SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (or Date of Earliest Event Reported): March 9, 2001
REGENT ENERGY CORPORATION
f/k/a NPC Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Nevada 0-08536 84-1034362
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
650 N. Sam Houston Parkway E., Suite 500,
Houston, Texas 77060
(Address of principal executive offices) (Zip Code)
(281) 931-3800
(Registrant's telephone number, including area code)
Not applicable.
(Former name or former address, if changed since last report)
INFORMATION TO BE INCLUDED IN THE REPORT
The consummation of the transaction contemplated by the Agreement and Plan
of Reorganization by and between Regent Energy Corporation (f/k/a NPC Holdings,
Inc.), a Nevada corporation (the "Company"), Vulcan Minerals & Energy, Inc., a
Texas corporation ("Vulcan"), and the owners of record of all of the issued and
outstanding stock of Vulcan (the "Transaction") was effective as of March 9,
2001. The Transaction was previously reported on Form 8-K filed with the
Securities and Exchange Commission (the "SEC") on March 14, 2001, as amended on
Form 8-K/A filed with the SEC May 1, 2001, as further amended by a Form 8-K/A
filed with the SEC on May 11, 2001 and as further amended by a Form 8-K/A filed
with the SEC on June 1, 2001. This fourth amendment to such Form 8-K is being
filed to correct certain financial information in the Form 8-K/A filed June 1,
2001.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements.
Attached to this report are the Financial Statement and Independent
Auditor's Report for the years ended December 31, 1999 and December 31, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
REGENT ENERGY CORPORATION
By: /s/ John N. Ehrman
Date: June 5, 2001 --------------------------------------------
President and Chief Executive Officer
REGENT ENERGY CORPORATION
Consolidated Financial Statement
and
Independent Auditor's Report
December 31, 2000 and 1999
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Regent Energy Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheet of Regent Energy
Corporation and subsidiary as of December 31, 2000, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Regent Energy Corporation and
subsidiary as of December 31, 2000, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in the last paragraph of note 1 to the financial statements, the
Company changed its method of accounting for its oil and gas producting
activities. This paragraph also describes the restatement of the Company's
financial statements for the year ended December 31, 1999.
HEIN + ASSOCIATES LLP
Houston, Texas
March 30, 2001
REGENT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
---------------------------------
2000 1999
--------------- ---------------
(Restated)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 45,075 $ 241,573
Accounts receivable:
Trade - production 988,680 507,014
Amounts due from working interest owners 1,695,460 200,232
Officers and stockholder 36,650 94,440
Other 50,410 430,000
Other current assets 300,374 13,653
-------------- --------------
Total current assets 3,116,649 1,486,912
PROPERTY AND EQUIPMENT, (full cost method for oil and gas properties),
net of accumulated depletion, depreciation and amortization of
$517,205 and $65,006 in 2000 and 1999 16,476,774 2,909,101
OTHER ASSETS 255,274 125,655
-------------- --------------
Total assets $ 19,848,697 $ 4,521,668
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 287,521 $ 944,882
Current portion of long-term debt 6,855,145 19,439
Accounts payable:
Trade 1,575,348 1,188,641
Related parties and investors 647,700 32,734
Accrued liabilities 658,146 273,797
Royalties and revenues payable 196,405 197,893
-------------- --------------
Total current liabilities 10,220,265 2,657,386
LONG-TERM DEBT, less current portion 3,237,214 76,754
GAS IMBALANCE LIABILITY 1,523,356 -
COMMITMENTS AND CONTINGENCIES (note 9)
REDEEMABLE COMMON STOCK, 172,000 shares at cost - 1,000,000
OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value; 20,000,000 shares authorized; 4,617,991
and 2,260,612 shares issued and outstanding at 2000 and 1999 47,900 20,887
Additional paid-in capital 14,389,488 3,943,537
Accumulated deficit (9,569,526) (3,176,896)
-------------- --------------
Total stockholders' equity 4,867,862 787,528
-------------- --------------
Total liabilities and stockholders' equity $ 19,848,697 $ 4,521,668
============== ==============
See accompanying notes to these financial statements.
2
REGENT ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999
---------------- ----------------
(Restated)
OIL AND GAS REVENUES $ 1,840,663 $ 164,838
COST AND EXPENSES:
Lease operating expenses 897,696 288,369
Severance taxes 75,732 14,240
Depletion, depreciation and amortization 452,461 53,524
General and administrative, of which $1,020,477 is stock
based in 2000 4,940,960 1,544,175
-------------- --------------
Total cost and expenses 6,366,849 1,900,308
-------------- --------------
LOSS FROM OPERATIONS (4,526,186) (1,735,470)
OTHER INCOME (EXPENSE):
Interest income 6,558 4,859
Interest expense and financing costs, of which $1,290,235
is stock based in 2000 (1,993,563) (138,914)
Other 120,561 304,100
-------------- --------------
Total other income (expense) (1,866,444) 170,045
-------------- --------------
LOSS BEFORE INCOME TAXES (6,392,630) (1,565,425)
INCOME TAX EXPENSE - DEFERRED - 291,686
-------------- --------------
NET LOSS $ (6,392,630) $ (1,857,111)
============== ==============
See accompanying notes to these financial statements.
3
REGENT ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000 AND 1999
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------------- ---------------- ---------------- ---------------- ----------------
BALANCES, January 1, 1999 1,545,558 $ 15,456 $ 1,512,041 $ (1,319,785) $ 207,712
Issuance of common stock 543,054 5,431 2,431,496 - 2,436,927
Net loss - - - (1,857,111) (1,857,111)
--------------- --------------- --------------- --------------- ---------------
BALANCES, December 31, 1999 2,088,612 20,887 3,943,537 (3,176,896) 787,528
Net loss - - - (6,392,630) (6,392,630)
Redemption of common stock (5,160) (52) (229,948) - (230,000)
Loans converted to common stock 250,000 2,500 1,997,500 - 2,000,000
Exercise of warrants 285,000 2,850 567,150 - 570,000
Sale of common stock, net of
offering costs of $975,416 2,096,539 20,965 5,801,318 - 5,822,283
Warrants issued in connection
with debt - - 990,234 - 990,234
Stock issued in connection with
debt 75,000 750 299,250 - 300,000
Stock-based compensation - - 1,020,447 - 1,020,447
--------------- --------------- --------------- --------------- ---------------
BALANCES, December 31, 2000 4,789,991 $ 47,900 $ 14,389,488 $ (9,569,526) $ 4,867,862
=============== =============== =============== =============== ===============
See accompanying notes to these financial statements.
4
REGENT ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999
---------------- ----------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,392,630) $ (1,857,111)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization 452,461 53,524
Deferred income taxes - 291,686
Stock-based compensation and financing costs 2,310,681 -
Changes in assets and liabilities:
(Increase) decrease in:
Trade receivables and amounts due from investors (1,976,894) (674,197)
Other current assets 82,303) (97,902)
Increase (decrease) in:
Accounts payable - trade 386,707 933,165
Other current liabilities 382,860 (57,366)
Other, net (129,880) -
--------------- ---------------
Net cash used in operating activities (4,884,392) (1,408,201)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties (12,262,089) (3,805,919)
Purchases of furniture and equipment (234,427) (181,347)
Proceeds from sale of property interests - 1,217,430
Other - (125,000)
--------------- ---------------
Net cash used in by investing activities (12,496,516) (2,894,836)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term notes payable 4,904,954 3,097,153
Repayments of short-term notes payable (1,062,315) (2,217,896)
Proceeds from long-term debt 7,754,319 75,703
Repayments of long-term debt (189,797) (15,201)
Redemption of common stock (1,230,000) -
Proceeds from exercise of warrants 570,000 -
Proceeds from sale of common stock 5,822,283 3,492,340
Increase in accounts payable to related parties and investors 614,966 -
Other - 64,168
--------------- ---------------
Net cash provided by financing activities 17,184,410 4,496,267
--------------- ---------------
(continued . . . )
See accompanying notes to these financial statements.
5
REGENT ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999
---------------- ----------------
INCREASE IN CASH AND CASH EQUIVALENTS (196,498) 193,230
CASH AND CASH EQUIVALENTS, beginning of year 241,573 48,343
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 45,075 $ 241,573
=============== ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES - interest paid $ 341,002 $ 130,071
=============== ===============
NONCASH TRANSACTIONS:
Gas imbalance on properties acquired $ 1,523,356 $ -
Notes payable converted to common stock $ 2,000,000 $ -
Short-term notes payable refinanced as long-term debt $ 2,500,000 $ -
Related party debt offset against a related party receivable $ 68,356 $ -
Stock-based financing costs incurred $ 1,290,235 $ -
Stock-based compensation $ 1,020,447 $ -
See accompanying notes to these financial statements.
6
REGENT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENT
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------
Organization - Regent Energy Corporation (the "Company"), was incorporated under
the name NPC Holdings, Inc. in Nevada in 2000. The Company is a successor of The
New Paraho Corporation, a Colorado corporation, which was a successor of Paraho
Development Corporation, which was incorporated in Colorado in 1971. The Company
has one subsidiary, Vulcan Minerals and Energy, Inc. ("Vulcan"), formerly Playa
Minerals & Energy, Inc., a Texas corporation incorporated on April 2, 1997,
which began operations on July 7, 1997. Vulcan became a subsidiary of the
Company effective March 9, 2001 when the shareholders of Vulcan approved the
exchange of Vulcan shares for shares of the Company. The Company is engaged in
the acquisition, marketing, exploration and development of oil and gas in the
Gulf of Mexico, New Mexico and other areas.
Consolidation - All significant intercompany transactions have been eliminated
in consolidation.
Oil and Gas Producing Activities - The Company follows the full-cost method of
accounting for oil and gas properties. Under the full-cost method, all costs
associated with property acquisition, exploration, and development activities
are capitalized. Capitalized costs include lease acquisitions, geological and
geophysical work, delay rentals, costs of drilling, completing and equipping
successful and unsuccessful oil and gas wells and directly related costs. Gains
or losses are normally not recognized on the sale or other disposition of oil
and gas properties.
The capitalized costs of oil and gas properties, plus estimated future
development costs relating to proved reserves and estimated cost of
dismantlement and abandonment, net of salvage value, are amortized on a
unit-of-production method over the estimated productive life of the proved oil
and gas reserves. Unevaluated oil and gas properties are excluded from this
calculation.
Capitalized oil and gas property costs are limited to an amount (the ceiling
limitation) equal to the sum of the following:
(a) The present value of estimated future net revenues from the projected
production of proved oil and gas reserves, calculated at prices in
effect as of the balance sheet date (with consideration of price
changes only to the extent provided by contractual arrangements) and a
discount factor of 10%;
(b) The cost of investments in unproved and unevaluated properties
excluded from the costs being amortized; and
(c) The lower of cost or estimated fair value of unproved properties
included in the costs being amortized.
Depletion and depreciation of capitalized costs for producing oil and gas
properties is provided using the units-of-production method based upon proved
reserves. Depletion and depreciation expense for the Company's oil and gas
properties amounted to $395,179 and $27,575 for the years ended December 31,
2000 and 1999, respectively.
7
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------
Use of Estimates and Certain Significant Estimates - The preparation of the
Company's financial statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates and assumptions
that affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates. Significant assumptions
are required in the valuation of proved oil and gas reserves, which as described
above may affect the amount at which oil and gas properties are recorded. It is
at least reasonably possible those estimates could be revised in the near term,
and those revisions could be material.
Other Property and Equipment - Depreciation of property and equipment, other
than oil and gas properties, is provided generally on the straight-line basis
over the estimated useful lives of the assets as follows:
Office furniture and equipment 5-10 years
Transportation and other equipment 5 years
Leasehold improvements 5 years
Cash and Cash Equivalents - For purposes of the statement of cash flows, the
Company considers cash equivalents to include all cash items, such as time
deposits and short-term investments that mature in three months or less.
Income Taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due, if any,
plus net deferred taxes related primarily to differences between the bases of
assets and liabilities for financial and income tax reporting. Deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets include recognition of
operating losses that are available to offset future taxable income and tax
credits that are available to offset future income taxes. Valuation allowances
are recognized to limit recognition of deferred tax assets where appropriate.
Such allowances may be reversed when circumstances provide evidence that the
deferred tax assets will more likely than not be realized.
Oil and Gas Revenues - The Company recognizes oil and gas revenues as production
occurs. As a result, the Company accrues revenue relating to production for
which the Company has not received payment.
Joint Interest Billings Receivable and Oil and Gas Revenue Payable - Joint
interest billings receivable represent amounts receivable for lease operating
expenses and other costs due from third party working interest owners in the
wells that the Company operates. The receivable is recognized when the cost is
incurred and the related payable and the Company's share of the cost is
recorded.
8
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------------
Oil and gas revenues payable represents amounts due to third party revenue
interest owners for their share of oil and gas revenue collected on their behalf
by the Company. The payable is recorded when the Company recognizes oil and gas
sales and records the related oil and gas sales receivable.
Stock Dividend and Reverse Stock Split - During March 2000, the Company
authorized a .72-to-1 stock dividend for owners of record as of April 30, 2000.
This stock dividend was accounted for in the same manner as a stock split. In
November 2000, the Company authorized a 1-for-2 reverse stock split. All share
and per share amounts have been adjusted to reflect these transactions.
Stock-Based Compensation - The Company applies Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which
requires recognition of the value of stock options and warrants granted based on
an option pricing model. However, as permitted by SFAS 123, the Company
continues to account for stock options and warrants granted to directors and
employees pursuant to Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations.
New Accounting Pronouncements - The FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The statement provides guidance for determining whether a transfer of financial
assets should be accounted for as a sale or a secured borrowing, and whether a
liability has been extinguished. The Statement is effective for recognition and
reclassification of collateral and for disclosures which relate to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Statement will become effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The initial application of SFAS No. 140 will not have a material
impact on the Company's results of operations and financial position.
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." This interpretation modified the practice of
accounting for certain stock award agreements and was generally effective
beginning July 1, 2000. The initial impact of this interpretation on the
Company's results of operations and financial position was not material.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This was followed in June 2000 by the issuance of SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which amends SFAS No. 133. SFAS Nos. 133 and 138 establish accounting and
reporting standards for derivative financial instruments.
9
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------------
The standards will require the gain or loss from a derivative to be recorded
each period in earnings if the derivative is not a hedge. If a derivative is a
hedge, changes in the fair value of the derivative will either be recognized in
earnings along with the change in the fair value of the hedged asset, liability
or firm commitment also recognized in earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. For a
derivative recognized in other comprehensive income, the ineffective portion of
the derivative's change in fair value will be recognized immediately in
earnings. The initial application of SFAS Nos. 133 and 138 may have a material
impact on the Company.
The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," to provide
guidance for revenue recognition issues and disclosure requirements.
Subsequently the SEC issued SAB No. 101A, "Amendment: Revenue Recognition in
Financial Statements," SAB No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements," which ultimately delayed implementation to the fourth
quarter of fiscal years beginning after December 15, 1999. SAB No. 101 covers a
wide range of revenue recognition topics and summarizes the staff's
interpretations on the application of generally accepted accounting principles
to revenue recognition. The Company does not believe this standard will have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
Restatement of Prior Year Financial Statements - As discussed in note 13, the
Company recognized a gain on the sale of a partial interest in oil and gas
properties in New Mexico in the amount of $4,257,798 in 1999. The Company has
since concluded that the gain should not have been recognized. In addition, the
Company elected to change from the successful efforts method for accounting for
its oil and gas producing activities to the full cost method. This change was
made because the Company believes most public oil and gas exploration companies
that would be reasonably comparable to the Company use the full-cost method. The
prior year financial statements were restated to effect the change in
accounting. A summary of the impact of the restatement and the change in
accounting policy on the year ended December 31, 1999 follows:
As Previously
Reported As Restated
---------------- ----------------
Gain on sale of working interests in oil and gas properties $ 4,257,798 $ -
Operating income (loss) 2,213,515 (1,565,425)
Net income (loss) 1,947,676 (1,857,111)
============== ==============
Total assets $ 12,188,739 $ 4,521,668
Property and equipment 2,358,974 2,909,101
Notes receivable 7,897,455 -
Long-term drilling commitments (3,948,750) -
============== ==============
10
2. ACQUISITIONS OF OIL AND GAS PROPERTIES
--------------------------------------
In November 2000, the Company acquired interests in certain producing properties
in the Gulf of Mexico for $11,528,000, plus the assumption of gas, imbalance
liabilities totaling $1,523,356. The imbalance liability was recorded based on
prices received for the natural gas giving rise to the imbalance liability. The
purchase was financed through a combination of proceeds from the sale of common
stock and debt financing.
3. PROPERTY AND EQUIPMENT
----------------------
A summary of property and equipment at December 31, 2000 and 1999 is as follows:
2000 1999
----------------- -----------------
Oil and gas properties $ 16,520,008 $ 2,734,563
Leasehold improvements 126,890 -
Transportation and other equipment 169,318 100,000
Office furniture and equipment 177,763 139,544
--------------- ---------------
16,993,979 2,974,107
Less accumulated depletion, depreciation and
amortization (517,205) (65,006)
--------------- ---------------
$ 16,476,774 $ 2,909,101
=============== ===============
4. NOTES PAYABLE
-------------
Notes payable consisted of the following at December 31, 2000 and 1999:
2000 1999
----------------- -----------------
Note payable to a company with interest at 18%. The $ - $ 929,520
note was retired during 2000.
Other 287,521 15,362
--------------- ---------------
$ 287,521 $ 944,882
=============== ===============
11
5. LONG-TERM DEBT
--------------
The following is a summary of long-term debt at December 31, 2000 and 1999:
2000 1999
----------------- -----------------
$6,000,000 note payable to bank generally due in monthly $ 5,830,000 $ -
payments of $175,000 plus interest at the prime rate plus
1% (10.5% at December 31, 2000) through September 2003.
$1,700,000 note payable to a financial institution due in
monthly installments of $58,893, including interest at
14%, through October 2003. 1,700,000 -
$2,500,000 demand note payable to a company with interest at
18%. 2,500,000 -
Various notes payable to acquire vehicles due in monthly
installments of $372 to $497 with interest rates ranging
from 3.9% to 6.9%; collateralized by vehicles. 47,131 -
Unsecured installment note payable to a stockholder due in 45
monthly installments of $946, including interest at 9%. 15,228 25,918
Installment note payable to a company related through
common ownership. The note is payable in monthly installments
of $1,336,including interest, at 12%. The note
was repaid in 2000 by offsetting the note with
amounts that were due from the Company's president. - 70,275
--------------- ---------------
10,092,359 96,193
Less current portion (6,855,145) (19,439)
--------------- ---------------
$ 3,237,214 $ 76,754
=============== ===============
The $6,000,000 note payable to a bank is collateralized by oil and gas
properties with an acknowledged borrowing base of $6,000,000 on the date the
loan was funded. The borrowing base is reduced by $175,000 each month and is
subject to redetermination semi-annually. If at any time the outstanding balance
of the note exceeds the borrowing base, the Company must either pay down the
note and/or provide additional collateral. In addition to interest on the note,
the Company pays a facility fee on a quarterly basis equal to 1/2% of the unused
commitment under the agreement. The note agreement includes various covenants,
the most significant of which are to maintain a ratio of current assets to
current liabilities, and a debt coverage ratio, as defined. The Company was in
violation of the debt coverage covenant at December 31, 2000. The Company did
not receive a waiver of such covenant. As a result, the entire amount due this
bank is included in current liabilities.
12
5. LONG-TERM DEBT (continued)
--------------
The $1,700,000 note to a financial institution is subordinate to the $6,000,000
bank note and is collateralized by an assignment of proceeds from the sale of
oil and gas from certain oil and gas properties. The note agreements include
various covenants, the most significant of which require the Company to maintain
a ratio of current assets to current liabilities and a debt coverage ratio, as
defined, of 1.1 to 1.0. The Company was in violation of the debt coverage
covenant at December 31, 2000. The Company received a waiver of such violation
through December 31, 2001.
The $2.5 million demand note to a company was renegotiated in March 2001 to
provide for interest only payments through April 30, 2001, computed based on a
rate of 18% for January 2001, and 12% from February 1, 2001 through April 30,
2001. Under terms of the note, the interest rate reverted to 18%, and the
Company must pay the note in 35 monthly installments of $70,000 plus interest
with a final installment of the remaining balance of $50,000 in the 36th month.
This note is subordinate to the $6,000,000 note to bank, is partially
collateralized by oil and gas properties, and is guaranteed by the Company's
president. Under the terms of this note, the lender is entitled to an assignment
of 10% of the Company's cash flow/property, after deduction for debt and
interest payments on related debt, of any oil and gas properties the Company may
acquire through December 31, 2002 from certain companies. As of December 31,
2000, one property has been acquired to which the 10% provision applies.
Payments under this provision were minor in 2000.
Maturities of long-term debt are as follows:
Years ending December 31,
2001 $ 3,125,145
2002 3,538,242
2003 3,137,093
2004 288,340
2005 3,539
--------------
$ 10,092,359
13
6. INCOME TAXES
------------
Deferred tax assets and liabilities as of December 31, 2000 and 1999 consisted
of the following:
2000 1999
---------------- ----------------
Deferred tax assets:
Net operating loss carryforwards $ 3,859,207 $ 1,452,122
Less valuation allowance (2,833,160) (1,202,472)
-------------- --------------
Net deferred tax asset 1,026,047 249,650
Deferred tax liability - financial statement basis of
property and equipment in excess of tax basis 1,026,407 249,650
-------------- --------------
Net deferred taxes $ - $ -
============== ==============
The valuation allowance increased by $1,630,688 during 2000 because of the
increase in the Company's net operating losses carryforwards ("NOL's").
The Company has NOL's available to offset future federal taxable income of
approximately $10,155,800 at December 31, 2000, which will expire, if not used,
from 2017 to 2020. Due to a change of control, as defined in Section 382 of the
Internal Revenue Code, which likely occurred in 1999 and 2000, the Company's
ability to utilize these NOL's to offset future taxable income may be limited.
The following is a reconciliation of the expected tax provision at the statutory
rate of 34% to the actual provision:
YEARS ENDING DECEMBER 31,
-----------------------------------
2000 1999
---------------- ----------------
Expected benefit (34)% (34)%
Non-deductible expenses 16 -
Increase in valuation allowance 18 53
------------ ------------
Actual expense (benefit) - % 19%
============= ============
7. STOCKHOLDERS' EQUITY
--------------------
During 2000, the Company obtained $2,000,000 in the form of convertible bridge
loans. These loans were converted into 250,000 shares of the Company's common
stock during 2000.
The Company obtained $5,822,283, net of offering cost, in cash during 2000 from
the sale of 2,096,539 shares of common stock.
The Company purchased 172,000 shares of its common stock from a company that had
participated in a prior common stock offering. The Company paid a total of
$1,200,000 to redeem the shares. The stock buyback arose from the exercise of a
put option that had been granted to the stockholder.
14
7. STOCKHOLDERS' EQUITY (continued)
--------------------
The Company issued stock options during 2000 to employees with exercise
prices below the fair market value of the Company's common stock on the date of
grant. Total expense recorded during 2000 for these stock options amounted to
$1,020,447.
The Company issued stock warrants and common stock in 2000 in connection with
financing it obtained during the year. The fair market value of the stock
warrants and common stock amounted to $1,290,235. The fair value of the stock
warrant was determined using the Black Scholes Option Pricing Model using the
following assumptions: expected dividend yield - 0%, risk-free interest rate -
6%; expected volatility - 198%; and expected term - 155 days to one year. The
$1,290,235 incurred was expensed as finance charges in 2000.
The following is a summary of warrant activity for the years ended December 31,
1999 and 2000:
December 31, 2000 December 31, 1999
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
Of Shares Price Of Shares Price
--------------- --------------- --------------- ---------------
Outstanding, beginning of year 159,100 $ 2.43 73,100 $ 3.93
Canceled or expired (86,000) $ (1.16) - $ -
Granted 874,181 $ 2.16 86,000 $ 1.16
Exercised (490,200) $ 1.16 - $ -
-------------- -------------- -------------- ---------------
Outstanding, end of year 457,081 $ 3.51 159,100 $ 2.43
============== ============== ============== ===============
Exercisable, end of year 457,081 $ 3.51 159,100 $ 2.43
============== ============== ============== ===============
If not previously exercised, warrants outstanding at December 31, 2000 will
expire as follows:
Weighted
Average
Number Exercise
Of Shares Price
Years Ending December 31, --------------- ---------------
-------------------------
2001 53,750 $ 1.16
2002 19,350 11.62
2003 283,981 3.60
2005 100,000 $ 8.00
-------------- ----------
Total 457,081 $ 3.51
============== ==========
15
8. FAIR VALUE OF FINANCIAL INSTRUMENTS AND OF CREDIT RISK CONCENTRATION
--------------------------------------------------------------------
The Company's financial instruments are cash, amounts receivable and payable,
long-term and short-term debt, and a swap agreement. The fair value of the swap
agreement is disclosed in note 11. Management believes the fair values of the
remaining instruments, with the exception of long-term debt, approximate their
carrying values, due to the short-term nature of the instruments. The long-term
debt, with the exception of some minor notes, arose in November 2000. As a
result, management believes the carrying value of the long-term debt
approximates fair value.
Substantially all of the Company's accounts receivable at December 31, 2000,
result from crude oil, natural gas sales and joint interest billings to
investors. This concentration may impact the Company's overall credit risk,
either positively or negatively, since these entities may be similarly affected
by changes in economic or other conditions. Receivables are generally not
collateralized; however, receivables from joint interest owners are subject to
collection under operating agreements, which generally provide lien rights.
Historical credit losses incurred on trade receivables by the Company have been
insignificant.
All of the Company's oil production in 2000, which amounted to $846,000, was
purchased by one customer. All of the Company's natural gas production in 2000,
which amounted to $994,100, was purchased by one customer. The Company's trade
accounts receivable at December 31, 2000 were due from these customers.
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
Lease Commitments - The Company leases office space and automobiles under
operating leases that have remaining non-cancelable lease terms in excess of one
year. The total minimum lease commitments under these non-cancelable leases as
of December 31, 2000 are as follows:
Years ending December 31,
2001 $ 141,000
2002 135,000
2003 134,000
2004 11,000
---------------
$ 421,000
===============
Rental expense for the years ended December 31, 2000 and 1999 was approximately
$114,000 and $95,000, net of sublease income of approximately $18,000 and
$13,000, respectively. The Company subleases space in its headquarters to an
engineering service provider. The sublease arrangement terminates upon
termination of their services.
16
9. COMMITMENTS AND CONTINGENCIES (continued)
-----------------------------
Financing Commitments - The Company aassigned the lender under the $2,500,000
note discussed in note 5 a 10% undivided interest in the Marathon Oil properties
acquired in November 2000 and has an obligation to grant this lender a 10%
undivided interest in certain future property acquisitions through December 31,
2002.
Environmental Issues - The Company is engaged in oil and gas exploration and
production and may become subject to certain liabilities as they relate to
environmental clean-up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously-drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during such time the wells were operated.
Should it be determined that a liability exists with respect to any
environmental clean-up or restoration, the liability to cure such a violation
could fall upon the Company. No claim has been made, nor is the Company aware of
any liability which the Company may have, as it relates to any environmental
clean-up, restoration or the violation of any rules or regulations relating
thereto.
10. RELATED PARTY TRANSACTIONS
--------------------------
The Company leased office space from a corporation which is related through
common ownership for the month of January 1999. During February 1999, the
Company acquired the furniture located in its previously leased premises from
the related corporation. The furniture was purchased on an 84-month installment
note, bearing interest at 12% per annum. The purchase price was $75,703.
As of December 31, 2000 and 1999, $29,150 and $94,339 was due from an officer.
Of the balance outstanding at December 31, 1999, $75,000 represented a note
receivable from this officer. During 2000, the note payable discussed in the
previous paragraph was offset against the $75,000 note receivable.
The Company paid commissions to two members of the board of directors in
connection with common stock sold by the Company and paid consulting fees to two
members of the board of directors. The amounts paid totaled $129,930 during the
year ended December 31, 2000 and $311,195 during the year ended December 31,
1999.
11. PRICE RISK MANAGEMENT ACTIVITIES
--------------------------------
The Company utilizes derivative financial instruments to manage market risks
associated with certain energy commodities. The Company currently enters into
swap contracts to reduce the exposure to market fluctuations in the price and
demand of energy commodities. The Company does not engage in speculative
trading.
The Company's commodity price risk exposure arises from its production of oil
and gas which it sells at spot prices. Beginning in 2000, the Company uses
17
over-the-counter swap contracts to manage and hedge price risk related to this
market exposure. Over-the-counter swap agreements require the Company to receive
or make payments based on the difference between a specified price and the
actual price of natural gas. The Company uses swaps to fix the price it will
receive from the sale of the oil and gas it produces.
The gains, losses and related costs of the financial instruments that qualify as
a hedge are not recognized until the underlying physical transaction occurs. At
December 31, 2000, the Company had a net unrealized gain of $561,000 from the
sole swap contract in force at that date. The notional contract quantities under
this contract, which expires January 1, 2001, amounted to 247,800 barrels of
oil. The Company has a second swap contract that commenced January 1, 2001 and
expires on December 1, 2002. The notional quantity for this contract amounts to
600,000 mcf of natural gas. This contract had an unrealized loss of $446,000 on
January 1, 2001. Fair value was determined based upon the present value of cash
flows to be derived from the contract based on market prices at December 31,
2000.
12. STOCK OPTIONS
-------------
The Company's stock option plan (the "Plan") provides for both incentive stock
options and non-qualified stock options. The Plan was adopted on July 15, 1997
and both the incentive stock options and non-qualified stock options will expire
on December 15, 2007. The maximum number of shares underlying the options
granted under the Plan is 154,533. The Company has issued stock options in
excess of the maximum allowed by the Plan. The Company has plans to present to
its shareholders an amendment increasing the number of shares reserved under the
Plan. The following is a summary of option activity during 1999 and 2000.
December 31, 2000 December 31, 1999
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
Of Shares Price Of Shares Price
--------------- --------------- --------------- ---------------
Outstanding, beginning of year 115,899 $ 2.30 131,352 $ 2.30
Canceled or expired (23,179) $ 2.30 (15,453) $ 2.30
Granted 667,545 $ 1.30 - $ -
Exercised - - - -
-------------- ------------ -------------- ------------
Outstanding, end of year 760,265 $ 1.43 115,899 $ 2.30
============== ============ ============== ============
Exercisable, end of year 132,720 $ 1.30 94,431 $ 2.30
============== ============ ============== ============
18
12. STOCK OPTIONS
-------------
If not previously exercised, options outstanding at December 31, 2000 will
expire as follows:
Weighted
Average
Number Exercise
Of Shares Price
--------------- ---------------
December 31, 2002 132,720 $ 4.02
December 31, 2005 627,545 $ .65
-------------- ------------
Total 760,265 $ 1.43
============== ============
Presented below is a comparison of the weighted average exercise prices and fair
values of the Company's common stock options on the measurement date for the
options granted during fiscal years 2000 and 1999.
2000 1999
---------------------------------------- ----------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Fair Number Exercise Fair
Of Shares Price Value Of Shares Price Value
---------- ----------- ----------- ---------- ----------- -----------
Exercise equal to or
greater than market
price 32,680 $ 2.33 $ .60 - $ - $ -
Exercise price less than
market price 594,865 $ .79 $ 2.45 - $ - $ -
Pro Forma Stock-Based Compensation Disclosures - As discussed in note 1, the
Company applies APB Opinion No. 25 and related interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized for
grants of options to employees with the exercise prices at or above the market
price of the Company's common stock on the measurement dates. Had compensation
been determined based on the estimated fair value at the measurement dates for
awards under those plans consistent with the method prescribed by SFAS No. 123,
the Company's December 31, 2000 and 1999 net loss would have been changed to the
pro forma amounts indicated below.
2000 1999
--------------- ---------------
Net loss:
As reported $ (6,392,630) $ (1,857,111)
Pro forma (6,523,376) (1,857,111)
19
12. STOCK OPTIONS (continued)
-------------
The estimated fair value of each officer and director option granted during
fiscal year 2000 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
2000
---------------
Expected volatility 198%
Risk-free interest rate 6%
Expected dividends -
Expected terms (in years) 5
13. SUBSEQUENT EVENTS
-----------------
During 1999, the Company sold working interests totaling 58.5% in the Company's
New Mexico oil and gas properties for cash of $20,810 and a note for $135,000
for each working interest sold. The notes were due in three annual installments,
contingent upon the Company's obtaining a specified level of financing. In
addition, the agreements required the Company to develop these properties.
Because of the contingent nature of the notes and the development commitments
arising from the sale, the cash received from the sale was applied as a
reduction of the carrying value of those properties, and the notes were not
recorded in the Company's accounts.
The Company was unable to obtain the requisite financing, and no principal
payments have been received to date on the notes, but such payments were not due
until June 15, 2001. A portion of the revenues otherwise due these investors has
been applied to joint interest bills due from these investors, but not in
sufficient amounts to keep the investors current on their joint interest
billings. As of December 31, 2000, $1,295,605 in joint interest billings was due
from these investors. In addition, the Company has incurred development costs
applicable to the working interest owners that were to be repaid from the
proceeds of the investor notes. At December 31, 2000, the unpaid development
costs amounted to $384,825.
During March 2001, the Company made a formal offer, subsequently amended, to buy
back the working interests from the investors. The terms would require the
Company to forgive the notes receivable from the investors and to apply the
unpaid joint interest billings and development costs to the purchase price. In
addition, the Company would pay each investor $28,570 in cash. As of May 31,
2001, investors holding almost all of these working interests have signed a term
sheet indicating their intentions to sell their interest to the Company.
20
14. SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
--------------------------------------------------------------
The following table sets forth certain information regarding the Company's oil
and gas producing activities:
DECEMBER 31,
-------------------------------------
2000 1999
----------------- -----------------
Capitalized costs relating to oil and gas producing activities
(full cost method) -
Proved oil and gas properties $ 16,520,008 $ 2,734,563
Less accumulated amortization and impairment (432,475) (27,575)
--------------- ---------------
Net capitalized costs 16,087,533 2,706,988
=============== ===============
YEAR ENDING DECEMBER 31,
-------------------------------------
2000 1999
----------------- -----------------
Costs incurred in oil and gas producing activities:
Property acquisition costs:
Proved $ 13,051,463 $ 584,879
Unproved - -
Exploration costs - -
Development costs 553,982 83,654
--------------- ---------------
$ 13,605,445 $ 668,533
=============== ===============
Results of operations for oil and gas producing activities:
Oil and gas sales $ 1,840,663 $ 164,838
Production costs (973,428) (302,609)
Depreciation, depletion and amortization (395,179) (27,575)
--------------- ---------------
Results of operations for oil and gas producing activities
(excluding corporate overhead and financing costs) $ 472,056 $ (165,346)
=============== ===============
The following table, based on information prepared by independent petroleum
engineers, summarizes changes in the estimates of the Company's net interest in
total proved reserves of crude oil and condensate and natural gas, all of which
are domestic reserves.
21
14. SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED) (continued)
-------------------------------------------------------------
Oil Gas
(mbbls) (mmcf)
----------------- -----------------
Proved developed and undeveloped reserves:
January 1, 1999 - -
Revisions of previous estimates - -
Purchases of minerals in place 11,090,989 -
Extensions and discoveries - -
Production (8,623) -
Sales of mineral in place (6,488,229) -
---------------- ----------------
December 31, 1999 4,594,137 -
Revision of previous estimates (676,337) -
Purchases of minerals in place 692,890 5,180,604
Production (53,290) (79,304)
---------------- ----------------
December 31, 2000 4,557,400 5,101,300
================ ================
Proved developed reserves: Year ended December 31, 1999:
Beginning of year - -
End of year 1,152,326 -
================ ================
Year ended December 31, 2000:
Beginning of year 1,152,326 -
End of year 1,590,000 4,977,900
================ ================
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate and natural gas which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
oil and gas reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. The above
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the limitations inherent in such estimation.
The process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.
22
15. RESERVE INFORMATION AND RELATED STANDARDIZED MEASURE OF DISCOUNTED
FUTURE NET CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------
The standardized measure of discounted future net cash flows at December 31,
2000 and 1999 relating to proved oil and gas reserves is set forth below. The
assumptions used to compute the standardized measure are those prescribed by the
Financial Accounting Standards Board and, as such, do not necessarily reflect
the Company's expectations of actual revenues to be derived from those reserves
nor their present worth. The limitations inherent in the reserve quantity
estimation process are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation process.
DECEMBER 31,
-------------------------------------
2000 1999
----------------- -----------------
Future cash inflows $ 157,605,000 $ 105,206,000
Future production costs and development costs (55,753,900) (35,284,000)
Future income tax expense (30,963,000) (27,921,000)
---------------- ----------------
Future net cash flows 70,888,100 42,001,000
10% annual discount for estimated timing of cash flows (27,707,100) (27,228,000)
---------------- ----------------
Standardized measure of discounted future net cash flows $ 43,181,000 $ 14,773,000
================ ================
Future net cash flows were computed using year-end prices and costs, and
year-end statutory tax rates (adjusted for permanent differences) that relate to
existing oil and gas reserves at year end. The following are the principal
sources of change in the standardized measure of discounted future net cash
flows:
Beginning of year $ 14,773,372 $ -
Sales of oil and gas produced, net of production costs (730,000) (138,000)
Change in estimated production and development costs (721,000) -
Purchases of minerals in place 26,182,000 24,640,000
Effect of changes in prices 5,765,000 -
Accretion of discount 1,477,337 -
Net change in income taxes (1,853,000) (9,820,000)
Other (1,712,709) 91,372
---------------- ----------------
End of year $ 43,181,000 $ 14,773,372
================ ================
23