SYMSKAYA EXPLORATION INCORPORATED
(A Company in the Development Stage)
Report on Audits of Financial Statements
and Supplemental Data
as of December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994,
and the period from inception (November 25, 1991)
to December 31, 1996
Report of Independent Accountants
To the Board of Directors of
Symskaya Exploration Incorporated:
We have audited the accompanying balance sheet of Symskaya Exploration
Incorporated (a company in the development stage) as of December 31, 1996 and
1995, and the related statements of operations, changes in stockholders' equity,
and cash flows for the years ended December 31, 1996, 1995 and 1994, and the
period from inception (November 25, 1991) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Symskaya Exploration
Incorporated (a company in the development stage) as of December 31, 1996 and
1995, and the results of its operations and its cash flows for the years ended
December 31, 1996, 1995 and 1994, and for the period from inception (November
25, 1991) to December 31, 1996 in conformity with generally accepted accounting
principles.
Salt Lake City, Utah
February 13, 1997
SYMSKAYA EXPLORATION, INCORPORATED
(A Company in the Development Stage)
BALANCE SHEET
as of December 31, 1996 and December 31, 1995
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 46,150 $ 171,408
Due from Equity Oil Company 101,771 189,425
Due from Leucadia National Corporation 101,771 189,425
------------ ------------
Total current assets 249,692 550,258
------------ ------------
Unproved oil and gas property, at cost
(full cost method of accounting) 5,876,700 10,329,991
------------ ------------
Total assets $ 6,126,392 $ 10,880,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68,476 $ 241,093
Accrued interest payable - Equity Oil Company 29,734 93,480
------------ ------------
Total current liabilities 98,210 334,573
------------ ------------
Accrued interest payable 1,105,002 126,306
Notes payable - Equity Oil Company 6,644,380 5,648,922
Notes payable - Leucadia National Corporation 4,903,861 3,908,403
------------ ------------
Total liabilities 12,751,453 10,018,204
------------ ------------
Commitments (Note 1)
Stockholders' equity:
Common stock, no par value:
Authorized: 20,000,000 shares; issued 1,000
shares 1,000 1,000
Contributed capital - Equity Oil Company 2,238,132 494,625
Contributed capital - Leucadia National
Corporation 2,238,132 494,625
Deficit accumulated during development stage (11,102,325) (128,205)
------------ ------------
(6,625,061) 862,045
------------ ------------
Total liabilities and stockholders' equit $ 6,126,392 $ 10,880,249
============ ============
The accompanying notes are an integral
part of these financial statements
SYMSKAYA EXPLORATION, INCORPORATED
(A Company in the Development Stage)
STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
and the period from inception (November 25, 1991) to December 31, 1996
Inception to
December 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
Revenues:
Overhead income $ 47,258 $ 62,097 $ -- $ 109,355
Interest income 12,147 7,146 5,663 24,956
------------ ------------ ------------ ------------
59,405 69,243 5,663 134,311
------------ ------------ ------------ ------------
Expenses:
Overhead expenses 64,213 62,106 -- 126,319
Impairment of unproved
oil and gas property 10,955,728 -- -- 10,955,728
Interest expense -- -- -- 126,306
Foreign exchange loss 13,584 8,431 6,268 28,283
------------ ------------ ------------ ------------
11,033,525 70,537 6,268 11,236,636
------------ ------------ ------------ ------------
Net (loss) $(10,974,120) $ (1,294) $ (605) $(11,102,325)
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
SYMSKAYA EXPLORATION, INCORPORATED
A Company in the Development Stage)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the period from inception (November 25, 1991)
to December 31, 1996
Contributed Capital Deficit Accumulated
Common Stock Equity Oil Leucadia National During the
Shares Amount Company Corporation Development Stage Total
------ ------ ------- ----------- ----------------- -----
Contribution of capital - - $ 60,000 - - $ 60,000
Loss from inception to
December 31, 1991 - - - - - -
------ ------ -------- --------- ------- --------
Balance at December 31, 1991 - - 60,000 - - 60,000
Issuance of common stock for
cash on February 29, 1992
(at $1.00 per share) 1,000 $1,000 - - - 1,000
Conversion of contributed
capital to note payable - - (60,000) - - (60,000)
1992 net loss - - - - $ (34,484) (34,484)
------ ------ -------- --------- -------- ---------
Balance at December 31, 1992 1,000 1,000 - - (34,484) (33,484)
1993 net loss - - - - (91,822) (91,822)
------ ------ -------- --------- -------- --------
Balance at December 31, 1993 1,000 1,000 - - (126,306) (125,306)
Contribution of capital - - 494,625 $494,625 - 989,250
1994 net loss - - - - (605) (605)
------ ------ ------- -------- ----------- --------
Balance at December 31, 1994 1,000 1,000 494,625 494,625 (126,911) 863,339
1995 net loss - - - - (1,294) (1,294)
------ ------ ------- -------- ---------- --------
Balance at December 31, 1995 1,000 $ 1,000 494,625 494,625 (128,205) 862,045
Contribution of capital - - 1,743,507 1,743,507 - 3,487,014
1996 net loss - - (10,974,120) (10,974,120)
------ ------ --------- --------- ---------- ----------
Balance at December 31, 1996 1,000 $ 1,000 $2,238,132 $2,238,132 $(11,102,325) $(6,625,061)
====== ====== ========= ========= ========== ==========
The accompanying notes are an integral
part of these financial statements
SYMSKAYA EXPLORATION, INCORPORATED
(A Company in the Development Stage)
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
and the period from inception (November 25, 1991)
to December 31, 1996
Period from
inception
(November 25, 1991)
to December 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(10,974,120) $ (1,294) $ (605) $(11,102,325)
Impairment of unproved
oil and gas property 10,955,728 -- -- 10,955,728
Increase (decrease) from changes in:
Accrued interest payable - Equity Oil Company -- -- -- 126,306
------------ ------------ ------------ ------------
Net cash used in operating activities (18,392) (1,294) (605) (20,291)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to unproved oil and gas property (5,760,104) (5,057,805) (3,224,241) (15,755,522)
------------ ------------ ------------ ------------
Net cash used in investing activities (5,760,104) (5,057,805) (3,224,241) (15,755,522)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock -- -- -- 1,000
Notes payable - Equity Oil Company 995,458 2,649,047 1,281,013 6,584,380
Notes payable - Leucadia National Corporation 995,458 2,649,047 1,259,356 4,903,861
Contribution of capital - Equity Oil Company 1,743,507 -- 494,625 2,298,132
Contribution of capital - Leucadia National
Corporation 1,743,507 -- 494,625 2,238,132
Due from Equity Oil Company and Leucadia
National Corporation 175,308 (100,871) (277,979) (203,542)
------------ ------------ ------------ ------------
Net cash provided by financing activities 5,653,238 5,197,223 3,251,640 15,821,963
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (125,258) 138,124 26,794 46,150
Cash and cash equivalents at beginning of period 171,408 33,284 6,490 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 46,150 $ 171,408 $ 33,284 $ 46,150
============ ============ ============ ============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Income taxes - - - -
Interest - - - -
Supplemental disclosures of non-cash investing and financing activities: At
December 31, 1996, 1995, and 1994 the Company financed $1,047,172, $334,573, and
$336,621, respectively, of oil and gas property additions with accounts payable
and accrued liabilities. Effective February 29, 1992, the Company converted the
original $60,000 capital contribution from Equity Oil Company to an interest
bearing note payable to Equity Oil Company.
The accompanying notes are an integral
part of these financial statements
SYMSKAYA EXPLORATION, INCORPORATED
(A Company in the Deveopment Stage)
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
A. Symskaya Exploration, Inc., a company in the development
stage, (the Company), a Texas corporation, was formed on
November 25, 1991, and is engaged in oil and gas exploration in
Russia. Symskaya holds a Combined License which grants it the
exclusive right to explore, develop and produce hydrocarbons on
a contract area totaling approximately 1,100,000 acres in the
Yenisysk District of the Krasnoyarsk Krai in the Russian
Federation. The License has a primary term of 25 years.
The work to be performed and the obligations and rights of
Symskaya are set forth in a License Agreement and a Production
Sharing Agreement (PSA) which are integral parts of the
License. Under the License and PSA, Symskaya will provide
funding for all exploration and development and will recover
these costs from 80% of hydrocarbon production after payment of
an 8% royalty. The remaining 20% of any hydrocarbon production,
net of royalty, will be shared by Symskaya and the Russian
government based on the rate of production.
Minimum expenditures required under the License and PSA total
$12,000,000 during the first five years of the License term,
which began on November 15, 1993. As of December 31, 1996,
Symskaya had satisfied all of the minimum expenditures
required.
Symskaya is owned 50% each by Equity Oil Company (Equity) and
Leucadia National Corporation, (Leucadia). Leucadia acquired
50% of the stock of Symskaya effective January 1, 1994, in
exchange for their commitment to spend up to $6,000,000, in an
amount equal to that spent by Equity, towards the Symskaya
project through the drilling, completion and/or plugging and
abandonment of the initial test well, the Lemok #1. Pursuant to
a Shareholders' Agreement, Leucadia was not required to pay any
part of the amounts previously advanced by Equity under a Loan
Agreement with Symskaya, with the exception of one-half (1/2)
of the interest on a $1,740,519 loan between Equity and
Symskaya. The loan reflects the initial investment by Equity in
Symskaya prior to Leucadia's ownership.
NOTES TO FINANCIAL STATEMENTS, Continued:
1. SIGNIFICANT ACCOUNTING POLICIES, Continued:
Amounts advanced by Equity and Leucadia after January 1, 1994
are treated as interest-bearing advances or equity, as mutually
agreed upon by the respective companies. The agreement with
Leucadia also requires that Leucadia share equally in the
payment of the one (1%) percent royalty obligation in favor of
Coastline Exploration, Inc. on future revenues from the
Symskaya project.
Equity and Leucadia have agreed to continue funding the
operations of Symskaya, through at least December 31, 1997,
while the Company conducts its search for additional financing
to fund further exploration activity.
B. ACCOUNTING FOR OIL AND GAS OPERATIONS:
The Company uses the full cost method of accounting, under
which the costs of all exploration and development activities
(both successful and unsuccessful) are capitalized and
subsequently amortized to expense using the units-of-production
method, based upon production and estimates of proved reserve
quantities. Unevaluated costs and related capitalized interest
costs are excluded from the amortization base until the
properties associated with these costs are evaluated and
determined to be productive or impaired. Should the net
evaluated capitalized costs exceed the estimated present value
of oil and gas reserves on a country-by-country basis, the
excess would be charged to expense. Proceeds from disposals of
oil and gas properties are applied as reductions of capitalized
costs. Gain or loss is recognized only on the sale of oil and
gas properties involving significant amounts of reserves.
During the years ended December 31, 1996, 1995 and 1994, the
Company capitalized interest of $1,097,994, $188,455 and
$158,756, respectively, related to its unproved property.
In August of 1996, Symskaya plugged and abandoned the Lemok #1
well, which was the initial test well drilled on the Company's
concession. Symskaya subsequently charged the drilling costs of
the well to expense.
NOTES TO FINANCIAL STATEMENTS, Continued:
1. SIGNIFICANT ACCOUNTING POLICIES, Continued:
B. ACCOUNTING FOR OIL AND GAS OPERATIONS, continued:
The remaining capitalized costs associated with the Company's
uproved oil and gas properties respresent the cost of the
concession, as well as related equipment and capitalized
interest costs. Future exploration activities are dependent on
Symskaya's obtaining additional financing. Should Symskaya be
unable to obtain adequate financing, or should Symskaya abandon
the license area for whatever reason, the remaining capitalized
costs would be charged to expense during the period that
determination is made.
C. FOREIGN OPERATIONS:
The Company's exploration activities are located in Russia and
its functional and reporting currency is U.S. dollars.
Aggregate exchange gains and losses arising from the
translation of foreign currency transactions are included in
income.
D. CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to
be cash equivalents. The majority of the Company's cash and
cash equivalents is held by one financial institution in Salt
Lake City, Utah.
E. OVERHEAD INCOME AND EXPENSE:
Overhead expense represents a monthly charge to the Company
for management services provided by Equity. This charge is
borne equally by Equity and Leucadia, and is recognized as
overhead income by the Company upon issuance of invoices to
Equity and Leucadia.
F. ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTES TO FINANCIAL STATEMENTS, Continued:
2. NOTES PAYABLE:
Through December 31, 1993, the Company borrowed $1,740,519 from Equity
under a note payable which bears interest at the rate of prime plus two
percent (10.5% at December 31, 1996) with a cap of twelve (12%) percent
from and after January 1, 1994. Subsequent to the plugging of the Lemok
#1 well, Equity and Leucadia agreed to suspend interest payments on
Symskaya's note with Equity. Unpaid interest will continue to accrue
until exploration operations resume, or until the sale of, or
production of oil and gas from, the Symskaya project. Interest incurred
between January 1, 1994 and August 31, 1996 will be repaid using funds
advanced by Equity and Leucadia, and is classified as a current
liability. The interest accrued before and after this repayment period
and the unpaid principal balance will become due upon the receipt of
any proceeds by the Company from its Russian project. If no proceeds
are received, the principal balance of the note and any unpaid accrued
interest will be forfeited by Equity. The unpaid interest accrued and
note payable have been classified as long-term as no amounts will be
repaid during 1997.
As agreed upon by Equity and Leucadia effective January 1, 1994,
advances to the Company are treated as interest bearing notes or
equity. The notes are evidenced by loan agreements, with interest being
accrued at prime rates in effect for the terms of the loans. The loans
have a primary term of five years, at which time accrued interest and
principal will be repaid.
During the years ended December 31, 1995 and 1994, Equity and Leucadia
each advanced $2,649,047 and $1,259,356, respectively, to the Company.
Such advances were non-interest bearing during 1995 and 1994, but at
the option of the stockholders a portion became interest bearing notes
as mutually agreed upon by the stockholders during 1996. In addition,
Equity and Leucadia have each designated a portion of their advances as
contributed capital as of December 31, 1996.
3. INCOME TAXES:
The Company accounts for income taxes using the asset and liability
approach in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". The Company had net
operating loss carryforwards of approximately $11,102,000 at December
31, 1996, which are available to offset future taxable income through
2007 and 2011. The Company recognized no income tax benefit from its
net losses in 1996, 1995 and 1994.
NOTES TO FINANCIAL STATEMENTS, Continued:
3. INCOME TAXES, continued:
The components of the net deferred tax asset as of December 31, 1996
and
December 31, 1995 are as follows:
December 31, December 31,
1996 1995
Deferred tax asset:
Net operating loss carryforwards $ 4,163,400 $ 48,000
Valuation allowance (4,163,400) (48,000)
---------- -------
Net deferred tax asset $ - $ -
========== =======
The valuation allowance increased by $4,115,400, $400 and $350 during
the years ended December 31, 1996, 1995 and 1994, respectively.