangible net worth, and limits on partnership subsidies and general and
administrative costs.
The following is a summary of certain information regarding ESI's
short-term borrowings for years ended December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Balance at end of year $ 902,456 $ 636,773
Weighted average interest rate at end of year 9.80% 10.2%
Average amount outstanding during the year $ 1,013,163 $ 786,012
Maximum amount outstanding at any month end
1,126,980 919,441
during the year
</TABLE>
NOTE F - LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Variable-rate subordinated debentures; unsecured,
converted to preferred stock in 1996 as discussed in
Note G $ - $ 2,169,500
Note payable to bank, collateralized by equipment,
interest only payable at a rate of 8.5% through
March 17, 1997, monthly installments of $2,863,
including interest of 8.5% commencing April 17,
1997, through March 17, 2002 140,145 -
Note payable to bank, collateralized by vehicles and
guaranties of shareholders, payable in monthly
installments of $5,250, including interest at prime
plus .50%, which was 9% at December 31, 1995
and 1994, through May 10, 1998 84,378 137,296
</TABLE>
14
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE F - LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Notes payable to related entities, unsecured, payable
in monthly installments of $13,066, including
interest ranging from 10% to 12%, paid in 1996 - 125,277
--------- -----------
Total 224,523 2,432,073
Less current portion 69,729 146,481
--------- -----------
Total long-term debt $ 154,794 $ 2,285,592
========= ===========
</TABLE>
Principal maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 69,729
1998 56,530
1999 26,940
2000 29,339
2001 31,985
Thereafter 10,000
---------
Total $ 224,523
=========
</TABLE>
NOTE G - PREFERRED STOCK ISSUANCE
During 1996, ESI issued 207,700 shares of Class A convertible preferred
stock with a $10 stated value in exchange for and to retire the
outstanding principal on its variable rate subordinated debentures. Of
the $2,169,500 debentures payable outstanding at December 31, 1995, a
total of $2,077,000 was converted to Class A convertible preferred
stock, with the remaining $92,500 in debentures being retired with
cash. The write-off of the deferred loan costs of $129,920 related to
the debentures has been reflected as a loss on early extinguishment of
the debt. In addition, ESI issued 242,300 shares of Class B convertible
preferred stock with a $10 stated value during this period. Issue costs
of $27,693 and $226,147 related to the Class A and Class B preferred
stock, respectively, were netted against the respective preferred stock
accounts.
Both the Class A and B preferred stock is redeemable by the Company, at
the option of the holder, at $10 per share or, if not redeemed, is
automatically convertible on a share-by-share basis into common stock
upon the occurrence of a certain event. Such events include the
undertaking of a registration and initial public offering of any of
ESI's common stock. As discussed in Note L, the preferred stock was
converted to common stock in 1997 in conjunction with the successful
initial public offering of ESI's common stock.
15
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE H - RECAPITALIZATION OF COMMON STOCK
On July 1, 1996, all of the existing shareholders of ESI surrendered
1,200 shares of common stock outstanding as of June 30, 1996, in
exchange for 550,000 shares of no par common stock from the Company for
no additional consideration. In January 1997, immediately prior to
completion of the initial public offering, a two-for-one stock split
was completed which doubled the number of outstanding shares of common
stock to 1,100,000. The changes have been retroactively reported in the
financial statements.
NOTE I - RELATED-PARTY TRANSACTIONS
Because of the nature of ESI's business, a significant number of
transactions are with related parties.
During 1996 and 1995, ESI received drilling advances from two
affiliated oil and gas partnerships in the amount of $2,037,750 and
$2,935,000, respectively. The balance of drilling advances from
affiliated oil and gas partnerships of $1,335,124 and $2,415,120 as of
December 31, 1996 and 1995, respectively, relate to advances in 1996,
1995, and preceding years and will be earned as respective wells are
completed.
In its role as operator of the oil and gas wells owned by various
related partnerships, ESI charges a wellhead and administrative fee of
between $100 and $200 per month for each producing well. These fees
totaled $158,666 and $115,350 for 1996 and 1995, respectively. In its
role as general partner of the partnership, which owns the gas pipeline
and gathering system, ESI charges the partnership a management fee of
$5,000 per month. These fees totaled $55,000 and $60,000 for 1996 and
1995, respectively.
Equity Financial Corporation (EFC), a related party, acts as placement
agent for ESI programs. ESI paid EFC $183,150 and $250,000 in 1996 and
1995, respectively, for costs associated with program placement. The
balance owed EFC was $84,900 and $112,200 as of December 31, 1996 and
1995, respectively. In 1995, ESI paid EFC $41,000 in sales commissions
for placement of variable rate subordinated debentures and paid EFC
$83,080 in sales commissions in 1996 for conversion of these debentures
to preferred stock. ESI paid EFC $28,000 and $36,000 in 1996 and 1995,
respec tively, for rent and management fees under a monthly shared
service arrangement.
16
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE I - RELATED-PARTY TRANSACTIONS (Continued)
ESI has the contractual right to change partnership administrative fees
and production operating fees in excess of the aggregate amounts
charged to the partnerships during 1996 and 1995.
The Company, in its discretion and given the business environment
existing at the time, chose not to collect certain amounts due from
partnerships and also paid certain expenses due to others on behalf of
partnerships.
ESI is under no legal or contractual obligation to continue this
activity, and there is no expectation that it will continue in future
years.
The following is a summary for the years ended December 31 of expenses
paid on behalf of the partnerships and advances forgiven:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Expenses paid on behalf of partnerships $ 197,852 $ 188,072
Advances forgiven 57,996 42,290
</TABLE>
NOTE J - EMPLOYEE BENEFIT PLANS
ESI sponsors a simplified employee pension plan (SEP) for qualifying
employees. Employee contributions to individual retirement plans may
not exceed the greater of 15 percent of employee earnings or $22,500
per year per employee. ESI contributed $15,726 and $12,235 to the SEP
during 1996 and 1995, respectively.
Under the Company's existing common stock warrant plans, 8,175 stock
warrants for the purchase of common stock at $10 per share and 4,000
warrants for the purchase of common stock at $.01 per share have been
issued to employees and sales agents of the Company, respectively, as
of December 31, 1996. In conjunction with this plan, 13,975 shares to
common stock have been reserved for issuance upon exercise of these
warrants. The fair value of the $.01 warrants outstanding at December
31, 1996, is approximately $32,000. The fair value of the $10 warrants
is insignificant. The warrants were exercised in 1997.
NOTE K - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
As general partner in various affiliated oil and gas partnerships, ESI
is subject to contingencies that may arise in the normal course of
business of these partnerships. Management is of the opinion that
liabilities, if any, related to such contingencies that may arise would
not be material to the financial statements.
17
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE K - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS (Continued)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject ESI to credit risk
include cash on deposit with one financial institution in which these
deposits exceed the federally insured amount. ESI places its temporary
cash investments with high credit quality financial institutions. At
December 31, 1996, ESI's uninsured cash balances were $144,444.
The Company extends credit to affiliated partnerships in the normal
course of business. Within this industry, certain concentrations of
credit risk exist. ESI, in its role as operator of co-owned
properties, assumes responsibility for payment to vendors for goods and
services related to joint operations and extends credit to these
partnerships as co-owners of these properties.
This concentration of credit risk may be similarly affected by changes
in economic or other conditions and may, accordingly, impact the
Company's overall credit risk. However, management believes that its
accounts receivable are well diversified, thereby reducing potential
risk to ESI.
GEOGRAPHIC CONCENTRATION
The Company plans to increase its oil and gas reserves by continued
developmental drilling in southeastern Ohio in the area serviced by its
gas gathering system and through primarily developmental drilling in
its Dupont Field and on its Beaver Coal Company Lease in Wood and
Raleigh counties, West Virginia, respectively. The Company may also
undertake activities elsewhere in the Appalachian Basin and the mid-
continent region of the United States. It plans to drill an increasing
number of wells for its own account, while at the same time continuing
to drill wells with future affiliated drilling partnerships to be
syndicated on a private placement basis.
NOTE L - SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In January 1997, the Company registered its stock in a public offering
and raised $6,715,000 net of underwriter fees, professional fees, and
various other costs associated with this stock offering. Costs
incurred prior to December 31, 1996, have been recorded as prepaid
stock offering costs. These costs will be netted against the proceeds
of the offering in 1997.
18
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE L - SUBSEQUENT EVENTS (Continued)
The following table sets forth the capitalization of the Company as of
December 31, 1996, as reflected in the audited financial statements and
the pro forma capitalization of the Company as of December 31, 1996,
giving effect to the sale of 1,000,000 common shares, the application
of the net proceeds therefrom, and the conversion of all outstanding
preferred stock to common stock.
<TABLE>
<CAPTION>
Pro forma
December 31, December 31,
1996 1996
------------ --------------
<S> <C> <C>
SHAREHOLDERS' EQUITY
Class A convertible preferred stock (no par $ 2,049,307 $ -
value, 5% cumulative, 216,945 shares
authorized, 207,700 shares issued and
outstanding at $10 per share)
Class B convertible preferred stock (no par 2,196,853 -
value; no dividend preference, 450,000
shares authorized, 242,300 shares issued
and outstanding at $10 per share)
Common stock (no stated value, 10,000,000 1,200 10,962,360
shares authorized, 1,100,000 shares issued
and outstanding)
Accumulated deficit (1,074,554) (1,074,554)
------------ --------------
Total shareholders' equity $ 3,172,806 $ 9,887,806
============ ==============
</TABLE>
After completion of the initial public offering, ESI will have
3,000,000 shares outstanding, which will consist of the 1,000,000
shares sold in the offering plus 2,000,000 shares resulting from
converted preferred stock and common stock after the two-for-one stock
split.
19
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE L - SUBSEQUENT EVENTS
STOCK OPTION AND WARRANT PLANS
The Company has established a stock option plan effective January 1,
1997, for unaffiliated parties that excludes officers, directors other
than outside directors, employees, and advisors of the Company. A total
of 300,000 shares of common stock have been authorized and reserved for
issuance under this plan. The Company has also established an outside
directors stock option plan, effective January 1, 1997. A total of
50,000 shares of common stock have been authorized and reserved for
issuance under this plan.
The exercise price of each option granted under both stock option plans
may not be less than the fair market value of the common stock on the
day of the grant of the option, and no option may be exercisable more
than 10 years after the date of the grant.
An executive officer common stock warrant plan was also adopted in
January 1997 under which executive officers have been granted a common
stock purchase warrant for the purchase of up to 30,000 shares of
common stock at the IPO price ($8 per share) per year for five years,
starting in 1997.
SERIES A WARRANTS
As part of ESI's public offering, the Board of Directors has authorized
the issuance of 1,000,000 Series A warrants included in units that
consist of one share of common stock and one Series A warrant. The
Board has also authorized the issuance of 150,000 units that may be
issued pursuant to the Underwriters' over-allotment option, and 100,000
"representative's" warrants that may be issued pursuant to
Underwriters' compensation. An equivalent number of shares of common
stock has been authorized and reserved for issuance upon exercise of
such Series A warrants.
Each Series A warrant entitles the holder to purchase one share of
common stock at an exercise price of 120 percent of the offering price
per unit exercisable at any time after February 28, 1998, until January
30, 2002. The Series A warrants may not be traded separately until July
24, 1997. The warrants are subject to redemption by the Company at a
price of $.05 per Series A warrant on 30 days written notice at any
time after July 24, 1998, provided that the closing sale price per
share for the common stock has equaled or exceeded 200 percent of the
offering price per unit for 20 consecutive trading days within the 30-
day period immediately preceding such notice.
20
<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE L - SUBSEQUENT EVENTS (Continued)
EQUITY FINANCIAL CORPORATION ACQUISITION
On March 3, 1997, the Company's Board of Directors approved the
acquisition of Equity Financial Corporation. EFC is a Tennessee
corporation and an NASD member broker-dealer. EFC acted as the
placement agent for each of the Company's drilling programs and
received sales commissions in connection with the offerings. EFC is
owned by two of the Company's officers. The purchase price is $190,000.
Condensed financial statements for EFC for the two most recent years
are as follows:
BALANCE SHEET
<TABLE>
<CAPTION>
October 31
-------------------------
ASSETS
1996 1995
------------ ----------
<S> <C> <C>
Cash $ 102,000 $ 67,000
Other assets 131,000 122,000
------------ ----------
Total assets $ 233,000 $ 189,000
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 73,000 $ 70,000
Shareholders' equity 160,000 119,000
------------ ----------
Total liabilities and shareholders' equity $ 233,000 $ 189,000
============ ==========
INCOME STATEMENT
1996 1995
------------ ----------
<S> <C> <C>
Revenues $ 1,350,000 $ 835,000
Expenses 1,297,000 841,000
------------ ----------
Net income (loss) before income taxes 53,000 (6,000)
Income tax (expense) benefit (12,000) 3,000
------------ ----------
Net income (loss) $ 41,000 $ (3,000)
============ ==========
</TABLE>
21
<PAGE>
ADDITIONAL INFORMATION
22
<PAGE>
[LETTERHEAD OF PLANTE & MORAN, LLP APPEARS HERE]
================================================================================
Independent Accountant's Report
on Additional Information
To the Shareholders of
Energy Search, Incorporated:
The Costs Incurred in Oil and Gas Producing Activities and Estimates of Natural
Gas and Oil Reserves on pages 23 through 25 are not a required part of the basic
financial statements of Energy Search, Incorporated, but constitute additional
supplementary information required by the Financial Accounting Standards Board.
We have applied certain limited procedures, which consisted principally of
inquiries of management regarding the methods of measurement and presentation of
the supplementary information. However, we did not audit the information and
express no opinion on it.
/s/ PLANTE & MORAN, LLP
Grand Rapids, Michigan
March 6, 1997
23
<PAGE>
ENERGY SEARCH, INCORPORATED
SUPPLEMENTARY INFORMATION (UNAUDITED)
DECEMBER 31, 1996
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES
<TABLE>
<CAPTION>
Year Ending December 31
------------------------
1996 1995
------------------------
<S> <C> <C>
Property acquisition costs $ 72,640 $ 146,109
Exploration costs - Proven 46,246 49,010
Exploration costs - Unproven 242,130 75,877
Development costs 775,658 622,642
</TABLE>
ESTIMATES OF NATURAL GAS AND OIL RESERVES
The following estimates of proven developed natural gas and oil reserve
quantities and related standardized measure of discounted net cash flow are
estimates prepared by an independent petroleum engineer on behalf of ESI's
engineer as of December 31, 1996 and 1995. They do not purport to reflect
realizable values or fair market values of ESI's reserves. ESI emphasizes that
reserve estimates are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and gas properties. Accordingly,
these estimates are expected to change as future information becomes available.
Proven reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proven
developed reserves are those expected to be recovered through existing wells,
equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas to the estimated future production of
proven oil and gas reserves, less estimated future expenditures (based on year-
end costs) to be incurred in developing and producing the proven reserves, less
estimated future severance tax expenses and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10 percent per year to reflect the estimated timing of the
future cash flows.
24
<PAGE>
ENERGY SEARCH, INCORPORATED
SUPPLEMENTARY INFORMATION (UNAUDITED)
DECEMBER 31, 1996
ESTIMATES OF NATURAL GAS AND OIL RESERVES (Continued)
<TABLE>
<CAPTION>
Oil (Bbl) Gas (Mcf)
-------------- -------------
<S> <C> <C>
Proven, developed and undeveloped reserves:
January 1, 1995 21,922 747,993
Revisions and other changes (15,302) (153,948)
Extensions and discoveries 16,886 2,594,786
Purchases of reserves - 466,815
Production (1,166) (91,119)
-------------- -------------
December 31, 1995 22,340 3,564,527
Revisions and other changes (2,568) (431,499)
Extensions and discoveries - 13,471,501
Purchases and sales of reserves (2,079) (829,969)
Production (957) (82,260)
-------------- -------------
December 31, 1996 16,736 15,692,300
============== =============
Proven developed reserves:
December 31, 1995 11,723 1,259,454
December 31, 1996 16,725 1,148,764
Equity interest in proven reserves:
December 31, 1995 2,392 169,023
December 31, 1996 2,391 214,474
</TABLE>
25
<PAGE>
ENERGY SEARCH, INCORPORATED
SUPPLEMENTARY INFORMATION (UNAUDITED)
DECEMBER 31, 1996
ESTIMATES OF NATURAL GAS AND OIL RESERVES (Continued)
<TABLE>
<CAPTION>
December 31
--------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Standardized measure of discounted future pretax net cash flows
Future cash inflows $ 53,269,424 $ 10,097,118
Future production costs (6,876,455) (2,385,183)
Future development costs (10,069,585) (2,454,290)
-------------- -------------
Future pretax net cash flows 36,323,384 5,257,645
10% annual discount for estimated timing of cash flows (14,996,587) (2,536,994)
-------------- -------------
Standardized measure of discounted future pretax net
cash flows relating to proven oil and gas reserves $ 21,326,797 $ 2,720,651
============== =============
Standardized measure of discounted future net cash flows
Future cash inflows $ 53,269,424 $ 10,097,118
Future production costs (6,876,455) (2,385,183)
Future development costs (10,069,484) (2,454,290)
Future income taxes (10,747,719) -
--------------- -------------
Future net cash flows 25,575,665 5,257,645
10% annual discount for estimated timing of cash flows (10,402,907) (2,536,994)
-------------- -------------
Standardized measure of discounted future net cash flows
relating to proven oil and gas reserves $ 15,172,758 $ 2,720,651
============== =============
ESI's share of equity method investors' standardized measure
of discounted future cash flows $ 34,478 $ 26,387
============== =============
The following reconciles the change in the standardized measure of discounted future net cash flows for
the year ended December 31,
1996 1995
-------------- -------------
Beginning of year $ 2,720,651 $ 832,924
Sales of oil and gas produced, net of production costs (303,913) (219,464)
Extensions, discoveries, and improved recovery -
Less related costs 23,352,526 1,603,198
Revisions of previous quantity estimates (271,797) (253,575)
Net change from purchases and sales of minerals in place (632,667) 535,514
Net change in income taxes (10,279,719) -
Other 587,677 222,054
-------------- -------------
End of year $ 15,172,758 $ 2,720,651
============== =============
</TABLE>
26
