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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number: 001-12679
ENERGY SEARCH, INCORPORATED
(Name of Small Business Issuer in Its Charter)
TENNESSEE 62-1423071
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
280 FORT SANDERS WEST BLVD., SUITE 200
KNOXVILLE, TENNESSEE 37922
(Address of Principal Executive Offices) (Zip Code)
(800) 551-5810
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON
STOCK, NO PAR VALUE
Check whether the Registrant has: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The Registrant's total revenues for the year ended December 31, 1997, were
$2,361,249.
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As of March 27, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $27,812,950. This
amount is based on the sale price of $10.125 per share for the Registrant's
stock as of such date.
As of March 27, 1998, the Registrant had outstanding 3,773,241 shares of
Common Stock, no par value.
Portions of the Registrant's definitive proxy statement to be filed no
later than April 30, 1998 for the Registrant's annual meeting of
stockholders are incorporated by reference into Part III of this Report.
Transitional Small Business Disclosure Format (check one): Yes ____ No __X__
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL.
Energy Search, Incorporated ("Energy Search" or the "Company") is an
independent oil and natural gas company engaged in the exploration,
development, production and acquisition of domestic oil and natural
gas properties primarily in the Appalachian Basin. In 1997, 95% of
the Company's production was natural gas. Commencing in January 1997,
the Company shifted its focus from drilling primarily for limited
partnerships which it sponsored ("Affiliated Drilling Partnerships")
to developing reserves for its own account. As a result of this
shift, daily net production, which the Company estimates averaged 0.9
million cubic feet equivalent per day ("MMcfed") in 1997, reached the
level of approximately 2.7 MMcfed by January 1998. The Company
drilled 36 wells in 1997 (28 net to the Company), of which over 90%
were successfully completed thereby increasing its reserves by 93.7%.
According to the 1997 year-end reserve report prepared by the
Company's independent certified petroleum engineers, Wright & Company,
the Company as of December 31, 1997 had proven natural gas reserves
of 30.8 billion cubic feet of gas equivalent ("Bcfe") with a pre-tax
present value of proved reserves discounted at the rate of 10% per
year ("SEC PV-10") of $32.4 million. The Company's future growth is
anticipated to be driven by development, exploitation and controlled
exploration drilling on its existing properties and the continuation
of an opportunistic acquisition strategy in the Appalachian Basin
region. The Company drills primarily developed wells and, on
occasion, exploratory wells.
The Company was organized as a Tennessee corporation in 1990. Since
its inception, the Company has raised over $40.0 million for
Affiliated Drilling Partnerships and other energy related
partnerships, and has drilled over 230 gross wells in the Appalachian
Basin with more than a 90% success rate. During the last 18 months,
the Company has grown primarily through opportunistic acquisitions of
Appalachian Basin properties and the subsequent development,
exploitation and exploration of these properties. These activities
have resulted in substantial increases in its reserves and production.
In 1996 and 1997, the Company made two significant acquisitions which,
due to development by the Company, currently have SEC PV-10 values
that are several times their original acquisition price. As a result,
the Company has significantly increased its asset base, as shown in
the following table.
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<TABLE>
<CAPTION>
ASSET GROWTH
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DECEMBER 31, 1996 1997 % CHANGE
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<S> <C> <C> <C>
Net gas reserves (Bcfe) 16 31 93.7
SEC PV-10 ($000s) $21,327 $32,361 51.7
Acreage under lease 59,720 68,610 14.9
Gross wells drilled 23 36 56.5
Wells operated 177 370 109.0
Miles of pipeline operated 60 92 53.3
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</TABLE>
The Company's operations presently are focused entirely in the
Appalachian Basin. The Appalachian Basin is characterized by shallow
natural gas formations, which historically have provided for highly
predictable drilling success rates. In addition, because wells
drilled in the Appalachian Basin are closer to the large demand
centers in the northeastern United States, natural gas from this area
typically has commanded a premium price relative to natural gas
produced in areas such as the Gulf Coast and Mid-Continent regions of
the United States. In 1997, the Company received an average price for
its natural gas of $3.08 per thousand cubic feet ("Mcf") verses an
average New York Mercantile Exchange ("NYMEX") price of $2.35 per Mcf.
Throughout the 1990s, the Company averaged drilling of approximately
25 to 35 wells per year. Until February of 1997, substantially all of
the Company's wells were drilled in joint ventures with Affiliated
Drilling Partnerships which were syndicated primarily by the Company's
affiliate, Equity Financial Corporation. The Affiliated Drilling
Partnerships participated primarily in development drilling in
Washington, Athens and Meigs Counties, Ohio. The Company has drilled
over 200 wells with Affiliated Drilling Partnerships, 191 of which the
Company operated as of December 31, 1997. The primary geological
formations which the Company had targeted in southeastern Ohio for
exploration and development are the Clinton Sandstone, the Medina
Sandstone, the Lockport Dolomite, the Oriskany Sandstone and the Berea
Sandstone.
Management's business plan for the Company currently anticipates
drilling an average of approximately 25 to 50 wells per year over the
next five years with net cash flow, proceeds of future equity
offerings, incurring of additional limited long-term debt, and, on a
limited basis, proceeds of future Affiliated Drilling Partnerships.
Management believes it can efficiently maintain the planned level of
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drilling activity in the foreseeable future. Management plans to
continue drilling and development activities primarily for the
Company's own account which should enable the Company to expand its
activities and operations. This plan, management believes, should
result in the continued growth of the Company's proved natural gas and
oil reserves, net cash flow and shareholder value. As the Company's
revenues and net cash flows grow, the Company intends to expand its
drilling activities and continue to evaluate and execute natural gas
and oil property acquisitions.
The Company was formed by a three member management team with energy,
financial, legal and transactional experience. Since formation, the
Company has developed a qualified team of geologists, petroleum
engineers and land managers. In 1997, the Company hired a chief
petroleum engineer from one of the Company's Appalachian Basin
competitors. This individual now serves as the Company's Chief
Operating Officer. In addition, two land department professionals
were added to the Company's management team in 1997 to enhance further
the Company's ability to identify, evaluate, acquire and exploit new
oil and natural gas development opportunities.
BUSINESS STRATEGY
The Company's objective is to maximize shareholder value by growing
reserves, production, cash flow and earnings through active
development of its existing properties and through the opportunistic
acquisition of Appalachian properties with underexploited value.
Fundamental to the execution of the Company's strategy is its focus on
the Appalachian Basin region and its foundation of experienced
technical personnel strengthened by a high level of financial and
transactional experience.
GEOGRAPHIC AND NATURAL GAS FOCUS. The Company focuses on natural gas
in the Appalachian Basin. Unlike many exploration and production
companies, the Company has concentrated on one region and is one of
only a few publicly traded pure Appalachian Basin natural gas
producers. The Company believes this region remains attractive for
future development, exploration and acquisition activities due to
significant reserve potential, a well developed Company infrastructure
of gathering systems and pipelines and premium pricing and economics.
This geographic focus has enabled the Company to build and utilize a
base of region-specific geological, geophysical, engineering and
production expertise.
Management believes that natural gas is gaining popularity as a power
source and is expected to continue to increase market share relative
to other fossil fuels due to its efficiency and its environmental
characteristics. According to industry statistics, in 1996, more than
22.4 trillion cubic feet of natural gas ("Tcf") were consumed in the
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United States, and consumption may increase 16.5% to reach 26.1 Tcf by
the year 2005. Uses of natural gas include steam; process heat and
co-generation for industrial uses; feedstock for chemicals used in
fertilizer and gasoline production; electric generation and
residential and commercial heating. In addition, the Company believes
that deregulation of certain sectors of the natural gas industry,
which has resulted in lower prices for natural gas, may increase
market demand.
Management believes that natural gas in the Appalachian Basin enjoys
favorable economics. The Appalachian Basin has a price advantage over
the Gulf Coast and other natural gas producing regions given its
proximity to the primary markets on the East Coast. In 1997, the
Company enjoyed an average premium of $0.73 per Mcf over the average
gas price listed on NYMEX.
ACQUISITION OF PROPERTIES WITH UNDEREXPLOITED VALUE. The Company
employs an acquisition strategy of purchasing Appalachian Basin
natural gas properties from large independents and major oil
companies. These properties provide opportunities to increase
reserves, production and cash flow through development and
exploitation drilling and lease operating expense reduction. The
Company uses its in-house landmen and network of relationships in the
region to discover acquisitions that are not widely advertised. The
Company also believes its reputation in the region has caused many
property owners to approach the Company for potential acquisitions.
FOCUS ON DEVELOPMENT AND EXPLOITATION WITH CONTROLLED EXPLORATION.
The Company integrates its reservoir and production engineering
expertise with its geological interpretation abilities to enhance the
results of its exploration and production business. The Company's
ability to integrate geophysics with detailed geology, reservoir
engineering and production engineering allows it to identify multiple
development and exploratory prospects in mature producing fields that
were not identified by previous operators and to identify multiple
horizon wells that have previously been unexploited. The Company
continues to drill its Beaver Coal Company in central West Virginia
(the "Beaver Lease") and has recently begun drilling in its newly
acquired Simmons Field in Washington County, Ohio (the "Simmons
Field") where it has identified as many as four horizons.
The Company has assembled a multi-year inventory of development,
exploitation and exploratory drilling opportunities in the Appalachian
Basin and has identified more than 170 drill sites on its current
lease inventory. Most of the properties comprising this inventory are
located in fields that have established production histories. Based
on its experience on these properties and on independent reports from
its petroleum engineers, the Company believes these properties may
yield significant additional recoverable reserves.
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CONTROL OF OPERATIONS. The Company seeks to operate and maintain a
majority working interest position in each of its core properties.
Consequently, the Company can control directly all aspects of
drilling, completion and production. In addition, the Company intends
to maintain a low cost overhead structure by controlling the timing of
the development of its properties. By operating its producing wells,
the Company believes it is well positioned to control the expenses and
timing of development and exploitation of such properties and better
manage cost reduction efforts.
EMPLOYMENT OF TECHNOLOGY. The Company uses advanced technology in
both its development and exploration activities to reduce drilling
risks and finding costs and to prioritize its drilling prospects based
on return potential. Specifically, the Company uses GeoGraphix for
determining well location, mapping and possible viability of potential
leases. GeoGraphix is one of the top programs used for mapping
reserve geology and overall reserve evaluation. The Company also has
a proprietary database of over 25,000 wells that has been integrated
into GeoGraphix making the program a powerful planning tool. The
Company has spent years developing this extensive proprietary database
and has a full time employee dedicated to accumulating and inputting
data from its drilling experiences and from public and other records
to form this database.
INTEGRATION. The Company operates gas gathering and pipeline systems
throughout its fields. The Company believes that through this
integration it has been able to improve overall margins on the sale of
gas; in particular, in 1997 the Company received an average gas price
in some areas of $0.20 per Mcf above the average sales price for that
region. The Company is actively examining additional integration
possibilities for transmission, gathering and marketing of gas to
continue this integration of its natural gas business.
MARKET FOR OIL AND NATURAL GAS
GENERAL. The revenues generated from the Company's oil and gas
operations are highly dependent upon the prices of and the demand for
its oil and natural gas production. The prices received by the
Company for its oil and gas production depend upon numerous factors
beyond the Company's control including seasonality, the condition of
the United States economy, foreign imports of oil and natural gas,
political conditions in other oil and natural gas producing countries,
the actions of the Organization of Petroleum Exporting Countries and
domestic government regulation, legislation and regulatory policies.
Decreases in the prices of oil and natural gas could have an adverse
effect on the carrying value of the Company's proved reserves, and the
Company's revenues, profitability and cash flow.
Although the Company has not entered into any crude oil or natural gas
price swaps or other similar hedging transactions for the purpose of
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reducing its exposure to future price fluctuations, it may engage in
such transactions from time to time in the future as management deems
it advisable to do so.
Although the Company currently is not experiencing any involuntary
curtailments of its oil or natural gas production, market, economic
and regulatory factors in the future may materially affect the
Company's ability to sell its oil or natural gas production. Due to
the availability of other markets and pipeline connections, the
Company does not believe that the loss of any single oil or natural
gas customer would have a material adverse effect on the Company's
results of operations.
NATURAL GAS SALES. Natural gas produced from completed wells must be
transported through pipeline systems to get to market. In the
Company's primary fields of operations in southeastern Ohio
substantially all the Company's completed wells are connected to the
Company's gas gathering system (the "Ohio Gas Gathering System") which
collects the gas from wells in the field, sends it through compressor
stations to enhance transportability and delivers it to the East Ohio
Company interstate pipeline and to Columbia Gas Company interstate
pipeline. Much of the Ohio Gas Gathering System is owned by ESI
Pipeline Operating L.P., an affiliate of the Company (the "Pipeline
Operating Partnership"). The Company, for its own account and on
behalf of the Affiliated Drilling Partnerships it manages, has entered
into a gas servicing agreement (the "Gas Servicing Agreement") with
the Pipeline Operating Partnership pursuant to which all natural gas
produced from wells connected to the Ohio Gas Gathering System is
purchased by the Pipeline Operating Partnership and subsequently
resold. The price received by the Company for its natural gas is a
function of what the Pipeline Operating Partnership sells it for on
the market (i.e. the "Adjusted Gas Price Spread"). The Gas Servicing
Agreement thus provides for natural gas purchased from the Company and
Affiliated Drilling Partnerships on a "net back" basis. As of
December 31, 1997, the Adjusted Gas Price Spread with respect to the
Gas Servicing Agreement ranged from approximately $0.45 per Mcf to
$0.48 per Mcf where no compression is used.
Natural gas produced from the Company's wells is sold by the Pipeline
Operating Partnership pursuant to one or more natural gas sales
contracts to gas marketers, interstate or intrastate pipelines, local
utilities or industrial end users in the Appalachian Basin. For the
fiscal year ended December 31, 1997, gross natural gas prices received
by the Company for its natural gas ranged from $2.23 to $5.04 per Mcf
before royalties and gathering and transportation costs.
REGULATION AND ENVIRONMENTAL MATTERS
GENERAL REGULATION. Oil and natural gas exploration, production and
related operations are subject to extensive rules and regulations
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promulgated by federal, state and local agencies. Failure to comply
with such rules and regulations can result in substantial penalties.
The regulatory burden on the oil and gas industry increases the
Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations
frequently are amended or interpreted, the Company is unable to
predict the future cost or impact of complying with such laws.
Environmental enforcement efforts with respect to natural gas and oil
operations recently have increased and it can be anticipated that such
regulation will expand and have a greater impact on future natural 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 federal, state or local laws respecting the environment. 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.
STATE REGULATION. Natural gas and oil 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 also may 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 natural gas and oil
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 natural 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.
FEDERAL REGULATION. The Company's sales of natural gas are affected
by the availability, terms and cost of transportation. The price and
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terms for access to pipeline transportation are subject to extensive
regulation. The Federal Energy Regulatory Commission ("FERC")
regulates the transportation and sale for resale of natural gas in
interstate commerce pursuant to the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978. In the past, the federal government
has regulated the prices at which oil and natural gas can be sold.
While sales by producers of natural gas, and all sales of oil and
natural gas liquids currently can be made at uncontrolled market
prices, Congress could reenact price controls in the future.
In recent years, FERC has undertaken various initiatives to increase
competition within the natural gas industry. As a result of
initiatives like FERC Order 636, issued in April 1992 and its progeny,
the interstate natural gas transportation and marketing system has
been substantially restructured to remove various barriers and
practices that historically limited non-pipeline natural gas sellers,
including producers, from effectively competing with interstate
pipelines for sales to local distribution companies and large
industrial and commercial customers. The most significant provisions
of Order No. 636 require that interstate pipelines provide
transportation separate or "unbundled" from their sales service, and
require that pipelines provide firm and interruptible transportation
service on an open access basis that is equal for all natural gas
supplies. In many instances, the result of Order No. 636 and related
initiatives has been to substantially reduce or eliminate the
interstate pipelines' traditional role as wholesalers of natural gas
in favor of providing only storage and transportation services.
Although Order No. 636 has largely been upheld on appeal, several
appeals remain pending in related restructuring proceedings. It is
difficult to predict when these remaining appeals will be completed or
their impact on the Company.
FERC has announced several important transportation-related policy
statements and proposed rule changes, including a statement of policy
and a request for comments concerning alternatives to its traditional
cost-of-service ratemaking methodology to establish the rates
interstate pipelines may charge for their services. A number of
pipelines have obtained FERC authorization to charge negotiated rates
as one such alternative. In February 1997, FERC announced a broad
inquiry into issues facing the natural gas industry to assist FERC in
establishing regulatory goals and priorities in the post-Order No. 636
environment. While the changes being considered by federal and state
regulators would affect the Company only indirectly, they are intended
to further enhance competition in natural gas markets. Additional
proposals and proceedings that might affect the natural gas industry
are pending before Congress, FERC, state commissions and the courts.
The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory
approach recently pursued by FERC and Congress will continue.
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The price the Company receives from the sale of oil and natural gas
liquids is affected by the cost of transporting products to markets.
Effective January 1, 1995, FERC implemented regulations establishing
an indexing system for transportation rates for oil pipelines, which,
generally, would index such rates to inflation, subject to certain
conditions and limitations. The Company is not able to predict with
certainty the effect, if any, of these regulations on its operations.
However, the regulations may increase transportation costs or reduce
well head prices for oil and natural gas liquids.
ENVIRONMENTAL REGULATION. The Company's operations and properties are
subject to extensive and changing federal, state and local laws and
regulations relating to environmental protection, including the
generation, storage, handling, emission, transportation and discharge
of materials into the environment, and relating to safety and health.
The recent trend in environmental legislation and regulation generally
is toward stricter standards, and this trend likely will continue.
These laws and regulations may require the acquisition of a permit or
other authorization before construction or drilling commences;
restrict the types, quantities and concentration of various substances
that can be released into the environment in connection with drilling
and production activities; limit or prohibit construction, drilling
and other activities on certain lands lying within wilderness,
wetlands and other protected areas; require remedial measures to
mitigate pollution from former operations such as plugging abandoned
wells; and impose substantial liabilities for pollution resulting from
the Company's operations. The permits required for various of the
Company's operations are subject to revocation, modification and
renewal by issuing authorities. Governmental authorities have the
power to enforce compliance with their regulations, and violators are
subject to civil and criminal penalties or injunction. Management
believes that the Company is in substantial compliance with current
applicable environmental laws and regulations, and that the Company
has no material commitments for capital expenditures to comply with
existing environmental requirements. Nevertheless, changes in existing
environmental laws and regulations or in interpretations thereof could
have a significant impact on the Company, as well as the oil and gas
industry in general and thus the Company is unable to predict the
ultimate cost and effects of such continued compliance in the future.
The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") and comparable state statutes impose strict, joint and
several liability on certain classes of persons who are considered to
have contributed to the release of a "hazardous substance" into the
environment. These persons include the owner or operator of a
disposal site or sites where a release occurred and companies that
disposed or arranged for the disposal of the hazardous substances
released at the site. Under CERCLA such persons or companies may be
liable for the costs of cleaning up the hazardous substances that have
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been released into the environment and for damages to natural
resources, and it is not uncommon for the neighboring land owners and
other third parties to file claims for personal injury, property
damage and recovery of response costs allegedly caused by the
hazardous substances released into the environment. The Resource
Conservation and Recovery Act ("RCRA") and comparable state statutes
govern the disposal of "solid waste" and "hazardous waste" and
authorize imposition of substantial civil and criminal penalties for
noncompliance. Although CERCLA currently excludes petroleum from its
definition of "hazardous substance," state laws affecting the
Company's operations impose clean-up liability relating to petroleum
and petroleum-related products. In addition, although RCRA classifies
certain oil field wastes as "non-hazardous," such exploration and
production wastes could be reclassified as hazardous wastes thereby
making such wastes subject to more stringent handling and disposal
requirements.
The Company has acquired leasehold interests in numerous properties
that for many years have produced oil and natural gas. Although the
Company believes that the previous owners of these interests used
operating and disposal practices that were standard in the industry at
the time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties. In addition, most of the
Company's properties are operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes is not under the
Company's control. These properties and the wastes disposed thereon
may be subject to CERCLA, RCRA and analogous state laws.
Notwithstanding the Company's lack of control over properties operated
by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, adversely
impact the Company.
The Federal Clean Water Act and analogous state laws require permits
to be obtained to authorize discharge into surface waters or to
construct facilities in wetland areas. With respect to certain of its
operations, the Company is required to maintain such permits or meet
general permit requirements. The Environmental Protection Agency
("EPA") has adopted regulations concerning discharges of storm water
runoff. This program requires covered facilities to obtain individual
permits, participate in a group or seek coverage under an EPA general
permit. The Company believes that it will be able to obtain, or be
included under, such permits, where necessary, and to make minor
modifications to existing facilities and operations that would not
have a material effect on the Company.
COMPETITION
The oil and natural gas industry is highly competitive in all of its
phases. The Company competes with many other companies in the search
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for and acquisition of oil and natural gas properties and leases for
exploration and development, and also competes with other companies in
its activities as drilling contractor and natural gas marketers. The
Company's competitors include numerous independent oil and natural gas
companies, major integrated oil and natural gas companies, individuals
and drilling and income programs. Many of these companies have
substantially greater financial, technical and other resources than
the Company and have been engaged in the exploration and production
business for a much longer time than the Company. Such companies may
be able to pay more for leases on oil and natural gas properties and
exploratory prospects, as well as to define, evaluate, bid for or
purchase a greater number of properties and prospects than the
Company's financial or human resources would permit. The Company will
be required to maintain and enhance its ability to conduct its
operations, to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment.
Competition among oil and gas companies for favorable oil and natural
gas prospects can be expected to continue. It is anticipated that the
cost of acquiring oil and natural gas properties may increase
appreciably.
The Company competes with a number of other companies which offer
interests in drilling partnerships with a wide range of investment
objectives and program structures. Competition for investment capital
for both public and private drilling programs is intense.
OPERATING HAZARDS AND UNINSURED RISKS
Drilling activities are subject to many risks, including the risk that
no commercially productive reservoirs will be encountered. There can
be no assurance that new wells drilled by the Company will be
productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable
efforts, not only from dry wells, but from wells that are productive
but do not produce sufficient net revenues to return a profit after
drilling, operating and other costs. The cost of drilling, completing
and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond the Company's control,
including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of
equipment and services. The Company's future drilling activities may
not be successful and, if unsuccessful, may have a material adverse
effect on the Company's future results of operations and financial
condition.
The Company's operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and natural gas, such
as fires, natural disasters, explosions, encountering formations with
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abnormal pressures, blowouts, craterings, pipeline ruptures and
spills, uncontrollable flows of oil, natural gas or well fluids, any
of which can result in the loss of hydrocarbons, environmental
pollution, personal injury claims and other damage to properties of
the Company and others. The Company maintains insurance against some
but not necessarily all of the risks described above. In particular,
the insurance maintained by the Company does not cover claims relating
to failure of title to oil and natural gas leases, trespass during
survey acquisition or surface change attributable to seismic
operations and, except in limited circumstances, losses due to
business interruption. The Company may elect to self-insure if
management believes that the cost of insurance, although available, is
excessive relative to the risks presented. In addition, pollution and
environmental risks generally are not fully insurable. The occurrence
of an event that is not covered, or not fully covered, by insurance
could have a material adverse effect on the Company's business,
financial condition and results of operations.
OFFICES AND EMPLOYEES
The Company's administrative offices are located at Suite 200, 280
Fort Sanders West Boulevard, Knoxville, Tennessee, 37922. At this
office, all executive management, financial, accounting and general
administrative functions for the Company and its Affiliated Drilling
Partnerships are performed. The Company's main field office is
located at 217 Second Street, Marietta, Ohio, with a satellite field
office at 114 Club Circle, Daniels, West Virginia. Geological,
engineering and exploration and production activities are coordinated
from the Marietta office.
As of March 31, 1998, the Company had 23 full-time employees, including
one geologist, one engineer, two landmen and seven pumpers. As drilling
production activities increase, the Company intends to hire additional
technical, operational and administrative personnel as appropriate. None
of the Company's employees are represented by any labor union. The
Company believes its relations with its employees are good. From time to
time, the Company uses the services of independent consultants and
contractors to perform various professional services, particularly in the
area of drilling services, water hauling acquisition of leases and lease
options, construction, design, well-site surveillance, permitting and
environmental assessment. The Company believes that this use of
third-party service providers enhances its ability to contain general
and administrative expenses.
-12-
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
COMPANY OIL AND NATURAL GAS ASSETS
As of December 31, 1997, the Company partially owned and operated
approximately 370 wells and approximately 92 miles of natural gas
gathering systems on approximately 68,610 acres in the Appalachian
Basin. For the year ended December 31, 1997, the Company's wells had
a net average daily production of approximately 0.9 MMcfed. As of the
date of this Report, the Company's gross production of natural gas was
approximately 3.5 MMcfed and net production was estimated to be 2.7
MMcfed. Following is a summary of the Company's oil and natural gas
assets.
BECKLEY, WEST VIRGINIA AREA -- BEAVER LEASE/DUPONT FIELDS. On July 17,
1996, the Company acquired the Beaver Lease, approximately 17,000 leasehold
acres, mostly contiguous, in Raleigh County, West Virginia from the
Beaver Coal Company. The Company has drilled 27 wells on the Beaver
Lease and an additional well on acreage contiguous to the Beaver
Lease. Twenty producing gross natural gas wells are currently
on the property producing an average of 1.6 MMcfed with an additional
four wells which have been completed and awaiting hook-up, one well
which is in the process of evaluation and three dry holes. The
Company plans to continue drilling the Beaver Lease for its own
account and to exploit other similar opportunities in the area. Based
on its experience on these properties and on reports from its
independent petroleum engineers, the Company currently believes that
at least 75 developmental well sites exist for further drilling in
this acreage. All of the working interest of the Beaver Lease is
owned by the Company. The Company also has 13 producing gross natural
gas wells on its Dupont Field located in Wood County, West Virginia
(the "Dupont Field"). As of December 31, 1997, the Company and its
independent petroleum engineers have estimated the remaining proved
developed reserves in these West Virginia properties to be
approximately 6.0 Bcf of natural gas with a SEC PV-10 of $7.7 million
and proved undeveloped reserves to be approximately 8.7 Bcf with a SEC
PV-10 value of $10.4 million.
SIMMONS FIELD. In November 1997, the Company acquired the Simmons
field (the "Simmons Field"), comprised of approximately 9,000 acres
of oil and natural gas properties from Lomak Petroleum, Incorporated
("Lomak"). The purchase included 192 wells on leases located in Ohio
and West Virginia, wellhead equipment, surface equipment, a 10-mile,
6-inch gas gathering pipeline system and a compression facility. One
hundred forty-one producing gross (100% co-owned) natural gas wells
are currently on the property producing an average of 0.7 MMcfed of
which 135 are located in Ohio and six are located in West Virginia.
As of December 31, 1997, the Company and its independent petroleum
engineers have estimated remaining proved developed reserves in these
properties to be approximately 3.6 Bcf of natural gas with a SEC PV-10
-13-
<PAGE>
of $4.2 million and proved undeveloped reserves to be approximately
7.5 Bcf with a SEC PV-10 value of $5.0 million. Since this
acquisition, the Company has begun remediating and increasing
production from existing wells, identifying more than 30 wells with
uphole recompletion potential, and drilling its first developmental
well. Management believes that this property is a prototype of what
the Company targets as an acquisition candidate, a property with
remediation and enhanced production potential, unexploited uphole
reserves and a significant number of developmental sites left to be
drilled. The Company currently believes that at least 70
developmental well sites exist for further drilling in this acreage.
All of the working interest of the oil and natural gas leases
concerning the Simmons Field is wholly owned by the Company.
BARTLETT/TORCH/CHURCHTOWN FIELDS. The Bartlett, Torch and Churchtown
fields (the "Bartlett Field," "Torch Field," and "Churchtown Field,"
respectively) are accumulations of many small lease tracts from
individual owners into relatively contiguous field operation areas
located in Washington, Athens and Meigs Counties, Ohio. The acreage
was accumulated in large part in connection with Company-sponsored
Affiliated Drilling Partnerships over the past eight years. These
fields total approximately 33,000 acres. There are currently 167
producing gross (177.9 net) natural gas wells in these fields
producing an average of 1.2 MMcfed. As of December 31, 1997, the
Company and its independent petroleum engineers have estimated, for
the Company's working interest, remaining proved developed reserves in
these properties to be approximately 1.8 Bcf of natural gas with a SEC
PV-10 of $2.6 million, and proved undeveloped reserves to be
approximately 3.2 Bcf with a SEC PV-10 value of $2.5 million. The
Company currently believes that at least 25 developmental well sites
exist for further drilling in this acreage. The Company owns 100% of
the well equipment on this acreage and varying percentages of working
interest in the wells in conjunction with Affiliated Drilling
Partnerships.
GAS GATHERING SYSTEMS. Throughout its various fields of operation in
Ohio and West Virginia, the Company owns and operates approximately
92-miles of pipeline and natural gas gathering systems. In the Torch,
Bartlett and Churchtown Fields, the Company operates approximately 60
miles of natural gas gathering systems most of which are owned by the
Pipeline Operating Partnership. Substantially all completed wells in
this area are connected to these natural gas gathering systems which
collects the natural gas from the wells, sends it through one or more
compressor stations to enhance transportability and delivers it to the
East Ohio Company interstate pipeline and to the Columbia Gas Company
interstate pipeline. In connection with the Simmons Field, the
Company owns and operates approximately 18 miles of natural gas
gathering systems. The Company owns and operates approximately four
miles of gas gathering systems in the Dupont Field and approximately
10 miles of gas gathering systems in connection with the Beaver Lease.
-14-
<PAGE>
OIL AND NATURAL GAS RESERVES
The Company's oil and natural gas reserves are located in Ohio and
West Virginia. Proved reserves represent estimated quantities of
crude oil and natural gas which geological and engineering data
demonstrate to be reasonably certain to be recoverable in the future
from known reservoirs under existing economic and operating
conditions. Proved developed oil and natural gas reserves are proved
reserves that can be expected to be recovered through existing wells
using existing equipment and operating methods. Proved undeveloped
reserves are proved reserves expected to be recovered from new wells
on undrilled acreage, or from existing wells at depths below the
present bottom of the wells.
The following tables summarize information with respect to the
estimated net proved oil and natural gas reserves as reviewed,
evaluated and certified by the independent engineers and/or a
geologist attributable to the Company's interests in oil and natural
gas properties as of December 31, 1997, 1996 and 1995. The
substantial difference in total proved reserves of the Company's
natural gas from 1996 to 1997 is primarily due to the acquisition and
development of the Company's Beaver Lease in central West Virginia and
the Simmons Field in Ohio and West Virginia. The year-end reserve
reports for December 31, 1996 and December 31, 1995 were prepared by
Kim A. Walbe, independent certified geologist. The year-end reserve
report for December 31, 1997 was prepared by Wright & Company, Inc.,
independent certified petroleum engineers.
TOTAL ESTIMATED NET RESERVE QUANTITIES
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
-------------- -------------- -------------
COMPANY - TOTAL
- ---------------
<S> <C> <C> <C>
Total Proved Reserves:<F1>
Oil (Bbls) 23,624 16,736 22,340
Natural Gas (Mcf) 30,609,977 15,692,300 3,564,527
Equivalent Bbls (BOE)<F2> 5,125,287 2,632,119 616,428
Equivalent Mcf (Mcfe)<F2> 30,751,721 15,892,716 3,698,567
Total Proved Undeveloped Reserves:<F1>
Oil (Bbls) -- 11 10,616
Natural Gas (Mcf) 19,417,960 14,543,536 2,305,073
Equivalent Bbls (BOE)<F2> 3,236,327 2,423,934 394,795
Equivalent Mcf (Mcfe)<F2> 19,417,960 14,543,602 2,368,769
-15-
<PAGE>
Total Proved Developed Reserves:<F1>
Oil (Bbls) 23,624 16,725 11,724
Natural Gas (Mcf) 11,192,017 1,148,764 1,259,454
Equivalent Bbls (BOE)<F2> 1,888,960 208,186 221,633
Equivalent Mcf (Mcfe)<F2> 11,333,761 1,249,114 1,329,798
- ---------------------
<FN>
<F1>Reserves are net to the Company's interest. Applicable royalties have been deducted from these volumes.
<F2>After conversion on the basis of 6.0 Mcf of natural gas to 1.0 barrel of crude oil.
</FN>
</TABLE>
DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
The following tables represent the estimated future net revenues and
the present value of the future estimated net reserves discounted at a
rate of 10% per year from the proved developed producing, proved
developed non-producing and proved undeveloped reserves of the Company.
With respect to the tables below, the Estimated Discounted Present
Value Future Net Cash Flows from Proved Oil and Gas Reserves is
computed assuming a constant price of $3.45 per Mcf. For the fiscal
year ended December 31, 1997, gross natural gas prices received by the
Company for its natural gas ranged from $2.23 to $5.04 per Mcf before
royalties and gathering and transportation costs.
-16-
<PAGE>
ESTIMATED DISCOUNTED PRESENT VALUE OF FUTURE NET CASH FLOWS
FROM PROVED OIL AND NATURAL AS RESERVES
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
-------------- --------------- -------------
COMPANY - TOTAL
- ---------------
<S> <C> <C> <C>
Proved Developed Producing
Oil (Bbl) 23,624 13,859 7,798
Natural Gas (Mcf) 7,475,526 943,584 969,573
Proved Developed Non-Producing
Oil (Bbl) -- 2,866 3,926
Natural Gas (Mcf) 3,716,491 205,180 289,881
Proved Undeveloped
Oil (Bbl) -- 11 10,616
Natural Gas (Mcf) 19,417,960 14,543,536 2,305,073
Estimated Future Net Cash Flows
Before Income Taxes
Proved Producing $ 20,212,160 $ 2,356,125 $ 2,080,061
Proved Non-Producing 9,575,898 362,073 461,001
Proved Undeveloped 41,354,112 33,605,186 2,707,583
------------ ----------- ------------
Total $ 71,142,170 $36,323,384 $ 5,248,645
============ =========== ============
Estimated Future Net Cash Flows
Before Income Taxes Discounted
at 10%
Proved Producing $ 9,703,797 $ 1,434,504 $ 1,203,549
Proved Non-Producing 4,748,113 227,129 279,747
Proved Undeveloped 17,909,290 19,665,164 1,237,353
------------ ------------ ------------
Total $ 32,361,200 $21,326,797 $ 2,720,649
============ =========== ============
</TABLE>
For additional information concerning the discounted future net cash
flows to be derived from the Company's reserves, see the Supplemental
Information to Consolidated Financial Statements incorporated herein.
In accordance with applicable requirements of the Securities and
Exchange Commission (SEC), estimates of the Company's proved reserves
and future cash flows are made using sales prices estimated to be in
effect as of the date of such reserve estimates and are held constant
throughout the life of the properties (except to the extent a contract
specifically provides otherwise). Estimated quantities of proved
-17-
<PAGE>
reserves and future cash flows therefrom are affected by natural gas
and oil prices, which have fluctuated widely in recent years.
There are numerous uncertainties inherent in estimating oil and
natural gas reserves and their values, including many factors beyond
the control of the producer. The reserve data set forth in this Form
10-KSB represents estimates only. The meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions
upon which they were based. Reserve engineering and evaluation is a
subjective process of estimating underground accumulations of oil and
gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result,
estimates of different engineers and geologists often vary. In
addition, estimates of reserves are subject to revision by the results
of drilling, testing and production subsequent to the date of such
estimate. Accordingly, reserve estimates are often different from the
quantities of oil and natural gas that are ultimately recovered.
While the Company believes that reserve estimates presented in this
Form 10-KSB are reasonable, the estimates should be viewed with the
understanding that subsequent reservoir performance, the timing and
success of future development drilling and changes in pricing
structure or market demand will affect the reserve estimates.
In general, the volume of production from oil and gas properties
declines as reserves are depleted. Except to the extent the Company
acquires properties containing proven reserves or conducts successful
exploration and development activities, or both, the proven reserves
of the Company will decline as reserves are produced. The Company's
future oil and natural gas production is, therefore, highly dependent
upon its level of success in acquiring or developing additional
reserves.
PRODUCING WELLS
The following table sets forth certain information regarding the
Company's ownership, as of December 31, 1997, of productive wells in
Ohio and West Virginia. For purposes of this table, productive wells
are producing wells and wells capable of production. A gross well is
a well in which a working interest is owned by the Company. The
number of gross wells is the total number of wells in which the
Company owns a working interest. A net well is deemed to exist when
the sum of the fractional ownership interests in gross wells equals
one. The number of net wells is the sum of the fractional working
interests owned by the Company in gross wells expressed as whole
numbers and fractions thereof.
-18-
<PAGE>
<TABLE>
<CAPTION>
PRODUCTIVE WELL SUMMARY
OIL NATURAL GAS TOTAL
--------------------- ----------------------- ----------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Ohio 10.0 1.2 302.0 177.9 312.0 179.1
West Virginia 2.0 0.3 39.0 28.6 41.0 28.9
---- --- ----- ----- ----- -----
Total 12.0 1.5 341.0 206.5 353.0 208.0
==== === ===== ===== ===== =====
</TABLE>
As of December 31, 1997, the Company owned three wells, not included
in the above tables, which were awaiting completion.
PRODUCTION VOLUMES, AVERAGE PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the
production volumes of, average sales prices received for, and average
production costs associated with, the Company's sales of oil and
natural gas for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
NET PRODUCTION:
Oil (Bbls) 1,158 957 1,166
Natural Gas (Mcf) 138,958 82,260 91,119
Total (BOE) 24,318 14,667 16,353
Total (Mcfe) 145,906 88,002 98,115
AVERAGE SALES PRICE:
Oil ($/Bbl) $ 18.06 $ 19.26 $ 16.48
Natural Gas ($/Mcf) $ 3.08 $ 2.97 $ 2.34
AVERAGE PRODUCTION LIFTING COST:
($/Mcf) <F1> $ 0.39 $ 0.41 $ 0.82
- ----------------
<FN>
<F1>Includes direct lifting costs (labor, repairs and maintenance, materials and supplies) and property and severance taxes.
</FN>
</TABLE>
-19-
<PAGE>
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and
acquisition activities on its Ohio and West Virginia properties during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Development Costs $ 5,683,356 $ 1,066,814 $ 622,642
Exploration Costs $ 84,616 $ 288,376 $ 124,887
Property Acquisition Costs $ 1,535,173 $ 72,640 $ 146,109
</TABLE>
RECENT DRILLING ACTIVITIES
The Company has drilled or participated in the drilling of wells in
its Ohio and West Virginia properties as set out in the tables below
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -----------------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
OHIO
- ----
DEVELOPMENT WELLS
Oil 0.0 0.0 0.0 0.0 0.0 0.0
Natural Gas 8.0 3.8 17.0 3.5 17.0 2.7
Dry 0.0 0.0 1.0 0.2 1.0 0.2
---- ---- ---- ---- ---- ----
Total 8.0 3.8 18.0 3.7 18.0 2.9
==== ==== ==== ==== ==== ====
EXPLORATORY WELLS
Oil 0.0 0.0 0.0 0.0 0.0 0.0
Natural Gas 1.0 0.1 1.0 0.1 0.0 0.0
Dry 0.0 0.0 0.0 0.0 2.0 0.2
---- ---- ---- ---- ---- ----
Total 1.0 0.1 1.0 0.1 2.0 0.2
==== ==== ==== ==== ==== ====
-20-
<PAGE>
WEST VIRGINIA
DEVELOPMENT WELLS
Oil 0.0 0.0 0.0 0.0 0.0 0.0
Natural Gas 24.0 20.1 4.0 0.8 0.0 0.0
Dry 3.0 3.0 0.0 0.0 0.0 0.0
---- ---- ---- ---- ---- ----
Total 27.0 23.1 4.0 0.8 0.0 0.0
==== ==== ==== ==== ==== ====
EXPLORATORY WELLS
Oil 0.0 0.0 0.0 0.0 0.0 0.0
Natural Gas 1.0 1.0 0.0 0.0 0.0 0.0
Dry 0.0 0.0 0.0 0.0 0.0 0.0
---- ---- ---- ---- ---- ----
Total 1.0 1.0 0.0 0.0 0.0 0.0
==== ==== ==== ==== ==== ====
</TABLE>
The Company has drilled 36 gross wells during fiscal year ended
December 31, 1997. Twenty-eight wells were drilled in southern West
Virginia, completed in one or more of the multiple horizons available
(Princeton, Ravencliff, Maxton, Big Lime, Weir). Eight wells were
drilled and completed in multiple zones including the Clinton, the
Medina and the Berea sands in southeastern Ohio.
OIL AND NATURAL GAS LEASES
LEASEHOLD ACREAGE. As of December 31, 1997, the Company owned oil and
natural gas leasehold acres located in Washington, Athens, Meigs,
Noble and Morgan Counties, Ohio, and in Gilmer, Ritchie, Wood and
Raleigh Counties, West Virginia.
The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December
31, 1997.
<TABLE>
<CAPTION>
LEASEHOLD ACREAGE
DEVELOPED UNDEVELOPED TOTAL
------------------- ---------------------- ----------------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Ohio 25,383 9,057 22,547 19,729 47,930 28,786
West Virginia 18,766 14,098 1,914 1,675 20,680 15,773
------ ------ ------- ------ ------ ------
Total 44,149 23,155 24,461 21,404 68,610 44,559
====== ====== ======= ====== ====== ======
</TABLE>
-21-
<PAGE>
Substantially all of the Company's Ohio and West Virginia leases are
subject to landowner royalties of 12.5% and, occasionally, subject to
additional overriding royalty interests of 3.125%. Thus, the net
revenue interest of the Company's Ohio and West Virginia leases
generally ranges from 87.5% to 84.375%.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company, its properties, nor any of its directors or
officers, is involved in any material litigation or administrative
proceedings.
ITEM 4. SUBMISSION OF MATTERS to a VOTE OF SECURITIES HOLDERS.
None.
-22-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is quoted on the Nasdaq SmallCap Market
under the ticker symbol "EGAS." The following table sets forth for the
periods indicated, the high and low quarterly sales prices for a share
of common stock as reported on the Nasdaq Small CapMarket. On
January 24, 1997, the Company completed an initial public offering of
1,000,000 units (the "Unit(s)") comprised of one share of common stock
and one Series A common stock purchase warrant each. The Units ceased
trading and the Company's common stock began trading separately from
the Series A common stock purchase warrant on May 28, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
June 30, 1997 $ 9.81 $ 6.75
September 30, 1997 $ 9.25 $ 7.58
December 31, 1997 $ 11.50 $ 8.00
January 1, 1998, through March 26, 1998 $ 10.38 $ 9.00
</TABLE>
The estimated number of holders of common stock of the Company was
approximately 900 as of March 27, 1998.
The Company has not paid any dividends on its common stock and
currently intends to retain earnings for the future operation and
development of its use in its business. Therefore, it does not expect
to declare cash dividends in the foreseeable future.
On January 24, 1997, the Company's SB-2 registration statement for its
initial public offering ("IPO") of common stock and Series A common
stock purchase warrants was declared effective by the SEC. The IPO
was completed by January 30, 1997 at which time all of the securities
covered by the registration statement were sold. The managing
underwriters were Neidiger/Tucker/Bruner, Inc. and National Securities
Corporation. The securities offered and sold in the IPO were Units
comprised of one share of common stock and one Series A common stock
purchase warrant.
Underwriting discounts and commissions for the IPO totaled $800,000.
Expenses paid to or for the underwriters were $232,938. Other
expenses of the IPO amounted to $465,571. Total expenses of the IPO
were $1,498,509.
The net IPO offering proceeds to the Company after all offering
expenses were $6,501,491, which total was applied as follows:
-23-
<PAGE>
$5,267,492 to explore for, acquire and develop natural gas and oil
reserves; $912,500 for working capital; $261,750 for repayment of
certain indebtedness to officers of the Company; and $59,749 for
payment of accrued dividends to Class A preferred shareholders whose
preferred stock converted to common stock upon consummation of the
IPO.
In October 1997, the Company completed the private placement sale of
749,961 shares of common stock at $7.00 per share. The Placement
Agent for the sale of such common stock was Neidiger/Tucker/Bruner,
Inc., of Denver, Colorado (the "Placement Agent"). Certain other
NASD-member broker-dealers, including Equity Financial Corporation, a
wholly owned subsidiary of the Company, participated in the offering
as selling agents. The shares of common stock were sold primarily to
accredited investors, as defined in Rule 501 of Regulation D, and to
no more than 35 nonaccredited investors. The offer and sale of common
stock by the Company in this transaction was exempt from registration
under Rule 4(2) of the Securities Act and Rule 506 of Regulation D,
promulgated thereunder. The total offering proceeds were $5,249,727.
Total commissions payable to the Placement Agent were $367,481 (7%),
and nonaccountable expense allowance payable to the Placement Agent
was $157,492 (3%) some of which commissions and nonaccountable expense
allowance were allowed to the Placement Agent and the participating
selling agents. Net proceeds to the Company after deductions and
expenses were $4,671,582. As additional compensation for selling the
common stock in this transaction, the Company issued to the Placement
Agent (and its authorized designees) warrants to purchase 74,996
shares of common stock (the "Participating Selling Agent Warrants").
The Participating Selling Agent Warrants provide for an exercise price
of $7.00 per share and an exercise date of no later than January 30,
2002.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
This discussion and analysis of financial condition and results of
operations, and other sections of this Form 10-KSB, contain
forward-looking statements that are based on management's beliefs,
assumptions, current expectations, estimates and projections about the
oil and gas industry, the economy and about the Company itself. Words
such as "anticipates," "believes," "estimates," "expects,"
"forecasts," "intends," "is likely," "plans," "predicts," "projects,"
variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what
-24-
<PAGE>
may be expressed or forecasted in such forward-looking statements.
Furthermore, the Company undertakes no obligation to update, amend or
clarify forward-looking statements, whether as a result of new
information, future events or otherwise.
Important factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited to,
changes in production volumes, worldwide demand and commodity prices
for petroleum natural resources; the timing and extent of the
Company's success in discovering, acquiring, developing and producing
oil and natural gas reserves; risks incident to the drilling and
operation of oil and natural gas wells; future production and
development costs; the effect of existing and future laws,
governmental regulations and the political and economic climate of the
United States; the effect of hedging activities; and conditions in the
capital markets. Other risks are discussed elsewhere in this Form
10-KSB, including those risks described under the headings "Market for
Oil and Gas," "Regulation and Environmental Matters" and "Operating
Hazards and Uninsured Risks."
OVERVIEW
The Company is an independent oil and gas company organized as a
Tennessee corporation in 1990 and engaged in the exploration,
development, production and acquisition of natural gas properties in
the Appalachian Basin. Since its inception, the Company has raised
over $40.0 million for Affiliated Drilling Partnerships and other
energy related investment partnerships and drilled over 230 gross
wells in the Appalachian Basin with more than a 90% completion rate.
During the last 18 months, the Company has grown primarily through
opportunistic acquisitions of Appalachian properties for its own
account and the subsequent development, exploitation and exploration
of these properties, resulting in significant increases in its
reserves and production. In 1997, 95% of the Company's production was
natural gas. In January 1997, the Company shifted its focus from
being primarily a driller-operator for limited partnerships in which
it took a small working interest to an independent energy company
developing reserves for its own account. Management believes that
this strategic shift has begun to improve the Company's financial
condition and results of operations. Daily net production averaged
0.9 MMcfed in 1997, and reached a level of approximately 2.7 MMcfed in
January 1998. The Company drilled 36 wells in 1997 (28 net to the
Company), of which over 90% were successfully completed thereby
increasing its overall reserves by 93.7%. According to the year-end
reserve report prepared by the Company's independent certified
petroleum engineers, Wright & Company, the Company as of December 31,
1997 had proven natural gas reserves of 30.8 Bcfe with a SEC PV-10 of
$32.4 million.
-25-
<PAGE>
The Company's future growth is expected to be driven by development,
exploitation and controlled exploration drilling on its existing
properties and the continuation of an opportunistic acquisition
strategy in the Appalachian Basin region. The Company has
approximately 170 developmental well sites to drill on its existing
leasehold acreage. Most of these sites are located in fields with
well established production histories.
In January of 1997, the Company completed the IPO of Units by which it
raised $6,501,491 net of expenses. With these proceeds the Company
shifted its primary operational focus from the drilling of wells for
Affiliated Drilling Partnerships to the development of wells wholly
owned by the Company. While the Company anticipates the continued
sponsoring of Affiliated Drilling Partnerships on a limited basis,
management believes the Company's new focus will allow the Company to
more expeditiously develop its own reserves, cash flow from oil and
natural gas revenues and shareholder value.
In October of 1997, the Company completed the private placement of
749,961 shares of common stock at $7.00 per share. The total offering
proceeds were $5,249,727 and the net proceeds to the Company, after
selling commissions and expenses of the offering, were $4,671,582.
The Company utilized the funds for the continued development of its
Beaver Lease and Churchtown Lease areas, the acquisition of the
Simmons Field from Lomak and for the commencement of enhancement efforts
and development of the newly acquired Simmons Field.
In 1996 and 1997, the Company made two significant acquisitions.
In July of 1996, the Company acquired approximately 17,000 leasehold
acres, mostly contiguous, in Raleigh County, West Virginia, for
$170,000 from the Beaver Coal Company. The Company has drilled 27
wells on the Beaver Lease and an additional well on acreage contiguous
to the Beaver Lease. Twenty producing gross natural gas wells are
currently on the property producing an average of 1.6 MMcfed with an
additional four wells which have been completed and awaiting hook-up,
one well which is in the process of evaluation and three dry holes.
As of December 31, 1997, the Company and its independent petroleum
engineers have estimated remaining proved developed reserves in these
properties of approximately 6.0 Bcf of natural gas with a SEC PV-10 of
$7.7 million and proved undeveloped reserves of approximately 8.7 Bcf
with a SEC PV-10 value of $10.4 million. The Company plans to
continue drilling the Beaver Lease for its own account and to exploit
other similar opportunities in the area. Based on its experience on
these properties and on reports from its independent petroleum
engineers, the Company believes that at least 75 developmental well
sites exist for further drilling on this acreage. The Beaver Lease is
wholly owned by the Company.
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<PAGE>
In November 1997, the Company acquired the Simmons Field,
approximately 9,000 acres of oil and natural gas properties from Lomak
for $1.25 million. The purchase included 192 wells on leases located
in Ohio and West Virginia, wellhead equipment, surface equipment, a
10-mile, 6-inch gas gathering pipeline system and a compression
facility. One hundred forty-one producing gross natural gas wells are
currently on the property producing an average of 0.7 MMcfed of which
135 are located in Ohio and six are located in West Virginia. As of
December 31, 1997, the independent petroleum engineers and the Company
have estimated remaining proved developed reserves in these properties
of approximately 3.6 Bcf of natural gas with a SEC PV-10 to be $4.2
million and proved undeveloped reserves of approximately 7.5 Bcf with
a SEC PV-10 value to be $5.0 million. Since this acquisition, the
Company has begun remediating and increasing production of existing
wells, identifying more than 30 wells with uphole recompletion
potential, and successfully drilling its first two developmental
wells. Management believes this property acquisition is a prototype
of what the Company targets as an acquisition candidate, a property
with remediation and enhanced production potential, unexploited uphole
reserves and a significant number of developmental sites left to be
drilled. The Company currently believes that at least 70
developmental well sites exist for further drilling in this acreage.
The Simmons Field is wholly owned by the Company.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996
FINANCIAL CONDITION
Total assets increased $9,452,328 or 142% from December 31, 1996 to
December 31, 1997, primarily due to the funds received from the IPO
and the October, 1997 Regulation D Offering.
Current assets for the year ended December 31, 1997 increased
$2,580,541 to $3,320,051, or a 349% increase compared to current
assets for the year ended December 31, 1996. The Company has raised
to date approximately $11,200,000 net of underwriter fees, professional
fees and various other costs associated with its two stock offerings
completed in 1997. The Company invested the proceeds in short-term,
investment grade obligations. At December 31, 1997, the balance in
the investment account was approximately $1,850,000. Accounts
receivable for the year ended December 31, 1997 increased $408,689 to
$976,065, or a 72% increase compared to accounts receivable for the
year ended December 31, 1996. The increase in the Company's oil and
natural gas sales is due to drilling 28 net wells for the account of
the Company in 1997 and the year end acquisition of the Simmons Field
from Lomak.
Oil and natural gas properties for the year ended December 31, 1997
increased $6,254,024 to $9,700,884, or 181% from the amount reported
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<PAGE>
at December 31, 1996. The increase primarily is a result of a
significant increase in drilling activity for its own account in 1997,
the acquisition of the Simmons Field and the acquisition by the
Company of oil and natural gas lease interests in proved properties.
Due to the increased drilling activity, the Company increased capital
expenditures for well-related equipment and drilling equipment from
December 31, 1996 to December 31, 1997 in the amount of $5,833,488.
Included in this amount are intangible drilling costs of $3,324,484
associated with Company drilled wells.
Other assets for the year ended December 31, 1997 increased $617,763
to $3,099,765, or 24.9%. The increase primarily is due to an increase
in property and equipment of $168,512 (86.6%) due to the purchase of
Company vehicles, an increase in investments in affiliated
partnerships of $286,426 (21%) due to contributions made to Affiliated
Drilling Partnerships, the net income recognized during the period and
an increase in the deferred tax asset of $237,400. An offsetting
decrease in other assets was due to the prepaid stock offering costs
of $265,948 being charged against the common stock account when the
IPO closed.
Total liabilities decreased $1,321,355 or 37.8% from December 31,
1996, to December 31, 1997, due to a decrease in current liabilities
of $1,304,156 or 39.0% and a decrease in long-term debt of $17,199 or
11.1%.
Current liabilities decreased primarily due to a decrease in drilling
advances of $1,335,124. Drilling advances decrease (and revenues are
recognized) with the Company drilling Affiliated Drilling Partnership
wells. The drilling advance decrease represents the Company drilling
all wells required to be drilled for Affiliated Drilling Partnerships
through the second quarter of 1997. The Company raised an additional
$765,000 and $440,000 on its two 1997 Affiliated Drilling Partnerships.
The Company completed the required drilling for the 1997 and
the 1997-A Affiliated Drilling Partnerships by December 31, 1997.
Accounts payable and accrued expenses increased $323,285 to $1,356,748
at December 31, 1997, an increase of 31.3%. Notes payable decreased
$251,772 to $650,684 at December 31, 1997, a decrease of 27.9%. This
decrease is due to the payment by the Company of notes payable due to
officers of the Company.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Company had a net loss after
tax of $367,281 compared to a net loss after tax of $684,391 for the
year ended December 31, 1996.
Total net revenues increased $790,842 or 54.8% from December 1, 1996
to December 31, 1997 primarily due to an increase in oil and natural
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<PAGE>
gas revenue, an increase in other income and an offsetting decrease in
turnkey revenue as explained in the following paragraphs.
In 1997, net turnkey revenue decreased $406,301 or 46.1% as compared
to the amounts reported at December 31, 1996. Net turnkey revenue is
drilling revenue received from the offering proceeds of Affiliated
Drilling Partnerships. The Company contemplates sponsoring one or
more Affiliated Drilling Partnerships in 1998, and if successful,
would expect some level of turnkey revenues attributable to such
programs. However, there can be no assurance that the Company will be
successful in sponsoring Affiliated Drilling Partnerships and, if
successful, will raise any particular level of funds.
Oil and natural gas revenue increased $509,768 to $798,956 for the
year ended December 31, 1997, an increase of 176% over that reported
as of December 31, 1996. The increase primarily is due to the 28
wells drilled (net to the Company) and the related revenue recognized.
This increase is consistent with the Company's changing focus to
drilling wells for its own account. The Company expects to drill a
higher number of wells for its own account resulting in further
increases in production and revenues for 1998.
The increase in other revenue primarily is due to the interest earned
on the IPO investment account of approximately $154,000, and
approximately $496,131 of gross operating commission revenue earned by
Equity Financial Corporation. The Company acquired Equity Financial
Corporation, an affiliate of the Company, during 1997. The Company
expects Equity Financial Corporation to continue to be a profitable
segment of the Company's operation. The increase in earnings also is
due to an increase in management fees for the year ended December 31,
1997, of $50,924 to $264,590, or 23.8% for the year.
Total operating expenses increased $555,492 or 24.4% for the year
ended December 31, 1997, over the same period ending December 31,
1996. This increase primarily is due to an increase in general and
administrative expenses of $536,424, or 41.9% for the year. The
increase in general and administrative expenses primarily is due to an
increase in salaries of the Company's officers and employees, as well
as the addition of two new officers. Messrs. Torrey and Remine were,
prior to the IPO, on the payroll of Equity Financial Corporation. The
Company acquired Equity Financial Corporation as of May 1, 1997 and
Messrs. Torrey and Remine no longer receive a salary from that
company. As a direct result of the Company's public status, general
and administrative costs have increased in marketing, printing and
production, and professional fees. The balance of the increase in
operating expenses is a net result of an increase in production
expenses of $103,235 or 60.2% for the year due to the 28 wells (net to
the Company) drilled and operated in 1997; a decrease in exploration
costs of $165,320 or 68.3% for the year due to the capitalization of
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<PAGE>
landman expenses related to the Company wells; an increase in
depreciation, depletion and amortization expense of $182,456 or 48.7%
for the year due to an increase in depletion expense related to the
Company's Affiliated Drilling Partnership Wells; and the write down of
the investments in related partnerships; and interest expense
decreased $101,303 or 48.9% for the year due to the Company's decrease
in long-term debt as discussed above.
The other income and expense category includes the profit (loss) from
partnership investments, costs of subsidizing various drilling
programs and other non-operating income and expense. For the year
ended December 31, 1997, other income and expense changed from a net
expense of $189,345 for the year ended December 31, 1996 to net income
of $48,195. The change is a result of a decrease in program subsidies
of $117,508 or 59.4%, an increase in partnership income of $86,263 or
230% and no write-off of stock issuance costs ($83,080 in 1996). The
improvement in partnership income and reduction of program subsidies
resulted from higher natural gas prices and improved production.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds for the year ended December 31, 1997, was
from the issuance of common stock in two offerings. The Company
raised approximately $11,200,000, net of costs from the two
offerings. The proceeds from the two offerings have been spent
primarily on developing the Beaver Lease, other developmental drilling
activities located generally in the southeastern Ohio and West
Virginia areas and the acquisition of the Simmons Field.
To a lesser degree the Company also had funds available from oil and
natural gas revenues, turnkey revenues and bank financing. The Company
expects oil and natural gas revenues to increase and turnkey revenues
to remain level or perhaps decrease. The Company envisions the use of
bank debt to leverage corporate growth as a viable alternative.
The Company maintains a line of credit (the "Bank One Credit
Facility") with Bank One, Texas, N.A. ("Bank One"). The Bank One
Credit Facility is secured by all oil and natural gas assets of the
Company. Pending renewal, interest is payable on the amounts drawn
and outstanding. The applicable interest rate is based on a floating
rate equal to Bank One's base rate, published from time to time, plus,
1 3/4. As of December 31, 1997, the Bank One Credit Facility was
$920,000. This amount is subject to a monthly decrease. The credit
limit on the Bank One Credit Facility is to be reviewed periodically
and is expected to be increased based on the year-end independent
reserve evaluation reflecting current Company reserves in place.
The Company used $1,703,426 and $896,745 of cash flows for operations in
the years ended December 31, 1997 and 1996, respectively. Cash was
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<PAGE>
absorbed by losses of $367,281 and $684,391 and decreases in drilling
advances of $1,335,124 and $1,079,996 in 1997 and 1996, respectively.
Cash was also used in 1997 by an increase in accounts receivable. The
increase in accounts receivable is a result of increased gas
production in the fourth quarter. Cash was provided by depreciation,
depletion and amortization (DDA) of $557,167 and $374,711 and an
increase in accounts payable and accrued expenses of $323,286 and
$340,660 in 1997 and 1996, respectively. The increases in DDA and
payables are a direct result of increased drilling and gas operations.
In 1996, operating cash was provided by an increase in accounts
payable.
In 1997, cash flows used for investing activities increased from
$1,172,375 in 1996 to $7,117,384. The larger investing activities in
1997 were purchases of proven properties of $4,129,663, purchase of
wells and related equipment of $2,513,051, purchase of other property
and equipment of $251,244 and contributions to Affiliated Drilling
Partnerships of $318,100. The only significant cash flow from
investing activities in 1997 were distributions from Affiliated
Drilling Partnerships of $92,426. The more significant uses of cash
flows for investing activities in 1996 were the purchase of other
property and equipment for $892,165, purchase of proven properties for
$170,000 and contributions to Affiliated Drilling Partnerships of
$125,898.
Cash flows from financing activities increased $9,007,850 or 447% from
$2,014,209 to $11,022,059 in 1997 from 1996. The primary cause of the
increase in 1997 was the net proceeds from the sale of common stock
sales in the amount of $11,466,661. The primary use of cash for
financing activities was an increase in payments on long-term debt of
$168,696 from $270,695 to $439,391.
The Company intends to fund its budgeted capital expenditures through
the end of 1998 from cash flow from operations and borrowings under
the Bank One Credit Facility.
The Company's revenues, profitability, future growth and ability to
borrow funds or obtain additional capital, and the carrying value of
its properties, substantially are dependent on prevailing prices of
oil and natural gas. The Company cannot predict future oil and
natural gas price movements with certainty. Declines in prices
received for oil and natural gas may have an adverse effect on the
Company's financial condition, liquidity, ability to finance capital
expenditures and results of operations. Lower prices also may impact
the amount of reserves that can be produced economically by the
Company.
The Company has experienced and expects to continue to experience
substantial working capital requirements primarily due to the
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<PAGE>
Company's active exploration and development programs and its
increased participation percentages and its technology enhancement
programs. While the Company believes that cash flow from operations
and borrowings under the Bank One Credit Facility should allow the
Company to implement its present business strategy through 1998,
additional financing may be required in the future to fund the
Company's growth, development and exploration program and continued
technological enhancement. In the event such capital resources are
not available to the Company, its exploration and other activities may
be curtailed.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by
changing oil and natural gas prices. If the price of oil and natural
gas increases (decreases), there could be a corresponding increase
(decrease) in the operating cost that the Company is required to bear
for operations, as well as an increase (decrease) in revenues. Recent
rates of inflation have had a minimal effect on the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
each of which will require expanded disclosures effective for 1998.
The Company does not expect the application of these statements to
have a material effect on its financial position, liquidity or results
of operations.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for, and the
development, production and transportation of, oil and natural gas, as
well as environmental and safety matters. Many of these laws and
regulations have become more stringent in recent years, often imposing
greater liability on a larger number of potentially responsible
parties. Although the Company believes it is in substantial
compliance with all applicable laws and regulations, the requirements
imposed by laws and regulations frequently are changed and subject to
interpretation, and the Company is unable to predict the ultimate cost
of compliance with these requirements or their effect on its
operations. Any suspensions, terminations or inability to meet
applicable bonding requirements could materially adversely affect the
Company's business, financial condition and results of operations.
Although significant expenditures may be required to comply with
governmental laws and regulations applicable to the Company,
compliance has not had a material adverse effect on the earnings or
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<PAGE>
competitive position of the Company. Future regulations may add to
the cost of, or significantly limit, drilling activity.
COMPUTER MODIFICATIONS FOR YEAR 2000
The Company has assessed and will continue to assess the impact of the
Year 2000 issue on the Company's reporting systems and operations.
The Year 2000 issue exists because many computer systems and
applications abbreviate dates by eliminating the first two digits of
the year, assuming that these two digits would always be "19." Unless
corrected, this shortcut is expected to cause problems when the
century date occurs. On that date, some computer programs may
recognize the date as January 1, 1900 instead of January 1, 2000.
This may cause the Company's systems to incorrectly process critical
financial and operational information, or stop processing altogether.
Additionally, computer applications may be affected before January 1,
2000, if calculations into the year 2000 are involved.
The Company has a plan to address the Year 2000 issue and will
continue to assess the impact of the Year 2000 issue on the remainder
of its computer-based systems and applications throughout 1998.
At December 31, 1997, no material expenditures had been made by the
Company directly with respect to the Year 2000 issue. The Company
estimates that approximately $10,000 will be incurred in 1998 and 1999
on Year 2000 issues. These costs are expected to consist primarily of
personnel expense for staff dedicated to the effort and professional fees
paid to third party providers of remedial services. It is the Company's
policy to expense such costs as incurred. The Company also may invest in
new or upgraded technology which has definable value lasting beyond 2000.
In these instances, where Year 2000 compliance is merely ancillary, the
Company may capitalize and depreciate such an asset over its estimated
useful life.
If the Company's plans are not successful, there could be a
significant disruption of the Company's ability to bill customers and
pay suppliers, as well as a possible slowdown of certain computer-
dependent processes. Based on currently available information,
management does not presently anticipate that the costs to address the
Year 2000 issues or potential operating disruptions will have an
adverse impact on the Company's financial conditions, results of
operations or liquidity.
In addition to reviewing its own computer operating systems and
applications, the Company plans to initiate formal communications with
its significant suppliers and large customers to determine the extent
to which the Company's interface systems are vulnerable to those third
parties' failure to resolve their own Year 2000 issues. There is no
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<PAGE>
assurance that the systems of other companies on which the Company's
systems rely will be converted in a timely manner. If such
modifications and conversions are not made, or are not completed in a
timely manner, the Year 2000 issue could have an adverse impact on the
operations of the Company.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's
best estimates. There can be no guarantee that these estimates will
be achieved and actual results could differ from those anticipated.
Specific factors that might cause differences include, but are not
limited to, the ability of other companies on which the Company's
systems rely to modify or convert their systems to be Year 2000
compliant, the ability to locate and correct all relevant computer
codes and similar uncertainties.
ITEM 7. FINANCIAL STATEMENTS.
The response to this Item is set forth herein in a separate section to
this Annual Report, beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
On February 25, 1997, the Registrant dismissed Ronald D. Cameron,
Certified Public Accountant, as its independent accountant. The
reports of Ronald D. Cameron on the financial statements for the year
ended December 31, 1994 and December 31, 1995 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principle. The Registrant's
board of directors participated in and approved the decision to change
independent accountants.
In connection with its audits for years ended December 31, 1994 and
1995, respectively, as well as thereafter, 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.
During the two most recent fiscal years and through February 25, 1997,
there were no reportable events (as defined in Regulation S-K Item 304
(a)(1)(v)).
The Registrant requested that Ronald D. Cameron furnish it with a
letter addressed to the SEC stating whether or not it agrees with the
above statements.
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<PAGE>
The Registrant 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 the Nasdaq
SmallCap Stock Market and the National Market System for the listing
of Energy Search, Incorporated Common Stock and Redeemable Series A
Common Stock Purchase Warrants. During the most recent fiscal year
and through February 25, 1997, the Registrant engaged Plante & Moran,
LLP to assist the Company's former auditor, Ronald D. Cameron, CPA, in
applying generally accepted accounting principles and SEC reporting
disclosure issues in connection with the registration statement, filed
with the SEC on January 24, 1997. The Registrant 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)).
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
There is incorporated by reference herein in response to this Item,
the material under the heading "Board of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement for its 1998 annual meeting of stockholders, to be filed
on or before April 30, 1998.
ITEM 10. EXECUTIVE COMPENSATION.
There is incorporated by reference herein in response to this Item the
material under the heading "Executive Compensation," "Employment
Agreements and Termination of Employment and Change in Control
Arrangements" and "Compensation Committee Report on Executive
Compensation" in the Company's definitive proxy statement for its 1998
annual meeting of stockholders to be filed on or before April 30,
1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
There is incorporated by reference herein in response to this Item,
the material under the heading "Ownership of Common Stock" and
"Securities Ownership of Management" in the Company's definitive proxy
statement for its 1998 annual meeting of stockholders to be filed on
or before April 30, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated by reference herein in response to this Item,
the material under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 1998
annual meeting of stockholders to be filed on or before April 30,
1998.
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<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
EXHIBIT NUMBER DESCRIPTIONS
3.1 Third Amended and Restated Charter of the Registrant<F1>
3.2 Sixth Amended and Restated Bylaws of the Registrant
4.1 Specimen of Common Stock Certificate<F1>
4.2 Specimen of Redeemable Series A Common Stock Purchase
Warrant Certificate<F1>
4.3 Specimen of Underwriters' Warrant Certificate<F1>
4.4 Charter (See Exhibit 3.1)
4.5 Bylaws (See Exhibit 3.2)
9.1 Shareholder Voting Agreement and Irrevocable Proxy<F1>
10.1 Energy Search Natural Gas 1995-A L.P. Limited Partnership
Agreement, dated December 31, 1995<F1>
10.2 Energy Search Natural Gas 1995-A L.P. Joint Drilling and
Operating Agreement, dated December 31, 1995<F1>
10.3 Energy Search Natural Gas 1996 L.P.-Limited Partnership
Agreement, dated June 10, 1996<F1>
10.4 Energy Search Natural Gas 1996 L.P.-Joint Drilling and
Operating Agreement, dated June 10, 1996<F1>
10.5 ESI Pipeline Operating Partnership-Limited Partnership
Agreement, dated January 7, 1993<F1>
10.6 Energy Search Natural Gas Pipeline Income Partnership-Limited
Partnership Agreement, dated January 7, 1993<F1>
10.7 Gas Servicing Agreement between the Registrant and ESI
Pipeline Operating L.P., dated January 5, 1993<F1>
10.8 Selling Agreement-Class B Convertible Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F1>
10.9 Selling Agreement-Class A and Class B Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F1>
10.10 Selling Agreement-Variable Rate Subordinated Debentures
between Registrant and Equity Financial Corporation, dated
September 19, 1994<F1>
10.11 Aircraft Lease between Charles P. Torrey, Jr. and the
Registrant dated February 1, 1995<F1>
10.12 Beaver Coal Company Lease between Beaver Coal Company
Limited and the Registrant, dated September 15, 1996<F1>
10.13 Employment Agreements with officers and key employees of the
Registrant
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<PAGE>
(a) John M. Johnston<F1><F*>
(b) Robert L. Remine<F1><F*>
(c) Charles P. Torrey, Jr.<F1><F*>
(d) Richard S. Cooper<F1><F*>
(e) Michael W. Mooney<F*>
10.14 Promissory Notes of Executive Officers in Favor of
Registrant
(a) Charles P. Torrey, Jr.<F1>
(b) Robert L. Remine<F1>
(c) Richard S. Cooper<F1>
10.15 Stock Option Plan<F1><F*>
10.16 Outside Directors' Stock Option Plan<F1><F*>
10.17 Form of Lock-Up Agreement<F1>
11.1 Statement Regarding Computation of Earnings Per Common Share
21.1 Subsidiaries
23.1 Consent of Experts and Counsel
(a) Consent of Independent Accountant, Ronald
D. Cameron, CPA<F1>
(b) Consent of Independent Accountant, Plante &
Moran, LLP, CPA
(c) Consent of Independent Geologist, Kim A.
Walbe
(d) Consent of Independent Petroleum Consultant,
Wright & Company, Inc.
27.1 Financial Data Schedule
- ------------------
[FN]
<F1> Previously filed with the Company's Registration Statement on Form
SB-2 (Registration No. 333-12755) filed with the Securities and Exchange
Commission, and here incorporated by reference.
<F*> Management contract or compensatory plan or arrangement.
</FN>
REPORTS ON FORM 8-K
The Company filed no reports on form 8-K during the fourth quarter
of 1997.
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENERGY SEARCH, INCORPORATED
Date: March 27, 1998 /s/ Richard S. Cooper, President
Richard S. Cooper
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Charles P. Torrey, Jr. Chief Executive Officer and March 27, 1998
Charles P. Torrey, Jr. Director (Principal Executive
Officer)
/s/ Richard S. Cooper President and Director March 27, 1998
Richard S. Cooper
/s/ Robert L. Remine Secretary, Treasurer and Director March 27, 1998
Robert L. Remine (Principal Financial and
Accounting Officer)
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<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONTENTS
REPORT LETTER 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statement of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-24
REPORT LETTER 25
ADDITIONAL INFORMATION
Cost Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities 26
Estimates of Natural Gas and Oil Reserves 27-29
<PAGE>
Independent Auditor's Report
To the Stockholders of
Energy Search, Incorporated and Subsidiary
We have audited the accompanying balance sheet of Energy Search,
Incorporated and Subsidiary, (the Company) as of December 31, 1997 and 1996
and the related statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Energy Search,
Incorporated and Subsidiary, as December 31, 1997 and 1996 and the results
of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Plante & Moran, LLP
Grand Rapids, Michigan
February 20, 1998
PLANTE & MORAN, LLP
====== ==========
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
-------------- ---------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,252,316 $ 51,067
Accounts receivable (Note J) 976,065 567,376
Other current assets 91,670 66,067
Deferred tax asset (Note D) -- 55,000
-------------- ---------------
Total current assets 3,320,051 739,510
OIL AND GAS PROPERTIES
Proven properties 4,546,833 420,040
Unproven properties 193,965 186,159
Wells and related equipment 8,100,764 5,591,760
Less accumulated depreciation, depletion
and amortization (3,140,678) (2,751,099)
-------------- ---------------
Net oil and gas properties 9,700,884 3,446,860
OTHER ASSETS
Other property and equipment - net (Note C) 363,180 194,668
Investments in related partnerships (Note B) 1,649,849 1,363,423
Deferred tax asset (Note D) 650,400 413,000
Due from affiliated partnerships, net of $172,431
allowance for uncollectible accounts in 1997 and
$160,464 in 1996 (Notes B and L) 213,246 165,865
Prepaid stock offering costs (Note M) 75,336 265,948
Other 147,754 79,098
-------------- ---------------
Total other assets 3,099,765 2,482,002
-------------- ---------------
Total assets $ 16,120,700 $ 6,668,372
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note E) $ 650,684 $ 902,456
Current portion of long-term debt (Note F) 29,184 69,729
Accounts payable and accrued liabilities 1,356,748 1,033,463
Drilling advances (Note J) -- 1,335,124
-------------- ---------------
Total current liabilities 2,036,616 3,340,772
LONG-TERM DEBT - less current portion (Note F) 137,595 154,794
F-2
<PAGE>
STOCKHOLDERS' EQUITY (Notes G, H, I and K)
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; 3,768,241 and 1,100,000 shares issued
and outstanding at December 31, 1997, and 1996,
respectively) 15,448,073 1,200
Accumulated deficit (1,501,584) (1,074,554)
-------------- ---------------
Total stockholders' equity 13,946,489 3,172,806
-------------- ---------------
Total liabilities and stockholders' equity $ 16,120,700 $ 6,668,372
============== ===============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
REVENUE
Net turnkey revenue $ 475,936 $ 882,237
Oil and gas sales 798,956 289,188
Management fees (Note J) 264,590 213,666
Other revenue (Note M) 693,188 56,737
-------------- ---------------
Total revenue 2,232,670 1,441,828
OPERATING EXPENSES
Production costs 274,571 171,336
Exploration costs 76,810 242,130
Depreciation, depletion and amortization 557,167 374,711
Interest 105,735 207,038
General and administrative 1,816,163 1,279,739
-------------- ---------------
Total operating expenses 2,830,446 2,274,954
-------------- ---------------
NET (LOSS) FROM OPERATIONS (597,776) (833,126)
OTHER INCOME (EXPENSE)
Program subsidies (Note J) (80,384) (197,892)
Stock issuance expense -- (83,080)
Gain on sale of assets 4,785 54,096
Equity in income of related partnerships (Note B) 123,794 37,531
-------------- ---------------
Total other income (expense) 48,195 (189,345)
-------------- ---------------
NET (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (549,581) (1,022,471)
INCOME TAX BENEFIT (Note D) 182,300 417,000
-------------- ---------------
NET (LOSS) BEFORE EXTRAORDINARY ITEM (367,281) (605,471)
EXTRAORDINARY ITEM - loss on early extinguishment of
debt, net of income tax benefit of $51,000 (Note G) -- (78,920)
-------------- ---------------
F-4
<PAGE>
NET (LOSS) $ (367,281) $ (684,391)
============== ===============
NET LOSS PER SHARE AVAILABLE TO COMMON $ (0.14) $ (0.60)
EXTRAORDINARY ITEM PER SHARE -- (0.07)
-------------- ---------------
NET LOSS PER SHARE TO COMMON STOCKHOLDERS $ (0.14) $ (0.67)
============== ===============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- ---------------------
ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ --------- ---------- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE-January 1, 1996 -- $ -- 1,200 $ 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 of 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
Issuance of common stock (Note H) -- -- 1,755,761 11,178,273 -- 11,178,273
Conversion of preferred stock A and B to
common stock (450,000) (4,246,160) 900,000 4,246,160 -- --
Exercise of pre-IPO warrants -- -- 12,480 22,440 -- 22,440
Dividends on preferred stock A -- -- -- -- (59,749) (59,749)
Net loss for the year ended December 31,
1997 -- -- -- -- (367,281) (367,281)
--------- ----------- --------- ----------- ----------- -----------
BALANCE - December 31, 1997 -- $ -- 3,768,241 $15,448,073 $(1,501,584) $13,946,489
========= =========== ========= =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (367,281) $ (684,391)
Adjustments to reconcile net (loss) to net cash from
operating activities:
Depreciation, depletion and amortization expense 557,167 374,711
Dryholes and abandonments of previously capitalized oil
and gas properties 2,865 125,854
Loss on early extinguishment of debt -- 129,920
(Gain) on sale of assets (4,785) (54,096)
Equity in (income) losses of related partnerships (123,794) (37,531)
(Increase) in deferred taxes (182,300) (468,000)
(Increase) decrease in assets:
Accounts receivable and due from partnerships (456,070) 460,026
Other current assets (25,603) (3,902)
Other assets (91,787) --
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 323,286 340,660
Drilling advances (1,335,124) (1,079,996)
------------- --------------
Net cash used in operating activities (1,703,426) (896,745)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of proven properties (4,129,663) (170,000)
Proceeds from sale of other property and equipment 10,054 38,000
Purchase of wells and related equipment (2,513,051) --
Purchase of other property and equipment (251,244) (892,165)
Distributions from affiliated partnerships 92,426 23,934
Contributions to affiliated partnerships (318,100) (125,898)
Purchase of oil and gas leases (7,806) (46,246)
-------------- --------------
Net cash used in investing activities (7,117,384) (1,172,375)
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock $ 11,466,661 --
Net proceeds from short-term debt -- $ 265,683
Net proceeds from issuance of preferred stock -- 2,169,160
Proceeds from issuance of long-term debt 129,874 140,145
Payment of dividends on preferred stock (59,749) --
Net (increase) decrease in prepaid offering costs (75,336) (261,783)
Payments on long-term debt (439,391) (270,695)
Payments of loan issue costs -- (28,301)
--------------- -------------
Net cash provided by financing activities 11,022,059 2,014,209
--------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,201,249 (54,911)
CASH AND CASH EQUIVALENTS--Beginning of year 51,067 105,978
--------------- --------------
CASH AND CASH EQUIVALENTS--End of year $ 2,252,316 $ 51,067
=============== ===============
SUPPLEMENTAL DISCLOSURE
Cash paid for interest during the year $ 120,017 $ 192,994
=============== ===============
Cash paid for income taxes during the year $ 6,500 $ --
=============== ===============
NONCASH ACTIVITIES
Assets distributed to shareholders $ -- $ 24,000
=============== ===============
Debt converted to preferred stock (Note G) $ -- $ 2,077,000
=============== ===============
Conversion of preferred to common stock (Note G) $ 4,246,160 --
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Energy Search, Incorporated and Subsidiary
(the Company) consists of Energy Search, Inc. (ESI), and Equity
Financial Corporation (EFC), a wholly owned subsidiary acquired
May 1, 1997.
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 interest, 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 (Affiliated
Drilling Partnerships).
In 1997, ESI transitioned from being primarily a driller-operator
for syndicated Affiliated Drilling Partnerships to an energy
company developing reserves for its own account. The shift of
its primary operational focus was financed from public funds
raised through an initial public offering (Note L) and funds
raised through a private placement. While the Company
anticipates the continued sponsoring of Affiliated Drilling
Partnerships on a limited basis, management's primary focus will
be the development of its own reserves and acquisition of
primarily proved undeveloped properties for exploitation.
EFC is engaged in the operations of providing investment advice
and brokering and dealing in stocks, bonds, and other securities
in the east Tennessee region. EFC uses a clearing broker on a
fully disclosed basis to execute trades.
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of ESI and its wholly owned
subsidiary, EFC, since the date of acquisition. All significant
intercompany balances and transactions have been eliminated in
consolidation.
ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
F-9
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
OIL AND GAS PROPERTIES - ESI uses the successful efforts method
of accounting for oil and gas producing activities. Acquisition
costs for proved and unproved properties are capitalized when
incurred. Costs of unproved properties are transferred to proved
properties when proved reserves are discovered. Exploration
costs, including geological and geophysical costs and costs of
carrying and retaining unproved properties, are charged to
expense as incurred.
Exploratory drilling costs are capitalized initially; however, if
it is determined that an exploratory well does not contain proved
reserves, such capitalized costs are charged to expense, as dry
hole costs, at that time.
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 the Company's capital will be capitalized. Costs incurred
to operate and maintain wells and equipment and to lift oil and
gas to the surface are generally expensed.
Oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is
recognized at time of impairment. Proved properties represent
purchased working interests in producing oil and gas wells, costs
to acquire oil and gas leases and intangible well development
costs. Oil and gas properties 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.
F-10
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 $2,209,872 and $2,046,458 in
1997 and 1996, respectively.
INCOME TAXES - The Company 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.
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:
F-11
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 K). 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 any 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 was not assumed due to the net
losses for 1997 and 1996. Stock options and warrants more fully
described in Notes I and K that could potentially dilute basic
EPS in the future were not included in the computation of EPS,
since doing so would have been antidilutive.
CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents.
NEW ACCOUNTING STANDARDS - In 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," each of
which will require expanded disclosures effective for 1998. The
Company does not expect the application of these statements to
have a material effect on its financial position, liquidity or
the results of operations.
F-12
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS - Certain reclassifications have been made to
1996 amounts to conform to 1997 presentations.
NOTE B - AFFILIATED OIL AND GAS PARTNERSHIP
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., the Energy
Search Natural Gas 1993-A L.P., the Energy Search Natural Gas
1994 L.P., the Energy Search Natural Gas 1994-A L.P., the Energy
Search Natural Gas 1995 L.P., the Energy Search Natural Gas 1995-A
L.P., the Energy Search Natural Gas 1996 L.P., the Energy
Search Natural Gas 1996-A L.P., the Energy Search Natural Gas
1997 L.P. and the Energy Search Natural Gas 1997-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.
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
provided a guaranteed 10 percent return to pipeline investors
through 1997. Operations of the pipeline have been sufficient to
fund the preferential return through 1997. After preferential
returns, all cash is used to repay advances used to fund pipeline
extensions.
F-13
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - AFFILIATED OIL AND GAS PARTNERSHIP (CONTINUED)
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, 1997
and 1996, the Pipeline Partnership owned approximately 57 percent
of the Operating Partnership, with ESI owning the remaining 43
percent.
Total assets and equity of the related partnerships in the
aggregate were approximately $5,813,197 and $5,772,464,
respectively, at December 31, 1997, and $6,382,000 and
$5,808,000, respectively, at December 31, 1996.
Revenue and net income for ESI's share of such items of the
following equity investees for the years ended December 31, 1997,
and 1996, are given below. In the case of each equity investee,
the net income (loss) from continuing operations equals the net
income (loss).
F-14
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - AFFILIATED OIL AND GAS PARTNERSHIP (CONTINUED)
<CAPTION>
REVENUE NET INCOME (LOSS) FROM
------------------------------- CONTINUING OPERATIONS
-----------------------------
EQUITY INVESTEE 1997 1996 1997 1996
- ------------------------------------ ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Energy Search Natural Gas
Pipeline Income, L.P. $ 75 $ 5 $ (79) $ (3,169)
ESI Pipeline Operating L.P. 117,357 178,282 86,290 37,460
Energy Search Natural Gas
1993 L.P. 4,572 8,452 4,375 821
Energy Search Natural Gas
1993-A L.P. 8,931 14,315 8,541 5,506
Energy Search Natural Gas
1994 L.P. 10,684 11,607 10,387 4,604
Energy Search Natural Gas
1994-A L.P. 656 567 617 (2,056)
Energy Search Natural Gas
1995 L.P. 6,921 6,914 6,642 (1,408)
Energy Search Natural Gas
1995-A L.P. 6,454 2,879 6,287 (4,684)
Energy Search Natural Gas
1996 L.P. 536 -- 510 (32,193)
Energy Search Natural Gas
1996-A L.P. 123 -- 105 (6,400)
Energy Search Natural Gas
1997 L.P. 118 -- 117 --
Energy Search Natural Gas
1997-A L.P. -- -- -- --
</TABLE>
F-15
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE C - PROPERTY AND EQUIPMENT
The principal categories of property and equipment are as
follows:
<CAPTION>
DEPRECIABLE
1997 1996 LIFE-YEARS
--------------- -------------- ---------------
<S> <C> <C> <C>
Machinery and equipment $ 108,851 $ 39,942 5
Office furniture, equipment and software 212,860 143,785 5
Airplane 165,932 146,932 7-31
Vehicles 218,645 112,784 5
---------- ----------
Total cost 706,288 443,443
Less accumulated depreciation 343,108 248,775
---------- ----------
Net carrying amount $ 363,180 $ 194,668
========== ==========
</TABLE>
Depreciation expense totaled $74,750 and $66,445 for the years
ended December 31, 1997, and 1996, respectively.
NOTE D - INCOME TAXES
ESI and its subsidiary file a consolidated federal income tax
return. The following is a summary of the provisions for income
taxes for years ended December 31:
F-16
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE D - INCOME TAXES (CONTINUED)
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred benefit $ 182,300 $ 468,000
Amount allocated to extraordinary item -- (51,000)
-------------- --------------
Income tax benefit $ 182,300 $ 417,000
============== ==============
</TABLE>
The following is a reconciliation of the statutory federal income
tax rate to the Company's effective tax rate:
<TABLE>
<CAPTION>
Company's effective tax rate:
1997 1996
-------------- ------------
<S> <C> <C>
Income tax at federal statutory rate 34.0% 34.0%
State income tax, net of federal benefit 6.0% 6.0%
Other (6.8)% (0.5)%
----- ----
Actual effective tax rate 33.2% 39.5%
===== ====
</TABLE>
The significant components of ESI's deferred tax assets and
liabilities are as follows:
F-17
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE D - INCOME TAXES (CONTINUED)
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts $ 59,000 $ 55,000
Accounting for equity investments 177,000 198,000
Federal net operating loss 2,213,800 657,000
State net operating loss 125,800 102,000
Other -- 6,000
-------------- -------------
Total deferred tax asset 2,575,600 1,018,000
Valuation allowance for deferred tax assets -- --
Deferred tax liabilities:
Depreciation and pooling of capital 784,200 550,000
Intangible drilling costs 1,126,000 --
Other 15,000 --
-------------- -------------
Total deferred tax liabilities 1,925,200 550,000
-------------- -------------
Net deferred tax asset $ 650,400 $ 468,000
============== =============
</TABLE>
At December 31, 1997, the Company had federal and state operating
loss carryforwards of approximately $6,500,000 and $2,100,000
respectively, that expire in the years 2005 to 2017. These
carryforwards are available to offset future taxable income.
F-18
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE E - NOTES PAYABLE
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Notes payable to shareholders, unsecured, due on
demand, annual interest-only payments at 10% $ -- $ 251,773
Line-of-credit at bank, collateralized by lien on oil
and gas property, interest payable at prime plus
1.75% 650,684 650,683
-------------- -------------
Total $ 650,684 $ 902,456
============== =============
</TABLE>
The Company has a $920,000 line-of-credit. The initial borrowing
base is reduced by $20,000 per month. It has various loan
covenants including requirements on its tangible net worth, debt
to tangible net worth, limits on partnership subsidies,
restrictions on payment of dividends 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>
1997 1996
-------------- --------------
<S> <C> <C>
Balance at end of year $ 650,684 $ 902,456
Weighted average interest rate at end of year 10.00% 9.80%
Average amount outstanding during the year $ 776,570 $ 769,614
Maximum amount outstanding at any month end
during the year $ 902,456 $ 902,456
</TABLE>
F-19
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE F - LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
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, paid in 1997 $ -- $ 140,145
Note payable to bank, collateralized by equipment,
payable in monthly installments of $3,600, including
interest at prime plus .50%, which was 9% at
December 31, 1997, through October 15, 2002 166,779 84,378
-------------- -------------
Total 166,779 224,523
Less current portion 29,184 69,729
-------------- -------------
Total long-term debt $ 137,595 $ 154,794
============== =============
</TABLE>
Principal maturities of long-term debt at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 29,184
1999 31,962
2000 34,976
2001 38,332
2002 32,325
-----------
Total $ 166,779
===========
</TABLE>
F-20
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE G - PREFERRED STOCK
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 was redeemable by the
Company, at the option of the holder, at $10 per share or, if not
redeemed, was automatically convertible on a share-by-share basis
into common stock upon the occurrence of certain events. Such
events included the undertaking of a registration and initial
public offering of any of ESI's common stock. The preferred
stock was converted to common stock in 1997 in conjunction with
the successful initial public offering of ESI's common stock.
The number of shares issued at conversion was doubled as a result
of the two-for-one stock split (Note H).
NOTE H - COMMON STOCK
RECAPITALIZATION OF COMMON STOCK - On July 1, 1996, ESI's
shareholders' surrendered 1,200 shares of common stock
outstanding in exchange for 550,000 shares of no par common stock
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. These changes were
retroactively reported in the 1996 financial statements.
INITIAL PUBLIC OFFERING - In January 1997, the Company registered
its stock in a public offering of 1,000,000 common shares and
raised $6,551,765 net of underwriter fees, professional fees, and
various other costs associated with this stock offering of
$1,498,509.
F-21
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE H - COMMON STOCK (CONTINUED)
REGULATION D OFFERING - On October 27, 1997, the Company
completed a private offering of 749,961 shares of common stock
and raised $4,671,582, net of underwriter fees, professional
fees, and various other costs associated with this stock offering
of $578,145.
OTHER - In addition to the plans described in Notes I and K, the
Company issued 2,500 warrants to each of the two outside
directors during 1997. Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $6.50
and the warrants expire January 30, 2002.
NOTE I - STOCK OPTION AND WARRANT PLANS
The Company has established a stock option plan effective January
1, 1997, for 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. No options have been
issued under either of these plans as of December 31, 1997.
SERIES A WARRANTS - As part of ESI's public offering, the Board
of Directors issued 1,000,000 Series A warrants included in units
that consist of one share of common stock and one Series A
warrant. The Board issued additional Series A warrants
consisting of 100,000 units pursuant to the Underwriters' over-
allotment option, and 100,000 "representative's" warrants
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 $9.60 per unit
exercisable at any time after February 28, 1998, until January
30, 2002. The Series A warrants could not be traded separately
F-22
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE I - STOCK OPTION AND WARRANT PLANS (CONTINUED)
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.
REGULATION D WARRANTS - As part of ESI's private offering of
common stock that took place in October 1997, 74,996 warrants
were issued to unaffiliated parties pursuant to the Placement
Agent Agreement. The warrants entitle each holder to purchase
one share of common stock and are exercisable at $7 per share at
any time up to October 27, 2002. The number, type of security
and the exercise price is subject to adjustment upon occurrence
of certain events including consolidation, merger, subdivision or
combination of shares and issuance of stock dividends. None of
these warrants have been exercised at December 31, 1997.
NOTE J - RELATED PARTY TRANSACTIONS
Because of the nature of ESI's business, a significant number of
transactions are with related parties.
During 1997 and 1996, ESI received drilling advances from two
affiliated oil and gas partnerships in the amount of $1,156,800
and $2,037,750, respectively. Included in accounts receivable at
December 31, 1997 and 1996 is $426,800 and $456,000, respectively,
due from affiliated partnerships.
In its role as operator of the oil and gas wells owned by various
related partnerships, ESI charges a monthly wellhead and
administrative fee of between $100 and $300 for each producing
well. These fees totaled $239,433 and $158,666 for 1997 and
1996, 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 $60,000 and $55,000 for 1997 and 1996,
respectively.
Equity Financial Corporation (EFC), a wholly owned subsidiary
acquired in 1997, acts as placement agent for ESI programs. ESI
F-23
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE J - RELATED PARTY TRANSACTIONS (CONTINUED)
paid EFC $136,950 and $183,150 in 1997 and 1996, respectively,
for costs associated with program placement. The balance owed
EFC was $77,800 and $84,900 as of December 31, 1997 and 1996,
respectively. In 1996, ESI paid EFC $83,080 in sales commissions
for conversion of subordinated debentures to preferred stock.
ESI paid EFC $0 and $28,000 in 1997 and 1996, respectively, for
rent and management fees under a monthly shared service
arrangement. Intercompany balances between ESI and EFC relating
to 1997 have been eliminated through consolidation.
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, 1997 and
1996 of expenses paid on behalf of the partnerships and advances
forgiven:
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
Expenses paid on behalf of partnership $ 80,834 $ 197,852
============== =============
Advances forgiven $ 11,728 $ 57,996
============== =============
</TABLE>
ESI has the contractual right to charge partnership
administrative fees and production operating fees in excess of
the aggregate amounts charged to the partnerships during 1997 and
1996.
NOTE K - EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS
The Company sponsors a simplified employee pension plan (SEP) for
qualifying employees. Employee contributions to individual
F-24
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE K - EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS
(CONTINUED)
retirement plans may not exceed the greater of 15 percent of
employee earnings or $22,500 per year per employee. The Company
contributed $25,370 and $15,726 to the SEP during 1997 and 1996,
respectively.
The Company has a fixed employee stock-based compensation plan
under which the Company has granted warrants for 55,650 shares of
restricted common stock. The exercise price of each option is
equal to the market price of the Company's stock on the date of
grant. The warrants expire January 30, 2002 and vest
immediately upon grant.
The Company also has a fixed executive officer stock-based
compensation plan under which executive officers have been
granted warrants for the purchase of up to 450,000 shares
of restricted common stock. The exercise price of each
option is $8.00 per share, which equaled the market price
of the Company's stock on the date of grant. The term
of the warrants is five years starting in 1997 and the warrants
vest at 30,000 shares per officer per year.
The Company applies intrinsic value accounting to its fixed
stock-based compensation plans. Accordingly, no compensation
cost has been recognized for the fixed plans in 1997 or 1996.
Had compensation cost been determined using the fair value
method, net loss would have been $(476,563) and $(705,511) for
1997 and 1996, respectively, and earnings per share would have
been $(.18) and $(.63) for 1997 and 1996, respectively. The fair
value of the warrants was determined using the Black-Scholes
model with application of an additional 30% discount due to the
fact that the shares are restricted. The following assumptions
were made in estimating the fair value: risk-free interest rate-6%,
expected expiration of the warrants-January 30, 2002, expected
price volatility-20% and dividend yield-0%.
The following is a summary of the status of the fixed stock-based
compensation plans during 1997.
F-25
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE K - EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS
(CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES (AFTER WEIGHTED
TWO FOR ONE AVERAGE
STOCK SPLIT) EXERCISE PRICE
-------------- --------------
<S> <C> <C>
Outstanding at January 1, 1996 -- $ --
Granted 27,950 3.57
-------------- -------------
Outstanding - December 31, 1996 27,950 3.57
Granted 505,650 7.84
Expired (15,470) 10.00
Exercised (12,480) 3.59
-------------- -------------
Outstanding - December 31, 1997 505,650 $ 7.84
============== =============
Exercisable at December 31, 1997 145,650 $ 7.43
============== =============
Weighted average per share fair value of
options granted during 1997 $ 1.29
==============
</TABLE>
The following is a summary of the status of the fixed options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- ------------------------------------------------ ---------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING REMAINING
EXERCISE CONTRACTUAL EXERCISE CONTRACTUAL
PRICE NUMBER LIFE PRICE NUMBER LIFE
----- ------ ---- ----- ------ ----
<S><C> <C> <C> <C> <C> <C>
$6.50 55,650 5 $6.50 55,650 5
$8.00 450,000 5 $8.00 90,000 5
</TABLE>
F-26
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE L - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
As general partner in various affiliated oil and gas
partnerships, the Company 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.
CONCENTRATIONS OF CREDIT RISK - 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 the Company.
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, its Dupont Field and 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 M - BUSINESS SEGMENTS
The Company's operations are classified into two principal
industry segments. Oil and gas operations and brokerage
services. The oil and gas operations are conducted entirely
through ESI which is the primary industry segment. The
brokerage services are conducted exclusively through EFC.
See Note A for a description of the operations and accounting
F-27
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE M - BUSINESS SEGMENTS (CONTINUED)
policies of each Company. ESI acquired EFC during 1997 and,
therefore, prior to 1997 the Company operated only in the oil and gas
industry. The following is a summary of segment information for 1997.
<TABLE>
<CAPTION>
OIL & GAS BROKERAGE CONSOLIDATIONS
1997 OPERATIONS SERVICES & ELIMINATIONS CONSOLIDATED
- -------------------------------- ---------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Net revenues to
unaffiliated customers $ 1,736,539 $ 500,131 $ -- $ 2,236,670
Intersegment revenues -- 92,400 (92,400) --
------------- ----------- --------------- ---------------
Total net revenue 1,736,539 592,531 (92,400) 2,236,670
------------- ----------- --------------- ---------------
Operating income (loss) (678,044) 185,390 (105,122) (597,776)
Other income 175,285 -- (127,090) 48,195
------------- ----------- --------------- ---------------
Net income (loss) before
income taxes $ (502,759) $ 185,390 $ (232,212) $ (549,581)
============= =========== =============== ===============
Identifiable assets $ 16,181,777 $ 276,984 $ (338,061) $ 16,120,700
============= =========== =============== ===============
Capital expenditures $ 6,901,159 $ 605 $ -- $ 6,901,764
============= =========== =============== ==============
Depreciation, depletion
and amortization $ 543,749 $ 4,696 $ 8,722 $ 557,167
============= =========== =============== ===============
</TABLE>
F-28
<PAGE>
To the Stockholders of
Energy Search, Incorporated and Subsidiary
We have audited the financial statements of Energy Search,
Incorporated and Subsidiary for the years ended December 31, 1997 and
1996. The accompanying schedules of Costs Incurred in Oil and Gas
Producing Activities and Estimates of Natural Gas and Oil Reserves on
pages 26 through 29 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
February, 20, 1998
F-29
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
SUPPLEMENTARY INFORMATION (UNAUDITED)
COST INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND
DEVELOPMENT ACTIVITIES
The following costs are comprised of both capitalized and expensed
costs included in the balance sheet and income statement:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Property acquisition costs $ 1,535,173 $ 72,640
================ ===============
Exploration costs $ 84,616 $ 288,376
================ ===============
Developments costs $ 5,683,356 $ 1,066,814
================ ===============
</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 the Company's engineer as of December 31, 1997 and 1996.
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.
F-30
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
SUPPLEMENTARY INFORMATION (UNAUDITED)
ESTIMATES OF NATURAL GAS AND OIL RESERVES (CONTINUED)
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.
<TABLE>
<CAPTION>
OIL (BBL) GAS (MCF)
--------------- -----------------
<S> <C> <C>
Proven, developed and undeveloped reserves:
January 1, 1996 22,340 3,564,527
Revisions and other changes (2,568) (431,499)
Extensions and discoveries -- 13,471,501
Purchases of reserves (2,079) (829,969)
Production (957) (82,260)
--------------- ---------------
December 31, 1996 16,736 15,692,300
Revisions and other changes (12,583) (1,608,121)
Extensions and discoveries -- 4,649,023
Purchases and sales of reserves 20,600 12,099,800
Production (1,129) (223,025)
--------------- ---------------
December 31, 1997 23,624 30,609,977
=============== ===============
Proven developed reserves:
December 31, 1996 16,725 1,148,764
December 31, 1997 23,624 11,192,017
Equity interest in proven reserves:
December 31, 1996 1,612 145,585
December 31, 1997 268 138,228
</TABLE>
F-31
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
<TABLE>
SUPPLEMENTARY INFORMATION (UNAUDITED)
ESTIMATES OF NATURAL GAS AND OIL RESERVES (CONTINUED)
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE PRETAX
NET CASH FLOWS
Future cash inflows $ 105,929,500 $ 53,269,424
Future production costs (18,076,980) (6,876,455)
Future development costs (16,710,350) (10,069,585)
----------------- ----------------
Future pretax net cash flows 71,142,170 36,323,384
10% annual discount for estimated timing
of cash flows (38,780,970) (14,996,587)
----------------- ----------------
Standardized measure of discounted future
pretax net cash flows relating to proven
oil and gas reserves $ 32,361,200 $ 21,326,797
================= ================
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS
Future cash inflows $ 105,929,500 $ 53,269,424
Future production costs (18,076,980) (6,876,455)
Future development costs (16,710,350) (10,069,585)
Future income taxes (22,149,426) (10,747,719)
----------------- ----------------
Future net cash flows 48,992,744 25,575,665
10% annual discount for estimated timing
of cash flows (24,897,377) (10,402,907)
----------------- ----------------
Standardized measure of discounted future
net cash flows relating to proven oil
and gas reserves $ 24,095,367 $ 15,172,758
================= ================
ESI's share of equity method investors' standardized
measure of discounted future cash flows $ 181,570 $ 215,995
================= ================
</TABLE>
F-32
<PAGE>
ENERGY SEARCH, INCORPORATED AND SUBSIDIARY
SUPPLEMENTARY INFORMATION (UNAUDITED)
ESTIMATES OF NATURAL GAS AND OIL RESERVES (CONTINUED)
The following reconciles the change in the standardized measure of
discounted future net cash flows for the year ended December 31,
<TABLE>
<CAPTION>
1997 1996
------------- -----------------
<S> <C> <C>
Beginning of year $ 15,172,758 $ 2,720,651
Sales of oil and gas produced, net of
production costs (524,385) (117,852)
Extensions, discoveries, and improved recovery -
Less related costs 4,853,796 23,352,526
Revisions of previous quantity estimates (394,343) (271,797)
Changes in prices 1,231,832 1,372,168
Net change from purchases and sales of
minerals in place 10,716,000 (632,667)
Net change in income taxes (11,258,007) (10,279,719)
Accretion of discount (1,517,276) (272,065)
Other 5,814,992 (698,487)
--------------- --------------
End of year $ 24,095,367 $ 15,172,758
=============== ==============
</TABLE>
F-33
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTIONS
3.1 Third Amended and Restated Charter of the Registrant<F1>
3.2 Sixth Amended and Restated Bylaws of the Registrant
4.1 Specimen of Common Stock Certificate<F1>
4.2 Specimen of Redeemable Series A Common Stock Purchase
Warrant Certificate<F1>
4.3 Specimen of Underwriters' Warrant Certificate<F1>
4.4 Charter (See Exhibit 3.1)
4.5 Bylaws (See Exhibit 3.2)
9.1 Shareholder Voting Agreement and Irrevocable Proxy<F1>
10.1 Energy Search Natural Gas 1995-A L.P. Limited Partnership
Agreement, dated December 31, 1995<F1>
10.2 Energy Search Natural Gas 1995-A L.P. Joint Drilling and
Operating Agreement, dated December 31, 1995<F1>
10.3 Energy Search Natural Gas 1996 L.P.-Limited Partnership
Agreement, dated June 10, 1996<F1>
10.4 Energy Search Natural Gas 1996 L.P.-Joint Drilling and
Operating Agreement, dated June 10, 1996<F1>
10.5 ESI Pipeline Operating Partnership-Limited Partnership
Agreement, dated January 7, 1993<F1>
10.6 Energy Search Natural Gas Pipeline Income Partnership-Limited
Partnership Agreement, dated January 7, 1993<F1>
10.7 Gas Servicing Agreement between the Registrant and ESI
Pipeline Operating L.P., dated January 5, 1993<F1>
10.8 Selling Agreement-Class B Convertible Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F1>
10.9 Selling Agreement-Class A and Class B Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F1>
10.10 Selling Agreement-Variable Rate Subordinated Debentures
between Registrant and Equity Financial Corporation, dated
September 19, 1994<F1>
10.11 Aircraft Lease between Charles P. Torrey, Jr. and the
Registrant dated February 1, 1995<F1>
10.12 Beaver Coal Company Lease between Beaver Coal Company
Limited and the Registrant, dated September 15, 1996<F1>
10.13 Employment Agreements with officers and key employees of the
Registrant
(a) John M. Johnston<F1><F*>
(b) Robert L. Remine<F1><F*>
(c) Charles P. Torrey, Jr.<F1><F*>
(d) Richard S. Cooper<F1><F*>
(e) Michael W. Mooney<F*>
<PAGE>
10.14 Promissory Notes of Executive Officers in Favor of
Registrant
(a) Charles P. Torrey, Jr.<F1>
(b) Robert L. Remine<F1>
(c) Richard S. Cooper<F1>
10.15 Stock Option Plan<F1><F*>
10.16 Outside Directors' Stock Option Plan<F1><F*>
10.17 Form of Lock-Up Agreement<F1>
11.1 Statement Regarding Computation of Earnings Per Common Share
21.1 Subsidiaries
23.1 Consent of Experts and Counsel
(a) Consent of Independent Accountant, Ronald
D. Cameron, CPA<F1>
(b) Consent of Independent Accountant, Plante &
Moran, LLP, CPA
(c) Consent of Independent Geologist, Kim A.
Walbe
(d) Consent of Independent Petroleum Consultant,
Wright & Company, Inc.
27.1 Financial Data Schedule
- ------------------
[FN]
<F1> Previously filed with the Company's Registration Statement on Form
SB-2 (Registration No. 333-12755) filed with the Securities and Exchange
Commission, and here incorporated by reference.
<F*> Management contract or compensatory plan or arrangement.
</FN>
<PAGE>
EXHIBIT 3.2
SIXTH AMENDED AND RESTATED BYLAWS OF THE REGISTRANT
SIXTH AMENDED AND RESTATED BYLAWS
OF
ENERGY SEARCH, INCORPORATED
ADOPTED AS OF MAY 20, 1997
These Sixth 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 September 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
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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.
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.
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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.
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
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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 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.
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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
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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.
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
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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.
(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
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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.
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.
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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 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.
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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;
(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.
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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.
CERTIFICATION
By my signature below I certify that I am the Secretary of the
Corporation and that the foregoing document represents the Sixth Amended
and Restated Bylaws of the Corporation duly adopted by the Board of
Directors of the Corporation. These Sixth 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: May 20, 1997
SECRETARY OF ENERGY SEARCH, INCORPORATED
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EXHIBIT 10.13
EMPLOYMENT AGREEMENTS WITH OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
(E) MICHAEL W. MOONEY
EMPLOYMENT AGREEMENT
THIS AGREEMENT is hereby made and entered into by and between ENERGY
SEARCH, INCORPORATED, a Tennessee corporation ("Employer"), and MICHAEL W.
MOONEY ("Employee"), this 1st day of November, 1997.
W I T N E S S E T H:
1. EMPLOYMENT. Employer employs Employee, and Employee accepts
employment, upon the terms and conditions of this Agreement.
2. TERM. The term of this Agreement, and of Employee's employment
hereunder, shall begin on November 1, 1997, and shall terminate on October
31, 1998. This Agreement, and Employee's employment hereunder, shall be
renewed automatically for successive periods of one (1) year each, subject
to termination as provided hereinafter.
3. COMPENSATION.
(a) During the first year of employment, Employer shall pay
to Employee as Base Salary Compensation for his services the sum
of Eighty-six Thousand Four Hundred Dollars ($86,400) per annum,
which shall be paid in arrears in equal biweekly installments of
Three Thousand Six Hundred Dollars ($3,600) each. Employee will
receive a salary compensation increase of a minimum of three
percent (3%) per year.
(b) Employee shall receive as additional compensation, a
Signing Bonus of Twenty Thousand Dollars ($20,000) and five
thousand shares of Energy Search, Incorporated common stock.
(c) Employer will assign to Employee an Incentive Bonus of
five thousand (5,000) shares of Energy Search, Incorporated
common stock for each year of Employee's employment during the
years of 1998 through 2002 assignable on January 5 of each year.
(d) Employee will receive a Share Bonus of five thousand
(5,000) shares when Energy Search, Incorporated common stock
maintains a trading price of Twelve Dollars ($12) per share for
twenty (20) days (the "$12 Bonus").
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Employee will receive a Share Bonus of five thousand
(5,000) shares when Energy Search, Incorporated common stock
maintains a trading price of Sixteen Dollars ($16) per share for
twenty (20) days (the "$16 Bonus").
If Energy Search, Incorporated is sold in less than
five (5) years, all annual five thousand (5,000) share stock
bonuses will be deemed to be earned as of date of sale. If
Energy Search, Incorporated is sold for Sixteen Dollars ($16) or
more per share then both the Twelve Dollar ($12) and Sixteen
Dollar ($16) Bonuses are earned.
(e) Employer will pay Nine Thousand Five Hundred Dollars
($9,500) plus a matching three percent (3%) per year into the
Employee's Company sponsored IRA/SEP Plan.
4. DUTIES. Employee is engaged as Chief Operating Officer for
Employer and shall have such authority as is commensurate with said
position and shall have the following specific duties: Coordinating all
drilling and completion functions of the Company as well as coordination of
all production activities with respect to Company operated wells, and the
general supervision of company personnel involved in the drilling,
completion and production functions of the Company, and such other duties
as the President of the Company delegates.
5. EXTENT OF SERVICES. Employee shall devote his entire time,
attention, and energies to Employer's business and shall not during the
term of this Agreement be engaged in any other business activity whether or
not such business activity is pursued for gain, profit, or other pecuniary
advantage. However, Employee may invest his assets in such form or manner
as will not require his services in the operation of the affairs of the
companies or entities in which such investments are made.
6. WORKING FACILITIES. Employee shall have an office, stenographic
help, typing and filing assistance, telephone(s) and facsimile machine(s),
and such other facilities and services as are suitable to his position and
appropriate for the performance of his duties.
7. EXPENSES.
(a) Reimbursement. Employer shall reimburse Employee for
all reasonable and necessary business expenses incurred by him in
carrying out his duties under this Agreement. Employee shall
present to Employer from time to time an itemized account of such
expenses in such form as may be required by Employer.
(b) Automobile. In recognition of Employee's need for an
automobile for business purposes, Employer will provide Employee
with an automobile, and pay all maintenance, repair, insurance
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and reasonable costs incident thereto. In lieu of the above,
Employee may choose to use his personal vehicle for business
purposes and receive an automobile allowance therefor in the
amount of Four Hundred Dollars ($400) per month.
8. BENEFITS. Employer shall further:
(a) provide Employee with medical health and
hospitalization insurance coverage as Employer provides to its
other employees (Employee will be responsible for the incremental
cost of family coverage);
(b) if Employee is totally disabled during the term of the
employment agreement, Employee's salary will continue at one
hundred percent (100%) for six months, and then continue for one
additional year at fifty percent (50%); if Employee is totally
disabled at any time there will be a minimum of 20,000 shares of
all the earnable Bonus Shares set out above construed to be
earned; and
(c) allow Employee to take part in any executive bonus
plan, profit-sharing plan, qualified salary deferral plan, and
pension plan which Employer now has or may hereafter adopt during
the term of Employee's employment hereunder.
9. VACATIONS. Employee shall be entitled each year to a vacation of
two (2) weeks, during which time his compensation shall be paid in full.
10. TERMINATION.
(a) Without cause, Employer and Employee may terminate this
Agreement at any time upon one hundred twenty (120) days' written
notice. In such event, Employee, if requested by Employer, shall
continue to render his services and shall be paid one (1) year's
severance pay from the date of termination.
(b) Employer may terminate Employee's employment for cause
if:
(1) Employee refuses to perform, or does not perform,
in a normal business manner his duties of employment with
Employer;
(2) Employee fails or refuses to obey and comply with
the instructions, rules and regulations of Employer as
promulgated by its Board of Directors respecting the
operations of Employer; or
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(3) Employee engages in any unlawful conduct in
connection with his duties of employment with Employer, is
guilty of any acts of dishonesty in connection therewith, is
convicted of a felony, is convicted of a misdemeanor
involving moral turpitude, or engages in any conduct clearly
detrimental to the business of Employer.
(4) Employee breaches any confidentiality or non-competition
covenant or agreement with the Employer.
If Employee's employment is terminated for cause, as set forth
just hereinabove, Employee shall receive his Base Salary accrued up through
the date of termination and shall be entitled to receive any Bonus (or
portion thereof) set forth in herein.
Upon termination for any reason, except as may be otherwise
required by law, all benefits set forth in Section 8 shall cease, although
Employee may keep any pension or other similar rights which have already
vested in him.
Employee will receive one (1) year's severance pay on termination
by the Company for any or no reason. If Employee leaves the Company on his
own violation, there will be no severance pay, and if Employee leaves the
employ of the Company within one (1) year of commencement, the Signing Cash
and Stock Bonuses are to be returned to the Company.
11. DEATH DURING EMPLOYMENT. If Employee dies during the term of
employment, Employer shall pay to the estate of Employee the Base Salary
and Incentive Bonus that would otherwise be payable to Employee up to the
end of the month in which his death occurs.
12. NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and delivered in person or by
courier or sent by certified, United States mail, return receipt requested,
postage prepaid, to his residence shown below in the case of Employee, or
to its principal office as shown below in the case of Employer. Notice
shall be effective upon the date of delivery, if delivered in person or by
courier, or three (3) days after depositing the notice in the United States
mail, if sent by certified mail.
Employee: Employer:
Michael W. Mooney Energy Search, Incorporated
RD 3, Box 186-B 280 Ft. Sanders W. Blvd.
Shelocta, PA 15774 Suite 200
Knoxville, TN 37922
13. WAIVER OF BREACH. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed
as a waiver of any subsequent breach by Employee. No waiver shall be valid
unless in writing and signed by an authorized officer of Employer.
-4-
<PAGE>
14. ASSIGNMENT. Employee acknowledges that the services to be
rendered by him are unique and personal. Accordingly, Employee may not
assign any of his rights or delegate any of his duties or obligations under
this Agreement. The rights and obligations of Employer under this
Agreement shall inure to the benefit of, and shall be binding upon, the
successors and assigns of Employer.
15. CONFIDENTIALITY. Employee acknowledges that Company data is
confidential and proprietary to Employer and agrees not to impart to any
third party any of such proprietary data. Employer shall be entitled to
protect its interest herein by specific performance and the right to enjoin
Employee from engaging in such prohibited practices, without limiting any
other remedies available to it.
16. COVENANT AGAINST COMPETITION. In recognition of the close
personal contact Employee will have with Employer's confidential and
proprietary information and records, and the position of trust in which
Employer holds Employee, Employee agrees as follows:
(a) Non-Compete. For a period of one (1) year from date of
termination, Employee shall not, either as an officer,
stockholder, director, employee, representative, broker, partner,
sole proprietor or in any other manner or capacity directly or
indirectly take proprietary information of Employer and share it
with a competitor of Employer who operates within a fifty mile
radius of any Employer operations.
(b) Remedy for Breach. The parties hereto recognize that
the services to be rendered under this Agreement by Employee are
of a special and unique character; and that in the event of the
breach by Employee of the terms and conditions of this Agreement
to be performed by Employee, or in the event the Employee shall
violate any of the restrictions set forth in this Section 16,
then Employer shall be entitled, if it so elects, to institute
and prosecute proceedings in any court of competent jurisdiction,
either at law or in equity, to obtain damages for any breach of
this Agreement, to enforce the specific performance hereof and to
enjoin Employee from performing any prohibited act hereunder.
Nothing herein contained shall be construed to prevent Employer's
election of any such remedy in the event of the breach of the
Agreement by Employee.
17. APPLICABLE LAW. This Agreement has been negotiated and entered
into and to some extent shall be performed in the State of Ohio, and by
agreement of the parties shall be interpreted and construed in accordance
with and pursuant to the laws of the State of Ohio.
18. TAXES. Employer shall withhold all taxes, such as FICA and all
employment-related taxes (income or otherwise), from the compensation,
-5-
<PAGE>
bonuses and benefits paid hereunder, as required by law. Employee shall be
responsible for the payment of his income taxes on such compensation,
bonuses, and benefits, though the Employer will withhold such taxes as it
is required to withhold.
19. ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties. It may not be changed orally but only by an
agreement in writing signed by both parties hereto.
20. CAPTIONS. The captions herein contained in no way limit or
extend the meaning of any Section, or the provisions therein, and are to be
used for reference purposes only.
IN WITNESS WHEREOF, the parties hereto
have executed this Agreement in
duplicate on the day and date first
above written.
EMPLOYER:
EMPLOYEE: ENERGY SEARCH, INCORPORATED
/S/ MICHAEL W. MOONEY
Michael W. Mooney By: /S/ RICHARD S. COOPER
Richard S. Cooper, President
-6-
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER COMMON SHARE
ENERGY SEARCH, INCORPORATED
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
BASIC EARNINGS PER SHARE
Net Income (367,281)
Shares
Weighted average shares 2,996,533
outstanding 3,768,241
Basic earnings per share (.14)
DILUTED EARNINGS PER SHARE
Net Income (367,281)
Shares
Weighted average shares 2,996,533
outstanding 3,768,241
Diluted earnings per share (.14)
</TABLE>
<PAGE>
EXHIBIT 23.1(b)
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the use in the Securities and Exchange Commission
Form 10-KSB for the fiscal year ended December 31, 1997 (the "10-KSB") of
Energy Search, Incorporated (the "Company") of our report which is dated
February 20, 1998 on the financial statements of the Company for the years
ended December 31, 1996 and December 31, 1997. We consent to the use in
the 10-KSB of the Company of our report on Supplementary Information dated
December 31, 1996 which is presented as supplementary information to the
December 31, 1997 financial statement of the Company.
PLANTE & MORAN, LLP
By: /S/ JONATHAN M. CHISM
Jonathan M. Chism, CPA
March 27, 1998
Grand Rapids, MI
<PAGE>
EXHIBIT 23.1(c)
CONSENT OF INDEPENDENT GEOLOGIST
I consent to the use in the Securities and Exchange Commission
Form 10-KSB (the "10-KSB") for the fiscal year ended December 31, 1997 of
Energy Search, Incorporated (the "Company") of my report dated August 31,
1996 on the oil and gas reserves of Energy Search, Incorporated as of
December 31, 1996. I also consent to the reference to me as an expert in
geology and oil and gas reserve analysis in the 10-KSB.
WALBE & ASSOCIATES, INC.
By: /S/ KIM A. WALBE
Kim A. Walbe, President
March 27, 1998
Charleston, WV
<PAGE>
EXHIBIT 23.1(d)
CONSENT OF INDEPENDENT PETROLEUM CONSULTANT
I consent to the use, in the Securities and Exchange Commission
Form 10-KSB (the "10-KSB") for the fiscal year ended December 31, 1997 of
Energy Search, Incorporated (the "Company") of our report dated March 4,
1998 on the oil and gas reserves of the Company as of January 1, 1998. I
also consent to the reference in the 10-KSB to Wright & Company, Inc. as
experts in oil and gas analysis.
WRIGHT & COMPANY, INC.
By: /S/ D. RANDALL WRIGHT
D. Randall Wright, President
March 26, 1998
Brentwood, TN
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-KSB FOR ENERGY SEARCH, INCORPORATED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,252,316
<SECURITIES> 0
<RECEIVABLES> 1,361,742
<ALLOWANCES> 172,431
<INVENTORY> 54,363
<CURRENT-ASSETS> 3,320,051
<PP&E> 13,547,850
<DEPRECIATION> (3,483,786)
<TOTAL-ASSETS> 16,120,700
<CURRENT-LIABILITIES> 2,036,616
<BONDS> 137,595
<COMMON> 0
0
15,448,073
<OTHER-SE> (1,501,584)
<TOTAL-LIABILITY-AND-EQUITY> 16,120,700
<SALES> 798,956
<TOTAL-REVENUES> 2,361,249
<CGS> 24,669
<TOTAL-COSTS> 2,712,983
<OTHER-EXPENSES> 80,384
<LOSS-PROVISION> 11,728
<INTEREST-EXPENSE> 105,735
<INCOME-PRETAX> (549,581)
<INCOME-TAX> 182,300
<INCOME-CONTINUING> (367,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (367,281)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
